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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 27, 2004, 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 27, 2004: 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, 2003

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;



•

assumptions related to pension and other postretirement costs;



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fluctuations in energy cost;



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fluctuations in wood fiber and reclaimed fiber cost; 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

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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.

PART I

ITEM 1.    BUSINESS

        Unless the context otherwise requires, "we," "us," "our," "Company" 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, 2003, our net sales were $3,651 million and net income was $17 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.

FINANCIAL INFORMATION CONCERNING INDUSTRY SEGMENTS

        We have three reportable segments: 1) Containerboard and Corrugated Containers, 2) Consumer Packaging and 3) Reclamation. For financial information relating to our segments, including our net sales to external customers by country of origin, see the information set forth in Note 20 of the Notes to Consolidated Financial Statements.

PRODUCTS

CONTAINERBOARD AND CORRUGATED CONTAINERS SEGMENT

        The Containerboard and Corrugated Containers segment includes five paper mills, 49 container plants and one wood products plant located in the United States, one container plant located in Mexico and one container plant located in Puerto Rico. The primary products of our Containerboard and Corrugated Containers segment include:

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corrugated containers;



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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 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. Net sales of corrugated containers for 2003, 2002 and 2001 represent 41%, 41% and 42%, respectively, of the Company's total net sales.

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        Our containerboard mills produce a full line of containerboard, which is used primarily in the production of corrugated packaging. In 2003, we produced 770,000 tons of unbleached kraft linerboard, 305,000 tons of white top linerboard and 972,000 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 2003, our container plants consumed 1,929,000 tons of containerboard, representing an integration level of approximately 83%. Net sales of containerboard for 2003, 2002 and 2001 represent 15%, 12% and 10%, respectively, of the Company's total net sales.

        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, 18 folding carton plants and 13 other converting plants. Our Consumer Packaging operations are located in the United States. The primary products of our Consumer Packaging segment include:

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folding cartons;



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coated recycled boxboard;



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laminated products; and



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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. Net sales of folding cartons for 2003, 2002 and 2001 represent 20%, 21% and 23%, respectively, of the Company's total net sales.

        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 mills and folding carton operations are highly integrated, with the majority of our coated boxboard used internally by our folding carton operations. In 2003, our folding carton plants consumed 356,000 tons of recycled boxboard, representing an integration level of approximately 62%.

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        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 2003, 2002 and 2001 were 6,549,000, 6,582,000 and 6,714,000, respectively. In 2003, our paper mills consumed 1,239,000 tons of fiber reclaimed and brokered, representing an integration level of approximately 19%. Net sales of reclaimed fiber for 2003, 2002 and 2001 represent 12%, 14% and 11%, respectively, of the Company's total net sales.

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. Adverse weather, conservation regulations and the shutdown of a number of sawmills 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 manufacturers of industrial and consumer products. 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 paperboard 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.

        We 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

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office. National account business may be allocated to more than one plant due to production capacity, logistics and equipment requirements. Marketing of containerboard to third parties is centralized in Smurfit-Stone's board sales group, which sells approximately three million tons of pulp and paperboard annually.

        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 13,100 employees at December 31, 2003, of which approximately 12,900 were employees of U.S. operations. Approximately 7,800 (60%) 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:

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Brewton, Alabama—October 2007



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Fernandina Beach, Florida—June 2008

        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 2003. 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.

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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.



•

MACT II of the Cluster Rule requires control of particulate from recovery boilers, smelt tanks and lime kilns and has a compliance date of March 13, 2004. We spent approximately $14 million through 2003 and will spend approximately $1 million in 2004 for projects related to MACT II of the Cluster Rule, which will substantially complete all of the projects to bring us into compliance with MACT II of the Cluster Rule.



•

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. We continue to study possible means of compliance with Phase II of MACT I of the Cluster Rule. Based on currently available information, we estimate that the aggregate compliance cost of Phase II of MACT I of the Cluster Rule will be approximately $10 million and that such cost will be incurred over the next three years. We do not anticipate any spending in 2004 on projects related to Phase II of MACT I.

        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

        We make available free of charge our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished as required by Section 13(a) or 15(d) of the Securities and Exchange Act of 1934 through Smurfit-Stone's Internet Website (www.smurfit-stone.com) as soon as reasonably practicable after we electronically file such information with, or furnish it to,

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the Securities and Exchange Commission (SEC). You may access these SEC filings via the hyperlink provided on Smurfit-Stone's Internet Website to a third-party SEC filings website. We have adopted a Code of Ethics for senior officers (including our Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer), which is also available on Smurfit-Stone's Internet 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, 2003 are summarized below.

