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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

Commission file number 0-11951

JSCE, Inc.
(Exact name of registrant as specified in its charter)

Registrant's Telephone Number: (312) 346-6600

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: None

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

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

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

        As of February 28, 2003, none of the registrant's voting stock was held by non-affiliates.

        The number of shares outstanding of the registrant's common stock as of February 28, 2003: 1,000

DOCUMENTS INCORPORATED BY REFERENCE: None

        The registrant meets the conditions set forth in General Instruction (I)(1)(a) and (b) of Form 10-K and is therefore filing this form with the reduced disclosure format permitted thereby.

JSCE, INC.
ANNUAL REPORT ON FORM 10-K
December 31, 2002

TABLE OF CONTENTS

FORWARD-LOOKING STATEMENTS

        Except for the historical information contained in this Annual Report on Form 10-K, certain matters discussed herein, including (without limitation) under Part I, Item 1, "Business—Environmental Compliance," under Part I, Item 3, "Legal Proceedings" and under Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. Although we believe that, in making any such statements, our expectations are based on reasonable assumptions, any such statements may be influenced by factors that could cause actual outcomes and results to be materially different from those projected. When used in this document, the words "anticipates," "believes," "expects," "intends," and similar expressions, as they relate to JSCE, Inc. or its management, are intended to identify such forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties. There are important factors that could cause actual results to differ materially from those in forward-looking statements, certain of which are beyond our control. These factors, risks and uncertainties include the following:

•

the impact of general economic conditions in North America where we currently do business;



•

general industry conditions, including competition and product and raw material prices;



•

fluctuations in interest rates, exchange rates and currency values;



•

unanticipated capital expenditure requirements;



•

legislative or regulatory requirements, particularly concerning environmental matters;



•

access to capital markets;



•

fluctuations in energy prices; and



•

obtaining required consents or waivers of creditors in the event we are unable to satisfy covenants in our debt instruments.

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

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PART I

ITEM 1.    BUSINESS

        Unless the context otherwise requires, "we," "us," "our" or "JSCE" refers to the business of JSCE, Inc. and its subsidiaries.

GENERAL

        JSCE, Inc., a Delaware corporation, is an integrated producer of containerboard, corrugated containers and other packaging products. We conduct our business operations through our wholly-owned subsidiary Jefferson Smurfit Corporation (U.S.), a Delaware corporation (Jefferson Smurfit (U.S.) or JSC(U.S.)). Jefferson Smurfit (U.S.) has extensive operations located primarily in the United States. For the year ended December 31, 2002, our net sales were $3,456 million and net income was $111 million.

        JSCE, Inc. is a wholly-owned subsidiary of Smurfit-Stone Container Corporation, a Delaware corporation. Smurfit-Stone is a holding company with no business operations of its own. Smurfit-Stone conducts its business operations through two wholly-owned subsidiaries: JSCE and Stone Container Corporation, a Delaware corporation.

        On September 30, 2002, Jefferson Smurfit (U.S.) acquired a corrugating medium mill located in Stevenson, Alabama that has an annual capacity of 830,000 tons, seven corrugated container plants, one hardwood sawmill and approximately 82,000 acres of timberland from MeadWestvaco Corporation (the Stevenson Mill Acquisition). Jefferson Smurfit (U.S.) subsequently closed three of the corrugated container plants acquired as part of the Stevenson Mill Acquisition. Amounts included in the discussions herein include the Stevenson Mill Acquisition after September 30, 2002.

PRODUCTS

        We report our results of operations in three industry segments, all of which are reportable: 1) Containerboard and Corrugated Containers, 2) Consumer Packaging and 3) Reclamation. On January 1, 2002, we combined the former Specialty Packaging segment with the Consumer Packaging segment. The Specialty Packaging segment was previously not a reportable segment. The information for 2001 and 2000 has been restated in order to conform to the 2002 presentation. The industrial packaging operations, which were previously part of the Consumer Packaging segment, were sold in 2002 and have been classified as discontinued and are excluded from the segment results for all periods presented. For financial information relating to our segments, see the information set forth in Note 18 of the Notes to Consolidated Financial Statements.

CONTAINERBOARD AND CORRUGATED CONTAINERS SEGMENT

        The Containerboard and Corrugated Containers segment includes five paper mills, 50 container plants and two wood products plants located in the United States, one container plant located in Mexico and one container plant located in Puerto Rico. In addition, we own approximately 82,000 acres of timberland located in the United States. The primary products of our Containerboard and Corrugated Containers segment include:

•

corrugated containers;



•

containerboard; and



•

solid bleached sulfate.

        We produce a full range of high quality corrugated containers designed to protect, ship, store and display products made to our customers' merchandising and distribution specifications. Corrugated containers are sold to a broad range of manufacturers of consumer goods. Corrugated containers are used to ship

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such diverse products as home appliances, electric motors, small machinery, grocery products, produce, computers, books, furniture and many other products. We provide customers with innovative packaging solutions to advertise and sell their products. In addition, we manufacture and sell a variety of retail ready, point of purchase displays and a full line of specialty products, including pizza boxes, corrugated clamshells for the food industry, Cordeck® recyclable pallets and custom die-cut boxes to display packaged merchandise on the sales floor. Our container plants serve local customers and large national accounts.

        Our containerboard mills produce a full line of containerboard, which is used primarily in the production of corrugated packaging. In 2002, we produced 781,000 tons of unbleached kraft linerboard, 295,000 tons of white top linerboard and 428,000 tons of medium. Our containerboard mills and corrugated container operations are highly integrated, with the majority of our containerboard used internally by our corrugated container operations or by Stone Container's corrugated container operations. In 2002, our container plants consumed 1,699,000 tons of containerboard, representing an integration level of approximately 77%.

        Our paper mills also produce solid bleached sulfate (SBS), specializing in high-quality grades of SBS, which are designed to meet the demanding print requirements of folding carton and carded packaging customers in the food, pharmaceutical, cosmetics and other niche markets. A portion of our SBS is consumed internally by our folding carton plants.

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

CONSUMER PACKAGING SEGMENT

        The Consumer Packaging segment includes four paper mills, 17 folding carton plants and 14 other converting plants. Our Consumer Packaging operations are located in the United States. The primary products of our Consumer Packaging segment include:

•

folding cartons;



•

coated recycled boxboard;



•

laminated products; and



•

paper, foil and heat transfer labels.

        Folding cartons are used primarily to protect customers' products, while providing point of purchase advertising. We produce a full range of carton styles appropriate to nearly all carton end uses. The folding carton plants offer extensive converting capabilities, including sheet and web lithographic, rotogravure and flexographic printing and laminating. In addition, we provide Lithoflute™ packaging for a number of applications. The folding carton plants also provide a full line of structural and graphic design services tailored to specific technical requirements, as well as photography for packaging, sales promotion concepts and point of purchase displays. Converting capabilities include gluing, tray forming, windowing, waxing and laminating, plus other specialties. Our customer base is made up primarily of producers of packaged foods, beverages, fast food, detergents, paper, pharmaceuticals and cosmetics. Our customers range from local accounts to large national accounts.

        Our coated recycled boxboard mills produce a broad range of recycled grades, including clay-coated newsback, kraftback and whiteback, as well as waxable and laminated grades. Our coated boxboard

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mills and folding carton operations are highly integrated, with the majority of our coated boxboard used internally by our folding carton operations. In 2002, our folding carton plants consumed 366,000 tons of recycled boxboard, representing an integration level of approximately 63%.

