# ** **

# **UnitedStates**

# **Securitiesand Exchange Commission**

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

## ** **

### **Form 10-K**

### ** **

| x                                                                                                                                                                                   | ** ** | **Annual  Report Pursuant to Section 13 or 15(d) of the Securities Exchange  Act of 1934**     |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                |       |                                                                                                     |
| **For the  fiscal year ended December 31, 2007**                                                                                                                               |
| ** **                                                                                                                                                                          | ** ** | ** **                                                                                               |
| **or**                                                                                                                                                                              |
|                                                                                                                                                                                |       |                                                                                                     |
| o                                                                                                                                                                                   | ** ** | **Transition  Report Pursuant to Section 13 or 15(d) of the Securities Exchange  Act of 1934** |
|                                                                                                                                                                                |       |                                                                                                     |
| **For the  transition period from                           to** |

 

**Commissionfile number 0-23876**

 

# **Smurfit-StoneContainer Corporation**

(Exact name ofregistrant 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’sTelephone Number:**(312) 346-6600

## ** **

**Securities registered pursuant toSection 12(b) of the Act:**

 
| **Title of Each Class**                                                                            | ** ** | **Name of Each Exchange on Which Registered** |
|----------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|
| Common Stock, $0.01 Par  Value                                                                     |       | NASDAQ Global Select  Market                  |
| 7%  Series A Cumulative Exchangeable Redeemable Convertible Preferred Stock,  $0.01 Par Value |       | NASDAQ Global Select  Market                  |

###### ** **

###### **Securities registered pursuant to Section 12(g) ofthe Act:     **None

###### ** **

Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act.  Yes  x Noo

 

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Act.  Yes  o Nox

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.  Yes  x No  o

 

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

 

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

 

Largeaccelerated filer  x             Acceleratedfiler  o                 Non-acceleratedfiler  o           Smallerreporting company o

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).

Yes  o   No  x

 

Theaggregate market value of the voting stock held by non-affiliates of theregistrant as of the last business day of the registrant’s most recentlycompleted second fiscal quarter was approximately $3.4 billion, based on theclosing sales price of $13.31 per share of such stock on The NASDAQ GlobalSelect Market on June 29, 2007.

 

The number of sharesoutstanding of the registrant’s common stock as of February 25, 2008: 255,506,075

 

**DOCUMENTS INCORPORATED BYREFERENCE:**

 
| **Document**                                                                                                                                                            | ** ** | **Part of Form 10-K  Into Which Document Is Incorporated** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------|
| Sections of the  Registrant’s Proxy Statement to be filed on or before March 28, 2008 for  the Annual Meeting of Stockholders to be held on May 7, 2008. |       | Part III                                                        |

 

 

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SMURFIT-STONECONTAINER CORPORATION

ANNUAL REPORT ON FORM 10-K

December 31,2007

 

TABLE OF CONTENTS

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

 

###### **FORWARD-LOOKINGSTATEMENTS**

###### ** **

Exceptfor the historical information contained in this Annual Report on Form 10-K,certain matters discussed herein contain forward-looking statements within themeaning of Section 21E of the Securities Exchange Act of 1934, asamended.  Although we believe that, inmaking any such statements, our expectations are based on reasonableassumptions, any such statements may be influenced by factors that could causeactual outcomes and results to be materially different from those contained insuch forward-looking statements.  Whenused in this document, the words “anticipates,” “believes,” “expects,” “intends”and similar expressions as they relate to Smurfit-Stone Container Corporation,its operations or its management are intended to identify such forward-lookingstatements.  These forward-lookingstatements 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 are discussed in Part I,Item 1A, “Risk Factors.”

 

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

 

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**PART I**

 

**ITEM 1.      BUSINESS**

 

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

 

**GENERAL**

 

Smurfit-Stone ContainerCorporation, incorporated in Delaware in 1989, is the industry’s leadingintegrated manufacturer of paperboard and paper-based packaging in NorthAmerica, including containerboard and corrugated containers, and is one of theworld’s largest paper recyclers.  We havea complete line of graphics capabilities for packaging. For the year ended December 31,2007, our net sales were $7,420 million and our net loss available to commonstockholders was $115 million.

 

Smurfit-Stone is aholding company with no business operations of its own.  Smurfit-Stone conducts its businessoperations through its wholly-owned subsidiary Smurfit-Stone ContainerEnterprises, Inc. (SSCE), a Delaware corporation.

 

**DISCONTINUED OPERATIONS**

 

On June 30, 2006, we completed the sale ofsubstantially all of the assets of our Consumer Packaging division for $1.04billion.  Reflecting final workingcapital adjustments and sales transaction costs, net cash proceeds were $897million, which excluded $130 million of accounts receivable previously sold toStone Receivables Corporation (SRC) under our accounts receivablesecuritization program.  We recorded apretax gain of $171 million, offset by a $174 million income tax provision,resulting in a net loss on sale of discontinued operations of $3 million.  The after-tax loss was the result of aprovision for income taxes that was higher than the statutory income tax ratedue to non-deductible goodwill of $273 million.

 

The Consumer Packaging division was a reportablesegment comprised of four coated recycled boxboard mills and 39 consumerpackaging operations in the United States, including folding carton, multiwalland specialty bag, flexible packaging, label, contract packaging and laminationbusinesses and one consumer packaging plant in Brampton, Ontario.   Net sales for these operations were $787million for the six months ended June 30, 2006, and $1,584 million for theyear ended December 31, 2005.  Thesefacilities employed approximately 6,600 hourly and salaried employees.  The results of operations of the ConsumerPackaging segment have been reclassified as discontinued operations for allperiods presented.

 

**FINANCIAL INFORMATION CONCERNINGINDUSTRY SEGMENTS**

 

In2007, we combined our Reclamation operations into the Containerboard andCorrugated Containers segment and now operate as one segment.  The change to one segment was driven bychanges to our management structure and further integration resulting from ourstrategic initiative plan, including the sale of the Consumer Packagingdivision.  The Reclamation segment waspreviously a non-reportable segment.  The 2006 and 2005 financial informationhas been restated to conform to the current year presentation.  For financial information relating to oursegment for the last three fiscal years, including our net sales to externalcustomers by country of origin and total long-lived assets by country, see theinformation set forth in Note 26 of the Notes to Consolidated FinancialStatements.

 

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###### ** **

###### **PRODUCTS**

###### ** **

###### **CONTAINERBOARD,CORRUGATED CONTAINERS and RECLAMATION SEGMENT**

###### ** **

The Containerboard,Corrugated Containers and Reclamation segment includes 16 paper mills (13located in the United States and three in Canada), 124 container plants (102located in the United States, 16 in Canada, three in Mexico, two in China andone in Puerto Rico), 24 reclamation plants, one paper tube and core plant andone wood products plant located in the United States and one lamination plantlocated in Canada.  In addition, we haveequity ownership in two corrugated container plants in Asia (one in China andone in Thailand), as well as one sheet plant and a lithographic printing plantin China.  Also, we own approximately onemillion acres of timberland in Canada and operate wood harvesting facilities inCanada and the United States.  Theprimary products of our Containerboard, Corrugated Containers and Reclamationsegment include:

 

·                  containerboard;

·                  corrugated containers;

·                  kraft paper;

·                  market pulp; and

·                  reclaimed and brokered fiber.

 

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 transportsuch diverse products as home appliances, electric motors, small machinery,grocery products, produce, books and furniture. We provide customers with innovativepackaging solutions to advertise and sell their products.  In addition, we manufacture and sell avariety of retail ready, point of purchase displays and a full line ofspecialty products, including pizza boxes, corrugated clamshells for the foodindustry, Cordeck® recyclable pallets and custom die-cut boxes to displaypackaged merchandise on the sales floor. We also provide custom, proprietary and standard automated packagingmachines, offering customers turn-key installation, automation, line integrationand packaging solutions.  Ourcontainer plants serve local customers and large national accounts.  Net sales of corrugated containers for 2007,2006 and 2005 represented 60%, 64% and 65%, respectively, of the Company’stotal net sales.

 

Our containerboard millsproduce a full line of containerboard, which is used primarily in theproduction of corrugated packaging.  Weproduced 3,736,000 tons of unbleached kraft linerboard, 959,000 tons of whitetop linerboard and 2,641,000 tons of medium in 2007.  Our containerboard mills and corrugatedcontainer operations are highly integrated, with the majority of ourcontainerboard used internally by our corrugated container operations.  In 2007, our corrugated container plantsconsumed 4,913,000 tons of containerboard. Net sales of containerboard to third parties for 2007, 2006 and 2005represented 21%, 19% and 19%, respectively, of the Company’s total net sales.

 

Our paper mills alsoproduce market pulp, kraft paper, solid bleached liner (SBL) and otherspecialty products.  We produce bleachednorthern and southern hardwood pulp, bleached southern softwood pulp and fluffpulp, which are sold to manufacturers of paper products, including photographicand other specialty papers, as well as the printing and writing sectors.  Kraft paper is used in numerous products,including consumer and industrial bags, grocery and shopping bags, counterrolls, handle stock and refuse bags.

 

Our reclamationoperations procure fiber resources for our paper mills as well as otherproducers.  We operate 24 reclamationfacilities in the United States that collect, sort, grade and bale recoveredpaper.  We also collect aluminum andplastics for resale to manufacturers of these products.  In addition, we operate a nationwidebrokerage system whereby we purchase and resell recovered paper to our recycledpaper mills and other producers on a regional and national contract basis.  Our waste reduction services extractadditional recyclables from the waste stream by partnering with customers toreduce their waste expenses and increase efficiencies.  Brokerage contracts provide bulk purchasing,often resulting in lower prices and cleaner recovered paper.  Many of our reclamation facilities arelocated close to our recycled paper mills, ensuring availability of supply withminimal shipping costs.  In 2007, ourpaper mills 

 

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consumed 2,780,000 tonsof the fiber reclaimed and brokered by our reclamation operations, representingan integration level of approximately 41%.

 

Production for our papermills, sales volume for our corrugated container facilities and fiber reclaimedand brokered for the last three years were:

 
| (In thousands of tons, except as noted)             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                                          | ** ** | **2007**   | ** ** | **2006**   | ** ** | **2005**   | ** ** |
| Mill Production                                     |       |       |       |       |       |       |       |
| Containerboard                                      |       | 7,336      |       | 7,402      |       | 7,215      |       |
| Solid bleached  sulfate (SBS)/SBL(Note 1)           |       | 269        |       | 313        |       | 283        |       |
| Kraft paper                                         |       | 177        |       | 199        |       | 204        |       |
| Market pulp                                         |       | 574        |       | 564        |       | 563        |       |
| Corrugated containers sold (in billion square feet) |       | 74.8       |       | 80.0       |       | 81.3       |       |
| Fiber reclaimed and brokered                        |       | 6,842      |       | 6,614      |       | 6,501      |       |

 

                                                Note 1: Production for the years ended2007, 2006 and 2005 include 143,000, 189,000 and 177,000 tons, respectively, ofSBS which was produced by the Brewton, Alabama mill.  The Brewton, Alabama mill was sold in September 2007.  See Item 7. Management’s Discussion andAnalysis of Financial Condition and Results of Operations, “Sale of Assets.”

 

**RAW MATERIALS**

 

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

 

**MARKETING ANDDISTRIBUTION**

 

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 paperboardcustomers.  Our converting plants focuson supplying both specialized packaging with high value graphics that enhance aproduct’s market appeal and high-volume commodity products.

 

We serve a broad customerbase.  We serve thousands of accountsfrom our plants and sell packaging and other products directly to end users andconverters, as well as through resellers. Our corrugated container sales organization is centralized with salesresponsibilities for all converting plants. This allows us to better focus on revenue growth and assign theappropriate resources to the best opportunities.  Marketing of containerboard andpulp to third parties is centralized in our board sales group.  Total tons of containerboard andmarket pulp sold in 2007, 2006 and 2005 were 3,381,000, 3,093,000 and2,651,000, respectively.

 

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**

 

Themarkets in which we sell our principal products are highly competitive andcomprised of many participants.  Althoughno single company is dominant, we do face significant competitors, includinglarge vertically integrated companies as well as numerous smallercompanies.  The markets in which wecompete have historically been sensitive to price fluctuations brought about byshifts in industry 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.

 

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**BACKLOG**

 

Demandfor our major product lines is relatively constant throughout the year, andseasonal fluctuations in marketing, production, shipments and inventories arenot significant.  Backlog orders are nota significant factor in the industry.  Wedo not have a significant backlog of orders as most orders are placed fordelivery within 30 days.

 

**RESEARCH AND NEW PRODUCTDEVELOPMENT**

 

Themajority of our research and development activities are performed at ourfacility located in Carol Stream, Illinois. We use advanced technology to assist all levels of the manufacturing andsales processes, from raw material supply through finished packagingperformance.  Research programs haveprovided improvements in coatings and barriers, stiffeners, inks andprinting.  Our technical staff conductsbasic, applied and diagnostic research, develops processes and products andprovides a wide range of other technical services.  In 2007, 2006 and 2005, we spentapproximately $3 million, $4 million and $9 million, respectively, on researchand new product development activities.

 

**INTELLECTUAL PROPERTY**

 

Weactively pursue applications for patents on new technologies and designs andattempt to protect our patents against infringement.  Nevertheless, we believe our success andgrowth are more dependent on the quality of our products and our relationshipswith customers than on the extent of our patent protection.  We hold or are licensed to use certainpatents, licenses, trademarks and trade names on our products, but do notconsider the successful continuation of any material aspect of our business tobe dependent upon such intellectual property.

 

**EMPLOYEES**

 

Wehad approximately 22,700 employees at December 31, 2007, of whichapproximately 18,600 were employees of U.S. operations.  Approximately 11,100 (60%) 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:

 

·                  Panama City, Florida - March 2008

·                  Fernandina Beach, Florida - June 2008

·                  West Point, Virginia - September 2008

·                  Pontiac, Quebec, Canada - April 2009

·                  Florence, South Carolina - August 2009

·                  La Tuque,Quebec, Canada - August 2009

·                  Hodge, Louisiana - June 2010

·                  Jacksonville, Florida -  June 2010

·                  Missoula, Montana -  May 2011

·                  Hopewell, Virginia - July 2011

 

Webelieve our employee relations are generally good.  While the terms of our collective bargainingagreements may vary, we believe the material terms of the agreements arecustomary for the industry, the type of facility, the classification of theemployees and the geographic location covered thereby.

 

**ENVIRONMENTAL COMPLIANCE**

 

Ouroperations are subject to extensive environmental regulation by federal, state,local and foreign authorities.  In thepast, we have made significant capital expenditures to comply with water, air,solid and hazardous waste and other environmental laws and regulations.  We expect to make significant expenditures inthe future for environmental compliance. Because various environmental standards are subject to change, it isdifficult to predict with certainty the amount of capital expenditures thatwill ultimately be required to comply with future standards.

 

 

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The United StatesEnvironmental Protection Agency (EPA) issued its comprehensive rule governingair emissions (Maximum Achievable Control Technology (MACT)) and waterdischarges for the pulp, paper and paperboard industry known as the “ClusterRule.”  Phase II of MACT I of the ClusterRule required us to implement systems to collect and control high volume,low concentration gases (or implement an approved compliance alternative) atvarious mills.  All projects required forcompliance were completed and operating prior to the required compliancedates.  To comply with Phase II of MACTI, we spent approximately $65 million through 2006 and $9 million in 2007.

 

In  2004, the EPA promulgated a MACT regulationto limit hazardous air pollutant emissions from certain industrial boilers(Boiler MACT).  Several of our mills wererequired to install new pollution control equipment in order to meet thecompliance deadline of September 13, 2007. The Boiler****MACT rule was challenged by thirdparties in litigation, and the United States District Court of Appeals for theD.C. Circuit issued a decision vacating Boiler MACT and remanding the rule tothe EPA.  Except for one mill whichobtained a compliance extension until March 2008,****all projects required to bring usinto compliance with the now vacated Boiler MACT requirements were completed****bySeptember 13, 2007.  We spentapproximately $50 million on Boiler MACT projects through 2006 and $28 millionin 2007.  We anticipate spendingapproximately $3 million on these projects during the first quarter of 2008.  It ispresently****unclear whetherfuture rulemaking will require us to install additional pollution controlequipment on industrial boilers at our facilities.

 

In addition to Cluster Rule andBoiler MACT compliance, we anticipate additional capital expenditures relatedto environmental compliance.  Excludingthe spending on Cluster Rule and Boiler MACT projects described above, forthe past three years we have spent an average of approximately $9 millionannually on capital expenditures for environmental purposes.  Since our principal competitors are subjectto comparable environmental standards, including the Cluster Rule andBoiler MACT, it is our opinion, based on current information, that compliancewith environmental standards should not adversely affect our competitiveposition or operating results.  However,we could incur significant expenditures due to changes in law or the discoveryof new information, which could have a material adverse effect on our operatingresults.  See Part I, Item 3, “LegalProceedings, Environmental Matters.”

 

**EXECUTIVE OFFICERS OFTHE REGISTRANT**

** **

**MathewBlanchard,**born September 9,1959, was appointed Vice President and General Manager - Board Sales Divisionin July 2000.

 

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

 

**CharlesA. Hinrichs**, bornDecember 3, 1953, was appointed SeniorVice President and Chief Financial Officer on February 23, 2005, and priorto that had been Vice President and Chief Financial Officer since January 2002.  He was Vice President and Treasurer from November 1998to January 2002.

 

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

 

**Mack C.Jackson**, born May 18,1955, was appointed Senior Vice Presidentand General Manager — Containerboard Mill and Forest Resources Division on February 23,2005, and prior to that had been Vice President and General Manager —Containerboard Mill and Forest Resources Division since January 2005.  He was Vice President of Mill Operations fromAugust 2002 to January 2005. Prior to that, he was General Manager of two of our containerboard millssince 1994.

 

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

 

 

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**Steven J.Klinger**, born March 5,1959, was appointed President and ChiefOperating Officer on May 11, 2006. Prior to joining Smurfit-Stone, Mr. Klinger was employed by GeorgiaPacific Corporation for 23 years, most recently as Executive Vice President,Packaging from February 2003 to May 2006 and President, Packaging andContainerboard Sales / Logistics from August 2001 to January 2003.

 

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

 

**PatrickJ. Moore**, born September 7,1954, has served as Chairman and Chief Executive Officer since May 2006.  He had been Chairman, President and ChiefExecutive Officer since May 2003, and prior to that he was President andChief Executive Officer since January 2002, when he was also elected as aDirector.  He was Vice President andChief Financial Officer from November 1998 until January 2002.  Mr. Moore is a director of ArcherDaniels Midland Company.

 

**Susan M.Neumann**, born February 5,1954, was appointed Senior Vice President,Corporate Communications on November 15, 2006.  Prior to joining Smurfit-Stone, Ms. Neumannwas employed by Albertsons, Inc. most recently as Senior Vice President,Education, Communications and Public Affairs from November 2003 to November 2006,Group Vice President, Communications and Education from January 2002 to November 2003and Vice President, Communications from January 1996 to January 2002.

 

**Mark R. O’Bryan**, born January 15, 1963, wasappointed Senior Vice President — Strategic Initiatives and Chief InformationOfficer in April 2007.  He had beenSenior Vice President — Strategic Initiatives since July 2005 and prior tothat had been Vice President - Operational Improvement for the ConsumerPackaging Division from April 2004 to July 2005.  He was Vice President — Procurement from October 1999to April 2004.

 

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

 

**StevenC. Strickland**,born July 12, 1952, was appointed Senior Vice President of Sales for theContainer Division on October 27, 2006. Prior to joining Smurfit-Stone, Mr. Strickland was employed byUnisource most recently as Senior Vice President of Packaging and Supply from September 2006to October 2006, Senior Vice President of Packaging from March 2004to August 2006, Senior Vice President of Operations — East from March 2003to March 2004 and Vice President of National Sales from September 1999to March 2003.

 

**AVAILABLE INFORMATION**

 

Wemake available free of charge our annual report on Form 10-K, quarterlyreports on Form 10-Q, current reports on Form 8-K and amendments tothose reports filed or furnished as required by Section 13(a) or 15(d) ofthe Securities Exchange Act of 1934, as amended (the Exchange Act), through ourInternet Website (www.smurfit-stone.com) as soon as reasonably practicableafter we electronically file such material with, or furnish it to, theSecurities and Exchange Commission (SEC). You may access these SEC filings via the hyperlink that we provide onour Website to a third-party SEC filings Website.

 

**ITEM 1A.   RISKFACTORS**

 

Weare subject to certain risks and events that, if one or more of them occur,could adversely affect our business, our financial condition and results ofoperations and the trading price of our common stock.  You should consider the following riskfactors, in addition to the other information presented in this report, as wellas the other reports and registration statements we file from time to time withthe SEC, in evaluating us, our business and an investment in oursecurities.  The risks below are not theonly ones 

 

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weface.  Additional risks not currentlyknown to us or that we currently deem immaterial also may adversely impact ourbusiness.

 

**We have a highly leveraged capital structure.**

 

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

 

·                  we may be required to seek additionalsources of capital, including additional borrowings under our existing creditfacilities, other private or public debt or equity financings to service orrefinance our indebtedness, which borrowings may not be available on favorableterms, particularly in the event that our credit ratings are downgraded byrating agencies;

·                  a substantial portion of our cash flowfrom operations will be needed to meet the payment of principal and interest onour indebtedness and other obligations and will not be available for ourworking capital, capital expenditures and other general corporate purposes; and

·                  our level of debt makes us morevulnerable to economic downturns and reduces our operational and businessflexibility in responding to changing business and economic conditions andopportunities.

 

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

 

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

 

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

 

·                  incur liens or make negative pledges onour assets;

·                  merge, consolidate or sell our assets;

·                  issue additional debt;

·                  pay dividends or repurchase or redeemcapital stock;

·                  make investments and acquisitions;

·                  enter into certain transactions withstockholders and affiliates;

·                  make capital expenditures;

·                  materially change our business;

·                  amend our debt and other materialagreements;

·                  issue and sell capital stock;

·                  make investments in unrestrictedsubsidiaries; or

·                  prepay specified indebtedness or otherdebt.

 

Oursenior secured credit facility requires us to maintain specified financialratios.  Our failure to comply with thesecovenants could result in an event of default that, if not cured or waived,could result in our being required to repay these borrowings before their duedate.  If we were unable to make thisrepayment or otherwise refinance these borrowings, our lenders could forecloseon our assets.  If we were unable torefinance these borrowings on favorable terms, our costs of borrowing couldincrease significantly.

 

Oursenior debt bears interest at fixed and floating rates.  Currently, only a portion of our floatinginterest rate debt is capped. If interest rates rise, our senior debt interestpayments also will increase.  Although wemay enter into agreements to hedge our interest rate risk, these agreements maybe inadequate to protect us fully against our interest rate risk.

 

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

 

Ouroperating results reflect the industry’s general cyclical pattern.  The majority of our products can be subjectto extreme price competition.  Somesegments of our industry have production overcapacity, which may require us totake downtime periodically to reduce inventory levels during periods of weakdemand.  In addition, the industry iscapital intensive, which leads to high fixed costs and has historicallyresulted in continued production as long as prices are sufficient to covermarginal costs.  These conditions havecontributed to substantial price competition and volatility in the industry.  Decreases in 

 

8

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pricesfor our products, coupled with our highly leveraged financial position, mayadversely impact our ability to respond to competition and to other marketconditions or to otherwise take advantage of business opportunities.

 

Thepaperboard and packaging products industries are highly competitive and areparticularly sensitive to price fluctuations as well as other factors includinginnovation, design, quality and service, with varying emphasis on these factorsdepending on the product line.  To theextent that one or more of our competitors become more successful with respectto any key competitive factor, our ability to attract and retain customerscould be materially adversely affected. Many of our competitors are less leveraged, have financial and otherresources greater than ours and are more capable to withstand the adversenature of the business cycle.  If ourfacilities are not as cost efficient as those of our competitors, we may needto temporarily or permanently close such facilities and suffer a consequentreduction in our revenues.

 

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

 

Wehave made substantial contributions to our pension plans in the past five yearsand expect to continue to make substantial contributions in the coming years inorder to ensure that our funding levels remain adequate in light of projectedliabilities and to meet the requirements of the Pension Protection Act of 2006.  These contributions reduce the amount of cashavailable for us to repay indebtedness or make capital investments.

 

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

 

Thecost of producing and transporting our products is highly sensitive to theprice of energy.  Energy prices, inparticular oil and natural gas, have experienced significant volatility inrecent years, with a corresponding effect on our production costs.  Energy prices may continue to fluctuate andmay rise to higher levels in future years. This could adversely affect our production costs and results ofoperations. Although we may enter into agreements to hedge our energy costs,these agreements may be inadequate to protect us fully against the volatilityof energy costs.  To the extent wehave  positions that are not hedged orour hedging procedures do not perform as planned, fluctuating energy costscould reduce our operating profit.

 

Woodfiber and reclaimed fiber, the principal raw materials used in the manufactureof our paper products, are purchased in highly competitive, price-sensitivemarkets, which have historically exhibited price and demand cyclicality.  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 and demand for reclaimedfiber, particularly export demand from Asian producers, have occasionallycaused tight supplies of reclaimed fiber. At such times, we may experience an increase in the cost of fiber or maytemporarily have difficulty obtaining adequate supplies of fiber.

 

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

 

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

 

·                  the state of the economy;

·                  the financial markets;

·                  demand for, and selling prices of, ourproducts;

·                  performance of our major customers;

·                  costs of raw materials and energy;

·                  hurricanes and other majorweather-related disruptions; and

·                  legislation and other factors relating tothe paperboard and packaging products industries generally or to specificcompetitors.

 

9

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Ifoperating cash flows, net proceeds from borrowings, divestitures or otherfinancing sources do not provide us with sufficient liquidity to meet ouroperating and debt service requirements, we will be required to pursue otheralternatives to repay debt and improve liquidity.  Such alternatives may include:

 

·                  sales of assets;

·                  cost reductions;

·                  deferral of certain discretionary capitalexpenditures and benefit payments; and

·                  amendments or waivers to our debtinstruments.

 

Wemight not successfully complete any of these measures or they may not generatethe liquidity we require to operate our business and service ourobligations.  If we are not able togenerate sufficient cash flow or otherwise obtain funds necessary to makerequired debt payments or we fail to comply with our debt covenants, we wouldbe in default under the terms of our various debt instruments.  This would permit our debt holders toaccelerate the maturity of such debt and would cause defaults under our otherdebt.

 

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

 

Federal,state, provincial, foreign and local environmental requirements, particularlythose relating to air and water quality, are a significant factor in ourbusiness.  Maintaining compliance withexisting environmental laws, as well as complying with requirements imposed bynew or changed environmental laws, may require capital expenditures forcompliance.  In addition, ongoingremediation costs and future remediation liability at sites where we may be apotentially responsible party (PRP) for cleanup activity under theComprehensive Environmental Response, Compensation and Liability Act of 1980(CERCLA) and analogous state and other laws may materially adversely affect ourresults of operations and financial condition.

 

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

 

Ourassets and liabilities outside the United States are primarily located inCanada.  Our principal foreign exchangeexposure is the Canadian dollar.  Thefunctional currency for our Canadian operations is the U.S. dollar.  Our net income could be reduced to the extentwe have un-hedged positions, our hedging procedures do not perform as plannedor the Canadian dollar continues to strengthen. Our financial performance is directly affected by exchange ratesbecause:

 

·                  certain of our products are manufacturedin Canada, but sold in U.S. dollars; and

·                  the monetary assets and liabilities ofour Canadian operations are translated into U.S. dollars for financialreporting purposes.

 

**ITEM 1B.   UNRESOLVEDSTAFF COMMENTS**

 

None

 

 

10

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**ITEM 2.      PROPERTIES**

 

The manufacturingfacilities of our consolidated subsidiaries are located primarily in NorthAmerica.  We believe that our facilitiesare adequately insured, properly maintained and equipped with machinerysuitable for our use. During the last two years, we have invested significantcapital in our operations to upgrade or replace corrugators and convertingmachines, while closing higher cost facilities. See Part II, Item 7, “Management’s Discussion and Analysis of FinancialCondition and Results of Operations, Strategic Initiatives.”  Our manufacturing facilities as of December31, 2007 are summarized below:

 
| ** **                         | ** ** | **Number of Facilities** | ** ** | **State**  | ** ** |
|------------------------------------|------------|--------------------------|------------|------------|------------|
| ** **                         | ** ** | **Total**                | ** ** | **Owned**  | ** ** | **Leased** | ** ** | **Locations(a)** | ** ** |
| **United States**                  | ** ** | ** **               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Paper mills                        |       | 13                       |       | 13         |       |   |   | 10 |   |
| Corrugated  container plants       |       | 102                      |       | 72         |       | 30 |   | 30 |   |
| Wood products  plant               |       | 1                        |       | 1          |       |   |   | 1 |   |
| Paper tube and  core plant         |       | 1                        |       | 1          |       |   |   | 1 |   |
| Reclamation  plants                |       | 24                       |       | 16         |       | 8 |   | 14 |   |
| Subtotal                           |       | 141                      |       | 103        |       | 38 |   | 36 |   |
| ** **                         | ** ** | ** **               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Canada and Other North America** |       |                     |       |       |       |   |   |   |   |
| Paper mills                        |       | 3                        |       | 3          |       |   |   | N/A |   |
| Corrugated  container plants       |       | 20                       |       | 16         |       | 4 |   | N/A |   |
| Laminating plant                   |       | 1                        |       | 1          |       |   |   | N/A |   |
| Subtotal                           |       | 24                       |       | 20         |       | 4 |   |   |   |
|                               |       |                     |       |       |       |   |   |   |   |
| **China**                          | ** ** | ** **               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Corrugated  container plants       |       | 2                        |       | 1          |       | 1 |   | N/A |   |
|                               |       |                     |       |       |       |   |   |   |   |
| Total                              |       | 167                      |       | 124        |       | 43 |   | N/A |   |
|                               |       |                     |       |       |       |   |   |   |   |

----

(a) Reflects the numberof states in which we have at least one manufacturing facility.

 

Our paper millsrepresent approximately 74% of our investment in property, plant andequipment.  In addition to manufacturingfacilities, we own approximately one million acres of timberland in Canada andoperate wood harvesting facilities in Canada and the United States.  The approximate annual tons of productivecapacity of our paper mills at December 31, 2007 were:

 
| ** **     | ** ** | **Annual Capacity (in thousands)** | ** ** |
|----------------|------------|------------------------------------|------------|
| ** **     | ** ** | **United States**                  | ** ** | **Canada** | ** ** | **Total** | ** ** |
| Containerboard |       | 6,631                              |       | 507 |   | 7,138 |   |
| SBL            |       |                               |       | 127 |   | 127 |   |
| Kraft paper    |       | 185                                |       |   |   | 185 |   |
| Market pulp    |       | 286                                |       | 254 |   | 540 |   |
| Total          |       | 7,102                              |       | 888 |   | 7,990 |   |

###### ** **

###### **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 CashProvided By (Used For) Financing Activities."**

###### ** **

 

11

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###### ** **

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

 

**LITIGATION**

 

In 2003, we settled all of the antitrust class actioncases pending against Smurfit-Stone, which were based on allegations of aconspiracy among linerboard manufacturers from 1993 to 1995, and made aggregatesettlement payments of $92.5 million, one-half of which was paid in December2003 and the remainder of which was paid in January 2005.  We subsequently settled all of the lawsuitsbrought on behalf of numerous****companiesthat opted out of these class actions to seek their own recovery (Direct ActionCases), and made aggregate payments of $60 million, including $14 million in2005 and $46 million in 2006.  Werecorded additional charges of $36 million in 2005 in connection with thesesettlements.

 

We are a defendant in a number of lawsuits and claims arising out ofthe conduct of our business.  While theultimate results of such suits or other proceedings against us cannot bepredicted with certainty, we believe the resolution of these matters will nothave a material adverse effect on our consolidated financial condition orresults of operations.

 

**ENVIRONMENTALMATTERS**

 

Federal, state, local and foreign environmental requirements are asignificant factor in our business.  Weemploy processes in the manufacture of pulp, paperboard and other productswhich result in various discharges, emissions and wastes.  These processes are subject to numerousfederal, state, local and foreign environmental laws and regulations, includingreporting and disclosure obligations.  Weoperate and expect to continue to operate under permits and similarauthorizations from various governmental authorities that regulate suchdischarges, emissions and wastes.

 

We also facepotential liability as a result of releases, or threatened releases, of hazardoussubstances into the environment from various sites owned and operated by thirdparties at which Company-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, all of whom arereferred to as PRPs, are, in most instances, subject to joint and severalliability for response costs for the investigation and remediation of such sitesunder CERCLA and analogous state laws, regardless of fault or the lawfulness ofthe original disposal.  We have receivednotice that we are or may be a PRP at a number of federal and/or state siteswhere response action may be required and as a result may have joint andseveral liability for cleanup costs at such sites.  However, liability for CERCLA sites istypically shared with other PRPs and costs are commonly allocated according torelative amounts of waste deposited.  Inestimating our reserves for environmental remediation and future costs, ourestimated liability of $5 million reflects our expected share of costs afterconsideration for the relative percentage of waste deposited at each site, thenumber of other PRPs, the identity and financial condition of such parties andexperience regarding similar matters.  Inaddition to participating in the remediation of sites owned by third parties,we have entered into consent orders for the investigation and/or remediation ofcertain of our owned properties.

 

Based oncurrent information, we believe the costs of the potential environmentalenforcement matters 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, 2007, we had approximately$18 million reserved for environmental liabilities.  We believe our liability for these matterswas adequately reserved at December 31, 2007, and that the possibility isremote that we would incur any material liabilities for which we have notrecorded adequate reserves.

 

###### **ITEM4.      SUBMISSION OF MATTERS TO A VOTEOF SECURITY HOLDERS**

 

No matters were submitted to a vote of security holders, through thesolicitation of proxies or otherwise, during the fourth quarter ended December31, 2007.

 

12

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## **PART II**

## ** **

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

## ** **

**MARKET INFORMATION**

 

At December 31, 2007, approximately 45,000 stockholders, includingstockholders of record, beneficial owners and employee participants in ourvoluntary savings plans, held our common stock. Our common stock trades on The NASDAQ Global Select Market under thesymbol "SSCC."  The high andlow sales prices of our common stock in 2007 and 2006 were:
| ** **     | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------|------------|----------|------------|----------|------------|
| ** **     | ** ** | **High** | ** ** | **Low**  | ** ** | **High** | ** ** | **Low** | ** ** |
| First Quarter  |       | $        | 14.08      |     | $          | 9.85 |   | $ | 14.40 |   | $ | 12.13 |   |
| Second Quarter |       | $        | 13.54      |     | $          | 11.25 |   | $ | 15.15 |   | $ | 10.21 |   |
| Third Quarter  |       | $        | 14.08      |     | $          | 8.85 |   | $ | 11.80 |   | $ | 9.77 |   |
| Fourth Quarter |       | $        | 13.56      |     | $          | 9.45 |   | $ | 11.62 |   | $ | 9.88 |   |

 

**DIVIDENDS ON COMMON STOCK**

 

We have not paid cashdividends on our common stock and do not intend to pay dividends in theforeseeable future.  Our ability to paydividends in the future is restricted by certain provisions contained invarious agreements and indentures relating to SSCE’s outstandingindebtedness.  See Item 7, “Management'sDiscussion and Analysis of Financial Condition and Results of Operations,Liquidity and Capital Resources - Net Cash Provided By (Used For) FinancingActivities.”

 

**STOCK PERFORMANCEGRAPH**

 

The information set forth under thiscaption shall not be deemed to be “filed” or incorporated by referenceinto any of our other filings with the SEC.