(a)

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

        Our paper mills represent approximately 60% of our investment in property, plant and equipment. The approximate annual tons of productive capacity of our paper mills at December 31, 2003 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—Net Cash Provided By (Used For) Financing Activities."

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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. 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 were amended to name several other defendants, including Jefferson Smurfit (U.S.) and Smurfit-Stone. The suits sought an unspecified amount of damages arising out of the sale of corrugated products for a period during 1993-95. The complaints were transferred to and consolidated in the United States District Court for the Eastern District of Pennsylvania, which certified two plaintiff classes. In November 2003, Smurfit-Stone reached an agreement to settle the antitrust class action cases pending against Smurfit-Stone, Stone Container and Jefferson Smurfit (U.S.). Jefferson Smurfit (U.S.) will make a settlement payment of $36 million, one-half of which was paid in December 2003 and the remainder of which will be paid in January 2005. The settlement is subject to final court approval following a fairness hearing to be held on March 26, 2004. All of the other defendants have also entered into agreements to settle these class actions; however, all of the defendants in the class actions continue to be defendants in 12 lawsuits brought on behalf of numerous parties that have opted out of the class actions to seek their own recovery. All but one of the opt-out cases have been transferred to the same United States District Court for the Eastern District of Pennsylvania for pretrial proceedings. We continue to vigorously defend these opt-out cases. We believe our liability for these matters was adequately reserved at December 31, 2003.

        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.

        In May 2003, we received a Violation Notice from the Illinois Environmental Protection Agency (IEPA) alleging that our flexible packaging facility in Schaumburg, Illinois violated various provisions of the Illinois Environmental Protection Act and various conditions of the applicable Clean Air Act permit issued to the facility. In June 2003, we received a Notice of Violation and Finding of Violation from the EPA containing similar allegations. The allegations primarily relate to the alleged failure of two afterburner systems designed to capture and reduce certain emissions from printing presses below required levels and the potential impact of such failure on past and future regulatory standards, permitting requirements, emission credit requirements, recordkeeping and reporting. We discovered and corrected a problem with one of the systems and subsequently replaced certain components of the second system to ensure that it operates as designed and to reduce the potential for any future failure. We responded to the IEPA Violation Notice and the EPA Notice of Violation and Finding of Violation and are attempting to reach an acceptable resolution with the IEPA and the EPA. Based on discussions to date with the two agencies, we believe the costs to resolve this matter will not be material and will not exceed established reserves.

        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

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(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, 2003, we had approximately $12 million reserved for environmental liabilities. We believe our liability for these matters was adequately reserved at December 31, 2003.

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 2003 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—Net Cash Provided By (Used For) Financing Activities."

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ITEM 6.    SELECTED FINANCIAL DATA (g)

Notes to Selected Financial Data

(a)

We recorded a $3 million charge, net of income taxes, in 2003 for the cumulative effect of an accounting change in accordance with Statement of Financial Accounting Standards (SFAS) 143, "Accounting for Asset Retirement Obligations."

(b)

Results for 2002 include the acquisition of the Stevenson, Alabama containerboard mill and the related corrugated container assets (the Stevenson Mill Acquisition) after September 30, 2002, the date of acquisition.

(c)

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

(d)

We recorded restructuring charges of $21 million, $4 million, $4 million and $9 million in 2003, 2002, 2001 and 1999, respectively.

(e)

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

(f)

Effective January 1, 2002, we adopted SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 requires that goodwill no longer be amortized, but instead be tested for impairment at least annually. Depreciation, depletion and amortization included goodwill amortization of $7 million in 2001, 2000 and 1999.

(g)

Certain prior year amounts have been restated to conform to current year presentation.

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

OVERVIEW

        Jefferson Smurfit Corporation (U.S.) is an integrated producer of paperboard and paper-based packaging. Our major products are containerboard, solid bleached sulfate (SBS), recycled fiber, corrugated containers, coated recycled boxboard and folding cartons. We operate in three reportable industry segments. Approximately 60% of our 2003 net sales were generated by the Containerboard and Corrugated Containers segment, 28% were generated by the Consumer Packaging segment and 12% were generated by the Reclamation segment. Our mill operations supply paper to our corrugated container and folding carton converting operations. The products of our converting operations, as well as the mill and reclamation tonnage in excess of what is consumed internally, are the main products sold to third parties. Our operating facilities and customers are located primarily in the United States.