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

        We also produce printed paper, foil and DI-NA-CAL® heat transfer labels, which are used in a wide range of industrial and consumer product applications. DI-NA-CAL® is a proprietary labeling system that applies high-speed heat transfer labels to plastic containers. We also produce specialized laminations of film, foil and paper. We have a full-service organization experienced in the production of color separations and lithographic film for the commercial printing, advertising and packaging industries.

RECLAMATION SEGMENT

        Our reclamation operations procure fiber resources for Smurfit-Stone's paper mills as well as for other producers. We operate 23 reclamation facilities in the United States that collect, sort, grade and bale recovered paper. We also collect aluminum and glass for resale to manufacturers of these products. In addition, we operate a nationwide brokerage system whereby we purchase and resell recovered paper to Smurfit-Stone's recycled paper mills and other producers on a regional and national contract basis. Brokerage contracts provide bulk purchasing, often resulting in lower prices and cleaner recovered paper. Many of our reclamation facilities are located close to Smurfit-Stone's recycled paper mills, ensuring availability of supply with minimal shipping costs. Domestic tons of fiber reclaimed and brokered for 2002, 2001 and 2000 were 6,582,000, 6,714,000 and 6,768,000, respectively.

RAW MATERIALS

        Wood fiber and reclaimed fiber are the principal raw materials used in the manufacture of our paper products. We satisfy the majority of our need for wood fiber through purchases on the open market or under supply agreements. We satisfy essentially all of our need for reclaimed fiber through our reclamation operations and nationwide brokerage system.

        Wood fiber and reclaimed fiber are purchased in highly competitive, price-sensitive markets, which have historically exhibited price and demand cyclicality. Conservation regulations have caused, and will likely continue to cause, a decrease in the supply of wood fiber and higher wood fiber costs in some of the regions in which we procure wood fiber. Fluctuations in supply and demand for reclaimed fiber have occasionally caused tight supplies of reclaimed fiber. At those times, we have experienced an increase in the cost of such fiber.

MARKETING

        Our marketing strategy is to sell a broad range of paper-based packaging products to marketers of industrial and consumer products. In managing the marketing activities of our paperboard mills, we seek to meet the quality and service needs of the customers of our converting plants at the most efficient cost, while balancing those needs against the demands of our open market customers. Our converting plants focus on supplying both specialized packaging with high value graphics that enhance a product's market appeal and high-volume commodity products. Our board sales group is responsible for marketing and selling paper and paperboard products to third parties worldwide.

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        We seek to serve a broad customer base for each of our industry segments. As a result, we serve thousands of accounts from our plants. Each plant has its own sales force and many have product design engineers and other service professionals who are in close contact with customers to respond to their specific needs. We complement our local plants' marketing and service capabilities with regional and national design and service capabilities, as well as national sales offices for customers who purchase through a centralized purchasing office. National account business may be allocated to more than one plant due to production capacity, logistics and equipment requirements.

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

COMPETITION

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

BACKLOG

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

RESEARCH AND DEVELOPMENT

        Our research and development center, located in Carol Stream, Illinois, uses advanced technology to assist all levels of the manufacturing and sales processes, from raw material supply through finished packaging performance. Research programs have provided improvements in coatings and barriers, stiffeners, inks and printing. Our technical staff conducts basic, applied and diagnostic research, develops processes and products and provides a wide range of other technical services.

        We actively pursue applications for patents on new inventions and designs and attempt to protect our patents against infringement. Nevertheless, we believe our success and growth are more dependent on the quality of our products and our relationships with customers than on the extent of our patent protection. We hold or are licensed to use certain patents, licenses, trademarks and trade names on products, but do not consider the successful continuation of any material aspect of our business to be dependent upon such intellectual property.

EMPLOYEES

        We had approximately 13,900 employees at December 31, 2002, of which approximately 13,700 were employees of U.S. operations. Approximately 8,700 (63%) of our U.S. employees are represented by collective bargaining units. The expiration dates of union contracts for our major paper mill facilities are as follows:

•

Brewton, Alabama—October 2007



•

Fernandina Beach, Florida—June 2008

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        We believe our employee relations are generally good. We are currently in the process of bargaining with unions representing production employees at a number of our operations. There were no significant or material work stoppages during 2002. While the terms of our collective bargaining agreements may vary, we believe the material terms of the agreements are customary for the industry, the type of facility, the classification of the employees and the geographic location covered thereby.

ENVIRONMENTAL COMPLIANCE

        Our operations are subject to extensive environmental regulation by federal, state and local authorities. In the past, 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 in the future for environmental compliance. Because various environmental standards are subject to change, it is difficult to predict with certainty the amount of capital expenditures that will ultimately be required to comply with future standards.

        In particular, the United States Environmental Protection Agency (EPA) has finalized significant portions of its comprehensive rule governing air emissions (Maximum Achievable Control Technology-MACT) and water discharges (Effluent Limitation Guidelines) from the pulp, paper and paperboard industry, known as the "Cluster Rule". Phase I of MACT I and the Effluent Limitation Guidelines of the Cluster Rule required us to convert our bleached linerboard mill at Brewton, Alabama to an elemental chlorine free bleaching process, to install systems at several of our mills for the collection and destruction of low volume, high concentration gases and to implement best management practices, such as spill controls. These projects have been completed at a cost of approximately $76 million. Phase II of MACT I of the Cluster Rule will require the implementation of systems to collect high volume, low concentration gases at various mills and has a compliance date of 2006. MACT II of the Cluster Rule will require control of particulate from recovery boilers, smelt tanks and lime kilns and has a compliance date of 2004. We have spent approximately $12 million (of which approximately $10 million was spent in 2002) for capital projects related to MACT II of the Cluster Rule. We continue to study possible means of compliance with phase II of MACT I and MACT II of the Cluster Rule. Based on currently available information, we estimate that the aggregate compliance cost of phase II of MACT I and MACT II of the Cluster Rule is likely to be in the range of $15 million to $20 million and that such cost will be incurred over the next four years.

        In recent years, the EPA has undertaken significant air quality initiatives associated with nitrogen oxide emissions, regional haze and national ambient air quality standards. Several of our mills are located in states affected by these EPA initiatives. The EPA is also currently proposing to limit particulate emissions from industrial boilers in a new Boiler MACT regulation. Several of our mills will be subject to the Boiler MACT regulation when it is finalized. When regulatory requirements for new and changing standards are finalized, we will add any resulting future cost projections to our expenditure forecast.

        In addition to Cluster Rule compliance, we anticipate additional capital expenditures related to environmental compliance. Excluding the spending on Cluster Rule projects described above, for the past three years, we have spent an average of approximately $2 million annually on capital expenditures for environmental purposes. Since our principal competitors are subject to comparable environmental standards, including the Cluster Rule, it is our opinion, based on current information, that compliance with environmental standards should not adversely affect our competitive position. However, we could incur significant expenditures due to changes in law or the discovery of new information, which could have a material adverse effect on our operating results.

AVAILABLE INFORMATION

        Smurfit-Stone's Internet address is www.smurfit-stone.com. Smurfit-Stone's Internet address is included in this annual report on Form 10-K as an inactive textual reference only. The information contained on Smurfit-Stone's website is not incorporated by reference into this annual report on Form 10-K and should not be considered part of this report. We file annual, quarterly and current reports and other information

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with the Securities and Exchange Commission (SEC). We make available free of charge most of our SEC filings through Smurfit-Stone's Internet website as soon as reasonably practicable after we electronically file such information with, or furnish it to, the SEC. You may access these SEC filings via the hyperlink provided on Smurfit-Stone's Internet website to a third-party SEC filings website.

