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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

For Quarter Ended September 30, 2002

Commission File Number 0-11951

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

(312) 346-6600
(Registrant's telephone number, including area code)

Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

        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

APPLICABLE ONLY TO CORPORATE ISSUERS:

        As of September 30, 2002, the registrant had outstanding 1,000 shares of common stock, $.01 par value per share, all of which are owned by Smurfit-Stone Container Corporation.

PART I—FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS

JSCE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

See notes to consolidated financial statements.

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JSCE, INC.

CONSOLIDATED BALANCE SHEETS

See notes to consolidated financial statements.

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JSCE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

See notes to consolidated financial statements.

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JSCE, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in millions)

1.    Significant Accounting Policies

        The accompanying consolidated financial statements and notes thereto of JSCE, Inc. have been prepared in accordance with the instructions to Form 10-Q and reflect all adjustments which management believes necessary (which include only normal recurring accruals) to present fairly the Company's financial position, results of operations and cash flows. These statements, however, do not include all information and footnotes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with generally accepted accounting principles. Interim results may not necessarily be indicative of results which may be expected for any other interim period or for the year as a whole. These financial statements should be read in conjunction with the audited consolidated financial statements and footnotes included in the JSCE, Inc. Annual Report on Form 10-K for the year ended December 31, 2001, filed March 13, 2002 with the Securities and Exchange Commission.

        JSCE, Inc., hereafter referred to as the "Company," is a wholly-owned subsidiary of Smurfit-Stone Container Corporation ("SSCC"). The Company owns 100% of the equity interest in Jefferson Smurfit Corporation (U.S.) ("JSC(U.S.)") and is a guarantor of the senior indebtedness of JSC(U.S.). The Company has no other material operations other than its investment in JSC(U.S.). JSC(U.S.) has operations throughout the United States.

2.    Reclassifications

        Certain prior year amounts have been reclassified to conform to the current year presentation.

3.    Discontinued Operations

        On September 30, 2002, JSC(U.S.) sold the industrial packaging division included in the Consumer Packaging segment to a third party for approximately $80 million and retained $12 million of accounts receivable. The sale resulted in a gain on disposition of discontinued operations of $22 million, net of tax of $17 million. The assets sold include 17 tube and core manufacturing facilities, three fiber partition plants and three uncoated recycled boxboard mills. Net sales for these operations were $122 million for the year ended December 31, 2001 and $96 million for the nine months ended September 30, 2002. These facilities employed approximately 700 hourly and 150 salaried employees. The results of operations from the industrial packaging division have been reclassified as discontinued operations for all periods presented. The assets and liabilities of the industrial packaging division, excluding retained assets and liabilities, included in the accompanying consolidated balance sheet as of December 31, 2001 consisted of the following:

        Proceeds of the sale were used to reduce borrowings outstanding under the JSC(U.S.) revolving credit agreement.

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4.    Stevenson Mill Acquisition

        On September 30, 2002, JSC(U.S.) purchased a corrugating medium mill, seven corrugated container plants, one hardwood sawmill and approximately 82,000 acres of timberland from MeadWestvaco (the "Stevenson Mill Acquisition"). JSC(U.S.) paid $350 million, subject to a final working capital adjustment, for the assets and agreed to pay an additional $25 million within a twelve month period in connection with benefits obtained by the Company under certain financing arrangements. The cost to acquire these plants has been preliminarily allocated to the assets acquired and liabilities assumed according to estimated fair values and is subject to adjustment when asset and liability valuations are finalized. The preliminary allocation has resulted in working capital of $45 million and property, plant and equipment and timberland of $305 million. The commitment to pay $25 million for the assumption of environmental improvement revenue bonds has been recorded in other assets with a corresponding amount in other current liabilities. The Company has not recorded any goodwill in connection with this acquisition.