        Market conditions and demand for the products of our segments are subject to cyclical changes in the economy and changes in industry capacity, both of which can significantly impact selling prices and our profitability. In recent years, the continued loss of domestic manufacturing to offshore competition and the changing retail environment in the U.S. have also played a key role. The influence of superstores and discount retailing giants, as well as the impacts from online shopping, has resulted in growing demand for packaging which is more condensed, lighter weight and less expensive. These factors have greatly influenced the corrugated industry. Demand for corrugated products has declined approximately 6% since 1999 and prices have fallen approximately 15% from their peak in 2000.

        Many of these same issues are impacting our Consumer Packaging businesses, and, in particular, our folding carton business. This industry has seen moderate growth in the last few years, but has come under considerable pricing pressures. This, coupled with increasing cost pressures, has resulted in a decline in earnings for our Consumer Packaging segment.

        We have responded to this challenging demand environment by 1) taking extensive market related downtime in recent years in our mill operations in order to maintain an internal balance between supply and demand, 2) restructuring our operations thereby reducing excess productive capacity and fixed costs, 3) using an area- management approach at our converting operations that provides added value to customers through focused and unified sales and manufacturing teams, 4) expanding our core capabilities to serve the evolving needs of packaging customers in North America and 5) making strategic acquisitions that can provide competitive advantages.

        Growth in the manufacturing sector of the U.S. economy continued to be slow through most of 2003, resulting in sluggish demand for our products and lower profitability compared to 2002. Prices for many of our products declined compared to 2002 and profits declined due to lower pricing, restructuring activities and higher costs, including energy, fiber and employee benefits.

        The economic recovery that has recently begun in the United States is expected to have a positive impact on packaging demand. In January 2004, we advised our customers of a $40 per ton price increase for liner and medium, with corresponding increases for corrugated containers. While we anticipate that 2004 will be a stronger year, we cannot predict whether the U.S. economic recovery will continue, the rate of such recovery or the success of our planned price increase implementation.

ACQUISITIONS

        On May 31, 2003, Jefferson Smurfit (U.S.) acquired the operations of Arko Paper Products Co., Inc. (the Arko Acquisition), a folding carton producer, for $30 million. Arko's results of operations are included in the consolidated statement of operations after May 31, 2003. The cost to acquire the operations has been allocated to the assets acquired and liabilities assumed according to fair values. The purchase price

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allocation, completed in the fourth quarter of 2003, has resulted in acquired goodwill of $12 million and intangible assets of $3 million, which were allocated to the Consumer Packaging segment.

RESULTS OF OPERATIONS

Segment Data

(1)

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

(2)

Corporate expenses and other includes corporate expenses, corporate charges to segments for working capital interest and other expenses not allocated to segments.

2003 COMPARED TO 2002

        The decline in our income from continuing operations before income taxes and cumulative effect of accounting change was due primarily to lower segment profits and higher restructuring and litigation charges. Total segment operating profit was lower due primarily to higher costs of energy, fiber and employee benefits, but benefited from the acquisition of the Stevenson, Alabama containerboard mill and related corrugated container assets on September 30, 2002 (the Stevenson Mill Acquisition). Annualized synergy savings from the Stevenson Mill Acquisition achieved in 2003, including administrative cost reductions, system optimization and purchasing savings, exceeded our targeted annual savings of $40 million.

        Net sales of $3,651 million in 2003 were 6% higher due primarily to additional sales attributable to the Stevenson Mill Acquisition. The increase in sales volume was partially offset by lower sales prices. The change in net sales for each of our segments is summarized in the chart below:

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        Cost of goods sold increased due primarily to the Stevenson Mill Acquisition and higher energy cost ($20 million) and employee benefits. Cost of goods sold as a percent of net sales in 2003 was 88% compared to 86% in 2002 due primarily to higher costs of energy and employee benefits and the effects of our lower average sales prices.

        Selling and administrative expenses increased due primarily to the litigation charges of $44 million, the Stevenson Mill Acquisition and higher employee benefits. On November 10, 2003, Smurfit-Stone reached an agreement to settle the antitrust class action cases pending against Smurfit-Stone, Stone Container and Jefferson Smurfit (U.S.), which were based on allegations of a conspiracy among containerboard manufacturers in 1993-95. Jefferson-Smurfit (U.S.) will make a settlement payment of $36 million, one-half of which was paid in December 2003 and the remainder will be paid in January 2005. The settlement is subject to final court approval following a fairness hearing to be held on March 26, 2004. All of the other defendants previously entered into agreements to settle these class actions; however, all of the defendants in the class actions continue to be defendants in 12 unresolved lawsuits brought on behalf of parties that have opted out of the class actions to seek their own recovery. Jefferson-Smurfit (U.S.) recorded pretax charges of $44 million in 2003, to accrue for the antitrust settlement and the estimated liability of the opt-out cases. See Part 1, Item 3, "Legal Proceedings."