ITEM 2.    PROPERTIES

        Our manufacturing facilities are located primarily in the United States. We believe that our facilities are adequately insured, properly maintained and equipped with machinery suitable for their use. Our manufacturing facilities as of December 31, 2002 are summarized below.

(a)

Reflects the number of states in which we have at least one manufacturing facility.

        Our paper mills represent approximately 61% of our investment in property, plant and equipment. In addition to manufacturing facilities, we own approximately 82,000 acres of timberland in the states of Alabama and Tennessee. The approximate annual tons of productive capacity of our paper mills at December 31, 2002 were:

        Substantially all of our operating facilities have been pledged as collateral under Jefferson Smurfit (U.S.)'s credit agreement. See Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Financing Activities.

ITEM 3.    LEGAL PROCEEDINGS

LITIGATION

        In 1998, seven putative class action complaints were filed in the United States District Court for the Northern District of Illinois and in the United States District Court for the Eastern District of Pennsylvania.

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These complaints alleged that Stone Container reached agreements in restraint of trade that affected the manufacture, sale and pricing of corrugated products in violation of antitrust laws. The complaints have been amended to name several other defendants, including Jefferson Smurfit (U.S.) and Smurfit-Stone. The suits seek an unspecified amount of damages arising out of the sale of corrugated products for the period from October 1, 1993 through March 31, 1995. Under the provisions of the applicable statutes, any award of actual damages could be trebled. The complaints have been transferred to and consolidated in the United States District Court for the Eastern District of Pennsylvania, which has certified two plaintiff classes. The defendants' appeal of the class certification rulings in the Third Circuit Court of Appeals has been denied. We continue to vigorously defend these cases.

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

ENVIRONMENTAL MATTERS

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

        We also face potential liability as a result of releases, or threatened releases, of hazardous substances into the environment from various sites owned and operated by third parties at which company-generated wastes have allegedly been deposited. Generators of hazardous substances sent to off-site disposal locations at which environmental problems exist, as well as the owners of those sites and certain other classes of persons (generally referred to as "potentially responsible parties" or "PRPs"), are, in most instances, subject to joint and several liability for response costs for the investigation and remediation of such sites under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA) and analogous state laws, regardless of fault or the lawfulness of the original disposal. We have received notice that we are or may be a PRP at a number of federal and/or state sites where response action may be required and as a result may have joint and several liability for cleanup costs at such sites. However, liability for CERCLA sites is typically shared with other PRPs and costs are commonly allocated according to relative amounts of waste deposited. Our relative percentage of waste deposited at these sites ranges from 1% to 6%. In addition to participating in the remediation of sites owned by third parties, we have entered into consent orders for the investigation and/or remediation of certain of our owned properties.

        Based on current information, we believe the probable costs of the potential environmental enforcement matters discussed above, response costs under CERCLA and similar state laws, and the remediation of owned property will not have a material adverse effect on our financial condition or results of operations. As of December 31, 2002, we had approximately $13 million reserved for environmental liabilities. We believe our liability for these matters was adequately reserved at December 31, 2002.

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PART II

ITEM 5.    MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

MARKET INFORMATION

        We are a wholly-owned subsidiary of Smurfit-Stone. Therefore, all of our outstanding common stock is owned by Smurfit-Stone. As a result, there is no established public market for our common stock.

DIVIDENDS ON COMMON STOCK

        We paid dividends to Smurfit-Stone in the aggregate amount of approximately $8 million in 2002 to fund the dividend obligations of Smurfit-Stone to the holders of the 7% Series A Cumulative Exchangeable Redeemable Convertible Preferred Stock of Smurfit-Stone. Our ability to pay dividends in the future is restricted by certain provisions contained in Jefferson Smurfit (U.S.)'s credit agreement and the indentures relating to Jefferson Smurfit (U.S.)'s outstanding indebtedness, which we guarantee. See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.

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ITEM 6.    SELECTED FINANCIAL DATA

Notes to Selected Financial Data

(a)

Results for 2002 include the Stevenson Mill Acquisition after September 30, 2002, the date of the acquisition.

(b)

We recorded a gain of $407 million on the sale of our timberlands in 1999.

(c)

In connection with the Stone Container merger, we recorded charges of $310 million in the fourth quarter of 1998, including $257 million of restructuring charges, $30 million for settlement of certain litigation and $23 million of merger-related costs. We recorded additional restructuring charges in 1999, 2001 and 2002 of $9 million, $4 million and $4 million, respectively.

(d)

Includes income from discontinued operations (net of income tax) and gain or loss on disposition of discontinued operations (net of tax).

(e)

Effective January 1, 2002, we adopted Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 requires that goodwill no longer be

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amortized, but instead be tested for impairment at least annually. Depreciation, depletion and amortization includes goodwill amortization of $7 million in 2001, 2000, 1999 and 1998.

ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                   RESULTS OF OPERATIONS

GENERAL

        Containerboard market conditions and demand for containerboard and corrugated containers, our primary products, have historically been subject to cyclical changes in the economy and changes in industry capacity, both of which can significantly impact selling prices and our profitability.

        Containerboard market conditions were generally strong in the first half of 2000. Linerboard prices increased to $480 per ton during the first quarter and held through the end of the year. Domestic economic growth began to slow in the second half of 2000, however, and market conditions began to deteriorate. In addition, the sustained strength of the U.S. dollar made products manufactured in the U.S. less competitive in global markets. Industry shipments of corrugated containers for 2000 declined 1% compared to 1999 and declined an additional 6% in 2001, the worst performance since 1975. The slowdown in the U.S. economy, in addition to weak export markets, exerted downward pressure on containerboard demand. In order to maintain a balance between supply and demand, certain companies in the containerboard industry took extensive market related downtime in 2000 and 2001. The sluggish corrugated demand in 2001 and the excess supply of containerboard resulted in an 11% decline in linerboard pricing to $425 per ton as of December 31, 2001. Linerboard prices decreased an additional $5 per ton in the first quarter of 2002. Corrugated container prices also declined during this period. Certain companies in the containerboard industry continued to take market related downtime in 2002. Markets gradually improved in 2002 and a linerboard price increase was implemented effective July 1, 2002. Corresponding price increases were implemented for corrugated containers in the third and fourth quarters of 2002. As of December 31, 2002, linerboard prices were approximately $440 per ton, but have decreased $10 per ton in the first quarter of 2003. Industry shipments of corrugated containers in 2002 were flat compared to 2001. We do not expect a recovery in demand for corrugated containers until the U.S. economy strengthens.

        Market conditions in the folding carton and recycled boxboard mill industry were strong going into 2000 and sales price increases were implemented in the second quarter of 2000. Shipments of folding cartons in 2000 increased 3% compared to 1999. Recycled boxboard mill operating rates were lower, however, and production in 2000 decreased 1% compared to 1999. Markets for the most part weakened in 2001, as industry shipments of folding cartons declined 1% and recycled boxboard production declined by 5% compared to 2000. Prices for folding cartons in 2001, however, increased by 1% compared to 2000. In 2002, folding carton shipments declined for the second consecutive year, as the industry contended with maturing markets and slowing sector growth rates. The carton industry also faces a shrinking supply chain, as customers continue to work down inventories to reduce supply. Shipments of folding cartons and recycled boxboard production both declined by 1% in 2002 and prices for folding cartons decreased by 2% compared to 2001. In March 2003, we announced a price increase of $40 per ton for recycled boxboard effective April 1.