Thegraph below compares the cumulative total stockholder return on an investmentin the Common Stock, the S&P 500 Index, and an index of a peer group ofpaper companies (the Peer Group) for the five-year period endedDecember 31, 2007.  The Peer Groupis comprised of the following four medium- to large-sized companies whoseprimary business is the manufacture and sale of paper products and packaging:International Paper Company, Weyerhaeuser Company, Packaging Corporation ofAmerica and Temple-Inland Inc.  The 2006Peer Group also included Greif Inc., but that company was removed from the PeerGroup for 2007 because its business is no longer an appropriatecomparison.  The graph assumes the valueof an investment in the Common Stock and each index was $100.00 atDecember 31, 2002 and that all dividends were reinvested.

 
| ** **                              | ** ** | **INDEXED  RETURNS** | ** ** |
|-----------------------------------------|------------|----------------------|------------|
| ** **                              | ** ** | **Years  Ending**    | ** ** |
| ** **                              | ** ** | **Base**             | ** ** | ** ** | ** ** |
| ** **                              | ** ** | **Period**           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Company Name / Index**                | ** ** | **12/31/02**         | ** ** | **12/31/03** | ** ** | **12/31/04** | ** ** | **12/31/05** | ** ** | **12/31/06** | ** ** | **12/31/07** | ** ** |
| **Smurfit-Stone Container Corporation** | ** ** | **100**              |       | 120.65 |   | 121.37 |   | 92.07 |   | 68.61 |   | 68.61 |   |
| **S&P 500 Index**                   | ** ** | **100**              |       | 128.68 |   | 142.69 |   | 149.70 |   | 173.34 |   | 182.86 |   |
| **New Peer Group**                      | ** ** | **100**              |       | 130.07 |   | 135.69 |   | 129.48 |   | 138.06 |   | 145.19 |   |
| **Old Peer Group**                      | ** ** | **100**              |       | 130.46 |   | 137.50 |   | 132.17 |   | 144.47 |   | 152.57 |   |

 

13

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**ITEM 6.   SELECTEDFINANCIAL DATA**

 

(In millions, except pershare and statistical data)

 
| ** **                                                                                  | ** ** | ** ** | ** ** | ** ** | ** ** | **Restated(a)** | ** ** |
|---------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|-----------------|------------|
| ** **                                                                                  | ** ** | **2007**   | ** ** | **2006**   | ** ** | **2005**        | ** ** | **2004** | ** ** | **2003(b)(c)** | ** ** |
| **Summary of Operations**                                                                   |       |       |       |       |       |            |       |   |   |   |   |
| Net sales (d)                                                                               |       | $          | 7,420      |       | $          | 7,157           |       | $ | 6,812 |   | $ | 6,716 |   | $ | 6,146 |   |
| Operating income (loss) (e)(f)(g)                                                           |       | 305        |       | 276        |       | (253            | )          | 172 |   | (42 | ) |
| Income (loss)  from continuing operations before cumulative effect of accounting change (g) |       | (103       | )          | (70        | )          | (381            | )          | (109 | ) | (270 | ) |
| Discontinued operations, net of income tax provision                                        |       |       |       | 11         |       | 51              |       | 54 |   | 59 |   |
| Net income (loss) available to common stockholders                                          |       | (115       | )          | (71        | )          | (342            | )          | (66 | ) | (227 | ) |
|                                                                                        |       |       |       |       |       |            |       |   |   |   |   |
| Basic and  diluted earnings per share of common stock                                       |       |       |       |       |       |            |       |   |   |   |   |
| Income (loss)  from continuing operations before cumulative effect of accounting change     |       | (.45       | )          | (.32       | )          | (1.54           | )          | (.47 | ) | (1.14 | ) |
| Discontinued  operations                                                                    |       |       |       | .04        |       | .20             |       | .21 |   | .24 |   |
| Net income  (loss) available to common stockholders                                         |       | (.45       | )          | (.28       | )          | (1.34           | )          | (.26 | ) | (.92 | ) |
| Weighted average basic and diluted shares  outstanding                                      |       | 256        |       | 255        |       | 255             |       | 253 |   | 246 |   |
|                                                                                        |       |       |       |       |       |            |       |   |   |   |   |
| **Other Financial Data**                                                                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** **      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net cash provided by operating activities                                                   |       | $          | 243        |       | $          | 265             |       | $ | 221 |   | $ | 273 |   | $ | 162 |   |
| Net cash provided by (used for) investing activities                                        |       | 68         |       | 706        |       | (277            | )          | (200 | ) | 15 |   |
| Net cash provided by (used for) financing activities                                        |       | (313       | )          | (967       | )          | 55              |       | (79 | ) | (171 | ) |
| Depreciation, depletion and amortization                                                    |       | 360        |       | 377        |       | 408             |       | 416 |   | 415 |   |
| Capital investments and acquisitions                                                        |       | 384        |       | 274        |       | 285             |       | 232 |   | 238 |   |
| Working capital, net                                                                        |       | 13         |       | (141       | )          | (4              | )          | 148 |   | 136 |   |
| Net property, plant, equipment and timberland                                               |       | 3,486      |       | 3,774      |       | 4,289           |       | 4,682 |   | 4,974 |   |
| Total assets                                                                                |       | 7,387      |       | 7,777      |       | 9,114           |       | 9,583 |   | 9,956 |   |
| Long-term debt (h)                                                                          |       | 3,359      |       | 3,634      |       | 4,571           |       | 4,498 |   | 4,807 |   |
| Redeemable preferred stock                                                                  |       | 97         |       | 93         |       | 89              |       | 85 |   | 82 |   |
| Stockholders’ equity(a)                                                                |       | 1,855      |       | 1,779      |       | 1,854           |       | 2,234 |   | 2,254 |   |
| ** **                                                                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** **      | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Statistical Data (tons in thousands)**                                                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** **      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Containerboard production (tons)                                                            |       | 7,336      |       | 7,402      |       | 7,215           |       | 7,438 |   | 7,185 |   |
| Kraft paper production (tons)                                                               |       | 177        |       | 199        |       | 204             |       | 259 |   | 293 |   |
| Market pulp production (tons)                                                               |       | 574        |       | 564        |       | 563             |       | 549 |   | 497 |   |
| SBS/SBL production (tons)                                                                   |       | 269        |       | 313        |       | 283             |       | 276 |   | 290 |   |
| Corrugated containers sold (billion square feet)                                            |       | 74.8       |       | 80.0       |       | 81.3            |       | 81.8 |   | 79.7 |   |
| Fiber reclaimed and brokered (tons)                                                         |       | 6,842      |       | 6,614      |       | 6,501           |       | 6,542 |   | 6,549 |   |
| Number of employees (i)                                                                     |       | 22,700     |       | 25,200     |       | 33,500          |       | 35,300 |   | 36,700 |   |

 

14

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**Notes to Selected Financial Data**

 

(a)          In2007, we determined that $28 million of net benefits from income taxespreviously recognized on non-cash foreign currency exchange losses from 2000 to2006 should not have been recognized under Statement of Financial AccountingStandards (SFAS) No. 109, “Accounting for Income Taxes.”  The effect of the restatement on the 2005,2004 and 2003 consolidated statements of operations was a loss of $3 million,$9 million and $19 million, respectively. In addition, the 2003 consolidated balance sheet adjustment includes thecumulative effect of income (loss) adjustments for the fiscal years ended December 31,2002, 2001 and 2000 of $(1) million, $3 million and $1 millionrespectively.

(b)         Resultsfor 2003 include the acquisition of Smurfit-MBI after March 31, 2003, thedate of the acquisition.

(c)          Werecorded a $5 million charge, net of income tax, or $.02 per diluted share, in2003 for the cumulative effect of an accounting change in accordance with SFAS No. 143,“Accounting for Asset Retirement Obligations.”

(d)         EffectiveApril 1, 2006, we adopted Emerging Issues Task Force Issue No. 04-13,“Accounting for Purchases and Sales of Inventory With the Same Counterparty”,which required us to prospectively report certain inventory buy/selltransactions of similar containerboard types in our Containerboard andCorrugated Containers segment on a net basis in our consolidated statements ofoperations, thereby reducing net sales and cost of goods sold by $194 millionin 2006.

(e)          In2004, operating income (loss) included an asset impairment charge of $73million attributable to the write-down of non-core pulp mill fixed assets.

(f)            In 2007, 2006, 2005, 2004 and 2003, we recordedrestructuring charges of $16 million, $43 million, $321 million, $16 millionand $115 million, respectively.

(g)         In2007, we recorded a loss of $65 million (after-tax loss of approximately $97million) related to the sale of our Brewton, Alabama mill.

(h)         In 2007, 2006, 2005, 2004 and 2003, long-term debtincludes obligations under capital leases of $7 million, $7 million, $12million, $13 million and $12 million, respectively.

(i)             Number of employees for 2006 excludes approximately6,600 employees of our former Consumer Packaging division, which was sold on June 30,2006.

 

**ITEM 7.****                ****MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION****AND RESULTSOF OPERATIONS**

 

**OVERVIEW**

 

Smurfit-Stone ContainerCorporation is an integrated manufacturer of paperboard and paper-basedpackaging.  Our major products arecontainerboard, corrugated containers, market pulp, recycled fiber and kraftpaper. We operate in one reportable industry segment.  Our mill operations supply paper to ourcorrugated container converting operations. The products of our converting operations, as well as the mill andreclamation tonnage in excess of what is consumed internally, are the mainproducts sold to third parties.  Ouroperating facilities and customers are located primarily in the United Statesand 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 inreducing growth in domestic packaging demand. The influence of superstores and discount retailing giants, as well asthe impacts from online shopping, has resulted in a shifting of demand topackaging which is more condensed, lighter weight and less expensive.  These factors have greatly influenced thecorrugated industry.

 

In 2007, weimplemented price increases for our products, made substantial progressexecuting our strategic initiative plan and strengthened our managementteam.  The higher average prices and incremental strategicinitiative savings more than offset significant cost inflation.  In 2007, U.S. industry per day shipments ofcorrugated containers decreased 2.1%. Our North American per day shipments ofcorrugated containers decreased 7.2% compared to 2006 due primarily to theclosures of converting facilities and continued efforts to improve margins by exitingunprofitable business. Increased 

 

15

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containerboard sales tothird parties substantially offset the reduction in corrugated containerssold.  During 2007, our containerboardinventories decreased and ended the year at record low levels.  In September 2007, wesold our Brewton, Alabama mill and used the proceeds to repay debt.

 

For 2007, we recorded anet loss available to common stockholders of $115 million, compared to a netloss of $71 million in 2006.  The higherloss was due principally to the 2007 loss on sale of the Brewton, Alabama mill($97 million after-tax loss) and higher non-cash foreign currency exchangelosses ($53 million after-tax).  The 2007results benefited from higher sales prices, savings from our strategicinitiatives, lower interest expense and lower restructuring charges in 2007compared to 2006.  These benefits werepartially offset by significant cost inflation on key input costs includingfiber and freight.

 

In 2008, we anticipatecontinued improvement in our financial performance driven by higher averageprices and incremental initiative benefits. While we expect continued inflation, cost pressures should moderatecompared to levels seen in recent years. There is uncertainty about thedirection of the overall economy, but we are projecting improved operatingperformance for our business in 2008.

 

**RESTATEMENT OF PRIOR PERIODFINANCIAL STATEMENTS**

 

In 2007, we determinedthat $28 million of net benefits from income taxes previously recognized onnon-cash foreign currency exchange losses from 2000 to 2006 should not havebeen recognized under SFAS No. 109, “Accounting for Income Taxes.”  Because we are indefinitely reinvested in theforeign operations, the losses should have been treated as permanentdifferences when determining taxable income for financial accounting purposes.

 

We performed anevaluation to determine if the errors resulting from recognizing the deferredtax impact of the non-cash foreign currency exchange losses were material toany individual prior period, taking into account the requirements of SEC StaffAccounting Bulletin No. 108, “Consideringthe Effects of Prior Year Misstatements when Quantifying Misstatements inCurrent Year Financial Statements” (SAB No.108), which was adopted in2006.  Based on this analysis, weconcluded the errors were not material to any individual period from 2000 to2006 and, therefore as provided by SAB No. 108, the correction of theerror does not require previously filed reports to be amended.  We have restated the 2006 consolidatedbalance sheet and 2005 financial statements included in this filing.  In Note 2 of the Notes to ConsolidatedFinancial Statements, we have provided tables that show the impact of thefinancial statement adjustments related to the restatement of the Company’spreviously reported financial statements for the fiscal years ended December 31,2006 and 2005.  In addition, 2004 and2003 financial information included in Part I, Item 6, “Selected FinancialData” has been restated.

 

# **STRATEGICINITIATIVES**

#  

During 2005, we announceda strategic initiative plan to improve performance and better position us forlong-term growth.  Our plan focused oncost reduction and productivity initiatives with a target to achieve $525million in annual savings in 2008 compared to levels prior to the start of ourplan.  In order to reduce our costs inour converting operations, we planned to close up to 30 converting facilitiesby the end of 2008 (inclusive of 28 facilities closed through December 31,2007), transfer the majority of their production to other facilities and investin new corrugators and finishing equipment in certain locations to improve ourproductivity.  We expected to achieveadditional cost reductions through i) mill consolidation, ii) productivityimprovements at the mills and the remaining container plants, iii)standardization of containerboard trim sizes and grades produced, iv)transportation and procurement savings and v) reductions in selling andadministrative expenses.

 

In 2005, as the firststep in this cost reduction process and in order to better align productioncapacity with market conditions and demand, we permanently closed the NewRichmond, Quebec linerboard mill, the Bathurst, New Brunswick medium mill andthe previously idled No. 2 paper machine at the Fernandina Beach, Floridalinerboard mill. Our containerboard manufacturing capacity was reduced by700,000 tons, 

 

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or 8.5%, as a result ofthese closures.  In addition, we alsoclosed two converting facilities, exited our investment in the Las Vegas,Nevada converting facility, and agreed to the closure of the Groveton, NewHampshire medium mill, in which we own a minority interest.  As a result of these closures, we recordedrestructuring charges of $321 million, including non-cash charges of $267 millionrelated to the write-down of assets, primarily property, plant and equipment,to estimated net realizable values.  Theremaining charges were primarily for severance, benefits, lease commitments andpost-closure environmental costs.  Theseshutdowns resulted in approximately 780 employees being terminated. Inaddition, another 720 employees were terminated as part of the strategicinitiative plan.

 

In 2006, in conjunctionwith the strategic initiative plan, we closed 14 converting facilities andpermanently shut down four corrugators, resulting in the termination ofapproximately 1,400 employees.  Inaddition, another 700 employees were terminated as part of the strategicinitiative plan.  We recordedrestructuring charges of $43 million, net of gains of $18 million from the saleof three closed facilities and the No. 2 paper machine at the FernandinaBeach, Florida linerboard mill. Restructuring charges include non-cash charges of $23 million related tothe write-down of assets, primarily property, plant and equipment, to estimatednet realizable values and the acceleration of depreciation for equipmentexpected to be abandoned or taken out of service.   The remaining charges of $38 million wereprimarily for severance and benefits, including pension settlement costs of $6million.

 

In 2007, we closed 12converting facilities and the Carthage, Indiana and Los Angeles, Californiamedium mills and reduced our headcount by approximately 1,750 employees.  The restructuring charges were $16 million,net of gains of $69 million on the sale of properties related to previouslyclosed facilities.  Restructuring chargesinclude non-cash charges of $48 million related to the write-down of assets,primarily property, plant and equipment, to estimated net realizable values andthe acceleration of depreciation for equipment expected to be abandoned ortaken out of service. The remaining charges of $37 million were primarily forseverance and benefits.  The productionof the two medium mills, which had combined annual capacity of 200,000 tons,was partially offset by restarting the previously idled machine at theJacksonville, Florida mill with annual capacity to produce 170,000 tons ofmedium.

 

For 2007, we targeted$420 million in savings and productivity improvements, net of transition costs,from our strategic initiatives, compared to levels prior to the start of ourplan as adjusted for the impact of inflation. During 2007, we realized savings of $438 million from theseinitiatives, including incremental savings of $195 million compared to2006.  The benefits were driven byheadcount reductions, productivity improvements, including benefits from ouroperational excellence program, and the closure of four containerboard millsand 28 converting facilities through December 31, 2007.  As a result of these actions, we have reducedour headcount by approximately 5,350 since June 30, 2005.

 

# For2008, we are targeting $525 million in cumulative savings and productivityimprovements from our strategic initiatives. Incremental savings compared to 2007 will be driven by improved boxplant productivity from our capital investments and our operational excellenceprogram.  We expect to incur capitalexpenditures of approximately $400 million in 2008.  We expect to fund the capital expendituresthrough anticipated improvements in our operating cash flows and with proceedsfrom the sale of closed facilities.

#  

During 2008, to continueimplementation of the strategic initiative plan, we expect to record additionalrestructuring charges of approximately $20 million, including accelerateddepreciation of approximately $8 million related to equipment expected to beabandoned or taken out of service in conjunction with the future closure ofcertain facilities.

 

**SALE OF ASSETS**

 

InSeptember 2007, wecompleted the sale of the Brewton, Alabama, mill assets for $355 million.  We received cash proceeds of $338 million,which excluded $16 million of accounts receivable previously sold to StoneReceivables Corporation under the accounts receivable securitization programand was net of $1 million of other closing adjustments.  The Brewton mill had annual productioncapacity of approximately 300,000 tons of white top linerboard and 190,000 tonsof solid bleached sulfate (SBS).  Wecontinue to produce white top linerboard at two of our mills.  Substantially all of the proceeds wereapplied directly to debt reduction.   Werecorded a pretax loss of $65 million, and a $32 million income tax 

 

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provision, resulting in anet loss of $97 million.  The after-taxloss was the result of a provision for income taxes that was higher than thestatutory income tax rate due to non-deductible goodwill of $146 million.

 

**RESULTS OF OPERATIONS**

 

**Discontinued Operations**

 

Our Consumer Packagingsegment, which was sold on June 30, 2006, has been classified asdiscontinued operations and is excluded from the segment results for allperiods presented.  See Part I, Item1, “Business, Discontinued Operations.”

 

**Recently Adopted AccountingStandards**

 

Effective January 1,2007, we adopted the Financial Accounting Standards Board (FASB) Staff Position(FSP) No. AUG AIR-1 “Accounting for Planned Major Maintenance Activities.”This FSP prohibits the use of the accrue-in-advance method of accounting forplanned major maintenance activities in annual and interim financial reportingperiods.  The FSP requires retrospectiveapplication to all financial statements presented.  The new standard does not impact our annual2006 and 2005 financial statements.

 

Effective January 1,2007, we adopted the provisions of FASB Interpretation No. 48, “Accountingfor Uncertainty in Income Taxes” (FIN No. 48), an interpretation of SFAS No. 109,“Accounting for Income Taxes.”  FIN No. 48creates a single model to address accounting for uncertainty in tax positionsand clarifies the accounting for income taxes by prescribing a minimumrecognition threshold a tax position is required to meet before beingrecognized in the financial statements. FIN No. 48 also provides guidance on derecognition, measurement,classification, interest and penalties, accounting in interim periods,disclosure and transition.  Upon adoption,we reduced our existing reserves for uncertain tax positions by $2million.  This reduction was recorded asa cumulative effect adjustment to the retained deficit.  As of January 1, 2007, we had $120million of net unrecognized tax benefits, of which $38 million wasclassified as a reduction to the amount of our net operating loss carryforwardsand $82 million was classified as a liability for unrecognized tax benefits andincluded in other long-term liabilities.

 

Upon adoption of FIN No. 48,we elected to classify interest and penalties related to unrecognized taxbenefits in our income tax provision, consistent with our previous accountingpolicy.  At January 1, 2007,interest and penalties of $14 million related to unrecognized tax benefits wasincluded in other long-term liabilities. The interest was computed on the difference between the tax positionrecognized in accordance with FIN No. 48 and the amount previously takenor expected to be taken in our tax returns, adjusted to reflect the impact ofnet operating loss and other tax carryforward items  (See Note 14 of the Notes to the ConsolidatedFinancial Statements).

 

Effective April 1,2006, we adopted Emerging Issues Task Force (EITF) Issue No. 04-13, “Accountingfor Purchases and Sales of Inventory With the Same Counterparty” (EITF No. 04-13),for new arrangements and modifications or renewals of existingarrangements.  EITF No. 04-13requires certain inventory buy/sell transactions between counterparties withinthe same line of business to be viewed as a single exchange transaction.   EITF No. 04-13 required us toprospectively report, beginning in the second quarter of 2006, certaininventory buy/sell transactions of similar containerboard types on a net basisin the consolidated statements of operations. Had EITF No. 04-13 previously been in effect, net sales and cost ofgoods sold would have been reduced by an additional $58 million for thefirst quarter of 2006 and $296 million for 2005.

 

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###### ** **

**Segment Financial Data**

** **
| **(In millions)**                                                                | ** ** | **2007**             | ** ** | **2006**                  | ** ** | **2005**             | ** ** |
|----------------------------------------------------------------------------------|------------|----------------------|------------|---------------------------|------------|----------------------|------------|
| ** **                                                                       | ** ** | **Net   Sales** | ** ** | **Profit/   (Loss)** | ** ** | **Net   Sales** | ** ** | **Profit/   (Loss)** | ** ** | **Net   Sales** | ** ** | **Profit/   (Loss)** | ** ** |
| Containerboard, corrugated containers and  reclamation operations (Note 1 and 2) |       | $                    | 7,420      |                      | $          | 604                  |       | $ | 7,157 |   | $ | 522 |   | $ | 6,812 |   | $ | 279 |   |
|                                                                             |       |                 |       |                      |       |                 |       |   |   |   |   |   |   |
| Restructuring charges                                                            |       |                 |       | (16                       | )          |                 |       | (43 | ) |   |   | (321 | ) |
| Gain (loss) on sale of assets                                                    |       |                 |       | (62                       | )          |                 |       | 24 |   |   |   | (1 | ) |
| Interest expense, net                                                            |       |                 |       | (285                      | )          |                 |       | (341 | ) |   |   | (345 | ) |
| Loss on early extinguishment of debt                                             |       |                 |       | (29                       | )          |                 |       | (28 | ) |   |   |   |   |
| Foreign currency exchange gains (losses)                                         |       |                 |       | (52                       | )          |                 |       | 1 |   |   |   | (9 | ) |
| Litigation charges and settlements, net                                          |       |                 |       |                      |       |                 |       |   |   |   |   | (36 | ) |
| Corporate expenses and other (Note 1 and 3)                                      |       |                 |       | (236                      | )          |                 |       | (245 | ) |   |   | (186 | ) |
| Loss from continuing operations before income taxes                              |       |                 |       | $                         | (76        | )                    |       |   | $ | (110 | ) |   |   | $ | (619 | ) |
|                                                                                  |            |                      |            |                           |            |                      |            |  |  |  |  |  |  |  |  |  |  |  |  |

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Note 1:  Effective January 1, 2007, workingcapital interest is no longer charged to operations.  The financial information for 2006 and 2005has been restated to conform to the current year presentation.

 

Note 2:  Effective April 1, 2007, results for ourreclamation operations have been combined with the Containerboard andCorrugated Containers segment.  Thefinancial information for 2006 and 2005 has been restated to conform to thecurrent year presentation.

 

Note 3: Corporate expensesand other include corporate expenses and other expenses not allocated tooperations.

 

**2007 COMPARED TO 2006**

 

We had a net lossavailable to common stockholders of $115 million, or $0.45 per diluted share,for 2007 compared to a net loss of $71 million, or $0.28 per diluted share, for2006.  The higher loss in 2007 comparedto 2006 was due primarily to the after-tax loss on the sale of the Brewton,Alabama mill and higher non-cash foreign currency exchange losses.  In 2007, the containerboard, corrugated containersand reclamation operating profit of $604 million was $82 million highercompared to 2006 due primarily to higher average selling prices for ourproducts and benefits from our strategic initiatives.  Operating profits in 2007 were negativelyimpacted by higher costs for fiber and freight compared to 2006.

 

Net sales increased 3.7%in 2007 compared to last year due primarily to higher average selling prices($476 million) for containerboard, corrugated containers, market pulp andreclaimed fiber.  Net sales werenegatively impacted by $161 million in 2007 as a result of the sale of theBrewton, Alabama mill on September 28, 2007 and a change in the mix of oursales.  As a result of lower corrugatedcontainer sales volume, more of our containerboard tons were sold directly tothird parties.  In addition, net saleswere reduced as a result of the adoption of EITF 04-13 ($52 million), asdescribed in “Recently Adopted Accounting Standards.”  Average domestic linerboard prices for 2007were 4.9% higher compared to 2006.  Ouraverage North American selling price for corrugated containers increased 3.5%compared to 2006. Third party shipments of containerboard increased 11.9%compared to the same period last year. Shipments of corrugated containers on a total and per day basis werelower 6.5% and 7.2%, respectively, compared to last year due primarily tocontainer plant closure efforts, actions to improve the profitability ofmarginal accounts and market conditions. Our average sales prices for market pulp, SBS/SBL and kraft paperincreased 13.8%, 2.4% and 5.5%, respectively, compared to last year.  The average price for old corrugatedcontainers (OCC) increased approximately $45 per ton compared to last year.

 

Our containerboardmills operated at 99.2% of capacity in 2007, while containerboard productionwas 0.9% lower compared to last year. The lower containerboard production wasprimarily due to the impact of the mill closures and the sale of the Brewton,Alabama mill, which were partially offset by the restarting of the previouslyidled machine at the Jacksonville, Florida mill.  Production of SBS decreased by 14.1% 

 

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compared to lastyear due to the sale of the Brewton, Alabama mill. Production of market pulpincreased 1.8%, while kraft paper decreased 11.1%.  Total tons of fiber reclaimed and brokeredincreased 3.4%.

 

Cost of goods soldincreased from $6,185 million in 2006 to $6,404 million in 2007 due primarilyto higher costs of reclaimed material purchased by our reclamation operations($275 million), wood fiber ($17 million), freight ($37 million) and othermaterials ($81 million).  Cost of goodssold in 2007 was favorably impacted by the adoption of EITF No. 04-13 ($52million) and lower sales volume ($139 million). Cost of goods sold as a percent of net sales in 2007 was 86.3%,comparable to 2006.

 

Selling andadministrative expense decreased $44 million in 2007 compared to 2006 dueprimarily to lower employee benefits cost and savings achieved from ourstrategic initiatives plan.  Selling andadministrative expense as a percent of net sales decreased from 9.5% in 2006 to8.5% in 2007 due primarily to the lower employee benefits costs and the higheraverage sales prices.

 

We recorded a pretax lossof $65 million in the third quarter of 2007 related to the sale of our Brewton,AL mill.  We recorded a gain on sale ofassets of $23 million in 2006 related to the divestiture of our Port St. Joe,Florida joint venture interest and related real estate.

 

Interest expense, net was$285 million in 2007.  The $56 milliondecrease compared to 2006 was the result of lower average borrowings ($46million) and lower average interest rates ($10 million).  The lower average borrowings were primarilydue to debt reduction from the sales of the Consumer Packaging division and theBrewton, Alabama mill.  Our overallaverage effective interest rate in 2007 was lower than 2006 by approximately0.27%.

 

In 2007, we recorded aloss on early extinguishment of debt of $29 million, including $23 million fortender premiums and a $6 million non-cash write-off of deferred debt issuancecost.

 

We recorded non-cashforeign currency exchange losses of $52 million in 2007 compared to gains of $1million in 2006 due to the strengthening of the Canadian dollar.

 

The provision for income taxes differed from the amount computed byapplying the statutory U.S. federal income tax rate to loss before income taxesdue primarily to the non-deductibility of goodwill on the sale of the Brewton,Alabama mill and non-cash foreign currency translation losses, state incometaxes and the effect of other permanent differences.

 

**2006 COMPARED TO 2005**

 

For 2006, we had a netloss available to common stockholders of $71 million, or $0.28 per dilutedshare.  This compares to a net lossavailable to common stockholders of $342 million, or $1.34 per diluted share in2005.  Our loss was lower in 2006 dueprimarily to lower restructuring charges and higher Containerboard, CorrugatedContainers and Reclamation segment profit. In 2006, we recorded pretax restructuring charges of $43 millioncompared to $321 million in 2005.  In2006, the Containerboard, Corrugated Containers and Reclamation segment profitof $522 million was $243 million higher compared to 2005 due primarily tohigher average selling prices for containerboard and corrugated containers andcost savings achieved from our strategic initiative plan, which were partiallyoffset by higher key input costs.

 

Net salesincreased 5.1% in 2006 compared to 2005 primarily due to higher average salesprices ($497 million) for containerboard, corrugated containers and reclaimedfiber.  Net sales were unfavorablyimpacted by the adoption of EITF No. 04-13 ($194 million) as described in “RecentlyAdopted Accounting Standards.”  For 2006,average domestic linerboard prices increased 14.8% compared to 2005.  Our average North American selling price forcorrugated containers was 5.2% higher compared to 2005.  Shipments of corrugated containers decreased1.6% compared to 2005 due to one less shipping day and the container plantclosures.  On a per day basis, shipmentsof corrugated containers declined by 1.3%. Third party containerboard shipments increased 19.4% compared to2005.  Average sales prices for marketpulp, SBS/SBL and kraft paper increased 10.8%, 3.0%, and 8.9%, respectively,compared to 2005.  The average price forOCC decreased approximately $10 per ton compared to 2005.

 

 

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Our containerboard millsoperated at 100% of capacity in 2006 and containerboard production increased2.6% compared to 2005 despite the closure of two containerboard mills in August 2005.  Production of market pulp was comparable to2005.  Production of SBS/SBL increased10.6%, while kraft paper decreased by 2.5% compared to 2005.  Total tons of fiber reclaimed and brokeredfor 2006 was 1.7% higher compared to 2005 as a result of higher external salesvolume and higher internal consumption.

 

Cost of goods soldincreased from $6,054 million in 2005 to $6,185 million in 2006 due primarilyto higher sales volume ($37 million), and higher costs for freight ($47million), energy ($35 million), wood fiber ($17 million) and chemicals ($16million).  Cost of goods sold wasfavorably impacted by adopting EITF No. 04-13 ($194 million) and by lowercost for reclaimed material ($24 million). Cost of goods sold as a percent of net sales decreased from 88.9% in2005 to 86.4% in 2006 due primarily to the higher average sales prices.

 

Selling and administrativeexpense decreased $12 million in 2006 compared to 2005 due primarily to lowerlitigation charges and settlements, net. In 2005, we recorded charges of $36 million for the settlement of DirectAction Cases.  See Part I, Item 3, “LegalProceedings.”  Selling and administrativeexpense in 2006 was unfavorably impacted by higher stock-based compensationexpense ($13 million), including $5 million due to the impact of adopting SFAS No. 123(R) onJanuary 1, 2006, and costs related to the implementation of the strategicinitiatives ($13 million).  Forinformation concerning stock-based compensation, see Note 17 of the Notes toConsolidated Financial Statements. Selling and administrative expense as apercent of net sales decreased from 10.1% in 2005 to 9.5% in 2006 due primarilyto the higher average sales prices.

 

Interest expense, net was$341 million in 2006.  The $4 milliondecrease compared to 2005 was the result of lower average borrowings ($28million), partially offset by higher average interest rates ($24 million).  Our overall average effective interest ratein 2006 was higher than 2005 by approximately 0.57%.

 

We recorded a non-cashforeign currency exchange gain of $1 million in 2006 compared to a loss of $9million in 2005.  See Item 7A, “Quantitativeand Qualitative Disclosures About Market Risk, Foreign Currency Risk.”

 

Benefit fromincome taxes differed from the amount computed by applying the statutory U.S.federal income tax rate to loss before income taxes due primarily to stateincome taxes and the effect of other permanent differences.  In connection with the sale of the ConsumerPackaging division, during the year ended December 31, 2006, we recorded apretax gain of $171 million, offset by a $174 million income tax provision,resulting in a net loss on sale of discontinued operations of $3 million.  The after-tax loss is the result of aprovision for income taxes that is higher than the statutory income tax ratedue to the non-deductibility of goodwill. The sale of the Consumer Packaging division generated a $14 million U.S.federal alternative minimum tax, which was paid in 2006.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

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

 
| **(In millions)**                | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Net cash provided by (used for): |       |     |       |     |       |     |       |
| Operating  activities            |       | $        | 243        |     | $          | 265      |       | $ | 221 |   |
| Investing  activities            |       | 68       |       | 706      |       | (277     | )          |
| Financing  activities            |       | (313     | )          | (967     | )          | 55       |       |
| Net increase (decrease) in cash  |       | $        | (2         | )        | $          | 4        |       | $ | (1 | ) |

 

 

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

The change in net cashprovided by operating activities in 2007 compared to 2006 was due primarily tohigher working capital, which was partially offset by higher operating profitfrom our containerboard, corrugated containers and reclamation operations.  The higher working capital was due toincreased receivables due primarily to price increases for most of ourproducts.

 

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

Net cash provided byinvesting activities was $68 million for 2007. Expenditures for property, plant and equipment were $384 millionfor 2007, compared to the $274 million for 2006.  The amount expended for property, plant andequipment in 2007 included $332 million for projects related to upgrades,cost reductions and strategic initiatives, $41 million for environmentalprojects, and $11 million related to the buyout of leased equipment.  For 2007, we received proceeds of $452million from property disposals and sale of businesses including $338 millionfrom the sale of the Brewton, Alabama mill and $114 million from properties atpreviously closed facilities.  In 2006,we received proceeds from the sale of property and businesses of $980 million,principally from the sale of our Consumer Packaging division ($897 million) andfrom the divestiture of our Port St. Joe, Florida joint venture ($28 million).

 

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

Net cash used forfinancing activities for 2007 of $313 million included a net debt repayment of$277 million principally from the application of proceeds from the sale of theBrewton mill.  We paid debt issuancecosts of $7 million and tender premiums of $23 million in 2007 related tothe refinancing of certain of our debt obligations.  Preferred dividends paid were $8 million for2007.  We received proceeds from theexercise of stock options of $2 million.

 

We as guarantor, and SSCEand its subsidiary, Smurfit-Stone Container Canada Inc. (SSC Canada), asborrowers, entered into a credit agreement, as amended (the Credit Agreement)on November 1, 2004,   The CreditAgreement, which refinanced and replaced our former credit agreements in theirentirety, provides for (i) a revolving credit facility of $600 million toSSCE, of which $310 million was borrowed as of December 31, 2007 and (ii) arevolving credit facility of $200 million to SSCE and SSC Canada, of which nonewas borrowed as of December 31, 2007. The revolving credit facilities include sub-limits for the issuance ofletters of credit and swingline loans. Each of these revolving credit facilities matures on November 1,2009.  The Credit Agreement also providedfor a Tranche B term loan to SSCE in the aggregate principal amount of $975million and a Tranche C term loan to SSC Canada in the aggregate principalamount of $300 million, with outstanding balances of $137 million and $261million, respectively, at December 31, 2007.  The term loans are payable in quarterlyinstallments ending on November 1, 2011. In addition, the Credit Agreement provides for a deposit funded letterof credit facility to us, related to our variable rate industrial revenuebonds, for approximately $122 million that matures on November 1, 2010.

 

We have the option toborrow at a rate equal to LIBOR plus 2.00% or alternate base rate (“ABR”) plus1.00% for the term loan facilities and LIBOR plus 2.25% or ABR plus 1.25% forthe revolving credit facilities (the “Applicable Rate”).  The Applicable Rate will increase by 0.25% ifat any time the Company’s senior secured indebtedness is rated lower than BB-by Standard & Poor’s and Ba3 by Moody’s Investors Service.