        During 2003, we recorded restructuring charges of $21 million, including $17 million in the fourth quarter, related to rationalization and cost reduction plans. We permanently closed one of two paper machines at our Philadelphia, Pennsylvania coated recycled boxboard mill, closed three converting facilities and reduced the salaried workforce, primarily in the corrugated containers operations. As a result, our annual production capacity of boxboard will be reduced by about 70,000 tons (approximately 12%). We expect to record additional restructuring charges in 2004 for further rationalizations, including consolidation of facilities and additional reductions in workforce. The rationalization process, when completed, will result in an overall workforce reduction in Smurfit-Stone's subsidiaries of approximately 1,400 positions. Jefferson Smurfit (U.S.) expects to realize annual savings of approximately $40 million as a result of these actions.

        Interest expense increased $10 million due to the impact of $12 million from higher average borrowings, offset by $2 million due to lower overall average interest rates. The overall average effective interest rate in 2003 was lower than 2002 by approximately 10 basis points. Interest income from Smurfit-Stone increased $7 million due to a higher average balance for the notes receivable in 2003.

        Provision for income taxes in 2003 differed from the amount computed by applying the statutory U.S. tax rate to income from continuing operations before income taxes and cumulative effect of accounting change primarily due to a $6 million benefit related to the resolution of certain prior year tax matters, state income taxes and the effects of other permanent differences. For information concerning income taxes, see Note 12 of the Notes to Consolidated Financial Statements.

Containerboard and Corrugated Containers Segment

        Net sales increased by 11% due primarily to higher shipments resulting from the Stevenson Mill Acquisition. Prices for corrugated containers and containerboard were lower due to the poor market conditions.

        Production of containerboard increased 36% due primarily to the Stevenson Mill Acquisition. Our containerboard mills operated at an average rate of 87.3% of capacity in 2003 compared to 85.4% in 2002. Shipments of corrugated containers increased 6% due primarily to the Stevenson Mill Acquisition. SBS production was higher by 1%.

        Profits decreased by $36 million due primarily to the lower average sales prices and higher costs, including energy ($11 million) and employee benefits. Profits were favorably impacted by the Stevenson Mill Acquisition.

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Consumer Packaging Segment

        Net sales increased by 1%. Folding carton shipments increased 2% due primarily to the Arko Acquisition and shipments of flexible packaging increased by 11%. The increases in sales volume were partially offset by lower sales prices, particularly for folding cartons. Production of coated boxboard was comparable to 2002.

        Profits declined $32 million due primarily to lower prices, product mix and higher cost for energy ($8 million) and employee benefits.

Reclamation Segment

        Net sales decreased 5% compared to 2002 due primarily to lower sales volume. Shipments were lower in 2003 due to higher internal consumption as a result of the Stevenson Mill Acquisition. The average price of old corrugated containers (OCC) in 2003 was comparable to 2002 and the average price of old newsprint was higher by approximately $10 per ton. Profits increased $3 million due primarily to a shift from lower margin brokerage sales to higher margin plant sales.

2002 COMPARED TO 2001

        Income from continuing operations before income taxes and cumulative effect of accounting change in 2002 was $140 million, a decrease of $35 million compared to 2001. The decline was due primarily to lower segment profit as a result of lower average sales prices for containerboard and corrugated containers. Lower interest expense partially offset the decline in earnings.

        Net sales of $3,456 million in 2002 were 3% higher compared to 2001 due primarily to higher shipments of containerboard and corrugated containers, the majority of which was due to the Stevenson Mill Acquisition. Sales prices, primarily for containerboard and corrugated containers, were lower compared to 2001. The change 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.

        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 from Smurfit-Stone increased $8 million due to a higher average balance for the notes receivable in 2002.

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        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 Note 12 of the Notes to Consolidated Financial Statements.

Containerboard and Corrugated Containers Segment

        Net sales increased by 3% due primarily to higher shipments of containerboard and corrugated containers, the majority of which was due to the Stevenson Mill Acquisition. Shipments of corrugated containers increased 6%.

        Production of containerboard increased 13% due primarily to the Stevenson Mill Acquisition. Our containerboard mills operated at an average rate of 85.4% in 2002 compared to 81.5% in 2001. SBS production was lower by 4%.

        Profits decreased by $46 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 2001 by 17% due primarily to product mix changes.

        Profits declined $18 million due primarily to lower prices, lower sales volume and higher reclaimed fiber cost. Reclaimed fiber cost was higher than 2001 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 old 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.

LIQUIDITY AND CAPITAL RESOURCES

        The following table presents a summary of our cash flows for the years ended December 31,:

Net Cash Provided By Operating Activities

        Net cash provided by operating activities for the year ended December 31, 2003 decreased $188 million, or 79%, compared to 2002. The decrease was due primarily to lower segment profits, higher contributions to pension plans and litigation payments. Segment profits decreased $66 million compared to 2002 due primarily

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to higher costs of wood fiber, energy and employee benefits. Contributions to our pension plans were $72 million in 2003 compared to $2 million in 2002 and $2 million in 2001. In addition, we paid $18 million in 2003 related to the settlement of the antitrust class action litigation.

        Reductions in accounts receivable, due primarily to lower product prices, and lower inventory levels favorably impacted operating cash flow in 2003. The decline in accounts payable had an unfavorable impact on operating cash flow. In addition, we had higher payments for severance and restructuring costs in 2003.

Net Cash Used For Investing Activities

        Net cash used for investing activities was $44 million for the year ended December 31, 2003. The decrease compared to 2002 was due primarily to lower payments for acquisitions. Acquisitions in 2002 included $350 million for the Stevenson Mill Acquisition.

        In May 2003, Jefferson Smurfit (U.S.) sold approximately 81,000 acres of timberland located in Alabama and Tennessee and a hardwood sawmill, acquired as part of the Stevenson Mill Acquisition, to a third party for $38.5 million. The proceeds were used for general corporate purposes.

        As of December 31, 2003, our wholly-owned subsidiary, JSC Capital Corporation, had unsecured intercompany notes receivable from Smurfit-Stone totaling $582 million. JSC Capital Corporation received a total of $34 million from Smurfit-Stone in 2003 in repayment of the loan. 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.

        Our 2003 expenditures for property, plant and equipment were comparable to 2002. The $96 million expended for property, plant and equipment included $7 million for environmental projects, $10 million to maintain competitiveness and $79 million for upgrades, modernization and expansion.

Net Cash Provided By (Used For) Financing Activities

        Net cash provided by (used for) financing activities for the year ended December 31, 2003 decreased $112 million compared to 2002. A capital contribution from Smurfit-Stone of $31 million and net cash provided by operating and investing activities were used to repay debt, pay dividends and fund deferred debt issuance cost.

        In May 2003, Jefferson Smurfit (U.S.) issued $300 million of 7.50% unsecured senior notes due 2013 (the New Senior Notes). Jefferson Smurfit (U.S.) used the proceeds of this issuance to repay the $175 million Tranche A term loan due March 31, 2005, and $122 million of its outstanding Tranche B term loan due March 31, 2007 and to pay $3 million of fees and other expenses. On July 30, 2003, Jefferson Smurfit (U.S.) completed a registered exchange offer of all of the then outstanding New Senior Notes for a like principal amount of senior notes which have been registered under the Securities Act of 1933. Jefferson Smurfit (U.S.) did not receive any proceeds from the exchange offer.

        On June 30, 2003, Jefferson Smurfit (U.S.) obtained an amendment from its lender group easing certain financial covenant requirements under its bank credit agreement as of June 30, 2003 and for future periods through December 31, 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 a senior secured term loan aggregating $151 million (Tranche B) at December 31, 2003. Loans under Jefferson Smurfit (U.S.)'s revolving credit facility 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%.

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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%. A commitment fee of 0.5% is assessed on the unused portion of the Jefferson Smurfit (U.S.) revolving credit facility. The margins and fees are 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 the 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 expect to remain in compliance with all of the financial covenants contained in the Jefferson Smurfit (U.S.) credit agreement. However, if the difficult business conditions we experienced in 2003 continue to persist in 2004, Jefferson Smurfit (U.S.) may need to seek an amendment or waiver to avoid violating certain financial covenants contained in its credit agreement. We believe that Jefferson Smurfit (U.S.) could obtain such an amendment or waiver, if necessary. However, if there is a violation of any of the financial covenants and we are not successful in obtaining an amendment or waiver, a default would occur under the Jefferson Smurfit (U.S.) credit agreement, which could result in a material adverse impact on our financial condition.

FUTURE CASH FLOWS

Obligations and Commitments

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

(1)

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

(2)

Amounts shown are estimates of future spending on capital projects which were authorized prior to December 31, 2003. We intend to hold capital expenditures for 2004 to approximately $79 million.

