#  

# **Securitiesand Exchange Commission**

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

 

### **Form10-K**

 
| **ý** | **Annual  Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of  1934** |
|------------|-------------------------------------------------------------------------------------------------|

 

**For thefiscal year ended December 31, 2004**

 

**or**

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

 

**For thetransition period from                       to                        **

 

**Commissionfile number 0-23876**

 

#### **Smurfit-StoneContainer Corporation**

(Exact name of registrant as specified in its charter)

 
| **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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###### **Securities registered pursuant to Section 12(b) of theAct:        **None

 

Securities registeredpursuant to Section 12(g) of the Act:

 
| Title of Class                |
|-------------------------------|
| Common Stock, $0.01 par value |

7% Series A Cumulative Exchangeable Redeemable Convertible PreferredStock, $.01 par value

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months(or for such shorter period that the registrant was required to file suchreports), and (2) has been subject to such filing requirements for the past 90days.       Yes ý   Noo

 

Indicate by check mark if disclosure ofdelinquent filers pursuant to Item 405 of Regulation S-K is not contained herein,and will not be contained, to the best of the registrant’s knowledge, indefinitive proxy or information statements incorporated by reference in PartIII of this Form 10-K or any amendment to this Form 10-K.       o

 

Indicate by check mark if the registrantis an accelerated filer (as defined in Rule 12b-2 of the Act).       Yes  ý No o

 

The aggregate market value of the votingstock held by non-affiliates of the registrant as of the last business day ofthe registrant’s most recently completed second fiscal quarter wasapproximately $5.1 billion, based on the closing sales price of $19.95 pershare of such stock on The Nasdaq National Market on June 30, 2004.

 

The number of sharesoutstanding of the registrant’s common stock as of February 28, 2005: **253,812,227**

 

**DOCUMENTSINCORPORATED BY REFERENCE:**

 
| **Document**                                                                                                                                                       | ** ** | **Part of Form 10-K Into Which  Document Is Incorporated** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------|
| Sections of the  Registrant’s Proxy Statement to be filed on or before April 5, 2005 for  the Annual Meeting of Stockholders to be held on May 11, 2005. |       | Part III, Items 11, 12, 13 and 14                          |

 

 

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SMURFIT-STONE CONTAINER CORPORATION

ANNUAL REPORT ON FORM 10-K

December 31, 2004

 

TABLE OF CONTENTS

 
| **PART I**    | ** **                                                                                       | ** ** |
|---------------|--------------------------------------------------------------------------------------------------|------------|
| Item 1.       | Business                                                                                         |       |
| 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 and Related Stockholder Matters                      |       |
| 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-LOOKINGSTATEMENTS**

Except for the historical informationcontained in this Annual Report on Form 10-K, certain matters discussed herein,including (without limitation) under Part I, Item 1, “Business - EnvironmentalCompliance,” under Part I, Item 3, “Legal Proceedings” and under Part II, Item7, “Management’s Discussion and Analysis of Financial Condition and Results ofOperations,” contain forward-looking statements within the meaning of Section 21Eof the Securities Exchange Act of 1934, as amended.  Although we believe that, in making any suchstatements, our expectations are based on reasonable assumptions, any suchstatements may be influenced by factors that could cause actual outcomes andresults to be materially different from those projected.  When used in this document, the words “anticipates,”“believes,” “expects,” “intends” and similar expressions as they relate toSmurfit-Stone Container Corporation or its management are intended to identifysuch forward-looking statements.  Theseforward-looking statements are subject to numerous risks and uncertainties.  There are important factors that could causeactual results to differ materially from those in forward-looking statements,certain of which are beyond our control.  These factors, risks and uncertainties includethe following:

 

•                  the impactof general economic conditions in North America and in other locations where wedo business;

•                  generalindustry conditions, including competition and product and raw material prices;

•                  fluctuationsin interest rates, exchange rates and currency values;

•                  unanticipatedcapital expenditure requirements;

•                  legislativeor regulatory requirements, particularly concerning environmental matters;

•                  access tocapital markets;

•                  assumptionsrelating to pension and other postretirement costs;

•                  fluctuationsin energy cost;

•                  fluctuationsin wood fiber and reclaimed fiber costs;

•                  fluctuationsin other cost, including freight, chemicals, and employee benefits;

 

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•                  oursubstantial leverage;

•                  obtainingrequired consents or waivers of creditors in the event we are unable to satisfycovenants in our debt instruments; and

•                  the outcomeof negotiations for collective bargaining contracts.

 

Our actual results, performance orachievement could differ materially from those expressed in, or implied by,these forward-looking statements.  Accordingly,we can 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 topublicly revise any forward-looking statements that have been made to reflectthe occurrence of events after the date hereof.

 

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**PART I**

 

**ITEM 1.****                             BUSINESS**

 

Unless the contextotherwise requires, “we,” “us,” “our,” “Company” or “Smurfit-Stone” refers tothe business of Smurfit-Stone Container Corporation and its subsidiaries.

 

**GENERAL**

 

Smurfit-Stone ContainerCorporation, a Delaware corporation, is the industry’s leading integratedmanufacturer of paperboard and paper-based packaging in North America,including containerboard, corrugated containers, multiwall bags and coatedrecycled boxboard, and is one of the world’s largest paper recyclers.  In addition, we are a leading producer ofsolid bleached sulfate (SBS) and folding cartons.  We have a complete line of graphicscapabilities for packaging. For the year ended December 31, 2004, our netsales were $8,291 million and net loss available to common stockholders was $57million.

 

Smurfit-Stone is aholding company with no business operations of its own.  Smurfit-Stone conducts its business operationsthrough its wholly-owned subsidiary Smurfit-Stone Container Enterprises, Inc.(SSCE), a Delaware corporation.  SSCE isthe surviving company resulting from the merger (the Merger) of our primaryoperating subsidiaries on November 1, 2004.  JSCE, Inc. merged with and into JeffersonSmurfit Corporation (U.S.) (JSC(U.S.)), with JSC(U.S.) as the survivingcompany, and then JSC(U.S.) merged with and into Stone Container Corporation,with Stone Container as the surviving company.  Stone Container was simultaneously renamedSmurfit-Stone Container Enterprises, Inc.  The Merger was effected principally toconsolidate our debt financing activities.  Stone Container and JSC(U.S.) werewholly-owned subsidiaries of Smurfit-Stone and, therefore, the Merger does notimpact the Smurfit-Stone consolidated financial statements.  The Merger did not impact the operatingactivities of the merged companies, which will continue to do business as Smurfit-Stone.

 

**FINANCIALINFORMATION CONCERNING INDUSTRY SEGMENTS**

 

We have two reportable segments:(1) Containerboard and Corrugated Containers and (2) Consumer Packaging.  For financial information relating to oursegments, including our net sales to external customers by country of origin, seethe information set forth in Note 25 of the Notes to Consolidated Financial Statements.

 

###### **PRODUCTS**

 

###### **CONTAINERBOARD ANDCORRUGATED CONTAINERS SEGMENT**

 

TheContainerboard and Corrugated Containers segment includes 21 paper mills (16located in the United States and five in Canada), 149 container plants (127located in the United States, 17 in Canada, four in Mexico and one in PuertoRico) and one wood products plant located in the United States.  In addition, we own approximately one millionacres of timberland in Canada and operate wood harvesting facilities in Canadaand the United States.  The primaryproducts of our Containerboard and Corrugated Containers segment include:

 

•                  corrugated containers;

•                  containerboard;

•                  kraft paper;

•                  SBS; and

•                  market  pulp.

 

We produce a full rangeof high quality corrugated containers designed to protect, ship, store anddisplay products made to our customers’ merchandising and distributionspecifications.  Corrugated containersare sold to a broad range of manufacturers of consumer goods.  Corrugated containers are used to ship suchdiverse products as home appliances, electric motors, small machinery, groceryproducts, produce, computers, books, furniture and many other products.  We providecustomers with innovative packaging solutions to advertise and sell theirproducts.  In addition, we manufactureand sell a variety of retail ready, point of purchase displays and a full lineof specialty products, including pizza boxes, corrugated

 

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clamshellsfor the food industry, Cordeck® recyclable pallets and custom die-cut boxes todisplay packaged merchandise on the sales floor.  Our container plants serve localcustomers and large national accounts.  Netsales of corrugated containers for 2004, 2003 and 2002 represented 55%, 55% and52%, respectively, of the Company’s total net sales.

 

Our containerboard millsproduce a full line of containerboard, which is used primarily in the productionof corrugated packaging.  We produced 3,734,000tons of unbleached kraft linerboard, 999,000 tons of white top linerboard and2,705,000 tons of medium in 2004.  Ourcontainerboard mills and corrugated container operations are highly integrated,with the majority of our containerboard used internally by our corrugatedcontainer operations.  In 2004, ourcorrugated container plants consumed 5,528,000 tons of containerboard.  Net sales of containerboard to third parties for2004, 2003 and 2002 represented 15%, 15% and 16%, respectively, of the Company’stotal net sales.

 

Our paper mills alsoproduce SBS, kraft paper, market pulp and other specialty products.  We specialize in high-quality grades of SBS,which are designed to meet the demanding print requirements of folding cartonand carded packaging customers in the food, pharmaceutical, cosmetics and otherniche markets.  A portion of our SBS isconsumed internally by our folding carton plants. Kraft paper is used innumerous products, including consumer and industrial bags, grocery and shoppingbags, counter rolls, handle stock and refuse bags.  A significant portion of our kraft paper isconsumed by our consumer packaging operations.  In addition, we produce bleached northern andsouthern hardwood pulp and bleached southern softwood pulp which is sold tomanufacturers of paper products, including photographic and other specialtypapers, as well as the printing and writing sectors.

 

Production for our papermills and sales volume for our corrugated container facilities for the lastthree years were:

 
| ** **                                               | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|----------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Tons produced (in thousands)                             |       |     |       |     |       |     |       |
| Containerboard                                           |       | 7,438    |       | 7,185    |       | 6,860    |       |
| Kraft paper                                              |       | 259      |       | 293      |       | 283      |       |
| SBS                                                      |       | 276      |       | 290      |       | 296      |       |
| Market pulp                                              |       | 549      |       | 497      |       | 567      |       |
| Corrugated containers sold (in billion sq. ft.) (1)  (2) |       | 87.2     |       | 85.0     |       | 81.3     |       |

 

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(1)          Includes100% of Smurfit-MBI, a Canadian corrugated container producer, after March 31,2003, the date we acquired the remaining 50% not previously owned.  Amounts for periods prior to that date includeSmurfit-MBI at 50%.

(2)          Includesour proportionate share of affiliates reported on an equity ownership basis,including our interest in three corrugated container plants and two sheet plantsin China.

 

###### **CONSUMER PACKAGINGSEGMENT**

 

The Consumer Packagingsegment includes four paper mills, 17 folding carton plants, 11 bag packagingplants and 14 other converting plants.  OurConsumer Packaging operations are primarily located in the United States.  The primary products of our Consumer Packagingsegment include:

 

•                  folding cartons;

•                  coated recycled boxboard;

•                  multiwall and consumer bags;

•                  flexible packaging;

•                  laminated products; and

•                  paper, foil and heat transfer labels.

 

Folding cartons are usedprimarily to protect customers’ products, while providing point of purchaseadvertising.  We produce a full range ofcarton styles, appropriate for nearly all carton end uses.  The folding carton plants offer extensiveconverting capabilities, including sheet and web lithographic, rotogravure andflexographic printing and laminating.  Inaddition, we provide LithofluteTM packaging for a number of applications.  The folding carton plants also provide a fullline of structural and graphic design services tailored to specific technicalrequirements, as well as photography for packaging, sales

 

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promotion concepts andpoint of purchase displays.  Convertingcapabilities include gluing, tray forming, windowing, waxing and laminating,plus other specialties.  Our customer baseis made up primarily of producers of packaged foods, beverages, fast food,detergents, paper, pharmaceuticals and cosmetics.  Our customers range from local accounts tolarge national accounts.

 

Our coated recycledboxboard mills produce a broad range of recycled grades, including clay-coatednewsback, kraftback and whiteback, as well as waxable 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 2004, our folding carton plants consumed 365,000tons of recycled boxboard.

 

Multiwall bags aredesigned to safely and effectively ship a wide range of industrial andcommercial products, including fertilizers, chemicals, pharmaceuticals, buildingproducts, concrete, food, feed, seed and salt.  Bags can be customized with easy-openfeatures, handles and resealable closures, with a variety of liners, coatingsand other treatments.  We have developedand patented many innovative styles, including Cap-Sac®, PeelPak®, Soni-Loc®,Peel-N-PourTM, SquareStackTM and SquareSakTM.  We also manufacture small consumer bags forfood and other products sold at retail outlets, including pet food and litter,cookies, flour, baking mixes and microwave popcorn.  In 2004, our bag operations consumedapproximately 126,000 tons of kraft paper.

 

Production for our coatedrecycled boxboard mills and sales volume for the folding carton and multiwallbag facilities for the last three years were:

 
| ** **                            | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|---------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Tons (in thousands)                   |       |     |       |     |       |     |       |
| Coated recycled boxboard produced     |       | 560      |       | 577      |       | 582      |       |
| Folding cartons sold                  |       | 517      |       | 514      |       | 504      |       |
| Multiwall bags sold (in million bags) |       | 1,157    |       | 1,156    |       | 1,162    |       |

 

Our flexible packagingoperations manufacture a complete line of plain and printed polyethylene bags,sheeting and tubing in a variety of colors with custom treatments for specificapplications.  We specialize in packaginghard-to-hold products, condiments for fast food, pharmaceutical and healthcaretechnologies, flexo film printing and servicing multi-design andmulti-structural accounts.

 

We also produce printedpaper, foil and DI-NA-CAL® heat transfer labels, which are used in a wide rangeof industrial and consumer product applications.  DI-NA-CAL® is a proprietary labeling systemthat applies high-speed heat transfer labels to plastic containers.  We also produce specialized laminations offilm, foil and paper.

 

**NON-REPORTABLESEGMENTS**

 

**Reclamation**

Our reclamationoperations procure fiber resources for our paper mills as well as otherproducers.  We operate 23 reclamationfacilities in the United States that collect, sort, grade and bale recoveredpaper.  We also collect aluminum andglass for resale to manufacturers of these products.  In addition, we operate a nationwide brokeragesystem whereby we purchase and resell recovered paper to our recycled papermills and other producers on a regional and national contract basis.  Brokerage contracts provide bulk purchasing,often resulting in lower prices and cleaner recovered paper.  Many of our reclamation facilities are locatedclose to our recycled paper mills, ensuring availability of supply with minimalshipping costs.  Domestic tons of fiberreclaimed and brokered for 2004, 2003 and 2002 were 6,542,000, 6,549,000 and 6,582,000,respectively.  In 2004, our paper millsconsumed 2,993,000 tons of the fiber reclaimed and brokered by our reclamationoperations, representing an integration level of approximately 46%.

 

**Innovationto Implementation (i2iSM)**

In 2004, i2iSMwas formed as a single source integrator and provider of merchandisingsolutions to retailers and consumer packaging companies.  The products and services provided by i2iSMinclude branding,

 

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marketing, design photography,artwork production, pre-press, sourcing, fulfillment and inventory management. In2004, i2iSM had net sales to third parties of $23 million.

 

**RAWMATERIALS**

 

Wood fiber and reclaimed fiber are theprincipal raw materials used in the manufacture of our paper products.  We satisfy the majority of our need for woodfiber through purchases on the open market or under supply agreements.  We satisfy essentially all of our need forreclaimed fiber through our reclamation facilities and nationwide brokeragesystem.

 

Wood fiber and reclaimedfiber are purchased in highly competitive, price-sensitive markets, which havehistorically exhibited price and demand cyclicality.  Adverse weather, conservation regulations andthe shutdown of a number of sawmills have caused, and will likely continue tocause, a decrease in the supply of wood fiber and higher wood fiber costs insome of the regions in which we procure wood fiber. Fluctuations in supply anddemand for reclaimed fiber have occasionally caused tight supplies of reclaimedfiber.  At such times, we may experiencean increase in the cost of fiber or may temporarily have difficulty obtainingadequate supplies of fiber.

 

**MARKETING**

 

Ourmarketing strategy is to sell a broad range of paper-based packaging productsto manufacturers of industrial and consumer products.  We seek to meet the quality and service needsof the customers of our converting plants at the most efficient cost, whilebalancing those needs against the demands of our open market paperboard customers. Our converting plants focus on supplyingboth specialized packaging with high value graphics that enhance a product’smarket appeal and high-volume commodity products.

 

Weserve a broad customer base for each of our industry segments.  As a result, we serve thousands of accountsfrom our plants.  Each plant has its ownsales force and many have product design engineers and other serviceprofessionals who are in close contact with customers to respond to theirspecific needs.  We complement our localplants’ marketing and service capabilities with regional and national designand service capabilities, as well as national sales offices for customers whopurchase through a centralized purchasing office.  National account business may be allocated tomore than one plant due to production capacity, logistics and equipmentrequirements.  Marketing ofcontainerboard and pulp to third parties is centralized in our board salesgroup, which sells almost three million tons of pulp and paperboard annually.

 

Ourbusiness is not dependent upon a single customer or upon a small number ofmajor customers.  We do not believe theloss of any one customer would have a material adverse effect on our business.

 

**COMPETITION**

 

The markets in which we sell ourprincipal products are highly competitive and comprised of many participants.  Although no single company is dominant, we doface significant competitors in each of our businesses.  Our competitors include large verticallyintegrated companies as well as numerous smaller companies.  The industries in which we compete havehistorically been sensitive to price fluctuations brought about by shifts inindustry capacity and other cyclical industry conditions.  While we compete primarily on the basis ofprice in many of our product lines, other competitive factors include design,quality and service, with varying emphasis depending on product line.

 

**BACKLOG**

 

Demand for our major product lines isrelatively constant throughout the year and seasonal fluctuations in marketing,production, shipments and inventories are not significant.  Backlogs are not a significant factor in theindustry.  We do not have a significantbacklog of orders as most orders are placed for delivery within 30 days.

 

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**RESEARCHAND NEW PRODUCT DEVELOPMENT**

 

The majority of our research anddevelopment activities are performed at our facilities located in Carol Streamand Westmont, Illinois.  We use advancedtechnology to assist all levels of the manufacturing and sales processes, fromraw material supply through finished packaging performance.  Research programs have provided improvementsin coatings and barriers, stiffeners, inks and printing.  Our technical staff conducts basic, appliedand diagnostic research, develops processes and products and provides a widerange of other technical services.  Wespent $9 million in 2004 on research and new product development activities.  Comparable amounts were spent in 2003 and2002.

 

We actively pursue applications for patentson new inventions and designs and attempt to protect our patents againstinfringement.  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.  We hold or are licensed to use certainpatents, licenses, trademarks and trade names on products, but do not considerthe successful continuation of any material aspect of our business to bedependent upon such intellectual property.

 

**EMPLOYEES**

 

We had approximately 35,300 employees at December 31,2004, of which approximately 29,400 were employees of U.S. operations.  Approximately 18,500 (63%) of our U.S.employees are represented by collective bargaining units.  The expiration dates of union contracts forour major paper mill facilities are as follows:

 

•                  La Tuque, Quebec, Canada – August 2004

•                  Jacksonville, Florida - June 2006

•                  Hodge, Louisiana -  June 2006

•                  Missoula, Montana -  June 2007

•                  Hopewell, Virginia - July 2007

•                  Brewton, Alabama -  October 2007

•                  Panama City, Florida - March 2008

•                  Fernandina Beach, Florida - June 2008

•                  West Point, Virginia - September 2008

•                  Florence, South Carolina - August 2009

 

Labor agreements covering approximately 1,400employees at our five Canadian paper mills expired on various dates between April andAugust 2004.  These five mills havea capacity to produce 1,330,000 tons annually. The employees of these mills are primarily represented by theCommunications, Energy and Paper Union (CEP), which is currently negotiatingcollective bargaining agreements with other paper companies in Canada.  We expect to meet with the CEP in the firsthalf of 2005 to begin our negotiations with them.  While we consider relations with theseemployees to be good and we do not expect a work stoppage to occur, theoutcomes of the negotiations regarding the expired labor agreements are notentirely within our control and therefore, we can provide no assuranceregarding the outcomes or the timing of these negotiations or their effect onour results of operations.

 

We believe our employee relations aregenerally good.  There were no workstoppages during 2004.  While the termsof our collective bargaining agreements may vary, we believe the material termsof the agreements are customary for the industry, the type of facility, theclassification of the employees and the geographic location covered thereby.

 

**ENVIRONMENTALCOMPLIANCE**

 

Our operations are subject to extensiveenvironmental regulation by federal, state and local authorities.  In the past, we have made significant capitalexpenditures to comply with water, air, solid and hazardous waste and otherenvironmental laws and regulations.  Weexpect to make significant expenditures in the future for environmentalcompliance.  Because variousenvironmental standards are subject to change, it is difficult to predict withcertainty the amount of capital expenditures that will ultimately be requiredto comply with future standards.

 

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In 1998, the UnitedStates Environmental Protection Agency (EPA) issued its comprehensive rulegoverning air emissions (Maximum Achievable Control Technology (MACT)) andwater discharges (Effluent Limitation Guidelines) from the pulp, paper and paperboardindustry, known as the “Cluster Rule.”  We are in compliance with Phase I of MACT I,MACT II and the Effluent Limitation Guidelines of the Cluster Rule.  We spent approximately $8 million in 2004 for projectsrelated to MACT II of the Cluster Rule.

 

Phase II of MACT I of theCluster Rule will require the implementation of systems to collect high volume,low concentration gases at various mills and has a compliance date of2006.  We continue to study possible meansof compliance with Phase II of MACT I.  Basedon currently available information, we estimate that the aggregate compliancecost of Phase II of MACT I will be approximately $60 million to $70 million,$16 million of which was spent in 2004, with the remainder to be spent in 2005and 2006.

 

In recent years, the EPAhas undertaken significant air quality initiatives associated with nitrogenoxide emissions, regional haze and national ambient air quality standards.  Several of our mills are located in statesaffected by these EPA initiatives.  TheEPA has also promulgated a new Boiler MACT regulation that will limitparticulate emissions from industrial boilers.  Several of our mills will be subject to theBoiler MACT regulation and will be required to install new pollution controlequipment in order to meet the regulation’s 2007 compliance deadline.  Based on currently available information, weestimate that the aggregate compliance cost for Boiler MACT will beapproximately $90 million to $100 million, $1 million of which was spent in2004, with the remainder to be spent over the next three years.

 

In addition to Cluster Rule and BoilerMACT compliance, we anticipate additional capital expenditures related toenvironmental 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 principal competitors are subjectto comparable environmental standards, including the Cluster Rule and BoilerMACT, it is our opinion, based on current information, that compliance withenvironmental standards should not adversely affect our competitiveposition.  However, we could incursignificant expenditures due to changes in law or the discovery of newinformation, which could have a material adverse effect on our operatingresults.  See Part 1, Item 3, “LegalProceedings – Environmental Matters.”

 

**AVAILABLEINFORMATION**

 

We make available free of charge ourannual report on Form 10-K, quarterly reports on Form 10-Q, current reports onForm 8-K and amendments to those reports filed or furnished as required by Section 13(a)or 15(d) of the Securities Exchange Act of 1934, as amended (the Exchange Act)through our Internet Website (www.smurfit-stone.com) as soon as reasonablypracticable after we electronically file such material with, or furnish it to,the Securities and Exchange Commission (SEC).  You may access these SEC filings via thehyperlink that we provide on our Website to a third-party SEC filings website.

 

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**ITEM 2.****                             PROPERTIES**

 

The manufacturing facilities of ourconsolidated subsidiaries are located in North America.  We believe that our facilities are adequatelyinsured, properly maintained and equipped with machinery suitable for our use.  Our manufacturing facilities as of December 31,2004 are summarized below:

 
| ** **                                        | ** ** | **Number of Facilities** | ** ** | **StateLocations(a)** | ** ** |
|---------------------------------------------------|------------|--------------------------|------------|-----------------------|------------|
| **Total**                                         | ** ** | **Owned**                | ** ** | **Leased**            |
| **United States**                                 |       |                     |       |                  |       |   |   |   |   |
| Containerboard and Corrugated Containers Segment: |       |                     |       |                  |       |   |   |   |   |
| Paper mills                                       |       | 16                       |       | 16                    |       |   |   | 12 |   |
| Corrugated container plants                       |       | 127                      |       | 85                    |       | 42 |   | 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                                          |       | 211                      |       | 146                   |       | 65 |   | 39 |   |
|                                              |       |                     |       |                  |       |   |   |   |   |
| **Canada and Other North America**                |       |                     |       |                  |       |   |   |   |   |
| Containerboard and Corrugated Containers Segment: |       |                     |       |                  |       |   |   |   |   |
| Paper mills                                       |       | 5                        |       | 5                     |       |   |   | N/A |   |
| Corrugated container plants                       |       | 22                       |       | 18                    |       | 4 |   | N/A |   |
| Consumer Packaging Segment:                       |       |                     |       |                  |       |   |   |   |   |
| Consumer packaging plants                         |       | 2                        |       | 2                     |       |   |   | N/A |   |
| Subtotal                                          |       | 29                       |       | 25                    |       | 4 |   |   |   |
|                                              |       |                     |       |                  |       |   |   |   |   |
| Total                                             |       | 240                      |       | 171                   |       | 69 |   | N/A |   |

 

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(a) Reflects the number of states inwhich we have at least one manufacturing facility.

 

Our paper mills represent approximately 76%of our investment in property, plant and equipment.  In addition to manufacturing facilities, weown approximately one million acres of timberland in Canada and operate woodharvesting facilities in Canada and the United States.  The approximate annual tons of productivecapacity of our paper mills at December 31, 2004, were:

 
| ** **               | ** ** | **Annual Capacity** | ** ** |
|--------------------------|------------|---------------------|------------|
| ** **               | ** ** | **(in thousands)**  | ** ** |
| **United States**        |       |                |       |
| Containerboard           |       | 7,067               |       |
| Kraft paper              |       | 214                 |       |
| SBS                      |       | 187                 |       |
| Coated recycled boxboard |       | 541                 |       |
| Market pulp              |       | 311                 |       |
| Subtotal                 |       | 8,320               |       |
| **Canada**               |       |                |       |
| Containerboard           |       | 973                 |       |
| SBS                      |       | 112                 |       |
| Market pulp              |       | 245                 |       |
| Subtotal                 |       | 1,330               |       |
| Total                    |       | 9,650               |       |

 

###### **Substantially all of our North American operatingfacilities have been pledged as collateral under our various credit agreements.See Part II, Item 7, “Management’s Discussion and Analysis of FinancialCondition and Results of Operations, Liquidity and Capital Resources - Net CashUsed For Financing Activities.”**

 

9

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**ITEM 3.****                             LEGALPROCEEDINGS**

 

**LITIGATION**

 

In 1998, seven putativeclass action complaints were filed in the United States District Court for the NorthernDistrict of Illinois and in the United States District Court for the EasternDistrict of Pennsylvania.  Thesecomplaints alleged that Stone Container reached agreements in restraint oftrade that affected the manufacture, sale and pricing of corrugated products inviolation of antitrust laws.  Thecomplaints were amended to name several other defendants, including JSC(U.S.)and Smurfit-Stone.  The suits sought anunspecified amount of damages arising out of the sale of corrugated productsfor a period during 1993 to 1995.  Thecomplaints were transferred to and consolidated in the United States DistrictCourt for the Eastern District of Pennsylvania, which certified two plaintiffclasses.  Smurfit-Stone has settled theseclass action cases and made aggregate settlement payments of $92.5million.  All of the other defendantshave also entered into agreements to settle these class actions; however, mostof the defendants in the class actions continue to be defendants in 11 lawsuitsbrought on behalf of numerous parties that have opted out of the class actionsto seek their own recovery.  All of thesecases have been transferred to the same United States District Court for theEastern District of Pennsylvania for pretrial proceedings.  We continue to vigorously defend these opt-outcases.  We believe our liability forthese matters was adequately reserved at December 31, 2004.

 

We are a defendant in anumber of lawsuits and claims arising out of the conduct of our business,including those related to environmental matters.  While the ultimate results of such suits orother proceedings against us cannot be predicted with certainty, we believe theresolution of these matters will not have a material adverse effect on ourconsolidated financial condition or results of operations.

 

**ENVIRONMENTALMATTERS**

 

Federal, state and localenvironmental requirements are a significant factor in our business.  We employ processes in the manufacture ofpulp, paperboard and other products which result in various discharges, emissionsand wastes.  These processes are subjectto numerous federal, state and local environmental laws and regulations,including reporting and disclosure obligations.  We operate and expect to continue to operateunder permits and similar authorizations from various governmental authoritiesthat regulate such discharges, emissions and wastes.

 

In May 2003, we receiveda Violation Notice from the Illinois Environmental Protection Agency (IEPA)alleging that our flexible packaging facility in Schaumburg, Illinois violatedvarious provisions of the Illinois Environmental Protection Act and variousconditions of the applicable Clean Air Act permit issued to the facility.  In June 2003, we received a Notice ofViolation and Finding of Violation from the EPA containing similar allegations. The allegations primarily relate to thealleged failure of two afterburner systems designed to capture and reducecertain emissions from printing presses below required levels and the potentialimpact of such failure on past and future regulatory standards, permittingrequirements, emission credit requirements, recordkeeping and reporting.  After making certain repairs to the two oldsystems, we subsequently replaced these systems with a single regenerativethermal oxidizer to eliminate future failures and ensure long-term compliance.  We responded to the IEPA Violation Notice andthe EPA Notice of Violation and Finding of Violation and are attempting toreach an acceptable resolution with IEPA and EPA.  Based on discussions to date with the twoagencies, we believe the costs to resolve this matter will not be material andwill not exceed established reserves.

 

We also face potential liability as aresult of releases, or threatened releases, of hazardous substances into theenvironment from various sites owned and operated by third parties at whichCompany-generated wastes have allegedly been deposited.  Generators of hazardous substances sent tooff-site disposal locations at which environmental problems exist, as well asthe owners of those sites and certain other classes of persons (generallyreferred to as “potentially responsible parties” or “PRPs”) are, in mostinstances, subject to joint and several liability for response costs for theinvestigation and remediation of such sites under the ComprehensiveEnvironmental Response, Compensation and Liability Act of 1980 (CERCLA) andanalogous state laws, regardless of fault or the lawfulness of the originaldisposal.  We have received notice thatwe are or may be a PRP at a number of federal and/or state sites where responseaction may be required and as a result may have joint and several liability forcleanup costs at

 

10

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such sites.  However, liability for CERCLA sites is typicallyshared with other PRPs and costs are commonly allocated according to relativeamounts of waste deposited.  Our relativepercentage of waste deposited at these sites ranges from less than 1% to 6%.  In addition to participating in theremediation of sites owned by third parties, we have entered into consentorders for the investigation and/or remediation of certain of our ownedproperties.

 

Based on currentinformation, we believe the probable costs of the potential environmentalenforcement matter discussed above, response costs under CERCLA and similarstate laws, and the remediation of owned property will not have a materialadverse effect on our financial condition or results of operations.  As of December 31, 2004, we hadapproximately $20 million reserved for environmental liabilities.  We believe our liability for these matters wasadequately reserved at December 31, 2004.

 

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

 

No matters were submittedto a vote of security holders, through the solicitation of proxies orotherwise, during the fourth quarter ended December 31, 2004.