 

In June 2006,we, as guarantor, and SSCE and its subsidiary, SSC Canada, as borrowers,entered into an amendment to the senior credit facility with our lending grouppermitting us to use a portion of the net cash proceeds to be received from thesale of our Consumer Packaging division and additional borrowings, ifnecessary, to prepay certain unsecured debt. In addition, the amendment provided for the release of the lien on theassets of the Consumer Packaging division. The amendment (i) required the use of $240 million of the proceedsto prepay Tranche B term loans, (ii) permitted the use of up to $400million of the proceeds to prepay the unsecured senior notes and (iii) permittedthe reinvestment of up to $250 million of the balance of the proceeds in thebusiness of the Company and its subsidiaries.

 

In December 2005, weand our lenders entered into an agreement and amendment (Incremental Term Loan AssumptionAgreement and Amendment No. 2) to the Credit Agreement to ease certainfinancial covenant requirements as of December 31, 2005 and for futureperiods through September 30, 2007 and provided for a new term loan. Theother material terms of the Credit Agreement, including security and 

 

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final maturity, remainedthe same as under the original Credit Agreement.  The Incremental Term Loan AssumptionAgreement and Amendment No. 2 provided for a new SSC Canada IncrementalTerm Loan (Tranche C-1) in the aggregate principal amount of $90 million,with an outstanding balance of $79 million at December 31, 2007.  The term loan is payable in quarterlyinstallments and matures on November 1, 2011.

 

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) limitationson the incurrence of indebtedness, liens, leases and sale-leaseback transactions,(iii) limitations on capital expenditures and (iv) maintenance ofcertain financial covenants.  The CreditAgreement also requires prepayments if we have excess cash flows, as definedtherein, or receive proceeds from certain asset sales, insurance or incurrenceof certain indebtedness.  Our failure tocomply with these covenants could result in an event of default that, if notcured or waived, could result in us being required to repay these borrowingsbefore their due date.  If we were unableto make this repayment or otherwise refinance these borrowings, our lenderscould foreclose on our assets.  If wewere unable to refinance these borrowings on favorable terms, our costs ofborrowing could increase significantly. At December 31, 2007, we were in compliance with the financialcovenants required by the Credit Agreement. As of December 31, 2007, subject to the above limitations, we haveunused borrowing capacity under SSCE’s revolving credit facilities of $344million, after giving consideration to outstanding letters of credit.

 

For the year ended December 31,2007, SSCE used $114 million of net proceeds received from the sale ofproperties related principally to previously closed facilities to prepay $45million of its Tranche B term loan, $30 million of its Tranche C term loan, $9 millionof its Tranche C-1 term loan and $30 million of its revolving credit facility.

 

InSeptember 2007, wecompleted the sale of the Brewton, Alabama, mill assets and used the netproceeds of $338 million to prepay $301 million of Tranche B term loans and $21million of revolving credit facility. In addition, we paid fees and expenses of$16 million related to this transaction.

 

In March 2007, SSCEcompleted an offering of $675 million of 8.00% unsecured senior notes due March 15,2017 (the 8.00% Senior Notes).  We usedthe proceeds of this issuance to repay $546 million of 9.75% senior notes due2011 (the 9.75% Senior Notes), which were purchased in connection with a cashtender offer, pay related tender premiums and accrued interest of $19 millionand $8 million, respectively, and repay $95 million of the SSCE revolvingcredit facility.  In addition, we usedthe proceeds to pay fees and expenses of $7 million related to thistransaction.  A loss on early extinguishmentof debt of $23 million was recorded, including $19 million for tenderpremiums and a $4 million write-off of unamortized deferred debt issuancecost.  In May 2007, we redeemed theremaining $102 million of the 9.75% Senior Notes at a redemption price of103.25% plus accrued interest. Borrowings under the SSCE revolving credit facility were used to redeemthe notes and pay related call premiums and accrued interest.  In June 2007, SSCE completed aregistered exchange offer of all of the then outstanding 8.00% Senior Notes for

 

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a like principal amountof senior notes which have been registered under the Securities Act of1933.  SSCE did not receive any proceedsfrom the exchange offer.

 

In March 2007, weused approximately $66 million in borrowings against our revolving creditfacility together with an escrow balance of $3 million to prepay the $69million outstanding aggregate principal balance of our 8.45% mortgage notes,which were payable on September 1, 2007.

 

**FUTURE CASH FLOWS**

 

**Contractual Obligations andCommitments**

 

At December 31,2007, our contractual obligations and commitments were as follows:

** **
| ** **                                   | ** ** | ** ** | ** ** | **Amounts Payable During** | ** ** |
|----------------------------------------------|------------|------------|------------|----------------------------|------------|
| **(In millions)**                            | ** ** | **Total**  | ** ** | ** 2008**             | ** ** | ** 2009-10** | ** ** | ** 2011-12** | ** ** | **2013 &  Beyond** | ** ** |
|                                         |       |       |       |                       |       |   |   |   |   |   |   |
| Long-term debt, including capital leases (1) |       | $          | 3,359      |                       | $          | 11 |   | $ | 441 |   | $ | 1,567 |   | $ | 1,340 |   |
| Operating leases                             |       | 290        |       | 62                         |       | 87 |   | 45 |   | 96 |   |
| Purchase obligations (2)                     |       | 1,274      |       | 398                        |       | 518 |   | 217 |   | 141 |   |
| Commitments for capital expenditures (3)     |       | 393        |       | 310                        |       | 83 |   |   |   |   |   |
| Net unrecognized tax benefits (4)            |       | 9          |       | 9                          |       |   |   |   |   |   |   |
| Other long-term liabilities (5)              |       | 463        |       | 81                         |       | 119 |   | 240 |   | 23 |   |
| Total  contractual obligations               |       | $          | 5,788      |                       | $          | 871 |   | $ | 1,248 |   | $ | 2,069 |   | $ | 1,600 |   |

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(1)          Projected contractual interest paymentsare excluded.  Based on interest rates ineffect and long-term debt balances outstanding as of December 31, 2007,hypothetical projected contractual interest payments would be approximately$259 million in 2008 and for each future year.  For the purpose of this disclosure, ourvariable and fixed rate long-term debt would be replaced at maturity withsimilar long-term debt. This disclosure does not attempt to predict future cashflows or changes in interest rates.  SeeItem 7A, “Quantitative and Qualitative Disclosures About Market Risk, InterestRate Risk.”

(2)          Amounts shown consist primarily ofnational supply contracts to purchase containerboard, wood, reclaimed fiber,natural gas and other energy resources for which value is received.  We do not aggregate open purchase ordersexecuted in the normal course of business by each of our operating locationsand such purchase orders are therefore excluded from the table.

(3)          Amounts shown are estimates of futurespending on capital projects which were committed to prior to December 31,2007, but were not completed by December 31, 2007.  We expect capital expenditures for 2008 to beapproximately $400 million.

(4)          As of December 31, 2007, our FIN No. 48net unrecognized tax benefits totaled $139 million.  The amount shown represents the current portionof our net unrecognized tax benefits and is included in current income taxespayable in the 2007 consolidated balance sheet. The non-current portion of our net unrecognized tax benefits of $130million is excluded from the table since we cannot make a reasonably reliableestimate of the timing of future payments.

(5)          Amounts shown consist primarily ofminimum pension contribution obligations, severance costs and otherrationalization expenditures and environmental liabilities which have beenrecorded in our December 31, 2007 balance sheet.  The table does not include our deferredincome tax liability and accruals for self-insured losses because it is notcertain when these liabilities will become due. We contributed $129 million to our pension plans and $12 million toother postretirement plans in 2007 and expect to contribute approximately $75million and $15 million, respectively, to such plans in 2008.  Future contributions to our pension and otherpostretirement plans will be dependent upon pending legislation, future changesin discount rates and the earnings performance of our plan assets.

 

Scheduled debt payments,including capital lease payments, for 2008 and 2009 are $11 million and $316million, respectively.  We expect furtherimprovement in our cash flow from operations in 2008.  We expect that our cash flow from operationsand our unused borrowing capacity under SSCE’s revolving credit facilities, incombination, will be sufficient for the next several years to meet ourobligations and 

 

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commitments, includingdebt service, pension funding, costs related to the strategic initiative plan,preferred stock dividends, expenditures related to environmental compliance andother 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, 2007,SSCE had $146 million of letters of credit outstanding.  In addition, we have a deposit funded letterof credit facility, related to our variable rate industrial revenue bonds, forapproximately $122 million that matures on November 1, 2010.

 

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, 2007 was$31 million.  Cash proceeds receivedfrom liquidation of the chipping equipment would be based on market conditionsat the time of sale, and we may not recover in full the guarantee paymentsmade.

 

In 2006, we entered intoan agreement to guarantee a portion of a third party’s debt in decreasingamounts through January 2010.  Theguarantee was entered into in connection with the third party’s progresspayment financing for the purchase and installation of machinery and equipmentfor the manufacture of corrugated containerboard.  We and the third party are parties to asupply agreement through 2021, whereby we sell containerboard to the thirdparty, and a purchase agreement through 2014, whereby the third party sellscorrugated sheets to us.  At December 31,2007, the maximum potential amount of the future payments related to thisguarantee was approximately $12 million. We have no recourse to the assets of the third party, other than that ofa general unsecured creditor.  The fairvalue of this guarantee at December 31, 2007 was an immaterial amount andis included in other assets, with an offset in other long-term liabilities inthe accompanying consolidated balance sheets.

 

We are contingentlyliable for $18 million under a one year letter of credit issued in April 2007to support borrowings of one of our non-consolidated affiliates.  The letter of credit is collateralized by apledge of affiliate stock owned by the other shareholder of the affiliate inthe event the letter of credit is drawn upon and the other shareholder isunable to reimburse us for their 50% share of the letter of credit obligation.

 

**Pension Obligations**

Asof December 31, 2007, our pension benefit obligations exceeded the fairvalue of pension plan assets by $407 million, down from $633 million at the endof 2006. The majority of the reduction was due to higher discount rates atDecember 31, 2007 ($144 million) and plan changes made during 2007 to thedefined benefit pension plans for salaried employees ($43 million). In August 2007, we announced thefreeze of our defined benefit pension plans for salaried employees.  As a result, effective January 1, 2009,U.S. and Canadian salaried employees will no longer accrue additional years ofservice and U.S. salaried employees will no longer recognize future increasesin compensation under the existing defined benefit pension plans for benefitpurposes.  In accordance with SFAS No. 88,“Employers Accounting for Settlements and Curtailments of Defined BenefitPension Plans and for Termination Benefits,” we accounted for this freeze as aplan curtailment, remeasured our assets and obligation as of August 31,2007 and recognized a curtailment gain of approximately $3 million during thethird quarter of 2007.  See theinformation set forth in Note 15 of the Notes to Consolidated FinancialStatements.

 

#### **ExitLiabilities**

We recorded restructuringcharges of $16 million in 2007, net of gains of $69 million from sale ofproperties related to previously closed facilities.  Restructuring charges include $37 million forexit liabilities, which were principally for severance and benefits.  In 2007, we incurred cash expenditures of $29million for these exit liabilities.

 

We had $47 million ofexit liabilities as of December 31, 2006, related to the restructuring ofour operations.  During 2007, we incurredcash expenditures of $26 million for these exit liabilities.  The exit liabilities remaining as of December 31,2007, including the 2007 restructuring activities, totaled $29 million.  Future cash outlays, principally forseverance and benefits cost and long-term lease commitments and facilityclosure cost, are expected to be $16 million in 2008, $7 million in 2009 and $6million thereafter.  We intend tocontinue funding exit liabilities through operations as originally planned.

 

 

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**EnvironmentalMatters**

As discussed in Part IItem 1, “Business, Environmental Compliance,” during 2007 all projects requiredfor compliance with Phase II of MACT I of the Cluster Rule werecompleted.  In addition, we substantiallycompleted all projects required to bring us into compliance with the nowvacated Boiler MACT.  However, we couldincur significant expenditures due to changes in law or discovery of newinformation.  Excluding the spending onthe Cluster Rule and Boiler MACT projects, we have spent an average ofapproximately $9 million in each of the last three years on capitalexpenditures for environmental purposes. We anticipate that environmental capital expenditures, exclusive of theCluster Rule and Boiler MACT projects, will be approximately $6 million in2008.

 

#### **OFF-BALANCESHEET ARRANGEMENTS**

####  

At December 31,2007, 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 SFAS No. 140, “Accounting for Transfers and Servicing of FinancialAssets and Extinguishments of Liabilities.” Accordingly, accounts receivable sold to SRC for which we do not retainan interest are not included in our consolidated balance sheets.  SRC transfers the receivables to anon-consolidated subsidiary, a limited liability company, which has issuednotes to third-party investors.  At December 31,2007, $585 million of accounts receivable had been sold under the program, ofwhich $223 million was retained by SSCE as a subordinated interest andrecorded in retained interest in receivables sold in the accompanyingconsolidated balance sheet.  Werecognized a loss on sales of receivables to SRC of $25 million and $23 millionin 2007 and 2006, respectively, which is included in other, net in theconsolidated statements of operations. The off-balance sheet SRC debt at December 31, 2007 and 2006 was$379 million and $398 million, respectively. The investors and the limited liability company have no recourse to SSCEfor failure of debtors to pay when due.

 

SSCE, throughSmurfit-MBI, has a $70 million Canadian (approximately $71 million U.S.)accounts receivable securitization program whereby it sells, without recourse,on an ongoing basis, certain of its Canadian accounts receivable to a trust inwhich SSCE holds a variable interest, but is not the primary beneficiary.  Accordingly, under Financial AccountingStandards Board (FASB) Interpretation No. 46, “Consolidation of VariableInterest Entities,” accounts receivable sold to the trust, for which SSCE isnot the primary beneficiary, are not included in the accompanying consolidatedbalance sheets.  At December 31,2007, $71 million of accounts receivable had been sold under the program, ofwhich $26 million was retained by SSCE as a subordinated interest and recordedin retained interest in receivables sold in the accompanying consolidatedbalance sheet.  We recognized a loss onsales of receivables to the trust of $2 million in each of 2007 and 2006, whichis included in other, net in the consolidated statements of operations.  The amount funded to us at December 31,2007 and 2006, was $43 million and $50 million, respectively.  The investors and the securitization trusthave no recourse to SSCE for failure of debtors to pay when due.

 

We sold 980,000 acres ofowned and leased timberland in October 1999.  The final purchase price, after adjustments,was $710 million. We received $225 million in cash and $485 million in theform of installment notes, which mature from December 31, 2007 to December 31,2014.  Under our program to monetize theinstallment notes receivable, the notes were sold, without recourse, to TimberNote Holdings LLC (TNH), a qualified special purpose entity under theprovisions of SFAS No. 140, for $430 million in cash proceeds and aresidual interest in the notes.  Theresidual interest included in other assets in the accompanying consolidatedbalance sheet was $44 million at December 31, 2007.  TNH and its creditors have no recourse to usin the event of a default on the installment notes.

 

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###### ** **

###### **EFFECTSOF INFLATION**

###### ** **

Increases in costs forfiber, energy, freight and other materials including corn starch and ink havehad an adverse impact on our operating results during the past threeyears.  Fiber, energy and freight costincreases are strongly influenced by supply and demand factors includingcompetition in global markets and from hurricanes or other natural disasters incertain regions of the United States, and when supplies become tight, we haveexperienced 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 used the last-in,first-out method of accounting for approximately 41% of our inventories at December 31,2007.  Under this method, the cost ofgoods sold reported in the financial statements approximates current cost andthus provides a closer matching of revenue and expenses in periods ofincreasing costs.

 

Replacement of existingfixed assets in future years will be at higher costs, but this will take placeover many years.  New assets will resultin higher depreciation charges; but, in many cases, due to technologicalimprovements, there may be operating cost savings as well.

 

###### **CRITICALACCOUNTING POLICIES 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 accompanyingnotes.  Our estimates and assumptions arebased on historical experiences and changes in the business environment.  However, actual results may differ from theseestimates.  Critical accounting policiesand estimates are defined as those that are both most important to theportrayal of our financial condition and results and require management’s mostsubjective judgments.  Our most criticalaccounting policies and use of estimates are described below.

 

# **Long-LivedAssets Including Goodwill**

We conduct impairment reviews of long-lived assetsincluding goodwill in accordance with SFAS No. 144 and  SFASNo. 142, “Goodwill and Other Intangible Assets.”  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 as well as estimatesof the achievement of the strategic initiatives as described in Item 7, “Management’sDiscussion and Analysis of Financial Condition and Results of Operations,Strategic Initiatives.”  Our estimates offair value are determined using a variety of valuation techniques, includingdiscounted cash flows, our market capitalization and 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 indicate lowerfair values for long-lived assets and goodwill, which could materially affectthe carrying value of property, plant and equipment and goodwill and results ofoperations.

 

## **Restructurings**

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 adjustment of property, plant and equipment tonet realizable value.  We believe ourestimates are reasonable, considering our knowledge of the paper industry,previous experience in exiting activities and valuations received fromindependent third parties in the calculation of such estimates.  Although our estimates have been reasonablyaccurate in the past, significant judgment is required, and these estimates andassumptions may change as additional information becomes available and facts orcircumstances change.

 

Our strategic initiativeplan includes future closures of converting facilities or shutdowns oflong-lived assets.  Once we commit to aplan to abandon a long-lived asset before the end of its previously 

 

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estimated useful life,depreciation estimates are revised to reflect the use of the asset over itsshortened useful life.

 

## **Allowance for Doubtful Accounts**

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

 

## **Pension and Postretirement Benefits**

We have significantlong-term liabilities related to our defined benefit pension and postretirementbenefit plans.

 

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 15 of the Notes to ConsolidatedFinancial Statements.  In 2007, weadjusted the expected long-term rate of return on our U.S. plan assets to 8.50%from 8.75% and foreign plan assets generally to 7.5% from 7.75%, whichincreased retirement plan expense approximately $8 million for 2007.  The weighted average discount rates used todetermine the benefit obligations for the U.S. and foreign retirement plans at December 31,2007 were 6.19% and 5.50%, respectively. The assumed rate for the long-term return on plan assets was determinedbased upon target asset allocations and expected long-term rates of return byasset class.  Our assumed discount ratewas developed using a portfolio of Moody’s Aa-rated fixed income securitiesthat approximate the duration of our pension liabilities.  A decrease in the assumed rate of return of0.50% would increase pension expense by approximately $15 million.  A decrease in the discount rate of 0.50%would increase our pension expense by approximately $22 million and our pensionbenefit obligations by approximately $186 million.

 

Related to ourpostretirement benefit plans, we make assumptions for future trends for medicalcare costs.  The effect of a 1% change inthe assumed health care cost trend rate would increase our accumulatedpostretirement benefit obligation as of December 31, 2007 by $13 millionand would increase the annual net periodic postretirement benefits cost by $1million for 2007.

 

## **Income Taxes**

Effective January 1,2007, we adopted the provisions of FIN No. 48.  Upon adoption, we reduced our existingreserves for uncertain tax positions by $2 million.  This reduction was recorded as a cumulativeeffect adjustment to retained deficit. As of January 1, 2007, we had $120 million of net unrecognized taxbenefits ($169 million gross unrecognized tax benefits), of which $38 millionwas classified as a reduction to the amount of our net operating losscarryforwards and $82 million was classified as a liability for unrecognizedtax benefits and included in other long-term liabilities.  At December 31, 2007, we have $139million of net unrecognized tax benefits ($185 million gross unrecognized taxbenefits).  All net unrecognized tax benefits,if recognized, would affect our effective tax rate.  See Note 14 of Notes to ConsolidatedFinancial Statements for a reconciliation of 2007 activity.

 

At January 1, 2007,interest and penalties of $14 million related to unrecognized tax benefits wasincluded in other long-term liabilities in the consolidated balance sheet.  The interest was computed on the differencebetween the tax position recognized in accordance with FIN No. 48 and theamount previously taken or expected to be taken in the Company’s tax returns,adjusted to reflect the impact of net operating loss and other tax carryforwarditems.  For the year ended December 31,2007, an additional $11 million of interest was recorded related to taxpositions taken during the current and prior years.  No penalties were recorded during the yearrelated to these tax positions.  At December 31,2007, $25 million of interest and penalties is recognized in the consolidatedbalance sheet.

 

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 of

 

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items for tax andaccounting purposes.  In addition,unrecognized tax benefits under the provisions of FIN No. 48 reflectestimates of our current tax exposures. Based on our evaluation of our tax positions, we believe we wereadequately reserved for these matters at December 31, 2007.

 

At December 31,2007, we had deferred tax assets related to net operating loss, alternativeminimum tax and other tax credit carryforwards in the amount of $471million.  A valuation allowance of$31 million has been established for a portion of these deferred taxassets based on projected future taxable income, the expected timing ofdeferred tax liability reversals and the expiration dates of thesecarryforwards.  See Note 14 of the Notesto Consolidated Financial Statements.  Weexpect our deferred tax assets, net of the valuation allowance, will be fullyrealized through the reversal of net taxable temporary differences at December 31,2007, in combination with expected improvement in our operating results.  Substantially all of our valuation allowancewas recorded in connection with a prior purchase business combination and areduction in the valuation allowance would result principally in acorresponding reduction to goodwill.  Shouldadditional valuation allowances be necessary because of changes in economiccircumstances, those allowances would be established through a charge to incometax expense.

 

The Canada Revenue Agency(CRA) is currently examining our tax returns for the tax years 1999 through2005.  In connection with the examinationof our Canadian income tax returns for these years, the CRA is consideringcertain significant adjustments to taxable income related to the acquisition ofa Canadian company and to transfer prices of inventory sold by the our Canadiansubsidiaries to our U.S. subsidiaries. These matters may be resolved at the examination level or subsequentlyupon appeal within the next twelve months. While the final outcome of the examination or subsequent appeal,including an estimate of the range of the reasonably possible changes tounrecognized tax benefits, is not yet determinable, we believe that theexamination will not have a material adverse effect on our consolidatedfinancial condition or results of operations.

 

We have settled theInternal Revenue Service examinations of our tax returns for tax years through2003.  The federal statute of limitationsis closed through 2003, except for any potential correlative adjustments forthe years 1999 through 2003 relating to the CRA examinations noted above.  There are currently no federal examinationsin progress.  In addition, we file taxreturns in numerous states.  The states’statutes of limitations are generally open for the same years as the federalstatute of limitations.

 

In October 2004, theAmerican Jobs Creation Act (the AJCA) was signed into law.  The AJCA includes a temporary incentive forU.S. multinationals to repatriate foreign earnings by providing an elective 85%dividends received deduction for certain cash dividends from controlled foreigncorporations.  Under this law, in December 2005,we repatriated dividends of $483 million from earnings of foreign subsidiariespreviously considered indefinitely reinvested. The income tax expense associated with the repatriation was $34 million.  Excluding the repatriation discussed above,through December 31, 2007, no provision has been made for income taxes onthe remaining undistributed earnings of our foreign subsidiaries, as we intendto indefinitely reinvest such earnings in our foreign subsidiaries.

 

## **Legal and 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 probableoutcomes.  Assumptions are based onhistorical experience and recommendations of legal counsel.  Environmental estimates include assumptionsand judgments about particular sites, remediation alternatives andenvironmental regulations.  We believeour accruals are adequate.  However, dueto uncertainties associated with these assumptions and judgments, as well aspotential changes to governmental regulations and environmental technologies,actual costs could differ materially from the estimated amounts.

 

### **Self-Insurance**

We self-insure a majorityof our workers’ compensation costs. Other workers’ compensation and general liability costs are subject tospecific retention 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 workers’ compensation, generalliability and group health care claims are handled by third-partyadministrators. Consulting actuaries and administrators assist us indetermining our liability for self-insured claims.  Losses are accrued based upon the aggregateself-insured claims determined by the third-party administrators, actuarialassumptions and our historical 

 

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experience.  While we believe that our assumptions areappropriate, significant differences in our actual experience or significantchanges in our assumptions may materially affect our workers’ compensation,general liability and group health care costs.

 

**PROSPECTIVE ACCOUNTING STANDARDS**

 

In September 2006, theFASB issued SFAS No. 157, “Fair Value Measurements” (SFAS No. 157),effective for fiscal years beginning after November 15, 2007 for financialassets and liabilities and after November 15, 2008 for non-financialassets and liabilities.  SFAS No. 157defines fair value, establishes a framework for measuring fair value andexpands disclosures about fair value measurements, but does not requireadditional fair value measurements.  Weare currently evaluating the impact of SFAS No. 157, but do not expect itto have a material impact on our financial statements.

 

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

 

###### **Weare exposed to various market risks, including commodity price risk, foreigncurrency risk and interest rate risk. To manage the volatility related to theserisks, we enter into various derivative contracts.  The majority of these contracts are settledin cash.  However, such settlements havenot had a significant effect on our liquidity in the past, nor are theyexpected to be significant in the future. We do not use derivatives forspeculative or trading purposes.**

###### ** **

**CommodityPrice Risk**

Weuse financial derivative instruments, including fixed price swaps and options,to manage fluctuations in cash flows resulting from commodity price risk in theprocurement of natural gas and other commodities including fuel and heatingoil.  Our objective is to fix the priceof a portion of the purchases of these commodities 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, 2007, themaximum length of time over which we are hedging our exposure to thevariability in future cash flows associated with natural gas forecastedtransactions is one year.  As of December 31,2007, we had monthly derivative instruments to hedge approximately 45% of ourexpected natural gas requirements in the first quarter of 2008 andapproximately 25% for the remainder of 2008. Excluding the impact of derivative instruments, the potential change inour expected 2008 and 2007 natural gas cost, based upon our expected annualusage and unit cost, resulting from a hypothetical 10% adverse price change,would be approximately $13 million for both years.  The changes in energy cost discussed in Item7, “Management’s Discussion and Analysis of Financial Condition and Results ofOperations” include the impact of the natural gas derivative instruments.  See Note 10 of the Notes to Consolidated FinancialStatements.

 

**ForeignCurrency Risk**

Ourprincipal foreign exchange exposure is the Canadian dollar.  Assets and liabilities outside the UnitedStates are primarily located in Canada. Thefunctional currency for our Canadian operations is the U.S. dollar.  The Canadian dollar has strengthened againstthe U.S. dollar in each of the last three years.  In 2007, 2006 and 2005, the averageexchange rates for the Canadian dollar strengthened against the U.S. dollar by5.2%, 6.4% and 6.9%, respectively.  Ourinvestments in foreign subsidiaries with a functional currency other than theU.S. dollar are not hedged.

 

Weuse financial derivative instruments, including forward contracts and options,primarily to protect against Canadian currency exchange risk associated withexpected future cash flows.  These instrumentstypically have maturities of twelve months or less.  As of December 31, 2007, we had monthlyCanadian dollar forward purchase contracts to hedge approximately 40% of ourestimated requirements for 2008.

 

Weperformed a sensitivity analysis as of December 31, 2007 and 2006 thatmeasures the change in the book valueof our net monetary Canadian liability****arisingfrom a hypothetical 10% adverse movement in the exchange rate of the Canadiandollar relative to the U.S. dollar with all other variables held constant.  The potential change in fair value resultingfrom a hypothetical 10% adverse change in the Canadian dollar exchange rate at December 31,2007 and 2006, would be $30 million and $29 million, respectively.  Fluctuations in Canadian dollar monetaryassets and liabilities result in gains or losses, which are credited or chargedto income.

 

 

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**InterestRate Risk**

Ourearnings and cash flow are significantly affected by the amount of interest onour indebtedness.  Our financingarrangements include both fixed and variable rate debt in which changes ininterest rates will impact the fixed and variable rate debt differently.  A change in the interest rate of fixed ratedebt will impact the fair value of the debt, whereas a change in the interestrate on the variable rate debt will impact interest expense and cashflows.  Our objective is to mitigateinterest rate volatility and reduce or cap interest expense within acceptablelevels of market risk.  We periodicallyenter into interest rate swaps, caps or options to hedge interest rate exposureand manage risk within Company policy. Any derivative would be specific to the debt instrument, contract ortransaction, which would determine the specifics of the hedge.

 

We have entered intointerest rate swap contracts effectively fixing the interest rate at 4.3% for$300 million of the Tranche B and Tranche C variable rate term loans.  These contracts extend until 2011, consistentwith the maturity on our Tranche B and Tranche C term loans.  Changes in the fair value of the interestrate swap contracts are expected to be highly effective in offsetting thefluctuations in the variable interest rate, and are recorded in othercomprehensive income until the underlying transaction is recorded. Theaccounting for the cash flow impact of the swap contracts is recorded as anadjustment to interest expense each period. The fair value of our interest rate swap contracts at December 31,2007 was a $3 million liability, included in other long-term liabilities.

 

Weperformed a sensitivity analysis as of December 31, 2007 and 2006 thatmeasures the change in interest expense on our variable rate debt arising froma hypothetical 100 basis point adverse movement in interest rates.  Based on our outstanding variable rate debtas of December 31, 2007 and 2006, a hypothetical 100 basis point adversechange in interest rates would increase interest expense by approximately $6million and $8 million, respectively.

 

Thetable below presents principal amounts by year of anticipated maturity for ourdebt obligations and related average interest rates based on the weightedaverage interest rates at the end of the period.  Variable interest rates disclosed do notattempt to project future interest rates and do not reflect the impact of ourinterest rate swap contracts.  Thisinformation should be read in conjunction with Note 9 of the Notes toConsolidated Financial Statements.

 

###### **Shortand Long-Term Debt**

| **Outstanding as of  December 31, 2007  (U.S. $, in millions)** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **2012** | ** ** | **There-after** | ** ** | **Total** | ** ** | **Fair  Value** | ** ** |
|----------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|-----------------|------------|-----------|------------|-----------------|------------|
| Bank term loans  and revolver 7.3% average interest rate (variable)  |       | $        | 4          |     | $          | 313      |       | $        | 4          |     | $          | 466             |       | $         |       |            | $          |   |   | $ | 787 |   | $ | 771 |   |
| U.S. senior notes 8.0% average interest rate (fixed)                 |       | 2        |       |     |       |     |       |     |       | 1,100    |       | 1,175           |       | 2,277     |       | 2,215           |       |
| U.S. industrial  revenue bonds 6.5% average interest rate (fixed)    |       |     |       |     |       |     |       |     |       |     |       | 164             |       | 164       |       | 164             |       |
| U.S. industrial  revenue bonds 6.0% average interest rate (variable) |       |     |       |     |       | 120      |       |     |       |     |       |            |       | 120       |       | 120             |       |
| Other U.S.                                                           |       | 5        |       | 3        |       | 1        |       | 1        |       |     |       | 1               |       | 11        |       | 11              |       |
| Total debt                                                           |       | $        | 11         |     | $          | 316      |       | $        | 125        |     | $          | 467             |       | $         | 1,100      |            | $          | 1,340 |   | $ | 3,359 |   | $ | 3,281 |   |

 

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**ITEM8.   FINANCIAL STATEMENTS ANDSUPPLEMENTARY DATA**

 
| Index to Financial  Statements:                                        | ** ** | **Page No.** |
|------------------------------------------------------------------------|------------|-------------------|
|                                                                   |       |              |
| Management’s Report on Internal Control Over  Financial Reporting |       | 33                |
| Reports of Independent Registered Public Accounting  Firm              |       | 34                |
| Consolidated  Balance Sheets - December 31, 2007 and 2006         |       | 36                |
| For  the years ended December 31, 2007, 2006 and 2005:            |       |              |
| Consolidated  Statements of Operations                                 |       | 37                |
| Consolidated  Statements of Stockholders’ Equity                  |       | 38                |
| Consolidated  Statements of Cash Flows                                 |       | 39                |
| Notes  to Consolidated Financial Statements                            |       | 40                |

 

The followingconsolidated financial statement schedule is included in Item 15(a):

 
| II:  Valuation and Qualifying Accounts and  Reserves |   | 78 |
|-----------------------------------------------------------|--------|----|

 

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

 

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

 

Ourmanagement is responsible for establishing and maintaining adequate internalcontrol over financial reporting for Smurfit-Stone Container Corporation, assuch term is defined in Rule 13a-15(f) under the Exchange Act.  As required by Rule 13a-15(c) underthe Exchange Act, we carried out an evaluation, with the participation of ourprincipal executive officer and principal financial officer, of theeffectiveness of our internal control over financial reporting as of the end ofthe latest fiscal year.  The framework onwhich such evaluation 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 31,2007.

 

The effectiveness of ourinternal control over financial reporting as of December 31, 2007 has beenaudited by Ernst & Young LLP, our independent registered publicaccounting firm. Their report, which expresses an unqualified opinion on theeffectiveness of our internal control over financial reporting as of December 31,2007, is included herein.

 
| /s/  Patrick J. Moore                              |   |
|----------------------------------------------------|--------|
| Patrick  J. Moore                                  |   |
| Chairman 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)                    |   |

 

33

----

 

REPORT OF INDEPENDENTREGISTERED PUBLIC ACCOUNTING FIRM

 

**The Board of Directors and Shareholders of**

**Smurfit-Stone Container Corporation**

** **

We have audited Smurfit-Stone ContainerCorporation’s (the Company’s) internal control over financial reporting as of December 31,2007, based on criteria established inInternal Control—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (the COSO criteria). Smurfit-StoneContainer Corporation’s management is responsible for maintaining effectiveinternal control over financial reporting, and for its assessment of theeffectiveness of internal control over financial reporting included in theaccompanying Management’s Report on Internal Control Over Financial Reporting.Our responsibility is to express an opinion on the Company’s internal controlover financial reporting based on our audit.

 

We conducted our audit in accordance withthe standards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting wasmaintained in all material respects. Our audit included obtaining anunderstanding of internal control over financial reporting, assessing the riskthat a material weakness exists, testing and evaluating the design andoperating effectiveness of internal control based on the assessed risk, andperforming such other procedures as we considered necessary in thecircumstances. We believe that our audit provides a reasonable basis for ouropinion.

 

A company’s internal control overfinancial reporting is a process designed to provide reasonable assurance regardingthe reliability of financial reporting and the preparation of financialstatements for external purposes in accordance with generally acceptedaccounting principles. A company’s internal control over financial reportingincludes those policies and procedures that (1) pertain to the maintenanceof records that, in reasonable detail, accurately and fairly reflect thetransactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (3) provide reasonable assurance regarding preventionor timely detection of unauthorized acquisition, use or disposition of thecompany’s assets that could have a material 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,Smurfit-Stone Container Corporation maintained, in all material respects,effective internal control over financial reporting as of December 31,2007, based on****the COSO criteria**.**

 

We also have audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the consolidated balance sheets of Smurfit-Stone ContainerCorporation as of December 31, 2007 and 2006, and the related consolidatedstatements of operations, stockholders’ equity and cash flows for each of thethree years in the period ended December 31, 2007, and our report dated February 27,2008, expressed an unqualified opinion thereon.

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

 

St.Louis, Missouri

February 27,2008

 

34

----

 

REPORT OF INDEPENDENTREGISTERED PUBLIC ACCOUNTING FIRM

 

The Board of Directorsand Shareholders of

Smurfit-Stone ContainerCorporation

 

We have audited theaccompanying consolidated balance sheets of Smurfit-Stone Container Corporation(the Company) as of December 31, 2007 and 2006, and the relatedconsolidated statements of operations, stockholders’ equity and cash flows foreach of the three years in the period ended December 31, 2007.  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 on these financialstatements 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 financialstatements.  An audit also includes assessingthe accounting 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, 2007 and 2006, and the consolidated results ofits operations and its cash flows for each of the three years in the periodended December 31, 2007, in conformity with U.S. generally acceptedaccounting principles. Also, in our opinion, the related financial statementschedule, when considered in relation to the basic financial statements takenas a whole, presents fairly, in all material respects, the information setforth therein.

 

As discussed in Note 1 tothe financial statements, in 2007 the Company changed its method of accountingfor uncertain tax positions, and in 2006 the Company changed its method ofaccounting for purchases and sales of inventory with the same counterparty,share-based payments, and its method of accounting for defined benefit pensionand other postretirement plans.