        Wood fiber and reclaimed fiber are the principal raw materials used in the manufacture of our products. Fluctuations in supply and demand have occasionally caused tight supplies of fiber and, at those times, we have experienced a temporary increase in the cost of such fiber. Demand for reclaimed fiber, which was generally strong in 1999 and early 2000, has weakened in recent years as certain domestic companies in the containerboard industry have taken extensive market related downtime. Prices declined in 2000 and continued to be depressed throughout 2001 as more paper mills took downtime to manage their inventories. The average price of old corrugated containers, commonly known as OCC, the principal grade used in recycled containerboard mills, was lower in 2001 compared to 2000 by approximately 40%. Higher demand and tight supplies in the second and third quarters of 2002 caused OCC prices to temporarily escalate. Although prices subsequently dropped, the high prices in the second

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and third quarters caused the average price of OCC to be higher than 2001 by 55%. Wood fiber prices, in areas where we procure wood, increased 1% in 2001 compared to 2000, but declined in 2002 by 6% compared to 2001. Recent wet weather in the southeast U.S. has resulted in lower availability and higher prices for wood fiber in the first quarter of 2003.

ACQUISITION

        On September 30, 2002, Jefferson Smurfit (U.S.) purchased a corrugating medium mill with an annual capacity of 830,000 tons, seven corrugated container plants, one hardwood sawmill and approximately 82,000 acres of timberland from MeadWestvaco Corporation (the Stevenson Mill Acquisition). The Stevenson Mill Acquisition was accounted for as a purchase business combination. Accordingly, the related results of operations have been included in our consolidated statement of operations after September 30, 2002. The cost to acquire these operations was preliminarily allocated to the assets acquired and liabilities assumed using fair values. No goodwill was recorded related to the Stevenson Mill Acquisition. In connection with the Stevenson Mill Acquisition, Jefferson Smurfit (U.S.) announced the closure of three of the acquired corrugated container plants and recorded exit liabilities of $7 million in our preliminary purchase allocation for the termination of certain employees and liabilities for lease commitments and facility closure costs. We expect to finalize our preliminary purchase price allocation upon completion of the property, plant and equipment and timberland valuations.

        Smurfit-Stone has targeted synergy savings of $40 million from the Stevenson Mill Acquisition by the end of 2003. We expect to achieve these synergies through a combination of administrative cost reductions, system optimization and purchasing savings.

RESULTS OF OPERATIONS

Segment Data

        Corporate expenses and other includes corporate expenses, intracompany profit elimination and LIFO expense, corporate charges to segments for working capital interest and other expenses not allocated to segments. The effects of lower intracompany profit elimination and LIFO expense favorably impacted corporate expenses and other in 2000 and 2001.

        Amortization of goodwill ceased on January 1, 2002, when we adopted SFAS No. 142, "Goodwill and Other Intangible Assets."

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2002 COMPARED TO 2001

        Consolidated net sales of $3,456 million in 2002 were 3% higher compared to last year due primarily to additional sales attributable to the Stevenson Mill Acquisition and higher shipments of containerboard and corrugated containers. Sales prices for containerboard and corrugated containers were lower compared to 2001. The increase (decrease) in net sales for each of our segments is summarized in the chart below:

        Cost of goods sold increased due primarily to the Stevenson Mill Acquisition, higher sales volumes for containerboard and corrugated containers and higher reclaimed fiber cost ($124 million). Cost of goods sold was favorably impacted by lower energy cost ($16 million) and the elimination of goodwill amortization ($7 million). Cost of goods sold as a percent of net sales in 2002 was 86% compared to 85% in 2001 due primarily to the effects of our lower average sales prices.

        Selling and administrative expenses increased 6% due primarily to the impact of costs associated with the Stevenson Mill Acquisition. Selling and administrative expenses as a percent of net sales was 8% in 2002, comparable to 2001.

        During 2002, we recorded restructuring charges of $4 million related to the shutdown and sale of our Cladwood® operations.

        Interest expense declined $31 million due to the favorable impacts of overall average interest rates ($25 million) and from lower average borrowings ($6 million). The overall average effective interest rate in 2002 was lower than 2001 by approximately 180 basis points. Interest income for 2002 increased $8 million due to accrued interest on our intercompany notes receivable from Smurfit-Stone.

        Income from continuing operations before income taxes and extraordinary item in 2002 was $159 million, a decrease of $20 million compared to 2001. The decline in segment earnings was due primarily to lower average sales prices for containerboard and corrugated containers. The decline in interest expense partially offset the decline in segment earnings.

        The effective income tax rate for 2002 was 40%, compared to 41% in 2001. Provision for income taxes in 2002 differed from the federal statutory tax rate due to several factors, the most significant of which was state income taxes. For information concerning income taxes, see—Liquidity and Capital Resources and Note 10 of the Notes to Consolidated Financial Statements.

Containerboard and Corrugated Containers Segment

        Net sales increased by 3% due primarily to the Stevenson Mill Acquisition and higher shipments of containerboard and corrugated containers. Shipments of corrugated containers increased 6%. The average sales price of corrugated containers decreased 5%, linerboard sales prices were lower by 4% and SBS average sales prices decreased 5%.

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        Production of containerboard increased 13% due primarily to the Stevenson Mill Acquisition. We continued to take market related downtime (approximately 201,000 tons) in 2002 in order to maintain a lower level of inventory. SBS production was lower by 4%.

        Profits decreased by $28 million due primarily to the lower average sales prices. Profits were favorably impacted by the Stevenson Mill Acquisition and lower energy cost compared to 2001. Cost of goods sold as a percent of net sales increased to 88% in 2002 compared to 86% in 2001 due primarily to the lower average sales prices.

Consumer Packaging Segment

        Net sales decreased by 2% due primarily to lower sales volumes and lower average sales prices. Folding carton shipments decreased 4%. Production of coated boxboard in 2002 was 2% higher compared to 2001.

        The average sales price for flexible packaging products was lower than last year by 17% due primarily to product mix changes. Coated boxboard sales prices were 2% higher than 2001 and folding carton sales prices were comparable to last year.

        Profits declined $18 million due primarily to lower prices, lower sales volume and higher reclaimed fiber cost. Reclaimed fiber cost was higher than last year by approximately $7 million. Profits were favorably impacted by lower energy cost. Cost of goods sold as a percent of net sales in 2002 was 84% compared to 83% in 2001 due primarily to the lower average sales prices.

Reclamation Segment

        Net sales in 2002 increased 25% compared to 2001 due primarily to higher average sales prices. Higher demand and tight supplies in the second and third quarters of 2002 caused OCC prices to temporarily escalate. The average price of OCC in 2002 increased approximately $30 per ton compared to 2001 and the average price of newsprint was higher by approximately $10 per ton. Total tons of fiber reclaimed and brokered decreased 2%. Profits increased $13 million due primarily to the higher average sales prices. Cost of goods sold as a percent of net sales decreased from 91% in 2001 to 90% in 2002 due primarily to the higher average sales prices.

Discontinued Operations

        In September 2002, we sold our industrial packaging operations to a third party. The sale resulted in a gain on disposition of discontinued operations of $22 million, net of tax of $17 million. The assets sold include 17 tube and core manufacturing facilities, three fiber partition plants and three uncoated recycled boxboard mills. Net sales for these operations for the nine months ended September 30, 2002 were $96 million and operating profits were $7 million. The operations employed approximately 850 people. The results of operations for the industrial packaging operations, formerly included in the Consumer Packaging segment, have been reclassified as discontinued operations for all periods presented.