 

**PART II**

 

**ITEM 5.****                             MARKETFOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS**

 

**MARKETINFORMATION**

 

At December 31, 2004, approximately 58,000stockholders, including stockholders of record, beneficial owners and employee participantsin our voluntary savings plans, 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 2004 and 2003 were:

 
| ** **     | ** ** | **2004** | ** ** | **2003** | ** ** |
|----------------|------------|----------|------------|----------|------------|
| ** **     | ** ** | **High** | ** ** | **Low**  | ** ** | **High** | ** ** | **Low** | ** ** |
| First Quarter  |       | $        | 19.14      |     | $          | 16.00 |   | $ | 16.41 |   | $ | 11.89 |   |
| Second Quarter |       | $        | 20.10      |     | $          | 15.95 |   | $ | 15.20 |   | $ | 12.72 |   |
| Third Quarter  |       | $        | 19.95      |     | $          | 16.59 |   | $ | 16.40 |   | $ | 12.66 |   |
| Fourth Quarter |       | $        | 19.87      |     | $          | 16.78 |   | $ | 18.60 |   | $ | 13.87 |   |

 

**DIVIDENDSON COMMON STOCK**

 

We have not paid cash dividends on ourcommon stock and do not intend to pay dividends in the foreseeable future.  Our ability to pay dividends in the future isrestricted by certain provisions contained in various agreements and indenturesrelating to SSCE’s outstanding indebtedness.  See Item 7, “Management’s Discussion andAnalysis of Financial Condition and Results of Operations, Liquidity andCapital Resources - Net Cash Used For Financing Activities.”

 

11

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**ITEM 6.****                             SELECTEDFINANCIAL DATA**

(In millions, except pershare and statistical data)

 
| ** **                                                                                         | ** ** | **2004** | ** ** | **2003(a)(b)** | ** ** | **2002(c)** | ** ** | **2001** | ** ** | **2000(d)** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|----------|------------|----------------|------------|-------------|------------|----------|------------|-------------|------------|
| **Summary of Operations**                                                                          |       |     |       |           |       |        |       |     |       |        |       |
| Net sales                                                                                          |       | $        | 8,291      |           | $          | 7,722       |       | $        | 7,483      |        | $          | 7,691 |   | $ | 8,113 |   |
| Income from operations (e)(f)                                                                      |       | 263      |       | 47             |       | 462         |       | 583      |       | 892         |       |
| Income (loss) from continuing operations before  cumulative effect of accounting change            |       | (46      | )          | (198           | )          | 59          |       | 53       |       | 195         |       |
| Discontinued operations, net of income tax provision  (g)                                          |       |     |       | 6              |       | 6           |       | 24       |       | 30          |       |
| Net income (loss) available to common stockholders                                                 |       | (57      | )          | (208           | )          | 54          |       | 66       |       | 224         |       |
|                                                                                               |       |     |       |           |       |        |       |     |       |        |       |
| Basic earnings per share of common stock                                                           |       |     |       |           |       |        |       |     |       |        |       |
| Income (loss) from continuing operations before cumulative  effect of accounting change            |       | (.23     | )          | (.85           | )          | .20         |       | .17      |       | .83         |       |
| Net income (loss) available to common stockholders                                                 |       | (.23     | )          | (.85           | )          | .22         |       | .27      |       | .96         |       |
| Weighted average shares outstanding                                                                |       | 253      |       | 246            |       | 244         |       | 244      |       | 233         |       |
|                                                                                               |       |     |       |           |       |        |       |     |       |        |       |
| Diluted earnings per share of common stock                                                         |       |     |       |           |       |        |       |     |       |        |       |
| Income (loss) from continuing operations before  cumulative effect of accounting change            |       | (.23     | )          | (.85           | )          | .20         |       | .17      |       | .83         |       |
| Net income (loss) available to common stockholders                                                 |       | (.23     | )          | (.85           | )          | .22         |       | .27      |       | .96         |       |
| Weighted average shares outstanding                                                                |       | 253      |       | 246            |       | 246         |       | 245      |       | 234         |       |
|                                                                                               |       |     |       |           |       |        |       |     |       |        |       |
| **Other Financial Data**                                                                           |       |     |       |           |       |        |       |     |       |        |       |
| Net income (loss) available to common stockholders,  adjusted to exclude goodwill amortization (h) |       | $        | (57        | )              | $          | (208        | )          | $        | 54         |        | $          | 157 |   | $ | 313 |   |
| Net cash provided by operating activities                                                          |       | 273      |       | 162            |       | 503         |       | 597      |       | 811         |       |
| Net cash provided by (used for) investing activities                                               |       | (200     | )          | 15             |       | (462        | )          | (197     | )          | (916        | )          |
| Net cash provided by (used for) financing activities                                               |       | (79      | )          | (171           | )          | (53         | )          | (420     | )          | 131         |       |
| Depreciation, depletion and amortization (h)                                                       |       | 416      |       | 415            |       | 401         |       | 478      |       | 432         |       |
| Capital investments and acquisitions                                                               |       | 232      |       | 238            |       | 570         |       | 232      |       | 994         |       |
| Working capital, net                                                                               |       | 290      |       | 282            |       | 590         |       | 465      |       | 470         |       |
| Net property, plant, equipment and timberland                                                      |       | 4,682    |       | 4,974          |       | 5,182       |       | 5,166    |       | 5,670       |       |
| Total assets                                                                                       |       | 9,725    |       | 10,102         |       | 10,805      |       | 10,652   |       | 11,195      |       |
| Long-term debt (i)                                                                                 |       | 4,498    |       | 4,807          |       | 4,990       |       | 4,943    |       | 5,342       |       |
| Redeemable preferred stock                                                                         |       | 85       |       | 82             |       | 79          |       | 76       |       | 73          |       |
| Stockholders’ equity                                                                          |       | 2,259    |       | 2,270          |       | 2,320       |       | 2,485    |       | 2,528       |       |
|                                                                                               |       |     |       |           |       |        |       |     |       |        |       |
| **Statistical Data (tons in thousands)**                                                           |       |     |       |           |       |        |       |     |       |        |       |
| Containerboard production (tons) (j)                                                               |       | 7,438    |       | 7,185          |       | 6,860       |       | 6,640    |       | 6,505       |       |
| Kraft paper production (tons)                                                                      |       | 259      |       | 293            |       | 283         |       | 287      |       | 290         |       |
| Market pulp production (tons)                                                                      |       | 549      |       | 497            |       | 567         |       | 545      |       | 550         |       |
| Solid bleached sulfate production (tons)                                                           |       | 276      |       | 290            |       | 296         |       | 306      |       | 258         |       |
| Coated boxboard production (tons) (j)                                                              |       | 560      |       | 577            |       | 582         |       | 569      |       | 590         |       |
| Corrugated containers sold (billion sq. ft.) (j)                                                   |       | 87.2     |       | 85.0           |       | 81.3        |       | 79.7     |       | 81.2        |       |
| Folding cartons sold (tons)                                                                        |       | 517      |       | 514            |       | 504         |       | 523      |       | 561         |       |
| Multiwall bags sold (million bags)                                                                 |       | 1,157    |       | 1,156          |       | 1,162       |       | 1,108    |       | 1,054       |       |
| Fiber reclaimed and brokered (tons)                                                                |       | 6,542    |       | 6,549          |       | 6,582       |       | 6,714    |       | 6,768       |       |
| Number of employees                                                                                |       | 35,300   |       | 36,700         |       | 38,600      |       | 38,500   |       | 39,700      |       |

 

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**Notes to Selected Financial Data**

 

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

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

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

(d)         Results for2000 include the acquisition of St. Laurent Paperboard Inc. after May 31, 2000,the date of the acquisition.

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

(f)            In 2004, 2003, 2002, 2001 and 2000, we recorded restructuring charges of $16million, $115 million, $24 million, $10 million and $53 million, respectively.

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

(h)         Effective January 1,2002, we adopted SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No.142 requires that goodwill no longer be amortized, but instead be tested forimpairment at least annually.  Depreciation,depletion and amortization includes goodwill amortization of $91 million in2001 and $89 million in 2000.

(i)             In 2004, 2003, 2002, 2001 and 2000, long term debt includes obligationsunder capital leases of $13 million, $12 million, $16 million, $22 million and$30 million, respectively.

(j)             Excludesdiscontinued operations.

 

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**ITEM 7.****                             MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION****AND RESULTSOF OPERATIONS**

 

**OVERVIEW**

 

Smurfit-Stone ContainerCorporation is an integrated manufacturer of paperboard and paper-basedpackaging.  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 75% of our 2004net sales were generated by the Containerboard and Corrugated Containerssegment and 20% were generated by the Consumer Packaging segment.  Our mill operations supply paper to ourcorrugated container, folding carton and multiwall bag converting operations.  The products of our converting operations, aswell as the mill and reclamation tonnage in excess of what is consumed internally,are the main products sold to third parties.  Our operating facilities and customers arelocated primarily in the United States and Canada.

 

Market conditions anddemand for our products are subject to cyclical changes in the economy andchanges in industry capacity, both of which can significantly impact sellingprices and our profitability.  In recentyears, the continued loss of domestic manufacturing to offshore competition andthe changing retail environment in the U.S. have also played a key role.  The influence of superstores and discountretailing giants, as well as the impacts from online shopping, has resulted ina shifting of demand to packaging which is more condensed, lighter weight andless expensive.  These factors havegreatly influenced the corrugated industry.  By the end of 2003, demand for corrugatedcontainers had declined by approximately 6% since its peak in 1999 and pricesfor linerboard had declined by approximately 15% from December 2000.

 

Many of these same issuesimpacted our Consumer Packaging businesses and, in particular, our foldingcarton business.  This industry has seenmoderate growth in the last few years, but has come under considerable pricingpressure.

 

We responded to thischallenging environment by (1) realigning our production to meet customerdemand; (2) eliminating non-strategic and under-performing assets to reduce excessproduction capacity and fixed costs; (3) expanding our core capabilities to servethe needs of our packaging customers; and (4) consolidating our converting andsales activities in certain markets.

 

In 2004, our businessbegan to recover from the four-year cycle of declining demand.  Strong growth in the manufacturing sector ofthe U.S. economy generated increased demand for corrugated containers.  As a result, industry shipments of corrugatedcontainers increased by 2.8% compared to 2003.  Our results in 2004 improved due to higherpricing and sales volumes, higher mill operating rates, lower restructuring chargesand the impact of our cost savings initiatives.  Profits were negatively impacted by an asset impairmentcharge and higher costs, including energy, fiber, freight and employee benefits.

 

For 2005, we anticipate ahealthy U.S. economy will drive continued growth in packaging demand.  While challenged by higher costs in the areasof energy, chemicals, freight and employee benefits, we expect continuedimprovement in our packaging business in 2005.

 

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**RESULTSOF OPERATIONS**

 
| ** **                                                                                               | ** ** | **2004**       | ** ** | **2003**            | ** ** | **2002**       | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|----------------|------------|---------------------|------------|----------------|------------|
| **Segment  Data  (In millions)**                                                                         | ** ** | **Net  Sales** | ** ** | **Profit/  (Loss)** | ** ** | **Net  Sales** | ** ** | **Profit/  (Loss)** | ** ** | **Net  Sales** | ** ** | **Profit/  (Loss)** | ** ** |
| Containerboard and corrugated containers                                                                 |       | $              | 6,224      |                | $          | 315            |       | $ | 5,759 |   | $ | 246 |   | $ | 5,502 |   | $ | 465 |   |
| Consumer packaging                                                                                       |       | 1,656          |       | 81                  |       | 1,656          |       | 82 |   | 1,648 |   | 122 |   |
| Other operations                                                                                         |       | 411            |       | 28                  |       | 307            |       | 22 |   | 333 |   | 21 |   |
| Total segment operations                                                                                 |       | $              | 8,291      |                | 424        |           | $          | 7,722 |   | 350 |   | $ | 7,483 |   | 608 |   |
|                                                                                                     |       |           |       |                |       |           |       |   |   |   |   |   |   |
| Restructuring charges                                                                                    |       |           |       | (16                 | )          |           |       | (115 | ) |   |   | (24 | ) |
| Asset impairment charge                                                                                  |       |           |       | (73                 | )          |           |       |   |   |   |   |   |   |
| Gain (loss) on sale of assets                                                                            |       |           |       | 7                   |       |           |       | (5 | ) |   |   | (10 | ) |
| Interest expense, net                                                                                    |       |           |       | (343                | )          |           |       | (341 | ) |   |   | (355 | ) |
| Loss on early extinguishment of debt                                                                     |       |           |       | (11                 | )          |           |       | (3 | ) |   |   | (32 | ) |
| Litigation charges and settlements, net                                                                  |       |           |       | (3                  | )          |           |       | (110 | ) |   |   |   |   |
| Corporate expenses and other (1)                                                                         |       |           |       | (94                 | )          |           |       | (114 | ) |   |   | (93 | ) |
| Income (loss) from continuing operations before  income taxes and cumulative effect of accounting change |       |           |       | $                   | (109       | )              |       |   | $ | (338 | ) |   |   | $ | 94 |   |

 

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(1)    Corporateexpenses and other include corporate expenses, corporate charges for segmentsfor working capital interest and other expenses not allocated to segments.

 

**2004COMPARED TO 2003**

 

The improvement in our lossfrom continuing operations before income taxes and cumulative effect ofaccounting change was due primarily to higher segment profits and lowerrestructuring and litigation charges and settlements, net.  An asset impairment charge recorded in thefourth quarter of 2004 partially offset these improvements.  Total segment operating profit increased dueprimarily 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.  Segment profits were negatively impacted by highercosts of fiber, employee benefits and freight.

 

Net sales of $8,291million in 2004 increased by 7.4% due primarily to higher average sales pricesand higher sales volume.  Net salesinclude the sales of Smurfit-MBI, a Canadian corrugated producer, after March 31,2003, the date we acquired the remaining 50% not previously owned (theSmurfit-MBI Acquisition).  The change innet sales for each of our segments is summarized in the chart below:

 
| **(In  millions)**          | ** ** | **Container-  board &  CorrugatedContainers** | ** ** | **ConsumerPackaging** | ** ** | **OtherOperations** | ** ** | **Total** | ** ** |
|-----------------------------|------------|---------------------------------------------------|------------|-----------------------|------------|---------------------|------------|-----------|------------|
|                        |       |                                              |       |                  |       |                |       |      |       |
| Sales price and product mix |       | $                                                 | 186        |                  | $          | —              |       | $         | 75         |   | $ | 261 |   |
| Sales volume                |       | 160                                               |       | —                |       | 29                  |       | 189       |       |
| Smurfit-MBI Acquisition     |       | 119                                               |       | —                |       | —              |       | 119       |       |
| Total                       |       | $                                                 | 465        |                  | $          |                |       | $         | 104        |   | $ | 569 |   |

 

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

 

 

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Selling andadministrative expense decreased $112 million compared to last year.  The expense in 2003 included litigationcharges and settlements, net of $110 million. Selling and administrative expense as a percent of net sales decreasedfrom 11.4% in 2003 to 9.3% in 2004.

 

As part of our continuedoverall strategy to rationalize operations and cut costs in response to marketconditions, we closed ten converting facilities and sold our Indonesianoperations in 2004.  We recorded restructuringcharges of $16 million, net of a $5 million gain from the sale of threeshutdown facilities.  The assets of the2004 shutdown operations were adjusted to the estimated net realizable valueresulting in a $7 million non-cash write-down. The remaining charges are primarily severance and benefits resultingfrom the termination of approximately 1,000 employees.

 

The 2004 restructuringactivities were a continuation of our restructuring strategy announced in thefourth quarter of 2003 to rationalize operations and cut costs in response toexpected 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 $159million in savings from the workforce reductions, reduced fixed costs andprocess improvements.

 

We recorded an assetimpairment charge of $73 million in the fourth quarter of 2004 related to thewrite-down of non-core pulp mill property, plant and equipment included in ourContainerboard and Corrugated Containers segment.

 

Interest expense, net was$343 million in 2004, an increase of $2 million compared to 2003.  The increase was due to higher averageinterest rates ($3 million), which were partially offset by lower averageborrowings ($1 million).  Our overallaverage effective interest rate in 2004 was higher than 2003 by approximately 10basis points.

 

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

 

Benefit from income taxesin 2004 differed from the amount computed by applying the statutory U.S.federal income tax rate to loss from continuing operations before income taxesand cumulative effect of accounting change due primarily to a $10 millionbenefit related to the resolution of certain prior year tax matters, stateincome taxes and the effects of other permanent differences.  For information concerning income taxes, seeNote 13 of the Notes to Consolidated Financial Statements.

 

**Containerboardand Corrugated Containers Segment**

Net sales increased 8.1% in2004 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 the first part of 2004, have increasedsince their low point in April 2004.  For the year ended December 31, 2004,average North American corrugated container prices have increased 1.8% and averagedomestic linerboard prices were higher by approximately 6.3% compared to 2003.  Market pulp prices were approximately 3.2%higher than 2003.  Shipments of corrugatedcontainers on a per day basis increased 1.8% compared to 2003. The increase incorrugated container shipments was negatively impacted by the shutdown of nineconverting facilities during 2004.

 

Containerboard productionincreased by 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 ofmarket pulp increased 10.5%, while production of SBS decreased by 4.8%.  Production of kraft paper declined 11.6% dueprimarily to the shifting of production to containerboard on one of our papermachines, which is capable of producing both products.

 

Profits increased by $69million due primarily to higher average sales prices, improvements in our milloperating rates and cost savings initiatives ($137 million) we have implementedsince the fourth quarter of 2003, including reductions in our workforce andproductivity improvements.  Profits were unfavorablyimpacted by the higher costs of wood ($21 million), reclaimed fiber ($36million), freight and employee benefits.

 

**ConsumerPackaging Segment**

Net sales were comparableto 2003.  Flexible packaging shipmentswere higher compared to 2003, while folding carton and multiwall bag shipments wereflat.  The coated recycled boxboard millsoperated at near

 

16

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100% capacity in 2004compared to 94.9% in 2003, but production was lower by 2.9% due to thepermanent closure of a paper machine in the fourth quarter of 2003.  Shipments of laminated products declined primarilyas 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 ofcoated recycled boxboard were higher by 2.3%.

 

Profits decreased by $1million due primarily to an increase in reclaimed fiber cost ($8 million) and a$2 million loss related to a fire at our Salt Lake 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.

 

**OtherOperations**

#### Net sales increased by33.9% due primarily to higher sales prices for reclamation products in 2004.  The average price of old corrugated containers(OCC) was higher by approximately $20 per ton.  Total tons of fiber reclaimed and brokered werecomparable to last year.  Higher externalsales of reclaimed fiber were offset by lower internal consumption as a resultof the shutdown of three of our paper machines in the fourth quarter of 2003.

####  

**2003COMPARED TO 2002**

 

The decline in our resultsfrom continuing operations before income taxes and cumulative effect ofaccounting change was due primarily to lower segment profits, higherrestructuring and litigation charges and the impact of the stronger Canadiandollar.  Total segment operating profit waslower due to lower mill operating rates and higher costs of energy, fiber andemployee benefits, but benefited from the acquisition of the Stevenson, Alabamacontainerboard mill and the related corrugated container assets on September 30,2002 (the Stevenson Mill Acquisition) and the Smurfit-MBI Acquisition.  Annualized synergy savings from the StevensonMill Acquisition achieved in 2003, including administrative cost reductions,system optimization and purchasing savings, exceeded our targeted annualsavings of $40 million.

 

Net sales of $7,722 millionin 2003 increased by 3.2% due primarily to higher sales volume as a result of theSmurfit-MBI Acquisition.  Smurfit-MBI hadnet sales of $358 million for the nine months ended December 31, 2003. Thechange in net sales for each of our segments is summarized in the chart below:

 
| **(In  millions)**          | ** ** | **Container-  board &  CorrugatedContainers** | ** ** | **ConsumerPackaging** | ** ** | **OtherOperations** | ** ** | **Total** | ** ** |
|-----------------------------|------------|---------------------------------------------------|------------|-----------------------|------------|---------------------|------------|-----------|------------|
|                        |       |                                              |       |                  |       |                |       |      |       |
| Sales price and product mix |       | $                                                 | (28        | )                     | $          | (10                 | )          | $         | (9         | ) | $ | (47 | ) |
| Sales volume                |       | (73                                               | )          | 18                    |       | (17                 | )          | (72       | )          |
| Smurfit-MBI Acquisition     |       | 358                                               |       |                  |       |                |       | 358       |       |
| Total                       |       | $                                                 | 257        |                  | $          | 8                   |       | $         | (26        | ) | $ | 239 |   |

 

###### **Cost of goods sold increased from $ 6,247 million in 2002to $6,673 million in 2003 due to the Smurfit-MBI Acquisition ($298 million) andthe higher cost of energy ($69 million), wood fiber ($50 million), employeebenefits and the impact from the strengthening Canadian dollar.  Cost of goods sold as a percent of net salesincreased from 83% in 2002 to 86% in 2003 due primarily to our lower milloperating rates and higher costs of energy, wood fiber and employee benefits.**

 

Selling andadministrative expenses increased due primarily to litigation charges,acquisitions and higher employee benefits costs.  We recorded litigation charges of $121 millionin 2003 to accrue for an antitrust class action settlement and the estimatedliability of the opt-out cases (see Part I, Item 3, “Legal Proceedings”), whichwas partially offset by an $11 million settlement payment received inconnection with an environmental indemnification obligation.

 

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During 2003, we recordedrestructuring charges of $115 million, including $107 million in the fourthquarter, related to rationalization and cost reduction plans.  We permanently closed our Thunder Bay, Ontariocorrugating medium mill, temporarily idled one of two paper machines at ourJacksonville, Florida containerboard mill, permanently closed one of two papermachines at our Philadelphia, Pennsylvania coated recycled boxboard mill,closed six converting facilities and reduced the salaried workforce primarilyin our corrugated containers operations.  As a result, our annual production capacitiesof containerboard and boxboard were permanently reduced by approximately 225,000tons (3%) and approximately 70,000 tons (12%), respectively.

 

Interest expense, netdecreased by $14 million due to the favorable impacts of lower interest rates($10 million) and lower average borrowings ($4 million).  Our overall average effective interest rate in2003 was lower than 2002 by approximately 20 basis points.

 

Other, net for 2003included non-cash foreign currency exchange losses totaling $50 millioncompared to $2 million in 2002.  Theincrease compared to 2002 was due primarily to the strengthening Canadiandollar, which resulted in an approximately 18% adverse movement in the closing exchangerate relative to the U.S. dollar in 2003.  See Item 7a, “Quantitative and QualitativeDisclosures About Market Risk, Foreign Currency Risk.”

 

Benefit from income taxesin 2003 differed from the amount computed by applying the statutory U.S.federal income tax rate to loss from continuing operations before income taxesand cumulative effect of accounting change due primarily to a $12 millionbenefit related to the resolution of certain prior year tax matters, stateincome taxes and the effects of other permanent differences.  For information concerning income taxes, seeNote 13 of the Notes to Consolidated Financial Statements.

 

**Containerboardand Corrugated Containers Segment**

Net sales increased by 4.7%due primarily to higher shipments of corrugated containers resulting from the Smurfit-MBIAcquisition. Although containerboard production increased by 4.7% due primarilyto the Stevenson Mill Acquisition, external sales of containerboard declined dueto the higher integration level resulting from the Smurfit-MBI Acquisition.  Market pulp shipments were lower due in part towet weather conditions in the southeastern U.S., which hampered our ability tosource wood fiber.  Prices for corrugatedcontainers and containerboard were lower due to poor market conditions.  Market pulp prices increased compared to 2002.

 

Our containerboard millsoperated at an average rate of 88.7% of capacity in 2003, as compared to 90.0%in 2002.  Shipments of corrugatedcontainers increased 4.4% compared to 2002 due primarily to the Smurfit-MBIAcquisition.  Production of SBS decreasedby 2.0% and market pulp decreased by 12.4%.

 

Profits decreased by $219million due primarily to higher costs, including energy ($60 million), woodfiber ($50 million) and employee benefits and lower mill operating rates.  Profits were favorably impacted by the StevensonMill and Smurfit-MBI Acquisitions.

 

**ConsumerPackaging Segment**

Net sales were comparableto 2002.  Shipments of folding cartonsincreased 2.0%, primarily as a result of  an acquisition.  Production of coated recycled boxboard andshipments of our flexible products and multiwall bags were comparable to 2002.  The increases in sales volume were partiallyoffset by lower sales prices, particularly for folding cartons and multiwallbags.

 

Profits decreased by $40million due primarily to lower sales prices and product mix and higher costsfor energy ($8 million), reclaimed fiber ($3 million) and employee benefits.

 

**OtherOperations**

Shipments of reclaimedfiber to third parties were lower in 2003 due to higher internal consumption asa result of the Stevenson Mill Acquisition.  The average price of OCC and our total tons offiber reclaimed and brokered were comparable to 2002.  Profits were comparable to 2002.

 

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**LIQUIDITYAND CAPITAL RESOURCES**

 

The following tablepresents a summary of our cash flows for the years ended December 31:

 
| **(In millions)**                       | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|-----------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Net cash provided by (used for):        |       |     |       |     |       |     |       |
| Operating activities                    |       | $        | 273        |     | $          | 162      |       | $ | 503 |   |
| Investing activities                    |       | (200     | )          | 15       |       | (462     | )          |
| Financing activities                    |       | (79      | )          | (171     | )          | (53      | )          |
| Effect of exchange rate changes on cash |       |     |       | (2       | )          | 2        |       |
| Net increase (decrease) in cash         |       | $        | (6         | )        | $          | 4        |       | $ | (10 | ) |

 

**Net CashProvided By Operating Activities**

Net cash provided byoperating activities for the year ended December 31, 2004 increased by $111million, or 69%, compared to 2003 due primarily to higher segment profits andlower tax payments.  The 2003 period alsoincluded a payment of $46 million related to the settlement of the antitrustclass action litigation.  Working capitalwas higher in 2004 due primarily to increases in accounts receivable, which wasimpacted by higher product pricing, and higher inventories.  Contributions to our pension plans were $177million in 2004 compared to $171 million in 2003 and $120 million in 2002.

 

**Net CashProvided By (Used For) Investing Activities**

Net cash used forinvesting activities was $200 million for the year ended December 31, 2004. The 2003 period included approximately$189 million of cash received related to the exchange transactions withJefferson Smurfit Group (see Note 2 of the Notes to Consolidated FinancialStatements).  Expenditures for property,plant and equipment in 2004 were $219 million, including $39 million forenvironmental projects and $180 million for upgrades, modernization andexpansion.  In addition, in 2004 weacquired the remaining 15% interest not previously owned in a corrugatedcontainer operation for $13 million.

 

**Net CashUsed For Financing Activities**

Net cash used for financingactivities for the year ended December 31, 2004 of $79 million includednet repayments of debt of $312 million, proceeds from the sale of receivablesof $203 million, as discussed below, and the exercise of stock options of $54million.

 

In March  2004, SSCEused $38 million of proceeds received from the Smurfit-MBI securitizationprogram primarily to prepay a portion of its Tranche C term loan.  See “Off-Balance Sheet Arrangements” below.

 

In April  2004, SSCEand JSC(U.S.) obtained amendments from their lender groups easing certainfinancial covenant requirements under their bank credit agreements as of March 31,2004, and for future periods through December 31, 2004.

 

InJuly  2004, Stone Container Finance Company of Canada II, a wholly-ownedsubsidiary of SSCE, issued $200 million of 7.375% unsecured senior notes due2014.  The proceeds were used to redeemat par the $185 million outstanding aggregate principal amount of 11.5% seniornotes due August 15, 2006, prepay approximately $13 million of outstandingTranche B term loan under the SSCE credit facility and pay approximately $2million of fees and expenses related to the transaction.  On November 17, 2004, SSCEcompleted a registered exchange offer of all of the then outstanding 7.375%unsecured senior notes due 2014 for a like principal amount of senior noteswhich have been registered under the Securities Act of 1933. SSCE did notreceive any proceeds from the exchange offer.

 

On November 1, 2004,JSCE, Inc. merged with and into JSC(U.S.), with JSC(U.S.) as the survivingentity. JSC(U.S.) then merged into Stone Container (the Merger) principally tosimplify and consolidate our debt financing activities.  Stone Container was renamed Smurfit-StoneContainer Enterprises, Inc. (SSCE).  Inconnection with the Merger, we, as guarantor, and SSCE and its subsidiary,Smurfit-Stone Container Canada Inc. (SSC Canada), as borrowers, entered into anew credit agreement (the Credit Agreement) on November 1, 2004.  The Credit Agreement, which refinanced andreplaced our former credit agreements in their entirety, provided for (i) arevolving credit facility of $600 million to SSCE, of which $179 million wasborrowed upon the closing of the Credit Agreement, and (ii) a revolving creditfacility of $200 million to SSCE and SSC Canada, none of which was borrowed.  The revolving credit facilities

 

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include sub-limits forthe issuance of letters of credit and swingline loans.  Each of these revolving credit facilities matureson November 1, 2009.  The CreditAgreement also provided for a Tranche B term loan to SSCE in the aggregateprincipal amount of $975 million and a Tranche C term loan to SSC Canada in theaggregate principal amount of $300 million. The credit facilities bear interest at rates selected at the option ofSSCE, equal to LIBOR plus 2.25% or alternate base rate (ABR) plus 1.25%, in thecase of the revolving credit facilities and LIBOR plus 2.00% or ABR plus 1.00%,in the case of the term loan facilities. We pay a 0.5% commitment fee on the unused portions of our revolving creditfacilities.  The term loans are payablein quarterly installments beginning on April 1, 2005 and ending on November 1,2011.  In addition, the Credit Agreementprovides for a deposit funded letter of credit facility to us, related to ourvariable rate industrial revenue bonds, for approximately $122 million that matureson November 1, 2010.

 

SSCE used the proceeds ofthe Credit Agreement along with $19 million of available cash to repay alloutstanding obligations under its former credit agreements, consisting ofapproximately $1,013 million of Tranche B term loans, $120 million of a TrancheC Canadian term loan and $329 million under its former revolving creditfacilities, and to pay fees and other expenses of approximately $11 millionrelated to this transaction.

 

The obligations of SSCEunder the Credit Agreement are unconditionally guaranteed by us and thematerial U.S. subsidiaries of SSCE.  Theobligations of SSC Canada under the Credit Agreement are unconditionallyguaranteed by us, SSCE, the material U.S. subsidiaries of SSCE and the materialCanadian subsidiaries of SSC Canada.  Theobligations of SSCE under the Credit Agreement are secured by a securityinterest in substantially all of our assets and properties, and those of SSCEand the material U.S. subsidiaries of SSCE, by a pledge of all of the capitalstock of SSCE and the material U.S. subsidiaries of SSCE and by a pledge of 65%of the capital stock of SSC Canada that is directly owned by SSCE.  The security interests securing SSCE’sobligation under the Credit Agreement exclude cash, cash equivalents, certaintrade receivables, three paper mills and the land and buildings of certaincorrugated container facilities.  Theobligations of SSC Canada under the Credit Agreement are secured by a securityinterest in substantially all of the assets and properties of SSC Canada andthe material Canadian subsidiaries of SSC Canada, by a pledge of all of thecapital stock of the material Canadian subsidiaries of SSC Canada and by thesame U.S. assets, properties and capital stock that secure SSCE’s obligationsunder the Credit Agreement.  The securityinterests securing SSC Canada’s obligation under the Credit Agreement excludethree mills and property related thereto and certain other real propertylocated in New Brunswick and Quebec.