 

We also have audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the effectiveness of Smurfit-Stone Container Corporation’sinternal control over financial reporting as of December 31, 2007, basedon the criteria established in Internal Control — Integrated Framework issuedby the Committee of Sponsoring Organizations of the Treadway Commission and ourreport dated February 27, 2008, expressed an unqualified opinion thereon.

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

 

St.Louis, Missouri

February 27,2008

 

 

35

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**SMURFIT-STONECONTAINER CORPORATION**

**CONSOLIDATED BALANCE SHEETS**

 
| **December 31, (In millions, except share data)**                                                                                                     | ** ** | **2007**   | ** ** | **2006**       | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|----------------|------------|
| **Assets**                                                                                                                                                 |       |       |       | **(Restated)** |       |
|                                                                                                                                                       |       |       |       |           |       |
| Current assets                                                                                                                                             |       |       |       |           |       |
| Cash and cash equivalents                                                                                                                                  | ** ** | **$**      | **7**      |           | $          | 9 |   |
| Receivables, less allowances of $7 in 2007 and 2006                                                                                                        | ** ** | **170**    |       | 166            |       |
| Retained interest in receivables sold                                                                                                                      | ** ** | **249**    |       | 179            |       |
| Inventories                                                                                                                                                |       |       |       |           |       |
| Work-in-process and finished goods                                                                                                                         | ** ** | **145**    |       | 155            |       |
| Materials and supplies                                                                                                                                     | ** ** | **395**    |       | 383            |       |
|                                                                                                                                                       | ** ** | **540**    |       | 538            |       |
| Prepaid expenses and other current assets                                                                                                                  | ** ** | **36**     |       | 34             |       |
| Total current assets                                                                                                                                       | ** ** | **1,002**  |       | 926            |       |
| Net property, plant and  equipment                                                                                                                         | ** ** | **3,454**  |       | 3,731          |       |
| Timberland, less timber  depletion                                                                                                                         | ** ** | **32**     |       | 43             |       |
| Goodwill                                                                                                                                                   | ** ** | **2,727**  |       | 2,873          |       |
| Other assets                                                                                                                                               | ** ** | **172**    |       | 204            |       |
|                                                                                                                                                       | ** ** | **$**      | **7,387**  |           | $          | 7,777 |   |
| **Liabilities and Stockholders’  Equity**                                                                                                             | ** ** | ** ** | ** ** | ** **     | ** ** |
|                                                                                                                                                       |       |       |       |           |       |
| Current liabilities                                                                                                                                        |       |       |       |           |       |
| Current maturities of long-term debt                                                                                                                       | ** ** | **$**      | **11**     |           | $          | 84 |   |
| Accounts payable                                                                                                                                           | ** ** | **582**    |       | 542            |       |
| Accrued compensation and payroll taxes                                                                                                                     | ** ** | **193**    |       | 211            |       |
| Interest payable                                                                                                                                           | ** ** | **66**     |       | 79             |       |
| Income taxes payable                                                                                                                                       | ** ** | **10**     |       | 2              |       |
| Current deferred income taxes                                                                                                                              | ** ** | **21**     |       | 2              |       |
| Other current liabilities                                                                                                                                  | ** ** | **106**    |       | 147            |       |
| Total current liabilities                                                                                                                                  | ** ** | **989**    |       | 1,067          |       |
| Long-term debt, less  current maturities                                                                                                                   | ** ** | **3,348**  |       | 3,550          |       |
| Other long-term  liabilities                                                                                                                               | ** ** | **834**    |       | 1,010          |       |
| Deferred income taxes                                                                                                                                      | ** ** | **361**    |       | 371            |       |
| Stockholders’ equity                                                                                                                                  |       |       |       |           |       |
| Preferred stock, aggregate liquidation preference of $116; 25,000,000  shares authorized; 4,599,300 issued and outstanding                                 | ** ** | **97**     |       | 93             |       |
| Common stock, par value $.01 per share; 400,000,000 shares authorized,  256,201,779 and 255,300,904 issued and outstanding in 2007 and 2006,  respectively | ** ** | **3**      |       | 3              |       |
| Additional paid-in capital                                                                                                                                 | ** ** | **4,066**  |       | 4,040          |       |
| Retained earnings (deficit)                                                                                                                                | ** ** | **(2,058** | **)**      | (1,945         | )          |
| Accumulated other comprehensive income (loss)                                                                                                              | ** ** | **(253**   | **)**      | (412           | )          |
| Total stockholders’ equity                                                                                                                            | ** ** | **1,855**  |       | 1,779          |       |
|                                                                                                                                                       | ** ** | **$**      | **7,387**  |           | $          | 7,777 |   |

 

Seenotes to consolidated financial statements.

 

36

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**SMURFIT-STONE CONTAINER CORPORATION**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

 
| **Year Ended December 31, (In millions, except per share  data)**                           | ** ** | ** ** | ** ** | **2007**   | ** ** | **2006**   | ** ** | **2005**       | ** ** |
|--------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|----------------|------------|
|                                                                                             |       |       |       |       |       |       |       | **(Restated)** |       |
|                                                                                             |       |       |       |       |       |       |       |           |       |
| Net  sales .                                                                                     |       |       | ** ** | **$**      | **7,420**  |       | $          | 7,157          |       | $ | 6,812 |   |
| Costs and expenses                                                                               |       |       |       |       |       |       |       |           |       |
| Cost of goods sold                                                                               |       |       | ** ** | **6,404**  | ** ** | 6,185      |       | 6,054          |       |
| Selling and administrative expenses                                                              |       |       | ** ** | **633**    |       | 677        |       | 689            |       |
| Restructuring expense                                                                            |       |       | ** ** | **16**     |       | 43         |       | 321            |       |
| (Gain) loss on disposal of assets                                                                |       |       | ** ** | **62**     |       | (24        | )          | 1              |       |
| Operating income (loss)                                                                          |       |       | ** ** | **305**    |       | 276        |       | (253           | )          |
| Other income (expense)                                                                           |       |       |       |       |       |       |       |           |       |
| Interest expense, net                                                                            |       |       | ** ** | **(285**   | **)**      | (341       | )          | (345           | )          |
| Loss on early extinguishment of debt                                                             | ** ** | ** ** |       | **(29**    | **)**      | (28        | )          |           |       |
| Foreign currency exchange gains (losses)                                                         | ** ** | ** ** |       | **(52**    | **)**      | 1          |       | (9             | )          |
| Other, net                                                                                       |       |       | ** ** | **(15**    | **)**      | (18        | )          | (12            | )          |
| Loss from continuing operations before income taxes                                              |       |       | ** ** | **(76**    | **)**      | (110       | )          | (619           | )          |
| (Provision for) benefit  from income taxes                                                       |       |       | ** ** | **(27**    | **)**      | 40         |       | 238            |       |
| Loss from continuing operations                                                                  | ** ** | ** ** |       | **(103**   | **)**      | (70        | )          | (381           | )          |
| Discontinued operations                                                                          |       |       |       |       |       |       |       |           |       |
| Income from discontinued operations, net of income tax provisions of  $9 in 2006 and $34 in 2005 |       |       |       |       |       | 14         |       | 51             |       |
| Loss on disposition of discontinued operations, net of income tax  provision of $174             |       |       |       |       |       | (3         | )          |           |       |
| Net loss                                                                                         |       |       | ** ** | **(103**   | **)**      | (59        | )          | (330           | )          |
| Preferred stock dividends  and accretion                                                         | ** ** | ** ** |       | **(12**    | **)**      | (12        | )          | (12            | )          |
| Net loss available to common stockholders                                                        | ** ** | ** ** |       | **$**      | **(115**   | **)**      | $          | (71            | )          | $ | (342 | ) |
|                                                                                             |       |       |       |       |       |       |       |           |       |
| **Basic and diluted earnings per  common share**                                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** |
| Loss from continuing operations                                                                  |       |       | ** ** | **$**      | **(.45**   | **)**      | $          | (.32           | )          | $ | (1.54 | ) |
| Income from discontinued operations                                                              |       |       |       |       |       | .05        |       | .20            |       |
| Loss on disposition of discontinued operations                                                   |       |       |       |       |       | (.01       | )          |           |       |
| Net loss available to common stockholders                                                        |       |       | ** ** | **$**      | **(.45**   | **)**      | $          | (.28           | )          | $ | (1.34 | ) |
| Weighted average shares  outstanding                                                             |       |       | ** ** | **256**    |       | 255        |       | 255            |       |

 

See notes to consolidatedfinancial statements.

 

37

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**SMURFIT-STONECONTAINER CORPORATION**

**CONSOLIDATED STATEMENTS OFSTOCKHOLDERS’ EQUITY**

 
| **(In millions, except share data)**                                        | ** ** | ** **        | ** ** | ** **            | ** ** | ** ** | ** **    | ** ** | ** ** | ** **     | ** ** | ** **    | ** ** | ** **         | ** ** | ** ** | ** ** |
|-----------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|------------|---------------|------------|------------|----------------|------------|---------------|------------|--------------------|------------|------------|------------|
| ** **                                                                  | ** ** | **Common  Stock** | ** ** | **Preferred  Stock**  | ** ** | ** ** | ** **    | ** ** | ** ** | ** **     | ** ** | ** **    | ** ** |
| *** ***                                                                | ** ** | ** **        | ** ** | ** **            | ** ** | ** ** | ** **    | ** ** | ** ** | ** **     | ** ** | ** **    | ** ** | **Accumulated**    | ** ** | ** ** | ** ** |
| ** **                                                                  | ** ** | **Number**        | ** ** | ** **            | ** ** | **Number** | ** **    | ** ** | ** ** | **Additional** | ** ** | **Retained**  | ** ** | **Other**          | ** ** | ** ** | ** ** |
| ** **                                                                  | ** ** | **of**            | ** ** | **Par**               | ** ** | **of**     | ** **    | ** ** | ** ** | **Paid-In**    | ** ** | **Earnings**  | ** ** | **Comprehensive**  | ** ** | ** ** | ** ** |
| ** **                                                                  | ** ** | **Shares**        | ** ** | **Value, $ .01** | ** ** | **Shares** | ** **    | **Amount** | ** ** | **Capital**    | ** ** | **(Deficit)** | ** ** | **Income  (Loss)** | ** ** | **Total**  | ** ** |
|                                                                        |       |              |       |                  |       |       |          |       |       |           |       |          |       |               |       |       |       |
| **Balance at January 1, 2005, as reported**                            |       | 254,238,645       |       | $                     | 3          |       | 4,599,300     |       | $          | 85             |       | $             | 3,992      |               | $          | (1,507     | )          | $ | (314 | ) | $ | 2,259 |   |
| Restatement  adjustments (See Note 2)                                       |       |              |       |                  |       |       |          |       |       |           |       | (25           | )          |               |       | (25        | )          |
| **Balance at January 1, 2005, as restated**                            |       | 254,238,645       |       | 3                     |       | 4,599,300  |          | 85         |       | 3,992          |       | (1,532        | )          | (314               | )          | 2,234      |       |
| Comprehensive income (loss)                                                 |       |              |       |                  |       |       |          |       |       |           |       |          |       |               |       |       |       |
| Net loss, as  restated                                                      |       |              |       |                  |       |       |          |       |       |           |       | (330          | )          |               |       | (330       | )          |
| Other  comprehensive income (loss)                                          |       |              |       |                  |       |       |          |       |       |           |       |          |       |               |       |       |       |
| Deferred hedge  adjustments, net of tax expense of $18                      |       |              |       |                  |       |       |          |       |       |           |       |          |       | 29                 |       | 29         |       |
| Foreign currency  translation adjustment, net of tax benefit of $4          |       |              |       |                  |       |       |          |       |       |           |       |          |       | (7                 | )          | (7         | )          |
| Minimum pension  liability adjustment, net of tax benefit of $44            |       |              |       |                  |       |       |          |       |       |           |       |          |       | (81                | )          | (81        | )          |
| Comprehensive  income (loss)                                                |       |              |       |                  |       |       |          |       |       |           |       |          |       |               |       | (389       | )          |
| Issuance of  common stock under stock option and restricted stock plans     |       | 413,676           |       |                  |       |       |          |       |       | 17             |       |          |       |               |       | 17         |       |
| Preferred stock dividends and accretion                                     |       |              |       |                  |       |       |          | 4          |       |           |       | (12           | )          |               |       | (8         | )          |
| **Balance at December 31, 2005**                                       |       | 254,652,321       |       | 3                     |       | 4,599,300  |          | 89         |       | 4,009          |       | (1,874        | )          | (373               | )          | 1,854      |       |
| Comprehensive income (loss)                                                 |       |              |       |                  |       |       |          |       |       |           |       |          |       |               |       |       |       |
| Net loss                                                                    |       |              |       |                  |       |       |          |       |       |           |       | (59           | )          |               |       | (59        | )          |
| Other  comprehensive income (loss)                                          |       |              |       |                  |       |       |          |       |       |           |       |          |       |               |       |       |       |
| Deferred hedge  adjustments, net of tax benefit of $20                      |       |              |       |                  |       |       |          |       |       |           |       |          |       | (31                | )          | (31        | )          |
| Minimum pension  liability adjustment, net of tax expense of $64            |       |              |       |                  |       |       |          |       |       |           |       |          |       | 107                |       | 107        |       |
| Comprehensive  income                                                       |       |              |       |                  |       |       |          |       |       |           |       |          |       |               |       | 17         |       |
| Adjustment to  initially apply SFAS No. 158, net of tax benefit of $66 |       |              |       |                  |       |       |          |       |       |           |       |          |       | (115               | )          | (115       | )          |
| Issuance of  common stock under stock option and restricted stock plans.    |       | 648,583           |       |                  |       |       |          |       |       | 31             |       |          |       |               |       | 31         |       |
| Preferred stock dividends and accretion                                     |       |              |       |                  |       |       |          | 4          |       |           |       | (12           | )          |               |       | (8         | )          |
| **Balance at December 31, 2006**                                       |       | 255,300,904       |       | 3                     |       | 4,599,300  |          | 93         |       | 4,040          |       | (1,945        | )          | (412               | )          | 1,779      |       |
| Comprehensive income (loss)                                                 |       |              |       |                  |       |       |          |       |       |           |       |          |       |               |       |       |       |
| Net loss                                                                    | ** ** | ** **        | ** ** | ** **            | ** ** | ** ** | ** **    | ** ** | ** ** | ** **     | ** ** | **(103**      | **)**      | ** **         | ** ** | **(103**   | **)**      |
| Other  comprehensive income (loss)                                          |       |              |       |                  |       |       |          |       |       |           |       |          |       |               |       |       |       |
| Deferred hedge  adjustments, net of tax expense of $3                       | ** ** | ** **        | ** ** | ** **            | ** ** | ** ** | ** **    | ** ** | ** ** | ** **     | ** ** | ** **    | ** ** | **5**              | ** ** | **5**      | ** ** |
| Employee benefit  plan liability adjustments, net of tax expense of $99     | ** ** | ** **        | ** ** | ** **            | ** ** | ** ** | ** **    | ** ** | ** ** | ** **     | ** ** | ** **    | ** ** | **154**            | ** ** | **154**    | ** ** |
| Comprehensive  income                                                       | ** ** | ** **        | ** ** | ** **            | ** ** | ** ** | ** **    | ** ** | ** ** | ** **     | ** ** | ** **    | ** ** | ** **         | ** ** | **56**     | ** ** |
| Adjustment to initially apply FIN No. 48                               | ** ** | ** **        | ** ** | ** **            | ** ** | ** ** | ** **    | ** ** | ** ** | ** **     | ** ** | **2**         | ** ** | ** **         | ** ** | **2**      | ** ** |
| Issuance of  common stock under stock option and restricted stock plans     | ** ** | **900,875**       | ** ** | ** **            | ** ** | ** ** | ** **    | ** ** | ** ** | **26**         | ** ** | ** **    | ** ** | ** **         | ** ** | **26**     | ** ** |
| Preferred stock dividends and accretion                                     | ** ** | ** **        | ** ** | ** **            | ** ** | ** ** | ** **    | **4**      | ** ** | ** **     | ** ** | **(12**       | **)**      | ** **         | ** ** | **(8**     | **)**      |
| **Balance at December 31, 2007**                                       | ** ** | **256,201,779**   | ** ** | **$**                 | **3**      | ** ** | **4,599,300** | ** ** | **$**      | **97**         | ** ** | **$**         | **4,066**  | ** **         | **$**      | **(2,058** | **)**      | **$** | **(253** | **)** | **$** | **1,855** | ** ** |
|                                                                             |            |                   |            |                       |            |            |               |            |            |                |            |               |            |                    |            |            |            |  |  |  |  |  |  |  |

 

Seenotes to consolidated financial statements.

 

38

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**SMURFIT-STONE CONTAINER CORPORATION**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

** **

** **
| **Year Ended December 31, (In millions)**                                               | ** ** | **2007**   | ** ** | **2006**   | ** ** | **2005**       | ** ** |
|----------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|----------------|------------|
| ** **                                                                                   | ** ** | ** ** | ** ** | ** ** | ** ** | **(Restated)** | ** ** |
| **Cash flows from operating activities**                                                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** |
| Net loss                                                                                     | ** ** | **$**      | **(103**   | **)**      | $          | (59            | )          | $ | (330 | ) |
| Adjustments to reconcile net loss to net cash provided by operating  activities              |       |       |       |       |       |           |       |
| Gain on disposition of discontinued operations                                               |       |       |       | (171       | )          |           |       |
| Loss on early extinguishment of debt                                                         | ** ** | **29**     |       | 28         |       |           |       |
| Depreciation, depletion and amortization                                                     | ** ** | **360**    |       | 377        |       | 408            |       |
| Amortization of deferred debt issuance costs                                                 | ** ** | **8**      |       | 9          |       | 9              |       |
| Deferred income taxes                                                                        | ** ** | **11**     |       | 108        |       | (230           | )          |
| Pension and postretirement benefits                                                          | ** ** | **(59**    | **)**      | (14        | )          | (44            | )          |
| (Gain) loss on disposal of assets                                                            | ** ** | **62**     |       | (24        | )          | 1              |       |
| Non-cash restructuring (income) expense                                                      | ** ** | **(21**    | **)**      | 5          |       | 271            |       |
| Non-cash stock-based compensation                                                            | ** ** | **21**     |       | 25         |       | 12             |       |
| Non-cash foreign currency exchange (gains) losses                                            | ** ** | **52**     |       | (1         | )          | 9              |       |
| Change in current assets and liabilities, net of effects from  acquisitions and dispositions |       |       |       |       |       |           |       |
| Receivables and retained interest in receivables sold                                        | ** ** | **(71**    | **)**      | 11         |       | 48             |       |
| Inventories                                                                                  | ** ** | **(6**     | **)**      | 46         |       | 39             |       |
| Prepaid expenses and other current assets                                                    | ** ** | **7**      |       | 15         |       | 5              |       |
| Accounts payable and accrued liabilities                                                     | ** ** | **(39**    | **)**      | (90        | )          | 28             |       |
| Interest payable                                                                             | ** ** | **(13**    | **)**      | (17        | )          | 3              |       |
| Other, net                                                                                   | ** ** | **5**      |       | 17         |       | (8             | )          |
| Net cash provided by operating activities                                                    | ** ** | **243**    |       | 265        |       | 221            |       |
| **Cash flows from investing  activities**                                                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** |
| Expenditures for property, plant and equipment                                               | ** ** | **(384**   | **)**      | (274       | )          | (276           | )          |
| Proceeds from property disposals and sale of businesses                                      | ** ** | **452**    |       | 980        |       | 8              |       |
| Payments on acquisitions, net of cash received                                               |       |       |       |       |       | (9             | )          |
| Net cash provided by (used for) investing activities                                         | ** ** | **68**     |       | 706        |       | (277           | )          |
| **Cash flows from financing  activities**                                                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** |
| Proceeds from long-term debt                                                                 | ** ** | **675**    |       |       |       | 162            |       |
| Net repayments of long-term debt                                                             | ** ** | **(952**   | **)**      | (937       | )          | (93            | )          |
| Debt repurchase premiums                                                                     | ** ** | **(23**    | **)**      | (24        | )          |           |       |
| Preferred dividends paid                                                                     | ** ** | **(8**     | **)**      | (8         | )          | (8             | )          |
| Proceeds from exercise of stock options                                                      | ** ** | **2**      |       | 2          |       | 1              |       |
| Deferred debt issuance costs                                                                 | ** ** | **(7**     | **)**      |       |       | (7             | )          |
| Net cash provided by (used for) financing activities                                         | ** ** | **(313**   | **)**      | (967       | )          | 55             |       |
|                                                                                         |       |       |       |       |       |           |       |
| **Increase (decrease) in cash and  cash equivalents**                                        | ** ** | **(2**     | **)**      | 4          |       | (1             | )          |
| Cash and cash equivalents                                                                    |       |       |       |       |       |           |       |
| Beginning of year                                                                            | ** ** | **9**      |       | 5          |       | 6              |       |
| End of year                                                                                  | ** ** | **$**      | **7**      |       | $          | 9              |       | $ | 5 |   |

 

See notes toconsolidated financial statements.

 

 

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**SMURFIT-STONE CONTAINER CORPORATION**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

(Tabular amounts in millions, except share data)

 

 

**1.   Significant Accounting Policies**

 

**Basis of Presentation:** 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.

 

**Nature of Operations:** The Company’s major operations are containerboard, corrugated containersand reclamation.  The Company’spaperboard mills procure virgin and reclaimed fiber and produce paperboard forconversion into corrugated containers at Company-owned facilities andthird-party converting operations.  Paperproduct customers represent a diverse range of industries including paperboardpackaging and a broad range of manufacturers of consumer goods.  Recycling operations collect or brokerwastepaper for sale to Company-owned and third-party paper mills.  Customers and operations are locatedprincipally in North America.

 

**Principles of Consolidation:** The consolidated financial statements include the accounts of theCompany and majority-owned and controlled subsidiaries.  Investments in non-majority owned affiliatesare accounted for using the equity method. Significant intercompany accounts and transactions are eliminated inconsolidation.

 

**Cash and Cash Equivalents:** The Company considers all highly liquid investments with an originalmaturity of three months or less to be cash equivalents.

 

**Revenue Recognition:** The Company recognizes revenue at the time persuasive evidence of anagreement exists, price is fixed and determinable, title passes to externalcustomers and collectibility is reasonably assured.  Shipping and handling costs are included incost of goods sold.

 

Effective April 1,2006, the Company adopted Emerging Issues Task Force (“EITF”) Issue No. 04-13,“Accounting for Purchases and Sales of Inventory With the Same Counterparty,”for new arrangements and modifications or renewals of existingarrangements.  EITF No. 04-13requires certain inventory buy/sell transactions between counterparties withinthe same line of business to be viewed as a single exchange transaction.   EITF No. 04-13 required the Company toprospectively report, beginning in the second quarter of 2006, certaininventory buy/sell transactions of similar containerboard types on a net basisin the consolidated statements of operations, thereby reducing net sales andcost of goods sold by $194 million for 2006. Had EITF No. 04-13 previously been in effect, net sales and cost ofgoods sold would have been reduced by an additional $58 million for the firstquarter of 2006, and $296 million for 2005.

 

**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 cost or market under the last-in,first-out (“LIFO”) method, except for $320 million in 2007 and $299 million in2006, which are valued at the lower of average cost or market.  First-in, first-out (“FIFO”) costs (whichapproximate replacement costs) exceed the LIFO value by $105 million and $86million at December 31, 2007 and 2006, respectively.

 

**Net Property, Plant andEquipment:**  Property, plant and equipment are carried atcost.  The costs of additions,improvements and major replacements are capitalized, while maintenance and repairsare charged to expense as incurred. Provisions for depreciation and amortization are made using straight-

 

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line rates over theestimated useful lives of the related assets and the shorter of useful lives orterms of the applicable leases for leasehold improvements.  Papermill machines have been assigned auseful life of 18 to 23 years, while major converting equipment has beenassigned a useful life ranging from 12 to 20 years (See Note 7).

 

**Timberland, Less TimberDepletion:**  Timberland is stated at cost less accumulatedcost of timber harvested.  The portion ofthe costs of timberland attributed to standing timber is charged against incomeas timber is cut, at rates determined annually, based on the relationship ofunamortized timber costs to the estimated volume of recoverable timber.  The costs of seedlings and reforestation oftimberland are capitalized.

 

**Goodwill and Other IntangibleAssets:**  Goodwill and other intangible assets withindefinite lives are no longer amortized, but instead are reviewed annually ormore frequently, if impairment indicators arise.  For purposes of measuring goodwillimpairment, the Company now operates as one segment and was evaluated in total(See Note 26).  Other intangible assetsrepresent the fair value of identifiable intangible assets acquired in purchasebusiness combinations.  Other intangibleassets are amortized over their expected useful life, unless the assets are deemedto have an indefinite life.  Otherintangible assets are included in other assets in the Company’s consolidatedbalance sheets (See Note 21).

 

**Deferred Debt Issuance Costs andLosses From Extinguishment of Debt:**  Deferred debtissuance costs included in other assets are amortized over the terms of therespective debt obligations using the interest method.  The Company records losses due to earlyextinguishment of debt as a component of income (loss) from continuingoperations.

 

**Long-Lived Assets:** 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 market price of the asset; significant adversechanges in the business climate or legal factors; accumulation of costssignificantly in excess of the amount originally expected for the acquisitionor construction of the asset; current period cash flow or operating losses combinedwith a history of losses or a forecast of continuing losses associated with theuse of the asset; and current expectation that the asset will more likely thannot be sold or disposed of significantly before the end of its estimated usefullife.

 

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.

 

Once the Company commitsto a plan to abandon or take out of service a long-lived asset before the endof its previously estimated useful life, depreciation estimates are revised toreflect the use of the asset over its shortened useful life (See Note 4).

 

A component of theCompany is classified as a discontinued operation if the operations and cashflows of the component will be (or have been) eliminated from the ongoingoperations of the Company (See Note 3).

 

**Income Taxes:** The Company accounts for income taxes in accordance with the liabilitymethod of accounting for income taxes. Under the liability method, deferred assets and liabilities are recognizedbased upon anticipated future tax consequences attributable to differencesbetween financial statement carrying amounts of assets and liabilities andtheir respective tax bases.

 

Effective January 1,2007, the Company adopted the provisions of Financial Accounting StandardsBoard (“FASB”) Interpretation No. 48, “Accounting for Uncertainty inIncome Taxes” (“FIN No. 48”), an interpretation of Statement of FinancialAccounting Standards (“SFAS”) No. 109, “Accounting for Income Taxes” (“SFASNo. 109”).  FIN No. 48 createsa single model to address accounting for uncertainty in tax 

 

41

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positions and clarifiesthe accounting for income taxes by prescribing a minimum recognition thresholda tax position is required to meet before being recognized in the financialstatements.  Upon adoption of FIN No. 48,the Company elected to classify interest and penalties related to unrecognizedtax benefits in the Company’s income tax provision, consistent with the Company’sprevious accounting policy (See Note 14).

 

**Foreign Currency:** 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 19).

 

**Derivatives and HedgingActivities:**  The Company recognizes all derivatives on thebalance sheet at fair value.  Derivativesnot qualifying for hedge accounting are adjusted to fair value through income.  Derivatives qualifying for cash flow hedgeaccounting are recognized in OCI until the hedged item is recognized inearnings.  Hedges related to anticipatedtransactions are designated and documented at hedge inception as cash flowhedges and evaluated for hedge effectiveness quarterly (See Note 10).

 

**Transfers of 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 8).

 

**Stock-Based Compensation: **The Company has stock-based employee compensationplans, including stock options and restricted stock units (“RSUs”).  The Company adopted SFAS No. 123(R), “Share-BasedPayment” (“SFAS No. 123(R)”) effective January 1, 2006, which is arevision of SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFASNo. 123”), which the Company had previously adopted on January 1,2003.  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 as of the grant date (See Note 17).

 

**Environmental Matters:** The Company expenses environmental expenditures related to existingconditions resulting from past or current operations from which no current orfuture benefit is discernible. Expenditures that extend the life of the related property or mitigate orprevent future environmental contamination are capitalized.  The Company records a liability at the timewhen it is probable and can be reasonably estimated.  Such liabilities are not discounted orreduced for potential recoveries from insurance carriers.

 

**Asset Retirement Obligations:** The Company accounts for asset retirement obligations in accordance withSFAS No. 143, “Accounting for Asset Retirement Obligations,” and FASBInterpretation 47, “Accounting for Conditional Asset Retirement Obligations-  an interpretation of FASB Statement No. 143”,which established accounting standards for the recognition and measurement ofan asset retirement obligation and its associated asset retirement cost.  It also provides accounting guidance forlegal obligations associated with the retirement of tangible long-livedassets.  Asset retirement obligationsrecorded consist primarily of landfill capping and closure and post-closuremaintenance on the landfills.  TheCompany has other asset retirement obligations upon closure of facilities,principally costs for the closure of wastewater treatment ponds and the removalof asbestos and chemicals, for which retirement obligations are not recordedbecause the fair value of the liability could not be reliably measured due to 

 

42

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the uncertainty andtiming of facility closures or demolition. These asset retirement obligations have indeterminate settlement datesbecause the period over which the Company may settle these obligations isunknown and cannot be estimated.  TheCompany will recognize a liability when sufficient information is available toreasonably estimate its fair value (See Note 13).

 

**Restructuring:** Costs associated with exit or disposal activities are generallyrecognized when they are incurred rather than at the date of a commitment to anexit or disposal plan (See Note 4).

 

**Guarantees:** The Company accounts for guarantees in accordance with FASBInterpretation No. 45, “Guarantor’s Accounting and Disclosure Requirementsfor Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN No. 45”),which clarifies and expands on existing disclosure requirements for allguarantees and requires the Company to recognize a liability for the fair valueof its obligations under guarantees issued after December 31, 2002, theimplementation date of FIN No. 45 (See Note 12).

 

**Employee Benefit Plans: **At December 31, 2006, the Company adopted SFAS No. 158,“Employers’ Accounting for Defined Benefit Pension and Other PostretirementPlans” (“SFAS No. 158”), which requires the funded status of the Company’sdefined benefit pension plans and postretirement plans, measured as thedifference between plan assets at fair value and the benefit obligations, berecorded as an asset or liability with the after-tax impact recorded to OCIbased on an actuarial valuation as of the balance sheet date.  Subsequent changes in the funded status ofthe plans are recognized in OCI in the year in which the changes occur (SeeNote 15).

 

**Use of Estimates:** The preparation of financial statements in conformity with U.S.generally accepted accounting principles requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period.  Actual results coulddiffer from those estimates.

 

**Reclassifications:** Certain reclassifications of prior year presentations have been made toconform to the 2007 presentation.

 

**Recently Adopted AccountingStandards:**  Effective January 1, 2007, the Companyadopted the FASB Staff Position (“FSP”) No. AUG AIR-1, “Accounting forPlanned Major Maintenance Activities.” This FSP prohibits the use of the accrue-in-advance method of accountingfor planned major maintenance activities in annual and interim financialreporting periods.  The FSP requiresretrospective application to all financial statements presented.  The new standard does not impact the Company’sannual 2006 and 2005 financial statements. The quarterly restatements of the 2006 consolidated statements ofoperations are included in Quarterly Results (See Note 27).

 

**Prospective Accounting Pronouncements**:  In September 2006,the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”),effective for fiscal years beginning after November 15, 2007 for financialassets and liabilities and after November 15, 2008 for non-financialassets and liabilities.  SFAS No. 157defines fair value, establishes a framework for measuring fair value andexpands disclosures about fair value measurements.  SFAS No. 157 applies under otheraccounting pronouncements that require or permit fair value measurements and,accordingly, SFAS No. 157 does not require any new fair valuemeasurements.  The Company is currentlyevaluating the impact of SFAS No. 157, but does not expect it to have amaterial impact on the consolidated financial statements.

 

 

**2.   Restatement of Prior Period FinancialStatements**

 

During the second quarterof 2007, the Company determined that $28 million of net benefits from incometaxes previously recognized on non-cash foreign currency exchange losses from2000 to 2006 should not have been recognized under SFAS No. 109.  Because the Company is indefinitelyreinvested in its 

 

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foreign operations, thelosses should have been treated as permanent differences when determiningtaxable income for financial accounting purposes.

 

The Company performed anevaluation to determine if the errors resulting from recognizing the deferredtax impact of the non-cash foreign currency exchange losses were material toany individual prior period, taking into account the requirements of SEC StaffAccounting Bulletin No. 108, “Considering the Effects of Prior YearMisstatements when Quantifying Misstatements in Current Year FinancialStatements” (“SAB No.108”), which was adopted in 2006.  Based on this analysis, the Company concludedthe errors were not material to any individual period from 2000 to 2006 and,therefore, as provided for by SAB No. 108, the correction of the errordoes not require previously filed reports to be amended.  The Company restated the 2006 and 2005financial statements included in this filing. The quarterly restatements of the 2006 consolidated statements ofoperations are included in Quarterly Results (See Note 27).

 

The tables below presentthe effect of the financial statement adjustments related to the restatement ofthe Company’s previously reported financial statements for 2006 and 2005.  In addition, the adjustment to increase theretained deficit by $25 million at January 1, 2005 includes the cumulativeeffect of the income (loss) adjustments for 2004, 2003, 2002, 2001 and 2000 of$(9) million, $(19) million, $(1) million, $3 million and $1 million,respectively.

 

The effect of therestatement on the consolidated balance sheet as of December 31, 2006 isas follows:

 
| ** **                                      | ** ** | **As Reported** | ** ** | **Adjustments** | ** ** | **As Restated** | ** ** |
|-------------------------------------------------|------------|-----------------|------------|-----------------|------------|-----------------|------------|
|                                            |       |            |       |            |       |            |       |
| Total assets                                    |       | $               | 7,777      |            | $          |            |       | $ | 7,777 |   |
| Deferred income taxes                           |       | 343             |       | 28              |       | 371             |       |
| Retained earnings (deficit)                     |       | (1,917          | )          | (28             | )          | (1,945          | )          |
| Total stockholders’ equity                 |       | 1,807           |       | (28             | )          | 1,779           |       |
| Total liabilities and stockholders’ equity |       | 7,777           |       |            |       | 7,777           |       |
|                                                 |            |                 |            |                 |            |                 |            |  |  |  |

 

 

The effect of therestatement on the 2006 and 2005 consolidated statements of operations is asfollows:

 
| ** **                                          | ** ** | **As Reported** | ** ** | **Adjustments** | ** ** | **As Restated** | ** ** |
|-----------------------------------------------------|------------|-----------------|------------|-----------------|------------|-----------------|------------|
| 2006                                                |       |            |       |            |       |            |       |
| Loss from continuing operations before income taxes |       | $               | (110       | )               | $          |            |       | $ | (110 | ) |
| Benefit from income taxes                           |       | 40              |       |            |       | 40              |       |
| Loss from continuing operations                     |       | (70             | )          |            |       | (70             | )          |
| Net loss                                            |       | (59             | )          |            |       | (59             | )          |
| Net loss available to common stockholders           |       | (71             | )          |            |       | (71             | )          |
|                                                |       |            |       |            |       |            |       |
| Basic and diluted earnings per share:               |       |            |       |            |       |            |       |
| Loss from continuing operations                     |       | $               | (.32       | )               |       |            | $          | (.32 | ) |
| Net loss available to common stockholders           |       | $               | (.28       | )               |       |            | $          | (.28 | ) |
|                                                |       |            |       |            |       |            |       |   |   |
| 2005                                                |       |            |       |            |       |            |       |
| Loss from continuing operations before income taxes |       | $               | (619       | )               | $          |            |       | $ | (619 | ) |
| Benefit from income taxes                           |       | 241             |       | (3              | )          | 238             |       |
| Loss from continuing operations                     |       | (378            | )          | (3              | )          | (381            | )          |
| Net loss                                            |       | (327            | )          | (3              | )          | (330            | )          |
| Net loss available to common stockholders           |       | (339            | )          | (3              | )          | (342            | )          |

 

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| Basic and diluted earnings per share:     |   |   |   |   |   |   |   |
|-------------------------------------------|--------|--------|--------|--------|--------|--------|--------|
| Loss from continuing operations           |   | $      | (1.53  | )      | $      | (.01   | )      | $ | (1.54 | ) |
| Net loss available to common stockholders |   | $      | (1.33  | )      | $      | (.01   | )      | $ | (1.34 | ) |

 

 

The effect of therestatement on the 2006 and 2005 consolidated statements of cash flows is asfollows:

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

 

 

**3.   Discontinued Operations**

 

On June 30, 2006, the Company completed thesale of substantially all of the assets of its Consumer Packaging division for$1.04 billion.  Reflecting final workingcapital adjustments and sales transaction costs, net cash proceeds were $897million, which excluded $130 million of accounts receivable previously sold toStone Receivables Corporation (“SRC”) under the accounts receivablesecuritization program.  The Companyrecorded a pretax gain of $171 million, offset by a $174 million income taxprovision, resulting in a net loss on disposition of discontinued operations of$3 million.  The after-tax loss was theresult of a provision for income taxes that was higher than the statutoryincome tax rate due to non-deductible goodwill of $273 million.

 

The Consumer Packaging division was a reportablesegment of the Company comprised of four coated recycled boxboard mills, 39consumer packaging operations in the United States, including folding carton,multiwall and specialty bag, flexible packaging, label, contract packaging andlamination businesses and one consumer packaging plant in Brampton,Ontario.   Net sales for these operationswere $787 million for the six months ended June 30, 2006 and $1,584million for the year ended December 31, 2005.  These facilities employed approximately 6,600hourly and salaried employees.  Theresults of operations from the Consumer Packaging segment have beenreclassified as discontinued operations for all periods presented.

 

Prior to the sale, the Company sold kraft paper,bleached linerboard, corrugated boxes and recycled fiber to the ConsumerPackaging division.  These intercompanysales, which have been eliminated in the Company’s consolidated financialstatements, were $108 million and $209 million in 2006 and 2005, respectively.

 

The Company entered into supply agreements withthe purchaser of the Consumer Packaging division to continue to sell theseproducts to the divested business for up to a two year period.  Pursuant to these agreements, the Companysold $160 million in 2007 and $81 million in the second half of 2006.  The Company entered into a transitionservices agreement to provide corporate administrative services and informationtechnology infrastructure for a period of up to 18 months.  As of December 31, 2007, all transitionservices have ended.  Under thetransition services agreement, the Company recorded income of $6 million in2007 and $6 million in the second half of 2006.

 

45

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**4.   Strategic Initiatives and RestructuringActivities**

 

During 2005, the Companyannounced a strategic initiative plan to improve performance and betterposition the Company for long-term growth. The plan focused on cost reduction and productivity initiatives,including reinvestment in the Company’s operations, from which the Companyexpects to achieve $525 million in annual savings by the end of 2008.

 

In 2005, as the firststep in this cost reduction process and in order to better align productioncapacity with market conditions and demand, the Company permanently closed theNew Richmond, Quebec linerboard mill, the Bathurst, New Brunswick medium milland the previously idled No. 2 paper machine at the Fernandina Beach,Florida linerboard mill. The Company’s containerboard manufacturing capacitywas reduced by 700,000 tons, or 8.5% as a result of these closures.  In addition, the Company also closed twoconverting facilities, exited its investment in the Las Vegas, Nevadaconverting facility, and agreed to the closure of the Groveton, New Hampshiremedium mill, in which the Company owns a minority interest.  The Company recorded restructuring charges of$321 million, including non-cash charges of $267 million related to thewrite-down of assets, primarily property, plant and equipment, to estimated netrealizable values and $4 million related to a pension curtailment charge forterminated employees.  The remainingcharges of $50 million were primarily for severance, benefits, leasecommitments and post-closure environmental costs.  These shutdowns resulted in approximately 780employees being terminated.  The netsales of the two shutdown converting operations in 2005 prior to closure were$24 million.  In addition, another 720employees were terminated as part of the strategic initiative plan.

 

In 2006, in conjunctionwith the strategic initiative plan, the Company closed fourteen convertingfacilities and permanently shutdown four corrugators, resulting in thetermination of approximately 1,400 employees. In addition, another 700 employees were terminated as part of thestrategic initiative plan.  The Companyrecorded restructuring charges of $43 million, net of gains of $18 million fromthe sale of three shutdown facilities and the No. 2 paper machine at theFernandina Beach, Florida linerboard mill. Restructuring charges include non-cash charges of $23 million related tothe write-down of assets, primarily property, plant and equipment, to estimatednet realizable values and the acceleration of depreciation for equipmentexpected to be abandoned or taken out of service.  The remaining charges of $38 million wereprimarily for severance and benefits, including pension settlement costs of $6million.  The net sales of thesefacilities in 2006 prior to closure and for the year ended December 31,2005 were $169 million and $262 million, respectively.

 

In 2007, the Companyclosed twelve converting facilities and the Carthage, Indiana and Los Angeles,California medium mills and reduced its headcount by approximately 1,750employees.  The Company recordedrestructuring charges of $16 million, net of gains of $69 million from the saleof properties related to previously closed facilities.  Restructuring charges include non-cashcharges of $48 million related to the write-down of assets, primarily property,plant and equipment, to estimated net realizable values and the acceleration ofdepreciation for equipment expected to be abandoned or taken out ofservice.  The remaining charges of $37million were primarily for severance and benefits.  The net sales of the closed convertingfacilities in 2007 prior to closure and for the years ended December 31,2006 and 2005 were $65 million, $192 million and $201 million,respectively.  The production of the twomedium mills, which had combined annual capacity of 200,000 tons, was partiallyoffset by restarting the previously idled machine at the Jacksonville, Floridamill with annual capacity to produce 170,000 tons of medium.

 

Through December 31,2007, the Company has closed 28 converting facilities in connection with thestrategic initiative plan.  The majorityof the net sales related to these closures were transferred to other operatingfacilities.

 

During 2008, to continueimplementation of the strategic initiative plan, the Company expects to record additionalrestructuring charges of approximately $20 million, including accelerateddepreciation of approximately $8 million related to equipment expected to beabandoned or taken out of service in conjunction with the future closure ofcertain facilities.

 

46

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The following is asummary of the restructuring liabilities recorded as part of therationalization of the Company’s mill and converting operations, including thetermination of employees and liabilities for lease commitments at the closedfacilities.

 
| ** **                        | ** ** | **Write-down of Property,  Equipment and  Investments to  Net Realizable  Value** | ** ** | **Severance  and  Benefits** | ** ** | **Lease  Commitments** | ** ** | **Facility  Closure  Costs** | ** ** | **Other**  | ** ** | **Total** | ** ** |
|-----------------------------------|------------|-----------------------------------------------------------------------------------|------------|------------------------------|------------|------------------------|------------|------------------------------|------------|------------|------------|-----------|------------|
| Balance at January 1, 2005   |       | $                                                                                 |       |                         | $          | 5                      |       | $                            | 11         |       | $          | 12        |       | $ |   |   | $ | 28 |   |
|                              |       |                                                                              |       |                         |       |                   |       |                         |       |       |       |      |       |
| Expense                           |       | 267                                                                               |       | 35                           |       | 7                      |       | 12                           |       |       |       | 321       |       |
| Payments                          |       |                                                                              |       | (21                          | )          | (3                     | )          | (3                           | )          |       |       | (27       | )          |
| Non-cash reduction                |       | (267                                                                              | )          | (4                           | )          |                   |       |                         |       |       |       | (271      | )          |
| Balance at December 31, 2005 |       |                                                                              |       | 15                           |       | 15                     |       | 21                           |       |       |       | 51        |       |
|                              |       |                                                                              |       |                         |       |                   |       |                         |       |       |       |      |       |
| (Income) expense                  |       | 23                                                                                |       | 38                           |       | 4                      |       | (4                           | )          | (18        | )          | 43        |       |
| Payments                          |       |                                                                              |       | (34                          | )          | (2                     | )          | (8                           | )          |       |       | (44       | )          |
| Non-cash reduction                |       | (23                                                                               | )          |                         |       |                   |       |                         |       |       |       | (23       | )          |
| Net gain on sale of assets        |       |                                                                              |       |                         |       |                   |       |                         |       | 18         |       | 18        |       |
| Balance at December 31, 2006 |       |                                                                              |       | 19                           |       | 17                     |       | 9                            |       |       |       | 45        |       |
|                              |       |                                                                              |       |                         |       |                   |       |                         |       |       |       |      |       |
| (Income) expense                  | ** ** | **48**                                                                            | ** ** | **30**                       | ** ** | ** **             | ** ** | **7**                        | ** ** | **(69**    | **)**      | **16**    | ** ** |
| Payments                          | ** ** | ** **                                                                        | ** ** | **(43**                      | **)**      | **(6**                 | **)**      | **(5**                       | **)**      | ** ** | ** ** | **(54**   | **)**      |
| Non-cash reduction                | ** ** | **(48**                                                                           | **)**      | ** **                   | ** ** | ** **             | ** ** | ** **                   | ** ** | ** ** | ** ** | **(48**   | **)**      |
| Net gain on sale of assets        | ** ** | ** **                                                                        | ** ** | ** **                   | ** ** | ** **             | ** ** | ** **                   | ** ** | **69**     | ** ** | **69**    | ** ** |
| Balance at December 31, 2007 | ** ** | **$**                                                                             | ** ** | ** **                   | **$**      | **6**                  | ** ** | **$**                        | **11**     | ** ** | **$**      | **11**    | ** ** | **$** | ** ** | ** ** | **$** | **28** | ** ** |

 

The $4 million adjustmentto facility closure costs in 2006 was due primarily to revising environmentalexit liabilities, based on current information and experience.

 

**Cash Requirements**

 

Future cash outlays underthe restructuring of operations are anticipated to be $16 million in 2008, $7million in 2009, $4 million in 2010 and $1 million thereafter.

 

 

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

 

On September 28,2007, the Company completed the sale of its Brewton, Alabama, mill assets for$355 million. The Company received cash proceeds of $338 million, whichexcluded $16 million of accounts receivable previously sold to SRC under theaccounts receivable securitization program and was net of $1 million of otherclosing adjustments.  Current liabilitiesof $22 million were retained and were paid by the Company.  The Brewton mill had annual productioncapacity of approximately 300,000 tons of white top linerboard and 190,000 tonsof solid bleached sulfate.  The Companywill continue to produce white top linerboard at two of its mills.  Substantially all of the proceeds from thesale were applied directly to debt reduction (See Note 9).  The Company recorded a pretax loss of $65million, and a $32 million income tax provision, resulting in a net loss of $97million.  The after-tax loss was theresult of a provision 

 

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for income taxes that washigher than the statutory income tax rate due to non-deductible goodwill of$146 million.

 

 

**6.   Acquisitions and Mergers**

 

During 2005, the Companyinvested in four separate joint ventures, accounted for under the equitymethod, for a total of $9 million.  Thelargest was an investment of $7 million in a producer of corrugated sheets andpackaging products located in China.

 

Remaining exitliabilities recorded as part of acquisition and merger transactions completedin prior years were $1 million and $2 million as of December 31, 2007 and2006, respectively.

 

 

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

 

Net property, plant andequipment at December 31 consist of:

 
| ** **                            | ** ** | **2007**   | ** ** | **2006** | ** ** |
|---------------------------------------|------------|------------|------------|----------|------------|
| Land and land improvements            | ** ** | **$**      | **147**    |     | $          | 164 |   |
| Buildings and leasehold  improvements | ** ** | **567**    |       | 600      |       |
| Machinery, fixtures and  equipment    | ** ** | **5,282**  |       | 5,482    |       |
| Construction in progress              | ** ** | **205**    |       | 166      |       |
|                                  | ** ** | **6,201**  |       | 6,412    |       |
| Less accumulated  depreciation        | ** ** | **(2,747** | **)**      | (2,681   | )          |
| Net property, plant and equipment     | ** ** | **$**      | **3,454**  |     | $          | 3,731 |   |

 

Depreciation expense was$355 million, $352 million and $364 million for 2007, 2006 and 2005,respectively, excluding depreciation expense related to discontinued operationsof $20 million and $40 million in 2006 and 2005, respectively.  Property, plant and equipment includecapitalized leases of $21 million and $22 million and related accumulatedamortization of $16 million and $17 million at December 31, 2007 and 2006,respectively.

 

 

**8.   Transfers of Financial Assets**

 

**Receivables SecuritizationProgram**

The Company has a $475million accounts receivable securitization program whereby the Company sells,without recourse, on an ongoing basis, certain of its accounts receivable toSRC a wholly-owned non-consolidated subsidiary of the Company.

 

SRC transfers thereceivables to a non-consolidated subsidiary, a limited liability company whichhas issued notes to third-party investors. The Company has retained servicing responsibilities and a subordinatedinterest in the limited liability company. The Company receives annual servicing fees of 1% of the unpaid balanceof the receivables and rights to future cash flows arising after the investorsin the securitization limited liability company have received the return forwhich they have contracted.

 

SRC is a qualifiedspecial—purpose entity under the provisions of SFAS No. 140, “Accountingfor Transfers and Servicing of Financial Assets and Extinguishments ofLiabilities” (“SFAS No. 140”). Accordingly, accounts receivable sold to SRC, for which the Company doesnot retain an interest, are not included in the accompanying consolidatedbalance sheets.

 

At December 31, 2007and 2006, $585 million and $522 million, respectively, of accounts receivablehad been sold to SRC, of which $223 million and $164 million, respectively,were retained by the Company as a subordinated interest.  The off-balance sheet SRC debt at December 31,2007 and 2006 was $379 million and $398 million, respectively.  The Company’s retained interest is carried atfair value and is 

 

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included in retained interestin receivables sold in the accompanying consolidated balance sheets.  The Company recognized a loss on sales ofreceivables to SRC of $25 million and $23 million in 2007 and 2006,respectively, which is included in other, net in the consolidated statements ofoperations.

 

Key economic assumptionsused in measuring the retained interest are as follows:

 

 
| ** **                         | ** ** | **Year Ended  December 31, 2007** | ** ** | **December 31, 2007** | ** ** | **Year Ended  December 31, 2006** | ** ** | **December 31, 2006** | ** ** |
|------------------------------------|------------|----------------------------------------|------------|----------------------------|------------|----------------------------------------|------------|----------------------------|------------|
| Residual cash flows  discounted at | ** ** | **8.00**                               | **%**      | **8.00**                   | **%**      | 8.00                                   | %          | 8.00                       | %          |
| Expected loss and dilution  rate   | ** ** | **2.40%-4.82**                         | **%**      | **4.82**                   | **%**      | 1.89%-4.14                             | %          | 2.77                       | %          |
| Variable return to  investors      | ** ** | **LIBOR  plus 23 to 135 basis points** | ** ** | **5.38**                   | **%**      | LIBOR  plus 23 to 135 basis points     |       | 5.72                       | %          |

 

At December 31,2007, the sensitivity of the current fair value of residual cash flows toimmediate 10% and 20% adverse changes in the expected loss and dilution ratewas $2 million and $4 million, respectively. The effects of the sensitivity analysis on the residual cash flowdiscount rate and the variable return to investors were insignificant.

 

The table belowsummarizes certain cash flows received from SRC:

 
| ** **                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------------------------------|------------|----------|------------|----------|------------|
| Cash proceeds from sales  of receivables        | ** ** | **$**    | **5,917**  |     | $          | 5,795 |   |
| Servicing fees received                         | ** ** | **6**    |       | 6        |       |
| Other cash flows received  on retained interest |       |     |       | 41       |       |
| Interest income received                        | ** ** | **5**    |       | 2        |       |
|                                                 |            |          |            |          |            |  |  |

 

**Canadian Securitization Program**

The Company has a $70million Canadian (approximately $71 million U.S. as of December 31, 2007)accounts receivable securitization program whereby the Company sells, withoutrecourse, on an ongoing basis, certain of its Canadian accounts receivable to atrust in which the Company holds a variable interest, but is not the primarybeneficiary.  Accordingly, under FASBInterpretation No. 46, “Consolidation of Variable Interest Entities,”accounts receivable sold to the trust, for which the Company is not the primarybeneficiary, are not included in the accompanying consolidated balancesheets.  The Company has retainedservicing responsibilities and a subordinated interest in future cash flowsfrom the receivables.  The Companyreceives rights to future cash flows arising after the investors in thesecuritization trust have received the return for which they have contracted.

 

The amount available tothe Company under the receivables program fluctuates based on the amount ofeligible receivables available and by the performance of the receivablesportfolio.  The Company’s residualinterest in the securitization program is recorded at fair value and is basedupon the total outstanding receivables sold, adjusted for dilution and lossreserves of approximately 3.6% and 3.7%, at December 31, 2007 and 2006,respectively, less the amount funded to the Company.

 

At December 31, 2007and 2006, $71 million and $68 million, respectively, of accounts receivable hadbeen sold under the program, of which $26 million and $15 million,respectively, were retained by the Company as a subordinated interest.  The amount funded to the Company at December 31,2007 and 2006, was $43 million and $50 million, respectively.  The Company’s retained interest is includedin retained interest in receivables sold in the accompanying consolidatedbalance sheets.  The Company recognized aloss on sales of receivables to the trust of $2 million in each of 2007 and 2006,which is included in other, net in the consolidated statements of operations.

 

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**Timberland Sale and NoteMonetization**

The Company soldapproximately 980,000 acres of owned and leased timberland in Florida, Georgiaand Alabama in October 1999.  Thefinal purchase price, after adjustments, was $710 million.  The Company received $225 million in cash,with the balance of $485 million in the form of installment notes.

 

The Company entered intoa program to monetize the installment notes receivable.  The notes were sold without recourse toTimber Note Holdings LLC (“TNH”), a qualified special-purpose entity under theprovisions of SFAS No. 140, for $430 million cash proceeds and a residualinterest in the notes.  The transactionwas accounted for as a sale under SFAS No. 140.  The cash proceeds from the sale andmonetization transactions were used to prepay borrowings under the Company’sCredit Agreement.  The residual interestwas $44 million and $48 million at December 31, 2007 and 2006,respectively, and is included in other assets in the accompanying consolidatedbalance sheets.  Cash flows received onthe Company’s retained interest in TNH were $8 million in 2007 due primarily tothe partial prepayment of the installment notes receivable.  The key economic assumption used in measuringthe residual interest at the date of monetization was the rate at which theresidual cash flows were discounted (9%). At December 31, 2007, the sensitivity on the current fair value ofthe residual cash flows to immediate 10% and 20% adverse changes in the assumedrate at which the residual cash flows were discounted (9%) was $1 million and$2 million, respectively.

 

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**9.   Long-Term Debt**

 

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

 
| ** **                                                                                                                                                | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| **Bank Credit Facilities**                                                                                                                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Tranche B Term Loan (7.1% weighted average variable rate), due in  various installments through November 1, 2011                                     | ** ** | **$**      | **137**    |       | $          | 490 |   |
| Tranche C Term Loan (7.2% weighted average variable rate), due in  various installments through November 1, 2011                                     | ** ** | **261**    |       | 295        |       |
| Tranche C-1 Term Loan (7.3% weighted average variable rate), due in  various installments through November 1, 2011                                   | ** ** | **79**     |       | 89         |       |
| SSCE revolving credit facility (7.6% weighted average variable rate),  due November 1, 2009                                                          | ** ** | **310**    |       | 70         |       |
| SSC Canada revolving credit facility (9.0% weighted average variable  rate), due November 1, 2009                                                    |       |       |       | 66         |       |
|                                                                                                                                                      | ** ** | **787**    |       | 1,010      |       |
| **Senior Notes**                                                                                                                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| 8.45% mortgage notes, payable in monthly installments through  August 1, 2007 and $69 on September 1, 2007                                      |       |       |       | 70         |       |
| 9.25% unsecured senior notes, due February 1, 2008                                                                                                   | ** ** | **2**      |       | 2          |       |
| 9.75% unsecured senior notes, due February 1, 2011                                                                                                   | ** ** | ** ** |       | 648        |       |
| 8.375% unsecured senior notes, due July 1, 2012                                                                                                      | ** ** | **400**    |       | 400        |       |
| 8.25% unsecured senior notes, due October 1, 2012                                                                                                    | ** ** | **700**    |       | 700        |       |
| 7.50% unsecured senior notes, due June 1, 2013                                                                                                       | ** ** | **300**    |       | 300        |       |
| 7.375% unsecured senior notes, due July 15, 2014                                                                                                     | ** ** | **200**    |       | 200        |       |
| 8.00% unsecured senior notes, due March 15, 2017                                                                                                     | ** ** | **675**    | ** ** | ** ** | ** ** |
|                                                                                                                                                      | ** ** | **2,277**  |       | 2,320      |       |
|                                                                                                                                                      |       |       |       |       |       |
| **Other Debt**                                                                                                                                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Fixed rate utility systems and pollution control revenue bonds (fixed  rates ranging from 5.1% to 7.5%), payable in varying annual payments through  2027 | ** ** | **164**    |       | 172        |       |
| Variable rate industrial revenue bonds (6.0% weighted average  variable rate), payable in varying annual payments through 2035                            | ** ** | **120**    |       | 120        |       |
| Other (including obligations under capitalized leases of $7 and $7)                                                                                       | ** ** | **11**     |       | 12         |       |
|                                                                                                                                                      | ** ** | **295**    |       | 304        |       |
| Total debt                                                                                                                                                | ** ** | **3,359**  |       | 3,634      |       |
| Less current maturities                                                                                                                                   | ** ** | **(11**    | **)**      | (84        | )          |
| **Total long-term debt**                                                                                                                                  | ** ** | **$**      | **3,348**  |       | $          | 3,550 |   |

 

 

The amounts of total debtoutstanding at December 31, 2007 maturing during the next five years andthereafter are as follows:

 
| 2008       |   |   |   | $     | 11     |   |
|------------|--------|--------|--------|-------|--------|--------|
| 2009       |   |   |   | 316   |   |
| 2010       |   |   |   | 125   |   |
| 2011       |   |   |   | 467   |   |
| 2012       |   |   |   | 1,100 |   |
| Thereafter |   |   |   | 1,340 |   |

 

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**Bank Credit Facilities**

The Company, asguarantor, and SSCE and its subsidiary, Smurfit-Stone Container Canada Inc.(“SSCCanada”), as borrowers, entered into a new credit agreement, as amended (the “CreditAgreement”) on November 1, 2004. The Credit Agreement, which refinanced and replaced SSCC’s former creditagreements in their entirety, provided for (i) a revolving credit facilityof $600 million to SSCE, of which $310 million was borrowed as of December 31,2007 and (ii) a revolving credit facility of $200 million to SSCE and SSCCanada, of which none was borrowed as of December 31, 2007.  The revolving credit facilities includesub-limits for the issuance of letters of credit and swingline loans.  The Company pays a 0.5% commitment fee on theunused portions of its revolving credit facilities.  At December 31, 2007, the unused portionof these facilities, after giving consideration to outstanding letters ofcredit, was $344 million subject to limitations in the Credit Agreementdescribed below.  Each of these revolvingcredit facilities mature on November 1, 2009.  The Credit Agreement also provided 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, with outstanding balances of $137 million and $261 million,respectively, at December 31, 2007. The term loans are payable in quarterly installments 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 Company has theoption to borrow at a rate equal to LIBOR plus 2.00% or alternate base rate (“ABR”)plus 1.00% for the term loan facilities and LIBOR plus 2.25% or ABR plus 1.25%for the revolving credit facilities (the “Applicable Rate”).  The Applicable Rate will increase by 0.25% ifat any time the Company’s senior secured indebtedness is rated lower than BB-by Standard & Poor’s and Ba3 by Moody’s Investors Service.

 

In December 2005,the Company and its lenders entered into an agreement and amendment (“IncrementalTerm Loan Assumption Agreement and Amendment No. 2”) to the CreditAgreement to ease certain financial covenant requirements as of December 31,2005 and for future periods through September 30, 2007 and provided for anew term loan.  The other material termsof the Credit Agreement, including security and final maturity, remained the sameas under the original Credit Agreement. The Incremental Term Loan Assumption Agreement and Amendment No. 2provided for a new SSC Canada Incremental Term Loan (“Tranche C-1”) in theaggregate principal amount of $90 million, with an outstanding balance of $79million at December 31, 2007.  Theterm loan is payable in quarterly installments and matures on November 1,2011.

 

The obligations of SSCEunder the Credit Agreement are unconditionally guaranteed by the Company andthe material U.S. subsidiaries of SSCE. The obligations of SSC Canada under the Credit Agreement areunconditionally guaranteed by the Company, SSCE, the material U.S. subsidiariesof SSCE and the material Canadian subsidiaries of SSC Canada.  The obligations of SSCE under the Credit Agreementare secured by a security interest in substantially all of the assets andproperties of the Company, SSCE (except for three paper mills) and the materialU.S. subsidiaries of SSCE, by a pledge of all of the capital stock of SSCE andthe material U.S. subsidiaries of SSCE and by a pledge of 65% of the capitalstock of SSC Canada that is directly owned by SSCE.  The security 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(except three paper mills) and the material Canadian subsidiaries of SSCCanada, by a pledge of all of the capital stock of the material Canadiansubsidiaries of SSC Canada and by the same U.S. assets, properties and capitalstock that secure SSCE’s obligations under the Credit Agreement.  The security interests securing SSC Canada’sobligation under the Credit Agreement exclude three mills and property relatedthereto and certain other real property located in New Brunswick and Quebec.

 

The Credit Agreementcontains various covenants and restrictions including (i) limitations ondividends, redemptions and repurchases of capital stock, (ii) limitationson the incurrence of indebtedness, liens, 

 

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leases and sale-leasebacktransactions, (iii) limitations on capital expenditures and (iv) maintenanceof certain financial covenants.  TheCredit Agreement also requires prepayments if the Company has excess cashflows, as defined, or receives proceeds from certain asset sales, insurance orincurrence of certain indebtedness.

 

At December 31,2007, the Company was in compliance with the financial covenants required bythe Credit Agreement.

 

The Company has interestrate swap contracts effectively fixing the interest rate at 4.3% for $300million of the Tranche B and Tranche C variable rate term loans (See Note 10).

 

**Senior Notes**

The 9.25% unsecuredsenior notes aggregating $2 million were repaid February 1, 2008.

 

The 8.375% unsecuredsenior notes of $400 million are redeemable in whole or in part at the optionof SSCE 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 principalamount, plus accrued interest.

 

The 8.25% unsecuredsenior notes of $700 million are redeemable in whole or in part at the optionof SSCE 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% unsecuredsenior notes of $300 million are redeemable in whole or in part at the optionof SSCE beginning on June 1, 2008 at a price of 103.75% plus accruedinterest.  The redemption price willdecline each year after 2008 and beginning on June 1, 2011 will be 100% ofthe principal amount, plus accrued interest.

 

The 7.375% unsecuredsenior notes of $200 million are redeemable in whole or in part at the optionof SSCE beginning on July 15, 2009 at a price of 103.688% plus accruedinterest.  The redemption price willdecline each year after 2009 and beginning on July 15, 2012 will be 100%of the principal amount, plus accrued interest.

 

The 8.00% unsecuredsenior notes of $675 million are redeemable in whole or in part at the optionof  SSCE beginning on March 15, 2012at a price of 104.0% plus accrued interest. The redemption price will declineeach year after 2012 and beginning on March 15, 2015 will be 100% of theprincipal amount, plus accrued interest.

 

The senior notes containbusiness and financial covenants which are less restrictive than thosecontained in the Credit Agreement.

 

**2007 Transactions**

In March 2007, SSCEcompleted an offering of $675 million of 8.00% unsecured senior notes due March 15,2017.  The Company used the proceeds ofthis issuance to repay $546 million of the 9.75% unsecured senior notes due2011, which were purchased in connection with a cash tender offer, pay relatedtender premiums and accrued interest of $19 million and $8 million, respectively,and repay $95 million of the SSCE revolving credit facility.  In addition, the Company used the proceeds topay fees and expenses of $7 million related to this transaction.  A loss on early extinguishment of debt of $23million was recorded in the first quarter of 2007, including $19 million fortender premiums and a $4 million write-off of unamortized deferred debtissuance costs.

 

In March 2007, SSCEused approximately $66 million in borrowings against its revolving creditfacility, together with an escrow balance of $3 million, to prepay the $69million outstanding aggregate principal balance of the Company’s 8.45% mortgagenotes, which were payable on September 1, 2007.

 

In May 2007, theCompany redeemed the remaining $102 million of the 9.75% Senior Notes at aredemption price of 103.25% plus accrued interest.  Borrowings under the SSCE revolving creditfacility 

 

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were used to redeem thenotes and pay related call premiums and accrued interest.  A loss on early extinguishment of debt of $5million was recorded in the second quarter of 2007, including $4 million fortender premiums and a $1 million write-off of unamortized deferred debtissuance costs.

 

In September 2007,SSCE completed the sale of its Brewton, Alabama mill (See Note 5) and used thenet proceeds of $338 million to prepay $301 million of its Tranche B term loanand $21 million of its revolving credit facility.  In addition, the Company paid fees andexpenses of $16 million related to the sale transaction.  The Company recorded a loss on earlyextinguishment of debt of $1 million related to the write-off of unamortizeddeferred debt issuance costs.

 

For the year ended December 31,2007, SSCE used $114 million of net proceeds received from the sale ofproperties principally related to previously closed facilities to prepay $45million of its Tranche B term loan, $30 million of its Tranche C term loan, $9million of its Tranche C-1 term loan and pay down $30 million of its revolvingcredit facility.

 

**2006 Transactions**

In2006, SSCE completed the sale of its Consumer Packaging division and used thenet proceeds of $897 million to repay debt of $873 million and pay tenderpremiums and fees of $24 million.  A loss onearly extinguishment of debt of $28 million was recorded, including $24 millionfor tender premiums and fees for the unsecured senior notes called and a $4million write-off of unamortized deferred debt issuance costs.

 

**Other**

Interest costscapitalized on construction projects in 2007, 2006 and 2005 totaled $10million, $8 million and $8 million, respectively.  Interest payments on all debt instruments for2007, 2006 and 2005 were $302 million, $360 million and $344 million,respectively.

 

 

**10.  Derivative Instruments and Hedging Activities**

 

The Company’s derivativeinstruments used for its hedging activities are designed as cash flow hedgesand relate to minimizing exposures to fluctuations in the price of commoditiesused in its operations, the movement in foreign currency exchange rates and thefluctuations in the interest rate on variable rate debt.  All cash flows associated with the Company’sderivative instruments are classified as operating activities in theconsolidated statements of cash flows.

 

**Commodity Derivative Instruments**

The Company usesderivative instruments, including fixed price swaps and options, to managefluctuations in cash flows resulting from commodity price risk in theprocurement of natural gas and other commodities.  The objective is to fix the price of a portionof the Company’s purchases of these commodities used in the manufacturingprocess.  The changes in the market valueof such derivative instruments have historically offset, and are expected tocontinue to offset, the changes in the price of the hedged item.  As of December 31, 2007, the maximumlength of time over which the Company is hedging its exposure to thevariability in future cash flows associated with the commodities’ forecastedtransactions was one year.

 

For the years ended December 31,2007 and 2006, the Company reclassified a $10 million loss (net of tax) and a$3 million loss (net of tax), respectively, from OCI to cost of goods sold whenthe hedged items were recognized.  Thefair value of the Company’s commodity derivative instruments at December 31,2007 was a $7 million liability, included in other current liabilities.  The fair value of the Company’s commodityderivative instruments at December 31, 2006 was a $27 million liability,of which $22 million was included in other current liabilities and $5 millionwas included in other long-term liabilities.

 

For the years ended December 31,2007 and 2006, the Company recorded a $4 million gain (net of tax) and a $10million loss (net of tax), respectively, in cost of goods sold related to thechange in fair value of certain commodity derivative instruments not qualifyingfor hedge accounting.

 

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For the years ended December 31,2007 and 2006, the Company recorded a $6 million loss (net of tax) and an $8million loss (net of tax), respectively, in cost of goods sold on settledcommodity derivative instruments not qualifying for hedge accounting.

 

**Foreign Currency DerivativeInstruments**

The Company’s principalforeign exchange exposure is the Canadian dollar.  The Company uses foreign currency derivativeinstruments, including forward contracts and options, primarily to protectagainst Canadian currency exchange risk associated with expected future cashflows.  As of December 31, 2007, themaximum length of time over which the Company is hedging its exposure to thevariability in future cash flows associated with foreign currency exchange riskis one year.  For the years ended December 31,2007 and 2006, the Company reclassified a $2 million gain (net of tax) and a $3million gain (net of tax), respectively, from OCI to cost of goods sold relatedto the recognition of the foreign currency derivative instruments.  The change in fair value of these derivativeinstruments is recorded in OCI until the underlying transaction isrecorded.  The fair value of the Company’sforeign currency derivative instruments at December 31, 2007 and 2006 wasa $7 million asset and a $1 million asset, respectively, included in prepaidexpenses and other current assets.

 

**Interest Rate Swap Contracts**

The Company uses interestrate swap contracts to manage interest rate exposure on $300 million of thecurrent Tranche B and Tranche C floating rate bank term debt, effectivelyfixing the interest rate at 4.3%.  Thesecontracts extend until 2011, consistent with the maturity of the Company’sTranche B and Tranche C term loans. Changes in the fair value of the interest rate swap contracts areexpected to be highly effective in offsetting the fluctuations in the floatinginterest rate and are recorded in OCI until the underlying transaction isrecorded.  The accounting for the cashflow impact of the swap contracts is recorded as an adjustment to interestexpense each period.  For the years endedDecember 31, 2007 and 2006, the Company reclassified a $3 million gain(net of tax) and a $1 million gain (net of tax), respectively, from OCI whenthe hedged items were recognized.

 

The fair value of theCompany’s interest rate swap contracts at December 31, 2007 was a $3million liability, included in other long-term liabilities.  The fair value of the Company’s interest rateswap contracts at December 31, 2006 was a $9 million asset, included inother assets.

 

**Deferred Hedge Gain (Loss)**

The cumulative deferredhedge loss in OCI on all derivative instruments was $3 million (net of tax) at December 31,2007, including a $5 million loss (net of tax) on commodity derivativeinstruments, a $4 million gain (net of tax) on foreign currency derivativeinstruments and a $2 million loss (net of tax) on interest rate swapcontracts.  The cumulative deferred hedgeloss on all derivative instruments was $8 million (net of tax) at December 31,2006, including a $13 million loss (net of tax) on commodity derivativeinstruments, a $1 million loss (net of tax) on foreign currency derivativeinstruments and a $6 million gain (net of tax) on interest rate swapcontracts.  The Company expects toreclassify a $1 million loss (net of tax) into cost of goods sold during 2008related to the commodity and foreign currency derivative instruments.

 

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**11.  Leases**

 

The Company leasescertain facilities and equipment for production, selling and administrativepurposes under operating leases.  Certainleases contain renewal options for varying periods, and others include optionsto purchase the leased property 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:

 
| 2008                         |   | $  | 62     |   |
|------------------------------|--------|----|--------|--------|
| 2009                         |   | 50 |   |
| 2010                         |   | 37 |   |
| 2011                         |   | 24 |   |
| 2012                         |   | 21 |   |
| Thereafter                   |   | 96 |   |
| Total minimum lease payments |   | $  | 290    |   |

 

Net rental expense foroperating leases, including leases having a duration of less than one year, wasapproximately $132 million, $150 million and $137 million for 2007, 2006 and2005, respectively, excluding rental expense related to discontinued operationsof $16 million and $30 million in 2006 and 2005, respectively.

 

 

**12.  Guarantees**

 

The Company has certainwood chip processing contracts extending from 2012 through 2018 with minimumpurchase commitments.  As part of theagreements, the Company guarantees the third party contractor’s debtoutstanding and has a security interest in the chipping equipment.  At December 31, 2007 and 2006, themaximum potential amount of future payments related to these guarantees wasapproximately $31 million and $34 million, respectively, and decreases ratablyover the life of the contracts.  In theevent the guarantees on these contracts were called, proceeds from theliquidation of the chipping equipment would be based on current marketconditions and the Company may not recover in full the guarantee payments made.

 

In 2006, the Companyentered into an agreement to guarantee a portion of a third party’s debt indecreasing amounts through January 2010. The guarantee was entered into in connection with the third party’sprogress payment financing for the purchase and installation of machinery andequipment for the manufacture of corrugated containerboard.  The Company and the third party are partiesto a supply agreement through 2021, whereby the Company sells containerboard tothe third party, and a purchase agreement through 2014, whereby the third partysells corrugated sheets to the Company. At December 31, 2007, the maximum potential amount of the futurepayments related to this guarantee was approximately $12 million.  The Company has no recourse to the assets ofthe third party, other than that of a general unsecured creditor.  The fair value of this guarantee at December 31,2007 was an immaterial amount and is included in other assets, with an offsetin other long-term liabilities in the accompanying consolidated balance sheets.

 

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

 

56

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**13.  Asset Retirement Obligations**

 

The following tableprovides a reconciliation of the asset retirement obligations:

 
| Balance at January 1,  2005   |   |   |   | $      | 14         |       |
|------------------------------------|--------|--------|--------|--------|------------|------------|
| Accretion expense                  |   |   |   | 1      |       |
| Adjustments                        |   |   |   | (1     | )          |
| Balance at December 31,  2005 |   |   |   | 14     |       |
| Accretion expense                  |   |   |   | 1      |       |
| Adjustments                        |   |   |   | (1     | )          |
| Balance at  December 31, 2006 |   |   |   | 14     |       |
| Accretion expense                  |   |   |   | **1**  | ** ** |
| Adjustments                        |   |   |   | **(2** | **)**      |
| Payments                           |   |   |   | **(2** | **)**      |
| Balance at  December 31, 2007 |   |   |   | **$**  | **11**     | ** ** |

 

The 2005 adjustmentsrelate to the closures of containerboard mill facilities and thereclassification of these liabilities to a restructuring accrual.  The 2006 adjustments relate to revising theestimated life for certain asset retirement obligations.  The 2007 adjustments relate to thereclassification of the Brewton, Alabama, mill asset retirement obligations toa liability related to the Brewton sale agreement.

 

 

**14.  Income Taxes**

 

Significant components ofthe Company’s deferred tax assets and liabilities at December 31 are asfollows:

 
| ** **                                                                | ** ** | **2007**   | ** ** | **2006**       | ** ** |
|---------------------------------------------------------------------------|------------|------------|------------|----------------|------------|
| ** **                                                                | ** ** | ** ** | ** ** | **(Restated)** | ** ** |
| Deferred tax liabilities                                                  |       |       |       |           |       |
| Property, plant and equipment and timberland                              | ** ** | **$**      | **(928**   | **)**          | $          | (1,140 | ) |
| Inventory                                                                 | ** ** | **(40**    | **)**      | (41            | )          |
| Timber installment sale                                                   | ** ** | **(91**    | **)**      | (134           | )          |
| Other                                                                     | ** ** | **(75**    | **)**      | (63            | )          |
| Total deferred tax liabilities                                            | ** ** | **(1,134** | **)**      | (1,378         | )          |
|                                                                      |       |       |       |           |       |
| Deferred tax assets                                                       |       |       |       |           |       |
| Employee benefit plans                                                    | ** ** | **208**    |       | 313            |       |
| Net operating loss, alternative minimum tax and tax credit  carryforwards | ** ** | **471**    |       | 583            |       |
| Purchase accounting liabilities and restructuring                         | ** ** | **25**     |       | 21             |       |
| Other                                                                     | ** ** | **79**     |       | 124            |       |
| Total deferred tax assets                                                 | ** ** | **783**    |       | 1,041          |       |
| Valuation allowance for deferred tax assets                               | ** ** | **(31**    | **)**      | (36            | )          |
|                                                                      |       |       |       |           |       |
| Net deferred tax assets                                                   | ** ** | **752**    |       | 1,005          |       |
|                                                                      |       |       |       |           |       |
| Net deferred tax liabilities                                              | ** ** | **$**      | **(382**   | **)**          | $          | (373 | ) |

 

At December 31,2007, the Company had $599 million of net operating loss (“NOL”) carryforwardsfor U.S. federal income tax purposes that expire from 2022 through 2025, with atax value of $210 million.  The Companyhad NOL carryforwards for state purposes with a tax value of $70 million, whichexpire from 2008 to 2026.  A valuationallowance of $31 million exists for a portion of these deferred taxassets.  Substantially all of thevaluation allowance was recorded in connection with a prior purchase businesscombination and a reduction in the valuation allowance would result principallyin a corresponding reduction to goodwill. Further, the Company had $247 million of NOL carryforwards for Canadiantax 

 

57

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purposes that expire from2015 to 2027, with a tax value of $79 million, and Canadian investment taxcredits that expire from 2013 to 2016, with a tax value of $6 million.  In addition, the Company had $43 million ofNOL carryforwards for Canadian tax purposes, with a tax value of $14 million,and Canadian investment tax credits with a tax value of $2 million, that areavailable to reduce the impact of adjustments to taxable income in prior opentax years.  The Company had $88 millionof alternative minimum tax credit carryforwards for U.S. federal income taxpurposes, which are available indefinitely. In addition, the Company had other tax carryforwards of $2 million at December 31,2007, which can be carried forward indefinitely.  Deferred income taxes related to NOLcarryforwards have been classified as noncurrent to reflect the expected utilizationof the carryforwards.

 

The sale of the Brewton,Alabama mill assets during the third quarter of 2007 (See Note 5) generated ataxable gain for U.S. income tax purposes that was substantially offset byavailable NOL carryforwards.  Due to theutilization of state NOL carryforwards, the related valuation allowance wasreduced by $5 million in 2007.

 

The sale of the ConsumerPackaging division in 2006 (See Note 3) generated a taxable gain for U.S.income tax purposes that was offset by available NOL carryforwards, a portionof which was subject to valuation allowances previously established in a priorpurchase business combination.  Due tothe utilization of these NOL carryforwards, the related valuation allowance wasreduced by $157 million in the second quarter of 2006 with a correspondingreduction in goodwill related to the prior business combination.  Due to the utilization of state NOLcarryforwards, the related valuation allowance was reduced by an additional $15million in 2006.

 

In October 2004, theAmerican Jobs Creation Act (the “AJCA”) was signed into law.  The AJCA includes a temporary incentive forU.S. multinationals to repatriate foreign earnings by providing an elective 85%dividends received deduction for certain cash dividends from controlled foreigncorporations.  Under this law, in December 2005,the Company repatriated dividends of $483 million from earnings of foreignsubsidiaries previously considered indefinitely reinvested.  The income tax expense associated with therepatriation was $34 million.   Excludingthe repatriation discussed above, through December 31, 2007, no provisionhas been made for income taxes on the remaining undistributed earnings of theCompany’s foreign subsidiaries, as the Company intends to indefinitely reinvestsuch earnings in its foreign subsidiaries.

 

(Provision for) benefitfrom income taxes on loss from continuing operations before income taxes is asfollows:

 
| ** **                                               | ** ** | **2007**   | ** ** | **2006**   | ** ** | **2005**       | ** ** |
|----------------------------------------------------------|------------|------------|------------|------------|------------|----------------|------------|
| ** **                                               | ** ** | ** ** | ** ** | ** ** | ** ** | **(Restated)** | ** ** |
| Current                                                  | ** ** | ** ** | ** ** |       |       |           |       |
| Federal                                                  | ** ** | **$**      | **(6**     | **)**      | $          | (14            | )          | $ | (10 | ) |
| State and local                                          | ** ** | **(1**     | **)**      | (1         | )          | (5             | )          |
| Foreign                                                  | ** ** | **(5**     | **)**      | (6         | )          | (21            | )          |
| Total current provision for income taxes                 | ** ** | **(12**    | **)**      | (21        | )          | (36            | )          |
|                                                     |       |       |       |       |       |           |       |
| Deferred                                                 |       |       |       |       |       |           |       |
| Federal                                                  | ** ** | **(2**     | **)**      | 38         |       | 173            |       |
| State and local                                          | ** ** | **(7**     | **)**      | 4          |       | 34             |       |
| Foreign                                                  | ** ** | **(6**     | **)**      | 19         |       | 67             |       |
| Total deferred (provision for) benefit from income taxes | ** ** | **(15**    | **)**      | 61         |       | 274            |       |
| Total (provision for) benefit from income taxes          | ** ** | **$**      | **(27**    | **)**      | $          | 40             |       | $ | 238 |   |

 

58

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** **

The Company’s (provisionfor) benefit from income taxes differed from the amount computed by applyingthe statutory U.S. federal income tax rate to loss from continuing operationsbefore income taxes as follows:

 
| ** **                                                          | ** ** | **2007**   | ** ** | **2006**   | ** ** | **2005**       | ** ** |
|---------------------------------------------------------------------|------------|------------|------------|------------|------------|----------------|------------|
| ** **                                                          | ** ** | ** ** | ** ** | ** ** | ** ** | **(Restated)** | ** ** |
| U.S. federal income tax  benefit at federal statutory rate          | ** ** | **$**      | **26**     |       | $          | 39             |       | $ | 217 |   |
| Permanent differences and  other items                              | ** ** | **23**     |       | (3         | )          | 53             |       |
| State income taxes, net of  federal income tax effect               | ** ** | **(5**     | **)**      | 3          |       | 19             |       |
| Foreign taxes                                                       | ** ** | **(2**     | **)**      | 1          |       | (14            | )          |
| Non-deductibility of  goodwill on the sale of Brewton, Alabama mill | ** ** | **(51**    | **)**      | ** ** | ** ** | ** **     | ** ** |
| Non-cash foreign currency  exchange loss                            | ** ** | **(18**    | **)**      |       |       | (3             | )          |
| Repatriation of foreign  earnings                                   | ** ** | ** ** |       |       |       | (34            | )          |
| Total (provision for)  benefit from income taxes                    | ** ** | **$**      | **(27**    | **)**      | $          | 40             |       | $ | 238 |   |

 

The components of theloss from continuing operations before income taxes are as follows:

 
|                                                 | ** ** | **2007** |    | **2006** |   | **2005** |   |
|------------------------------------------------------|------------|----------|---------|----------|--------|----------|--------|
| United States                                        | ** ** | **$**    | **(31** | **)**    | $      | (70      | )      | $ | (442 | ) |
| Foreign                                              | ** ** | **(45**  | **)**   | (40      | )      | (177     | )      |
| Loss from continuing  operations before income taxes | ** ** | **$**    | **(76** | **)**    | $      | (110     | )      | $ | (619 | ) |

 

 

Effective January 1,2007, the Company adopted the provisions of FIN No. 48. Upon adoption, theCompany reduced its existing reserves for uncertain tax positions by $2million. This reduction was recorded as a cumulative effect adjustment toretained deficit. As of January 1, 2007, the Company had $120 million ofnet unrecognized tax benefits ($169 million gross unrecognized tax benefits),of which $38 million was classified as a reduction to the amount of the Company’snet operating loss carryforwards and $82 million was classified as a liabilityfor unrecognized tax benefits and included in other long-term liabilities.

 

At January 1, 2007,interest and penalties of $14 million related to unrecognized tax benefits wasincluded in other long-term liabilities. The interest was computed on thedifference between the tax position recognized in accordance with FIN No. 48and the amount previously taken or expected to be taken in the Company’s taxreturns, adjusted to reflect the impact of net operating loss and other taxcarryforward items.

 

 

A reconciliation of thebeginning and ending amount of gross unrecognized tax benefits is as follows:

 
| Balance at January 1, 2007                                    | ** ** | ** ** |   |   |   | $  | 169    |   |
|--------------------------------------------------------------------|------------|------------|--------|--------|--------|----|--------|--------|
| Additions based on tax positions taken in prior years              | ** ** | ** ** |   |   |   | 1  |   |
| Additions for tax positions taken in current year                  | ** ** | ** ** |   |   |   | 5  |   |
| Reductions relating to settlements with taxing authorities         | ** ** | ** ** |   |   |   | (2 | )      |
| Reductions relating to lapses of applicable statute of limitations | ** ** | ** ** |   |   |   | (7 | )      |
| Foreign currency exchange loss on Canadian tax positions           | ** ** | ** ** |   |   |   | 19 |   |
| Balance at December 31, 2007                                  | ** ** | ** ** |   |   |   | $  | 185    |   |

 

 

At December 31,2007, the Company had $139 million of net unrecognized tax benefits. Theprimary differences between gross unrecognized tax benefits and netunrecognized tax benefits are associated with offsetting benefits in otherjurisdictions related to transfer pricing and the U.S. federal tax benefit fromstate tax deductions.

 

59

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For the year ended December 31,2007, $11 million of interest was recorded related to tax positions takenduring the current and prior years. No penalties were recorded during the yearrelated to these tax positions. At December 31, 2007, $25 million ofinterest and penalties are recognized in the consolidated balance sheet. Allnet unrecognized tax benefits, if recognized, would affect the Company’seffective tax rate.

 

The Canada Revenue Agency(“CRA”) is currently examining the Company’s income tax returns for tax years1999 through 2005. In connection with the examination of the Company’s Canadianincome tax returns for these years, the CRA is considering certain significantadjustments to taxable income related to the acquisition of a Canadian companyand to transfer prices of inventory sold by the Company’s Canadian subsidiariesto its U.S. subsidiaries. These matters may be resolved at the examinationlevel or subsequently upon appeal within the next twelve months. While thefinal outcome of the examination or subsequent appeal, including an estimate ofthe range of the reasonably possible changes to unrecognized tax benefits, isnot yet determinable, the Company believes that the examination will not have amaterial adverse effect on its consolidated financial condition or results ofoperations.

 

The Company has settledthe Internal Revenue Service examinations of the Company’s income tax returnsfor tax years through 2003. The federal statute of limitations is closedthrough 2003, except for any potential correlative adjustments for the years1999 through 2003 relating to the CRA examinations noted above. There arecurrently no federal examinations in progress. In addition, the Company filestax returns in numerous states. The states’ statutes of limitations aregenerally open for the same years as the federal statute of limitations.

 

The Company made incometax payments of $17 million, $37 million and $36 million in 2007, 2006 and2005, respectively.

 

 

**15.  Employee Benefit Plans**

 

**DefinedBenefit Plans**

The Company sponsorsnoncontributory defined benefit pension plans for its U.S. employees and alsosponsors noncontributory and contributory defined benefit pension plans for itsCanadian employees. The Company’s defined benefit pension plans coversubstantially all hourly employees, as well as salaried employees hired priorto January 1, 2006.

 

On August 31, 2007,the Company announced the freeze of its defined benefit pension plans forsalaried employees. Effective January 1, 2009, U.S. and Canadian salariedemployees will no longer accrue additional years of service and U.S. salariedemployees will no longer recognize future increases in compensation under theexisting defined benefit pension plans for benefit purposes. In accordance withSFAS No. 88, “Employers Accounting for Settlements and Curtailments ofDefined Benefit Pension Plans and for Termination Benefits,” the Companyaccounted for this freeze as a plan curtailment, remeasured its assets andobligation as of August 31, 2007 and recognized a curtailment gain of $3million during the third quarter of 2007. Upon remeasurement, the Companyreduced its benefit obligation in other long-term liabilities by $106 million,decreased accumulated other comprehensive loss by $64 million and increaseddeferred income tax liability by $42 million. The impact of the freeze of thesalaried defined benefit pension plans will decrease 2008 expense byapproximately $8 million.

 

60

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The Company’s pensionplans’ weighted-average asset allocations at December 31 by asset categoryare as follows:

 

 

 
| ** **        | ** ** | **U.S.  Plans** | ** ** | **Canadian  Plans** | ** ** |
|-------------------|------------|-----------------|------------|---------------------|------------|
| ** **        | ** ** | **2007**        | ** ** | **2006**            | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **        | ** ** | ** **      | ** ** | ** **          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash equivalents  | ** ** | **2**           | **%**      | 3                   | %          | **1** | **%** | 1 | % |
| Debt securities   | ** ** | **38**          | **%**      | 33                  | %          | **47** | **%** | 42 | % |
| Equity securities | ** ** | **59**          | **%**      | 63                  | %          | **50** | **%** | 54 | % |
| Real estate       | ** ** | ** **      |       |                | ** ** | **2** | **%** | 3 | % |
| Other             | ** ** | **1**           | **%**      | 1                   | %          |   |   |   |   |
| Total             | ** ** | **100**         | **%**      | 100                 | %          | **100** | **%** | 100 | % |

 

Equity securities for theU.S. plans at December 31, 2007 and 2006 include 2.7 million shares ofSSCC common stock with a market value of $28 million in each year,(approximately 1% of total U.S. plan assets).

 

The primary objective ofthe Company’s investment policy is to provide eligible employees with scheduledpension benefits. The basic strategy of this investment policy is to earn thehighest risk adjusted rate of return on assets consistent with prudent investorstandards identified in the Employee Retirement Income Security Act of 1974 forthe U.S. plans and the Quebec Supplemental Pension Plans Act and otherapplicable legislation in Canada for the Canadian plans. In identifying thetarget asset allocation that would best meet the above policy, consideration isgiven to a number 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 assetallocation for the pension plans during a complete market cycle is as follows:

 
| ** **                | ** ** | **U.S.  Plans** | ** ** | **Canadian  Plans** | ** ** |
|---------------------------|------------|-----------------|------------|---------------------|------------|
| Equity securities         |       | 53              | %          | 49                  | %          |
| Debt securities           |       | 40              | %          | 46                  | %          |
| Alternative asset classes |       | 7               | %          | 5                   | %          |

 

 

**PostretirementHealth Care and Life Insurance Benefits**

The Company providescertain health care and life insurance benefits for all retired salaried andcertain retired hourly employees, and for salaried and certain hourly employeeswho have reached the age of 60 with ten years of service as of January 1,2007.

 

In December 2005,the Company announced the elimination of postretirement health care and relatedlife insurance benefits for all salaried and certain hourly employees who havenot reached the age of 60 with 10 years of service as of January 1, 2007. Asa result of the plan changes, the Company recorded an $8 million curtailmentgain in 2005.

 

61

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The assumed health carecost trend rates used in measuring the accumulated postretirement benefitobligation (“APBO”) at December 31 are as follows:

 
| ** **                                                                         | ** ** | **2007**      | ** ** | **2006**   | ** ** |
|------------------------------------------------------------------------------------|------------|---------------|------------|------------|------------|
| **U.S. Plans**                                                                     | ** ** | ** **    | ** ** | ** ** | ** ** |
| Health care cost trend rate assumed for next year                                  | ** ** | **8.00**      | **%**      | 9.00       | %          |
| 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                                  | ** ** | **7.90-8.60** | **%**      | 8.30-9.20  | %          |
| Rate to which the cost trend rate is assumed to decline (the ultimate  trend rate) | ** ** | **4.80-4.90** | **%**      | 4.80-4.90  | %          |
| Year the rate reaches the ultimate trend rate                                      | ** ** | **2014**      |       | 2014       |       |

 

The effect of a 1% changein the assumed health care cost trend rate would increase and decrease the APBOas of December 31, 2007 by $13 million and $11 million, respectively, andwould increase and decrease the annual net periodic postretirement benefit costfor 2007 by $1 million and $1 million, respectively.

 

The Consumer Packagingdivision employees participated in the Company’s defined benefit pension andpostretirement plans through June 30, 2006 (See Note 3). The associateddefined benefit pension and postretirement plan liabilities are included in theCompany’s total benefit obligations. The related defined benefit pension andpostretirement expense is included through June 30, 2006.

 

The following provides areconciliation of benefit obligations, plan assets and funded status of theplans:

 
| ** **                                     | ** ** | **Defined Benefit Plans** | ** ** | **Postretirement Plans** | ** ** |
|------------------------------------------------|------------|---------------------------|------------|--------------------------|------------|
| ** **                                     | ** ** | **2007**                  | ** ** | **2006**                 | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Change in benefit obligation:**              | ** ** | ** **                | ** ** | ** **               | ** ** | ** ** | ** ** | ** ** | ** ** |
| Benefit obligation at  January 1          | ** ** | **$**                     | **3,541**  |                     | $          | 3,591 | ** ** | **$** | **233** |   | $ | 260 |   |
| Service cost                                   | ** ** | **53**                    |       | 68                       | ** ** | **3** |   | 5 |   |
| Interest cost                                  | ** ** | **198**                   |       | 196                      | ** ** | **11** |   | 13 |   |
| Amendments                                     | ** ** | **(43**                   | **)**      | 8                        | ** ** | **(7** | **)** | (4 | ) |
| Settlements                                    | ** ** | **(10**                   | **)**      | (36                      | )          |   |   | (1 | ) |
| Curtailments                                   | ** ** | **(4**                    | **)**      | (26                      | )          | **(1** | **)** | (13 | ) |
| Actuarial gain                                 | ** ** | **(170**                  | **)**      | (78                      | )          | **(48** | **)** | (16 | ) |
| Plan participants’  contributions         | ** ** | **5**                     |       | 6                        | ** ** | **12** |   | 13 |   |
| Benefits paid and expected  expenses           | ** ** | **(208**                  | **)**      | (190                     | )          | **(23** | **)** | (24 | ) |
| Foreign currency rate  changes                 | ** ** | **164**                   |       | 2                        | ** ** | **9** | ** ** | ** ** | ** ** |
| Benefit obligation at  December 31        | ** ** | **$**                     | **3,526**  |                     | $          | 3,541 | ** ** | **$** | **189** |   | $ | 233 |   |
|                                           |       |                      |       |                     |       |   |   |   |   |
| **Change in plan assets:**                     | ** ** | ** **                | ** ** | ** **               | ** ** | ** ** | ** ** | ** ** | ** ** |
| Fair value of plan assets  at January 1   | ** ** | **$**                     | **2,908**  |                     | $          | 2,700 | ** ** | **$** | ** ** | ** ** | **$** | ** ** | ** ** |
| Actual return on plan  assets                  | ** ** | **156**                   |       | 279                      |       |   |   |   |   |
| Settlements                                    | ** ** | **(10**                   | **)**      | (36                      | )          |   |   |   |   |
| Employer contributions                         | ** ** | **129**                   |       | 147                      | ** ** | **12** |   | 11 |   |
| Plan participants’  contributions         | ** ** | **5**                     |       | 6                        | ** ** | **11** |   | 13 |   |
| Benefits paid                                  | ** ** | **(203**                  | **)**      | (186                     | )          | **(23** | **)** | (24 | ) |
| Foreign currency rate  changes                 | ** ** | **134**                   |       | (2                       | )          |   |   |   |   |
| Fair value of plan assets  at December 31 | ** ** | **$**                     | **3,119**  |                     | $          | 2,908 | ** ** | **$** | ** ** | ** ** | **$** | ** ** | ** ** |
|                                           |       |                      |       |                     |       |   |   |   |   |
| **Over (under) funded status:**                | ** ** | **$**                     | **(407**   | **)**                    | $          | (633 | ) | **$** | **(189** | **)** | $ | (233 | ) |

 

62

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| ** **                                                                                                  | ** ** | **Defined Benefit Plans** | ** ** | **Postretirement Plans** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|---------------------------|------------|--------------------------|------------|
| ** **                                                                                                  | ** ** | **2007**                  | ** ** | **2006**                 | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Amounts recognized in the balance sheet:**                                                                | ** ** | ** **                | ** ** | ** **               | ** ** | ** ** | ** ** | ** ** | ** ** |
| Current liabilities                                                                                         | ** ** | **$**                     | **(9**     | **)**                    | $          | (8 | ) | **$** | **(16** | **)** | $ | (18 | ) |
| Non-current liabilities                                                                                     | ** ** | **(398**                  | **)**      | (625                     | )          | **(173** | **)** | (215 | ) |
| Net liability recognized in balance sheet                                                                   | ** ** | **$**                     | **(407**   | **)**                    | $          | (633 | ) | **$** | **(189** | **)** | $ | (233 | ) |
| ** **                                                                                                  | ** ** | ** **                | ** ** | ** **               | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Reconciliation  of amounts recognized in accumulated OCI to net liability recognized in  balance sheet:** | ** ** | ** **                | ** ** | ** **               | ** ** | ** ** | ** ** | ** ** | ** ** |
| Prior service credit (cost)                                                                                 | ** ** | **$**                     | **(11**    | **)**                    | $          | (58 | ) | **$** | **30** |   | $ | 25 |   |
| Net actuarial gain (loss)                                                                                   | ** ** | **(431**                  | **)**      | (586                     | )          | **17** |   | (29 | ) |
| Accumulated other comprehensive income (loss)                                                               | ** ** | **(442**                  | **)**      | (644                     | )          | **47** |   | (4 | ) |
| Prepaid (unfunded accrued) benefit cost                                                                     | ** ** | **95**                    |       | 34                       | ** ** | **(235** | **)** | (229 | ) |
| Foreign currency remeasurement                                                                              | ** ** | **(60**                   | **)**      | (23                      | )          | **(1** | **)** | ** ** | ** ** |
| Net liability recognized in balance sheet                                                                   | ** ** | **$**                     | **(407**   | **)**                    | $          | (633 | ) | **$** | **(189** | **)** | $ | (233 | ) |
| ** **                                                                                                  | ** ** | ** **                | ** ** | ** **               | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Change in accumulated OCI due to application of  SFAS No 158:**                                           | ** ** | ** **                | ** ** | ** **               | ** ** | ** ** | ** ** | ** ** | ** ** |
| Additional minimum liability before SFAS No. 158                                                       | ** ** | ** **                | ** ** | $                        | (529       | ) | ** ** |   | $ |   |   |
| Intangible asset offset before SFAS No. 158                                                            | ** ** | ** **                | ** ** | 62                       | ** ** | ** ** |   |   |   |
| Accumulated other comprehensive income (loss) before SFAS  No. 158                                     | ** ** | ** **                | ** ** | (467                     | )          | ** ** |   |   |   |
| Net increase in accumulated other comprehensive income (loss) due to  SFAS No. 158                     | ** ** | ** **                | ** ** | (177                     | )          | ** ** |   | (4 | ) |
| Accumulated other comprehensive income (loss) subsequent to adoption  of SFAS No. 158                  | ** ** | ** **                | ** ** | (644                     | )          | ** ** |   | (4 | ) |
| Deferred income taxes                                                                                       | ** ** | ** **                | ** ** | 243                      | ** ** | ** ** |   | 1 |   |
| Accumulated other comprehensive income (loss) subsequent to adoption  of SFAS No. 158, net of tax      | ** ** | ** **                | ** ** | $                        | (401       | ) | ** ** |   | $ | (3 | ) |
| ** **                                                                                                  | ** ** | ** **                | ** ** | ** **               | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Change in accumulated OCI:**                                                                              | ** ** | ** **                | ** ** | ** **               | ** ** | ** ** | ** ** | ** ** | ** ** |
| Accumulated other comprehensive income (loss) at January 1                                             | ** ** | **$**                     | **(644**   | **)**                    | ** ** | ** ** | **$** | **(4** | **)** | ** ** | ** ** |
| Prior service (cost) credit arising during the period                                                       | ** ** | **43**                    | ** ** | ** **               | ** ** | **8** | ** ** | ** ** | ** ** |
| Net (loss) gain arising during the period                                                                   | ** ** | **96**                    | ** ** | ** **               | ** ** | **49** | ** ** | ** ** | ** ** |
| Amortization of prior service (credit) cost                                                                 | ** ** | **6**                     | ** ** | ** **               | ** ** | **(4** | **)** | ** ** | ** ** |
| Amortization of net (gain) loss                                                                             | ** ** | **57**                    | ** ** | ** **               | ** ** | **(2** | **)** | ** ** | ** ** |
| Accumulated other comprehensive income (loss) at December 31                                           | ** ** | **(442**                  | **)**      | ** **               | ** ** | **47** | ** ** | ** ** | ** ** |
| Deferred income taxes                                                                                       | ** ** | **163**                   | ** ** | ** **               | ** ** | **(18** | **)** | ** ** | ** ** |
| Accumulated other comprehensive income (loss), net of tax                                                   | ** ** | **$**                     | **(279**   | **)**                    | ** ** | ** ** | **$** | **29** | ** ** | ** ** | ** ** |
| ** **                                                                                                  | ** ** | ** **                | ** ** | ** **               | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Estimated amounts to be amortized from  accumulated OCI over the next fiscal year:**                      | ** ** | ** **                | ** ** | ** **               | ** ** | ** ** | ** ** | ** ** | ** ** |
| Prior service credit (cost)                                                                                 | ** ** | **$**                     | **(3**     | **)**                    | ** ** | ** ** | **$** | **1** | ** ** | ** ** | ** ** |
| Net actuarial gain (loss)                                                                                   | ** ** | **(40**                   | **)**      | ** **               | ** ** | **3** | ** ** | ** ** | ** ** |
| Total                                                                                                       | ** ** | **$**                     | **(43**    | **)**                    | ** ** | ** ** | **$** | **4** | ** ** | ** ** | ** ** |

 

The accumulated benefitobligation for all defined benefit pension plans was $3,452 million and $3,406million at December 31, 2007 and 2006, respectively.

 

The projected benefitobligation, accumulated benefit obligation and fair value of plan assets forthe pension plans with accumulated benefit obligations in excess of plan assetswere $3,389 million, $3,329

 

63

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million, and $2,992million, respectively, as of December 31, 2007 and $3,424 million, $3,304million, and $2,803 million, respectively, as of December 31, 2006.

 

The projected benefitobligation and fair value of plan assets for the pension plans with projectedbenefit obligations in excess of plan assets were $3,525 million and $3,117million, respectively, as of December 31, 2007 and $3,540 million and$2,906 million, respectively, as of December 31, 2006.

 

The components of net pensionexpense for the defined benefit plans and the components of the postretirementbenefit costs are as follows:

 
| ** **                                    | ** ** | **Defined  Benefit Plans** | ** ** | **Postretirement  Plans** | ** ** |
|-----------------------------------------------|------------|----------------------------|------------|---------------------------|------------|
| ** **                                    | ** ** | **2007**                   | ** ** | **2006**                  | ** ** | **2005** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
| Service cost                                  | ** ** | **$**                      | **53**     |                      | $          | 68 |   | $ | 81 | ** ** | **$** | **3** |   | $ | 5 |   | $ | 7 |   |
| Interest cost                                 | ** ** | **198**                    |       | 196                       |       | 189 | ** ** | **11** |   | 13 |   | 16 |   |
| Expected return on plan  assets               | ** ** | **(238**                   | **)**      | (224                      | )          | (210 | ) |   |   |   |   |   |   |
| Amortization of prior  service cost (benefit) | ** ** | **6**                      |       | 9                         |       | 10 | ** ** | **(3** | **)** | (3 | ) | (2 | ) |
| Amortization of net (gain)  loss              | ** ** | **54**                     |       | 71                        |       | 62 | ** ** | **(1** | **)** | 3 |   | 4 |   |
| Curtailment (gain) loss                       |       |                       |       | 16                        | ** ** | 4 |   | **(3** | **)** | (5 | ) | (8 | ) |
| Settlement (gain) loss                        | ** ** | **2**                      |       | 7                         |       |   | ** ** | ** ** |   | (1 | ) |   |   |
| Multi-employer plans                          | ** ** | **4**                      |       | 4                         |       | 6 |   |   |   |   |   |   |   |
| Net periodic benefit cost                     | ** ** | **$**                      | **79**     |                      | $          | 147 |   | $ | 142 | ** ** | **$** | **7** |   | $ | 12 |   | $ | 17 |   |

 

The 2006 curtailment(gains) losses are related to the sale of the Consumer Packaging division andare included in the net loss on disposition of discontinued operations (SeeNote 3).

 

The 2007 and 2006settlement (gains) losses are related to closed facilities and are included aspart of restructuring charges (See Note 4).

 

In 2007, closed facilitiesresulted in a $3 million curtailment loss related to the defined benefit plansand a $3 million curtailment gain related to the postretirement plans. Thesalaried defined benefit plan freeze, resulting in a $3 million gain, offsetthe impact of the closed facilities.

 

The weighted averageassumptions used to determine the benefit obligations at December 31 areas follows:

 
| ** **                    | ** ** | **Defined  Benefit Plans** | ** ** | **Postretirement  Plans** | ** ** |
|-------------------------------|------------|----------------------------|------------|---------------------------|------------|
| ** **                    | ** ** | **2007**                   | ** ** | **2006**                  | ** ** | **2007** | ** ** | **2006** | ** ** |
| **U.S. Plans**                |       |                       |       |                      |       |   |   |   |   |
| Discount rate                 |       | **6.19**                   | **%**      | 5.84                      | %          | **6.19** | **%** | 5.84 | % |
| Rate of compensation increase |       | **3.08**                   | **%**      | 3.11                      | %          | **N/A** |   | N/A |   |
| **Foreign Plans**             |       |                       |       |                      |       |   |   |   |   |
| Discount rate                 |       | **5.50**                   | **%**      | 5.10                      | %          | **5.50** | **%** | 5.10 | % |
| Rate of compensation increase |       | **3.20**                   | **%**      | 3.40                      | %          | **N/A** |   | N/A |   |

 

64

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The weighted averageassumptions used to determine net periodic benefit cost for the years ended December 31are as follows:

 
| ** **                               | ** ** | **Defined Benefit Plans** | ** ** | **Postretirement Plans** | ** ** |
|------------------------------------------|------------|---------------------------|------------|--------------------------|------------|
| ** **                               | ** ** | **2007**                  | ** ** | **2006**                 | ** ** | **2007** | ** ** | **2006** | ** ** |
| **U.S. Plans**                           | ** ** | ** **                | ** ** | ** **               | ** ** | ** ** | ** ** | ** ** | ** ** |
| Discount rate                            | ** ** | **5.84-6.22**             | **%**      | 5.61-6.36                | %          | **5.84** | **%** | 5.61-6.36 | % |
| Expected long-term return on plan assets | ** ** | **8.50**                  | **%**      | 8.75                     | %          | **N/A** |   | N/A |   |
| Rate of compensation increase            | ** ** | **3.11**                  | **%**      | 3.11                     | %          | **N/A** |   | N/A |   |
| **Foreign Plans**                        | ** ** | ** **                | ** ** | ** **               | ** ** | ** ** | ** ** | ** ** | ** ** |
| Discount rate                            | ** ** | **5.10**                  | **%**      | 5.00                     | %          | **5.10** | **%** | 5.00 | % |
| Expected long-term return on plan assets | ** ** | **7.50**                  | **%**      | 7.75-8.00                | %          | **N/A** |   | N/A |   |
| Rate of compensation increase            | ** ** | **3.40**                  | **%**      | 3.60                     | %          | **N/A** |   | N/A |   |

 

As a result of thesalaried defined benefit plan freeze on August 31, 2007, the Companycompleted a remeasurement of the salaried defined benefit plans resulting in thediscount rate being changed from 5.84% to 6.22%.  The impact of the discount rate changereduced defined benefit pension expense by approximately $6 million for theremainder of 2007.

 

As a result of theConsumer Packaging division sale on June 30, 2006, the Company completed aremeasurement for the U.S. defined benefit pension and postretirement plansresulting in the discount rate being changed from 5.61% to 6.36%.  The impact of the discount rate changereduced defined benefit pension and postretirement plan expense byapproximately $13 million in the second half of 2006.

 

The expected long-termrate of return using the current target asset allocation for U.S. and foreignpension plans is 8.50% and 7.50%, respectively. The fundamental assumptions behind the expected rate of return are thecumulative effect of several estimates, including the anticipated yield on highquality debt securities, the equity risk premium earned by investing in equitysecurities over a long-term time horizon and active investment management.

 

The Company expects tocontribute $75 million to its defined benefit plans and $15 million to itspostretirement plans in 2008.

 

**Expected Future Benefit PlanPayments**

Expected future benefitplan payments to participants, which reflect expected future service, are asfollows:

 
| ** ** | ** ** | **Defined Benefit Plans** | ** ** | **Postretirement Plans** | ** ** |
|------------|------------|---------------------------|------------|--------------------------|------------|
| 2008       |       | $                         | 216        |                     | $          | 15 |   |
| 2009       |       | 217                       |       | 15                       |       |
| 2010       |       | 224                       |       | 15                       |       |
| 2011       |       | 228                       |       | 16                       |       |
| 2012       |       | 233                       |       | 16                       |       |
| 2013-2017  |       | 1,242                     |       | 76                       |       |
|            |            |                           |            |                          |            |  |  |

 

**Savings Plans**

The Company sponsorsvoluntary savings plans covering substantially all salaried and certain hourlyemployees.  The Company match was paid inSSCC common stock through 2005, up to an annual maximum.  Beginning in 2006, the Company match is paidaccording to the employees’ selected investment allocation.  The Company’s expense for the savings planstotaled $18 million, $21 million and $23 million in 2007, 2006 and 2005,respectively.

 

65

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**16.  Preferred Stock**

 

The holders of theCompany’s preferred stock are entitled to cumulative dividends of $0.4375 perquarter, payable in cash except in certain circumstances.  SSCC had approximately 4.6 million shares ofpreferred stock issued and outstanding as of December 31, 2007 and2006.  Preferred stock dividends of $8million were paid during 2007, 2006 and 2005. Preferred stock accretion of $4 million in 2007, 2006 and 2005 wascharged to stockholders’ equity.  Theholders of preferred stock are not entitled to voting rights on matterssubmitted to the Company’s stockholders. The preferred stock is convertible, at the option of the holder, intoshares of SSCC common stock at a conversion price of $34.28 (equivalent to aconversion rate of 0.729 shares of SSCC common stock for each share ofpreferred stock), subject to adjustment based on certain events.  The preferred stock may alternatively beexchanged, at the option of the Company, for new 7% Convertible SubordinatedExchange Debentures due February 15, 2012. The preferred stock is redeemable at the Company’s option until February 15,2012, at which time the preferred stock must be redeemed.  The preferred stock may be redeemed, at theCompany’s option, with cash or SSCC common stock with an equivalent fairvalue.  The redemption price is 100% ofthe liquidation preference.  It is theCompany’s intention to redeem the preferred stock with SSCC common stock.  The liquidation preference is $25 per shareplus dividends accrued and unpaid.

 

 

**17.  Stock—Based Compensation**

 

The Company has stockoptions and RSUs outstanding under several long-term incentive plans.  The 1998 Long-Term Incentive Plan (the “1998Plan”) and the 2004 Long-Term Incentive Plan (the “2004 Plan”) have reserved16.5 million and 12.5 million shares, respectively, of Company common stock fornon-qualified stock options, RSUs and performance-based stock options toofficers, key employees and non-employee directors of the Company.  The stock options are exercisable at a priceequal to the fair market value of the Company’s stock on the date of grant.  The vesting schedule and other terms andconditions of options granted under each plan are established separately foreach grant.  The options expire no laterthan seven to ten years from the date of grant.

 

Certain grants under the1998 Plan and the 2004 Plan contain change in control provisions which providefor immediate vesting and exercisability in the event that specific ownershipconditions are met.  Grants issued beforeDecember 31, 2005 allowed for immediate vesting and exercisability in theevent of retirement.  For grants issuedafter December 31, 2005, unvested awards do not vest upon retirement.  Vested options remain exercisable until theearlier of five years from retirement or ten years from the initial grant date.

 

**SFAS No. 123**

In 2003, the Companyadopted the fair value recognition provisions of SFAS No. 123.  The Company selected the prospectivetransition method as allowed in SFAS No. 148, “Accounting for Stock-BasedCompensation-Transition and Disclosure,” which required expensing optionsprospectively, beginning in the year of adoption, and utilized theBlack-Scholes formula to estimate the value of stock options granted toemployees.  Because the prospectivetransition method was used and awards vest over three to eight years (see below),the expense for 2005 is less than what would have been recognized if the fairvalue-based method had been applied to all awards since the original effectivedate of SFAS No. 123.  The followingtable illustrates the effect on net loss available to common stockholders andearnings per share if the fair value based method had been applied to alloutstanding and unvested awards.

 

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| ** **                                                                                                                                   | ** ** | **2005** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|
| Net loss available to common stockholders, as restated (See Note 2)                                                                          |       | $        | (342       | ) |
| Add: Stock-based employee compensation expense included in restated  net loss, net of related tax effects                                    |       | 7        |       |
| Deduct: Total stock-based employee compensation expense determined  under fair value-based method for all awards, net of related tax effects |       | (12      | )          |
| Pro forma net loss available to common stockholders                                                                                          |       | $        | (347       | ) |
|                                                                                                                                         |       |     |       |
| Earnings per share:                                                                                                                          |       |     |       |
| Basic and diluted — as restated (See Note 2)                                                                                            |       | $        | (1.34      | ) |
| Basic and diluted — pro forma                                                                                                           |       | $        | (1.36      | ) |

 

**SFAS No. 123(R)**

The Company adopted SFAS No. 123(R) onJanuary 1, 2006, under the modified prospective method, in which therequirements of SFAS No. 123(R) must be applied to new awards and topreviously granted awards that are not fully vested on the effective date, butdoes not require a restatement of previous years’ financial statements.  Upon adoption, the Company implemented alattice option pricing model to estimate the fair value of stock optionsgranted after January 1, 2006.  TheCompany changed to a lattice option pricing model as it accommodates dynamicassumptions of expected volatility over the option’s contractual term, andestimates of expected option exercise patterns during the option’s contractualterm, including the effect of blackout periods, which provides a betterestimate of the options’ fair value and more fully reflects the substantivecharacteristics of the Company’s stock-based compensation.

 

The lattice optionpricing model considers a range of assumptions related to volatility, risk-freeinterest rate and historical employee behavior. Expected volatility was based on historical volatility on the Company’scommon stock and current implied volatilities from traded options on theCompany’s common stock.  The risk-freeinterest rate was based on U.S. Treasury security yields at the time ofgrant.  The dividend yield on the Company’scommon stock is assumed to be zero since the Company has not paid dividends andhas no current plans to do so in the future. The expected life was determined from the lattice option pricing model.  The lattice option pricing model incorporatesexercise and post-vesting forfeiture assumptions based on analysis ofhistorical data.

 

The following tableprovides the assumptions used in determining the fair value of the stock-basedawards using a lattice option pricing model in 2007 and 2006 and aBlack-Scholes option pricing model in 2005.

 
| ** **                                | ** ** | **2007**  | ** ** | **2006** | ** ** | **2005** | ** ** |
|-------------------------------------------|------------|-----------|------------|----------|------------|----------|------------|
| Weighted-average  volatility              | ** ** | **34.40** | **%**      | 35.65    | %          | 41.00    | %          |
| Weighted-average risk-free  interest rate | ** ** | **4.72**  | **%**      | 4.59     | %          | 4.10     | %          |
| Weighted-average dividend  yield          | ** ** | **0.00**  | **%**      | 0.00     | %          | 0.00     | %          |
| Weighted-average expected  life in years  | ** ** | **6**     |       | 5        |       | 6        |       |

 

Stock options and RSUsgranted prior to December 31, 2005 allowed for immediate vesting andexercisability in the event of retirement. The Company had recognized compensation expense over the explicitservice period (up to the date of actual retirement) and will continue thismethod for awards granted prior to the adoption of SFAS No. 123(R).  For options granted after January 1,2006, the Company is recognizing expense over the explicit service period sincethe options do not fully vest upon retirement.

 

The impact of adoptingSFAS No. 123(R) for 2006 was an increase in selling andadministrative expenses of $5 million due to recognizing expense on non-vested,outstanding shares issued prior to the adoption of SFAS No. 123 on January 1,2003.  The related tax benefit was $2million for 2006.  The net earnings pershare impact was $(.01) for 2006.

 

67

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Total pretax stock-based compensation costs recognized in selling andadministrative expense in the consolidated statements of operations for 2007,2006 and 2005 were $21 million, $23 million, and $10 million, respectively,excluding stock-based compensation costs related to discontinued operations of$2 million for each of 2006 and 2005. The related tax benefit for 2007, 2006 and 2005 was $8 million, $9 million, and $4 million, respectively, excluding the tax benefit related todiscontinued operations of $1 million for each of 2006 and 2005.

 

At December 31,2007, the total compensation cost related to non-vested awards not yetrecognized was approximately $26 million to be recognized through December 31,2010, with a weighted-average expense period of approximately two years.

 

**Stock Options**

The stock options grantedprior to January 2000 are fully vested and exercisable.  The stock options granted between January 2000and March 2001 vest and become exercisable eight years after the date ofgrant subject to acceleration based upon the attainment of pre-establishedstock price targets.  For grants between April 2001and June 2004, the stock options vest and become exercisable at the rateof 25% each year for four years.  Allnon-performance based grants issued subsequent to June 2004 vest andbecome exercisable on the third anniversary of the award date.  Awards with pro rata vesting are expensed ona straight-line basis.

 

During 2006 and 2007, theCompany granted performance-based stock options under the 2004 Plan tomanagement level employees responsible for implementing the strategicinitiative plan.  Vesting is dependentupon the financial performance of the Company and the attainment of thestrategic initiative plan savings from 2006 to 2008.  These performance-based stock options expireno later than seven years from the date of grant.  Compensation expense is recorded over theperformance period ranging from two to three years based on the achievement ofthe performance criteria.  As of December 31,2007, the Company is on target to attain the vesting requirements.

 

68

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Additional information relating to stock options is as follows:

 
| ** **                             | ** ** | **Options**    | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted  Average  Remaining  Contractual  Term  (in years)** | ** ** |
|----------------------------------------|------------|----------------|------------|----------------------------------------|------------|-----------------------------------------------------------------|------------|
| Outstanding at  January 1, 2005   |       | 14,273,239     |       | $                                      | 14.76      |                                                            |       |   |
|                                   |       |           |       |                                   |       |                                                            |       |
| Granted                                |       | 1,054,508      |       | 13.78                                  |       |                                                            |       |
| Exercised                              |       | (100,044       | )          | 13.40                                  |       |                                                            |       |
| Cancelled                              |       | (770,577       | )          | 17.41                                  |       |                                                            |       |
| Outstanding at  December 31, 2005 |       | 14,457,126     |       | 14.55                                  |       |                                                            |       |
|                                   |       |           |       |                                   |       |                                                            |       |
| Granted                                |       | 5,469,775      |       | 12.74                                  |       |                                                            |       |
| Exercised                              |       | (140,761       | )          | 12.78                                  |       |                                                            |       |
| Cancelled                              |       | (2,197,181     | )          | 13.99                                  |       |                                                            |       |
| Outstanding at  December 31, 2006 |       | 17,588,959     |       | 14.08                                  |       |                                                            |       |
|                                   |       |           |       |                                   |       |                                                            |       |
| Granted                                | ** ** | **1,331,190**  | ** ** | **12.74**                              | ** ** | ** **                                                      | ** ** |
| Exercised                              | ** ** | **(167,046**   | **)**      | **12.03**                              | ** ** | ** **                                                      | ** ** |
| Cancelled                              | ** ** | **(1,691,978** | **)**      | **14.02**                              | ** ** | ** **                                                      | ** ** |
| Outstanding at  December 31, 2007 | ** ** | **17,061,125** | ** ** | **14.00**                              | ** ** | **4.64**                                                        | ** ** |
|                                   | ** ** | ** **     | ** ** | ** **                             | ** ** | ** **                                                      | ** ** |
|                                   |       |           |       |                                   |       |                                                            |       |
| Exercisable at  December 31, 2007 | ** ** | **10,597,815** | ** ** | **$**                                  | **14.65**  | ** **                                                      | **3.47**   | ** ** |

 

The weighted-averagegrant date fair value of stock options granted during 2007, 2006 and 2005 was$4.69, $4.62 and $6.29, respectively.

 

The total intrinsic valueof stock options exercised was an immaterial amount in 2007 and 2006, and $1million in 2005.

 

The aggregate intrinsicvalue of stock options exercisable at December 31, 2007 was an immaterialamount.  The aggregate intrinsic valuerepresents the total pretax intrinsic value, based on options with an exerciseprice less than the Company’s closing stock price as of December 31, 2007,which would have been received by the option holders had those option holdersexercised their options as of that date.

 

**RSUs**

The Company issues RSUsto pay a portion of employee bonuses under its annual management incentiveplan.  These RSUs vest immediately, butwill not be distributed to active employees until the third anniversary of theaward date.  The Company pays a premiumon the employee bonuses in the form of RSUs (“Premium RSUs”) to certainemployees.  The Company also issuesnon-vested RSUs under the 2004 Plan to certain employees.  Non-employee directors are also annuallyawarded non-vested RSUs as part of their director compensation.  These non-vested RSUs and Premium RSUs vestat the earlier of a change in control, death, disability or three years afterthe award date.  The RSUs arenon-transferable and do not have voting rights.

 

69

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Additional informationrelating to RSUs is as follows:

 
| ** **                                            | ** ** | **RSUs**      | ** ** | **Weighted  Average  Grant Date  Fair Value** | ** ** |
|-------------------------------------------------------|------------|---------------|------------|-----------------------------------------------|------------|
| **Vested RSUs**                                       |       |          |       |                                          |       |
| Outstanding vested RSUs at January 1, 2005       |       | 766,965       |       | $                                             | 14.90      |   |
|                                                  |       |          |       |                                          |       |
| Granted                                               |       | 208,833       |       | 15.06                                         |       |
| Converted                                             |       | (345,352      | )          | 14.82                                         |       |
| Transfer from non-vested                              |       | 102,392       |       | 15.53                                         |       |
| Outstanding vested RSUs at December 31, 2005     |       | 732,838       |       | 15.07                                         |       |
|                                                  |       |          |       |                                          |       |
| Granted                                               |       | 180,759       |       | 12.96                                         |       |
| Converted                                             |       | (663,626      | )          | 14.33                                         |       |
| Transfer from non-vested                              |       | 326,607       |       | 14.68                                         |       |
| Outstanding vested RSUs at December 31, 2006     |       | 576,578       |       | 15.04                                         |       |
|                                                  |       |          |       |                                          |       |
| Granted                                               | ** ** | **348,040**   | ** ** | **10.89**                                     | ** ** |
| Converted                                             | ** ** | **(589,661**  | **)**      | **16.60**                                     | ** ** |
| Transfer from non-vested                              | ** ** | **381,668**   | ** ** | **17.15**                                     | ** ** |
| Outstanding vested RSUs at December 31, 2007     | ** ** | **716,625**   | ** ** | **12.84**                                     | ** ** |
|                                                  | ** ** | ** **    | ** ** | ** **                                    | ** ** |
|                                                  |       |          |       |                                          |       |
| **Non-Vested RSUs**                                   | ** ** | ** **    | ** ** | ** **                                    | ** ** |
| Outstanding non-vested RSUs at January 1, 2005   |       | 650,375       |       | $                                             | 17.28      |   |
|                                                  |       |          |       |                                          |       |
| Granted                                               |       | 763,631       |       | 12.79                                         |       |
| Forfeited                                             |       | (43,748       | )          | 16.06                                         |       |
| Transfer to vested                                    |       | (102,392      | )          | 15.53                                         |       |
| Outstanding non-vested RSUs at December 31, 2005 |       | 1,267,866     |       | 14.76                                         |       |
|                                                  |       |          |       |                                          |       |
| Granted                                               |       | 817,973       |       | 12.03                                         |       |
| Forfeited                                             |       | (157,231      | )          | 12.51                                         |       |
| Transfer to vested                                    |       | (326,607      | )          | 14.68                                         |       |
| Outstanding non-vested RSUs at December 31, 2006 |       | 1,602,001     |       | 13.60                                         |       |
|                                                  |       |          |       |                                          |       |
| Granted                                               | ** ** | **810,577**   | ** ** | **12.63**                                     | ** ** |
| Forfeited                                             | ** ** | **(132,688**  | **)**      | **12.51**                                     | ** ** |
| Transfer to vested                                    | ** ** | **(381,668**  | **)**      | **17.15**                                     | ** ** |
| Outstanding non-vested RSUs at December 31, 2007 | ** ** | **1,898,222** | ** ** | **12.55**                                     | ** ** |
|                                                  | ** ** | ** **    | ** ** | ** **                                    | ** ** |
|                                                  |       |          |       |                                          |       |
| Total outstanding RSUs at December 31, 2007      | ** ** | **2,614,847** | ** ** | **$**                                         | **12.63**  | ** ** |

 

 

**18.  Stockholder Rights Plan**

 

In September 2002,the Company adopted a stockholder rights plan under which the Board of Directorsdeclared a dividend of one preferred stock purchase right (“Right”) for eachoutstanding share of the Company’s common stock held of record as of the closeof business on September 17, 2002. Each Right entitles the holder to purchase one one-thousandth of a shareof Series B Junior Participating 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

 

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ownershipof 15% or more of the outstanding shares of the Company’s common stock orcommenced a tender or exchange offer that would result in such ownershipthreshold being attained.  Each Right, ifand when it becomes exercisable, will entitle holders of the Rights (other thanan Acquiring Person), upon payment of the exercise price, to the number ofshares of Preferred Stock having a fair value equal to approximately two timesthe exercise price.  In addition, if aftera person 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, 2012unless earlier redeemed or exchanged by the Company.

 

 

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

 

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

 
| ** **                                                            | ** ** | **Foreign  Currency  Translation  Adjustments** | ** ** | **Employee  Benefit Plans  Liability  Adjustments** | ** ** | **Deferred  Hedge  Adjustments** | ** ** | **Accumulated  Other  Comprehensive  Income (Loss)** | ** ** |
|-----------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------------|------------|----------------------------------|------------|------------------------------------------------------|------------|
| Balance  at January 1, 2005                                      |       | $                                               | 7          |                                                | $          | (315                             | )          | $                                                    | (6         | ) | $ | (314 | ) |
|                                                                  |       |                                            |       |                                                |       |                             |       |                                                 |       |
| Net changes in fair value of hedging transactions                     |       |                                            |       |                                                |       | 35                               |       | 35                                                   |       |
| Net gain reclassified into earnings                                   |       |                                            |       |                                                |       | (6                               | )          | (6                                                   | )          |
| Current period change                                                 |       | (7                                              | )          | (81                                                 | )          |                             |       | (88                                                  | )          |
| Balance  at December 31, 2005                                    |       |                                            |       | (396                                                | )          | 23                               |       | (373                                                 | )          |
|                                                                  |       |                                            |       |                                                |       |                             |       |                                                 |       |
| Net changes in fair value of hedging transactions                     |       |                                            |       |                                                |       | (30                              | )          | (30                                                  | )          |
| Net gain reclassified into earnings                                   |       |                                            |       |                                                |       | (1                               | )          | (1                                                   | )          |
| Current period change                                                 |       |                                            |       | 107                                                 |       |                             |       | 107                                                  |       |
| Adjustment to initially apply SFAS No. 158                       | ** ** | ** **                                      |       | (115                                                | )          | ** **                       |       | (115                                                 | )          |
| Balance  at December 31, 2006                                    |       |                                            |       | (404                                                | )          | (8                               | )          | (412                                                 | )          |
|                                                                  |       |                                            |       |                                                |       |                             |       |                                                 |       |
| Net loss reclassified into earnings                                   | ** ** | ** **                                      | ** ** | ** **                                          | ** ** | **5**                            | ** ** | **5**                                                | ** ** |
| Current period change                                                 | ** ** | ** **                                      | ** ** | **55**                                              | ** ** | ** **                       | ** ** | **55**                                               | ** ** |
| Net impact of defined benefit plan remeasurement (See Note 15)        | ** ** | ** **                                      | ** ** | **64**                                              | ** ** | ** **                       | ** ** | **64**                                               | ** ** |
| Net deferred employee benefit plan expense reclassified into earnings | ** ** | ** **                                      | ** ** | **35**                                              | ** ** | ** **                       | ** ** | **35**                                               | ** ** |
| Balance  at December 31, 2007                                    | ** ** | **$**                                           | ** ** | ** **                                          | **$**      | **(250**                         | **)**      | **$**                                                | **(3**     | **)** | **$** | **(253** | **)** |

 

71

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**20.  Earnings Per Share**

 

The following table setsforth the computation of basic and diluted earnings per share:

 
| ** **                                                                                                   | ** ** | **2007**   | ** ** | **2006**   | ** ** | **2005**       | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|----------------|------------|
| ** **                                                                                                   | ** ** | ** ** | ** ** | ** ** | ** ** | **(Restated)** | ** ** |
| Numerator:                                                                                                   |       |       |       |       |       |           |       |
| Loss from continuing operations                                                                              | ** ** | **$**      | **(103**   | **)**      | $          | (70            | )          | $ | (381 | ) |
| Preferred stock dividends and accretion                                                                      | ** ** | **(12**    | **)**      | (12        | )          | (12            | )          |
| Net loss from continuing operations available to common stockholders                                         | ** ** | **$**      | **(115**   | **)**      | $          | (82            | )          | $ | (393 | ) |
|                                                                                                         |       |       |       |       |       |           |       |
| Denominator:                                                                                                 |       |       |       |       |       |           |       |
| Denominator for basic and diluted earnings per share — weighted  average shares and assumed conversions | ** ** | **256**    |       | 255        |       | 255            |       |
|                                                                                                         |       |       |       |       |       |           |       |
| Basic and diluted earnings per share from continuing operations                                              | ** ** | **$**      | **(.45**   | **)**      | $          | (.32           | )          | $ | (1.54 | ) |

 

Convertible preferredstock to acquire three million shares of common stock with an effect of $12million on net loss from continuing operations available to common stockholdersfor each of 2007, 2006 and 2005, is excluded from the diluted earnings per sharecomputation because they are antidilutive for all years presented.  Employee stock options and non-vested RSUsare excluded from the diluted earnings per share calculation for 2007, 2006 and2005 because they are antidilutive.

 

 

**21.  Goodwill and Other Intangible Assets**

 

The Company has completedthe required annual impairment tests and determined there to be no impairment.

 

**Goodwill**

The following tableprovides a reconciliation of goodwill:

 
| Balance at January 1, 2006                                                                                    |   | $        | 3,309     |       |
|--------------------------------------------------------------------------------------------------------------------|--------|----------|-----------|------------|
| Goodwill included in loss on disposition of discontinued operations  (See Note 3)                                  |   | (279     | )         |
| Goodwill reduced as a result of a reduction of valuation allowances  associated with NOL utilization (See Note 14) |   | (157     | )         |
| Balance at December 31, 2006                                                                                  |   | 2,873    |      |
| Goodwill included in loss on sale of Brewton, Alabama mill (See Note  5)                                           |   | **(146** | **)**     |
| Balance at December 31, 2007                                                                                  |   | **$**    | **2,727** | ** ** |

 

72

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**OtherIntangible Assets**

The following tableprovides a reconciliation of intangible assets:

 
| ** **                                                                                | ** ** | **Definite Life** | ** ** | **Indefinite Life** | ** ** | **Total** | ** ** |
|-------------------------------------------------------------------------------------------|------------|-------------------|------------|---------------------|------------|-----------|------------|
| Balance  at January 1, 2006                                                          |       | $                 | 31         |                | $          | 12        |       | $ | 43 |   |
| Intangible asset included in loss on disposition of discontinued  operations (See Note 3) |       | (2                | )          |                |       | (2        | )          |
| Amortization                                                                              |       | (3                | )          |                |       | (3        | )          |
| Balance  at December 31, 2006                                                        |       | 26                |       | 12                  |       | 38        |       |
| Amortization                                                                              | ** ** | **(1**            | **)**      | ** **          | ** ** | **(1**    | **)**      |
| Balance  at December 31, 2007                                                        | ** ** | **$**             | **25**     | ** **          | **$**      | **12**    | ** ** | **$** | **37** | ** ** |

 

The gross carrying valueof the definite life intangible assets, primarily customer relationships, was$37 million at both December 31, 2007 and 2006.  The related accumulated amortization was $12million and $11 million at December 31, 2007 and 2006, respectively.  The weighted-average amortization period ofthe definite life intangible assets is 14 years.

 

 

**22.  Related Party Transactions**

 

**Transactions withNon-consolidated Affiliates**

The Company soldpaperboard, market pulp and fiber to and purchased containerboard and kraftpaper from various non-consolidated affiliates on terms generally similar tothose prevailing with unrelated parties. The following table summarizes the Company’s related party transactionswith its non-consolidated affiliates for each year presented:

 
| ** **                             | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Product sales                          |       | **$**    | **78**     |     | $          | 91       |       | $ | 67 |   |
| Product and raw material  purchases    |       | **50**   |       | 55       |       | 36       |       |
| Trade receivables at  December 31 |       | **9**    |       | 9        |       | 7        |       |
| Notes receivable at December 31   |       | **1**    |       | 4        |       | 2        |       |
| Trade payables at  December 31    |       | **3**    |       | 4        |       | 5        |       |
|                                        |            |          |            |          |            |          |            |  |  |  |

 

**Other Transactions**

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

 

William D. Smithburg, amember of the Company’s Board of Directors, is a member of the Board ofDirectors of Barry-Wehmiller Companies, Inc., which sold the Companyequipment for $15 million, $15 million and $9 million during 2007, 2006 and2005, respectively.  All such sales weremade on an arm’s-length basis.

 

Patrick J. Moore,Chairman and Chief Executive Officer and a member of the Company’s Board ofDirectors, is a member of the Board of Directors of Archer Daniels MidlandCompany (“ADM”).  ADM sold the Company$13 million, $10 million and $9 million of supplies used in mill operations in2007, 2006 and 2005, respectively.  TheCompany sold products to ADM of $7 million, $15 million and $21 million in2007, 2006 and 2005, respectively.  Allsuch sales were made on an arm’s-length basis.

 

73

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**23.  Fair Value of Financial Instruments**

 

The carrying amounts andfair values of the Company’s financial instruments as of December 31 areas follows:

 
| ** **                                    | ** ** | **2007**             | ** ** | **2006**        | ** ** |
|-----------------------------------------------|------------|----------------------|------------|-----------------|------------|
| ** **                                    | ** ** | **Carrying  Amount** | ** ** | **Fair  Value** | ** ** | **Carrying  Amount** | ** ** | **Fair  Value** | ** ** |
| Cash and cash equivalents                     | ** ** | **$**                | **7**      | ** **      | **$**      | **7** |   | $ | 9 |   | $ | 9 |   |
| Cost method investments                       | ** ** | **1**                | ** ** | **1**           |       | 1 |   | 1 |   |
| Notes receivable                              | ** ** | **6**                | ** ** | **6**           |       | 12 |   | 12 |   |
| Residual interest in  receivables sold        | ** ** | **249**              | ** ** | **249**         |       | 179 |   | 179 |   |
| Residual interest in  timber notes            | ** ** | **44**               | ** ** | **44**          |       | 48 |   | 48 |   |
| Net derivative assets  (liabilities)          | ** ** | **(3**               | **)**      | **(3**          | **)**      | (17 | ) | (17 | ) |
| Long-term debt, including  current maturities | ** ** | **3,359**            | ** ** | **3,281**       |       | 3,634 |   | 3,602 |   |
|                                               |            |                      |            |                 |            |  |  |  |  |  |  |  |  |

 

The carrying amount ofcash equivalents approximates fair value because of the short maturity of thoseinstruments.  The carrying amount of costmethod investments approximates fair value. The fair values of notes receivable are based on discounted future cashflows or the applicable quoted market price. The fair values of the residual interest in receivables sold and timbernotes are based on discounted future cash flows.  The fair values of the Company’s derivativesare based on prevailing market rates. The fair value of the Company’s debt is estimated based on the quotedmarket prices for the same or similar issues or on the current rates offered tothe Company for debt of the same remaining maturities.

 

 

**24.  Other, Net**

 

The significantcomponents of other, net in the Company’s consolidated statements of operationsare as follows:

 
| ** **                                         | ** ** | **2007** | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|----------------------------------------------------|------------|----------|------------|------------|------------|------------|------------|
| Loss on sales of  receivables                      |       | **$**    | **(27**    | **)**      | $          | (25        | )          | $ | (21 | ) |
| Gain on sale of emission  credits and water rights |       | **15**   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Other                                              |       | **(3**   | **)**      | 7          |       | 9          |       |
| Total other, net                                   |       | **$**    | **(15**    | **)**      | $          | (18        | )          | $ | (12 | ) |

 

 

**25.  Contingencies**

 

In 2003, the Company settled allof the antitrust class action cases pending against the Company, which werebased on allegations of a conspiracy among linerboard manufacturers from 1993to 1995 and made aggregate settlement payments of $92.5 million, one-half ofwhich was paid in December 2003 and the remainder of which was paid in January 2005.  The Company subsequently settled all of thelawsuits brought on behalf of numerous companies that opted out of these classactions to seek their own recovery, and made aggregate payments of $60 million,including $14 million in 2005 and $46 million in 2006.  In connection with these settlements, theCompany recorded charges of $36 million in 2005, included in selling andadministrative expenses in the accompanying consolidated statement ofoperations.

 

The Company’s past andpresent operations include activities which are subject to federal, state andlocal environmental requirements, particularly relating to air and waterquality.  The Company faces potentialenvironmental liability as a result of violations of permit terms and similarauthorizations that have 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.  In estimating itsreserves for environmental remediation and future costs, the Company’sestimated liability of $5 million reflects the Company’s expected share ofcosts after consideration for the relative percentage of waste deposited ateach site, the number of other 

 

74

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PRPs, the identity andfinancial condition of such parties and experience regarding similarmatters.  As of December 31, 2007,the Company had approximately $18 million reserved for environmentalliabilities included primarily in other long-term liabilities in theconsolidated balance sheet.  The Companybelieves the liability for these matters was adequately reserved at December 31,2007.

 

If all or most of theother PRPs are unable to satisfy their portion of the clean-up costs at one ormore of the significant sites in which the Company is involved or the Company’sexpected share increases, the resulting liability could have a material adverseeffect on the Company’s consolidated financial condition or results ofoperations.

 

The Company is adefendant in a number of lawsuits and claims arising out of the conduct of itsbusiness.  While the ultimate results ofsuch suits or other proceedings against the Company cannot be predicted withcertainty, the management of the Company believes that the resolution of thesematters will not have a material adverse effect on its consolidated financialcondition, results of operations or cash flows.

 

 

**26.  Business Segment Information**

 

The Company’sConsumer Packaging segment, which was sold as of June 30, 2006 (See Note3), has been classified as discontinued operations and is excluded from thesegment results.

 

During the second quarterof 2007, the Company combined the Reclamation operations, previously considereda separate, non-reportable segment, into the Containerboard and CorrugatedContainers segment and therefore, now operates as one segment.  The change to one segment was driven bychanges to the Company’s management structure and further integration resultingfrom the strategic initiative plan, including the sale of the ConsumerPackaging division.  The combinedoperating segment includes a system of mills and plants that produces a fullline of containerboard that is converted into corrugated containers andrecycling operations that procure fiber resources for the Company’s paper millsas well as other producers.  Corrugatedcontainers are used to transport such diverse products as home appliances,electric motors, small machinery, grocery products, produce, books andfurniture.

 

The following tablepresents net sales to external customers by country of origin:

 
| ** **      | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------|------------|----------|------------|----------|------------|----------|------------|
| United States   |       | **$**    | **6,518**  |     | $          | 6,314    |       | $ | 5,985 | ** ** |
| Canada          |       | **694**  |       | 704      |       | 734      | ** ** |
| Other           |       | **208**  |       | 139      |       | 93       | ** ** |
| Total net sales |       | **$**    | **7,420**  |     | $          | 7,157    |       | $ | 6,812 | ** ** |

 

The following tablepresents long-lived assets by country:

 
| ** **              | ** ** | **2007**  | ** ** | **2006** | ** ** | **2005** | ** ** |
|-------------------------|------------|-----------|------------|----------|------------|----------|------------|
| United States           |       | **$**     | **2,931**  |     | $          | 3,185    |       | $ | 3,647 | ** ** |
| Canada                  |       | **537**   |       | 571      |       | 623      | ** ** |
| Other                   |       | **18**    |       | 18       |       | 19       | ** ** |
|                    |       | **3,486** |       | 3,774    |       | 4,289    | ** ** |
| Goodwill                |       | **2,727** |       | 2,873    |       | 3,309    | ** ** |
| Total long-lived assets |       | **$**     | **6,213**  |     | $          | 6,647    |       | $ | 7,598 | ** ** |

 

The Company’s exportsales from the United States were approximately $814 million for 2007, $650million for 2006 and $525 million for 2005.

 

75

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**27.  Quarterly Results (Unaudited)**

 

The following table is asummary of the unaudited quarterly results of operations:

 
| ** **                                         | ** ** | **First Quarter** | ** ** | **Second Quarter** | ** ** | **Third Quarter** | ** ** | **Fourth Quarter** | ** ** |
|----------------------------------------------------|------------|-------------------|------------|--------------------|------------|-------------------|------------|--------------------|------------|
| **2007**                                           | ** ** | ** **        | ** ** | ** **         | ** ** | ** **        | ** ** | ** **         | ** ** |
| Net sales (a)                                      | ** ** | **$**             | **1,824**  | ** **         | **$**      | **1,870**         | ** ** | **$**              | **1,885**  | ** ** | **$** | **1,841** | ** ** |
| Gross profit                                       | ** ** | **214**           | ** ** | **261**            | ** ** | **289**           | ** ** | **252**            | ** ** |
| Income (loss) from continuing operations (b)       | ** ** | **(52**           | **)**      | **(2**             | **)**      | **(93**           | **)**      | **44**             | ** ** |
| Net income (loss)                                  | ** ** | **(52**           | **)**      | **(2**             | **)**      | **(93**           | **)**      | **44**             | ** ** |
| Preferred stock dividends and accretion            | ** ** | **(3**            | **)**      | **(3**             | **)**      | **(3**            | **)**      | **(3**             | **)**      |
| Net income (loss) available to common stockholders | ** ** | **(55**           | **)**      | **(5**             | **)**      | **(96**           | **)**      | **41**             | ** ** |
|                                               |       |              |       |               |       |              |       |               |       |
| **Basic and diluted earnings per share:**          | ** ** | ** **        | ** ** | ** **         | ** ** | ** **        | ** ** | ** **         | ** ** |
| Income (loss) from continuing operations           | ** ** | **$**             | **(.21**   | **)**              | **$**      | **(.02**          | **)**      | **$**              | **(.38**   | **)** | **$** | **.16** | ** ** |
| Net income (loss) available to common stockholders | ** ** | **$**             | **(.21**   | **)**              | **$**      | **(.02**          | **)**      | **$**              | **(.38**   | **)** | **$** | **.16** | ** ** |
|                                               |       |              |       |               |       |              |       |               |       |
| **2006 - As Restated (d)**                         | ** ** | ** **        | ** ** | ** **         | ** ** | ** **        | ** ** | ** **         | ** ** |
| Net sales (a)                                      |       | $                 | 1,729      |               | $          | 1,765             |       | $                  | 1,844      |   | $ | 1,819 |   |
| Gross profit                                       |       | 139               |       | 252                |       | 303               |       | 278                |       |
| Income (loss) from continuing operations (c)       |       | (71               | )          | (50                | )          | 26                |       | 25                 |       |
| Discontinued operations                            |       | 10                |       | 4                  |       |              |       |               |       |
| Loss on disposition of discontinued operations     |       |              |       | (1                 | )          | (2                | )          |               |       |
| Net income (loss)                                  |       | (61               | )          | (47                | )          | 24                |       | 25                 |       |
| Preferred stock dividends and accretion            |       | (3                | )          | (3                 | )          | (3                | )          | (3                 | )          |
| Net income (loss) available to common stockholders |       | (64               | )          | (50                | )          | 21                |       | 22                 |       |
| ** **                                         | ** ** | ** **        | ** ** | ** **         | ** ** | ** **        | ** ** | ** **         | ** ** |
| **Basic and diluted earnings per share:**          | ** ** | ** **        | ** ** | ** **         | ** ** | ** **        | ** ** | ** **         | ** ** |
| Income (loss) from continuing operations           |       | $                 | (.29       | )                  | $          | (.21              | )          | $                  | .09        |   | $ | .09 |   |
| Discontinued operations                            |       | .04               |       | .01                |       |              |       |               |       |
| Loss on disposition of discontinued operations     | ** ** | ** **        | ** ** | ** **         |       | (.01              | )          |               |       |
| Net income (loss) available to common stockholders |       | $                 | (.25       | )                  | $          | (.20              | )          | $                  | .08        |   | $ | .09 |   |

 

----

(a)          Net sales after April 1, 2006 wereimpacted by the adoption of EITF No. 04-13 (See Note 1 RevenueRecognition).

 

(b)         Income (loss) from continuing operationsincludes restructuring pretax income of $29 million in the fourth quarter of 2007.

 

(c)          Income (loss) from continuing operationsincludes restructuring pretax expense of $8 million in the fourth quarter of2006.

 

(d)         The Company restated its 2006 quarterlyconsolidated statements of operations as a result of the correction of an errorrelated to income taxes (See Note 2) and the adoption of FSP No. AUG AIR-1(See Note 1 Recently Adopted Accounting Standards).  The restatement does not impact the Company’sannual 2006 consolidated statement of operations.

 

76

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The following tableprovides a reconciliation of the restatement by quarter:

 
| ** **                                         | ** ** | **As  Reported** | ** ** | **Income Tax  Adjustments** | ** ** | **Major   Maintenance  Adjustments** | ** ** | **As   Restated** | ** ** |
|----------------------------------------------------|------------|------------------|------------|-----------------------------|------------|--------------------------------------|------------|-------------------|------------|
| **Three months ended  March 30, 2006**        | ** ** | ** **       | ** ** | ** **                  | ** ** | ** **                           | ** ** | ** **        | ** ** |
| Gross profit                                       |       | $                | 140        |                        | $          |                                 |       | $                 | (1         | ) | $ | 139 |   |
| Income (loss) from continuing operations           |       | (71              | )          | 1                           |       | (1                                   | )          | (71               | )          |
| Net income (loss)                                  |       | (61              | )          | 1                           |       | (1                                   | )          | (61               | )          |
| Net income (loss) available to common stockholders |       | (64              | )          | 1                           |       | (1                                   | )          | (64               | )          |
|                                               |       |             |       |                        |       |                                 |       |              |       |
| **Basic and diluted earnings per share:**          | ** ** | ** **       | ** ** | ** **                  | ** ** | ** **                           | ** ** | ** **        | ** ** |
| Income (loss) from continuing operations           |       | $                | (.29       | )                           | $          |                                 |       | $                 |       |   | $ | (.29 | ) |
| Net income (loss) available to common stockholders |       | (.25             | )          |                        |       |                                 |       | (.25              | )          |
|                                               |       |             |       |                        |       |                                 |       |              |       |
| **Three months ended  June 30, 2006**         | ** ** | ** **       | ** ** | ** **                  | ** ** | ** **                           | ** ** | ** **        | ** ** |
| Gross profit                                       |       | $                | 252        |                        | $          |                                 |       | $                 |       |   | $ | 252 |   |
| Income (loss) from continuing operations           |       | (44              | )          | (6                          | )          |                                 |       | (50               | )          |
| Net income (loss)                                  |       | (41              | )          | (6                          | )          |                                 |       | (47               | )          |
| Net income (loss) available to common stockholders |       | (44              | )          | (6                          | )          |                                 |       | (50               | )          |
|                                               |       |             |       |                        |       |                                 |       |              |       |
| **Basic and diluted earnings per share:**          | ** ** | ** **       | ** ** | ** **                  | ** ** | ** **                           | ** ** | ** **        | ** ** |
| Income (loss) from continuing operations           |       | $                | (.18       | )                           | $          | (.02                                 | )          | $                 |       |   | $ | (.21 | ) |
| Net income (loss) available to common stockholders |       | (.17             | )          | (.02                        | )          |                                 |       | (.20              | )          |
|                                               |       |             |       |                        |       |                                 |       |              |       |
| **Three months ended  September 30, 2006**    | ** ** | ** **       | ** ** | ** **                  | ** ** | ** **                           | ** ** | ** **        | ** ** |
| Gross profit                                       |       | $                | 293        |                        | $          |                                 |       | $                 | 10         |   | $ | 303 |   |
| Income (loss) from continuing operations           |       | 20               |       |                        |       | 6                                    |       | 26                |       |
| Net income (loss)                                  |       | 18               |       |                        |       | 6                                    |       | 24                |       |
| Net income (loss) available to common stockholders |       | 15               |       |                        |       | 6                                    |       | 21                |       |
|                                               |       |             |       |                        |       |                                 |       |              |       |
| **Basic and diluted earnings per share:**          | ** ** | ** **       | ** ** | ** **                  | ** ** | ** **                           | ** ** | ** **        | ** ** |
| Income (loss) from continuing operations           |       | $                | .07        |                        | $          |                                 |       | $                 | .02        |   | $ | .09 |   |
| Net income (loss) available to common stockholders |       | .06              |       |                        |       | .02                                  |       | .08               |       |
|                                               |       |             |       |                        |       |                                 |       |              |       |
| **Three months ended  December 31, 2006**     | ** ** | ** **       | ** ** | ** **                  | ** ** | ** **                           | ** ** | ** **        | ** ** |
| Gross profit                                       |       | $                | 287        |                        | $          |                                 |       | $                 | (9         | ) | $ | 278 |   |
| Income (loss) from continuing operations           |       | 25               |       | 5                           |       | (5                                   | )          | 25                |       |
| Net income (loss)                                  |       | 25               |       | 5                           |       | (5                                   | )          | 25                |       |
| Net income (loss) available to common stockholders |       | 22               |       | 5                           |       | (5                                   | )          | 22                |       |
|                                               |       |             |       |                        |       |                                 |       |              |       |
| **Basic and diluted earnings per share:**          | ** ** | ** **       | ** ** | ** **                  | ** ** | ** **                           | ** ** | ** **        | ** ** |
| Income (loss) from continuing operations           |       | $                | .09        |                        | $          | .02                                  |       | $                 | (.02       | ) | $ | .09 |   |
| Net income (loss) available to common stockholders |       | .09              |       | .02                         |       | (.02                                 | )          | .09               |       |

 

77

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**SMURFIT-STONECONTAINER CORPORATION**

**SCHEDULEII—VALUATION AND QUALIFYING ACCOUNTS AND RESERVES**

(In millions)

 
| **Column A**                                                           | ** ** | **Column B**                         | ** ** | **Column C**                                   | ** ** | **Column D**        | ** ** | **Column E**             | ** ** | **Column F**                   | ** ** |
|------------------------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------------------|------------|---------------------|------------|--------------------------|------------|--------------------------------|------------|
| **Description**                                                        | ** ** | **Balance at  Beginning of  Period** | ** ** | **Additions  Charged to  Costs and  Expenses** | ** ** | **Other  Describe** | ** ** | **Deductions  Describe** | ** ** | **Balance at  End of  Period** | ** ** |
| **Allowance for doubtful accounts and sales  returns and allowances:** | ** ** | ** **                           | ** ** | ** **                                     | ** ** | ** **          | ** ** | ** **               | ** ** | ** **                     | ** ** |
|                                                                   |       |                                 |       |                                           |       |                |       |                     |       |                           |       |
| Year ended December 31, 2007                                      | ** ** | **$**                                | **7**      | ** **                                     | **$**      | **3**               | ** ** | **$**                    | ** ** | ** **                     | **$**      | **3** | **(a)** | **$** | **7** | ** ** |
|                                                                   |       |                                 |       |                                           |       |                |       |                     |       |                           |       |
| Year ended December 31, 2006                                      |       | $                                    | 10         |                                           | $          | 5                   |       | $                        | (5)        |  (b)(c)                   | $          | 3 | (a) | $ | 7 |   |
|                                                                   |       |                                 |       |                                           |       |                |       |                     |       |                           |       |
| Year ended December 31, 2005                                      |       | $                                    | 12         |                                           | $          | 3                   |       | $                        | (1)        |  (b)                      | $          | 4 | (a) | $ | 10 |   |
|                                                                   |       |                                 |       |                                           |       |                |       |                     |       |                           |       |
| **Restructuring:**                                                     | ** ** | ** **                           | ** ** | ** **                                     | ** ** | ** **          | ** ** | ** **               | ** ** | ** **                     | ** ** |
|                                                                   |       |                                 |       |                                           |       |                |       |                     |       |                           |       |
| Year ended December 31, 2007                                      | ** ** | **$**                                | **45**     | ** **                                     | **$**      | **16**              | **(d)**    | **$**                    | **69**     | **(d)**                        | **$**      | **102** | **(e)** | **$** | **28** | ** ** |
|                                                                   |       |                                 |       |                                           |       |                |       |                     |       |                           |       |
| Year ended December 31, 2006                                      |       | $                                    | 51         |                                           | $          | 43                  | (d)        | $                        | 18         | (d)                            | $          | 67 | (e) | $ | 45 |   |
|                                                                   |       |                                 |       |                                           |       |                |       |                     |       |                           |       |
| Year ended December 31, 2005                                      |       | $                                    | 28         |                                           | $          | 321                 |       | $                        |       |                           | $          | 298 | (e) | $ | 51 |   |
|                                                                   |       |                                 |       |                                           |       |                |       |                     |       |                           |       |

----

(a)   Uncollectible amounts written off, net ofrecoveries

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

(c)          Includes $6 million in connection withcontainerboard customer accounts receivables sold into the SRC accountsreceivable program.

(d)         Gain on sale of closed properties reducesthe charge by $69 million and $18 million for 2007 and2006, respectively, and is added back toother, since there is no impact on exit liabilities.

(e)          Charges against the reserves.

 

78

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

 

None.

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

 

**Evaluation of Disclosure Controlsand Procedures**

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

 

**Changes in Internal Control**

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

 

TheSarbanes-Oxley Act of 2002 (the Act) imposed many requirements regardingcorporate governance and financial reporting. One requirement under Section 404 of the Act, beginning with our2004 Annual Report, was for management to report on the Company’s internalcontrol over financial reporting. Management’s Report on Internal Control over Financial Reporting and theReport of Independent Registered Public Accounting Firm are included in Item 8,“Financial Statements and Supplementary Data.”

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

 

None.

 

**PART III**

** **
| **ITEM  10.** | **DIRECTORS,  EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE** |
|---------------|-------------------------------------------------------------|

 

Additional informationregarding Smurfit-Stone’s directors, executive officers and corporategovernance matters, and called for by this Item 10, is set forth in the ProxyStatement for the annual meeting to be held May 7, 2008 (the ProxyStatement) and is incorporated herein by reference.

 

# **Directors**

 

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

 

**James R.Boris,**born****October 25, 1944,****is the retiredChairman and Chief Executive Officer of EVEREN Capital Corporation and itsprimary subsidiary, EVEREN Securities, Inc. (now known as Wachovia Securities, Inc.).  Mr. Boris is the non-executive Chairmanof the Board of Integrys Energy Group, Inc., and a director of Midwest AirGroup, Inc. and the Chicago Board Options Exchange.

 

**Connie K. Duckworth**, born November 3, 1954, has beenPresident and Chairman of Arzu, Inc. since August 2003.  She was a partner of Circle Financial Group,LLC from January 2003 to December 2004.  Ms. Duckworth retired from Goldman Sachs &Co. as Advisory Director in 2001.  Ms. Duckworthis a director of Northwestern Mutual, Frank Russell Company and DNP SelectIncome Fund.

 

79

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**Alan E. Goldberg**, born September 1,1954, co-founded and has been a Co-Managing Partner of Lindsay Goldberg &Bessemer G.P. LLC and its related investment manager, Goldberg Lindsay &Co. LLC, since March 2001 and is a Co-Managing Partner of their affiliatedinvestment partnerships.

 

**WilliamT. Lynch, Jr.,**bornDecember 3, 1942, has been President and Chief Executive Officer of LiamHoldings, LLC since April 1997.  Heis the retired President and Chief Executive Officer of Leo BurnettCompany.  Mr. Lynch is a director ofPella Corporation.

 

**PatrickJ. Moore**, born September 7,1954, has served as Chairman and Chief Executive Officer since May 2006.  He had been Chairman, President and ChiefExecutive Officer since May 2003, and prior to that he was President andChief Executive Officer since January 2002, when he was also elected as aDirector.  He was Vice President andChief Financial Officer from November 1998 until January 2002.  Mr. Moore is a director of ArcherDaniels Midland Company.

 

**James J. O’Connor**, born March 15, 1937, is the former Chairman and Chief ExecutiveOfficer of Unicom Corporation and its subsidiary, Commonwealth EdisonCompany.  Mr. O’Connor is a directorof Corning Incorporated and UAL Corporation.

 

**Jerry K. Pearlman**, born March 27, 1939, is the retired Chairman of the Board andChief Executive Officer of Zenith Electronics Corporation.  Mr. Pearlman is a director of NanophaseTechnologies Corporation and, from 1984 to 1998, served as director of StoneContainer, a predecessor of Smurfit-Stone.

 

**Thomas A. Reynolds, III**, born May 12, 1952, has been a partner ofWinston & Strawn LLP, a law firm that regularly representsSmurfit-Stone on numerous matters, since 1984. Mr. Reynolds is a member of Winston & Strawn LLP’sexecutive committee.

 

**Eugene C. Sit**, born August 8, 1938, has beenChairman, Chief Executive Officer and Chief Investment Officer of SitInvestment Associates for more than five years. Mr. Sit is a director of Corning Incorporated and is Chairman andDirector of The Sit Mutual Fund Group, a registered investment company.

 

**WilliamD. Smithburg,**bornJuly 9, 1938, is the retired Chairman, President and Chief ExecutiveOfficer of The Quaker Oats Company.  Mr. Smithburgis a director of Abbott Laboratories, Northern Trust Corporation and CorningIncorporated.

 

**ExecutiveOfficers**

Certaininformation concerning the executive officers of Smurfit-Stone is contained in Part I,Item 1, of this annual report on Form 10-K under the caption “ExecutiveOfficers Of The Registrant” and is incorporated by reference herein.

 

**Audit Committee**

We have a separatelydesignated standing 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’Connorand Mr. Sit.

 

**Audit Committee Financial Expert**

Our Board of Directorshas determined that Mr. Pearlman is an audit committee expert as definedby Item 407(d)(5)(ii) of Regulation S-K of the Exchange Act and isindependent, as such term is defined in the listing standard of the NASDAQGlobal Select Market.

 

**Code of Ethics**

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). We intend to satisfy our disclosurerequirements under Item 5.05 of Form 8-K regarding an amendment to, or awaiver from, a provision of our code of ethics that applies to our 

 

80

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Senior Financial Officersand that relates to any element of the code of ethics definition enumerated inItem 406(b) of Regulation S-K by posting such information on our Website.

 

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

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

 

**Recommendation of DirectorNominees by Stockholders**

There have been nomaterial changes to the procedures by which stockholders may recommend directornominees to our Board of Directors since the filing of our proxy statement in2005.

 
| **ITEM  11.** | **EXECUTIVE  COMPENSATION** |
|---------------|-----------------------------|

 

Informationrequired in response to this item is set forth under the captions “ExecutiveCompensation,” “Compensation Committee Report,” “Compensation Discussion and Analysis” and “Compensation CommitteeInterlocks and Insider Participation” in our Proxy Statement and isincorporated herein by reference.

 
| **ITEM  12.** | **SECURITY  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER  MATTERS** |
|---------------|------------------------------------------------------------------------------------------------------|

 

Informationrequired in response to this item is set forth under the captions “PrincipalStockholders” and “Executive Compensation, Existing Equity Compensation PlanInformation” in the Proxy Statement and is incorporated herein by reference.

 
| **ITEM  13.** | **CERTAIN  RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE** |
|---------------|--------------------------------------------------------------------------------|

 

Informationrequired in response to this item is set forth under the caption “CertainRelationships and Related Transactions” and “Board Committee Meetings,Committee Functions and Composition” in the Proxy Statement and is incorporatedherein by reference.

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

 

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

 

81

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**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.                                                                                                                                                                                                                                                                                                                                                                                                             |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 2.1(a) | Asset Purchase  Agreement, dated May 11, 2006, by and among Smurfit-Stone Container  Enterprises, Inc.(“SSCE”), Smurfit-Stone Container Canada Inc. and  Bluegrass Container Company, LLC (incorporated by reference to  Exhibit 2.1 to Smurfit-Stone Container Corporation’s (“SSCC”) Current  Report on Form 8-K dated July 6, 2006 (File No. 0-23876)).              |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 2.1(b) | Amendment No. 1 to  Asset Purchase Agreement, dated June 30, 2006, by and among  Smurfit-Stone Container Enterprises, Inc., Smurfit-Stone Container  Canada Inc. and Bluegrass Container Company, LLC (incorporated by reference  to Exhibit 2.2 to SSCC’s Current Report on Form 8-K dated  July 6, 2006 (File No. 0-23876)).                                                         |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 2.2    | Asset Purchase  Agreement, dated August 8, 2007, by and among SSCE, Georgia-Pacific  Brewton LLC and Georgia-Pacific LLC (incorporated by reference to  Exhibit 2.1 to SSCC’s Current Report on Form 8-K filed  August 10, 2007 (File No. 0-23876)).                                                                                                                                             |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 3.1    | Restated Certificate of  Incorporation of SSCC (incorporated by reference to Exhibit 3(a) to  SSCC’s Registration Statement on Form S-4 (File No. 333-65431)).                                                                                                                                                                                                                                        |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 3.2(a) | 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 (File No. 0-23876)).                                                                                                                                                                          |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 3.2(b) | Amendment to Second  Amended and Restated Bylaws of SSCC (incorporated by reference to  Exhibit 3.1 to SSCC’s Current Report on Form 8-K filed  March 2,, 2007 (File No. 0-23876)).                                                                                                                                                                                                                   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 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 (File No. 0-23876)).                                                                                                                                                                   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 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 (File No. 0-23876)). |

 

82

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Indenturesand other debt instruments with respect to long-term debt that do not exceed10% of the total assets of SSCC and its subsidiaries on a consolidated basisare not filed herewith. The Registrant agrees to furnish a copy of suchdocuments 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 SSCE Current Report on Form 8-K dated  November 24, 2004 (File No. 0-23876)).                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|---------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 4.6(b)  | Series 2004-1  Indenture Supplement to Master Indenture dated as of November 23, 2004  between SSCE Funding, LLC, as Issuer, and Deutsche Bank Trust Company  Americas, as Indenture Trustee (incorporated by reference to Exhibit 4.2  to SSCE’s Current Report on Form 8-K dated November 24, 2004 (File  No. 0-23876)).                                                                                                                                                                                                                                                                                                                                                                                                                |
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 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 (File  No. 0-23876)).                                                                                                                                                                                                                                                                                                                                                                                                                |
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 4.7(a)  | Form of 8.000%  Senior Notes due 2017 of Smurfit-Stone Container Enterprises, Inc.  (incorporated by reference to Exhibit 4.1 to SSCE’s Registration  Statement on Form S-4, Registration Number 333-141630 (the “SSCE  Form S-4”).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 4.7(b)  | Indenture dated as of  March 26, 2007, between Smurfit-Stone Container Enterprises, Inc.  and The Bank of New York Trust Company, N.A., as Trustee, relating to SSCE’s  8.000% Senior Notes due 2017 (incorporated by reference to Exhibit 4.2  to the SSCE Form S-4).                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 4.7(c)  | First Supplemental  Indenture dated as of March 23, 2007, between Smurfit-Stone Container  Enterprises, Inc. and The Bank of New York, as Trustee, relating to  SSCE’s 9-3/4% Senior Notes due 2011 (incorporated by reference to  Exhibit 4.2(c) to the SSCE Form S-4).                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.1(a) | Credit  Agreement, dated November 1, 2004, by and among SSCC, as guarantor, SSCE  and Smurfit-Stone Container Canada Inc., as borrowers, JPMorgan Chase Bank,  N.A., as Senior Agent, Deposit Account Agent and Deposit Funded Facility  Facing Agent, Deutsche Bank and Trust Company Americas, as Senior Agent,  Administrative Agent, Collateral Agent, Swingline Lender and Revolving  Facility Facing Agent, Deutsche Bank AG, as Canadian Administrative Agent and  Revolving (Canadian) Facility Facing Agent, and the other financial  institutions party thereto, as lenders (incorporated by reference to Exhibit 10.1 to  SSCC’s Current Report on Form 8-K dated November 1, 2004 (File  No. 0-23876)).                            |
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.1(b) | Amendment No. 1,  dated as of September 30, 2005, to the Credit Agreement, dated as of  November 1, 2004, among SSCC, as Guarantor, SSCE and Smurfit-Stone  Container Canada Inc., as Borrowers, the Lenders party thereto, Deutsche Bank  Trust Company Americas, as Senior Agent, Administrative Agent, Collateral  Agent, Swingline Lender and Revolving Facility Facing Agent, Deutsche Bank  AG, as Canadian Administrative Agent and Revolving (Canadian) Facility Facing  Agent, and JPMorgan Chase Bank, N.A., as Senior Agent, Deposit Account Agent  and Deposit Funded Facility Facing Agent (incorporated by reference to  Exhibit 10.1 to SSCC’s Current Report on Form 8-K dated  October 5, 2005 (File No. 0-23876)). |
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.1(c) | Incremental Term Loan  Assumption and Amendment No. 2, dated as of December 20, 2005,  related to the Credit Agreement, dated as of November 1, 2004, as  amended by Amendment No. 1 dated as of September 30, 2005, among  SSCC, as Guarantor, SSCE and Smurfit-Stone Container Canada Inc., as Borrowers,  the Lenders party thereto, Deutsche Bank Trust Company Americas, as Senior  Agent, Administrative Agent, Collateral Agent, Swingline Lender and Revolving  Facility Facing Agent, Deutsche Bank AG, as Canadian Administrative Agent                                                                                                                                                                                                   |

 

83

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|     | and Revolving  (Canadian) Facility Facing Agent, and JPMorgan Chase Bank, N.A., as Senior  Agent, Deposit Account Agent and Deposit Funded Facility Facing Agent  (incorporated by reference to Exhibit 10.1 to SSCC’s Current Report on  Form 8-K dated December 20, 2005 (File No. 0-23876)).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|----------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.1(d)  | Amendment No. 3  dated as of June 9, 2006, to the Credit Agreement dated as of  November 1, 2004, as amended by Amendment No. 1 dated as of  September 30, 2005, and Incremental Term Loan Assumption Agreement and  Amendment No. 2 dated as of December 20, 2005, among Smurfit-Stone  Container Corporation, as Guarantor; Smurfit-Stone Container  Enterprises, Inc. and Smurfit-Stone Container Canada Inc., as Borrowers;  the Lenders from time to time party thereto; Deutsche Bank Trust Company  Americas, as Senior Agent, Administrative Agent, Collateral Agent, Swingline  Lender and Revolving Facility Facing Agent; Deutsche Bank AG, as Canadian  Administrative Agent and Revolving (Canadian) Facility Facing Agent; and  JPMorgan Chase Bank, N.A., as Senior Agent, Deposit Account Agent and Deposit  Funded Facility Facing Agent (incorporated by reference to Exhibit 10.1  to SSCC’s Current Report on Form 8-K dated June 13, 2006 (File  No. 0-23876)). |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.2     | Sale Agreement dated as  of November 23, 2004 by and between SSCE, as Seller, and Stone  Receivables Corporation (“SRC”) (incorporated by reference to  Exhibit 10.1 to SSCE’s Current Report on Form 8-K dated  November 24, 2004 (File No. 0-23876)).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.3     | Transfer and Servicing  Agreement dated as of November 23, 2004 by and among SRC, SSCE Funding,  LLC and SSCE, as Servicer (incorporated by reference to Exhibit 10.2 to  SSCE’s Current Report on Form 8-K dated November 24, 2004 (File  No. 0-23876)).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.4     | Variable Funding Note  Purchase Agreement dated as of November 23, 2004 by and among SSCE  Funding, LLC, as issuer, Barton Capital LLC, as conduit purchaser, certain  financial institutions, as committed purchasers, and Societe Generale, as  agent for the purchasers (incorporated by reference to Exhibit 10.3 to  SSCE’s Current Report on Form 8-K dated November 24, 2004 (File  No. 0-23876)).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.5     | 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 (File  No. 0-23876)).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.6     | Support Agreement,  dated March 30, 2004, between Stone Container Corporation (“Stone  Container”) and Computershare Trust Company of Canada, in its capacity as  Trustee of King Street Funding Trust, by its Administrator, Scotia Capital  Inc. (incorporated by reference to Exhibit 10.2(b) to Stone  Container’s Quarterly Report on Form 10-Q for the quarter ended  March 31, 2004 (File No. 0-23876)).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.7(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 (File No. 0-23876)).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.7(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 (File No. 0-23876)).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |

 

84

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| 10.8*     | Jefferson Smurfit  Corporation Deferred Compensation Plan as amended (incorporated by reference  to Exhibit 10.7 to SSCC’s Annual Report on Form 10-K for the fiscal  year ended December 31, 1996 (File No. 0-23876)).                        |
|-----------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|      |                                                                                                                                                                                                                                                                    |
| 10.9*     | Jefferson Smurfit  Corporation Management Incentive Plan (incorporated by reference to  Exhibit 10.10 to SSCC’s Annual Report on Form 10-K for the fiscal  year ended December 31, 1995 (File No. 0-23876)).                                   |
|      |                                                                                                                                                                                                                                                                    |
| 10.10(a)* | Stone Container  Corporation 1995 Long-Term Incentive Plan (incorporated by reference to  Exhibit A to Stone Container’s Proxy Statement dated as of April 7,  1995 (File No. 0-23876)).                                                            |
|      |                                                                                                                                                                                                                                                                    |
| 10.10(b)* | Amendment  of the 1995 Long-Term Incentive Plan of Stone Container Corporation  (incorporated by reference to Exhibit 10.2 to Stone Container’s  Quarterly Report on Form 10-Q for the quarter ended September 30,  1999 (File  No. 0-23876)). |
|      |                                                                                                                                                                                                                                                                    |
| 10.11(a)* | Smurfit-Stone Container  Corporation 1998 Long-Term Incentive Plan (incorporated by reference to  Exhibit 10.14 to SSCC’s Annual Report on Form 10-K for the fiscal  year ended December 31, 1998 (File No. 0-23876)).                         |
|      |                                                                                                                                                                                                                                                                    |
| 10.11(b)* | First  Amendment of the Smurfit-Stone Container Corporation 1998 Long-Term Incentive  Plan (incorporated by reference to Exhibit 10.2 to SSCC’s Quarterly  Report on Form 10-Q for the quarter ended September 30, 1999 (File No. 0-23876)).   |
|      |                                                                                                                                                                                                                                                                    |
| 10.11(c)* | Second  Amendment of the Smurfit-Stone Container Corporation 1998 Long-Term Incentive  Plan (incorporated by reference to Exhibit 10.1 to SSCC’s Quarterly  Report on Form 10-Q for the quarter ended June 30, 2001 (File No. 0-23876)).       |
|      |                                                                                                                                                                                                                                                                    |
| 10.11(d)* | Third  Amendment of the Smurfit-Stone Container Corporation 1998 Long-Term Incentive  Plan (incorporated by reference to Exhibit 10.1 to SSCC’s Quarterly  Report on Form 10-Q for the quarter ended September 30, 2001 (File No. 0-23876)).   |
|      |                                                                                                                                                                                                                                                                    |
| 10.12(a)* | Smurfit-Stone Container  Corporation 2004 Long-Term Incentive Plan (incorporated by reference to  Appendix I to SSCC’s Proxy Statement dated April 5, 2004 (File  No. 0-23876)).                                                                         |
|      |                                                                                                                                                                                                                                                                    |
| 10.12(b)* | First  Amendment of the Smurfit-Stone Container Corporation 2004 Long-Term Incentive  Plan (incorporated by reference to Exhibit 10.1 to SSCC’s Quarterly  Report on Form 10-Q for the quarter ended June 30, 2004 (File No. 0-23876)).        |
|      |                                                                                                                                                                                                                                                                    |
| 10.13*    | Jefferson Smurfit  Corporation Supplemental Income Pension Plan II (incorporated by reference to  Exhibit 10.1 to SSCC’s Quarterly Report on Form 10-Q for the  quarter ended September 30, 2006 (File No. 0-23876)).                          |
|      |                                                                                                                                                                                                                                                                    |
| 10.14*    | 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)).                                                                                  |
|      |                                                                                                                                                                                                                                                                    |
| 10.15(a)* | Employment Agreement  for Patrick J. Moore (incorporated by reference to Exhibit 10.28 to  SSCC’s Annual Report on Form 10-K for the fiscal year ended December 31,  1999 (File No. 0-23876)).                                                 |
|      |                                                                                                                                                                                                                                                                    |
| 10.15(b)* | First  Amendment of Employment Agreement of Patrick J. Moore (incorporated by reference to  Exhibit 10.2 to SSCC’s Quarterly Report on Form 10-Q for the  quarter ended September 30, 2002 (File No. 0-23876)).                                |

 

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| 10.15(c)* | Second  Amendment of Employment Agreement of Patrick J. Moore effective as of  July 25, 2006, between Smurfit-Stone Container Corporation (“SSCC”) and  Patrick J. Moore (incorporated by reference to Exhibit 10.1 to SSCC’s  Quarterly Report on Form 10-Q for the quarter ended June 30, 2006 (File No. 0-23876)). |
|-----------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|      |                                                                                                                                                                                                                                                                                                                                                          |
| 10.16(a)* | Restricted  Stock Unit Agreement dated as of January 4, 2002 by and between SSCC and  Patrick J. Moore (incorporated  by reference to Exhibit 10.3 to SSCC’s Quarterly Report on  Form 10-Q for the quarter ended September 30, 2002 (File  No. 0-23876)).                                                                      |
|      |                                                                                                                                                                                                                                                                                                                                                          |
| 10.16(b)* | Amendment, dated  June 1, 2004, of Restricted Stock  Unit Agreement dated as of January 4, 2002 by and between SSCC and Patrick  J. Moore (incorporated by reference to Exhibit 10.2 to SSCC’s  Quarterly Report on Form 10-Q for the quarter ended June 30, 2004  (File No. 0-23876)).                                    |
|      |                                                                                                                                                                                                                                                                                                                                                          |
| 10.16(c)* | Amendment No. 2,  dated December 31, 2004, of Restricted  Stock Unit Agreement dated as of January 4, 2002 by and between SSCC and  Patrick J. Moore (incorporated by reference to Exhibit 10.20(c) to  SSCC’s Annual Report on Form 10-K for the fiscal year ended  December 31, 2004 (File No. 0-23876)).      |
|      |                                                                                                                                                                                                                                                                                                                                                          |
| 10.17(a)* | Offer Letter dated as  of May 11, 2006 between the Company and Steven J. Klinger (incorporated  by reference to Exhibit 10.1 to SSCC’s Current Report on Form 8-K  dated May 12, 2006 (File No. 0-23876)).                                                                                                                      |
|      |                                                                                                                                                                                                                                                                                                                                                          |
| 10.17(b)* | Employment Agreement  dated as of May 11, 2006 between the Company and Steven J. Klinger  (incorporated by reference to Exhibit 10.2 to SSCC’s Current Report on  Form 8-K dated May 12, 2006 (File No. 0-23876)).                                                                                                              |
|      |                                                                                                                                                                                                                                                                                                                                                          |
| 10.17(c)* | Executive Retirement  Agreement, dated as of October 2, 2006, between Smurfit-Stone Container  Corporation (“SSCC”) and Steven J. Klinger (incorporated by reference to  Exhibit 10.1 to SSCC’s Current Report on Form 8-K dated  October 5, 2006 (File No. 0-23876)).                                                |
|      |                                                                                                                                                                                                                                                                                                                                                          |
| 10.18(a)* | Employment Agreement of  Charles A. Hinrichs (incorporated by reference to Exhibit 10.22 to SSCC’s  Annual Report on Form 10-K for the fiscal year ended December 31,  2003 (File No. 0-23876)).                                                                                                                                     |
|      |                                                                                                                                                                                                                                                                                                                                                          |
| 10.18(b)* | First  Amendment of Employment Agreement of Charles A. Hinrichs effective as of  July 25, 2006, between Smurfit-Stone Container Corporation and Charles  A. Hinrichs (incorporated by reference to Exhibit 10.2 to SSCC’s  Quarterly Report on Form 10-Q for the quarter ended June 30, 2006 (File No. 0-23876)).               |
|      |                                                                                                                                                                                                                                                                                                                                                          |
| 10.19*    | Smurfit-Stone Container  Corporation Executive Deferred Compensation Plan (incorporated by reference  to Exhibit 10.25 to SSCC’s Annual Report on Form 10-K for the  fiscal year ended December 31, 2004 (File No. 0-23876)).                                                                                                        |
|      |                                                                                                                                                                                                                                                                                                                                                          |
| 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.                                                                                                                                                                                     |

 

86

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

----

  * Indicates a management contract orcompensation plan or arrangement.

 

87

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SIGNATURES

 

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.

 
| DATE   | February 28, 2008 |   |   | SMURFIT-STONE CONTAINER  CORPORATION                      |   |
|--------|------------------------|--------|--------|-----------------------------------------------------------|--------|
|   |                   |   |   | (Registrant)                                              |   |
|   |                   |   |   |                                                      |
|   |                   |   |   |                                                      |
|   |                   |   | By     |   /s/ Charles A. Hinrichs                            |
|   |                   |   |   |   Charles A. Hinrichs                                |
|   |                   |   |   |   Senior Vice President and Chief Financial  Officer |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the registrant in thecapacities and on the dates indicated.

 
| **SIGNATURE**                 | ** ** | **TITLE**                                                        | ** ** | **DATE**                |
|-------------------------------|------------|------------------------------------------------------------------|------------|-------------------------|
| ** **                    | ** ** | ** **                                                       | ** ** | ** **              |
| /s/  Patrick J. Moore         |       | Chairman  and Chief Executive Officer and Director               |       | February 28,  2008 |
| Patrick  J. Moore             |       | (Principal  Executive Officer)                                   |       |                    |
|                          |       |                                                             |       |                    |
| /s/  Charles A. Hinrichs      |       | Senior  Vice President and Chief Financial Officer               |       | February 28,  2008 |
| Charles  A. Hinrichs          |       | (Principal  Financial Officer)                                   |       |                    |
|                          |       |                                                             |       |                    |
| /s/  Paul K. Kaufmann         |       | Senior  Vice President and Corporate Controller                  |       | February 28,  2008 |
| Paul  K. Kaufmann             |       | (Principal  Accounting Officer)                                  |       |                    |
| *                             |       |                                                             |       |                    |
| 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         |       | Director                                                         |       |                    |
|                          |       |                                                             |       |                    |
| *By  /s/ Charles A. Hinrichs  |       | Pursuant  to Powers of Attorney filed as part of Form 10-K. |       | February 28,  2008 |
| Charles  A. Hinrichs          |       |                                                             |       |                    |

 

88

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