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2001 COMPARED TO 2000

        Poor market conditions for our major products led to an 11% decline in our consolidated net sales in 2001. Lower sales prices for containerboard, corrugated containers and reclamation products, and reduced shipments of containerboard, corrugated containers and folding cartons were the major reasons for the decline. In addition, the shutdown of a paper machine, the closure of a trucking operation and the sale of three reclamation facilities negatively impacted net sales by $33 million. The increase (decrease) in net sales for each of our segments is summarized in the chart below:

        Cost of goods sold decreased due primarily to lower reclaimed fiber cost and lower sales volumes. Reclaimed fiber cost was lower by approximately $258 million. Cost of goods sold was unfavorably impacted by higher energy cost of $26 million. Cost of goods sold as a percent of net sales increased to 85% compared to 84% in 2000 due primarily to the effects of our lower average sales prices. Selling and administrative expenses as a percent of net sales was 8% compared to 7% in 2000 due primarily to the lower average sales prices.

        During 2001, we recorded a restructuring charge of $4 million related to the permanent shutdown of a paper machine and related operation, which produced approximately 50,000 tons of uncoated recycled boxboard annually and a trucking operation.

        Interest expense declined $31 million due to the favorable impacts from lower overall average interest rates ($25 million) and from lower average borrowings ($6 million). The overall average effective interest rate in 2001 was 150 basis points lower than in 2000. Interest income from Smurfit-Stone of $65 million for 2001 increased by $12 million compared to 2000 due to the higher level of accrued interest on our intercompany notes receivable.

        Income from continuing operations before income taxes and extraordinary item in 2001 was $179 million, a decrease of $53 million compared to 2000. The decrease was due primarily to the decline in segment earnings, particularly in the Containerboard and Corrugated Containers segment. Interest expense, net was lower compared to 2000, partially offsetting the declines in segment earnings. Net income was $108 million in 2001 compared to $151 million in 2000.

        Provision for income taxes in 2001 differed from the federal statutory tax rate due to several factors, the most significant of which was state income taxes. For information concerning income taxes, see—Liquidity and Capital Resources and Note 10 of the Notes to the Consolidated Financial Statements.

Containerboard and Corrugated Containers Segment

        Net sales decreased by 6% due primarily to lower average sales prices and lower sales volume for containerboard and corrugated containers. The weak market conditions during 2001 resulted in excessive supplies of containerboard and prices declined. We took market related downtime in order to maintain a lower level of inventory. On average, corrugated container prices declined 1%, linerboard prices were lower by 5% and SBS prices were 2% lower.

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        Production of containerboard declined 7% in 2001 because we curtailed production to meet demand. We took approximately 284,000 tons of containerboard market related downtime in 2001 compared to 181,000 tons in 2000. Corrugated container sales volume decreased 6% and SBS production decreased 2%.

        Profits decreased by $64 million due primarily to our lower average sales prices. The higher level of market related downtime taken in 2001 and higher energy cost also had a negative impact on profits. Profits were favorably impacted by lower fiber cost. Cost of goods sold as a percent of net sales increased from 83% in 2000 to 86% in 2001 due primarily to the lower average sales prices.

Consumer Packaging Segment

        Net sales decreased by 4% due primarily to lower sales volume for folding cartons. Sales of laminated products and recycled boxboard were also lower. Folding carton sales prices were 3% higher than last year, but coated boxboard sales prices were 3% lower. Sales volume of folding cartons decreased 7% due to overall economic conditions, an industry-wide decline in the soap powder business and the expiration of certain customer contracts. Production of coated boxboard decreased 4%.

        Profits declined $6 million due primarily to lower sales volume for folding cartons, higher converting cost and higher energy cost. Profits were favorably impacted by lower reclaimed fiber cost. Cost of goods sold as a percent of net sales was 83% in 2001, unchanged from 2000.

Reclamation Segment

        Net sales decreased 38% due primarily to lower average sales prices and the sale of three facilities. Demand for OCC was weak as a result of the significant amount of market related downtime taken by domestic containerboard paper mills. Export markets were strong in 2001. OCC prices decreased 40% and old newsprint prices decreased 34%. Profits decreased $20 million due primarily to our lower average sales prices. Cost of goods sold as a percent of net sales was 91% in 2001, unchanged from 2000.

RESTRUCTURINGS AND EXIT LIABILITIES

        We have from time to time restructured certain operations and closed operating facilities upon assessments of supply and demand, productive capacity within a market area, operating cost and other economic considerations. In addition, certain of our recent acquisitions have included operations that overlap existing operations. In the first quarter of 2003, we will record restructuring charges of approximately $3 million for the closure of two converting facilities. Additional plant closures may occur in the future.

        We recorded restructuring charges totaling $4 million in 2002 for the disposition of our Cladwood® facilities. The assets of these operations were adjusted to estimated fair value less cost to sell resulting in a $3 million non-cash write-down. Approximately 110 employees were terminated. Severance and facility closure costs related to the closed operations were paid in 2002.

        In addition, in November 2002, we announced the closure of three of the corrugated container facilities acquired as part of the Stevenson Mill Acquisition. The preliminary purchase price allocation for the Stevenson Mill Acquisition includes an adjustment to fair value of property, plant and equipment associated with the permanent shutdown of the three corrugated container plants, liabilities for the termination of certain employees and liabilities for lease commitments and facility closure costs. The exit liabilities for the three closed corrugated container facilities total $7 million and will be paid in 2003.

        As explained in our 2001 Annual Report on Form 10-K, we had $20 million of exit liabilities as of December 31, 2001 related to the Smurfit-Stone merger and from our restructuring activities. During 2002, we incurred approximately $3 million of cash expenditures for exit liabilities. The exit liabilities remaining as of December 31, 2002, including those of the Stevenson Mill Acquisition, total $25 million. Future cash outlays, principally for long-term commitments, are expected to be $9 million in 2003, $2

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million in 2004 and $14 million thereafter. We intend to continue funding the remaining exit liabilities through operations as originally planned.

LIQUIDITY AND CAPITAL RESOURCES

General

        In 2002, net cash provided by operating activities of $238 million, additional cash provided from new borrowings, which, net of financing fees, call premiums and other refinancing costs, totaled $763 million, proceeds from asset sales of $83 million and proceeds from notes receivable from Smurfit-Stone of $6 million were used to fund net debt payments of $646 million, expenditures for property, plant and equipment and acquisitions of $442 million and dividends to Smurfit-Stone of $8 million.

        In September 2002, Jefferson Smurfit (U.S.) completed the Stevenson Mill Acquisition. Jefferson Smurfit (U.S.) paid $350 million in September for the assets and an additional $25 million in December related to the assumption of $120 million of industrial revenue bonds. Jefferson Smurfit (U.S.) funded the Stevenson Mill Acquisition using a portion of the proceeds from the sale of $700 million 8.25% unsecured senior notes due 2012 (the 8.25% Senior Notes) and with additional borrowings under its existing bank credit facilities (see—Financing Activities).

        In September 2002, Jefferson Smurfit (U.S.) sold its industrial packaging operations to a third party for approximately $80 million. Jefferson Smurfit (U.S.) retained approximately $12 million of receivables from the business. Proceeds from the sale were used to reduce borrowings under the Jefferson Smurfit (U.S.) revolving credit facility.