 

The Credit Agreementcontains various covenants and restrictions including (i) limitations ondividends, redemptions and repurchases of capital stock, (ii) limitations onthe incurrence of indebtedness, liens, leases and sale-leaseback transactions,(iii) limitations on capital expenditures and (iv) maintenance of certainfinancial covenants.  The CreditAgreement also requires prepayments if we have excess cash flows, as definedbeginning in 2005, or receive proceeds from certain asset sales, insurance orincurrence of certain indebtedness.

 

Inconnection with the Merger, SSCE entered into two supplemental indenturespursuant to which SSCE assumed the obligations of JSC(U.S.) with respect to$700 million in aggregate principal amount of JSC(U.S.)’s 8.25% senior notesdue October 1, 2012 and $300 million in aggregate principal amount ofJSC(U.S.)’s 7.50% senior notes due June 1, 2013.

 

In November 2004, inconnection with the Merger, SSCE replaced its former $265 million off-balancesheet accounts receivable securitization program with a new $475 million accountsreceivable securitization program whereby SSCE sells, without recourse, on anongoing basis, certain of its accounts receivable to Stone ReceivablesCorporation (SRC).  Approximately $203million of the proceeds received upon the sale of the accounts receivable wereused by SSCE to repay amounts due under the former JSC(U.S.) securitization program.

 

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**FUTURECASH FLOWS**

 

**ContractualObligations and Commitments**

At December 31, 2004,our contractual obligations and commitments were as follows:

 
| ** **                                   | ** ** | ** ** | ** ** | **Amounts Payable During** | ** ** |
|----------------------------------------------|------------|------------|------------|----------------------------|------------|
| **(In millions)**                            | ** ** | **Total**  | ** ** | **2005**                   | ** ** | **2006-07** | ** ** | **2008-09** | ** ** | **2010 &  Beyond** | ** ** |
| ** **                                   | ** ** | ** ** | ** ** | ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Long-term debt, including capital leases (1) |       | $          | 4,498      |                       | $          | 19 |   | $ | 121 |   | $ | 479 |   | $ | 3,879 |   |
| Operating leases                             |       | 340        |       | 98                         |       | 136 |   | 60 |   | 46 |   |
| Purchase obligations (2)                     |       | 819        |       | 234                        |       | 260 |   | 152 |   | 173 |   |
| Commitments for capital expenditures (3)     |       | 311        |       | 262                        |       | 49 |   |   |   |   |   |
| Other long-term liabilities (4)              |       | 104        |       | 54                         |       | 13 |   | 6 |   | 31 |   |
| Total contractual obligations                |       | $          | 6,072      |                       | $          | 667 |   | $ | 579 |   | $ | 697 |   | $ | 4,129 |   |

 

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(1)            Interestpayments on all debt instruments for 2004, 2003 and 2002 were $340 million,$341 million and $337 million, respectively. See Item 7a, “Quantitative andQualitative Disclosures About Market Risk - Interest Rate Risk.”

(2)            Amountsshown consist primarily of national supply contracts to purchasecontainerboard, wood, reclaimed fiber, natural gas and other energy resourcesfor which value is received.  We do notaggregate open purchase orders executed in the normal course of business byeach of our operating locations and such purchase orders are therefore excludedfrom the table.

(3)            Amountsshown are estimates of future spending on capital projects which wereauthorized prior to December 31, 2004, but were not completed by December 31,2004.  We expect capital expenditures for2005 to be in the range of $275 million to $300 million.

(4)            Amountsshown consist primarily of severance costs and other rationalizationexpenditures, antitrust payments and environmental liabilities which have beenrecorded in our December 31, 2004 balance sheet.  The table does not include our deferred incometax liability, accruals for self-insured losses and pension and otherpostretirement plans because it is not certain when these liabilities willbecome due.  We contributed $177 millionto our pension plans and $20 million to other postretirement plans in 2004 andexpect to contribute approximately $175 million and $20 million, respectively, tosuch plans in 2005.  Future contributionsto our pension and other postretirement plans will be dependent upon pendinglegislation, future changes in discount rates and the earnings performance ofour plan assets.

 

As previously discussed,our cash flow from operations improved in 2004 compared to 2003 primarily as aresult of the improving U.S. economy.  Weexpect further improvement in our cash flow from operations in 2005, providedthe economic expansion continues.  As of December 31,2004, we have unused borrowing capacity under the SSCE’s revolving creditfacilities of $495 million.

 

Scheduled debt payments,including capital lease payments, for 2005 and 2006 are $19 million and $32million, respectively.  We expect thatour cash flow from operations and our unused borrowing capacity under SSCE’srevolving credit facilities, in combination, will be sufficient for the nextseveral years to meet our obligations and commitments, including debt service,pension funding, the antitrust settlement, severance costs and otherrationalization expenditures, preferred stock dividends, expenditures relatedto environmental compliance and other capital expenditures.

 

**ContingentObligations**

We issue standby lettersof credit primarily for performance bonds and for self-insurance.  Letters of credit are issued under SSCE’srevolving credit facilities, generally have a one-year maturity and are renewedannually.  As of December 31, 2004, SSCEhad $161 million of letters of credit outstanding.

 

We have certain woodchipprocessing contracts, which provide for guarantees of third party contractors’debt outstanding, with a security interest in the chipping equipment.  Guarantee payments would be triggered in theevent of a loan default by any of the contractors.  The maximum potential amount of futurepayments related to all of such arrangements as of December 31, 2004 was $43million.  Cash proceeds received fromliquidation of the chipping equipment would be based on market conditions atthe time of sale, and we may not recover in full the guarantee payments made.

 

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**PensionObligations**

Asof December 31, 2004, our pension benefit obligations exceeded the fairvalue of pension plan assets by $870 million, down from $880 million at the endof 2003.  In 2004, we recorded an increaseto the minimum pension liability of $21 million and a decrease to othercomprehensive income of $14 million, net of tax of $7 million.

 

#### **Exit Liabilities**

We recorded restructuringcharges of $16 million in 2004, including $14 million for exit liabilities,which were principally for severance and benefit cost and facility closurecost.  In 2004, we incurred cashexpenditures of $10 million for these exit liabilities.

 

We had $51 million ofexit liabilities as of December 31, 2003, related to the restructuring of ouroperations.  During 2004, we incurredcash expenditures of $22 million for these exit liabilities.  The exit liabilities remaining as of December 31,2004, including the 2004 restructuring activities, totaled $33 million.  Future cash outlays, principally for severanceand benefits cost and long-term lease commitments and facility closure cost,are expected to be $13 million in 2005, $4 million in 2006 and $16 millionthereafter. We intend to continue funding exit liabilities through operationsas originally planned.

 

**EnvironmentalMatters**

As discussed in Item 1, “Business,Environmental Compliance,” we continue to study possible means of compliancewith Phase II of MACT I of the Cluster Rule and the new Boiler MACT regulation. Based on currently availableinformation, we estimate that the aggregate compliance cost of Phase II of MACTI will be approximately $60 million to $70 million, $16 million of which wasspent in 2004, with the remainder to be spent in 2005 and 2006.  Based on currently available information, weestimate that the aggregate compliance cost for Boiler MACT will beapproximately $90 million to $100 million, $1 million of which was spent in2004, with the remainder to be spent over the next three years. In addition toCluster Rule and Boiler MACT compliance, we anticipate additional capitalexpenditures related to environmental compliance.  Excluding the spending on the Cluster Rule andBoiler MACT projects, we have spent an average of approximately $14 million ineach of the last three years on capital expenditures for environmentalpurposes.  We anticipate thatenvironmental capital expenditures, exclusive of the Cluster Rule and BoilerMACT projects, will be approximately $14 million in 2005.

 

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

####  

At December 31, 2004,we had three off-balance sheet financing arrangements.

 

SSCE has a $475 millionaccounts receivable securitization program whereby it sells, without recourse,on an ongoing basis, certain of its accounts receivable to SRC.  SRC is a wholly-owned non-consolidatedsubsidiary of SSCE and a qualified special-purpose entity under the provisionsof Statement of Financial Accounting Standards (SFAS) No. 140, “Accounting forTransfers and Servicing of Financial Assets and Extinguishments of Liabilities.” Accordingly, accounts receivable sold toSRC for which we do not retain an interest are not included in our consolidatedbalance sheets.  SRC transfers thereceivables to a non-consolidated subsidiary, a limited liability company,which has issued notes to third-party investors.  At December 31, 2004, $557 million ofaccounts receivable had been sold under the program, of which $140 million wasretained by SSCE as a subordinated interest and recorded in retained interestin receivables sold in the accompanying consolidated balance sheet.  The investors and the limited liabilitycompany have no recourse to SSCE for failure of debtors to pay when due.

 

SSCE, throughSmurfit-MBI, has an accounts receivable securitization program whereby itsells, without recourse, on an ongoing basis, certain of its Canadian accountsreceivable to a trust in which SSCE holds a variable interest, but is not theprimary beneficiary.  Accordingly, underFinancial Accounting Standards Board (FASB) Interpretation No. 46, “Consolidationof Variable Interest Entities,” accounts receivable sold to the trust, forwhich SSCE is not the primary beneficiary, are not included in the accompanyingconsolidated balance sheet. At December 31, 2004, $67 million of accountsreceivable had been sold under the program, of which $18 million was retainedby SSCE as a subordinated interest and recorded in retained interest in receivablessold in the accompanying consolidated balance sheet. The investors and thesecuritization trust have no recourse to SSCE for failure of debtors to paywhen due.

 

JSC(U.S.)sold 980,000 acres of owned and leased timberland in October 1999.  The final purchase price, after adjustments,was $710 million. JSC(U.S.) received $225 million in cash and $485 million in

 

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theform of installment notes, which mature from December 31, 2007 to December 31,2014.  Under JSC(U.S.)’s program tomonetize the installment notes receivable, the notes were sold, withoutrecourse, to Timber Note Holdings LLC (TNH), a wholly-owned subsidiary of JSC(U.S.)and a qualified special purpose entity under the provisions of SFAS No. 140,for $430 million in cash proceeds and a residual interest in the notes.  The residual interest included in other assetsin the accompanying consolidated balance sheet was $45 million at December 31,2004.  TNH and its creditors have norecourse to JSC(U.S.) in the event of a default on the installment notes.

 

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

 

Increases in costs for energy,fiber, freight, chemicals and employee benefits have had an adverse impact onour operating results during the past three years.  Energy and fiber cost increases are stronglyinfluenced by supply and demand factors, and when supplies become tight, wehave experienced temporary increases in the cost of these items.  We continue to seek ways to mitigate theimpact of such cost increases and, to the extent permitted by competition, passthe increased cost on to customers by increasing sales prices over time.

 

We use the last-in,first-out method of accounting for approximately 55% of our inventories.  Under this method, the cost of goods soldreported in the financial statements approximates current cost and thusprovides a closer matching of revenue and expenses in periods of increasingcosts.

 

Approximately 77% of ourproperty plant and equipment has been acquired over the past seven years.  Replacement of assets acquired in prior yearswill be at higher costs, but this will take place over many years.  New assets will result in higher depreciationcharges; but in many cases, due to technological improvements, there may beoperating cost savings as well.

 

###### **CRITICAL ACCOUNTINGPOLICIES AND USE OF ESTIMATES**

 

Our ConsolidatedFinancial Statements have been prepared in accordance with U.S. generallyaccepted accounting principles (GAAP). The preparation of financial statements in accordance with U.S. GAAPrequires our management to make estimates and assumptions that affect theamounts reported in the Consolidated Financial Statements and accompanyingfootnotes.  Our estimates and assumptionsare based on historical experiences and changes in the businessenvironment.  However, actual results maydiffer 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 policies and use of estimates are describedbelow.

 

# **Long-Lived Assets IncludingGoodwill**

We conduct impairment reviews of long-lived assets includinggoodwill in accordance with SFAS No. 144 and SFAS No 142.  Such reviews require us to make estimates offuture cash flows and fair values.  Ourcash flow projections include significant assumptions about economicconditions, demand and pricing for our products and cost.  Our estimates of fair value are determinedusing a variety of valuation techniques, including pricing of recent industryacquisitions.  While significant judgmentis required, we believe that our estimates of future cash flows and fair valueare reasonable.  However, should ourassumptions change in future years, our fair value models could result in lowerfair values for long-lived assets and goodwill, which could materially affect thevalue of property, plant and equipment and goodwill and results of operations.

 

We performed an impairment review of one of our pulp mills whichhad significant operating and cash flow losses in 2004, combined with a historyof losses due to a prolonged economic downturn affecting the pulp mill.  As a result, we recorded an asset impairmentcharge of $73 million in the fourth quarter of 2004 related to the write-downof non-core pulp mill property, plant and equipment.  We evaluated the recoverability of theselong-lived assets and recorded the impairment charge based on the amounts bywhich the carrying value of the assets exceeded their fair value.  Fair value of the assets was determined basedon a discounted cash flow analysis of the pulp mill’s projected operatingresults.  No goodwill had

 

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been assigned to the pulp mill, which is included in theContainerboard and Corrugated Containers segment.

 

## **IdlePaper Machines and Restructurings**

We have excess capacity in our containerboard systemdue to our policy of producing to meet demand.  As a result,we have temporarily shut down two of our paper machines, one located inFernandina Beach, Florida and the other in Jacksonville, Florida.  Our decision to shut down these machines wasbased upon anticipated supply and demand factors, their locations and operatingcost.  The Fernandina Beach machine,which was idled in 2001, has the annual capacity to produce approximately200,000 tons of lightweight linerboard and the Jacksonville machine, which wasidled in the fourth quarter of 2003, has the annual capacity to produce 167,000tons of medium.  No decision has beenmade to permanently shut down either of these machines, as they may berestarted, subject to future demand and industry conditions.  As of December 31, 2004, the Fernandina Beachand Jacksonville machines had net book values of approximately $110 millionand $21 million, respectively.  Foraccounting purposes, each of these machines is classified as held and used andcontinues to be depreciated.

 

In recent years, we haveclosed a number of operating facilities and exited non-core businesses.  Identifying and calculating the cost to exitthese businesses requires certain assumptions to be made, the most significantof which are anticipated future liabilities, including leases and othercontractual obligations, and the net realizable value of assets held for sale.  We believe our estimates are reasonable,considering our knowledge of the paper industry, previous experience in exitingactivities and valuations received from independent third parties in thecalculation 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.

 

## **Allowancefor Doubtful Accounts**

We evaluate the collectibility ofaccounts receivable on a case-by-case basis and make adjustments to the baddebt reserve for expected losses.  We alsoestimate reserves for bad debts based on historical experience and past duestatus of the accounts.  We performcredit evaluations and adjust credit limits based upon each customer’s paymenthistory and credit worthiness.  Whilecredit losses have historically been within our expectations and the provisionsestablished, actual bad debt write-offs may differ from our estimates,resulting in higher or lower charges in the future for our allowance fordoubtful accounts.

 

## **Pension**

The determination ofpension obligations and expense is dependent upon our selection of certainassumptions, the most significant of which are the expected long-term rate ofreturn on plan assets and the discount rates applied to plan liabilities.  Consulting actuaries assist us in determiningthese assumptions, which are described in Note 14 of the Notes to ConsolidatedFinancial Statements.  In 2004, weadjusted the expected long-term rate of return on our foreign plan assets to 8.0%,down from 9.0%, which increased retirement plan expense approximately $6 millionin 2004.  Effective for 2005, theexpected long-term rate of return is 9.0% on U.S. plan assets and 7.75% onforeign plan assets.  The discount ratesused to determine the benefit obligations for the U.S. and foreign retirementplans at December 31, 2004 were 5.84% and 5.75%, respectively.  The assumed rate for the long-term return onplan assets was determined based upon target asset allocations and expectedlong-term rates of return by asset class.  Our assumed discount rate was developed usinga portfolio of Moody’s Aa-rated fixed income securities that approximate theduration of our pension liabilities.  Adecrease in the assumed rate of return of 0.50% would increase pension expenseby approximately $11 million.  A decreasein the discount rate of 0.50% would increase our pension expense by approximately$19 million and our pension obligations by approximately $191 million.

 

## **IncomeTaxes**

Deferred tax assets andliabilities reflect our assessment of future taxes to be paid in thejurisdictions in which we operate.  Theseassessments involve temporary differences resulting from differing treatment ofitems for tax and accounting purposes, as well as estimates of our current taxexposures.  Based on our evaluation ofour tax positions, we believe we were adequately reserved for these matters at December 31,2004.

 

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At December 31, 2004,we had deferred tax assets related to net operating loss, alternative minimumtax and investment tax credit carryforwards in the amount of $776 million.  A valuation allowance of $208 million hasbeen established 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 to ConsolidatedFinancial Statements.  Utilization ofthese carryforwards has been consistent with expectations and we expect ourdeferred tax assets, net of the valuation allowance, will be fully realized.  Substantially all of our valuation allowancewas recorded in connection with the 1998 merger with Stone Container and areduction in the valuation would result principally in a correspondingreduction to goodwill.  Should additionalvaluation allowances be necessary because of changes in economic circumstances,those allowances would be established through a charge to income tax expense.

 

Through December 31,2004, no provision had been made for U.S. federal and state income taxes on theaccumulated unremitted earnings of our foreign subsidiaries because suchearnings are intended to be reinvested outside the U.S. indefinitely.  On October 22, 2004, the American JobsCreation Act (the AJCA) was signed into law. The AJCA includes a deduction of 85% of certain foreign earnings thatare repatriated, as defined in the AJCA. Under this law, we could elect to repatriate earnings of up to $500million, with related income taxes of up to $30 million.  We have started an evaluation of the effectsof the repatriation provision; however, whether we will ultimately utilize thisprovision depends on a number of factors including reviewing future guidancefrom Congress or the Treasury Department on key elements of the provision.  We expect to complete our evaluation of theeffects of the repatriation provision within a reasonable period of timefollowing the publication of the additional guidance.  Until that time, our current intention toindefinitely reinvest outside the U.S. accumulated earnings of our foreignsubsidiaries remains unchanged.

 

We frequently face challengesfrom domestic and foreign tax authorities regarding the amount of taxes due.  These challenges include questions regardingthe timing and amount of deductions and the allocation of income among varioustax jurisdictions.  We have settled theInternal Revenue Service’s examination of the years 1999 through 2001,resulting in the expected payment of tax and interest of less than $1 million.  In connection with this settlement, werecorded a tax benefit of $10 million in the fourth quarter of 2004.  The Internal Revenue Service is currentlyexamining the years 2002 through 2003. The Canadian Revenue Agency is currently examining the years 1999through 2002 of the Company’s Canadian subsidiaries.  To the extent we prevail in matters for whichaccruals have been established or are required to pay amounts in excess of ourreserves, our effective tax rate in a given financial statement period may bematerially impacted.  While the ultimateresults cannot be predicted with certainty, we  believe that the examinations will not have amaterial adverse effect on our consolidated financial condition or results ofoperations.

 

## **Legaland Environmental Contingencies**

Accruals for legal andenvironmental matters are recorded when it is probable that a liability hasbeen incurred and the amount of loss can be reasonably estimated.  Such liabilities are developed based oncurrently available information and require judgments as to probable outcomes.  Assumptions are based on historical experienceand recommendations of legal counsel.  Environmentalestimates include assumptions and judgments about particular sites, remediationalternatives and environmental regulations.  We believe our accruals are adequate.  However, due to uncertainties associated withthese assumptions and judgments, as well as potential changes to governmentalregulations and environmental technologies, actual costs could differmaterially from the estimated amounts.

 

### **Self-Insurance**

We self-insure a majorityof our workers’ compensation and general liability costs subject to specificretention levels for certain policies and coverage.  Losses above these retention levels aretransferred to insurance companies.  Inaddition, we self-insure the majority of our group health care costs.  All of the health care, workers’ compensationand general liability claims are handled by third-party administrators.Consulting actuaries and administrators assist us in determining our liabilityfor self-insured claims.  Losses areaccrued based upon the aggregate self-insured claims determined by the third-partyadministrators, actuarial assumptions and our historical experience.  While we believe that our assumptions areappropriate, significant differences in our actual experience or significantchanges in our

 

25

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assumptions maymaterially affect our workers’ compensation, general liability and group healthcare costs.

 

**PROSPECTIVEACCOUNTING STANDARDS**

 

In December 2004,the FASB issued SFAS No. 123(R), “Share-Based Payment,” effective July 1,2005, which is a revision of SFAS No. 123, “Accounting for Stock-BasedCompensation.”  SFAS No. 123(R) requiresall share-based payments to employees, including grants of employee stockoptions, to be recognized in the financial statements based on their fairvalues.  We adopted the fair-value-basedmethod of accounting for share-based payments effective January 1, 2003using the prospective method described in SFAS No. 148, “Accounting forStock-Based Compensation – Transition and Disclosure.”  Currently, we use the Black-Scholes formula toestimate the value of stock options granted to employees and may continue touse this acceptable option valuation model upon the required adoption of SFASNo. 123(R) on July 1, 2005.  BecauseSFAS No. 123(R) must be applied not only to new awards but to previouslygranted awards that are not fully vested on the effective date, and because weadopted SFAS No. 123 using the prospective transition method (which appliedonly to awards granted, modified or settled after the adoption date),compensation cost for some previously granted awards that were not recognizedunder SFAS No.123 will be recognized under SFAS No. 123(R).  However, had we adopted SFAS No. 123(R) inprior periods, the impact of that standard would have approximated the impactof SFAS No. 123 as described in the disclosure of pro forma net income andearnings per share disclosed under the “Stock-Based Compensation” caption of Note1 of the Notes to Consolidated Financial Statements.  SFAS No. 123(R) also requires the benefits oftax deductions in excess of recognized compensation cost to be reported as afinancing cash flow, rather than as an operating cash flow as required undercurrent literature.  This requirementwill reduce net operating cash flows and increase net financing cash flows inperiods after adoption.  While we cannotestimate what those amounts will be in the future (because they depend on whenemployees exercise stock options), the amounts of operating cash flowsrecognized in prior periods for such excess tax deductions were $8 million, $7million and $1 million in 2004, 2003 and 2002, respectively.

 

In November 2004,the FASB issued SFAS No. 151, “Inventory Costs,” effective January 1,2006.  SFAS No. 151 requires abnormal amountsof idle facility expense, freight, handling costs and wasted materials to berecognized as current period charges.  Inaddition, SFAS No. 151 requires that allocation of fixed production overheadsto the costs of conversion be based on the normal capacity of the productionfacilities.  We plan to adopt SFAS No.151 on January 1, 2006.  The impactof this standard is not expected to be material.

 

**ITEM 7a.****                       QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

###### **We are exposed to various market risks, including commodityprice risk, foreign currency risk and interest rate risk. To manage thevolatility related to these risks, we enter into various derivative contracts.  The majority of these contracts are settled incash.  However, such settlements have nothad a significant effect on our liquidity in the past, nor are they expected tobe significant in the future. We do not use derivatives for speculative ortrading purposes.**

 

**CommodityPrice Risk**

We use financialderivative instruments, including fixed price swaps and options, to managefluctuations in cash flows resulting from commodity price risk in theprocurement of natural gas.  Ourobjective is to fix the price of a portion of the purchases of natural gas usedin the manufacturing process.  The changesin the market value of such derivative instruments have historically been, andare expected to continue to be, highly effective at offsetting changes in priceof the hedged item.  As of December 31,2004, the maximum 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 31,2004, we had monthly derivative instruments to hedge approximately 60% to 85%of our expected natural gas requirements through October 2005 andapproximately 30% to 35% of our requirements through December 2006.  Excluding the impact of derivative instruments,the potential change in our expected 2005 natural gas cost, based upon ourexpected annual usage and unit cost, resulting from a hypothetical 10% adverse pricechange, would be approximately $14 million.  The changes in energy cost discussed in Item 7,“Management’s Discussion and Analysis of

 

26

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Financial Condition andResults of Operations” include the impact of the natural gas derivativeinstruments.  See Note 9 of the Notes toConsolidated Financial Statements.

 

**ForeignCurrency Risk**

Our principal foreignexchange exposure is the Canadian dollar.  Assets and liabilities outside the UnitedStates are primarily located in Canada. The functional currency for our Canadianoperations is the U.S. dollar.  Ourinvestments in foreign subsidiaries with a functional currency other than theU.S. dollar are not hedged.

 

We use financialderivative instruments, including forward contracts and options, primarily toprotect against Canadian currency exchange risk associated with expected futurecash flows.  These instruments typicallyhave maturities of eighteen months or less.  As of December 31, 2004, we had monthlyCanadian dollar forward purchase contracts to hedge substantially all of ourrequirements through March 2005, approximately 65% to 70% of our Canadiandollar requirements through December 2005 and 25% to 30% of our Canadiandollar requirements for the first half of 2006.

 

We performed a sensitivity analysis as ofDecember 31, 2004 and 2003 that measures the change in the book value of our net monetaryCanadian 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.  The potential change in fair value resultingfrom a hypothetical 10% adverse change in the Canadian dollar exchange rate at December 31,2004 and 2003, would be $33 million and $29 million, respectively.  Fluctuations in Canadian dollar monetaryassets and liabilities result in gains or losses, which are credited or chargedto income.

 

In 2004, 2003 and 2002, the averageexchange rates for the Canadian dollar strengthened (weakened) against the U.S.dollar by 7.1%, 10.8% and (1.4)%, respectively.

 

**InterestRate Risk**

Our earnings and cash flow aresignificantly affected by the amount of interest on our indebtedness.  Our financing arrangements include both fixedand variable rate debt in which changes in interest rates will impact the fixedand variable rate debt differently.  Achange in the interest rate of fixed rate debt will impact the fair value ofthe debt, whereas a change in the interest rate on the variable rate debt willimpact interest expense and cash flows.  Ourobjective is to mitigate interest rate volatility and reduce or cap interestexpense within acceptable levels of market risk.  We periodically enter into interest rate swaps,caps or options to hedge interest rate exposure and manage risk within Companypolicy.  Any derivative would be specificto the debt instrument, contract or transaction, which would determine thespecifics of the hedge.

 

In the fourth quarter of2004, we 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.  Changes in the fairvalue of the interest rate swap contracts are expected to be highly effectivein offsetting the fluctuations in the variable interest rate, and are recordedin other comprehensive income until the underlying transaction isrecorded.  The accounting for the cashflow impact of the swap contracts is recorded as an adjustment to interestexpense each period.  The fair value ofour interest rate swap contracts at December 31, 2004 was a $2 millionloss included in other current liabilities. Contracts extend until 2011, consistent with the maturity on our TrancheB and Tranche C term loans.

 

We performed a sensitivity analysis as ofDecember 31, 2004 and 2003 that measures the change in interest expense onour variable rate debt arising from a hypothetical 100 basis point adversemovement in interest rates.  Based on ouroutstanding variable rate debt as of December 31, 2004 and 2003, ahypothetical 100 basis point adverse change in interest rates would increase interestexpense by approximately $12 million and $19 million, respectively.

 

The table below presents principal amountsby year of anticipated maturity for our debt obligations and related averageinterest rates based on the weighted average interest rates at the end of theperiod.  Variable interest ratesdisclosed do not attempt to project future interest rates and do not reflectthe impact of our interest rate swap contracts.  This information should be read in conjunctionwith Note 8 of the Notes to Consolidated Financial Statements.

 

27

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

 

Outstanding as ofDecember 31, 2004

 
| **(U.S.$, in millions)**                                             | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **Thereafter** | ** ** | **Total** | ** ** | **Fair Value** | ** ** |
|----------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------------|------------|-----------|------------|----------------|------------|
| Bank term loans and revolver  4.5% average interest rate (variable)  |       | $        | 9          |     | $          | 13       |       | $        | 13         |     | $          | 13             |       | $         | 157        |           | $          | 1,214 |   | $ | 1,419 |   | $ | 1,432 |   |
| U.S. senior notes  8.7% average interest rate (fixed)                |       |     |       |     |       |     |       | 300      |       |     |       | 2,350          |       | 2,650     |       | 2,885          |       |
| U.S. industrial revenue bonds  7.5% average interest rate (fixed)    |       | 2        |       | 11       |       | 2        |       | 1        |       | 4        |       | 192            |       | 212       |       | 212            |       |
| U.S. industrial revenue bonds  4.5% average interest rate (variable) |       |     |       |     |       |     |       |     |       |     |       | 120            |       | 120       |       | 120            |       |
| Other U.S.                                                           |       | 8        |       | 8        |       | 74       |       | 2        |       | 2        |       | 3              |       | 97        |       | 97             |       |
| Total debt                                                           |       | $        | 19         |     | $          | 32       |       | $        | 89         |     | $          | 316            |       | $         | 163        |           | $          | 3,879 |   | $ | 4,498 |   | $ | 4,746 |   |

 

**ITEM 8.****                             FINANCIALSTATEMENTS AND 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, 2004 and 2003                           |   |
| For  the years ended December 31, 2004, 2003 and 2002:                              |   |
| 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                                |   |

 

All other schedules specified underRegulation S-X have been omitted because they are not applicable, because theyare not required or because the information required is included in thefinancial statements or notes thereto.

 

28

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**Management’s Report on Internal Control overFinancial Reporting**

 

Our management is responsible for establishingand maintaining adequate internal control over financial reporting for Smurfit-StoneContainer Corporation, as such term is defined in Rule 13a-15(f) under the ExchangeAct.  As required by Rule 13a-15(c) underthe Exchange Act, we carried out an evaluation, with the participation of our principalexecutive officer and principal financial officer, of the effectiveness of ourinternal control over financial reporting as of the end of the latest fiscalyear.  The framework on which suchevaluation was based is contained in the report entitled “Internal Control - Integrated Framework”**issued by the Committee ofSponsoring Organizations of 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 inherentlimitations in the effectiveness of any system of internal control overfinancial reporting, based on our evaluation, we have concluded that ourinternal control over financial reporting was effective as of December 31,2004.

 

Ernst & Young LLP, ourindependent registered public accounting firm, has issued an attestation reporton management’s assessment of internal control over financial reporting forSmurfit-Stone Container Corporation as of December 31, 2004, which isincluded 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)                    |

 

29

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REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

Boardof Directors

Smurfit-StoneContainer Corporation:

 

We have auditedmanagement’s assessment, included in the accompanying Management’s Report onInternal Control over Financial Reporting, that Smurfit-Stone ContainerCorporation maintained effective internal control over financial reporting asof December 31, 2004, based on criteria established in InternalControl—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (the COSO criteria).  Smurfit-Stone Container Corporation’smanagement is responsible for maintaining effective internal control overfinancial reporting and for its assessment of the effectiveness of internalcontrol over financial reporting.  Ourresponsibility is to express an opinion on management’s assessment and anopinion on the effectiveness of the Company’s internal control over financialreporting based on our audit.

 

We conducted our audit inaccordance with the standards of the Public Company 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 includedobtaining an understanding of internal control over financial reporting,evaluating management’s assessment, testing and evaluating the design andoperating effectiveness of internal control, and performing such otherprocedures as we considered necessary in the circumstances. We believe that ouraudit provides a reasonable basis for our opinion.