(3)

Amounts shown consist primarily of severance costs and other rationalization expenditures, antitrust payments and environmental expenditures, which have been recorded in our December 31, 2003 balance sheet. The table does not include deferred income tax liability, accruals for self-insured losses and pension and other postretirement plans because it is not certain when these liabilities will become due. We contributed $84 million to our pension and other postretirement plans in 2003 and expect to contribute $81 million to such plans in 2004. Future contributions to our pension and other

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postretirement plans will be dependent upon pending legislation, future changes in discount rates and the earnings performance of our plan assets.

        As previously discussed, our cash flow from operations declined significantly in 2003 as a result of the challenging operating conditions within our industry. We expect an improvement in our cash flow from operations in 2004, provided the economic expansion continues and we are successful in implementing our planned price increases. As of December 31, 2003, Jefferson Smurfit (U.S.) had $281 million of unused borrowing capacity under its revolving credit facility.

        Scheduled debt payments, including capital lease payments, for 2004 and 2005 total $180 million and $215 million, respectively. Jefferson Smurfit (U.S.)'s Accounts Receivable Securitization Program, which has an outstanding balance of $177 million at December 31, 2003, expires in December 2004. Jefferson Smurfit (U.S.) intends to enter into a new accounts receivable program during 2004 to refinance this debt. Jefferson Smurfit (U.S.)'s revolving credit facility matures in 2005. Smurfit-Stone is currently evaluating refinancing alternatives, including a combination of Jefferson Smurfit (U.S.) with Stone Container, and as part of such combination, the separate senior secured bank financings of each of Jefferson Smurfit (U.S.) and Stone Container may be combined into a new single senior secured bank facility. Also, we will continue to pursue opportunities to reduce interest costs by refinancing certain of Jefferson Smurfit (U.S.)'s debt obligations. Jefferson Smurfit (U.S.) has historically had good access to capital markets and expects to be able to repay or refinance its debt maturities on or before the maturity dates. Although Jefferson Smurfit (U.S.) believes it will have access to the capital markets in the future, these markets are volatile and Jefferson Smurfit (U.S.) 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, Jefferson Smurfit (U.S.) would explore additional options, including, but not limited to, the sale or monetization of assets.

        We expect that all of our cash sources detailed above, in combination, will be sufficient for the next several years to meet our obligations and commitments, including debt service, pension funding, the antitrust settlement, severance costs and other rationalization expenditures, expenditures related to environmental compliance and other capital expenditures.

Contingent Obligations

        We issue standby letters of credit for performance bonds and self-insurance. Letters of credit are issued under the Jefferson Smurfit (U.S.) revolving credit facility, generally have a one-year maturity and are renewed annually. As of December 31, 2003, Jefferson Smurfit (U.S.) had $175 million of letters of credit outstanding.

        We have certain woodchip processing 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 the event of a loan default by any of the contractors. The maximum potential amount of future payments related to all of such arrangements as of December 31, 2003 would be $24 million. Cash proceeds received from the liquidation of the chipping equipment would be based on market conditions at the time of sale, and we may not recover in full the guarantee payments made.

Pension Obligations

        As of December 31, 2003, our pension benefit obligations exceeded the fair value of pension plan assets by $335 million, down from $425 million at the end of 2002. The decrease in the under-funded status was due primarily to higher contributions and actual returns on plan assets in excess of the assumed returns. In 2003, we recorded a decrease to the minimum pension liability of $74 million and an increase to other comprehensive income of $45 million, net of tax of $29 million.

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Exit Liabilities

        We recorded restructuring charges of $21 million in 2003, including $10 million for exit liabilities, which were principally for severance and benefit cost and facility closure cost. In 2003, we incurred cash expenditures of $3 million for these exit liabilities.

        As explained in our 2002 Annual Report on Form 10-K, we had $25 million of exit liabilities as of December 31, 2002 related to the Smurfit-Stone merger and from our restructuring activities. During 2003, we incurred approximately $8 million of cash expenditures for exit liabilities. The exit liabilities remaining as of December 31, 2003 total $24 million, including the 2003 restructuring activities. Future cash outlays, principally for severance, long-term lease commitments and facility closure costs, are expected to be $9 million in 2004, $2 million in 2005 and $13 million thereafter. We intend to continue funding the remaining exit liabilities through operations as originally planned.