        As of December 31, 2002, our wholly-owned subsidiary, JSC Capital Corporation, had unsecured intercompany notes receivable from Smurfit-Stone totaling $561 million. The loans arose primarily in connection with the Smurfit-Stone merger and include interest accrued from November 18, 1998, the date of the merger. With the exception of a note issued November 15, 2000, the notes bear interest at the rate of 14.21% per annum. The note issued on November 15, 2000 was in the amount of $30 million and bears interest at the rate of 15.39% per annum. Smurfit-Stone has the option of paying the interest in cash or compounding the interest into the principal amount of the notes. Interest income since inception has been added to the principal amount of the notes. All of the notes have a maturity date of November 18, 2004.

        We expect internally generated cash flows, available borrowing capacity under the Jefferson Smurfit (U.S.) credit facility and future financing activities will be sufficient for the next several years to meet our obligations, including debt service, pension funding, expenditures related to environmental compliance and other capital expenditures. Scheduled debt payments for 2003 and for 2004 total $37 million and $266 million, respectively, with varying amounts thereafter. Jefferson Smurfit (U.S.) has historically had good access to capital markets and expects to be able to repay or refinance these debt payments on or before their maturity dates. Although we believe we will have access to the capital markets in the future, these markets are volatile and we cannot predict the condition of the markets or the timing of any related transactions. Access to the capital markets may be limited or unavailable due to an unpredictable material adverse event unrelated to our operational or financial performance. In such event, we would explore additional options, including, but not limited to, the sale or monetization of assets.

        We intend to hold capital expenditures for 2003 significantly below our anticipated depreciation level of $133 million. As of December 31, 2002, we had authorized commitments for capital expenditures of $60 million, including $3 million for environmental projects, $10 million to maintain competitiveness and $47 million for upgrades, modernization and expansion.

        We expect to use any excess cash flows provided by operations to make further debt reductions. As of December 31, 2002, Jefferson Smurfit (U.S.) had $265 million of unused borrowing capacity under its bank credit facility and $67 million of unused borrowing capacity under the $255 million accounts

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receivable securitization program, subject to Jefferson Smurfit (U.S.)'s level of eligible accounts receivable.

Financing Activities

        In January 2002, Jefferson Smurfit (U.S.) obtained a waiver and an amendment from its lender group under its credit agreement. The amendment eased certain quarterly financial covenant requirements as of December 31, 2001 and for future periods.

        In May 2002, Jefferson Smurfit (U.S.) repaid its $100 million 10.75% unsecured senior notes at maturity with borrowings under its revolving credit facility.

        In August 2002, Jefferson Smurfit (U.S.) amended its credit agreement to permit the distribution of Smurfit-Stone common stock by Jefferson Smurfit Group plc to its stockholders, which otherwise would have constituted a change of control event of default, and to permit the refinancing of all or any portion of the 9.75% unsecured senior notes due 2003 with the 8.25% Senior Notes.

        In September 2002, Jefferson Smurfit (U.S.) amended and restated its credit agreement to permit 1) the incurrence of indebtedness represented by the 8.25% Senior Notes in excess of the amount necessary for the refinancing of the 9.75% unsecured senior notes due 2003 and 2) the use of a portion of the proceeds from the issuance of the 8.25% Senior Notes to fund the Stevenson Mill Acquisition. In addition, the Jefferson Smurfit (U.S.) amended and restated credit agreement permits Jefferson Smurfit (U.S.) to obtain an incremental loan facility of up to $140 million to be used for the issuance of letters of credit to secure the environmental improvement revenue bonds related to the Stevenson Mill Acquisition. The amended and restated credit agreement also permits the merger of Stone Container and Jefferson Smurfit (U.S.) under certain circumstances.

        In September 2002, Jefferson Smurfit (U.S.) issued $700 million of 8.25% Senior Notes. Jefferson Smurfit (U.S.) used a portion of the proceeds of this issuance to repurchase $474 million of the 9.75% unsecured senior notes due 2003, pay $18 million of related call premiums and pay $12 million of issuance costs. Jefferson Smurfit (U.S.) used the remaining portion of the proceeds from the sale of the 8.25% Senior Notes to fund a portion of the purchase price of the Stevenson Mill Acquisition.

        In December 2002, Jefferson Smurfit (U.S.) completed the assumption of industrial revenue bonds associated with the Stevenson Mill Acquisition. Jefferson Smurfit (U.S.) paid $25 million to assume all rights and obligations under the indentures and lease agreements. The revenue bonds were re-marketed in December 2002, with a variable rate of interest of 3.9% as of December 31, 2002. At December 31, 2002, the aggregate balance of these bonds was $120 million. The revenue bonds are secured by letters of credit in the amount of $122 million issued under the Jefferson Smurfit (U.S.) credit agreement. The letters of credit were issued as credit enhancement for the investors.

        In December 2002, the Jefferson Smurfit (U.S.) accounts receivable securitization program was amended to (i) increase the borrowings available through the issuance of commercial paper or under the liquidity loan facility from $214 million to $255 million and (ii) extend the final maturity on these borrowings from February 2004 to December 2004.

        Jefferson Smurfit (U.S.) has a bank credit facility consisting of a $550 million revolving credit facility, of which up to $290 million may consist of letters of credit and two senior secured term loans (Tranche A and Tranche B) aggregating $449 million at December 31, 2002. Loans under Jefferson Smurfit (U.S.)'s revolving credit facility and Tranche A term loan bear interest at variable rates selected at the option of Jefferson Smurfit (U.S.) equal to adjusted LIBOR plus a margin ranging from 1.5% to 2.5% or the alternate base rate (ABR) plus a margin ranging from 0.5% to 1.5%. Outstanding loans under Jefferson Smurfit (U.S.)'s Tranche B term loan bear interest at variable rates equal to adjusted LIBOR plus a margin ranging from 2.0% to 3.25% or the ABR plus a margin ranging from 1.0% to 2.25%. Commitment fees on the unused portion of the revolving credit facility range from 0.375% to 0.5%. The margins and fees are

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determined by the ratio of total indebtedness to EBITDA, as defined in the Jefferson Smurfit (U.S.) credit agreement.

        The obligations under the Jefferson Smurfit (U.S.) credit agreement are unconditionally guaranteed by JSCE, Smurfit-Stone and material subsidiaries of Jefferson Smurfit (U.S.). The obligations under the Jefferson Smurfit (U.S.) credit agreement are secured by a security interest in substantially all of the assets of Jefferson Smurfit (U.S.) and the assets of its material subsidiaries, a pledge of all of the capital stock of JSCE, Jefferson Smurfit (U.S.) and the material U.S. subsidiaries of Jefferson Smurfit (U.S.) and a pledge of 65% of the capital stock of certain foreign subsidiaries of Jefferson Smurfit (U.S.). The security interest under the Jefferson Smurfit (U.S.) credit agreement excludes certain trade receivables and proceeds thereof.

        The Jefferson Smurfit (U.S.) credit agreement contains various covenants and restrictions including, among other things, (i) limitations on dividends, redemptions and repurchases of capital stock, (ii) limitations on the incurrence of indebtedness, liens, leases and sale-leaseback transactions, (iii) limitations on capital expenditures and (iv) maintenance of certain financial covenants. The Jefferson Smurfit (U.S.) credit agreement also requires prepayments of the term loans from excess cash flows, as defined, and proceeds from certain asset sales, insurance and incurrence of certain indebtedness. These restrictions, together with our highly leveraged position, could restrict our corporate activities, including our ability to respond to market conditions, to provide for unanticipated capital expenditures or to take advantage of business opportunities. We believe the risk of our breaching our debt covenants in 2003 is unlikely absent any material adverse event affecting the U.S. economy as a whole. However, our expectations of future operating results and continued compliance with our debt covenants cannot be assured and we cannot control our lenders' actions. If our debt is placed in default, we would experience a material adverse impact on our financial condition.