 

A company’s internalcontrol over financial reporting is a process designed to provide reasonableassurance regarding the reliability of financial reporting and the preparationof financial statements for external purposes in accordance with generallyaccepted accounting principles.  Acompany’s internal control over financial reporting includes those policies andprocedures that (1) pertain to the maintenance of records that, in reasonabledetail, accurately and fairly reflect the transactions and dispositions of theassets of the company; (2) provide reasonable assurance that transactions arerecorded as necessary to permit preparation of financial statements inaccordance with generally accepted accounting principles and that receipts andexpenditures of the company are being made only in accordance withauthorizations of management and directors of the company; and (3) providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use or disposition of the company’s assets that could have amaterial effect on the financial statements.

 

Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements.  Also, projectionsof any evaluation of effectiveness to future periods are subject to the riskthat controls may become inadequate because of changes in conditions or thatthe degree of compliance with the policies or procedures may deteriorate.

 

In our opinion,management’s assessment that Smurfit-Stone Container Corporation maintainedeffective internal control over financial reporting as of December 31,2004, is fairly stated, in all material respects, based on the COSO criteria.  Also, in our opinion, Smurfit-Stone ContainerCorporation maintained, in all material respects, effective internal controlover financial reporting as of December 31, 2004, based on the COSOcriteria.

 

We also have audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the consolidated balance sheets as of December 31, 2004and 2003, and the related consolidated statements of operations, stockholders’equity and cash flows for each of the three years in the period ended December 31,2004, of Smurfit-Stone Container Corporation, and our report dated February 23,2005, expressed an unqualified opinion thereon.

 
|                    | /s/ Ernst & Young LP |   |
|-------------------------|--------------------------|--------|
|                    | Ernst &  Young LLP   |
|                    |                     |
| St. Louis,  Missouri    |                     |
| February 23,  2005 |                     |

 

30

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REPORT OF INDEPENDENTREGISTERED PUBLIC ACCOUNTING FIRM

 

Board of Directors

Smurfit-Stone ContainerCorporation

 

We have audited theaccompanying consolidated balance sheets of Smurfit-Stone Container Corporationas of December 31, 2004 and 2003, and the related consolidated statementsof operations, stockholders’ equity and cash flows for each of the three yearsin the period ended December 31, 2004.  Our audits also included the financialstatement schedule listed in the Index at Item 15(a).  These financial statements and schedule arethe responsibility of the Company’s management.  Our responsibility is to express an opinion onthese financial statements and schedule based on our audits.

 

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States).  Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement.  An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing theaccounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation.  We believe that our audits provide areasonable basis for our opinion.

 

In our opinion, thefinancial statements referred to above present fairly, in all materialrespects, the consolidated financial position of Smurfit-Stone ContainerCorporation at December 31, 2004 and 2003, and the consolidated results ofits operations and its cash flows for each of the three years in the periodended December 31, 2004, in conformity with U.S. generally acceptedaccounting principles.  Also, in ouropinion, the related financial statement schedule, when considered in relationto the basic financial statements taken as a whole, presents fairly, in allmaterial respects, the information set forth therein.

 

As discussed in Note 1 tothe financial statements, in 2003 the Company changed its method of accountingfor asset retirement obligations and for stock-based compensation.

 

We also have audited, inaccordance with the standards of the Public Company Accounting Oversight Board (UnitedStates), the effectiveness of Smurfit-Stone Container Corporation’s internal controlover financial reporting as of December 31, 2004, based on the criteriaestablished in Internal Control – Integrated Framework issued by the Commissionof Sponsoring Organizations of the Treadway Commission and our report dated February 23,2005, expressed an unqualified opinion thereon.

 
|                    | /s/ Ernst & Young LLP |   |
|-------------------------|---------------------------|--------|
|                    | Ernst &  Young LLP    |
|                    |                      |
| St. Louis,  Missouri    |                      |
| February 23,  2005 |                      |

 

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**SMURFIT-STONE CONTAINER CORPORATION**

**CONSOLIDATED BALANCE SHEETS**

 
| **December 31, (In  millions, except share data)**                                                                                               | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| **Assets**                                                                                                                                                 |       |       | ** ** |       |       |
|                                                                                                                                                       |       |       | ** ** |       |       |
| Current assets                                                                                                                                             |       |       | ** ** |       |       |
| Cash and cash equivalents                                                                                                                                  | ** ** | **$**      | **6**      | ** ** | $          | 12 |   |
| Receivables, less allowances of $12 in 2004 and $38  in 2003                                                                                               | ** ** | **254**    | ** ** | 470        |       |
| Retained interest in receivables sold                                                                                                                      | ** ** | **158**    | ** ** | 58         |       |
| Inventories                                                                                                                                                |       |       | ** ** |       |       |
| Work-in-process and finished goods                                                                                                                         | ** ** | **265**    | ** ** | 255        |       |
| Materials and supplies                                                                                                                                     | ** ** | **521**    | ** ** | 456        |       |
| ** **                                                                                                                                                 |       | **786**    | ** ** | 711        |       |
| Deferred income taxes                                                                                                                                      | ** ** | **142**    | ** ** | 146        |       |
| Prepaid expenses and other current assets                                                                                                                  | ** ** | **60**     | ** ** | 56         |       |
| Total current assets                                                                                                                                       | ** ** | **1,406**  | ** ** | 1,453      |       |
| Net property, plant and equipment                                                                                                                          | ** ** | **4,638**  | ** ** | 4,929      |       |
| Timberland, less timber depletion                                                                                                                          | ** ** | **44**     | ** ** | 45         |       |
| Goodwill                                                                                                                                                   | ** ** | **3,301**  | ** ** | 3,301      |       |
| Other assets                                                                                                                                               | ** ** | **336**    | ** ** | 374        |       |
| ** **                                                                                                                                                 |       | **$**      | **9,725**  | ** ** | $          | 10,102 |   |
| **Liabilities and Stockholders’ Equity**                                                                                                              |       |       | ** ** |       |       |
|                                                                                                                                                       |       |       | ** ** |       |       |
| Current liabilities                                                                                                                                        |       |       | ** ** |       |       |
| Current maturities of long-term debt                                                                                                                       | ** ** | **$**      | **19**     | ** ** | $          | 197 |   |
| Accounts payable                                                                                                                                           | ** ** | **604**    | ** ** | 512        |       |
| Accrued compensation and payroll taxes                                                                                                                     | ** ** | **191**    | ** ** | 197        |       |
| Interest payable                                                                                                                                           | ** ** | **95**     | ** ** | 98         |       |
| Other current liabilities                                                                                                                                  | ** ** | **207**    | ** ** | 167        |       |
| Total current liabilities                                                                                                                                  | ** ** | **1,116**  | ** ** | 1,171      |       |
| Long-term debt, less current maturities                                                                                                                    | ** ** | **4,479**  | ** ** | 4,610      |       |
| Other long-term liabilities                                                                                                                                | ** ** | **1,048**  | ** ** | 1,127      |       |
| Deferred income taxes                                                                                                                                      | ** ** | **823**    | ** ** | 924        |       |
| Stockholders’ equity                                                                                                                                  |       |       | ** ** |       |       |
| Preferred stock, aggregate liquidation preference of  $116; 25,000,000 shares authorized; 4,599,300 issued and outstanding                                 | ** ** | **85**     | ** ** | 82         |       |
| Common stock, par value $.01 per share; 400,000,000  shares authorized, 254,238,645 and 250,547,712 issued and outstanding in 2004  and 2003, respectively | ** ** | **3**      | ** ** | 3          |       |
| Additional paid-in capital                                                                                                                                 | ** ** | **3,999**  | ** ** | 3,926      |       |
| Unamortized restricted stock                                                                                                                               | ** ** | **(7**     | **)**      | (2         | )          |
| Retained earnings (deficit)                                                                                                                                | ** ** | **(1,507** | **)**      | (1,450     | )          |
| Accumulated other comprehensive income (loss)                                                                                                              | ** ** | **(314**   | **)**      | (289       | )          |
| Total stockholders’ equity                                                                                                                            | ** ** | **2,259**  | ** ** | 2,270      |       |
| ** **                                                                                                                                                 |       | **$**      | **9,725**  | ** ** | $          | 10,102 |   |

 

See notes to consolidated financial statements.

 

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**SMURFIT-STONE CONTAINER CORPORATION**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

 
| **Year Ended December 31, (In millions, except per share data)**                                    | ** ** | **2004**  | ** ** | **2003**   | ** ** | **2002** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|-----------|------------|------------|------------|----------|------------|
| Net sales                                                                                                |       | **$**     | **8,291**  | ** ** | $          | 7,722    |       | $ | 7,483 |   |
| Costs and expenses                                                                                       |       |      | ** ** |       |       |     |       |
| Cost of goods sold                                                                                       |       | **7,176** | ** ** | 6,673      |       | 6,247    |       |
| Selling and administrative expenses                                                                      |       | **770**   | ** ** | 882        |       | 740      |       |
| Restructuring charges                                                                                    |       | **16**    | ** ** | 115        |       | 24       |       |
| Asset impairment charge                                                                                  |       | **73**    | ** ** |       |       |     |       |
| Loss (gain) on sale of assets                                                                            |       | **(7**    | **)**      | 5          |       | 10       |       |
| Income from operations                                                                                   |       | **263**   | ** ** | 47         |       | 462      |       |
| Other income (expense)                                                                                   |       |      | ** ** |       |       |     |       |
| Interest expense, net                                                                                    |       | **(343**  | **)**      | (341       | )          | (355     | )          |
| Loss from early extinguishment of debt                                                                   | ** ** | **(11**   | **)**      | (3         | )          | (32      | )          |
| Other, net                                                                                               |       | **(18**   | **)**      | (41        | )          | 19       |       |
| Income (loss) from continuing operations before income  taxes and cumulative effect of accounting change |       | **(109**  | **)**      | (338       | )          | 94       |       |
| Benefit from (provision for) income taxes                                                                |       | **63**    | ** ** | 140        |       | (35      | )          |
| Income (loss) from continuing operations before  cumulative effect of accounting change                  | ** ** | **(46**   | **)**      | (198       | )          | 59       |       |
| Discontinued operations                                                                                  |       |      | ** ** |       |       |     |       |
| Income from discontinued operations, net of income  tax provisions of $4 in 2003 and $15 in 2002         |       |      | ** ** | 6          |       | 24       |       |
| Loss on disposition of discontinued operations, net  of income tax provision of $57                      |       |      | ** ** |       |       | (18      | )          |
| Income (loss) before cumulative effect of accounting  change                                             |       | **(46**   | **)**      | (192       | )          | 65       |       |
| Cumulative effect of accounting change                                                                   |       |      | ** ** |       |       |     |       |
| Asset retirement obligations, net of income tax  benefit of $3                                           |       |      | ** ** | (5         | )          |     |       |
| Net income (loss)                                                                                        | ** ** | **(46**   | **)**      | (197       | )          | 65       |       |
| Preferred stock dividends and accretion                                                                  | ** ** | **(11**   | **)**      | (11        | )          | (11      | )          |
| Net income (loss) available to common stockholders                                                       | ** ** | **$**     | **(57**    | **)**      | $          | (208     | )          | $ | 54 |   |
|                                                                                                     |       |      | ** ** |       |       |     |       |
| **Basic earnings per common share**                                                                      |       |      | ** ** |       |       |     |       |
| Income (loss) from continuing operations before  cumulative effect of accounting change                  |       | **$**     | **(.23**   | **)**      | $          | (.85     | )          | $ | .20 |   |
| Discontinued operations                                                                                  |       |      | ** ** | .02        |       | .09      |       |
| Loss on disposition of discontinued operations                                                           |       |      | ** ** |       |       | (.07     | )          |
| Cumulative effect of accounting change                                                                   |       |      | ** ** | (.02       | )          |     |       |
| Net income (loss) available to common stockholders                                                       |       | **$**     | **(.23**   | **)**      | $          | (.85     | )          | $ | .22 |   |
| Weighted average shares outstanding                                                                      |       | **253**   | ** ** | 246        |       | 244      |       |
|                                                                                                     |       |      | ** ** |       |       |     |       |
| **Diluted earnings per common share**                                                                    |       |      | ** ** |       |       |     |       |
| Income (loss) from continuing operations before  cumulative effect of accounting change                  |       | **$**     | **(.23**   | **)**      | $          | (.85     | )          | $ | .20 |   |
| Discontinued operations                                                                                  |       |      | ** ** | .02        |       | .09      |       |
| Loss on disposition of discontinued operations                                                           |       |      | ** ** |       |       | (.07     | )          |
| Cumulative effect of accounting change                                                                   |       |      | ** ** | (.02       | )          |     |       |
| Net income (loss) available to common stockholders                                                       |       | **$**     | **(.23**   | **)**      | $          | (.85     | )          | $ | .22 |   |
| Weighted average shares outstanding                                                                      |       | **253**   | ** ** | 246        |       | 246      |       |

 

See notes to consolidatedfinancial statements.

 

33

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**SMURFIT-STONE CONTAINER CORPORATION**

**CONSOLIDATEDSTATEMENTS 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, 2002**                                     |       | 243,902,361           |                   | $                   | 2          |                             | 4,599,300     |                               | $          | 76                                |       | $                                                    | 3,833      |       | $          |   |   | $ | (1,296 | ) | $ | (130 | ) | $ | 2,485 |   |
| Comprehensive income (loss)                                             |       |                  |                   |                |       |                             |          |                               |       |                              |       |                                                 |       |       |       |   |   |   |   |
| Net income                                                              |       |                  |                   |                |       |                             |          |                               |       |                              |       |                                                 |       | 65         |       |   |   | 65 |   |
| Other comprehensive income (loss)                                       |       |                  |                   |                |       |                             |          |                               |       |                              |       |                                                 |       |       |       |   |   |   |   |
| Deferred hedge gain, net of tax expense of $7                           |       |                  |                   |                |       |                             |          |                               |       |                              |       |                                                 |       |       |       | 11 |   | 11 |   |
| Unrealized holding loss on marketable securities, net  of tax of $0     |       |                  |                   |                |       |                             |          |                               |       |                              |       |                                                 |       |       |       | (1 | ) | (1 | ) |
| Foreign currency translation adjustment, net of tax  expense of $4      |       |                  |                   |                |       |                             |          |                               |       |                              |       |                                                 |       |       |       | 7 |   | 7 |   |
| Minimum pension liability adjustment, net of tax  benefit of $162       |       |                  |                   |                |       |                             |          |                               |       |                              |       |                                                 |       |       |       | (250 | ) | (250 | ) |
| Comprehensive income (loss)                                             |       |                  |                   |                |       |                             |          |                               |       |                              |       |                                                 |       |       |       |   |   | (168 | ) |
| Proceeds from stock transaction                                         |       |                  |                   |                |       |                             |          |                               |       | 1                                 |       |                                                 |       |       |       |   |   | 1 |   |
| Issuance of common stock under stock option and  restricted stock plans |       | 676,088               |                   |                |       |                             |          |                               |       | 11                                |       | (2                                                   | )          |       |       |   |   | 9 |   |
| Amortization of restricted stock                                        |       |                  |                   |                |       |                             |          |                               |       |                              |       | 1                                                    |       |       |       |   |   | 1 |   |
| Preferred stock dividends and accretion                                 |       |                  |                   |                |       |                             |          | 3                                  |       |                              |       |                                                 |       | (11        | )          |   |   | (8 | ) |
| **Balance at December 31, 2002**                                   |       | 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** | ** ** |

 

See notes to consolidatedfinancial statements.

 

34

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**SMURFIT-STONE CONTAINER CORPORATION**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

 
| **Year Ended December 31, (In millions)**                                               | ** ** | **2004**   | ** ** | **2003**   | ** ** | **2002** | ** ** |
|----------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|----------|------------|
| **Cash flows from operating activities**                                                     |       |       | ** ** |       |       |     |       |
| Net income (loss)                                                                            |       | **$**      | **(46**    | **)**      | $          | (197     | )          | $ | 65 |   |
| Adjustments to reconcile net income (loss) to net  cash provided by operating activities     |       |       | ** ** |       |       |     |       |
| Gain on disposition of discontinued operations                                               |       |       | ** ** |       |       | (39      | )          |
| Loss from early extinguishment of debt                                                       | ** ** | **11**     | ** ** | 3          |       | 32       |       |
| Cumulative effect of accounting change for asset  retirement obligations                     |       |       | ** ** | 8          |       |     |       |
| Depreciation, depletion and amortization                                                     |       | **416**    | ** ** | 415        |       | 401      |       |
| Amortization of deferred debt issuance costs                                                 |       | **11**     | ** ** | 10         |       | 9        |       |
| Deferred income taxes                                                                        |       | **(80**    | **)**      | (203       | )          | 92       |       |
| Non-cash impairment and restructuring charges                                                | ** ** | **80**     | ** ** | 85         |       | 18       |       |
| Pension and postretirement benefits                                                          |       | **(48**    | **)**      | (62        | )          | (64      | )          |
| Non-cash foreign currency losses                                                             |       | **22**     | ** ** | 50         |       | 2        |       |
| Change in current assets and liabilities, net of effects  from acquisitions and dispositions |       |       | ** ** |       |       |     |       |
| Receivables                                                                                  |       | **(99**    | **)**      | 82         |       | (2       | )          |
| Inventories                                                                                  |       | **(50**    | **)**      | 31         |       | (6       | )          |
| Prepaid expenses and other current assets                                                    |       | **(18**    | **)**      | 1          |       | 1        |       |
| Accounts payable and accrued liabilities                                                     |       | **64**     | ** ** | (69        | )          | (12      | )          |
| Interest payable                                                                             |       | **(4**     | **)**      | (2         | )          | 15       |       |
| Income tax benefit on exercise of employee stock  options                                    | ** ** | **8**      | ** ** | 7          |       | 1        |       |
| Other, net                                                                                   |       | **6**      | ** ** | 3          |       | (10      | )          |
| Net cash provided by operating activities                                                    |       | **273**    | ** ** | 162        |       | 503      |       |
| **Cash flows from investing activities**                                                     |       |       | ** ** |       |       |     |       |
| Expenditures for property, plant and equipment                                               |       | **(219**   | **)**      | (212       | )          | (207     | )          |
| Proceeds from property and timberland disposals and  sale of businesses                      | ** ** | **32**     | ** ** | 253        |       | 108      |       |
| Payments on acquisitions, net of cash received                                               | ** ** | **(13**    | **)**      | (26        | )          | (363     | )          |
| Net cash provided by (used for) investing activities                                         |       | **(200**   | **)**      | 15         |       | (462     | )          |
| **Cash flows from financing activities**                                                     |       |       | ** ** |       |       |     |       |
| Proceeds from long-term debt                                                                 |       | **1,480**  | ** ** | 300        |       | 2,520    |       |
| Net repayments of debt                                                                       |       | **(1,615** | **)**      | (502       | )          | (2,472   | )          |
| Net repayments under accounts receivable  securitization programs                            | ** ** | **(177**   | **)**      | (10        | )          | (13      | )          |
| Net proceeds from sale of receivables                                                        |       | **203**    | ** ** |       |       |     |       |
| Debt repurchase premiums                                                                     |       |       | ** ** |       |       | (25      | )          |
| Preferred dividends paid                                                                     | ** ** | **(8**     | **)**      | (8         | )          | (8       | )          |
| Proceeds from stock transaction                                                              |       |       | ** ** |       |       | 1        |       |
| Proceeds from exercise of stock options                                                      | ** ** | **54**     | ** ** | 57         |       | 4        |       |
| Deferred debt issuance costs                                                                 |       | **(16**    | **)**      | (8         | )          | (60      | )          |
| Net cash used for financing activities                                                       |       | **(79**    | **)**      | (171       | )          | (53      | )          |
|                                                                                         |       |       | ** ** |       |       |     |       |
| Effect of exchange rate changes on cash                                                      |       |       | ** ** | (2         | )          | 2        |       |
| **Increase (decrease) in cash and cash equivalents**                                         |       | **(6**     | **)**      | 4          |       | (10      | )          |
| Cash and cash equivalents                                                                    |       |       | ** ** |       |       |     |       |
| Beginning of year                                                                            |       | **12**     | ** ** | 8          |       | 18       |       |
| End of year                                                                                  |       | **$**      | **6**      | ** ** | $          | 12       |       | $ | 8 |   |

 

See notes to consolidatedfinancial statements.

 

35

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**SMURFIT-STONE CONTAINER CORPORATION**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

(Tabular amounts in millions, except share data)

 

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

 

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

 

Prior to November 1,2004, SSCC owned 100% of the equity interest in JSCE, Inc. (“JSCE”) and StoneContainer Corporation (“Stone”).  JSCEowned 100% of the equity interest in Jefferson Smurfit Corporation (U.S.) (“JSC(U.S.)”)and was the guarantor of the senior unsecured indebtedness of JSC(U.S.).  JSCE had no operations other than itsinvestment in JSC(U.S.).  On November 1,2004, JSCE merged with and into JSC(U.S.), with JSC(U.S.) as the survivingcompany, and then JSC(U.S.) merged with and into Stone, with Stone as thesurviving company (the “Merger”), principally to consolidate debt financingactivities of the Company and its subsidiaries. Stone was simultaneously renamed SSCE. Stone and JSC(U.S.) were wholly-owned subsidiaries of SSCE and,therefore, the Merger does not impact SSCC’s consolidated financialstatements.  The Merger did not impactthe operating activities of the merged companies which will continue to dobusiness as SSCC.

 

**Nature ofOperations:**  TheCompany’s major operations are containerboard and corrugated containers,consumer packaging and reclamation.  TheCompany’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.  Paper product customers represent a diverserange of industries including paperboard packaging and a broad range ofmanufacturers of consumer goods. Recycling operations collect or broker wastepaper for sale toCompany-owned and third-party paper mills. Customers and operations are located principally in North America.

 

**Principlesof Consolidation:**  Theconsolidated financial statements include the accounts of the Company andmajority-owned and controlled subsidiaries. Investments in non-majority owned affiliates are accounted for using theequity method.  Significant intercompanyaccounts and transactions are eliminated in consolidation.

 

**Cash andCash Equivalents:**  TheCompany considers all highly liquid investments with an original maturity ofthree months or less to be cash equivalents.

 

**RevenueRecognition:**  TheCompany recognizes revenue at the time persuasive evidence of an agreement exists,price is fixed and determinable, products are shipped to external customers andcollectibility is reasonably assured. Shipping and handling costs are included in cost of goods sold.

 

**Receivables,Less Allowances:** Credit is extended to customers based on an evaluation of theirfinancial condition.  The Companyevaluates the collectibility of accounts receivable on a case-by-case basis andmakes adjustments to the bad debt reserve for expected losses, considering suchthings as ability to pay, bankruptcy, credit ratings and payment history.  The Company also estimates reserves for baddebts based on historical experience and 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 $351 millionin 2004 and $290 million in 2003, which are valued at the lower of average costor market.  First-in, first-out (“FIFO”)costs (which approximate replacement costs) exceed the LIFO value by $94million and $83 million at December 31, 2004 and 2003, respectively.

 

36

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**NetProperty, Plant and Equipment:**  Property, plant and equipment are carried atcost.  The costs of additions,improvements and major replacements are capitalized, while maintenance andrepairs are charged to expense as incurred. Provisions for depreciation and amortization are made usingstraight-line rates over the estimated useful lives of the related assets and theshorter of useful lives or terms of the applicable leases for leaseholdimprovements.  Papermill machines havebeen assigned a useful life of 18 to 23 years, while major converting equipmentand folding carton presses have been assigned useful lives ranging from 12 to20 years (See Note 6).

 

**Timberland,Less Timber Depletion:** Timberland is stated at cost less accumulated cost of timberharvested.  The portion of the costs oftimberland attributed to standing timber is charged against income as timber iscut, at rates determined annually, based on the relationship of unamortizedtimber costs to the estimated volume of recoverable timber.  The costs of seedlings and reforestation oftimberland are capitalized.

 

**Goodwilland Other Intangible Assets:** Goodwill and other intangible assets with indefinite lives are no longeramortized, but instead are reviewed annually or more frequently, if impairmentindicators arise.  For purposes ofmeasuring goodwill impairment, the Company’s reporting units are its businesssegments.  Other intangible assets representthe fair value of identifiable intangible assets acquired in purchase businesscombinations.  Other intangible assetsare amortized over their expected useful life, unless the assets are deemed tohave an indefinite life.  Otherintangible assets are included in other assets in the Company’s consolidatedbalance sheets (See Note 20).

 

**DeferredDebt Issuance Costs and Losses From Extinguishment of Debt:**  Deferred debt issuance costs included inother assets are amortized over the terms of the respective debt obligationsusing the interest method.  In accordancewith Statement of Financial Accounting Standards (“SFAS”) No. 145, “Rescissionof FASB Statements No. 4, 44 and 62, Amendment of FASB No. 13, and TechnicalCorrections,” the Company records losses due to early extinguishment of debt asa component of income (loss) from continuing operations.

 

**Long-LivedAssets:**  In accordancewith SFAS No. 144, “Accounting for the Impairment or Disposal of Long-LivedAssets,” long-lived assets held and used by the Company are reviewed forimpairment when events or changes in circumstances indicate that their carryingamount may not be recoverable. Circumstances which could trigger a review include, but are not limitedto:  significant decreases in the marketprice of the asset; significant adverse changes in the business climate orlegal factors; accumulation of costs significantly in excess of the amountoriginally expected for the acquisition or construction of the asset; currentperiod cash flow or operating losses combined with a history of losses or aforecast of continuing losses associated with the use of the asset; and currentexpectation that the asset will more likely than not be sold or disposed ofsignificantly before the end of its estimated useful life.

 

Recoverability isassessed based on the carrying amount of the asset compared to the sum of theundiscounted cash flows expected to result from the use and the eventualdisposal of the asset, as well as specific appraisal in certain instances.  An impairment loss is recognized when thecarrying amount is not recoverable and exceeds fair value (See Note 5).

 

A component of theCompany, as defined in SFAS No. 144, is classified as a discontinued operationif the operations and cash flows of the component will be (or have been)eliminated from the ongoing operations of the Company.

 

**IncomeTaxes:**  The Companyaccounts for income taxes in accordance with the liability method of accountingfor income taxes.  Under the liabilitymethod, deferred assets and liabilities are recognized based upon anticipatedfuture tax consequences attributable to differences between financial statementcarrying amounts of assets and liabilities and their respective tax bases (SeeNote 13).

 

37

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**ForeignCurrency Translation:** The functional currency for Canadian operations is the U.S. dollar.  Fluctuations in Canadian dollar monetaryassets and liabilities result in gains or losses which are credited or chargedto income.  Foreign currencytransactional gains or losses are also credited or charged to income.

 

The Company’s remainingforeign operations’ functional currency is the applicable local currency.  Assets and liabilities for these foreignoperations are translated at the exchange rate in effect at the balance sheetdate, and income and expenses are translated at average exchange ratesprevailing during the year.  Translationgains or losses are included within stockholders’ equity as part of accumulatedother comprehensive income (loss) (“OCI”) (See Note 18).

 

**Derivativesand Hedging Activities:** In accordance with SFAS No. 133 “Accounting for Derivative Instrumentsand Hedging Activities,” as amended by SFAS No. 137, SFAS No. 138 and SFAS No.149, the Company recognizes all derivatives on the balance sheet at fairvalue.  Derivatives that are notaccounted for as hedges are adjusted to fair value through income.  If the derivative is a hedge, depending onthe effectiveness of the hedge, changes in the fair value are either recognizedimmediately through earnings or recognized in OCI until the hedged item isrecognized in earnings.  Hedges relatedto anticipated transactions are designated and documented at hedge inception ascash flow hedges and evaluated for hedge effectiveness quarterly (See Note 9).

 

**Transfersof Financial Assets:** Certain financial assets are transferred to qualifying special-purposeentities and variable interest entities where the Company is not the primarybeneficiary.  The assets and liabilitiesof such entities are not reflected in the consolidated financial statements ofthe Company.  Gains or losses on sale offinancial assets depend in part on the previous carrying amount of thefinancial assets involved in the transfer, allocated between the assets soldand the retained interests based on their relative fair value at the date oftransfer.  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-BasedCompensation:**  At December 31,2004, the Company has stock-based employee compensation plans, including stockoptions and restricted stock units (“RSUs”) (See Note 16).

 

Stock Options:  In the second quarter of 2003, the Companyadopted the fair value recognition provisions of SFAS No. 123, “Accounting forStock-Based Compensation,” effective as of January 1, 2003.  The Company selected the prospectivetransition method as allowed in SFAS No. 148, “Accounting for Stock-BasedCompensation-Transition and Disclosure,” which requires expensing optionsprospectively, beginning in the year of adoption.  Because the prospective method was used andawards vest over three to eight years, the 2003 and 2004 expense is less thanwhat would have been recognized if the fair value based method had been appliedto all awards since the original effective date of SFAS No. 123.

 

Prior to 2003, theCompany accounted for stock options under the recognition and measurementprovisions of Accounting Principles Board Opinion No. 25, “Accounting for StockIssued to Employees,” and related interpretations.  No stock-based employee compensation cost wasreflected in 2002 net income, as all options granted have an exercise priceequal to the market value of the underlying common stock on the date of grant.

 

38

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The following tableillustrates the effect on net income (loss) and earnings per share if the fairvalue based method had been applied to all outstanding and unvested awards ineach period.

 
| ** **                                                                                                                                    | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Net income (loss) available to common stockholders,  as reported                                                                              | ** ** | **$**    | **(57**    | **)**    | $          | (208     | )          | $ | 54 |   |
| Add: Stock-based employee compensation expense  included in reported net income (loss), net of related tax effects                            | ** ** | **6**    | ** ** | 2        |       |     |       |
| Deduct: Total stock-based employee compensation  expense determined under fair value based method for all awards, net of  related tax effects | ** ** | **(15**  | **)**      | (13      | )          | (8       | )          |
|                                                                                                                                          |       |     | ** ** |     |       |     |       |
| Pro forma net income (loss) available to common  stockholders                                                                                 | ** ** | **$**    | **(66**    | **)**    | $          | (219     | )          | $ | 46 |   |
|                                                                                                                                          |       |     | ** ** |     |       |     |       |
| Earnings per share:                                                                                                                           |       |     | ** ** |     |       |     |       |
| Basic – as reported                                                                                                                      | ** ** | **$**    | **(.23**   | **)**    | $          | (.85     | )          | $ | .22 |   |
| Basic – pro forma                                                                                                                        | ** ** | **$**    | **(.26**   | **)**    | $          | (.89     | )          | $ | .19 |   |
|                                                                                                                                          |       |     | ** ** |     |       |     |       |
| Diluted – as reported                                                                                                                    | ** ** | **$**    | **(.23**   | **)**    | $          | (.85     | )          | $ | .22 |   |
| Diluted – pro forma                                                                                                                      | ** ** | **$**    | **(.26**   | **)**    | $          | (.89     | )          | $ | .19 |   |

 

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

 

**EnvironmentalMatters:**  The Companyexpenses environmental expenditures related to existing conditions resultingfrom past or current operations from which no current or future benefit isdiscernible.  Expenditures that extendthe life of the related property or mitigate or prevent future environmentalcontamination are capitalized.  TheCompany records a liability at the time when it is probable and can bereasonably estimated.  Such liabilitiesare not discounted or reduced for potential recoveries from insurance carriers.

 

**Asset RetirementObligations:**  EffectiveJanuary 1, 2003, the Company adopted SFAS No. 143, “Accounting for AssetRetirement Obligations.”  SFAS No. 143establishes accounting standards for the recognition and measurement of anasset retirement obligation and its associated asset retirement cost.  It also provides accounting guidance forlegal obligations associated with the retirement of tangible long-livedassets.  The Company’s asset retirementobligations relate primarily to environmental requirements upon closure of anoperating facility.  Certain of theCompany’s facilities have indeterminate lives because they are expected toremain in operation for the foreseeable future. Consequently, the asset retirement obligations related to thesefacilities cannot be reasonably estimated (See Note 12).

 

**Restructuring:**  Effective January 1, 2003, the Companyadopted SFAS No. 146, “Accounting for Costs Associated with Exit or DisposalActivities.”  Costs associated with exitor disposal activities are recognized when they are incurred rather than at thedate of a commitment to an exit or disposal plan (See Note 4).

 

**Guarantees:**  Effective January 1, 2003, the Companyadopted Financial Accounting Standards Board (“FASB”) Interpretation No. 45, “Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others,” which clarifies and expands on existingdisclosure requirements for guarantees and requires the Company to recognize aliability for the fair value

 

39

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of its obligations underthat guarantee.  The initial measurementand recognition provisions are prospective for guarantees issued after December 31,2002.  Disclosure requirements areeffective for guarantees issued prior to January 1, 2003 (See Note 11).

 

**Use ofEstimates:**  Thepreparation of financial statements in conformity with generally acceptedaccounting principles requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reporting period.  Actual results could differ from thoseestimates.

 

**Reclassifications:**  Certain reclassifications of prior yearpresentations have been made to conform to the 2004 presentation.

 

**ProspectiveAccounting Pronouncements:** In December 2004, the FASB issued SFAS No. 123(R), “Share-BasedPayment,” effective July 1, 2005, which is a revision of SFAS No. 123 “Accountingfor Stock-Based Compensation.”  SFAS No.123(R) requires all share-based payments to employees, including grants ofemployee stock options, to be recognized in the financial statements based ontheir fair values.  The Company adoptedthe fair-value-based method of accounting for share-based payments effective January 1,2003 using the prospective method described in SFAS No. 148.  Currently, the Company uses the Black-Scholesformula to estimate the value of stock options granted to employees and maycontinue to use this acceptable option valuation model upon the requiredadoption of SFAS No. 123(R) on July 1, 2005.  Because SFAS No. 123(R) must be applied notonly to new awards, but to previously granted awards that are not fully vestedon the effective date, and because the Company adopted SFAS No. 123 using theprospective transition method (which applied only to awards granted, modifiedor settled after the adoption date), compensation cost for some previously grantedawards that were not recognized under SFAS No. 123 will be recognized underSFAS No. 123(R).  However, had theCompany adopted SFAS No. 123(R) in prior periods, the impact of that standardwould have approximated the impact of SFAS No. 123 as described in thedisclosure of pro forma net income and earnings per share disclosed under the “Stock-BasedCompensation” section of this footnote. SFAS No. 123(R) also requires the benefits of tax deductions in excessof recognized compensation cost to be reported as a financing cash flow, ratherthan as an operating cash flow as required under current literature.  This requirement will reduce net operatingcash flows and increase net financing cash flows in periods afteradoption.  While the Company cannot estimatewhat those 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 $8million, $7 million and $1 million in 2004, 2003 and 2002, respectively.

 

In November 2004,the FASB issued SFAS No. 151, “Inventory Costs,” effective January 1,2006.  SFAS No. 151 requires abnormalamounts of idle facility expense, freight, handling costs and wasted materialsto be recognized as current period charges. In addition, SFAS No. 151 requires allocation of fixed productionoverheads to the costs of conversion be based on the normal capacity of theproduction facilities.  The Company plansto adopt SFAS No. 151 on January 1, 2006. The impact of this standard is not expected to be material.

 

**2.****              DiscontinuedOperations and Exchange Transaction**

 

In December 2002,the Company reached agreements with an affiliate of Jefferson Smurfit Group (“JSGroup”), formerly SSCC’s largest stockholder, to exchange, in two separatetransactions, its European packaging operations for JS Group’s 50% ownership inSmurfit-MBI, a Canadian packaging business, and a payment from JS Group ofapproximately $189 million.  The Companyrecorded a loss on disposition of discontinued European operations of $40million arising from a provision for taxes on the disposition during the fourthquarter of 2002.  Net sales for theEuropean operations were $192 million for the three months ended March 31,2003 and $632 million for the year ended December 31, 2002.  The results of operations from the Europeanoperations have been reclassified as discontinued operations for 2003 and 2002.

 

40

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On March 31, 2003,the Company completed these exchange transactions, resulting in no additionaladjustments to the Company’s results of operations.  Previously, the Company owned 50% ofSmurfit-MBI and, as a result of the completed transactions, now owns 100% ofSmurfit-MBI.  Smurfit-MBI operates 16converting facilities in Canada and employs approximately 2,500 hourly andsalaried employees.  The results ofoperations have been included in the consolidated statements of operationsafter March 31, 2003.  The cost toacquire the remaining 50% of Smurfit-MBI of $137 million, including $26 millionof debt assumed, has been allocated to the assets acquired and liabilitiesassumed according to fair values.  Thepurchase price allocation, completed during the fourth quarter of 2003,resulted in acquired goodwill of $94 million, including a reclassification of$52 million associated with the Company’s original 50% investment, andintangible assets of $45 million which have been allocated to theContainerboard and Corrugated Containers segment.

 

On September 30,2002, the Company sold the industrial packaging division included in theConsumer Packaging segment to a third party for approximately $80 million andretained $12 million of accounts receivable. The sale resulted in a gain on disposition of discontinued operations of$22 million, net of tax of $17 million. The assets sold include 17 tube and core manufacturing facilities, threefiber partition plants and three uncoated recycled boxboard mills.  Net sales for these operations were $94million for the nine months ended September 30, 2002.  These facilities employed approximately 850hourly and salaried employees.  Theresults of operations from the industrial packaging division have beenreclassified as discontinued operations for 2002.

 

**3.****              Acquisitionsand Mergers**

 

**InnovativePackaging**

In December 2004,the Company acquired 15% of Innovative Packaging Corp. (“IPC”), a corrugatedcontainer 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’sminority interest liability of $1 million with the remaining balance of $12million preliminarily allocated to intangible assets.  The Company expects to finalize itspreliminary purchase price allocation upon completion of the intangible assetsvaluation.

 

**Arko**

On May 31, 2003, theCompany acquired the operations of Arko Paper Products Co., Inc. (“Arko”), afolding carton producer, for $30 million. The results of operations have been included in the consolidatedstatements of operations after May 31, 2003. The purchase price allocation, completed during the fourth quarter of2003, resulted in goodwill of $12 million and intangible assets of $3 millionwhich have been allocated to the Consumer Packaging segment.

 

**StevensonMill**

On September 30,2002, the Company acquired a corrugating medium mill and related assets fromMeadWestvaco Corporation (the “Stevenson Mill Acquisition”).  The Company paid $350 million for the assetsand an additional $25 million in connection with certain financingarrangements.  Included in the allocationof the cost of the Stevenson Mill Acquisition is the adjustment to fair valueof property and equipment associated with the permanent shutdown of threecorrugated container plants, liabilities for the termination of certainemployees and liabilities for lease commitments and facility closure costs.

 

41

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The following table is a summary of theremaining exit liabilities recorded as part of the Stevenson Mill Acquisitionand acquisition and merger transactions completed in prior years.

 
| ** **                   | ** ** | **Severance** | ** ** | **Lease  Commitments** | ** ** | **Other  Commitments** | ** ** | **Facility  Closure  Costs** | ** ** | **Total**  | ** ** |
|------------------------------|------------|---------------|------------|------------------------|------------|------------------------|------------|------------------------------|------------|------------|------------|
| Balance at January 1, 2002   |       | $             | 1          |                   | $          | 16                     |       | $                            | 11         |       | $          |   |   | $ | 28 |   |
|                         |       |          |       |                   |       |                   |       |                         |       |       |       |
| Stevenson Mill Acquisition   |       | 5             |       | 1                      |       |                   |       | 1                            |       | 7          |       |
| Payments                     |       | (1            | )          | (1                     | )          | (1                     | )          |                         |       | (3         | )          |
| Adjustments                  |       |          |       | (4                     | )          |                   |       |                         |       | (4         | )          |
| Balance at December 31, 2002 |       | 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** | ** ** |

 

The $7 million reduction to lease commitmentsin 2003 is due primarily to the renegotiation of a lease contract.  The $8 million reduction to other commitmentsin 2003 is due primarily to the reduction of the environmental exit liabilitiesassociated with a containerboard mill.

 

The $4 million reduction to the leasecommitments in 2002 is due primarily to the expiration of an equipment removalcommitment associated with a containerboard mill.

 

Future cash outlays under the exitliabilities are anticipated to be $1 million in 2005, $1 million in 2006, $1million in 2007 and $2 million thereafter.

 

**4.   Restructurings**

 

The Company has recorded variousrestructuring charges related to the rationalization of its containerboard milland converting operations, including the termination of employees andliabilities for lease commitments at the closed facilities.

 

As part of the Company’s continued overallstrategy to rationalize operations and cut costs in response to marketconditions, the Company closed ten converting facilities and exited itsIndonesian operations in 2004.  TheCompany recorded restructuring charges of $16 million, net of a $5 million gainfrom sales of three shutdown facilities. The assets of the 2004 shutdown operations were adjusted to theestimated net realizable value resulting in a $7 million non-cashwrite-down.  The remaining charges areprimarily severance and benefits resulting from approximately 1,000 employeesbeing terminated.  The net sales andoperating losses of these shutdown operations in 2004 prior to closure were $99million and $15 million, respectively. The net sales and operating losses of these facilities for the yearended December 31, 2003 were $213 million and $11 million, respectively.  The net sales and operating losses of these shutdownoperations in 2002 were $217 million and $2 million, respectively.  No significant additional charges related tothese shutdown operations are expected.

 

42

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The Company recorded restructuring charges of$115 million in 2003.  The assets of theshutdown operations were adjusted to the estimated net realizable value resultingin an $85 million non-cash charge primarily related to the write-down of fixedassets at the Thunder Bay, Ontario and Philadelphia, Pennsylvania mills.  The shutdowns resulted in approximately 1,000employees being terminated.  The netsales and operating losses of these shutdown operations in 2003 prior toclosure were $78 million and $10 million, respectively.  The net sales and operating losses of theseshutdown operations in 2002 were $129 million and $2 million, respectively.

 

During 2002, the Company recordedrestructuring charges of $24 million related to the permanent closure of apaperboard machine and related operations, two converting facilities and theshutdown and sale of its Cladwood® operations. The assets of these closed operations were adjusted to the estimatedfair value less cost to sell resulting in an $18 million non-cashwrite-down.  The shutdowns resulted inapproximately 210 employees being terminated. The net sales and operating losses of the two converting facilities andCladwood® facilities in 2002 prior to closure were $16 million and $3 million,respectively.

 

The following is a summary of the restructuringliabilities recorded:

 
| ** **                   | ** ** | **Write-down of  Property and  Equipment to  Fair Value** | ** ** | **Severance  and  Benefits** | ** ** | **Lease  Commitments** | ** ** | **Facility  Closure  Costs** | ** ** | **Other**  | ** ** | **Total** | ** ** |
|------------------------------|------------|-----------------------------------------------------------|------------|------------------------------|------------|------------------------|------------|------------------------------|------------|------------|------------|-----------|------------|
| Balance at January 1, 2002   |       | $                                                         |       |                         | $          | 2                      |       | $                            | 16         |       | $          | 10        |       | $ | 1 |   | $ | 29 |   |
|                         |       |                                                      |       |                         |       |                   |       |                         |       |       |       |      |       |
| Charge                       |       | 18                                                        |       | 5                            |       | 1                      |       |                         |       |       |       | 24        |       |
| Payments                     |       |                                                      |       | (7                           | )          | (3                     | )          |                         |       | (1         | )          | (11       | )          |
| Non-cash reduction           |       | (18                                                       | )          |                         |       |                   |       |                         |       |       |       | (18       | )          |
| Balance at December 31, 2002 |       |                                                      |       |                         |       | 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** | ** ** |

 

**Cash Requirements**

Future cash outlays under the restructuringof operations are anticipated to be $12 million in 2005, $3 million in 2006, $2million in 2007 and $11 million thereafter.

 

43

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**5.   Asset Impairment Charge**

 

The Company recorded an asset impairment chargeof $73 million in the fourth quarter of 2004 related to the write-down ofnon-core pulp mill property, plant and equipment.  The Company performed the impairment review inaccordance with SFAS No. 144 as a result of significant operating and cash flowlosses in 2004, combined with a history of losses due to a prolonged economicdownturn affecting the pulp mill.  TheCompany evaluated the recoverability of its long-lived assets and recorded theimpairment charge based on the amounts by which the carrying value of theassets exceeded their fair value.  Fairvalue of the assets was determined based on discounted cash flow analysis ofthe pulp mill’s projected operating results. No goodwill had been assigned to the pulp mill, which is included in theContainerboard and Corrugated Containers segment.

 

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

 

Net property, plant and equipment at December31 consist of:

 
| ** **                           | ** ** | **2004**   | ** ** | **2003** | ** ** |
|--------------------------------------|------------|------------|------------|----------|------------|
| Land and land improvements           | ** ** | **$**      | **185**    |     | $          | 192 |   |
| Buildings and leasehold improvements | ** ** | **702**    |       | 694      |       |
| Machinery, fixtures and equipment    | ** ** | **6,191**  |       | 6,152    |       |
| Construction in progress             | ** ** | **126**    |       | 92       |       |
| ** **                           |       | **7,204**  |       | 7,130    |       |
| Less accumulated depreciation        | ** ** | **(2,566** | **)**      | (2,201   | )          |
| Net property, plant and equipment    | ** ** | **$**      | **4,638**  |     | $          | 4,929 |   |

 

Depreciation expense was $413 million, $406 millionand $376 million for 2004, 2003 and 2002, respectively, excluding depreciationexpense related to discontinued operations of $7 million in 2003 and $25million in 2002.  Property, plant andequipment include capitalized leases of $28 million and $25 million and relatedaccumulated amortization of $17 million and $16 million at December 31, 2004 and2003, respectively.

 

**7.   Transfers of Financial Assets**

 

**Receivables SecuritizationProgram**

In November 2004, in connection with theMerger, the Company replaced its former $265 million off-balance sheet accountsreceivable securitization program with a new $475 million accounts receivablesecuritization program whereby the Company sells, without recourse, on anongoing basis, certain of its accounts receivable to Stone ReceivablesCorporation (“SRC”), a wholly-owned non-consolidated subsidiary of the Company.

 

SRC transfers the receivables to anon-consolidated subsidiary, a limited liability company, which has issuednotes to third-party investors.  TheCompany has retained servicing responsibilities and a subordinated interest inthe limited liability company.  TheCompany receives annual servicing fees of 1% of the unpaid balance of thereceivables and rights to future cash flows arising after the investors in thesecuritization limited liability company have received the return for whichthey have contracted.

 

44

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SRC, whose legal structure and purpose have remainedunchanged subsequent to the Merger, is a qualified special–purpose entity underthe provisions of SFAS No. 140, “Accounting for Transfers and Servicing ofFinancial Assets and Extinguishments of Liabilities.”  Accordingly, accounts receivable sold to SRC,for which the Company does not retain an interest, are not included in theCompany’s consolidated balance sheets.

 

At December 31, 2004 and 2003, $557 millionand $267 million, respectively, of accounts receivable had been sold to SRC, ofwhich $140 million and $58 million, respectively, were retained by the Companyas a subordinated interest.  The Company’sretained interest is carried at fair value and is included in retained interestin receivables sold in the accompanying consolidated balance sheets.  The Company recognized a loss on sales ofreceivables to SRC of $6 million and $4 million in 2004 and 2003, respectively,which is included in other, net in the consolidated statements of operations.

 

Key economic assumptions used in measuringthe retained interest are as follows:

 
| ** **                        | ** ** | **Year Ended  December 31,  2004**    | ** ** | **December 31,  2004** | ** ** | **Year Ended  December 31,  2003** | ** ** | **December 31,  2003** | ** ** |
|-----------------------------------|------------|---------------------------------------|------------|------------------------|------------|------------------------------------|------------|------------------------|------------|
| Residual cash flows discounted at | ** ** | **8.00%**                             | ** ** | **8.00**               | **%**      | 8.00%                              |       | 8.00                   | %          |
| Expected loss and dilution rate   | ** ** | **2.45%-4.39%**                       | ** ** | **2.45**               | **%**      | 2.65%-5.28%                        |       | 5.28                   | %          |
| Variable return to investors      | ** ** | **LIBOR plus 23 to 135 basis points** | ** ** | **2.78**               | **%**      | LIBOR plus 50 to 180 basis points  |       | 1.72                   | %          |

 

At December 31, 2004, the sensitivity of thecurrent fair value of residual cash flows to immediate 10% and 20% adversechanges in the expected loss and dilution rate was $2 million and $3 million,respectively.  The effects of thesensitivity analysis on the residual cash flow discount rate and the variablereturn to investors were insignificant.

 

The table below summarizes certain cash flowsreceived from SRC:

 
| ** **                                      | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------------------------|------------|----------|------------|----------|------------|
| Cash proceeds from sales of receivables         | ** ** | **$**    | **3,059**  |     | $          | 2,737 |   |
| Servicing fees received                         | ** ** | **3**    |       | 3        |       |
| Other cash flows received on retained  interest | ** ** | **31**   |       | 12       |       |
|                                                 |            |          |            |          |            |  |  |

 

**MBI Securitization Program**

On March 30, 2004, the Company, throughSmurfit-MBI, entered into a $70 million Canadian (approximately $58 millionU.S. as of December 31, 2004) accounts receivable securitization programwhereby the Company sells, without recourse, on an ongoing basis, certain ofits Canadian accounts receivable to a trust in which the Company holds avariable interest, but is not the primary beneficiary.  Accordingly, under FASB Interpretation No.46, “Consolidation of Variable Interest Entities,” accounts receivable sold tothe trust, for which the Company is not the primary beneficiary, are notincluded in the accompanying consolidated balance sheet.  The Company has retained servicing responsibilitiesand a subordinated interest in future cash flows from the receivables.  The Company receives rights to future cashflows arising after the investors in the securitization trust have received thereturn for which they have contracted.

 

45

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The amount available to the Company under thereceivables program fluctuates based on the amount of eligible receivablesavailable and by the performance of the receivables portfolio.  The Company’s residual interest in thesecuritization program is recorded at fair value and is based upon the totaloutstanding receivables sold, adjusted for dilution and loss reserves ofapproximately 4.75%, less the amount funded to the Company.

 

At December 31, 2004, $67 million of accountsreceivable had been sold under the program, of which $18 million was retainedby the Company as a subordinated interest. The amount funded to the Company at December 31, 2004 was $46million.  The Company’s retained interestis included in retained interest in receivables sold in the accompanyingconsolidated balance sheet.  The Companyrecognized a loss on sales of receivables to the trust of $2 million in 2004,which is included in other, net in the consolidated statement of operations.

 

**Timberland Sale and NoteMonetization**

The Company sold approximately 980,000 acresof owned and leased timberland in Florida, Georgia and Alabama in October1999.  The final purchase price, afteradjustments, was $710 million.  TheCompany received $225 million in cash, with the balance of $485 million in theform of installment notes.

 

The Company entered into a program tomonetize the installment notes receivable. The notes were sold without recourse to Timber Note Holdings LLC, aqualified special-purpose entity under the provisions of SFAS No. 140, for $430million cash proceeds and a residual interest in the notes.  The transaction was accounted for as a saleunder SFAS No. 140.  The cash proceedsfrom the sale and monetization transactions were used to prepay borrowingsunder the JSC(U.S.) Credit Agreement. The residual interest was $45 million and $43 million at December 31, 2004and 2003, respectively, and is included in other assets in the accompanyingconsolidated balance sheets.  The keyeconomic assumption used in measuring the residual interest at the date ofmonetization was the rate at which the residual cash flows were discounted(9%).  At December 31, 2004, thesensitivity on the current fair value of the residual cash flows to immediate10% and 20% adverse changes in the assumed rate at which the residual cashflows were discounted (9%) was $2 million and $3 million, respectively.

 

46

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**8.   Long-Term Debt**

 

Long-term debt as of December 31 is as follows:

 
| ** **                                                                                                                                                | ** ** | **2004**  | ** ** | **2003** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------|------------|----------|------------|
| **Bank Credit Facilities**                                                                                                                                |       |      |       |     |       |
| **SSCE**                                                                                                                                                  |       |      |       |     |       |
| Tranche B Term Loan (4.5% weighted average  variable rate), due in various installments through November 1, 2011                                          | ** ** | **$**     | **975**    |     | $          |   |   |
| Tranche C Term Loan (4.4% weighted average  variable rate), due in various installments through November 1, 2011                                          | ** ** | **300**   |       |     |       |
| Revolving credit facility (5.1% weighted  average variable rate), due November 1, 2009                                                                    | ** ** | **144**   |       |     |       |
| Tranche B Term Loan, due in various  installments through June 30, 2009                                                                                   |       |      |       | 933      |       |
| Tranche C Term Loan, due in various  installments through June 30, 2009                                                                                   |       |      |       | 158      |       |
| Revolving credit facility, due December 31,  2005                                                                                                         |       |      |       | 230      |       |
|                                                                                                                                                      |       |      |       |     |       |
| **JSC(U.S.)**                                                                                                                                             |       |      |       |     |       |
| Tranche B Term Loan, due in various  installments through March 31, 2007                                                                                  |       |      |       | 151      |       |
| Revolving credit facility, due March 31,  2005                                                                                                            |       |      |       | 94       |       |
| ** **                                                                                                                                                |       | **1,419** |       | 1,566    |       |
| **Accounts Receivable Securitization Program  Borrowings**                                                                                                |       |      |       |     |       |
| JSC(U.S.) accounts receivable  securitization program borrowings                                                                                          |       |      |       | 177      |       |
|                                                                                                                                                      |       |      |       |     |       |
| **Senior Notes**                                                                                                                                          |       |      |       |     |       |
| 11.5% unsecured senior notes (plus unamortized  premium of $2)                                                                                            |       |      |       | 187      |       |
| 8.45% mortgage notes, payable in monthly  installments through August 1, 2007 and $69 on September 1, 2007                                                | ** ** | **74**    |       | 75       |       |
| 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**   |       |     |       |
| ** **                                                                                                                                                |       | **2,724** |       | 2,712    |       |
|                                                                                                                                                      |       |      |       |     |       |
| **Other Debt**                                                                                                                                            |       |      |       |     |       |
| Fixed rate utility systems and pollution  control revenue bonds (fixed rates ranging from 5.9% to 8.3%), payable in  varying annual payments through 2027 | ** ** | **207**   |       | 187      |       |
| Variable rate industrial revenue bonds  (4.5% weighted average variable rate), payable in varying annual payments  through 2035                           | ** ** | **120**   |       | 120      |       |
| Other (including obligations under  capitalized leases of $13 and $12)                                                                                    | ** ** | **28**    |       | 45       |       |
| ** **                                                                                                                                                |       | **355**   |       | 352      |       |
| Total debt                                                                                                                                                | ** ** | **4,498** |       | 4,807    |       |
| Less current maturities                                                                                                                                   | ** ** | **(19**   | **)**      | (197     | )          |
| **Total long-term debt**                                                                                                                                  | ** ** | **$**     | **4,479**  |     | $          | 4,610 |   |

 

47

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The amounts of total debt outstanding atDecember 31, 2004 maturing during the next five years are as follows:

 
| 2005       |   | $     | 19     |   |
|------------|--------|-------|--------|--------|
| 2006       |   | 32    |   |
| 2007       |   | 89    |   |
| 2008       |   | 316   |   |
| 2009       |   | 163   |   |
| Thereafter |   | 3,879 |   |

 

**Bank Credit Facilities**

In connection with the Merger, the Company,as guarantor, and SSCE and its subsidiary, Smurfit-Stone Container Canada Inc.(“SSC Canada”), as borrowers, entered into a new credit agreement (the “CreditAgreement”) on November 1, 2004.  TheCredit Agreement, which refinanced and replaced SSCC’s former credit agreementsin their entirety, provides for (i) a revolving credit facility of $600 millionto SSCE, $144 million borrowed as of December 31, 2004, and (ii) a revolvingcredit facility of $200 million to SSCE and SSC Canada, none of which wasborrowed as of December 31, 2004.  Therevolving credit facilities include sub-limits for the issuance of letters ofcredit and swingline loans.  The Companypays a 0.5% commitment fee on the unused portions of its revolving creditfacilities.  At December 31, 2004, theunused portion of these facilities, after giving consideration to outstandingletters of credit, was $495 million.  Eachof these revolving credit facilities mature on November 1, 2009.  The Credit Agreement also provides for aTranche B term loan to SSCE in the aggregate principal amount of $975 millionand a Tranche C term loan to SSC Canada in the aggregate principal amount of$300 million.  The term loans are payablein 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.  The creditfacilities bear interest at rates selected at the option of the Company, equalto LIBOR plus 2.00% or alternate base rate (“ABR”) plus 1.00%, in the case ofthe term loan facilities and LIBOR plus 2.25% or ABR plus 1.25%, in the case ofthe revolving credit facilities.

 

SSCE used the proceeds of the CreditAgreement, including $179 million under its revolving credit facility, alongwith $19 million available cash to repay all outstanding obligations under the formercredit facilities, consisting of approximately $1,013 million of Tranche B termloans, $120 million of a Tranche C Canadian term loan and $329 million underthe existing revolving credit facilities, and to pay fees and other expenses ofapproximately $11 million related to this transaction.  A loss of $12 million was recorded during thefourth quarter of 2004 due to the early extinguishment of debt.

 

The obligations of SSCE under the CreditAgreement are unconditionally guaranteed by 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.  Theobligations of SSCE under the Credit Agreement are secured by a securityinterest in substantially all of the assets and properties of the Company, SSCE(except for three paper mills) and the material U.S. subsidiaries of SSCE, by apledge of all of the capital stock of SSCE and the material U.S. subsidiariesof SSCE and by a pledge of 65% of the capital stock of SSC Canada that isdirectly 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 SSC Canada under theCredit Agreement are secured by a security interest in substantially all of theassets and properties of SSC Canada (except three paper mills) 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 interestssecuring SSC Canada’s obligation under the Credit Agreement exclude three millsand property related thereto and certain other real property located in NewBrunswick and Quebec.

 

48

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The Credit Agreement contains variouscovenants and restrictions including (i) limitations on dividends, redemptionsand repurchases of capital stock, (ii) limitations on the incurrence ofindebtedness, liens, leases and sale-leaseback transactions, (iii) limitationson capital expenditures and (iv) maintenance of certain financialcovenants.  The Credit Agreement alsorequires prepayments if the Company has excess cash flows, as defined, beginningin 2005, or receives proceeds from certain asset sales, insurance or incurrenceof certain indebtedness.

 

In connection with the Merger, SSCE alsoentered into two supplemental indentures pursuant to which SSCE assumed theobligations of JSC(U.S.) with respect to $700 million in aggregate principalamount of JSC(U.S.)’s 8.25% senior notes due October 1, 2012 and $300 millionin aggregate principal amount of JSC(U.S.)’s 7.50% senior notes due June 1,2013.

 

The Company has entered into interest rateswap contracts effectively fixing the interest rate at 4.3% for $300 million ofthe Tranche B and Tranche C variable rate term loans (See Note 9).

 

In March 2004, SSCE used $38 million ofproceeds received from the Smurfit-MBI securitization program primarily toprepay a portion of its former Tranche C term loan.

 

**Bond Offering**

In July 2004, SSCE, through a wholly-ownedsubsidiary, completed an offering of $200 million of 7.375% unsecured seniornotes due 2014.  The Company used theproceeds of this issuance to redeem the $185 million aggregate principal 11.5%senior notes due August 15, 2006, prepay approximately $13 million of itsformer Tranche B term loan and pay fees and other expenses of approximately $2million related to this transaction.  Again of $1 million was recorded due to the early extinguishment of debt.

 

**Accounts ReceivableSecuritization Program Borrowings**

In November 2004, in connection with theMerger, SSCE entered into a new $475 million accounts receivable securitizationprogram (See Note 7).  Proceeds from thesale of accounts receivable into the new program were used to repay borrowingsoutstanding under the JSC(U.S.) accounts receivable securitization program.

 

**Senior Notes**

The 9.75% unsecured senior notes of $750million are redeemable in whole or in part at the option of SSCE beginning onFebruary 1, 2006 at a price of 104.875% plus accrued interest.  The redemption price will decline each yearafter 2006 and beginning on February 1, 2009 will be 100% of the principalamount, plus accrued interest.

 

The 8.375% unsecured senior notes of $400million are redeemable in whole or in part at the option of SSCE beginning onJuly 1, 2007 at a price of 104.188% plus accrued interest.  The redemption price will decline each yearafter 2007 and beginning on July 1, 2010 will be 100% of the principal amount,plus accrued interest.

 

The 8.25% unsecured senior notes of $700million are redeemable in whole or in part at the option of SSCE beginning onOctober 1, 2007 at a price of 104.125% plus accrued interest.  The redemption price will decline each yearafter 2007 and beginning on October 1, 2010 will be 100% of the principalamount, plus accrued interest.

 

The 7.50% unsecured senior notes of $300million are redeemable in whole or in part at the option of SSCE beginning onJune 1, 2008 at a price of 103.75% plus accrued interest.  The redemption price will decline each yearafter 2008 and beginning on June 1, 2011 will be 100% of the principal amount,plus accrued interest.

 

49

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The 7.375% unsecured senior notes of $200million are redeemable in whole or in part at the option of SSCE beginning onJuly 15, 2009 at a price of 103.688% plus accrued interest.  The redemption price will decline each yearafter 2009 and beginning on July 15, 2012 will be 100% of the principal amount,plus accrued interest.

 

The 9.25% unsecured senior notes aggregating$300 million are not redeemable prior to maturity.

 

The senior notes rank pari passu with theCredit Agreement and contain business and financial covenants which are lessrestrictive than those contained in the Credit Agreement.

 

The 8.45% mortgage notes are secured by theassets of 37 corrugated container plants.

 

**Other**

Interest costs capitalized on constructionprojects in 2004, 2003 and 2002 totaled $5 million, $6 million and $4 million,respectively.  Interest payments on alldebt instruments for 2004, 2003 and 2002 were $340 million, $341 million and$337 million, respectively.

 

During 2002, the Company reported a $32million loss from early extinguishment of debt due to the payment of callpremiums and the write-off of deferred debt issuance costs as a result of thefollowing transactions:  (i) JSC(U.S.)used a portion of the proceeds from the issuance of the $700 million 8.25%unsecured senior notes, due October 1, 2012 to repurchase $474 million of 9.75%unsecured senior notes, due April 1, 2003 ($19 million loss), (ii) Stonerefinanced its bank credit agreement including $1,300 million of Tranche B andTranche C term loans and a senior secured revolving credit facility ($7 millionloss), (iii) Stone redeemed $125 million in aggregate principal of the 12.58%rating adjustable unsecured senior notes due 2016 ($5 million loss) and (iv) Stoneused proceeds from the issuance of the $400 million 8.375% unsecured seniornotes, due July 1, 2012 along with additional borrowings under its revolvingcredit facility to redeem $443 million of Tranche C, Tranche D and Tranche Eterm loans, due October 1, 2003, which were outstanding under its bank credit agreement($1 million loss).