Environmental Matters

        As discussed in Item 1, "Business, Environmental Compliance," we will spend approximately $1 million in 2004 on MACT II of the Cluster Rule, which will substantially complete all of the projects to bring us into compliance with MACT II of the Cluster Rule. We continue to study possible means of compliance with Phase II of MACT I of the Cluster Rule. Based on currently available information, we estimate that the aggregate compliance cost of Phase II of MACT I of the Cluster Rule will be approximately $10 million and that such cost will be spent in 2005 and 2006. In addition to Cluster Rule compliance, we anticipate additional capital expenditures related to environmental compliance. Excluding the spending on the Cluster Rule projects, we have spent an average of approximately $2 million in each of the last three years on capital expenditures for environmental purposes. We anticipate that environmental capital expenditures, exclusive of the Cluster Rule projects, will be approximately $7 million in 2004.

OFF-BALANCE SHEET FINANCING ARRANGEMENT

        At December 31, 2003 and 2002, we had an off-balance sheet financing arrangement with a qualified special purpose entity. Jefferson Smurfit (U.S.) sold 980,000 acres of owned and leased timberland in October 1999. The final purchase price, after adjustments, was $710 million. Jefferson Smurfit (U.S.) 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, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities," for $430 million in cash proceeds and a residual interest in the notes. The residual interest in the accompanying consolidated balance sheet was $43 million at December 31, 2003. TNH and its creditors have no recourse to us in the event of default on the installment notes.

EFFECTS OF INFLATION

        With the exception of energy, fiber and employee benefits, inflationary increases in operating costs have been moderate during the past three years. Energy and fiber cost increases are strongly influenced by supply and demand factors, and when supplies become tight, we have experienced temporary increases in the cost of these items. We continue to seek ways to mitigate the impact of such cost increases and, to the extent permitted by competition, pass the increased cost on to customers by increasing sales prices over time.

        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.

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CRITICAL ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES

        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.

Long-Lived Assets and Goodwill

        We conduct impairment reviews of long-lived assets and goodwill in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," and SFAS No. 142, respectively. Such reviews require us to make estimates of future cash flows and fair values. Our cash flow projections include significant assumptions about economic conditions, demand and pricing for our products and cost. Our estimates of fair value are determined using a variety of valuation techniques, including pricing of recent industry acquisitions. While significant judgment is required, we believe that our estimates of future cash flows and fair value are reasonable. However, should our assumptions change in future years, our fair value models could result in lower fair values for long-lived assets and goodwill, which could materially affect the value of property, plant and equipment and goodwill and results of operations.

Idle Paper Machines and Restructurings

        Smurfit-Stone has excess capacity in its containerboard system due to its policy of producing to meet demand. As a result, Smurfit-Stone has temporarily shut down two of its paper machines, one located in Fernandina Beach, Florida and the other in Jacksonville, Florida. The Fernandina Beach machine is owned by Jefferson Smurfit (U.S.). Smurfit-Stone's decision to shut down these machines was based upon anticipated supply and demand factors, their locations and operating cost. The Fernandina Beach machine has the capacity to produce approximately 200,000 tons of lightweight linerboard. No decision has been made to permanently shut down the Fernandina Beach machine, as it may be restarted, subject to future demand and industry conditions. As of December 31, 2003, the Fernandina Beach machine had a net book value of approximately $118 million. For accounting purposes, the machine is classified as held and used and continues to be depreciated.

        In recent years, we have closed a number of operating facilities and exited non-core businesses. Identifying and calculating the cost to exit these businesses requires certain assumptions to be made, the most significant of which are anticipated future liabilities, including leases and other contractual obligations, and the net realizable value of assets held for sale. We believe our estimates are reasonable, considering our knowledge of the paper industry, previous experience in exiting activities and valuations received from independent third parties in the calculation of such estimates. Although our estimates have been reasonably accurate in the past, significant judgment is required and these estimates and assumptions may change as additional information becomes available and facts or circumstances change.

Allowance for Doubtful Accounts

        We evaluate the collectibility of accounts receivable on a case-by-case basis and make adjustments to the bad debt reserve for expected losses. We also estimate reserves for bad debts based on historical experience and past due status of the accounts. We perform credit evaluations and adjust credit limits based upon each customer's payment history and credit worthiness. While credit losses have historically been within our expectations and the provisions established, actual bad debt write-offs may differ from our estimates, resulting in higher or lower charges in the future for our allowance for doubtful accounts.

Pension

        The determination of pension obligations and pension 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 applied to plan liabilities. Consulting actuaries assist us in determining these assumptions, which are described in Note 13 of the Notes to Consolidated Financial Statements. In 2003, we adjusted the expected long-term rate of return on plan assets to 9.0%, down from 9.5%, which increased retirement plan expense approximately $4 million. The discount rate at December 31, 2003 was 6.25%. The assumed rate for the long-term return on plan assets has been determined based upon target asset allocations and expected long-term rates of return by asset class. We regularly review our asset allocation, periodically

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rebalance our investments to the targeted allocation and evaluate our actuarial assumptions. Our assumed discount rate is developed using Moody's Average Aa-Rated Corporate Bonds index as a benchmark. A decrease in the assumed rate of return of 0.50% would increase pension expense by approximately $5 million. A decrease in the discount rate of 0.50% would increase our pension obligations by approximately $73 million.

Income Taxes

        Deferred tax assets and liabilities reflect our assessment of future taxes to be paid in the jurisdictions in which we operate. These assessments involve temporary differences resulting from differing treatment of items for tax and accounting purposes, as well as estimates of our current tax exposure. Based on our evaluation of our tax positions, we believe we are adequately reserved for these matters at December 31, 2003.

        At December 31, 2003, we had net operating loss and alternative minimum tax credit carryforwards in the amount of $86 million. Valuation allowances of $10 million have been established for a portion of these deferred tax assets. For additional information, see Note 12 of the Notes to Consolidated Financial Statements. The realization of these deferred tax assets is dependent upon future taxable income and we expect that our deferred tax assets, net of valuation allowances, will be fully realized. Should additional valuation allowances be necessary because of changes in economic circumstances, those allowances would be established through a charge to income tax expense.

        We frequently face challenges from domestic 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. In June 2003, we settled the examination by the Internal Revenue Service (IRS) for the years 1995 through 1998, resulting in a payment of tax and interest of $50 million. Adequate reserves were available to cover the payment. The IRS is currently examining the years 1999 through 2001. To the extent we prevail in matters for which accruals have been established or are required to pay amounts in excess of our reserves, our effective tax rate in a given financial statement may be materially impacted. While the ultimate results cannot be predicted with certainty, we believe that the examination will not have a material adverse effect on our consolidated financial condition or results of operations.

Legal and Environmental Contingencies

        Accruals for legal and environmental matters are recorded when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. Such liabilities are developed based on currently available information and require judgments as to probable outcomes. Assumptions are based on historical experience and recommendations of legal counsel. Environmental estimates include assumptions and judgments about particular sites, remediation alternatives and environmental regulations. We believe our accruals are adequate. However, due to uncertainties associated with these assumptions and judgments, as well as potential changes to governmental regulations and environmental technologies, actual costs could differ materially from the estimated amounts.

Self-Insurance

        We self-insure a majority of our workers' compensation and general liability costs subject to specific retention levels for certain policies and coverage. Losses above these retention levels are transferred to insurance companies. In addition, we self-insure 100% of our group health care costs. All of the health care, workers' compensation and general liability claims are handled by third party administrators. Consulting actuaries and administrators assist us in determining our liability for self-insured claims. Losses are accrued based upon the aggregate self-insured claims determined by the third party administrators, actuarial assumptions and our historical experience. While we believe that our assumptions are appropriate, significant differences in our actual experience or significant changes in our assumptions may materially affect our workers' compensation, general liability and group health care costs.

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PROSPECTIVE ACCOUNTING STANDARD

        In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act) was enacted. The Act introduced a prescription drug benefit under Medicare Part D as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. Under FASB Staff Position 106-1, issued in January 2004, related to the Act, we elected to defer recognizing the effects of the Act on our accumulated postretirement benefit obligation and net periodic postretirement benefit costs until pending authoritative guidance on the accounting for the federal subsidy is issued, which could require a change to previously reported information.

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.

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, 2003, we have monthly futures contracts to hedge approximately 50% to 60% of our expected natural gas requirements through March 2004. We have monthly futures contracts to hedge approximately 15% of our expected natural gas requirements for the remainder of 2004. 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 expected 2004 natural gas cost, based upon our expected annual usage and unit cost, resulting from a hypothetical 10% change, would be approximately $7 million. The change in energy cost discussed in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" include 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, 2003.

        We have performed a sensitivity analysis as of December 31, 2003 and 2002 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, 2003 and 2002, a hypothetical 100 basis point change in interest rates would impact interest expense by approximately $6 million and $8 million, respectively.

        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.

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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, 2003 and 2002, and the related consolidated statements of operations, stockholder's equity (deficit) and cash flows for each of the three years in the period ended December 31, 2003. 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, 2003 and 2002, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2003 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 2003 the Company changed its method of accounting for asset retirement obligations and for stock-based compensation, and in 2002 the Company changed its method of accounting for goodwill and other intangible assets.

St. Louis, Missouri
January 27, 2004

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JSCE, INC.

CONSOLIDATED BALANCE SHEETS

See notes to consolidated financial statements.

27

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)