Pension Obligations

        As of December 31, 2002, our pension benefit obligations exceeded the fair value of pension plan assets by $425 million, up from $132 million at the end of 2001. The increase in the under-funded status was due primarily to interest cost on our pension obligations, the actuarial loss resulting primarily from the decrease in discount rates used for plan liabilities and negative investment returns resulting in a reduction of plan assets. As a result, in 2002, we recorded an increase to the minimum pension liability of $266 million, an increase to intangible assets of $5 million and a reduction to other comprehensive income of $159 million, net of tax of $102 million. In 2002, we contributed $2 million to our pension plans. Contributions to our plans will likely be higher in 2003 and 2004, but will be dependent upon future changes in discount rates and the earnings performance of our plan assets.

Environmental Matters

        Phase I of MACT I and the Effluent Limitation Guidelines of the Cluster Rule required us to convert our bleached linerboard mill at Brewton, Alabama to an elemental chlorine free bleaching process, to install systems at several of our mills for the collection and destruction of low volume, high concentration gases and to implement best management practices, such as spill controls. These projects have been completed at a cost of approximately $76 million. Phase II of MACT I of the Cluster Rule will require the implementation of systems to collect high volume, low concentration gases at various mills and has a compliance date of 2006. MACT II of the Cluster Rule will require control of particulate from recovery boilers, smelt tanks and lime kilns and has a compliance date of 2004. We have spent approximately $12 million (of which approximately $10 million was spent in 2002) for capital projects related to MACT II of the Cluster Rule. We continue to study possible means of compliance with phase II of MACT I and MACT II of the Cluster Rule. Based on currently available information, we estimate that the aggregate compliance cost of phase II of MACT I and MACT II of the Cluster Rule is likely to be in the range of $15 million to $20 million and that such cost will be incurred over the next four years.

        In recent years, the EPA has undertaken significant air quality initiatives associated with nitrogen oxide emissions, regional haze and national ambient air quality standards. Several of our mills are located in

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states affected by these EPA initiatives. The EPA is also currently proposing to limit particulate emissions from industrial boilers in a new Boiler MACT regulation. Several of our mills will be subject to the Boiler MACT regulation when it is finalized. When regulatory requirements for new and changing standards are finalized, we will add any resulting future cost projections to our expenditure forecast.

        In addition to Cluster Rule compliance, we anticipate additional capital expenditures related to environmental compliance. Excluding the spending on Cluster Rule projects described above, for the past three years, we have spent an average of approximately $2 million annually on capital expenditures for environmental purposes. We anticipate that environmental capital expenditures, exclusive of the Cluster Rule projects, will be approximately $4 million in 2003.

TRANSFER OF FINANCIAL ASSETS

        At December 31, 2002 and 2001, we had one off-balance sheet financing arrangement with a qualified special purpose entity. We sold 980,000 acres of owned 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 the form of installment notes, which mature from December 31, 2007 to December 31, 2014. Under our program to monetize the installment notes receivable, the notes were sold, without recourse, to Timber Notes Holdings LLC (TNH), a wholly-owned subsidiary of Jefferson Smurfit (U.S.) and a qualified special purpose entity under the provisions of SFAS No. 140, for $430 million in cash proceeds and a residual interest in the notes. The residual interest in the accompanying consolidated balance sheet was $41 million at December 31, 2002. TNH and its creditors have no recourse to us in the event of default on the installment notes.

EFFECTS OF INFLATION

        Although inflation has slowed in recent years, it is still a factor in the economy and we continue to seek ways to mitigate its impact. Energy resources have been tight in certain areas of the United States in recent years and prices of natural gas and purchased electricity have fluctuated. Our paper mills are large users of energy and we attempt to mitigate cost increases through hedging programs and supply contracts. Natural gas prices, which peaked in the first quarter of 2001, were lower for most of 2002. Prices began increasing in the fourth quarter of 2002, however, and the upward trend has continued into 2003. With the exception of energy costs, inflationary increases in operating costs have been moderate during the last three years and have not had a material impact on our financial position or operating results.

        We use the last-in, first-out method of accounting for approximately 80% of our inventories. Under this method, the cost of goods sold reported in the financial statements approximates current cost and thus provides a closer matching of revenue and expenses in periods of increasing costs. On the other hand, depreciation charges represent the allocation of historical costs incurred over past years and are significantly less than if they were based on the current cost of productive capacity being consumed.

CRITICAL ACCOUNTING POLICIES

        Certain accounting issues require management estimates and judgments for the preparation of financial statements. Our most significant policies requiring the use of estimates and judgments are listed below.

Goodwill

        Effective January 1, 2002, goodwill is no longer amortized, but instead is tested for impairment at least annually in accordance with SFAS No. 142, "Goodwill and Other Intangible Assets." Under SFAS No. 142, an impairment is recognized when a reporting unit's carrying amount of goodwill exceeds its implied fair value. We performed our transitional and annual impairment tests for each of our reporting units, as required by SFAS No. 142. We determined the fair value of our reporting units based upon discounted cash flow models supported by recent acquisitions within our industry and various other valuation

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techniques. Based upon the results of these impairment tests, the carrying amount of goodwill was not determined to be impaired.

Paper Machine Shutdowns

        As a result of excess capacity in Smurfit-Stone's containerboard system and its policy of producing to meet demand, Smurfit-Stone temporarily shut down four of its paper machines in 2001. Two of the machines, located in Fernandina Beach, Florida and Carthage, Indiana are owned by Jefferson Smurfit (U.S.). The Carthage machine was subsequently restarted. Stone Container's Missoula, Montana No. 1 paper machine remained closed during the first ten months of 2002. In light of the 830,000 tons of additional capacity added with the Stevenson Mill Acquisition, Smurfit-Stone performed an evaluation of its overall containerboard requirements. Consideration was given to such things as supply and demand, location of its containerboard mills and operating cost of paper machines. As a result of the study, Stone Container permanently closed the Missoula No. 1 paper machine in November 2002.

        The fourth paper machine, Jefferson Smurfit (U.S.)'s Fernandina Beach, Florida No. 2 machine continues to be temporarily shut down. This machine has the capacity to produce approximately 200,000 tons of lightweight linerboard. Demand for such lightweight paper grades continues to increase worldwide. No decision has been made to permanently shut down this machine, as it may be restarted, subject to future demand and industry conditions. As of December 31, 2002, the machine had a net book value of approximately $138 million. For accounting purposes, the machine is classified as held and used, and continues to be depreciated.

Allowance for Doubtful Accounts

        We evaluate the collectibility of selected accounts receivable on a case-by-case basis and make adjustments to the bad debt reserve for expected losses. We consider such things as ability to pay, bankruptcy, credit ratings and payment history. For all other accounts, we estimate reserves for bad debts based on historical experience and past due status of the accounts.