5.    Exit Liabilities

        The Company recorded a restructuring charge of $3 million during the third quarter and $4 million year to date related to the disposition of the Company's Cladwood® operations. The assets of these operations were adjusted to the estimated fair value less cost to sell resulting in a $3 million non-cash write-down. These shutdowns resulted in approximately 110 employees being terminated. The sales and operating income of these facilities in 2001 were $17 million and $1 million, respectively.

        At December 31, 2001, the Company had $20 million of exit liabilities related to the restructuring of operations. The Company had $2 million of cash disbursements related to these exit liabilities during the nine months ended September 30, 2002.

6.    Long-Term Debt

Bank Credit Facilities

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

        In August 2002, JSC(U.S.) amended its credit agreement to permit the distribution of approximately 71.6 million shares of SSCC common stock (approximately 29.3% of the total shares outstanding) by Jefferson Smurfit Group to its stockholders, which otherwise would have constituted a change of control event of default. In addition, this amendment permitted JSC(U.S.) to refinance all or any portion of the 9.75% Senior Notes due 2003 with the 8.25% Senior Notes due 2012.

        In September 2002, JSC(U.S.) amended and restated its credit agreement to permit (i) the incurrence of the indebtedness represented by the 8.25% Senior Notes due 2012 in excess of the amount necessary for refinancing the 9.75% Senior Notes due 2003 and (ii) the use of a portion of the proceeds from the sale of the 8.25% Senior Notes due 2012 to fund the Stevenson Mill Acquisition. In addition, the amended and restated credit agreement permits JSC (U.S.) to obtain an incremental loan facility of up to $140 million, subject to lender syndication, to be used for the issuance of letters of credit to support environmental improvement revenue bonds that are expected to be assumed by JSC (U.S.) within one year following the Stevenson Mill Acquisition. The amended and restated credit agreement also permits the merger of Stone and JSC(U.S.) under certain circumstances.

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Senior Notes

        In September 2002, the Company completed an offering of $700 million of 8.25% Senior Notes due 2012. The Company used the proceeds of this issuance in part to repurchase $474 million of the 9.75% Senior Notes due 2003, pay related call premiums of $18 million and pay issuance costs of $12 million. The remaining portion of the 8.25% Senior Note proceeds was subsequently used to fund a portion of the purchase price of the Stevenson Mill Acquisition. An extraordinary loss of $12 million, net of tax of $7 million, was recorded in the third quarter due to the early extinguishment of debt.

7.    Derivative Instruments and Hedging Activities

        Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended by SFAS No. 137 and SFAS No. 138 requires that all derivatives be recorded on the consolidated balance sheets at fair value. Changes in the fair value of derivatives not qualifying as hedges are recorded each period in earnings. Changes in the fair value of derivatives qualifying as hedges are either offset against the change in fair value of the hedged item through earnings or recognized in Other Comprehensive Income ("OCI") until the hedged item is recognized in earnings, depending on the nature of the hedge. The ineffective portion of the change in fair value of all derivatives is recognized in earnings. Hedges related to anticipated transactions are designated and documented at hedge inception as cash flow hedges and evaluated for hedge effectiveness quarterly.

        The Company's derivative instruments and hedging activities relate to minimizing exposure to fluctuations in the price of commodities used in its operations and are designated as cash flow hedges.

Commodity Future Contracts

        The Company uses exchange traded futures contracts to manage fluctuations in cash flows resulting from commodity price risk in the procurement of natural gas. The objective is to fix the price of a portion of the Company's forecasted purchases of natural gas used in the manufacturing process. The changes in the market value of such contracts have historically been, and are expected to continue to be, highly effective at offsetting changes in price of the hedged item. As of September 30, 2002, the maximum length of time over which the Company is hedging its exposure to the variability in future cash flows associated with natural gas forecasted transactions is approximately one year. For the nine months ended September 30, 2002, the Company reclassified a $3 million loss, from OCI to cost of goods sold when the hedged items were recognized. Amounts reclassified for the three month period ended September 30, 2002 were immaterial. The fair value of the Company's futures contracts at September 30, 2002 is immaterial.

        The cumulative deferred hedge gain on all commodity contracts is immaterial at September 30, 2002.

8.    Comprehensive Income (Loss)

        Comprehensive income (loss) is as follows:

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9.    Goodwill Accounting

        Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 142 requires that goodwill no longer be amortized, but instead tested for impairment at least annually. The Company has completed the required transitional impairment test as of January 1, 2002 and found no impairment of goodwill. On an ongoing basis (absent any impairment indicators), the Company expects to perform its impairment tests during the fourth quarter.

        Income from continuing operations before extraordinary item and net income for the three and nine months ended September 30, 2001, adjusted to exclude goodwill amortization expense, is as follows:

        As of January 1, 2002, goodwill of $191 million (net of $86 million of amortization) was attributable to the Company's segments as follows: $119 million for Containerboard and Corrugated Containers and $72 million for Consumer Packaging. Goodwill of $6 million, associated with the industrial packaging division plants, was written-off as part of the determination of the gain on disposition of discontinued operations. Other than this write-off of goodwill, no goodwill was acquired, impaired or written-off during the three and nine months ended September 30, 2002.

10.    Business Segment Information

        On January 1, 2002, the Company combined the Consumer Packaging segment with the Specialty Packaging segment. The Specialty Packaging segment was previously not a reportable segment. The information for 2001 has been restated from the prior year in order to conform to the 2002 presentation. In addition, the results reported for the Consumer Packaging segment have been restated to exclude the results of the discontinued operations, the industrial packaging division, for all periods presented.

        The Company has three reportable segments: (1) Containerboard and Corrugated Containers, (2) Consumer Packaging and (3) Reclamation. The Containerboard and Corrugated Containers segment is highly integrated. It includes a system of mills and plants that produces a full line of containerboard that is converted into corrugated containers. Corrugated containers are used to transport such diverse products as home appliances, electric motors, small machinery, grocery products, produce, books, tobacco and furniture. The Consumer Packaging segment is also highly integrated. It includes a system of mills and plants that produce a broad range of coated recycled boxboard that is converted into folding cartons and packaging labels. Folding cartons are used primarily to protect products such as food, fast food, detergents, paper products, beverages, health and beauty aids and other consumer products, while providing point of purchase advertising. Flexible packaging, paper and metalized paper and heat transfer labels are used in a wide range of consumer applications. The Reclamation segment collects recovered paper generated by industrial, commercial and residential sources which is used as raw material for the Company's containerboard and boxboard mills as well as sales to external third party mills.

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        Other includes corporate related items. Corporate related items include the elimination of intercompany profit and income and expense not allocated to reportable segments including corporate expenses, restructuring charges, goodwill amortization in 2001, interest expense and the adjustment to record inventory at LIFO.

        A summary by business segment follows:

11.    Contingencies

        The Company's past and present operations include activities which are subject to federal, state and local environmental requirements, particularly relating to air and water quality. The Company faces potential environmental liability as a result of violations of permit terms and similar authorizations that have occurred from time to time at its facilities. In addition, the Company faces potential liability for response costs at various sites for which it has received notice as being a potentially responsible party ("PRP") concerning hazardous substance contamination. In estimating its reserves for environmental remediation and future costs, the Company's estimated liability reflects only the Company's expected share after consideration for the number of other PRPs at each site, the identity and financial condition of such parties and experience regarding similar matters.

        If all or most of the other PRPs are unable to satisfy their portion of the clean-up costs at one or more of the significant sites in which the Company is involved or the Company's expected share increases, the resulting liability could have a material adverse effect on the Company's consolidated financial condition or results of operations.

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

12.    Prospective Accounting Standards

        In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 143, "Accounting for Asset Retirement Obligations." 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. This statement is effective for fiscal years beginning after June 15, 2002. The Company is currently assessing the impact of this new standard.

        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, the Company expects 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.

13.    Subsequent Event

        On November 4, 2002, the Company announced its decision to permanently close three corrugated container facilities acquired as part of the Stevenson Mill Acquisition. The final purchase price allocation for the Stevenson Mill Acquisition will include an adjustment to fair value of property, plant and equipment associated with the shutdown of the three corrugated container plants, liabilities for the termination of certain employees and other commitments.

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ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                  RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

        Some information included in this report may contain forward-looking statements within the meaning of Section 21 E 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 statement 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:

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



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



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fluctuations in interest rates, exchange rates and currency values;



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unanticipated capital expenditure requirements;



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legislative or regulatory requirements, particularly concerning environmental matters;



•

access to capital markets;



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fluctuations in energy prices; and



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obtaining required consents or waivers of lenders 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 and 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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RESULTS OF OPERATIONS

Third Quarter 2002 Compared to Third Quarter 2001

        Consolidated net sales of $914 million in 2002 were 10% higher compared to last year due primarily to higher sales prices for reclamation products and higher shipments of containerboard and corrugated containers. Sales prices for most of our major products were lower on average compared to 2001. Income from continuing operations before income taxes and extraordinary item in 2002 was $35 million, a decrease of $21 million compared to 2001. The decline in earnings was due primarily to lower average sales prices for containerboard and corrugated containers and higher fiber cost. The decline in interest expense partially offset the earnings decline.

        Amortization of goodwill ceased on January 1, 2002, when we adopted Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets." We performed our transitional impairment test for each of our reporting units, as required by SFAS No. 142, during the first quarter of 2002. Under SFAS No. 142, an impairment is recognized when a reporting unit's carrying amount of goodwill exceeds its implied fair value. Based upon the results of our transitional impairment test, our recorded goodwill as of January 1, 2002 was not impaired. 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 techniques.

        The increase (decrease) in net sales for each of our segments is summarized in the chart below:

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        Consolidated cost of goods sold increased due primarily to higher sales volumes for containerboard and corrugated containers and higher reclaimed fiber cost ($69 million). Cost of goods sold was favorably impacted by lower energy cost ($5 million) and the elimination of goodwill amortization ($2 million). Cost of goods sold as a percent of net sales in 2002 was 88% compared to 84% in 2001 due to lower average sales prices.

        Selling and administrative expenses increased by 7% due primarily to proceeds received in 2001 from lawsuits. Selling and administrative expense as a percent of net sales was 8% in 2002, comparable to 2001.

        We recorded a restructuring charge of $3 million in the third quarter of 2002 related to the disposition of our remaining Cladwood® facilities.

        Interest expense declined $8 million due to the favorable impacts from lower overall average interest rates ($5 million) and from lower average borrowings ($3 million). The overall average effective interest rate in 2002 was lower than 2001 by approximately 150 basis points. Interest income increased $2 million due to accrued interest on our intercompany notes receivable from Smurfit-Stone.

        The effective income tax rate for 2002 was 43%, comparable to 2001. Provision for income taxes in 2002 differed from the federal statutory tax rate due primarily to state income taxes.

Containerboard and Corrugated Containers Segment

        Net sales increased by 2% due primarily to higher sales volumes for containerboard and corrugated containers. Shipments of corrugated containers increased 9%. Production of containerboard decreased 3%. We continued to take market related downtime in order to maintain a lower level of inventory. We incurred approximately 50,000 tons of containerboard market related downtime in 2002. On average, corrugated container sales prices decreased by 4% and linerboard sales prices were lower by 1%. During the third quarter of 2002 we raised containerboard prices by $25 per ton and began implementing a corresponding price increase for corrugated containers. For solid bleached sulfate, the average sales price decreased 5% and production was 4% lower compared to last year.

        Profits decreased by $14 million due primarily to the lower average sales prices and higher fiber cost. Profits were favorably impacted by improvements in sales volume and lower energy cost. Cost of goods sold as a percent of net sales increased to 88% in 2002 compared to 83% in 2001 due primarily to the lower average sales prices.

Consumer Packaging Segment

        Net sales decreased by 1% due primarily to lower average sales prices for flexible packaging and lower shipments of folding cartons. On average, folding carton sales prices in 2002 were comparable to 2001, while coated boxboard sales prices were 3% higher. Folding carton shipments decreased 1%. Production of coated boxboard in 2002 was 6% higher compared to 2001.

        Profits decreased by $4 million due primarily to the lower sales prices and higher reclaimed fiber cost, which was higher than last year by approximately $8 million. Profits were favorably impacted by lower energy cost. Cost of goods sold as a percent of net sales in 2002 was 85%, compared to 83% in 2001 due primarily to lower average sales prices.

Reclamation Segment

        Net sales in 2002 increased by 90% compared to 2001 due primarily to higher average sales prices. Demand for reclaimed fiber, particularly for old corrugated containers, commonly known as OCC, the primary grade used by recycled containerboard mills, increased in the second and third quarters of 2002. The average price of OCC in the third quarter increased by approximately $30 per ton over the second quarter of 2002 and by approximately $60 per ton higher compared to last year. OCC prices peaked in July 2002 and then began dropping as export demand declined and collections increased. The average price of

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old newsprint increased approximately $30 per ton compared to last year. Total tons of fiber reclaimed and brokered increased 2%. Reclamation profits increased $7 million compared to last year due to the higher average sales prices. Cost of goods sold as a percent of net sales decreased from 92% in 2001 to 91% 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. The results of operations for the industrial packaging facilities, formerly included in the Consumer Packaging segment, have been reclassified to discontinued operations for all periods presented.

Nine Months 2002 Compared to Nine Months 2001

        Consolidated net sales of $2,532 million in 2002 were comparable to 2001. The higher pricing for reclaimed fiber products and the higher shipments of containerboard and corrugated containers more than offset the declines due to lower pricing in our major product lines. Income from continuing operations before income taxes and extraordinary item in 2002 was $116 million, a decrease of $10 million compared to 2001. The decrease was due primarily to the decline in earnings of our operations segments, particularly in the Containerboard and Corrugated Containers segment. Lower interest expense and the elimination of goodwill amortization in 2002 partially offset the decline in earnings of our segments.

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        The increase (decrease) in net sales for each of our segments is summarized in the chart below:

        Consolidated cost of goods sold increased due primarily to the higher cost of reclaimed fiber ($70 million). Cost of goods sold was favorably impacted by lower energy cost ($21 million) and the elimination of goodwill amortization ($5 million). Cost of goods sold as a percent of net sales in 2002 was 87% compared to 85% in 2001 due primarily to the lower average sales prices.

        Selling and administrative expenses increased by 1% compared to last year. Selling and administrative expense 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 disposition of our Cladwood® operations.

        Interest expense declined $30 million due to the favorable impacts from lower overall average interest rates ($21 million) and from lower average borrowings ($9 million). The overall average effective interest rate in 2002 was lower than 2001 by approximately 200 basis points. Interest income for 2002 increased by $6 million due to accrued interest on our intercompany notes receivable from Smurfit-Stone.

        The effective income tax rate for 2002 was 41%, comparable to 2001. Provision for income taxes in 2002 differed from the federal statutory tax rate due primarily to state income taxes.

Containerboard and Corrugated Containers Segment

        Net sales decreased by 4% due primarily to lower average sales prices. On average, corrugated container sales prices decreased by 6% and linerboard sales prices were lower by 6%. Shipments of corrugated containers increased 3%. Containerboard production decreased 1% compared to last year. We continued to take market related downtime in order to maintain a lower level of inventory. We incurred approximately 160,000 tons of containerboard market related downtime in 2002. For solid bleached sulfate, the average sales price decreased 6% and production was lower by 3%.

        Profits decreased by $31 million due primarily to the lower average sales prices. Profits were favorably impacted by lower energy cost compared to 2001. Cost of goods sold as a percent of net sales increased to 88% in 2002 compared to 85% in 2001 due to the lower average sales prices.

Consumer Packaging Segment

        Net sales decreased by 3% due primarily to lower sales volumes and lower average sales prices. Folding carton shipments decreased 5%. Sales prices of flexible packaging products were lower than last year by approximately 22%. On average, folding carton and coated boxboard sales prices were comparable to 2001. Production of coated boxboard in 2002 was 3% higher compared to 2001.

        Profits decreased by $9 million due primarily to the lower average sales prices 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 increased to 84% compared to 83% in 2001 due primarily to the lower average sales prices.

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Reclamation Segment

        Net sales in 2002 increased by 26% compared to 2001 due primarily to higher average sales prices. The average price of OCC in 2002 increased approximately $35 per ton compared to 2001 and the average price of old newsprint was higher by approximately $5 per ton. Total tons of fiber reclaimed and brokered decreased 2%. Reclamation profits increased $12 million compared to last year due to the higher average sales prices. Cost of goods sold as a percent of net sales decreased from 92% in 2001 to 91% in 2002 due primarily to the higher average sales prices.

Statistical Data

RESTRUCTURING AND EXIT LIABILITIES

        We recorded restructuring charges of $4 million in 2002 for the disposition of our Cladwood® facilities in Oregon. 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.

        As of December 31, 2001, we had $20 million of exit liabilities related to the Smurfit-Stone merger and from our restructuring activities. During the nine months ended September 30, 2002, we incurred cash expenditures of approximately $2 million for exit liabilities. Through September 30, 2002, we have incurred approximately $55 million (74%) of the planned cash expenditures to close facilities, pay severance and pay other exit liabilities. The remaining cash expenditures in connection with our restructuring activities will continue to be funded through operations as originally planned.

LIQUIDITY AND CAPITAL RESOURCES

General

        For the nine month period ended September 30, 2002, net cash provided by operating activities of $122 million, net borrowings of $713 million, proceeds of $80 million from the sale of a business and proceeds from notes receivable from Smurfit-Stone of $5 million were used to fund net debt payments of $465 million, payments on acquisitions of $350 million, expenditures for property, plant and equipment of $61 million, debt repurchase premiums of $18 million, financing fees of $13 million and dividends to Smurfit-Stone of $6 million.

        We expect internally generated cash flows, available borrowing capacity under the Jefferson Smurfit (U.S.) revolving credit facility and future financing activities will be sufficient for the next two years to meet our obligations, including debt service, expenditures related to environmental compliance and other capital expenditures. Scheduled debt payments for the remainder of 2002 and for 2003 total $2 million and $300 million, respectively, with varying amounts thereafter. We are exploring a number of options to repay or refinance these debt maturities, particularly the Jefferson Smurfit (U.S.) Accounts Receivable Securitization Program. We have historically had good access to the capital markets and expect to be able to repay or refinance these debt maturities 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

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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 2002 significantly below our anticipated annual depreciation level of $114 million. As of September 30, 2002, we had authorized commitments for capital expenditures of $65 million, including $5 million for environmental projects, $10 million to maintain competitiveness and $50 million for upgrades, modernization and expansion.

        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 outstanding under the Jefferson Smurfit (U.S.) revolving credit agreement.

        In September 2002, Jefferson Smurfit (U.S.) acquired a corrugating medium mill 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 (the Stevenson Mill Acquisition). Jefferson Smurfit (U.S.) paid $350 million (subject to a working capital adjustment) for the assets in September and will pay an additional $25 million over the next twelve months related to benefits obtained by us under certain financing arrangements. The cost to acquire these plants has been preliminarily allocated to the assets acquired and liabilities assumed according to estimated fair values and is subject to adjustment when asset and liability valuations are finalized. We did not record any goodwill related to this transaction. Jefferson Smurfit (U.S.) funded the acquisition using a portion of the proceeds from the $700 million 8.25% Senior Notes (see Financing Activities) and with additional borrowings under existing bank credit facilities. Smurfit-Stone has targeted synergy savings of $40 million from the Stevenson Mill Acquisition by the end of 2003. These synergies will be achieved through a combination of administrative cost reductions, system optimization and purchasing savings.

        We expect to use any excess cash flows provided by operations to make further debt reductions. As of September 30, 2002, Jefferson Smurfit (U.S.) had $268 million of unused borrowing capacity under its revolving credit facility and $1 million of unused borrowing capacity under the $229 million accounts 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 the Jefferson Smurfit (U.S.) credit agreement as of December 31, 2001. 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 the Jefferson Smurfit (U.S.) 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% senior notes due 2003 (the 9.75% Senior Notes) with the 8.25% Senior Notes.

        In September 2002, Jefferson Smurfit (U.S.) amended and restated its credit agreement to permit the incurrence of indebtedness represented by the 8.25% Senior Notes in excess of the amount necessary for the refinancing the 9.75% Senior Notes and 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 amended and restated credit agreement permits Jefferson Smurfit (U.S.) to obtain an incremental loan facility of up to $140 million, subject to lender syndication, to be used for the issuance of letters of credit to support environmental improvement revenue bonds that are expected to be assumed by Jefferson Smurfit (U.S.) within one year of 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.

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        In September 2002, Jefferson Smurfit (U.S.) issued $700 million of 8.25% senior notes due 2012 (the 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% Senior Notes, pay related call premiums of $18 million and pay $12 million of issuance costs. The remaining portion of the proceeds from the 8.25% Senior Notes was subsequently used to fund a portion of the purchase price of the Stevenson Mill Acquisition. The 8.25% Senior Notes have not been registered under the Securities Act of 1933 and are subject to certain transfer restrictions. If, by March 25, 2003, we do not consummate the registered exchange offer for a series of notes or cause a shelf registration with respect to resale of such series of notes to be declared effective, the interest rate on the notes will be increased by 50 basis points per annum until the consummation of a registered exchange offer or the effectiveness of a shelf registration statement.

        The obligations under the Jefferson Smurfit (U.S.) credit agreement are unconditionally guaranteed by Smurfit-Stone, JSCE, Inc. 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 its material subsidiaries, a pledge of all of the capital stock of JSCE, Inc., 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 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 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. Such 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 likelihood of our breaching our debt covenants in 2002 is remote 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 Obligation

        As discussed in our 2001 Annual Report on Form 10-K, our pension obligations exceeded the fair value of pension plan assets by $132 million as of December 31, 2001. For the nine months ended September 30, 2002, the actual loss on our pension plan assets of approximately $110 million was less than the expected return due to the poor performance of the equity markets. In addition, interest rates have declined, which may require us to decrease the discount rate assumption at the end of 2002. A decrease in the rate by 0.25% would increase our pension obligations by approximately $25 million. We expect the under funded status of our plans will increase and we will be required to record an additional minimum pension liability adjustment to stockholders' equity at December 31, 2002.

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 were listed in our Annual Report on Form 10-K for the year ended December 31, 2001.

        As a result of excess capacity in Smurfit-Stone's containerboard system and its policy of producing to meet demand, Smurfit-Stone temporarily shutdown four of its paper machines in 2001. Two of the machines, located at Fernandina, Florida and Carthage, Indiana, are owned by Jefferson Smurfit (U.S.) and are included in our Containerboard and Corrugated Containers segment. The Carthage machine

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was subsequently restarted. The Fernandina No.2 paper machine remained closed during the first 10 months of 2002.

        In light of the Stevenson Mill Acquisition, Smurfit-Stone performed an evaluation of its overall containerboard requirements. As a result, Stone Container announced the permanent closure of one of its paper machines in November 2002. The Fernandina No.2 machine, which produces lightweight linerboard and has a net book value of approximately $140 million, continues to be temporarily shut down. No decision has been made to permanently shut down this machine, as it may be restarted, subject to future demand for linerboard and industry conditions.

        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 final purchase price allocation for the Stevenson Mill Acquisition will include an adjustment to fair value of property, plant and equipment associated with the shutdown of the three corrugated container plants, liabilities for the termination of certain employees and other commitments.

PROSPECTIVE ACCOUNTING STANDARDS

        In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 143, "Accounting for Assets Retirement Obligations." 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. This statement is effective for fiscal years beginning after June 15, 2002. We are currently assessing the impact of this new standard.

        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.

ITEM 3.    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. We do not use derivatives for speculative or trading purposes.

Interest Rate Risk

        Our earnings and cash flows are significantly affected by the amount of interest on our indebtedness. Our objective is to protect JSCE, Inc. 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. 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 derivatives outstanding at September 30, 2002.

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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 September 30, 2002, we had futures contracts to hedge approximately 6% of our expected natural gas requirements for the month of October 2002 and approximately 11% of our requirements for January 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. The change in energy cost discussed in Part I, Item 2 includes the impact of the natural gas futures contracts. See Note 7 of the Notes to Consolidated Financial Statements.

ITEM 4.    CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

        Our principal executive officer and principal financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-14(c) and 15d-14(c)) as of a date within ninety days before the filing date of this report, have concluded that, as of such date our disclosure controls and procedures were adequate and effective to ensure that material information relating to JSCE, Inc. would be made known to them by others within the company.

Changes in Internal Controls

        There were no significant changes in our internal controls or in other factors that could significantly affect JSCE Inc.'s disclosure controls and procedures subsequent to the date of their evaluation, nor were there any significant deficiencies or material weaknesses in JSCE, Inc.'s internal controls. As a result, no corrective actions were required or undertaken.

PART II—OTHER INFORMATION

ITEM 1.    LEGAL PROCEEDINGS

        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 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 are vigorously defending these cases.

ITEM 2.    CHANGES IN SECURITIES

        None

ITEM 3.    DEFAULTS UPON SENIOR SECURITIES

        None

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        None

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ITEM 5.    OTHER INFORMATION

        None

ITEM 6.    EXHIBITS AND REPORTS ON FORM 8-K

a)

The following exhibits are included in this Form 10-Q:

b)

Reports on Form 8-K:

Form 8-K dated July 24, 2002 was filed with the Securities and Exchange Commission announcing the agreement to purchase a corrugating medium mill, seven corrugated container plants, one hardwood sawmill and approximately 82,000 acres of timberland from a third party.

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Form 8-K dated August 27, 2002 was filed with the Securities and Exchange Commission announcing the commencement of Jefferson Smurfit Corporation (U.S.)'s tender offer for its outstanding 9.75% Senior Notes due 2002.

Form 8-K dated September 9, 2002 was filed with the Securities and Exchange Commission announcing the expiration of the consent solicitation period for Jefferson Smurfit Corporation (U.S.)'s tender offer for its 9.75% Senior Notes due 2002.

Form 8-K dated September 11, 2002 was filed with the Securities and Exchange Commission announcing Jefferson Smurfit Corporation (U.S.)'s proposed offering of Senior Notes.

Form 8-K dated September 26, 2002 was filed with the Securities and Exchange Commission announcing that the previously announced tender offer of Jefferson Smurfit Corporation (U.S.), a wholly-owned subsidiary of JSCE, Inc., to purchase any and all of its outstanding 9.75% Senior Notes due 2003 had expired and that all of the 9.75% Senior Notes tendered were accepted, and the completion of the offering of $700 million of 8.25% Senior Notes due 2012.

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Signatures

        Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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Certifications

I, Patrick J. Moore, certify that:

1.

I have reviewed this quarterly report on Form 10-Q of JSCE, Inc.;

2.

Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.

Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.

The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a)

designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b)

evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and

c)

presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.

The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

a)

all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

6.

The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: November 8, 2002

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I, Charles A. Hinrichs, certify that:

1.

I have reviewed this quarterly report on Form 10-Q of JSCE, Inc.;

2.

Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.

Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.

The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a)

designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b)

evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and

c)

presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.

The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

a)

all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

6.

The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: November 8, 2002

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QuickLinks

ITEM 1. FINANCIAL STATEMENTS

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 4. CONTROLS AND PROCEDURES

ITEM 1. LEGAL PROCEEDINGS
ITEM 2. CHANGES IN SECURITIES
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K