 

**9.   Derivative Instruments and Hedging Activities**

 

The Company’s derivative instruments andhedging activities are designated as cash flow hedges and relate to minimizingexposures to fluctuations in the price of commodities used in its operations, themovement in foreign currency exchange rates and the fluctuations in theinterest rate on variable rate debt.

 

**Commodity Derivative Instruments**

The Company uses derivative instruments,including fixed price swaps and options, to manage fluctuations in cash flowsresulting from commodity price risk in the procurement of natural gas.  The objective is to fix the price of a portionof the Company’s purchases of natural gas used in the manufacturingprocess.  The changes in the market valueof such derivative instruments have historically been, and are expected tocontinue to be, highly effective at offsetting changes in price of the hedgeditem.  As of December 31, 2004, themaximum length of time over which the Company is hedging its exposure to thevariability in future cash flows associated with natural gas forecastedtransactions is two years.  For the yearsended December 31, 2004 and 2003, the Company reclassified a $1 million gain(net of tax) and a $4 million gain (net of tax), respectively, from OCI to costof goods sold when the hedged items were recognized.  The fair value of the Company’s commodityderivative instruments at December 31, 2004 is a net $2 million gain of which$6 million is included in other current assets, and $4 million is included inother current liabilities.  The fairvalue of the Company’s commodity derivative instruments at December 31, 2003 isa $2 million gain included in other current assets.  At December 31, 2004 and 2003, the Companyrecorded a $4 million gain (net of tax) and a $2 million loss (net of tax),respectively, in cost of goods sold on commodity derivative instruments,related to the ineffective portion of the change in fair value of certainderivative instruments not qualifying for hedge accounting.

 

50

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For the years ended December 31, 2004 and2003, the Company recorded a $1 million gain (net of tax) and a $2 million loss(net of tax), respectively, in cost of goods sold on settled commodityderivative instruments, related to the ineffective portion of hedges andderivative instruments not qualifying for hedge accounting.

 

**Foreign Currency DerivativeInstruments**

The Company uses foreign currency derivativeinstruments, including forward contracts and options, primarily to protectagainst Canadian currency exchange risk associated with expected future cashflows.  These instruments typically havematurities of eighteen months or less. For the years ended December 31, 2004 and 2003, the Company recorded a$2 million gain (net of tax) and a $9 million gain (net of tax), respectively,in cost of goods sold related to the foreign currency derivativeinstruments.  For the years endedDecember 31, 2004 and 2003, the Company reclassified a $2 million gain (net oftax) and a $2 million loss (net of tax), respectively, from OCI related to therecognition of the foreign currency derivative instruments.  The fair value of the Company’s foreigncurrency derivative instruments at December 31, 2004 and 2003 is an $11 milliongain and a $2 million gain, respectively, included in other currentassets.  The change in fair value ofthese derivative instruments is recorded in OCI until the underlyingtransaction is recorded.

 

**Interest Rate Swap Contracts**

The Company uses interest rate swap contractsto manage interest rate exposure on the current Tranche B and Tranche Cvariable rate debt.  Changes in the fairvalue of the interest rate swap contracts are expected to be highly effectivein offsetting the fluctuations in the variable interest rate, and are recordedin OCI until the underlying transaction is recorded.  The accounting for the cash flow impact of theswap contracts is recorded as an adjustment to interest expense eachperiod.  The fair value of the Company’sinterest rate swap contracts at December 31, 2004 is a $2 million loss includedin other current liabilities.  Contractsextend until 2011, consistent with the Company’s Tranche B and Tranche C termloans.

 

The cumulative deferred hedge loss on allderivative instruments was $6 million (net of tax) at December 31, 2004,including $5 million (net of tax) on commodity and foreign currency derivativeinstruments and $1 million (net of tax) on interest rate swap contracts.  The cumulative deferred hedge gain onderivative instruments was $1 million (net of tax) at December 31, 2003.  The Company expects to reclassify $3 million(net of tax) into cost of goods sold during 2005, related to the commodity andforeign currency derivative instruments.

 

**10.  Leases**

 

The Company leases certain facilities andequipment for production, selling and administrative purposes under operatingleases.  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 rental commitments (exclusiveof real estate taxes and other expenses) under operating leases having initialor remaining noncancelable terms in excess of one year, excluding leasecommitments on closed facilities, are reflected below:

 
| 2005                         |   | $  | 98     |   |
|------------------------------|--------|----|--------|--------|
| 2006                         |   | 80 |   |
| 2007                         |   | 56 |   |
| 2008                         |   | 34 |   |
| 2009                         |   | 26 |   |
| Thereafter                   |   | 46 |   |
| Total minimum lease payments |   | $  | 340    |   |

 

Net rental expense for operating leases,including leases having a duration of less than one year, was approximately $168million, $188 million and $199 million for 2004, 2003 and 2002, respectively.

 

51

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**11.  Guarantees**

 

The Company has certain wood chip processingcontracts, entered into prior to January 1, 2003, extending from 2010 through2018 with minimum purchase commitments. As part of the agreements, the Company guarantees the third partycontractor’s debt outstanding and has a security interest in the chippingequipment.  At December 31, 2004 and 2003,the maximum potential amount of future payments related to these guarantees wasapproximately $43 million and $48 million, respectively, and decreases ratablyover the life of the contracts.  Proceedsfrom the liquidation of the chipping equipment would be based on current marketconditions and the Company may not recover in full the guarantee payments made.

 

**12.  Asset Retirement Obligations**

 

Upon adoption of SFAS No. 143 in 2003, theCompany recorded an increase in net property, plant and equipment of $2million, an asset retirement obligation liability of $10 million and a chargefor the cumulative effect of an accounting change of $5 million, net of incometaxes of $3 million.  The net cumulativeeffect charge reflected the offset of a $5 million accrual recorded under theCompany’s previous accounting for landfills.

 

The following provides a reconciliation ofthe 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     |   |

 

The pro forma effect of adoption on thestatement of operations for the year ended December 31, 2002 was immaterial.  The 2003 adjustment relates to the closure ofa containerboard mill and the reclassification of the liability to a restructuringaccrual.

 

52

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**13.  Income Taxes**

 

Significant components of the Company’sdeferred tax assets and liabilities at December 31 are as follows:

 
| ** **                                                                | ** ** | **2004**   | ** ** | **2003** | ** ** |
|---------------------------------------------------------------------------|------------|------------|------------|----------|------------|
| Deferred tax liabilities                                                  |       |       |       |     |       |
| Property, plant and equipment and  timberland                             | ** ** | **$**      | **(1,441** | **)**    | $          | (1,447 | ) |
| Inventory                                                                 | ** ** | **(51**    | **)**      | (49      | )          |
| Timber installment sale                                                   | ** ** | **(134**   | **)**      | (134     | )          |
| Other                                                                     | ** ** | **(26**    | **)**      | (22      | )          |
| Total deferred tax liabilities                                            | ** ** | **(1,652** | **)**      | (1,652   | )          |
|                                                                      |       |       |       |     |       |
| Deferred tax assets                                                       |       |       |       |     |       |
| Employee benefit plans                                                    | ** ** | **298**    |       | 240      |       |
| Net operating loss, alternative minimum tax  and tax credit carryforwards | ** ** | **776**    |       | 712      |       |
| Deferred gain                                                             | ** ** | **4**      |       | 7        |       |
| Purchase accounting liabilities                                           | ** ** | **5**      |       | 14       |       |
| Restructuring                                                             | ** ** | **11**     |       | 17       |       |
| Other                                                                     | ** ** | **85**     |       | 92       |       |
| Total deferred tax assets                                                 | ** ** | **1,179**  |       | 1,082    |       |
| Valuation allowance for deferred tax assets                               | ** ** | **(208**   | )          | (208     | )          |
|                                                                      |       |       |       |     |       |
| Net deferred tax assets                                                   | ** ** | **971**    |       | 874      |       |
|                                                                      |       |       |       |     |       |
| Net deferred tax liabilities                                              | ** ** | **$**      | **(681**   | **)**    | $          | (778 | ) |

 

At December 31, 2004, the Company had $1,560million of net operating loss carryforwards for U.S. federal income taxpurposes that expire from 2012 through 2024, with a tax value of $546million.  A valuation allowance of $152million has been established for a portion of these deferred tax assets.  The Company had net operating losscarryforwards for state purposes with a tax value of $126 million, which expirefrom 2005 to 2024.  A valuation allowanceof $56 million has been established for a portion of these deferred taxassets.  Further, the Company had $14million of net operating loss carryforwards for Canadian tax purposes thatexpire from 2006 to 2007, with a tax value of $5 million, and Canadianinvestment tax credits that expire from 2005 to 2012, with a tax value of $12million.  The Company had $87 million ofalternative minimum tax credit carryforwards for U.S. federal income taxpurposes, which are available indefinitely.

 

Through December 31, 2004, no provision had beenmade for U.S. federal and state income taxes on the accumulated unremittedearnings of the Company’s foreign subsidiaries because such earnings areintended to be reinvested outside the U.S. indefinitely.  On October 22, 2004, the American JobsCreation Act (the “AJCA”) was signed into law.  The AJCA includes a deduction of 85% ofcertain foreign earnings that are repatriated, as defined in the AJCA.  Under this law, the Company could elect torepatriate earnings of up to $500 million, with related income taxes of up to $30million.  The Company has started anevaluation of the effects of the repatriation provision; however, whether theCompany will ultimately utilize this provision depends on a number of factorsincluding reviewing future guidance from Congress or the Treasury Department onkey elements of the provision.  TheCompany expects to complete its evaluation of the effects of the repatriationprovision within a reasonable period of time following the publication of theadditional guidance.  Until that time,the Company’s current intention to indefinitely reinvest accumulated earningsof its foreign subsidiaries remains unchanged.

 

53

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Benefit from (provision for) income taxes onincome (loss) from continuing operations before income taxes and cumulativeeffect of accounting change is as follows:

 
| ** **                                       | ** ** | **2004** | ** ** | **2003**   | ** ** | **2002** | ** ** |
|--------------------------------------------------|------------|----------|------------|------------|------------|----------|------------|
| Current                                          |       |     |       |       |       |     |       |
| Federal                                          | ** ** | **$**    | ** ** | ** ** | $          |     |       | $ |   |   |
| State and local                                  | ** ** | **(1**   | **)**      | (1         | )          | (5       | )          |
| Foreign                                          | ** ** | **(16**  | **)**      | (8         | )          | (9       | )          |
| Total current expense                            | ** ** | **(17**  | **)**      | (9         | )          | (14      | )          |
|                                             |       |     |       |       |       |     |       |
| Deferred                                         |       |     |       |       |       |     |       |
| Federal                                          | ** ** | **65**   |       | 113        |       | (6       | )          |
| State and local                                  | ** ** | **10**   |       | 22         |       |     |       |
| Foreign                                          | ** ** | **5**    |       | 14         |       | (15      | )          |
| Total deferred benefit (expense)                 | ** ** | **80**   |       | 149        |       | (21      | )          |
| Total benefit from (provision for) income  taxes | ** ** | **$**    | **63**     |       | $          | 140      |       | $ | (35 | ) |

 

The Company’s benefit from (provision for)income taxes differed from the amount computed by applying the statutory U.S.federal income tax rate to income (loss) from continuing operations beforeincome taxes and cumulative effect of accounting change as follows:

 
| ** **                                                             | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| U.S. federal income tax benefit (provision)  at federal statutory rate | ** ** | **$**    | **38**     |     | $          | 118      |       | $ | (33 | ) |
| Permanent differences                                                  | ** ** | **19**   |       | 7        |       |     |       |
| State income taxes, net of federal income  tax effect                  | ** ** | **6**    |       | 15       |       | (2       | )          |
| Total benefit from (provision for) income  taxes                       | ** ** | **$**    | **63**     |     | $          | 140      |       | $ | (35 | ) |

 

The Company has settled the Internal RevenueService examination of the years 1999 through 2001, resulting in the expectedpayment of tax and interest of less than $1 million.  Permanent differences in the preceding tableinclude benefits of $10 million and $12 million in 2004 and 2003, respectively,related to the resolution of tax matters in these years.

 

The components of the income (loss) fromcontinuing operations before income taxes and cumulative effect of accountingchange are as follows:

 
| ** **                                                                                               | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| United States                                                                                            | ** ** | **$**    | **(151**   | **)**    | $          | (325     | )          | $ | 14 |   |
| Foreign                                                                                                  | ** ** | **42**   |       | (13      | )          | 80       |       |
| Income (loss) from continuing operations  before income taxes and cumulative effect of accounting change | ** ** | **$**    | **(109**   | **)**    | $          | (338     | )          | $ | 94 |   |

 

The Internal Revenue Service is currentlyexamining the years 2002 through 2003.  TheCanadian Revenue Agency is currently examining the years 1999 through 2002 ofthe Company’s Canadian subsidiaries.  Whilethe ultimate results cannot be predicted with certainty, the Company’smanagement believes that the examinations will not have a material adverseeffect on its consolidated financial condition or results of operations.

 

The Company made income tax payments of $18 million,$70 million and $50 million in 2004, 2003 and 2002, respectively.

 

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**14.  Employee Benefit Plans**

 

**Defined Benefit Plans**

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

 
| ** **        | ** ** | **U.S. Plans** | ** ** | **Canadian Plans** | ** ** |
|-------------------|------------|----------------|------------|--------------------|------------|
| ** **        | ** ** | **2004**       | ** ** | **2003**           | ** ** | **2004** | ** ** | **2003** | ** ** |
|              |       |           |       |               |       |   |   |   |   |
| Cash equivalents  | ** ** | **5**          | **%**      | 7                  | %          | **2** | **%** | 1 | % |
| Debt securities   | ** ** | **33**         | **%**      | 28                 | %          | **44** | **%** | 42 | % |
| Equity securities | ** ** | **61**         | **%**      | 63                 | %          | **51** | **%** | 54 | % |
| Real estate       | ** ** | ** **     | ** ** | ** **         | ** ** | **3** | **%** | 3 | % |
| Other             | ** ** | **1**          | **%**      | 2                  | %          |   | ** ** |   |   |
| Total             | ** ** | **100**        | **%**      | 100                | %          | **100** | **%** | 100 | % |

 

Equity securities for the U.S. plans atDecember 31, 2004 and 2003 include 2.7 million shares of SSCC common stock witha market value of approximately $50 million and $49 million, respectively (3%of total U.S. plan assets).

 

The primary objective of the Company’sinvestment policy is to provide eligible employees with scheduled pensionbenefits.  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 Employee RetirementIncome 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 assetallocation that would best meet the above policy, consideration is given to anumber of factors including the various pension plans’ demographiccharacteristics, the long-term nature of the liabilities, the sensitivity ofthe liabilities to interest rates and inflation, the long-term returnexpectations and risks associated with key asset classes as well as theirreturn correlation with each other, diversification among asset classes andother practical considerations for investing 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         |       | 60             | %          | 52                 | %          |
| Debt securities           |       | 35             | %          | 45                 | %          |
| Alternative asset classes |       | 5              | %          | 3                  | %          |

 

The pension plans for the discontinuedEuropean operations (See Note 2) are included in the following defined benefitplan tables through March 31, 2003. Pension expense for the European operations was $2 million and $7 millionfor 2003 and 2002, respectively.

 

55

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**Postretirement Health Care and LifeInsurance Benefits**

The Company provides certain health care andlife insurance benefits for all salaried as well as certain hourlyemployees.  The discontinued Europeanoperations do not participate in these plans. The assumed health care cost trend rates used in measuring theaccumulated postretirement benefit obligation (“APBO”) at December 31 are asfollows:

 
| ** **                                                                         | ** ** | **2004**       | ** ** | **2003**   | ** ** |
|------------------------------------------------------------------------------------|------------|----------------|------------|------------|------------|
| **U.S. Plans**                                                                     |       |           |       |       |       |
| Health care cost trend rate assumed for  next year                                 | ** ** | **11.00%**     | ** ** | 12.00%     |       |
| 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%** |       | 8.70-9.60% |       |
| Rate to which the cost trend rate is assumed  to decline (the ultimate trend rate) | ** ** | **4.80-4.90%** |       | 4.80%      |       |
| Year the rate reaches the ultimate trend  rate                                     | ** ** | **2010**       |       | 2010       |       |

 

The effect of a 1% change in the assumedhealth care cost trend rate would increase/(decrease) the APBO as of December31, 2004 by $22 million and $18 million, respectively, and wouldincrease/(decrease) the annual net periodic postretirement benefit cost by $2 millionfor 2004.

 

In December 2003, the Medicare PrescriptionDrug, Improvement and Modernization Act of 2003 (the “Act”) was enacted.  The Act introduced a prescription drugbenefit under Medicare Part D as well as a federal subsidy to sponsors ofretiree health care benefit plans that provide a benefit that is at leastactuarially equivalent to Medicare Part D.  Under FASB Staff Position 106-1, issued inJanuary 2004, related to the Act, the Company elected to defer recognizing theeffects of the Act on its APBO and net periodic postretirement benefit costsuntil pending authoritative guidance on the accounting for the federal subsidy wasissued.

 

In May 2004, the FASB issued FSP 106-2, whichprovides guidance on the accounting for the effects of the Act and alsorequires employers to provide certain disclosures provided by the Act.  The Company determined that certain of itsplans are actuarially equivalent to Medicare Part D and the impact of the Act wasto reduce its APBO as of December 31, 2003 by approximately $13 million.  In accordance with FSP 106-2, the Companyreduced postretirement benefit costs by $2 million in 2004.

 

56

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The following provides a reconciliation ofbenefit obligations, plan assets and funded status of the plans:

 
| ** **                                     | ** ** | **Defined Benefit  Plans** | ** ** | **Postretirement  Plans** | ** ** |
|------------------------------------------------|------------|----------------------------|------------|---------------------------|------------|
| ** **                                     | ** ** | **2004**                   | ** ** | **2003**                  | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Change in benefit obligation:**              |       |                       |       |                      |       |   |   |   |   |
| Benefit obligation at January 1                | ** ** | **$**                      | **3,029**  | ** **                | $          | 2,629 | ** ** | **$** | **296** | ** ** | $ | 235 |   |
| Service cost                                   | ** ** | **72**                     | ** ** | 61                        | ** ** | **7** | ** ** | 6 |   |
| Interest cost                                  | ** ** | **183**                    | ** ** | 176                       | ** ** | **16** | ** ** | 17 |   |
| Acquisition                                    |       |                       | ** ** | 151                       |       |   | ** ** | 25 |   |
| Divestiture                                    |       |                       | ** ** | (133                      | )          |   | ** ** |   |   |
| Amendments                                     | ** ** | **9**                      | ** ** | 13                        |       |   | ** ** | (2 | ) |
| Settlements                                    | ** ** | **(1**                     | **)**      | (1                        | )          | ** ** | ** ** |   |   |
| Curtailments                                   | ** ** | **(3**                     | **)**      | (7                        | )          | **(1** | **)** | (1 | ) |
| Actuarial loss (gain)                          | ** ** | **141**                    | ** ** | 164                       |       | **(19** | **)** | 31 |   |
| Plan participants’ contributions          | ** ** | **6**                      | ** ** | 5                         |       | **15** | ** ** | 14 |   |
| Benefits paid and expected expenses            | ** ** | **(157**                   | **)**      | (144                      | )          | **(35** | **)** | (37 | ) |
| Foreign currency rate changes                  | ** ** | **57**                     | ** ** | 115                       |       | **4** | ** ** | 8 |   |
| Benefit obligation at December 31              | ** ** | **$**                      | **3,336**  | ** **                | $          | 3,029 |   | **$** | **283** | ** ** | $ | 296 |   |
| ** **                                     |       |                       | ** ** |                      |       |   | ** ** |   |   |
| **Change in plan assets:**                     | ** ** | ** **                 | ** ** |                      |       |   | ** ** |   |   |
| Fair value of plan assets at January 1         | ** ** | **$**                      | **2,149**  | ** **                | $          | 1,583 |   | **$** | ** ** | ** ** | $ |   | ** ** |
| Acquisition                                    |       |                       | ** ** | 100                       |       |   | ** ** |   |   |
| Actual return on plan assets                   | ** ** | **246**                    | ** ** | 352                       |       | ** ** | ** ** |   |   |
| Settlements                                    | ** ** | **(1**                     | **)**      | (1                        | )          | ** ** | ** ** |   |   |
| Employer contributions                         | ** ** | **177**                    | ** ** | 171                       |       | **20** | ** ** | 23 |   |
| Plan participants’ contributions          | ** ** | **6**                      | ** ** | 5                         |       | **15** | ** ** | 14 |   |
| Benefits paid                                  | ** ** | **(153**                   | **)**      | (141                      | )          | **(35** | **)** | (37 | ) |
| Foreign currency rate changes                  | ** ** | **42**                     | ** ** | 80                        |       | ** ** | ** ** |   |   |
| Fair value of plan assets at December 31       | ** ** | **$**                      | **2,466**  | ** **                | $          | 2,149 |   | **$** | ** ** | ** ** | $ |   | ** ** |
| ** **                                     |       |                       | ** ** |                      |       |   | ** ** |   |   |
| **Over (under) funded status:**                | ** ** | **$**                      | **(870**   | **)**                     | $          | (880 | ) | **$** | **(283** | **)** | $ | (296 | ) |
| Unrecognized actuarial loss                    | ** ** | **762**                    | ** ** | 724                       |       | **74** | ** ** | 98 |   |
| Unrecognized prior service cost (benefit)      | ** ** | **79**                     | ** ** | 82                        |       | **(19** | **)** | (22 | ) |
| Net amount recognized                          | ** ** | **$**                      | **(29**    | **)**                     | $          | (74 | ) | **$** | **(228** | **)** | $ | (220 | ) |
| ** **                                     |       |                       | ** ** |                      |       |   | ** ** |   |   |
| **Amounts recognized in the balance sheets:**  | ** ** | ** **                 | ** ** |                      |       |   | ** ** |   |   |
| Accrued benefit liability                      | ** ** | **$**                      | **(622**   | **)**                     | $          | (650 | ) | **$** | **(228** | **)** | $ | (220 | ) |
| Intangible asset                               | ** ** | **79**                     | ** ** | 83                        |       | ** ** | ** ** |   |   |
| Accumulated other comprehensive (income)  loss | ** ** | **514**                    | ** ** | 493                       |       | ** ** | ** ** |   |   |
| Net amount recognized                          | ** ** | **$**                      | **(29**    | **)**                     | $          | (74 | ) | **$** | **(228** | **)** | $ | (220 | ) |

 

The increase/(decrease) in the minimum pensionliability, included in other comprehensive (income) loss, was $21 million and $(82)million for the years ended December 31, 2004 and 2003, respectively.

 

The accumulated benefit obligation for alldefined benefit pension plans was $3,088 million and $2,798 million at December31, 2004 and 2003, respectively.

 

The projected benefit obligation, accumulatedbenefit obligation and fair value of plan assets for the pension plans withaccumulated benefit obligations in excess of plan assets were $3,324 million, $3,079million and $2,456 million, respectively, as of December 31, 2004 and $3,021 million,$2,792 million and $2,142 million, respectively, as of December 31, 2003.

 

57

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The components of net pension expense for thedefined benefit plans and the components of the postretirement benefit costsare as follows:

 
| ** **                                    | ** ** | **Defined Benefit Plans** | ** ** | **Postretirement Plans** | ** ** |
|-----------------------------------------------|------------|---------------------------|------------|--------------------------|------------|
| ** **                                    | ** ** | **2004**                  | ** ** | **2003**                 | ** ** | **2002** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| Service cost                                  | ** ** | **$**                     | **72**     |                     | $          | 61 |   | $ | 53 | ** ** | **$** | **7** |   | $ | 6 |   | $ | 5 |   |
| Interest cost                                 | ** ** | **183**                   | ** ** | 176                      |       | 161 | ** ** | **16** |   | 17 |   | 16 |   |
| Expected return on plan assets                | ** ** | **(194**                  | **)**      | (174                     | )          | (177 | ) |   |   |   |   |   |   |
| Amortization of prior service cost  (benefit) | ** ** | **10**                    | ** ** | 10                       |       | 9 | ** ** | **(2** | **)** | (3 | ) | (2 | ) |
| Amortization of net loss                      | ** ** | **49**                    |       | 37                       |       | 8 | ** ** | **5** |   | 5 |   | 4 |   |
| Curtailments                                  | ** ** | **3**                     |       | 4                        |       | 3 |   |   |   |   |   |   |   |
| Multi-employer plans                          | ** ** | **6**                     |       | 9                        |       | 8 |   |   |   |   |   |   |   |
| Net periodic benefit cost                     | ** ** | **$**                     | **129**    |                     | $          | 123 |   | $ | 65 | ** ** | **$** | **26** |   | $ | 25 |   | $ | 23 |   |

 

The weighted average assumptions used todetermine the benefit obligations at December 31 are as follows:

 
| ** **                    | ** ** | **Defined Benefit Plans** | ** ** | **Postretirement Plans** | ** ** |
|-------------------------------|------------|---------------------------|------------|--------------------------|------------|
| ** **                    | ** ** | **2004**                  | ** ** | **2003**                 | ** ** | **2004** | ** ** | **2003** | ** ** |
| **U.S. Plans**                |       |                      |       |                     |       |   |   |   |   |
| Discount rate                 | ** ** | **5.84**                  | **%**      | 6.25                     | %          | **5.84** | **%** | 6.25 | % |
| Rate of compensation increase | ** ** | **4.00**                  | **%**      | 4.00                     | %          | **N/A** | ** ** | N/A |   |
| **Foreign Plans**             |       |                      | ** ** |                     |       |   | ** ** |   |   |
| Discount rate                 | ** ** | **5.75**                  | **%**      | 6.00                     | %          | **5.75** | **%** | 6.00 | % |
| Rate of compensation increase | ** ** | **3.95**                  | **%**      | 3.65                     | %          | **N/A** | ** ** | N/A |   |

 

The weighted average assumptions used todetermine net periodic benefit cost for the years ended December 31 are asfollows:

 
| ** **                               | ** ** | **Defined Benefit Plans** | ** ** | **Postretirement Plans** | ** ** |
|------------------------------------------|------------|---------------------------|------------|--------------------------|------------|
| ** **                               | ** ** | **2004**                  | ** ** | **2003**                 | ** ** | **2004** | ** ** | **2003** | ** ** |
| **U.S. Plans**                           |       |                      |       |                     |       |   |   |   |   |
| Discount rate                            | ** ** | **6.25**                  | **%**      | 6.75                     | %          | **6.25** | **%** | 6.75 | % |
| 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                            | ** ** | **6.00**                  | **%**      | 5.50-6.75                | %          | **6.00** | **%** | 6.50-6.75 | % |
| Expected long-term return on plan assets | ** ** | **8.00**                  | **%**      | 9.00                     | %          | **N/A** | ** ** | N/A |   |
| Rate of compensation increase            | ** ** | **3.65**                  | **%**      | 2.00-3.75                | %          | **N/A** | ** ** | N/A |   |

 

Effective January 1, 2005, the expectedlong-term rate of return using the current target asset allocation for U.S. andforeign pension plans is 9.0% and 7.75%, respectively.  The fundamental assumptions behind theexpected rate of return are the cumulative effect of several estimates,including the anticipated yield on high quality debt securities, the equityrisk premium earned by investing in equity securities over a long-term timehorizon and active investment management.

 

The Company expects to contribute $175 millionto its defined benefit plans and $20 million to its postretirement plans in 2005.

 

58

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**Expected Future Benefit Payments**

The Company expects to pay benefits, whichreflect expected future service, as follows:

 
| ** ** | ** ** | **Defined Benefit Plans** | ** ** | **Postretirement Plans** | ** ** |
|------------|------------|---------------------------|------------|--------------------------|------------|
| 2005       |       | $                         | 171        |                     | $          | 20 |   |
| 2006       |       | 178                       |       | 20                       |       |
| 2007       |       | 186                       |       | 20                       |       |
| 2008       |       | 194                       |       | 20                       |       |
| 2009       |       | 203                       |       | 20                       |       |
| 2010-2014  |       | 1,147                     |       | 108                      |       |
|            |            |                           |            |                          |            |  |  |

 

**Savings Plans**

The Company sponsors voluntary savings planscovering substantially all salaried and certain hourly employees.  The Company match is paid in SSCC commonstock, up to an annual maximum.  TheCompany’s expense for the savings plans totaled $23 million in each of 2004, 2003and 2002.

 

**15.  Preferred Stock**

 

The holders of the Company’s preferred stock areentitled to cumulative dividends of $0.4375 per quarter, payable in cash exceptin certain circumstances.  SSCC had approximately4.6 million shares of preferred stock issued and outstanding as of December 31,2004 and 2003.  Preferred stock dividendsof $8 million were paid during 2004, 2003 and 2002.  Preferred stock accretion of $3 million wascharged to retained earnings (deficit) in 2004, 2003 and 2002.  The holders of preferred stock are not entitledto voting rights on matters submitted to the Company’s stockholders.  The preferred stock is convertible, at theoption of the holder, into shares of SSCC common stock at a conversion price of$34.28 (equivalent to a conversion rate of 0.729 shares of SSCC common stockfor each share of preferred stock), subject to adjustment based on certainevents.  The preferred stock mayalternatively be exchanged, at the option of the Company, for new 7% ConvertibleSubordinated Exchange Debentures due February 15, 2012.  The preferred stock is redeemable at theCompany’s option until February 15, 2012, at which time the preferred stock mustbe redeemed.  The preferred stock may beredeemed, at the Company’s option, with cash or SSCC common stock with anequivalent fair value.  The redemptionprice is 100% of the liquidation preference.  It is the Company’s intention to redeem the preferredstock with SSCC common stock.  Theliquidation preference is $25 per share plus dividends accrued and unpaid.

 

**16.  Stock-Based Compensation**

 

The Company has stock options and RSUs outstandingunder several long-term incentive plans. The stock options granted under plans prior to the 1998 Long-TermIncentive Plan (the “1998 Plan”) are fully vested and exercisable.

 

The 1998 Plan and the 2004 Long-TermIncentive Plan (the “2004 Plan”) have reserved 16.5 million and 12.5 millionshares, respectively, of Company common stock for non-qualified stock options,RSUs and performance awards to officers, key employees and non-employeedirectors of the Company.  The stockoptions are exercisable at a price equal to fair market value of the Company’sstock on date of grant.  The vestingschedule and other terms and conditions of options granted under each plan areestablished separately for each grant. These options expire no later than ten years from the date of grant.

 

59

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The stock options granted prior to April 2001vest and become exercisable eight years after the date of grant subject toacceleration based upon the attainment of pre-established stock pricetargets.  For grants between April 2001and June 2004, the stock options vest and become exercisable at the rate of 25%each year for four years.  The July 2004stock option grants vest and become exercisable on the third anniversary of theaward date.  Awards with pro rata vestingare expensed on a straight-line basis.

 

Certain grants under the 2004 Plan and the 1998Plan contain change in control provisions which provide for immediate vestingand exercisability in the event that specific ownership conditions aremet.  These grants also allow forimmediate vesting and exercisability in the event of retirement.  These options remain exercisable until theearlier of five years from retirement or ten years from the initial grant date.

 

The performance awards permit the holder toreceive amounts, denominated in shares of Company common stock, based on theCompany’s performance during the period between the date of grant and apre-established future date.  Performancecriteria, the length of the performance period and the form and time of paymentof the award are established separately for each grant.  There were no performance awards outstandingunder the 2004 Plan or 1998 Plan at December 31, 2004 and 2003.

 

Since 2002, the Company has issued RSUs topay a portion of employee bonuses under its annual management incentive plan.  These RSUs vest immediately, but therestrictions do not lapse until the third anniversary of the award date.  The Company pays a premium on the employeebonuses in the form of RSUs (“Premium RSUs”) to certain employees.  Premium RSUs vest at the earlier of a changein control, death, disability or three years after the award date.  Beginning in 2003, non-employee directors areannually awarded non-vested RSUs as part of their director compensation.  In 2004, the Company granted non-vested RSUsunder the 2004 Plan to certain employees. These non-employee directors and employees non-vested RSUs vest at theearlier of a change in control, death, disability or three years after theaward date.  The RSUs arenon-transferable and do not have voting rights.

 

Pro forma information regarding net incomeand earnings per share is required by SFAS No. 123 and has been determined asif the Company had accounted for its employee stock options issued subsequentto December 31, 1994 under the fair value method (See Note 1).  The pro forma net income information requiredby SFAS No. 123 is not likely to be representative of the effects on reportednet income for future years.  The fairvalue of options included in the pro forma information for 2004, 2003 and 2002 andoptions included in the 2004 and 2003 consolidated statements of operations wasestimated at the date of grant using a Black-Scholes option pricing model withthe following assumptions:

 
| ** **                               | ** ** | **2004**  | ** ** | **2003** | ** ** | **2002** | ** ** |
|------------------------------------------|------------|-----------|------------|----------|------------|----------|------------|
| Expected option life (years)             | ** ** | **6**     |       | 6        |       | 6        |       |
| Risk-free weighted average interest rate | ** ** | **4.08**  | **%**      | 3.16     | %          | 4.81     | %          |
| Stock price volatility                   | ** ** | **31.00** | **%**      | 41.00    | %          | 41.00    | %          |
| Dividend yield                           | ** ** | **0.0**   | **%**      | 0.0      | %          | 0.0      | %          |

 

The weighted average fair values of optionsgranted during 2004, 2003 and 2002 were $7.17, $6.23 and $7.88 per share,respectively.

 

60

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Additional information relating to the stockoptions is as follows:

 
| ** **                       | ** ** | **Shares Under  Option** | ** ** | **Option  Price Range** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
|----------------------------------|------------|--------------------------|------------|-------------------------|------------|----------------------------------------|------------|
| Outstanding at January 1, 2002   |       | 18,118,849               |       | $10.00 – $23.38    |       | $                                      | 13.09      |   |
| Granted                          |       | 2,379,760                |       | 13.12 – 17.03      |       | 16.71                                  |       |
| Exercised                        |       | (359,733                 | )          | 10.00 – 15.81      |       | 12.00                                  |       |
| Cancelled                        |       | (88,785                  | )          | 10.56 – 22.35      |       | 16.27                                  |       |
| Outstanding at December 31, 2002 |       | 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**                              | ** ** |
|                                  |            |                          |            |                         |            |                                        |            |  |

 

The following table summarizes informationabout stock options outstanding at December 31, 2004:

 
| **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          |       | 3,317,874                |       | $                                      | 12.49      |                                              | 3.95       |                     | 2,489,168  |                                   | $          | 12.38 |   |
| 13.00 –  14.44            |       | 6,824,054                |       | 14.07                                  |       | 6.27                                              |       | 4,481,049                |       | 13.98                                  |       |
| 14.81 –  17.03            |       | 2,373,662                |       | 16.59                                  |       | 7.01                                              |       | 1,297,121                |       | 16.58                                  |       |
| 17.19 –  23.38            |       | 1,757,649                |       | 19.25                                  |       | 6.55                                              |       | 649,665                  |       | 19.48                                  |       |
|                           |       | 14,273,239               |       |                                   |       |                                              |       | 8,917,003                |       |                                   |       |
|                                |            |                          |            |                                        |            |                                                   |            |                          |            |                                        |            |  |  |

 

The number of options exercisable at December31, 2003 and 2002 was 9,679,096 and 12,693,534, respectively.  Available shares under the 1998 Plan are nowavailable for issuance under the 2004 Plan. As of December 31, 2004, 12,451,593 shares were available for grantunder the 2004 Plan.

 

61

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Additional information relating to RSUs is asfollows:

 
| ** **                       | ** ** | **RSUs**      | ** ** | **Weighted Average  Grant Date  Fair Value** | ** ** |
|----------------------------------|------------|---------------|------------|----------------------------------------------|------------|
| Outstanding at January 1, 2002   |       |          |       |                                         |       |
| Granted                          |       | 453,550       |       | $                                            | 14.84      |   |
| Converted to SSCC common stock   |       | (3,855        | )          |                                         |       |
| Forfeited                        |       | (779          | )          |                                         |       |
| Outstanding at December 31, 2002 |       | 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** | ** ** | ** **                                   | ** ** |
|                                  |            |               |            |                                              |            |  |

 

The number of RSUs vested at December 31,2004, 2003 and 2002 was 766,965; 639,793; and 306,299, respectively.

 

**17.  Stockholder Rights Plan**

 

In September 2002, the Company adopted astockholder rights plan under which the Board of Directors declared a dividendof one preferred stock purchase right (“Right”) for each outstanding share ofthe Company’s common stock held of record as of the close of business onSeptember 17, 2002.  Each Right entitlesthe holder to purchase one one-thousandth of a share of Series B JuniorParticipating Preferred Stock (“Preferred Stock”).  The Rights become exercisable following apublic announcement that an acquiring person (“Acquiring Person”), asdetermined by the Board of Directors, has obtained beneficial ownership of 15%or more of the outstanding shares of the Company’s common stock or commenced atender or exchange offer that would result in such ownership threshold beingattained.  Each Right, if and when itbecomes exercisable, will entitle holders of the Rights (other than anAcquiring Person), upon payment of the exercise price, to the number of sharesof Preferred Stock having a fair value equal to approximately two times theexercise price.  In addition, if after aperson or group becomes an Acquiring Person and the Company was acquired in amerger or other business combination, each holder of Rights (other than anAcquiring Person) will have the right to acquire, upon payment of the exerciseprice, that number of shares of common stock of the acquiring company having afair value equal to approximately two times 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)**

 

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

 
| ** **                                         | ** ** | **Foreign  Currency  Translation  Adjustment** | ** ** | **Minimum  Pension  Liability** | ** ** | **Unrealized  Gain (Loss)  on  Marketable  Securities** | ** ** | **Deferred  Hedge  Gain  (Loss)** | ** ** | **Accumulated  Other  Comprehensive  Income (Loss)** | ** ** |
|----------------------------------------------------|------------|------------------------------------------------|------------|---------------------------------|------------|---------------------------------------------------------|------------|-----------------------------------|------------|------------------------------------------------------|------------|
| Balance at January 1, 2002                         |       | $                                              | (19        | )                               | $          | (101                                                    | )          | $                                 | 1          |                                                 | $          | (11 | ) | $ | (130 | ) |
| Net changes in fair value of hedging  transactions |       |                                           |       |                            |       |                                                    |       | 4                                 |       | 4                                                    |       |
| Net loss reclassified into earnings                |       |                                           |       |                            |       |                                                    |       | 7                                 |       | 7                                                    |       |
| Current period change                              |       | 7                                              |       | (250                            | )          | (1                                                      | )          |                              |       | (244                                                 | )          |
| Balance at December 31, 2002                       |       | (12                                            | )          | (351                            | )          |                                                    |       |                              |       | (363                                                 | )          |
| Net changes in fair value of hedging  transactions |       |                                           |       |                            |       |                                                    |       | 3                                 |       | 3                                                    |       |
| Net gain reclassified into earnings                |       |                                           |       |                            |       |                                                    |       | (2                                | )          | (2                                                   | )          |
| Exchange transaction (See Note 2)                  |       | 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** | **)** |

 

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**19.  Earnings Per Share**

 

The following table sets forth thecomputation of basic and diluted earnings per share:

 
| ** **                                                                                                  | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Numerator:                                                                                                  |       |     |       |     |       |     |       |
| Income (loss) from continuing operations  before cumulative effect of accounting change                     | ** ** | **$**    | **(46**    | **)**    | $          | (198     | )          | $ | 59 |   |
| Preferred stock dividends and accretion                                                                     | ** ** | **(11**  | **)**      | (11      | )          | (11      | )          |
| Income (loss) available to common  stockholders                                                             | ** ** | **$**    | **(57**    | **)**    | $          | (209     | )          | $ | 48 |   |
|                                                                                                        |       |     | ** ** |     |       |     |       |
| Denominator:                                                                                                |       |     | ** ** |     |       |     |       |
| Denominator for basic earnings per share –  weighted average shares                                    | ** ** | **253**  | ** ** | 246      |       | 244      |       |
| Effective of dilutive securities:  Employee stock options                                                   |       |     | ** ** |     |       | 2        |       |
| Denominator for diluted earnings per share –  adjusted weighted average shares and assumed conversions | ** ** | **253**  | ** ** | 246      |       | 246      |       |
|                                                                                                        |       |     | ** ** |     |       |     |       |
| Basic earnings per share from continuing  operations before cumulative effect of accounting change          | ** ** | **$**    | **(.23**   | **)**    | $          | (.85     | )          | $ | .20 |   |
|                                                                                                        |       |     | ** ** |     |       |     |       |
| Diluted earnings per share from continuing  operations before cumulative effect of accounting change        | ** ** | **$**    | **(.23**   | **)**    | $          | (.85     | )          | $ | .20 |   |

 

Convertible preferred stock to acquire threemillion shares of common stock with an effect of $11 million on net income (loss)available to common stockholders is excluded from the diluted earnings pershare computation because they are antidilutive for all years presented.  Employee stock options and non-vested RSUs areexcluded from the diluted earnings per share calculation for 2004 and 2003because they are antidilutive.

 

**20.  Goodwill and Other Intangible Assets**

 

The Company has completed the required annualimpairment tests and determined there to be no impairment.

 

**Goodwill**

 

The following table summarizes the activityof goodwill by segment:

 
| ** **                   | ** ** | **Containerboard  & Corrugated  Containers** | ** ** | **Consumer  Packaging** | ** ** | **Total** | ** ** |
|------------------------------|------------|--------------------------------------------------|------------|-------------------------|------------|-----------|------------|
| Balance at January 1, 2003   |       | $                                                | 2,928      |                    | $          | 267       |       | $ | 3,195 |   |
| Goodwill acquired            |       | 94                                               |       | 12                      |       | 106       |       |
| Balance at December 31, 2003 |       | 3,022                                            |       | 279                     |       | 3,301     |       |
| Goodwill acquired            |       |                                             |       |                    |       |      |       |
| Balance at December 31, 2004 | ** ** | **$**                                            | **3,022**  | ** **              | **$**      | **279**   | ** ** | **$** | **3,301** | ** ** |

 

64

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During 2003, goodwill of $94 million,including a reclassification of $52 million associated with the Company’soriginal 50% investment, was acquired in connection with the Smurfit-MBI exchangetransaction (See Note 2) and $12 million was acquired in connection with theacquisition of Arko (See Note 3).

 

**Other Intangible Assets**

 

During 2004, the Company preliminarilyallocated $12 million to intangible assets related to the IPC acquisition (SeeNote 3).

 

During 2003, the Company acquired $48 millionof intangible assets, of which $45 million related to the Smurfit-MBI exchangetransaction (See Note 2) and $3 million related to the Arko acquisition (SeeNote 3).  The intangible assets includecustomer relationships with lives of 14 years and 8 years for Smurfit-MBI andArko, respectively, and trademarks with indefinite lives.

 

Intangible asset activity is as follows:

 
| ** **                         | ** ** | **Definite Life** | ** ** | **Indefinite Life** | ** ** | **Total** | ** ** |
|------------------------------------|------------|-------------------|------------|---------------------|------------|-----------|------------|
| Intangible assets acquired in 2003 |       | $                 | 36         |                | $          | 12        |       | $ | 48 |   |
| Amortization                       |       | (2                | )          |                |       | (2        | )          |
| Balance at December 31, 2003       |       | 34                |       | 12                  |       | 46        |       |
| Intangible assets acquired         | ** ** | **12**            | ** ** | ** **          | ** ** | **12**    | ** ** |
| Amortization                       | ** ** | **(3**            | **)**      | ** **          | ** ** | **(3**    | **)**      |
| Balance at December 31, 2004       | ** ** | **$**             | **43**     | ** **          | **$**      | **12**    | ** ** | **$** | **55** | ** ** |

 

**21.  Related Party Transactions**

 

**Transactions withNon-consolidated Affiliates**

The Company sold paperboard, market pulp andfiber to and purchased containerboard and kraft paper from variousnon-consolidated affiliates on terms generally similar to those prevailing withunrelated parties.  The following tablesummarizes the Company’s related party transactions with its non-consolidatedaffiliates for each year presented:

 
| ** **                         | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Product sales                      | ** ** | **$**    | **77**     |     | $          | 114      |       | $ | 250 |   |
| Product and raw material purchases | ** ** | **32**   |       | 26       |       | 39       |       |
| Receivables at December 31         | ** ** | **8**    |       | 15       |       | 34       |       |
| Payables at December 31            | ** ** | **3**    |       | 3        |       | 2        |       |
|                                    |            |          |            |          |            |          |            |  |  |  |

 

**Transactions with JS Group**

JS Group, formerly SSCC’s largeststockholder, was a related party of the Company until May 8, 2003 when MichaelW. J. Smurfit, Anthony P. J. Smurfit, Dermot F. Smurfit and Howard E. Kilroy, eachof whom were current or former directors or executive officers of JS Group,retired from SSCC’s Board of Directors.  Previously,in September 2002, JS Group distributed to its stockholders substantially allof its 71.6 million shares of SSCC common stock, which representedapproximately 29.3% of the outstanding SSCC common stock.

 

On March 31, 2003, the Company exchanged itsEuropean packaging operations for JS Group’s 50% ownership in Smurfit-MBI and apayment from JS Group of $189 million (See Note 2).

 

65

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**Other Transactions**

Leigh J. Abramson, a member of the Company’sBoard of Directors until May 8, 2003, was a Managing Director of Morgan Stanley& Co. Incorporated, which has provided, and continues to provide, variousfinancial services to the Company, including investment banking, investmentmanagement, financial advisory and commodity hedging.  Payments made to Morgan Stanley & Co.Incorporated, representing commissions earned, were approximately $4 millionduring 2002 and were immaterial in 2003 through May 8, 2003.  Mr. Abramson resigned from SSCC’s Board ofDirectors effective May 8, 2003.

 

Thomas A. Reynolds, III, a member of theCompany’s Board of Directors, is a member of the Executive Committee of the lawfirm of Winston & Strawn LLP, which has provided, and continues to provide,legal services to the Company and its subsidiaries.

 

William D. Smithburg, a member of the Company’sBoard of Directors is a member of the Board of Directors of Barry-WehmillerCompanies, Inc., which sold the Company $9 million of equipment during 2004 and$6 million during the period May 2003 through December 2003.  All such sales were made on an arms-lengthbasis.

 

Patrick J. Moore, Chairman, President andChief Executive Officer and a member of the Company’s Board of Directors, is amember of the Board of Directors of Archer Daniels Midland Company (“ADM”)since November 2003. ADM sold the Company $8 million of supplies used in milloperations in 2004.  The Company soldproducts to ADM of $15 million in 2004 and $3 million during the periodNovember 2003 to December 2003.  All suchsales were made on an arms-length basis.

 

 

**22.  Fair Value of Financial Instruments**

 

The carrying amounts and fair values of theCompany’s financial instruments as of December 31 are as follows:

 
| ** **                                  | ** ** | **2004**             | ** ** | **2003**        | ** ** |
|---------------------------------------------|------------|----------------------|------------|-----------------|------------|
| ** **                                  | ** ** | **Carrying  Amount** | ** ** | **Fair  Value** | ** ** | **Carrying  Amount** | ** ** | **Fair  Value** | ** ** |
| Cash and cash equivalents                   | ** ** | **$**                | **6**      | ** **      | **$**      | **6** |   | $ | 12 |   | $ | 12 |   |
| Notes receivable                            | ** ** | **7**                | ** ** | **7**           |       | 2 |   | 2 |   |
| Residual interest in timber notes           | ** ** | **45**               | ** ** | **45**          |       | 43 |   | 43 |   |
| Net derivative assets                       | ** ** | **11**               | ** ** | **11**          |       | 4 |   | 4 |   |
| Long-term debt including current maturities | ** ** | **4,498**            | ** ** | **4,746**       |       | 4,807 |   | 5,040 |   |
|                                             |            |                      |            |                 |            |  |  |  |  |  |  |  |  |

 

The carrying amount of cash equivalentsapproximates fair value because of the short maturity of thoseinstruments.  The fair values of notesreceivable are based on discounted future cash flows or the applicable quotedmarket price.  The fair value of theresidual interest in timber notes is based on discounted future cashflows.  The fair values of the Company’sderivatives are based on prevailing market rates.  The fair value of the Company’s debt isestimated based on the quoted market prices for the same or similar issues oron the current rates offered to the Company for debt of the same remainingmaturities.

 

**23.  Other, Net**

 

The significant components of other, net inthe Company’s consolidated statements of operations are as follows:

 
| ** **                              | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|-----------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Foreign currency exchange losses        | ** ** | **$**    | **(20**    | **)**    | $          | (47      | )          | $ | (3 | ) |
| Loss on sales of receivables            | ** ** | **(8**   | **)**      | (4       | )          | (5       | )          |
| Income from non-consolidated affiliates | ** ** | **3**    | ** ** | 5        |       | 18       |       |
| Other                                   | ** ** | **7**    | ** ** | 5        |       | 9        |       |
| Total other, net                        | ** ** | **$**    | **(18**    | **)**    | $          | (41      | )          | $ | 19 |   |

 

66

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**24.  Contingencies**

 

In 2003, the Company settled the antitrustclass action cases pending against the Company, Stone and JSC(U.S.), which werebased on allegations of a conspiracy among containerboard manufacturers in 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 January2005.  The companies are defendants in elevenlawsuits brought on behalf of numerous parties that have opted out of the classactions to seek their own recovery.  TheCompany recorded pretax charges of $3 million and $121 million in 2004 and 2003,respectively, to accrue for the settlement and the estimated liability of theopt-out cases.  The Company believes theliability for these matters was adequately reserved at December 31, 2004.

 

The Company’s past and present operationsinclude activities which are subject to federal, state and local environmentalrequirements, particularly relating to air and water quality.  The Company faces potential environmentalliability as a result of violations of permit terms and similar authorizationsthat have occurred from time to time at its facilities.  In addition, the Company faces potentialliability for response costs at various sites for which it has received noticeas being a potentially responsible party (“PRP”) concerning hazardous substancecontamination.  The Company’s relativepercentage of waste deposited at these sites ranges from less than 1% to6%.  In estimating its reserves for environmentalremediation and future costs, the Company’s estimated liability reflects onlythe Company’s expected share after consideration for the relative percentage ofwaste deposited at each site, the number of other PRPs, the identity andfinancial condition of such parties and experience regarding similarmatters.  As of December 31, 2004, theCompany had approximately $20 million reserved for environmental liabilitiesincluded primarily in other long-term liabilities in the consolidated balancesheet.  The Company believes theliability for these matters was adequately reserved at December 31, 2004.

 

If all or most of the other PRPs are unableto satisfy their portion of the clean-up costs at one or more of thesignificant sites in which the Company is involved or the Company’s expectedshare increases, the resulting liability could have a material adverse effecton the Company’s consolidated financial condition or results of operations.

 

The Company is a defendant in a number oflawsuits and claims arising out of the conduct of its business, including thoserelated 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.

 

67

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**25.  Business Segment Information**

 

The Company has two reportable segments:  (1) Containerboard and Corrugated Containersand (2) Consumer Packaging.  TheContainerboard and Corrugated Containers segment is highly integrated.  It includes a system of mills and plants thatproduces a full line of containerboard that is converted into corrugatedcontainers.  Corrugated containers areused to transport such diverse products as home appliances, electric motors,small machinery, grocery products, produce, books, tobacco and furniture.  The Consumer Packaging segment is also highlyintegrated.  It includes a system ofmills and plants that produce a broad range of coated recycled boxboard that isconverted into folding cartons and packaging labels.  In addition, the Consumer Packaging segmentconverts kraft and specialty paper into multiwall bags, consumer bags andintermediate bulk containers.  Foldingcartons are used primarily to protect products, such as food, fast food,detergents, paper products, beverages, health and beauty aids and other consumerproducts, while providing point of purchase advertising.  Flexible packaging, paper and metalized paperlabels and heat transfer labels are used in a wide range of consumerapplications.  The bags and intermediatecontainers are designed to ship and protect a wide range of industrial and consumerproducts including fertilizers, chemicals, concrete and pet and food products.

 

The Company evaluates performance andallocates resources based on profit or loss from operations before incometaxes, interest expense and other non-operating gains and losses.  The accounting policies of the reportablesegments are the same as those described in the summary of significantaccounting policies.  Intersegment salesand transfers are recorded at market prices.

 

The Company’s reportable segments arestrategic business units that offer different products.  The reportable segments are each managedseparately because they manufacture distinct products.  Other includes corporate related items and threenon-reportable segments, including Reclamation, Innovation to Implementationand International, which has been eliminated as of the end of 2004.  Innovation to Implementation was formed in2004 as a single source integrator and provider of merchandising solutions toprovide branding, marketing, design photography, artwork production, pre-press,sourcing, fulfillment and inventory management to retailers and consumerpackaging companies.  Corporate relateditems include expenses not allocated to reportable segments including corporateexpenses, asset impairment charges, restructuring charges, non-cash foreigncurrency gains or losses and interest expense.

 

68

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| ** **                               | ** ** | **Container-  board &  Corrugated  Containers** | ** ** | **Consumer  Packaging** | ** ** | **Other** | ** ** | **Total** | ** ** |
|------------------------------------------|------------|-----------------------------------------------------|------------|-------------------------|------------|-----------|------------|-----------|------------|
| **Year ended December 31, 2004**         |       |                                                |       |                    |       |      |       |      |       |
| Revenues from external customers         | ** ** | **$**                                               | **6,224**  | ** **              | **$**      | **1,656** | ** ** | **$**     | **411**    | ** ** | **$** | **8,291** | ** ** |
| Intersegment revenues                    | ** ** | **144**                                             | ** ** | ** **              | ** ** | **303**   | ** ** | **447**   | ** ** |
| Depreciation, depletion and amortization | ** ** | **340**                                             | ** ** | **40**                  | ** ** | **36**    | ** ** | **416**   | ** ** |
| Segment profit (loss)                    | ** ** | **315**                                             | ** ** | **81**                  | ** ** | **(505**  | **)**      | **(109**  | **)**      |
| Total assets                             | ** ** | **5,084**                                           | ** ** | **605**                 | ** ** | **4,036** | ** ** | **9,725** | ** ** |
| 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                     |       | 4,002     |       | 10,102    |       |
| Expenditures for long-lived assets       |       | 129                                                 |       | 41                      |       | 42        |       | 212       |       |
|                                     |       |                                                |       |                    |       |      |       |      |       |
| **Year ended December 31, 2002**         |       |                                                |       |                    |       |      |       |      |       |
| Revenues from external customers         |       | $                                                   | 5,502      |                    | $          | 1,648     |       | $         | 333        |   | $ | 7,483 |   |
| Intersegment revenues                    |       | 129                                                 |       |                    |       | 248       |       | 377       |       |
| Depreciation, depletion and amortization |       | 306                                                 |       | 37                      |       | 33        |       | 376       |       |
| Segment profit (loss)                    |       | 465                                                 |       | 122                     |       | (493      | )          | 94        |       |
| Total assets                             |       | 5,462                                               |       | 677                     |       | 4,666     |       | 10,805    |       |
| Expenditures for long-lived assets       |       | 120                                                 |       | 39                      |       | 48        |       | 207       |       |

 

The following table presents net sales toexternal customers by country of origin:

 
| ** **      | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|-----------------|------------|----------|------------|----------|------------|----------|------------|
| United States   | ** ** | **$**    | **7,448**  |     | $          | 7,064    |       | $ | 7,233 |   |
| Foreign         | ** ** | **843**  |       | 658      |       | 250      |       |
| Total net sales | ** ** | **$**    | **8,291**  |     | $          | 7,722    |       | $ | 7,483 |   |

 

The following table presents long-livedassets by country:

 
| ** **              | ** ** | **2004**  | ** ** | **2003** | ** ** | **2002** | ** ** |
|-------------------------|------------|-----------|------------|----------|------------|----------|------------|
| United States           | ** ** | **$**     | **3,900**  |     | $          | 4,067    |       | $ | 4,346 |   |
| Canada                  | ** ** | **768**   |       | 890      |       | 818      |       |
| Other                   | ** ** | **14**    |       | 17       |       | 18       |       |
| ** **              |       | **4,682** |       | 4,974    |       | 5,182    |       |
| Goodwill                | ** ** | **3,301** |       | 3,301    |       | 3,195    |       |
| Total long-lived assets | ** ** | **$**     | **7,983**  |     | $          | 8,275    |       | $ | 8,377 |   |

 

The Company’s export sales from the UnitedStates were approximately $403 million for 2004, $395 million for 2003 and $298million for 2002.

 

69

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**26.  Quarterly Results (Unaudited)**

 

The following is a summary of the unauditedquarterly results of operations:

 
| ** **                                                                         | ** ** | **First  Quarter** | ** ** | **Second  Quarter** | ** ** | **Third  Quarter** | ** ** | **Fourth  Quarter** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------|------------|---------------------|------------|--------------------|------------|---------------------|------------|
| **2004**                                                                           |       |               |       |                |       |               |       |                |       |
| Net sales                                                                          | ** ** | **$**              | **1,942**  | ** **          | **$**      | **2,038**          | ** ** | **$**               | **2,165**  | ** ** | **$** | **2,146** | ** ** |
| Gross profit                                                                       | ** ** | **192**            | ** ** | **256**             | ** ** | **336**            | ** ** | **331**             | ** ** |
| Income (loss) from continuing operations  (a)                                      | ** ** | **(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 earnings per share:**                                                      | ** ** | ** **         | ** ** | ** **          | ** ** | ** **         | ** ** | ** **          | ** ** |
| Income (loss) from continuing operations                                           | ** ** | **(.26**           | **)**      | **(.04**            | **)**      | **.11**            | ** ** | **(.04**            | **)**      |
| Net income (loss)                                                                  | ** ** | **(.26**           | **)**      | **(.04**            | **)**      | **.11**            | ** ** | **(.04**            | **)**      |
| ** **                                                                         | ** ** | ** **         | ** ** | ** **          | ** ** | ** **         | ** ** | ** **          | ** ** |
| **Diluted earnings per share:**                                                    | ** ** | ** **         | ** ** | ** **          | ** ** | ** **         | ** ** | ** **          | ** ** |
| Income (loss) from continuing operations                                           | ** ** | **(.26**           | **)**      | **(.04**            | **)**      | **.11**            | ** ** | **(.04**            | **)**      |
| Net income (loss)                                                                  | ** ** | **(.26**           | **)**      | **(.04**            | **)**      | **.11**            | ** ** | **(.04**            | **)**      |
|                                                                               |       |               |       |                |       |               |       |                |       |
| **2003**                                                                           |       |               |       |                |       |               |       |                |       |
| Net sales                                                                          |       | $                  | 1,877      |                | $          | 1,988              |       | $                   | 1,944      |   | $ | 1,913 |   |
| Gross profit                                                                       |       | 261                |       | 273                 |       | 264                |       | 251                 |       |
| Loss from continuing operations before  cumulative effect of accounting change (b) |       | (31                | )          | (5                  | )          | (73                | )          | (89                 | )          |
| Discontinued operations                                                            |       | 6                  |       |                |       |               |       |                |       |
| Cumulative effect of accounting change                                             |       | (5                 | )          |                |       |               |       |                |       |
| Net loss                                                                           |       | (30                | )          | (5                  | )          | (73                | )          | (89                 | )          |
| Preferred stock dividends and accretion                                            |       | (3                 | )          | (3                  | )          | (2                 | )          | (3                  | )          |
| Net loss available to common stockholders                                          |       | (33                | )          | (8                  | )          | (75                | )          | (92                 | )          |
| ** **                                                                         | ** ** | ** **         | ** ** | ** **          | ** ** | ** **         | ** ** | ** **          | ** ** |
| **Basic earnings per share:**                                                      | ** ** | ** **         | ** ** | ** **          | ** ** | ** **         | ** ** | ** **          | ** ** |
| Loss from continuing operations before  cumulative effect of accounting change     |       | (.14               | )          | (.03                | )          | (.30               | )          | (.37                | )          |
| Discontinued operations                                                            |       | .03                |       |                |       |               |       |                |       |
| Cumulative effect of accounting change                                             |       | (.02               | )          |                |       |               |       |                |       |
| Net loss                                                                           |       | (.13               | )          | (.03                | )          | (.30               | )          | (.37                | )          |
|                                                                               |       |               |       |                |       |               |       |                |       |
| **Diluted earnings per share:**                                                    |       |               |       |                |       |               |       |                |       |
| Loss from continuing operations before  cumulative effect of accounting change     |       | (.14               | )          | (.03                | )          | (.30               | )          | (.37                | )          |
| Discontinued operations                                                            |       | .03                |       |                |       |               |       |                |       |
| Cumulative effect of accounting change                                             |       | (.02               | )          |                |       |               |       |                |       |
| Net loss                                                                           |       | (.13               | )          | (.03                | )          | (.30               | )          | (.37                | )          |

 

----

(a)          Income (loss) from continuing operationsincludes an asset impairment charge of $73 million in the fourth quarter of2004.

 

(b)         Loss from continuing operations beforecumulative effect of accounting change includes restructuring charges of $107million in the fourth quarter of 2003.

 

70

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**SMURFIT-STONECONTAINER CORPORATION**

**SCHEDULE II—VALUATIONAND QUALIFYING ACCOUNTS AND RESERVES**

(Inmillions)

 
| **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, 2004                                           | ** ** | **$**                                | **38**     | ** **                                     | **$**      | **8**               | ** ** | **$**                    | **(24**    | **)(a)**                       | **$**      | **10** | **(b)** | **$** | **12** | ** ** |
|                                                                   |       |                                 |       |                                           |       |                |       |                     |       |                           |       |
| Year ended December 31, 2003                                           |       | $                                    | 38         |                                           | $          | 11                  |       | $                        | (3         | )(a)(c)                        | $          | 8 | (b) | $ | 38 |   |
|                                                                   |       |                                 |       |                                           |       |                |       |                     |       |                           |       |
| Year ended December 31, 2002                                           |       | $                                    | 52         |                                           | $          | 10                  |       | $                        | (13        | )(a)                           | $          | 11 | (b) | $ | 38 |   |
|                                                                   |       |                                 |       |                                           |       |                |       |                     |       |                           |       |
| **Acquisitions and mergers exit liabilities:**                         |       |                                 |       |                                           |       |                |       |                     |       |                           |       |
|                                                                   |       |                                 |       |                                           |       |                |       |                     |       |                           |       |
| Year ended December 31, 2004                                           | ** ** | **$**                                | **7**      | ** **                                     | **$**      | ** **          | ** ** | **$**                    | ** ** | ** **                     | **$**      | **2** | **(d)** | **$** | **5** | ** ** |
|                                                                   |       |                                 |       |                                           |       |                |       |                     |       |                           |       |
| Year ended December 31, 2003                                           |       | $                                    | 28         |                                           | $          |                |       | $                        | (15        | )(e)                           | $          | 6 | (d) | $ | 7 |   |
|                                                                   |       |                                 |       |                                           |       |                |       |                     |       |                           |       |
| Year ended December 31, 2002                                           |       | $                                    | 28         |                                           | $          |                |       | $                        | 3          | (e)                            | $          | 3 | (d) | $ | 28 |   |
|                                                                   |       |                                 |       |                                           |       |                |       |                     |       |                           |       |
| **Restructuring:**                                                     |       |                                 |       |                                           |       |                |       |                     |       |                           |       |
|                                                                   |       |                                 |       |                                           |       |                |       |                     |       |                           |       |
| Year ended December 31, 2004                                           | ** ** | **$**                                | **44**     | ** **                                     | **$**      | **16**              | **(f)**    | **$**                    | **5**      | **(f)**                        | **$**      | **37** | **(d)** | **$** | **28** | ** ** |
|                                                                   |       |                                 |       |                                           |       |                |       |                     |       |                           |       |
| Year ended December 31, 2003                                           |       | $                                    | 24         |                                           | $          | 115                 |       | $                        |       |                           | $          | 95 | (d) | $ | 44 |   |
|                                                                   |       |                                 |       |                                           |       |                |       |                     |       |                           |       |
| Year ended December 31, 2002                                           |       | $                                    | 29         |                                           | $          | 24                  |       | $                        |       |                           | $          | 29 | (d) | $ | 24 |   |

 

----

(a)               Includes the effect of the accountsreceivable securitization application.

(b)              Uncollectible amounts written off, net ofrecoveries.

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

(d)              Charges against the reserves.

(e)               Charges and adjustments associated with theexit activities included in the purchase price allocation of the Stevenson MillAcquisition and acquisition and 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.

 

71

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

 

None.

 
| **ITEM 9a.** | **CONTROLS  AND PROCEDURES** | ** ** |
|--------------|------------------------------|------------|

 

**Evaluationof Disclosure Controls and Procedures**

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

 

**Changes inInternal Control**

We completed the implementationof a new company-wide financial system in September 2004.  The new financial system is an integratedfinancial accounting and reporting system for all of our North Americanfacilities. Its functional areas include general ledger, accounts receivable,accounts payable, fixed assets and financial reporting.  The new system was implemented in order toprovide us with one common financial accounting and reporting system, therebymaking the financial accounting and reporting process more efficient.  We are in the process of implementing a timemanagement system designed to eliminate manual tracking and recording of laborexpenses.  As a result of theseimplementations, we have updated our internal controls to ensure a continuingeffective control environment remains in place, including proper approval oftransactions, segregation of duties and appropriate integration and reconciliationprocesses under the new financial and time management systems.  There have not been any other changes in ourinternal control over financial reporting during the most recent quarter thathave materially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

 

The Sarbanes-Oxley Act of 2002(the Act) imposed many requirements regarding corporate governance andfinancial reporting.  One requirementunder Section 404 of the Act, beginning with this Annual Report, is formanagement to report on the Company’s internal control over financial reportingand for our independent registered public accountants to attest to thisreport.  Management’s Report on InternalControl over Financial Reporting and our independent registered publicaccounting firm’s report with respect to management’s assessment of theeffectiveness of internal control over financial reporting are included in Item8, “Financial Statements and Supplementary Data.”

 
| **ITEM 9b.** | **OTHER  INFORMATION** | ** ** |
|--------------|------------------------|------------|

 

None.

 

72

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**PART III**

 

**ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT**

 

**Directors**

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

 

**James R. Boris,**born****October25, 1944,****is the retired Chairman and ChiefExecutive Officer of EVEREN Securities, Inc. (formerly Kemper Securities,Inc.).  Mr. Boris is a director ofPeoples Energy Corporation, Loyola University Health Systems, Inc. and theChicago Board Options Exchange.

 

**Connie K.Duckworth**, born November 3, 1954, has been Presidentand Chairman of Arzu, Inc. since August 2003 and partner of 8Wings Enterprises,LLC since July 2001.  She was a partnerof Circle Financial Group, LLC from January 2003 to December 2004.  Ms. Duckworth retired from Goldman Sachs& Co. in 2001.  She was AdvisoryDirector of Goldman Sachs & Co. from December 2000 to November 2001 andManaging Director from December 1996 to December 2000.  Ms. Duckworth is a director of NorthwesternMutual and DNP Select Income Fund.

 

**Alan E. Goldberg**, born September 1, 1954, has been a Co-ManagingPartner of Lindsay Goldberg & Bessemer GP LLC and its related investmentmanager, Goldberg Lindsay & Co. LLC, since March 2001.  He served as Chairman and Chief ExecutiveOfficer of Morgan Stanley Dean Witter Private Equity from February 1998 throughJanuary 2001.  He served as ManagingDirector of Morgan Stanley & Co. Incorporated from January 1988 throughJanuary 2001.

 

**William T. Lynch, Jr.,**bornDecember 3, 1942, has been President and Chief Executive Officer of LiamHoldings, LLC since April 1997.  Heretired as President and Chief Executive Officer of Leo Burnett Company inMarch 1997 after 31 years with the advertising agency.  Mr. Lynch is a director of Krispy KremeDoughnuts, Inc., Pella Corporation and SEI Information Technology.

 

**Patrick J. Moore**,born September 7, 1954, was appointed President and Chief Executive Officer ofSmurfit-Stone in January 2002 and became Chairman of the Board in May2003.  He was Vice President and ChiefFinancial Officer of Smurfit-Stone from November 1998 to January 2002.  Mr. Moore is a director of Archer DanielsMidland Company.

 

**James J. O’Connor**,born March 15, 1937, is the former Chairman and Chief Executive Officer ofUnicom 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 Chairman of the Board and Chief ExecutiveOfficer of Zenith Electronics Corporation. Mr. Pearlman is a director of Ryerson-Tull Inc. and NanophaseTechnologies Corporation and served as director of Stone Container from 1984 to1998.

 

**Thomas A. Reynolds, III**,born May 12, 1952, has been a partner of Winston & Strawn LLP since 1984, alaw firm that regularly represents Smurfit-Stone on numerous matters.  Mr. Reynolds is a member of Winston &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 adirector of Corning Incorporated.

 

**William D. Smithburg,**bornJuly 9, 1938, is the retired Chairman, President and Chief Executive Officer ofThe Quaker Oats Company.  He is adirector of Abbott Laboratories, Northern Trust Corporation and CorningIncorporated.

 

73

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**Executive Officers**

Set forth below is information concerning theexecutive officers of Smurfit-Stone.

 

**Jeffrey S. Beyersdorfer,**born November 21, 1961, was appointed Vice President and Treasurer in June2002.  Prior to joining Smurfit-Stone,Mr. Beyersdorfer served as Vice President of Finance and Treasurer of PremcorInc. from April 1997 to June 2002. 

 

**Mathew Blanchard,** bornSeptember 9, 1959, was appointed Vice President and General Manager - BoardSales Division in July 2000.  Prior tojoining Smurfit-Stone, Mr. Blanchard was Vice President Supply Chain Managementwith St. Laurent Paperboard Inc. from July 1998 to July 2000.

 

**James E. Burdiss,**born May 15, 1951, was appointed Senior Vice President and Chief InformationOfficer on February 23, 2005, and prior to that had been Vice President andChief Information Officer since January 2002. He was Senior Director of Smurfit-Stone's Enterprise TransformationProject from January 2001 to January 2002. Prior to joining Smurfit-Stone, Mr. Burdiss was a principal at ComputerSciences Corporation from April 1997 to January 2001. 

 

**James P. Davis,** bornAugust 9, 1955, was appointed Senior Vice President and General Manager –Corrugated Container Division on February 23, 2005, and prior to that had been VicePresident and General Manager – Corrugated Container Division since January2002.  Mr. Davis was Vice President andArea Manager of the Corrugated Container Division from November 1998 to January2002. 

 

**James D. Duncan,**born June 12, 1941, was appointed Senior Vice President – Corporate Sales andMarketing on February 23, 2005, and prior to that had been Vice President -Corporate Sales and Marketing since October 2000.  Prior to that, he was Vice President andGeneral Manager – Specialty Packaging Division from November 1998 to October2000.  

 

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

 

**Ronald D. Hackney,** bornNovember 9, 1946, was appointed Senior Vice President – Human Resources onFebruary 23, 2005, and prior to that had been Vice President - Human Resourcessince July 2003.  He was Division HumanResource Manager for the Containerboard Mill and Forest Resources Division fromApril 1995 to July 2003.

 

**Charles A. Hinrichs,**born December 3, 1953, was appointed Senior Vice President and Chief FinancialOfficer on February 23, 2005, and prior to that had been Vice President andChief Financial Officer since January 2002. He was Vice President and Treasurer from November 1998 to January2002.  

 

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

 

**Mack C. Jackson,**born May 18, 1955, was appointed Senior Vice President and General Manager –Containerboard Mill and Forest Resources Division on February 23, 2005, andprior to that had been Vice President and General Manager – Containerboard Milland Forest Resources Division since January 2005.  He was Vice President of Mill Operations fromAugust 2002 to January 2005.  Prior tothat, he was General Manager of one of our containerboard mills since1994.  

 

74

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

 

**Timothy J.P. McKenna,**born March 25, 1948, was appointed Senior Vice President – Investor Relationsand Communications on February 23, 2005, and prior to that had been VicePresident – Investor Relations and Communications since November 1998. 

 

**Patrick J. Moore**–See Directors.

 

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

 

**John M. Riconosciuto,**born September 4, 1952, was appointed Senior Vice President and General Manager- Consumer Packaging Division on February 23, 2005, and prior to that had beenVice President and General Manager - Consumer Packaging Division since January2004.  He was Vice President ofOperations for the Consumer Packaging Division from January 2002 to January2004.  He was Vice President and GeneralManager – Specialty Packaging Division from October 2000 to January 2002.  Prior to that, he was Vice President andGeneral Manager – Industrial Bag and Specialty Packaging Division of SSCE fromNovember 1998 to October 2000. 

 

**David C. Stevens,**born August 11, 1934, was appointed Senior Vice President and General Manager –Smurfit Recycling Company on February 23, 2005, and prior to that had been VicePresident and General Manager – Smurfit Recycling Company since January1993.  

 

**William N. Wandmacher,**born September 27, 1942, retired in December 2004 as Vice President and GeneralManager – Containerboard Mill and Forest Resources Division, a position he heldsince November 1998. 

 

**AuditCommittee**

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

 

**AuditCommittee Financial Expert**

Our Board of Directors hasdetermined that Mr. Pearlman is an audit committee expert as defined by Item401(h) of Regulation S-K of the Exchange Act and is independent within themeaning of Item 7(d) (3) (iv) of Schedule 14A of the Exchange Act.

 

**Code ofEthics**

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

 

**Section16(a) Beneficial Ownership Reporting Compliance**

Information regarding Section16(a) Beneficial Ownership Reporting Compliance is set forth under the caption“Security Ownership of Certain Beneficial Owners and Management-Section 16(a)Beneficial Ownership Reporting Compliance” in the Proxy Statement for theannual meeting to be held May 11, 2005 (the Proxy Statement), and isincorporated herein by reference.

 

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

 

Information required inresponse to this item is set forth under the captions “Executive Compensation,”“Report of the Compensation Committee on Executive Compensation” and“Compensation Committee Interlocks and Insider Participation” in our ProxyStatement and is incorporated herein by reference.

 

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

 

Information required inresponse to this item is set forth under the captions “Principal Stockholders”and “Executive Compensation, Existing Equity Compensation Plan Information” inthe Proxy Statement and is incorporated herein by reference.

 

**ITEM 13.****     CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS**

 

Information required inresponse to this item is set forth under the caption “Certain Relationships andRelated Transactions” in the Proxy Statement and is incorporated herein byreference.

 

75

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| **ITEM 14.** |   | **PRINCIPAL ACCOUNTING FEES AND SERVICES** |
|--------------|--------|--------------------------------------------|

 

Information required inresponse to this item is set forth under the proposal “Ratification ofAppointment of Independent Auditors” in our Proxy Statement and is incorporatedherein by reference.

 

**PART IV**

 
| **ITEM 15.** |   | **EXHIBITS  AND 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 instruments with respect to long-term debt that do not exceed 10  percent of the total assets of SSCC and its subsidiaries on a consolidated  basis are not filed herewith. The Registrant agrees to furnish a copy of such  documents to the Commission upon request. |
|                                                                                                                                                                                                                                                                                              |   |                                                                                                                                                                                                                                                                                                                                                                    |
| 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).                                           |
|                                                                                                                                                                                                                                                                                              |   |                                                                                                                                                                                                                                                                                                                                                                    |
| 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                                                                                                                                                                                              |

 

76

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|     |   | 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     |   | Credit Agreement, dated November 1, 2004, by and among SSCC, as  guarantor, SSCE and Smurfit-Stone Container Canada Inc., as borrowers,  JPMorgan Chase Bank, 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)). |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.2(a)* |   | Third Amended and Restated Credit Agreement dated as of September 26,  2002 among Jefferson Smurfit Corporation (U.S.) (“JSC(U.S.)”), SSCC, JSCE,  Inc. (“JSCE”), The Lenders and Fronting Banks parties thereto, The Managing  Agents named therein, JPMorgan Chase Bank, as Administrative Agent and Senior  Managing Agent and Deutsche Bank Trust Company Americas, as Senior Managing  Agent (incorporated by reference to Exhibit 10.1 to SSCC’s  Quarterly Report on Form 10-Q for the quarter ended September 30, 2002).                                                                                                                                                         |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.2(b)* |   | Amendment No. 1, dated as of June 30, 2003, to the Third Amended and  Restated Credit Agreement, dated as of September 26, 2002, among JSC(U.S.),  SSCC, JSCE, The Lenders and Fronting Banks parties thereto, The Managing  Agents named therein, JPMorgan Chase Bank, as Administrative Agent and Senior  Managing Agent and Deutsche Bank Trust Company Americas, as Senior Managing  Agent (incorporated by reference to Exhibit 10.4(b) to JSCE, Inc.’s  Registration Statement on Form S-4 (File No. 333-106042)).                                                                                                                                                                                     |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.2(c)* |   | Amendment  No. 2 and Waiver, dated as of March 31, 2004, to the Third Amended and  Restated Credit Agreement, dated as of September 26, 2002 among JSC(U.S.),  SSCC, JSCE, The Lenders and Fronting Banks parties thereto, The Managing  Agents named therein, JPMorgan Chase Banks, as Administrative Agent and  Deutsche Bank Trust Company Americas, as Senior Managing Agent (incorporated  by reference to Exhibit 10.1 to JSCE, Inc.’s Quarterly Report on Form 10-Q  for the quarter ended March 31, 2004).                                                                                                                                                                                           |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.3(a)* |   | Amended and  Restated Credit Agreement, dated as of July 25, 2002, among Stone Container  Corporation (“Stone Container”), Smurfit-Stone Container Canada Inc., the  financial institutions signatory thereto, JPMorgan Chase Bank and Deutsche  Bank Trust Company Americas, as Agents, JPMorgan Chase Bank, as Syndication  Agent, Deutsche Bank Trust Company Americas, as Administrative Agent, and  Deutsche Bank AG, as Canadian Administrative Agent (incorporated by reference  to Exhibit 10.2 to Stone Container’s Quarterly Report on Form 10-Q for the  quarter ended June 30, 2002).                                                                                                  |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.3(b)* |   | Amendment  No. 1 and Waiver, dated as of March 10, 2003, to the Amended and Restated  Credit Agreement, dated as of July 25, 2002, among Stone Container,  Smurfit-Stone Container Canada Inc., the financial institutions signatory  thereto, JPMorgan Chase Bank and Deutsche Bank Trust Company Americas, as  Agents, JPMorgan Chase Bank, as Syndication Agent, Deutsche Bank Trust  Company Americas, as Administrative Agent, and Deutsche Bank AG, as Canadian  Administrative Agent (incorporated by reference to Exhibit 10.1(b) to Stone  Container’s Annual Report on Form 10-K for the fiscal year ended December 31,  2003).                                                                    |

 

77

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| 10.3(c)*  |   | Amendment  No. 2, dated as of November 11, 2003, to Amended and Restated Credit  Agreement, dated as of July 25, 2002, among Stone Container, Smurfit-Stone  Container Canada Inc., the financial institutions signatory thereto, JPMorgan  Chase Bank and Deutsche Bank Trust Company Americas, as Agents, JPMorgan  Chase Bank, as Syndication Agent, Deutsche Bank Trust Company Americas, as  Administrative Agent, and Deutsche Bank AG, as Canadian Administrative Agent  (incorporated by reference to Exhibit 10.1(c) to Stone Container’s Annual Report  on Form 10-K for the fiscal year ended December 31, 2003        |
|-----------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.3(d)*  |   | Amendment  No. 3, dated as of December 23, 2003, to the Amended and Restated Credit  Agreement, dated as of July 25, 2002, among Stone Container, Smurfit-Stone  Container Canada Inc., the financial institutions signatory thereto, JPMorgan  Chase Bank and Deutsche Bank Trust Company Americas, as Agents, JPMorgan  Chase Bank, as Syndication Agent, Deutsche Bank Trust Company Americas, as  Administrative Agent, and Deutsche Bank AG, as Canadian Administrative Agent  (incorporated by reference to Exhibit 10.1(d) to Stone Container’s Annual  Report on Form 10-K for the fiscal year ended December 31, 2003).  |
|      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.3(e)*  |   | Amendment  No. 4 and Waiver dated as of March 31, 2004, to the Amended and Restated  Credit Agreement, dated as of July 25, 2002, among Stone Container,  Smurfit-Stone Container Canada Inc., the financial institutions signatory  thereto, JPMorgan Chase Bank and Deutsche Bank Trust Company Americas, as  Agents, JPMorgan Chase Bank, as Syndication Agent, Deutsche Bank Trust  Company Americas, as Administrative Agent, and Deutsche Bank AG, as Canadian  Administrative Agent (incorporated by reference to Exhibit 10.1 to Stone  Container’s Quarterly Report on Form 10-Q for the quarter ended March 31,  2004). |
|      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.4      |   | 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).                                                                                                                                                                                                                                                                                                                                                                                     |
|      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.5      |   | 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).                                                                                                                                                                                                                                                                                                                                                                                             |
|      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.6      |   | 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).                                                                                                                                                                                                                                             |
|      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.7(a)** |   | Term Loan  Agreement, dated as of February 23, 1995, among Jefferson Smurfit Finance  Corporation (“JS Finance”) and Bank Brussels Lambert, New York Branch  (incorporated by reference to Exhibit 10.1 to SSCC’s Quarterly Report on Form  10-Q for the quarter ended March 31, 1995.                                                                                                                                                                                                                                                                                                                                  |
|      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.7(b)** |   | Depositary  and Issuing and Paying Agent Agreement (Series A Commercial Paper), dated as  of February 23, 1995 (incorporated by reference to Exhibit 10.2 to SSCC’s  Quarterly Report on Form 10-Q for the quarter ended March 31, 1995).                                                                                                                                                                                                                                                                                                                                                                                         |
|      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.7(c)** |   | Depositary  and Issuing and Paying Agent Agreement (Series B Commercial Paper), dated as  of February 23, 1995 (incorporated by reference to Exhibit 10.3 to SSCC’s  Quarterly Report on Form 10-Q for the quarter ended March 31, 1995                                                                                                                                                                                                                                                                                                                                                                                           |
|      |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.7(d)** |   | Receivables  Purchase and Sale Agreement, dated as of February 23, 1995, among JSC(U.S.),  as the Initial Servicer, and JS Finance, as the Purchaser (incorporated by                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |

 

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|      |   | reference to  Exhibit 10.4 to SSCC’s Quarterly Report on Form 10-Q for the quarter ended  March 31, 1995).                                                                                                                                                                                                                                                                                                                |
|-----------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|      |   |                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.7(e)** |   | Liquidity  Agreement, dated as of February 23, 1995, among JS Finance, the financial  institutions party thereto, as Banks, Bankers Trust Company, as Facility  Agent, and Bankers Trust Company, as Collateral Agent (incorporated by  reference to Exhibit 10.6 to SSCC’s Quarterly Report on Form 10-Q for the  quarter ended March 31, 1995.                                                                          |
|      |   |                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.7(f)** |   | Commercial  Paper Dealer Agreement, dated as of February 23, 1995, among BT Securities  Corporation, Morgan Stanley & Co., JSC(U.S.) and JS Finance (incorporated  by reference to Exhibit 10.7 to SSCC’s Quarterly Report on Form 10-Q for the  quarter ended March 31, 1995).                                                                                                                                       |
|      |   |                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.7(g)** |   | Addendum,  dated March 6, 1995, to Commercial Paper Dealer Agreement (incorporated by  reference to Exhibit 10.8 to SSCC’s Quarterly Report on Form 10-Q for the  quarter ended March 31, 1995).                                                                                                                                                                                                                          |
|      |   |                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.7(h)** |   | First  Omnibus Amendment, dated as of March 31, 1996, to the Receivables Purchase  and Sale Agreement among JSC(U.S.), JS Finance and the banks party thereto  (incorporated by reference to Exhibit 10.3 to SSCC’s Quarterly Report on Form  10-Q for the quarter ended June 30, 1996).                                                                                                                                  |
|      |   |                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.7(i)** |   | Amendment  No. 2 to the Term Loan Agreement, dated as of August 19, 1997, among JS  Finance and Bank Brussels Lambert, New York Branch and JSC(U.S.), as Servicer  (incorporated by reference to Exhibit 10.12(j) to SSCC’s Annual Report on  Form 10-K for the fiscal year ended December 31, 1997).                                                                                                                     |
|      |   |                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.7(j)** |   | Amendment  No. 2 to the Receivables Purchase and Sale Agreement, dated as of August 19,  1997, among JSC(U.S.), as the Seller and Servicer, and JS Finance, as the  Purchaser, Bankers Trust Company, as Facility Agent, and Bank Brussels  Lambert, New York Branch as the Term Bank (incorporated by reference to  Exhibit 10.12(k) to SSCC’s Annual Report on Form 10-K for the fiscal year  ended December 31, 1997). |
|      |   |                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.7(k)** |   | Amendment  No. 2 to the Liquidity Agreement, dated as of August 19, 1997, among JS  Finance, Bankers Trust Company, as Facility Agent, JSC(U.S.), as Servicer,  Bank Brussels Lambert, New York Branch as Term Bank and the financial institutions  party thereto as Banks (incorporated by reference to Exhibit 10.12(l) to  SSCC’s Annual Report on Form 10-K for the fiscal year ended December 31,  1997).            |
|      |   |                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.7(l)** |   | Amendment  No. 3 to the Liquidity Agreement, dated as of March 9, 2001, among JS  Finance, Bankers Trust Company, as Facility Agent, JSC(U.S.), as Servicer,  Bank Brussels Lambert, New York Branch as Term Bank and the financial  institutions party thereto as Banks (incorporated by reference to Exhibit  10.1 to SSCC’s Quarterly Report on Form 10-Q for the quarter year ended March  31, 2001).                 |
|      |   |                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.7(m)** |   | Amendment  No. 4, dated as of December 20, 2002, to Liquidity Agreement and Annex among  JSFinance, Societe Generale as Facility Agent and Collateral Agent, JSC(U.S.)  as Seller and Servicer and the financial institutions party thereto as Banks  (incorporated by reference to Exhibit 10.5(m) to SSCC’s Annual Report on Form  10-K for the fiscal year ended December 31, 2002                                     |
|      |   |                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.8(a)** |   | Pooling and Servicing Agreement, dated as of October 1, 1999, by and  among SRC, as Transferor, Stone Container, as Securer, and The Chase  Manhattan Bank, as Trustee (incorporated by reference to Exhibit 10.1(a) to  Stone Container’s Quarterly Report on Form 10-Q for the quarter ended  September 30, 1999.                                                                                                       |

 

79

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| 10.8(b)**   |   | Series 1999-1 Supplement, dated as of October 15, 1999, among SRC, as  Transferor, Stone Container, as Servicer, and The Chase Manhattan Bank, as  Trustee, under the Pooling and Servicing Agreement (incorporated by reference  to Exhibit 10.1(b) to Stone Container’s Quarterly Report on Form 10-Q for the  quarter ended September 30, 1999.                                                                                          |
|-------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.8(c)**   |   | Series 1999-2 Supplement, dated as of October 15, 1999, among SRC, as  Transferor, Stone Container, as Servicer, and The Chase Manhattan Bank, as  Trustee, under the Pooling and Servicing Agreement (incorporated by reference  to Exhibit 10.1(c) to Stone Container’s Quarterly Report on Form 10-Q for the  quarter ended September 30, 1999).                                                                                         |
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.8(d)**   |   | Receivables Purchase Agreement, dated as of October 15, 1999, between  Stone Container, as Seller and SRC, as Purchaser (incorporated by reference  to Exhibit 10.1(d) to Stone Container’s Quarterly Report on Form 10-Q for the  quarter ended September 30, 1999).                                                                                                                                                                       |
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.8(e)**   |   | Amendment No. 1 to Receivables Purchase Agreement, dated as of March  30, 2001, between Stone Container and SRC (incorporated by reference to  Exhibit 10.6(e) to Stone Container’s Annual Report on Form 10-K for the  fiscal year ended December 31, 2002).                                                                                                                                                                               |
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.8(f)**   |   | Additional Seller Supplement to Receivables Purchase Agreement, dated  March 30, 2001, by St. Laurent Paperboard (U.S.) Inc. and accepted by Stone  Container, SRC, The Chase Manhattan Bank, as Trustee and Bank One, NA, as  Agent (incorporated by reference to Exhibit 10.6(f) to Stone Container’s  Annual Report on Form 10-K for the fiscal year ended December 31, 2002).                                                           |
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.9(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 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). |
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.9(b)     |   | Support  Agreement, dated March 30, 2004, between 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).                                                                                 |
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.10(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).                                                                                                                                                                                                        |
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.10(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).                                                                                                                                                                                                                  |
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.11(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).                                                                                                                                                                                                                                                                             |
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.11(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).                                                                                                                                                                                                                              |
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.12***    |   | 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).                                                                                                                                                                                                                                        |
|             |        |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  |

 

80

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| 10.13***    |   | 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).                                             |
|-------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |   |                                                                                                                                                                                                                                       |
| 10.14(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).                                                                 |
|        |   |                                                                                                                                                                                                                                       |
| 10.14(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).              |
|        |   |                                                                                                                                                                                                                                       |
| 10.15(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).                                   |
|        |   |                                                                                                                                                                                                                                       |
| 10.15(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).              |
|        |   |                                                                                                                                                                                                                                       |
| 10.15(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).                  |
|        |   |                                                                                                                                                                                                                                       |
| 10.15(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).              |
|        |   |                                                                                                                                                                                                                                       |
| 10.16(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).                                                                          |
|        |   |                                                                                                                                                                                                                                       |
| 10.16(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).                   |
|        |   |                                                                                                                                                                                                                                       |
| 10.17***    |   | 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)).                                                                              |
|        |   |                                                                                                                                                                                                                                       |
| 10.18***    |   | Consulting  Agreement, dated as of October 24, 1996, by and between James E. Terrill and  JSC(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).   |
|        |   |                                                                                                                                                                                                                                       |
| 10.19(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).                                                           |
|        |   |                                                                                                                                                                                                                                       |
| 10.19(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).                                           |
|        |   |                                                                                                                                                                                                                                       |
| 10.20(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). |

 

81

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| 10.20(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). |
|-------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |   |                                                                                                                                                                                                                                                                     |
| 10.20(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.                                                                                                                    |
|        |   |                                                                                                                                                                                                                                                                     |
| 10.21(a)*** |   | Employment  Agreement of William N. Wandmacher  (incorporated by reference to Exhibit 10.31 to SSCC’s Annual Report on Form  10-K for the year ended December 31, 2000).                                                                                            |
|        |   |                                                                                                                                                                                                                                                                     |
| 10.21(b)*** |   | Consulting  Agreement of William N. Wandmacher.                                                                                                                                                                                                                          |
|        |   |                                                                                                                                                                                                                                                                     |
| 10.22***    |   | Employment  Agreement of James P. Davis (incorporated by reference to Exhibit 10.22 to  SSCC’s Annual Report on Form 10-K for the fiscal year ended December 31,  2002).                                                                                            |
|        |   |                                                                                                                                                                                                                                                                     |
| 10.23***    |   | Employment  Agreement of John M. Riconosciuto.                                                                                                                                                                                                                           |
|        |   |                                                                                                                                                                                                                                                                     |
| 10.24***    |   | Employment  Agreement of Charles A. Hinrichs (incorporated by reference to Exhibit 10.22  to SSCC Annual Report on Form 10-K for the fiscal year ended December 31,  2003).                                                                                              |
|        |   |                                                                                                                                                                                                                                                                     |
| 10.25***    |   | Smurfit-Stone  Container Corporation Executive Deferred Compensation Plan.                                                                                                                                                                                               |
|        |   |                                                                                                                                                                                                                                                                     |
| 21.1        |   | Subsidiaries  of Smurfit-Stone Container Corporation.                                                                                                                                                                                                                    |
|        |   |                                                                                                                                                                                                                                                                     |
| 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.                                                                                                                                                                                                                                                                    |

 

----

| *      |   | Terminated  and replaced effective November 1, 2004 by Exhibit 10.1.                                                                                                                  |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                  |
| **     |   | Terminated  and replaced effective November 23, 2004 by the accounts receivable  securitization program documents set forth in Exhibits 4.6(a), 4.6(b),  4.6(c), 10.4, 10.5 and 10.6. |
|   |   |                                                                                                                                                                                  |
| ***    |   | Indicates a  management contract or compensation plan or arrangement.                                                                                                                 |

 

82

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SIGNATURES

 

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, theregistrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 
| DATE   | March 8,  2005                                     |                    | SMURFIT-STONE  CONTAINER CORPORATION |   |
|--------|----------------------------------------------------|-------------------------|--------------------------------------|--------|
|   | (Registrant)                                       |                    |
|   |                                               |
|   | BY                                                 | /s/ Charles A. Hinrichs |                                 |
|   |                                               | Charles A. Hinrichs     |
|   | Senior Vice  President and Chief Financial Officer |
|        |                                                    |                         |                                      |        |  |  |

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the registrant in thecapacities and on the date indicated.

 
| **SIGNATURE**            |   |   | **TITLE**                                          |   | **DATE**       |
|--------------------------|--------|--------|----------------------------------------------------|--------|----------------|
|                     |   |   |                                               |   |
| /s/ Patrick J.  Moore    |   |   | Chairman,  President and Chief Executive           |   | March 8,  2005 |
| Patrick J.  Moore        |   |   | Officer and  Director                              |   |           |
|                     |   |   | (Principal  Executive Officer)                     |   |           |
|                     |   |   |                                               |   |           |
| /s/ Charles  A. Hinrichs |   |   | Senior Vice  President and Chief Financial Officer |   | March 8,  2005 |
| Charles A. Hinrichs      |   |   | (Principal  Financial Officer)                     |   |           |
|                     |   |   |                                               |   |           |
| /s/ Paul K.  Kaufmann    |   |   | Senior Vice  President and Corporate Controller    |   | March 8,  2005 |
| Paul K.  Kaufmann        |   |   | (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, 8  2005 |

 

83

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