Pension

        Our defined benefit pension plans are accounted for in accordance with SFAS No. 87, "Employers' Accounting for Pensions." The determination of pension obligations and expense is dependent upon our selection of certain assumptions, the most significant of which are the expected long-term rate of return on plan assets and the discount rates used to discount plan liabilities. Our assumptions are described in Note 11 of the Notes to Consolidated Financial Statements. The assumption for the long-term rate of return on plan assets is determined based on historical results of the portfolio and management's expectation of the current economic environment. Effective January 1, 2003, we reduced the expected long-term rate of return on plan assets to 9.0%, down from 9.5%. At December 31, 2002, our discount rate assumptions, which are developed using the Moody's Average Aa-Rated Corporate Bonds index as a benchmark, were reduced by 0.5% to 6.75%. The decrease in the discount rate increased our pension obligations by approximately $65 million. The changes in assumptions, in addition to the increase in pension obligations and negative investment returns on plan assets in 2002, will increase our pension expense in 2003 by an estimated $23 million.

Income Tax Matters

        We frequently face challenges from domestic and foreign tax authorities regarding the amount of taxes due. These challenges include questions regarding the timing and amount of deductions and the allocation of income among various tax jurisdictions. The Internal Revenue Service is currently examining the years 1995 through 2001. All years through 1994 are closed. In evaluating the exposure associated with our various filing positions, we record reserves for probable exposures. Based on our evaluation of our tax positions, we believe we have appropriately accrued for probable exposures. To the extent we were to prevail in matters for which accruals have been established or be required to pay amounts in excess of our reserves, our effective tax rate in a given financial statement period may be materially impacted.

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Environmental Liabilities

        We accrue environmental expenditures related to existing conditions, resulting from past or current operations, when they become probable and estimable. Our estimates are based on our knowledge of the particular site, environmental regulations or the potential enforcement matter. Based on current information, we believe the probable costs of the potential environmental enforcement matters, response costs under CERCLA and similar state laws, and the remediation of owned property discussed in Part I, Item 3, Legal Proceedings—Environmental Matters will not have a material adverse effect on our financial condition or results of operations. As of December 31, 2002, we had approximately $13 million reserved for environmental liabilities. We believe our liability for these matters was adequately reserved at December 31, 2002.

PROSPECTIVE ACCOUNTING STANDARDS

        In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 143, "Accounting for Asset Retirement Obligations," effective for fiscal years beginning after June 15, 2002. SFAS No. 143 establishes accounting standards for the recognition and measurement of an asset retirement obligation and its associated asset retirement cost. It also provides accounting guidance for legal obligations associated with the retirement of tangible long-lived assets. We will apply the new accounting for asset retirement obligations beginning the first quarter of 2003. However, the impact to our financial position and results of operations is not expected to be material.

        In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 62, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 145 requires, in most cases, gains and losses on extinguishments of debt to be classified as income or loss from continuing operations, rather than as extraordinary items. The statement is effective for fiscal years beginning after May 15, 2002. Upon adoption of SFAS No. 145, we expect to reclassify previously recognized extraordinary gains and losses from the early extinguishment of debt.

        In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. SFAS No. 146 replaces Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002.

        In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others," which clarifies and expands on existing disclosure requirements for guarantees and requires us to recognize a liability for the fair value of our obligations under that guarantee. The initial measurement and recognition provisions are prospective for guarantees issued after December 31, 2002. However, the disclosure requirements are effective for financial statements ending after December 15, 2002. See Note 1 of the Notes to Consolidated Financial Statements.

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        We are exposed to various market risks, including interest rate risk and commodity price risk. To manage the volatility related to these risks, we enter into various derivative contracts. The majority of these contracts are settled in cash. However, such settlements have not had a significant effect on our liquidity in the past, nor are they expected to be significant in the future. We do not use derivatives for speculative or trading purposes.

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Commodity Price Risk

        We periodically enter into exchange traded futures contracts to manage fluctuations in cash flows resulting from commodity price risk in the procurement of natural gas. As of December 31, 2002, we have futures contracts to hedge approximately 20% to 25% of our expected natural gas requirements for the months of January 2003 through June 2003. We have futures contracts to hedge approximately 10% of our expected natural gas requirements for the months of July 2003 through December 2003. Our objective is to fix the price of a portion of our forecasted purchases of natural gas used in the manufacturing process. Excluding the impact of future contracts, the potential change in our total natural gas cost, based upon our current expected annual usage and unit cost, resulting from a hypothetical 10% change, would be approximately $6 million. The change in energy cost discussed in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations included the impact of the natural gas futures contracts. See Note 8 of the Notes to Consolidated Financial Statements.

Interest Rate Risk

        Our earnings and cash flows are significantly affected by the amount of interest on our indebtedness. Our financing arrangements include both fixed and variable rate debt in which changes in interest rates will impact the fixed and variable debt differently. A change in the interest rate of fixed rate debt will impact the fair value of the debt, whereas a change in the interest rate on the variable rate debt will impact interest expense and cash flows. Our objective is to protect JSCE from interest rate volatility and reduce or cap interest expense within acceptable levels of market risk. We may periodically enter into interest rate swaps, caps or options to hedge interest rate exposure and manage risk within company policy. We do not utilize derivatives for speculative or trading purposes. Any derivative would be specific to the debt instrument, contract or transaction, which would determine the specifics of the hedge. There were no interest rate derivative contracts outstanding at December 31, 2002.

        We have performed a sensitivity analysis as of December 31, 2002 and 2001 that measures the change in interest expense on our variable rate debt arising from a hypothetical 100 basis point adverse movement in interest rates. Based on our outstanding variable rate debt as of December 31, 2002 and 2001, a hypothetical 100 basis point change in interest rates would impact interest expense by approximately $8 million for both periods.

        The table below presents principal amounts by year of anticipated maturity for our debt obligations and related average interest rates based on the weighted average interest rates at the end of the period. Variable interest rates disclosed do not attempt to project future interest rates. This information should be read in conjunction with Note 7 of the Notes to Consolidated Financial Statements.

Short and Long-Term Debt

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ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

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MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS

        The management of JSCE, Inc. is responsible for the information contained in the consolidated financial statements. The consolidated financial statements have been prepared by us in accordance with accounting principles generally accepted in the United States appropriate in the circumstances and necessarily include certain amounts based on management's best estimate and judgment.

        We maintain a system of internal accounting control, which we believe is sufficient to provide reasonable assurance that in all material respects transactions are properly authorized and recorded, financial reporting responsibilities are met and accountability for assets is maintained. In establishing and maintaining any system of internal control, judgment is required to assess and balance the relative costs and expected benefits. Management believes that through the careful selection of employees, the division of responsibilities and the application of formal policies and procedures JSCE has an effective and responsive system of internal accounting controls. The system is monitored by our staff of internal auditors, who evaluate and report to management on the effectiveness of the system. In addition, our business ethics policy requires employees to maintain a high level of ethical standards in the conduct of the company's business.

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REPORT OF INDEPENDENT AUDITORS

Board of Directors
JSCE, Inc.

        We have audited the accompanying consolidated balance sheets of JSCE, Inc. as of December 31, 2002 and 2001, and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for each of the three years in the period ended December 31, 2002. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

        We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

        In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of JSCE, Inc. at December 31, 2002 and 2001, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

        As discussed in Note 1 to the financial statements, in 2002 the Company changed its method of accounting for goodwill and other intangible assets, and in 2001 the Company changed its method of accounting for derivative instruments and hedging activities.

St. Louis, Missouri
January 29, 2003

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JSCE, INC.

CONSOLIDATED BALANCE SHEETS

See notes to consolidated financial statements.

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JSCE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

See notes to consolidated financial statements.

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JSCE, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT)

See notes to consolidated financial statements.

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JSCE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS