**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-Q**

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

 

**For Quarter Ended June 30,2010**

** **

**Commission File Number1-03439**

 

**SMURFIT-STONECONTAINER CORPORATION**

(Exact name of registrant as specified in its charter)

 

| **Delaware**                    | ** ** | **36-2041256**                    |
|---------------------------------|------------|-----------------------------------|
| (State or other jurisdiction of |       | (IRS Employer Identification No.) |
| incorporation or organization)  |       |                              |

 

| **222 North LaSalle Street, Chicago, Illinois** | ** ** | **60601**  |
|------------------------------------------------------|------------|------------|
| (Address of principal  executive offices)            |       | (Zip Code) |

 

**(312) 346-6600**

(Registrant’s telephone number, including area code)

 

**Not Applicable**

(Former name, former address and former fiscal year, ifchanged since last report)

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.  Yes x  No o

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T during thepreceding 12 months (or for such shorter period that the registrant wasrequired to submit and post such files).  Yes o  No o

 

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

 
| Large accelerated filer o                     |   | Accelerated filer o         |
|-----------------------------------------------|--------|----------------------------------|
|                                          |   |                             |
| Non-accelerated filer o                       |   | Smaller Reporting Company x |
| (Do not check if a smaller reporting company) |   |                             |

 

Indicateby check mark if the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).  Yes o  No x

 

APPLICABLEONLY TO CORPORATE ISSUERS:

 

Asof August 13, 2010, the registrant had outstanding 91,014,189 shares ofcommon stock, $.001 par value per share.

 

 

 

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**PART I - FINANCIAL INFORMATION**

 

Item1.    Financial Statements

 

**SMURFIT-STONE CONTAINER CORPORATION**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(Unaudited)**

 
| ** **                                                  | ** ** | **Predecessor**        | ** ** |
|-------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                  | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
| ** **                                                  | ** ** | **June 30,**           | ** ** | **June 30,** | ** ** |
| **(In  millions, except per share data)**                   | ** ** | **2010**               | ** ** | **2009** | ** ** | **2010** | ** ** | **2009** | ** ** |
| Net sales                                                   | ** ** | **$**                  | **1,563**  |   | $ | 1,407 | ** ** | **$** | **3,024** |   | $ | 2,778 |   |
| Costs and expenses                                          |       |                   |       |   |   |   |   |   |   |
| Cost of goods sold                                          | ** ** | **1,407**              |       | 1,256 | ** ** | **2,763** |   | 2,473 |   |
| Selling and administrative expenses                         | ** ** | **143**                |       | 146 | ** ** | **294** |   | 291 |   |
| Restructuring expenses                                      | ** ** | **19**                 |       | 11 | ** ** | **15** |   | 24 |   |
| (Gain) loss on disposal of assets                           |       |                   |       | (1 | ) |   |   | 1 |   |
| Other operating income                                      |       |                   |       | (276 | ) | **(11** | **)** | (276 | ) |
| Operating income (loss)                                     | ** ** | **(6**                 | **)**      | 271 | ** ** | **(37** | **)** | 265 |   |
| Other income (expense)                                      |       |                   |       |   |   |   |   |   |   |
| Interest expense, net                                       | ** ** | **(10**                | **)**      | (74 | ) | **(23** | **)** | (145 | ) |
| Debtor-in-possession debt issuance costs                    |       |                   |       |   |   |   |   | (63 | ) |
| Loss on early extinguishment of debt                        |       |                   |       |   |   |   |   | (20 | ) |
| Foreign currency exchange gains (losses)                    | ** ** | **9**                  |       | (2 | ) | **3** |   | 1 |   |
| Other, net                                                  | ** ** | **2**                  |       | 6 | ** ** | **4** |   | 4 |   |
| Income (loss) before reorganization items and  income taxes | ** ** | **(5**                 | **)**      | 201 | ** ** | **(53** | **)** | 42 |   |
| Reorganization items income (expense), net                  | ** ** | **1,219**              |       | (39 | ) | **1,178** |   | (93 | ) |
| Income (loss) before income taxes                           | ** ** | **1,214**              |       | 162 | ** ** | **1,125** |   | (51 | ) |
| (Provision for) benefit from income taxes                   | ** ** | **199**                |       | (4 | ) | **199** |   | (5 | ) |
| Net income (loss)                                           | ** ** | **1,413**              |       | 158 | ** ** | **1,324** |   | (56 | ) |
| Preferred stock dividends and accretion                     | ** ** | **(2**                 | **)**      | (3 | ) | **(4** | **)** | (6 | ) |
| Net income (loss) attributable to common  stockholders      | ** ** | **$**                  | **1,411**  |   | $ | 155 | ** ** | **$** | **1,320** |   | $ | (62 | ) |
|                                                        |       |                   |       |   |   |   |   |   |   |
| Basic earnings per common share                             |       |                   |       |   |   |   |   |   |   |
| Net income (loss) attributable to common  stockholders      | ** ** | **$**                  | **5.47**   |   | $ | 0.60 | ** ** | **$** | **5.12** |   | $ | (0.24 | ) |
| Weighted average shares outstanding                         | ** ** | **258**                |       | 257 | ** ** | **258** |   | 257 |   |
|                                                        |       |                   |       |   |   |   |   |   |   |
| Diluted earnings per common share                           |       |                   |       |   |   |   |   |   |   |
| Net income (loss) attributable to common  stockholders      | ** ** | **$**                  | **5.41**   |   | $ | 0.60 | ** ** | **$** | **5.07** |   | $ | (0.24 | ) |
| Weighted average shares outstanding                         | ** ** | **261**                |       | 257 | ** ** | **261** |   | 257 |   |

 

See notes to consolidated financial statements.

 

1

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**SMURFIT-STONE CONTAINER CORPORATION**

**CONSOLIDATED BALANCE SHEETS**

 
| ** **                                                                                                                                      | ** ** | **Successor  June 30,** | ** ** | **Predecessor  December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|------------------------------------|------------|
| **(In  millions, except share data)**                                                                                                           | ** ** | **2010**                     | ** ** | **2009**                           | ** ** |
| ** **                                                                                                                                      | ** ** | **(Unaudited)**              | ** ** | ** **                         | ** ** |
| **Assets**                                                                                                                                      |       |                         |       |                               |       |
|                                                                                                                                            |       |                         |       |                               |       |
| Current assets                                                                                                                                  |       |                         |       |                               |       |
| Cash and cash equivalents                                                                                                                       | ** ** | **$**                        | **340**    |                               | $          | 704 |   |
| Restricted cash                                                                                                                                 | ** ** | **7**                        |       | 9                                  |       |
| Receivables, less allowance of $24 in 2009                                                                                                      | ** ** | **739**                      |       | 615                                |       |
| Receivable for alternative energy tax credits                                                                                                   | ** ** | **11**                       |       | 59                                 |       |
| Inventories                                                                                                                                     |       |                         |       |                               |       |
| Work-in-process and finished goods                                                                                                              | ** ** | **148**                      |       | 105                                |       |
| Materials and supplies                                                                                                                          | ** ** | **348**                      |       | 347                                |       |
|                                                                                                                                            | ** ** | **496**                      |       | 452                                |       |
| Refundable income taxes                                                                                                                         | ** ** | **31**                       |       | 23                                 |       |
| Prepaid expenses and other current assets                                                                                                       | ** ** | **47**                       |       | 43                                 |       |
| Total current assets                                                                                                                            | ** ** | **1,671**                    |       | 1,905                              |       |
| Net property, plant and equipment                                                                                                               | ** ** | **4,405**                    |       | 3,081                              |       |
| Deferred income taxes                                                                                                                           |       |                         |       | 23                                 |       |
| Goodwill                                                                                                                                        | ** ** | **93**                       |       |                               |       |
| Intangible assets, net                                                                                                                          | ** ** | **77**                       |       |                               |       |
| Other assets                                                                                                                                    | ** ** | **163**                      |       | 68                                 |       |
|                                                                                                                                            | ** ** | **$**                        | **6,409**  |                               | $          | 5,077 |   |
| **Liabilities and Stockholders’  Equity (Deficit)**                                                                                        |       |                         |       |                               |       |
|                                                                                                                                            |       |                         |       |                               |       |
| Liabilities not subject to compromise                                                                                                           |       |                         |       |                               |       |
| Current liabilities                                                                                                                             |       |                         |       |                               |       |
| Current maturities of long-term debt                                                                                                            | ** ** | **$**                        | **18**     |                               | $          | 1,354 |   |
| Accounts payable                                                                                                                                | ** ** | **515**                      |       | 387                                |       |
| Accrued compensation and payroll taxes                                                                                                          | ** ** | **176**                      |       | 145                                |       |
| Interest payable                                                                                                                                | ** ** | **5**                        |       | 12                                 |       |
| Other current liabilities                                                                                                                       | ** ** | **81**                       |       | 164                                |       |
| Total current liabilities                                                                                                                       | ** ** | **795**                      |       | 2,062                              |       |
| Long-term debt, less current maturities                                                                                                         | ** ** | **1,176**                    |       |                               |       |
| Pension and postretirement benefits, net of  current portion                                                                                    | ** ** | **1,639**                    |       |                               |       |
| Other long-term liabilities                                                                                                                     | ** ** | **140**                      |       | 117                                |       |
| Deferred income taxes                                                                                                                           | ** ** | **307**                      |       |                               |       |
| Total liabilities not subject to compromise                                                                                                     | ** ** | **4,057**                    |       | 2,179                              |       |
|                                                                                                                                            |       |                         |       |                               |       |
| Liabilities subject to compromise                                                                                                               |       |                         |       | 4,272                              |       |
| Total liabilities                                                                                                                               | ** ** | **4,057**                    |       | 6,451                              |       |
|                                                                                                                                            |       |                         |       |                               |       |
| Stockholders’ equity                                                                                                                       |       |                         |       |                               |       |
| Successor preferred stock, par value $.001 per  share; 10,000,000 shares authorized; none issued and outstanding in 2010                        |       |                         |       |                               |       |
| Successor common stock, par value $.001 per share;  150,000,000 shares authorized; 89,854,782 issued and outstanding in 2010                    |       |                         |       |                               |       |
| Predecessor preferred stock, aggregate liquidation  preference of $126; 25,000,000 shares authorized; 4,599,300 issued and  outstanding in 2009 |       |                         |       | 104                                |       |
| Predecessor common stock, par value $.01 per  share; 400,000,000 shares authorized; 257,482,839 issued and outstanding in  2009                 |       |                         |       | 3                                  |       |
| Additional paid-in capital                                                                                                                      | ** ** | **2,352**                    |       | 4,081                              |       |
| Retained earnings (deficit)                                                                                                                     |       |                         |       | (4,883                             | )          |
| Accumulated other comprehensive income (loss)                                                                                                   |       |                         |       | (679                               | )          |
| Total stockholders’ equity (deficit)                                                                                                       | ** ** | **2,352**                    |       | (1,374                             | )          |
|                                                                                                                                            | ** ** | **$**                        | **6,409**  |                               | $          | 5,077 |   |

 

See notes to consolidated financial statements.

 

2

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**SMURFIT-STONE CONTAINER CORPORATION**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

 
| ** **                                                                                          | ** ** | **Predecessor** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|-----------------|------------|
| **Six  Months Ended June 30, (In millions)**                                                   | ** ** | **2010**        | ** ** | **2009** | ** ** |
| **Cash flows from operating  activities**                                                           | ** ** | ** **      |       |   |   |
| Net income (loss)                                                                                   | ** ** | **$**           | **1,324**  |   | $ | (56 | ) |
| Adjustments to reconcile net income (loss) to net  cash provided by (used for) operating activities |       |            |       |   |   |
| Loss on early extinguishment of debt                                                                |       |            |       | 20 |   |
| Depreciation, depletion and amortization                                                            | ** ** | **168**         |       | 182 |   |
| Debtor-in-possession debt issuance costs                                                            |       |            |       | 63 |   |
| Amortization of deferred debt issuance costs                                                        |       |            |       | 3 |   |
| Deferred income taxes                                                                               | ** ** | **(201**        | **)**      | 3 |   |
| Pension and postretirement benefits                                                                 | ** ** | **50**          |       | 20 |   |
| Loss on disposal of assets                                                                          |       |            |       | 1 |   |
| Non-cash restructuring expense                                                                      | ** ** | **7**           |       | 4 |   |
| Non-cash stock-based compensation                                                                   | ** ** | **3**           |       | 4 |   |
| Non-cash foreign currency exchange gains                                                            | ** ** | **(3**          | **)**      | (1 | ) |
| Gain due to plan effects                                                                            | ** ** | **(580**        | **)**      |   |   |
| Gain due to fresh start accounting adjustments                                                      | ** ** | **(742**        | **)**      |   |   |
| Payments to settle pre-petition liabilities  excluding debt                                         | ** ** | **(202**        | **)**      |   |   |
| Non-cash reorganization items                                                                       | ** ** | **101**         |       | 61 |   |
| Change in restricted cash for utility deposits                                                      | ** ** | **2**           |       | (13 | ) |
| Change in operating assets and liabilities, net of  effects from acquisitions and dispositions      |       |            |       |   |   |
| Receivables and retained interest in receivables  sold                                              | ** ** | **(129**        | **)**      | (38 | ) |
| Receivable for alternative energy tax credits                                                       | ** ** | **48**          |       | (89 | ) |
| Inventories                                                                                         | ** ** | **1**           |       | 19 |   |
| Prepaid expenses and other current assets                                                           | ** ** | **1**           |       | (5 | ) |
| Accounts payable and accrued liabilities                                                            | ** ** | **57**          |       | 204 |   |
| Interest payable                                                                                    | ** ** | **2**           |       | 77 |   |
| Other, net                                                                                          | ** ** | **8**           |       | 33 |   |
| Net cash provided by (used for) operating  activities                                               | ** ** | **(85**         | **)**      | 492 |   |
| **Cash flows from investing  activities**                                                           |       |            |       |   |   |
| Expenditures for property, plant and equipment                                                      | ** ** | **(83**         | **)**      | (69 | ) |
| Proceeds from property disposals                                                                    | ** ** | **10**          |       | 4 |   |
| Advances to affiliates, net                                                                         |       |            |       | (15 | ) |
| Net cash used for investing activities                                                              | ** ** | **(73**         | **)**      | (80 | ) |
| **Cash flows from financing  activities**                                                           |       |            |       |   |   |
| Proceeds from exit credit facilities                                                                | ** ** | **1,200**       |       |   |   |
| Original issue discount                                                                             | ** ** | **(12**         | **)**      |   |   |
| Proceeds from debtor-in-possession financing                                                        |       |            |       | 440 |   |
| Net borrowings (repayments) of long-term debt                                                       | ** ** | **(1,347**      | **)**      | 60 |   |
| Repurchase of receivables                                                                           |       |            |       | (385 | ) |
| Debtor-in-possession debt issuance costs                                                            |       |            |       | (63 | ) |
| Debt issuance costs on exit credit facilities and  other financing costs                            | ** ** | **(47**         | **)**      |   |   |
| Net cash provided by (used for) financing  activities                                               | ** ** | **(206**        | **)**      | **52** | ** ** |
|                                                                                                |       |            |       |   |   |
| **Increase (decrease) in cash and  cash equivalents**                                               | ** ** | **(364**        | **)**      | 464 |   |
| Cash and cash equivalents                                                                           |       |            |       |   |   |
| Beginning of period                                                                                 | ** ** | **704**         |       | 126 |   |
| End of period                                                                                       | ** ** | **$**           | **340**    |   | $ | 590 |   |

 

See notes to consolidated financial statements.

 

3

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**SMURFIT-STONE CONTAINERCORPORATION**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

(Tabular amounts inmillions, except per share data)

 

**1.****             ****BankruptcyProceedings**

 

**Chapter11 Bankruptcy Filings**

On January 26, 2009 (the “PetitionDate”), Smurfit-Stone Container Corporation (“SSCC” or the “Company”) and itsU.S. and Canadian subsidiaries (collectively, the “Debtors”) filed a voluntarypetition (the “Chapter 11 Petition”) for relief under Chapter 11 of the UnitedStates Bankruptcy Code (the “Bankruptcy Code”) in the United States BankruptcyCourt in Wilmington, Delaware (the “U.S. Court”).  On the same day, the Company’s Canadiansubsidiaries also filed to reorganize (the “Canadian Petition”) under theCompanies’ Creditors Arrangement Act (the “CCAA”) in the Ontario Superior Courtof Justice in Canada (the “Canadian Court”). The Company’s operations in Mexico and Asia and certain U.S. andCanadian legal entities (the “Non-Debtor Subsidiaries”) were not included inthe filings and continued to operate outside of the Chapter 11 and CCAA processes.  As described below, on June 21, 2010,the U.S. Court entered an order (“Confirmation Order”) approving and confirmingthe Joint Plan of Reorganization for Smurfit-Stone Container Corporation andits Debtor Subsidiaries and Plan of Compromise and Arrangement forSmurfit-Stone Container Canada Inc. and Affiliated Canadian Debtors (“Plan ofReorganization”).  The Company emergedfrom its Chapter 11 and CCAA bankruptcy proceedings on June 30, 2010 (“EffectiveDate”).  As of the Effective Date andpursuant to the Plan of Reorganization, the Company merged with and into itswholly-owned subsidiary, Smurfit-Stone Container Enterprises, Inc. (“SSCE”).  SSCE changed its name to Smurfit-StoneContainer Corporation and became the Reorganized Smurfit-Stone ContainerCorporation (“Reorganized Smurfit-Stone”).

 

Theterm “Predecessor” refers only to the Company and its subsidiaries prior to theEffective Date, and the term “Successor” refers only to the ReorganizedSmurfit-Stone and its subsidiaries subsequent to the Effective Date.  Unless the context indicates otherwise, theterms “SSCC” and the “Company” are used interchangeably in this QuarterlyReport on Form 10-Q to refer to both the Predecessor and SuccessorCompany.

 

Until its emergence on theEffective Date, the Debtors were operating as debtors-in-possession under thejurisdiction of the U.S. Court and Canadian Court (the “Bankruptcy Courts”) andin accordance with the applicable provisions of the Bankruptcy Code and theCCAA.  In general, asdebtors-in-possession, the Debtors were authorized to continue to operate asongoing businesses, but could not engage in transactions outside the ordinarycourse of business without the approval of the Bankruptcy Courts.

 

**Debtor-In-Possession (“DIP”) Financing**

In connection with filing theChapter 11 Petition and the Canadian Petition on the Petition Date, the Companyand certain of its affiliates filed a motion with the Bankruptcy Courts seekingapproval to enter into a Post-Petition Credit Agreement (the “DIP CreditAgreement”). Based on interim approval, the Company and certain affiliatesentered into the DIP Credit Agreement on January 28, 2009.  Final approval of the DIP Credit Agreementwas granted by the U.S. Court on February 23, 2009 and by the CanadianCourt on February 24, 2009. Amendments to the DIP Credit Agreement were entered into on February 25and 27, 2009.

 

The DIP Credit Agreement, asamended, provided for borrowings up to an aggregate committed amount of $750million, consisting of a $400 million U.S. term loan (“U.S. DIP Term Loan”) forborrowings by SSCE; a $35 million Canadian term loan (“Canadian DIP Term Loan”)for borrowings by Smurfit-Stone Container Canada Inc. (“SSC Canada”); a $250million U.S. revolving loan (“U.S. DIP Revolver”) for borrowings by SSCE and/orSSC Canada; and a $65 million Canadian revolving loan (“Canadian DIP Revolver”)for borrowings by SSCE and/or SSC Canada.

 

4

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Underthe DIP Credit Agreement, on January 28, 2009, the Company borrowed $440million, consisting of a $400 million U.S. DIP Term Loan, a $35 millionCanadian DIP Term loan and $5 million from the Canadian DIP Revolver.  In accordance with the terms of the DIP CreditAgreement, in January 2009 the Company used U.S. DIP Term Loan proceeds of$360 million, net of lenders’ fees of $40 million, and Canadian DIP Term Loanproceeds of $30 million, net of lenders’ fees of $5 million, to terminate thereceivables securitization programs and repay all indebtedness outstandingunder the programs of $385 million and to pay other expenses of $1million.  In addition, other fees andexpenses of $17 million related to the DIP Credit Agreement were paid for withproceeds of $5 million from the Canadian DIP Revolver and available cash.

 

The outstanding principalamount of the loans under the DIP Credit Agreement, plus interest accrued andunpaid, were due and payable in full at maturity, which was January 28,2010.  As all borrowings under theDIP Credit Agreement were paid in full as of December 31, 2009, theCompany allowed the DIP Credit Agreement to expire on the maturity date of January 28,2010.  Prior to the maturity of the DIPCredit Agreement on January 28, 2010, the Company transferred $15 millionof available cash to a restricted cash account to secure letters of creditunder the DIP Credit Agreement.

 

**ReorganizationProcess**

TheBankruptcy Courts approved payment of certain of the Company’s pre-petitionobligations, including employee wages, salaries and benefits, and the paymentof vendors and other providers in the ordinary course for goods received andservices rendered subsequent to the filing of the Chapter 11 Petition andCanadian Petition and other business-related payments necessary to maintain theoperation of the Company’s business.  TheCompany retained legal and financial professionals to advise it on thebankruptcy proceedings.

 

Immediatelyafter filing the Chapter 11 Petition and Canadian Petition, the Companynotified all known current or potential creditors of the bankruptcyfilings.  Subject to certain exceptionsunder the Bankruptcy Code and the CCAA, the Company’s bankruptcy filingsautomatically enjoined, or stayed, the continuation of any judicial oradministrative proceedings or other actions against the Company or its propertyto recover, collect or secure a claim arising prior to the filing of theChapter 11 Petition and Canadian Petition. Thus, for example, most creditor actions to obtain possession ofproperty from the Company, or to create, perfect or enforce any lien againstits property, or to collect on monies owed or otherwise exercise rights orremedies with respect to a pre-petition claim were enjoined unless and untilthe Bankruptcy Courts lifted the automatic stay.

 

Asrequired by the Bankruptcy Code, the United States Trustee for the District ofDelaware (the “U.S. Trustee”) appointed an official committee of unsecuredcreditors (the “Creditors’ Committee”). The Creditors’ Committee and its legalrepresentatives had a right to be heard on all matters that came before theU.S. Court with respect to the Debtors. A monitor was appointed by the Canadian Court with respect toproceedings before the Canadian Court.

 

Under the Bankruptcy Code,the Debtors either assumed or rejected pre-petition executory contracts,including real property leases, subject to the approval of the BankruptcyCourts and certain other conditions.  Inthis context, “assumption” meant that the Company agreed to perform itsobligations and cure all existing defaults under the contract or lease, and “rejection”meant that it was relieved from its obligations to perform further under thecontract or lease, but was subject to a pre-petition claim for damages for thebreach thereof, subject to certain limitations. Any damages resulting from rejection of executory contracts andunexpired leases, and from the determination of the U.S. Court (or agreement byparties in interest) of allowed claims for contingencies and other disputedamounts, that were permitted to be recovered under the Bankruptcy Code weretreated as liabilities subject to compromise unless such claims were securedprior to the Petition Date.

 

5

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**Plan of Reorganization and Exit Credit Facilities**

Inorder for the Debtors to successfully emerge from bankruptcy, the BankruptcyCourts had to first confirm a plan of reorganization that satisfied therequirements of the Bankruptcy Code and the CCAA.  A plan of reorganization was required to,among other things, resolve the Debtor’s pre-petition obligations, set forththe revised capital structure of the newly reorganized entity and provide forcorporate governance subsequent to the Company’s exit from bankruptcy.

 

*Plan ofReorganization*

OnDecember 1, 2009, the Debtors filed their Plan of Reorganization andDisclosure Statement (“Disclosure Statement”) with the U.S. Court.  On December 22, 2009, January 27,2010, and February 4, 2010, the Debtors filed amendments to the Plan ofReorganization and the Disclosure Statement. On March 19, 2010, the Debtors filed a supplement to the Plan ofReorganization, and on May 27, 2010, the Debtors filed the final Plan ofReorganization reflecting the resolution of certain objections by equitysecurity holders and other non-material modifications.

 

OnJanuary 29, 2010, the U.S. Court approved the Debtors’ DisclosureStatement as containing adequate information for the holders of impaired claimsand equity interests, who were entitled to vote to accept or reject the Plan ofReorganization.

 

ThePlan of Reorganization was overwhelmingly approved by number and dollaramount of the required classes of creditors of each of the Debtors, withthe exception of Stone Container Finance Company of Canada II.  StoneContainer Finance Company of Canada II was removed from the Plan ofReorganization.  A meeting of creditors was held for the Canadian debtorsubsidiaries on April 6, 2010, at which the necessary votes were receivedto confirm the Plan of Reorganization by all requisite classes of creditorsother than Stone Container Finance Company of Canada II.

 

TheBankruptcy Code required the U.S. Court, after appropriate notice, to hold ahearing on confirmation of a plan of reorganization.  The confirmation hearing on the Plan ofReorganization began in the U.S. Court on April 15, 2010, and concluded onMay 4, 2010, and a hearing was conducted in the Canadian Court on May 3,2010.  On May 13, 2010, the CanadianCourt issued an order approving the Plan of Reorganization in the CCAA proceedingsin Canada.

 

OnMay 24, 2010, the Debtors announced that they reached a resolution withcertain holders of the Company’s preferred and common stock that had filedobjections to the confirmation of the Plan of Reorganization.  On May 28, 2010, the U.S. Court approvednotice procedures with respect to this resolution.  On June 21, 2010, the U.S. Court enteredthe Confirmation Order which approved and confirmed the Plan ofReorganization.  The Company emerged fromits Chapter 11 and CCAA bankruptcy proceedings on June 30, 2010, theEffective Date.

 

Asof the Effective Date, the Company substantially consummated the varioustransactions contemplated under the Plan of Reorganization and the ConfirmationOrder, including the following:

 

·                  the Company merged with and into SSCE, withSSCE being the survivor entity and renaming itself Smurfit-Stone ContainerCorporation, and becoming the Reorganized Smurfit-Stone.  Reorganized Smurfit-Stone is governed by aboard of directors that includes Patrick J. Moore, the Company’s ChiefExecutive Officer, Steven J. Klinger, the Company’s President and ChiefOperating Officer, and nine independent directors, including a non-executivechairman selected by the Creditors’ Committee in consultation with the Debtors;

 

·                  Reorganized Smurfit-Stone filed the Amendedand Restated Certificate of Incorporation of the Company, which authorizedReorganized Smurfit-Stone to issue 160,000,000 shares, consisting of150,000,000 shares of common stock, par value $.001 per share (“Common Stock”)and 10,000,000 shares of preferred stock, par value $.001 per share (PreferredStock”).  Reorganized Smurfit-Stoneissued or reserved for issuance 100,000,000 shares of Common Stock fordistribution to creditors and interest holders pursuant to the Plan ofReorganization.  Under the 

 

6

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Plan of Reorganization, 89,854,782 shares were issued on June 30,2010 and an additional 1,159,407 shares were subsequently issued through August13, 2010.  None of the Preferred Stockwas issued or outstanding as of the Effective Date;

 

·                  all of the existing secured debt of theDebtors was fully repaid with cash;

 

·                  substantially all of the general unsecuredclaims against SSCE, and the Company, including all of the outstandingunsecured senior notes, were exchanged for Common Stock;

 

·                  holders of unsecured claims against SSCE ofless than or equal to $10,000 received payment of 100% of such claims in cash,and eligible cash-out participants who so indicated on their ballot receivedthe percentage amount of their allowed claim they elected to receive in cash inlieu of Common Stock;

 

·                  holders of the Company’s 7% Series ACumulative Exchangeable Redeemable Convertible preferred stock received apro-rata distribution of 2,172,166 shares of Common Stock and holders of theCompany’s common stock received a pro-rata distribution of 2,171,935 shares.  All shares of common stock and preferredstock of the Predecessor Company were cancelled;

 

·                  Reorganized Smurfit-Stone adopted the EquityIncentive Plan, pursuant to which, among other things, it reserved for issuance8,695,652 shares of Common Stock representing eight percent of the fullydiluted new Common Stock.  In accordancewith the terms of the Equity Incentive Plan, 2,895,909 stock options and914,498 Restricted Stock Units (“RSU’s”) were granted to executive officers andother key employees of Reorganized Smurfit-Stone on the Effective Date;

 

·                  the assets of the Canadian Debtors, otherthan Stone Container Finance Company of Canada II, were sold to a newly-formedCanadian subsidiary of Reorganized Smurfit-Stone free and clear of existingclaims, liens and interests in exchange for (i) the repayment in cash ofthe secured debt obligations of the Canadian Debtors, (ii) cash to theCanadian Debtors’ unsecured creditors and (iii) the assumption of certainliabilities and obligations of the Canadian Debtors;

 

·                  Reorganized Smurfit-Stone and its newly-formedCanadian subsidiary assumed all of the existing obligations under the qualifieddefined benefit pension plans in the United States and Canada sponsored by theDebtors, as well as all of the collective bargaining agreements in the UnitedStates and Canada between the Debtors and their labor unions;

 

·                  Pursuant to the Plan of Reorganization andafter the initial distribution, the Company reserved approximately 9.0 millionshares of Common Stock for future distribution to holders of unsecurednon-priority claims that were unliquidated or subject to dispute.  These shares will be distributed as theseclaims are liquidated or resolved, in accordance with the Plan ofReorganization and Confirmation Order. To the extent that such unliquidated or disputed claims are settled forless than the number of shares reserved, additional distributions may also bemade with respect to previously allowed claims under the terms and conditionsof the Plan of Reorganization and Confirmation Order.

 

*ExitCredit Facilities*

OnJanuary 14, 2010, the U.S. Court entered an order authorizing the Debtorsto (i) enter into an exit term loan facility engagement and arrangementletter and fee letters, (ii) pay associated fees and expenses and (iii) furnishrelated indemnities.   On February 1,2010, the Company filed a motion with the U.S. Court seeking approval to enterinto a senior secured term loan exit facility (the “Term Loan Facility”).

 

OnFebruary 16, 2010, the U.S. Court granted the motion and authorized theCompany and certain of its affiliates to enter into the Term Loan Facility.  On the same date, the U.S. Court also grantedthe Company’s February 3, 2010 motion seeking approval to enter into acommitment letter and fee letters for an asset-based revolving credit facility(the “ABL Revolving Facility”) (together with the Term Loan 

 

7

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Facility,the “Exit Credit Facilities”).  Based onsuch approvals, on February 22, 2010, the Company and certain of itssubsidiaries entered into the Term Loan Facility that provides for an aggregateterm loan commitment of $1,200 million. In addition, the Company entered into the ABL Revolving Facility withaggregate commitments of $650 million (including a $100 million CanadianTranche) on April 15, 2010.   TheABL Revolving Facility includes a $150 million sub-limit for letters of credit.

 

The Company is permitted,subject to obtaining lender commitments, to add one or more incrementalfacilities to the Term Loan Facility in an aggregate amount up to $400million.  Each incremental facility isconditioned on (a) there existing no defaults, (b) in the case ofincremental term loans, such loans have a final maturity no earlier than, and aweighted average life no shorter than, the Term Loan Facility, and (c) aftergiving effect to one or more incremental facilities, the consolidated seniorsecured leverage ratio shall be less than 3.00 to 1.00.  If the interest rate spread applicable to anyincremental facility exceeds the interest rate spread applicable to the TermLoan Facility by more than 0.25%, then the interest rate spread applicable tothe Term Loan Facility will be increased to equal the interest rate spreadapplicable to the incremental facility.

 

TheCompany is permitted, subject to obtaining lender commitments, to addincremental commitments under the ABL Revolving Facility in an aggregate amountup to $150 million.  Each incrementalcommitment is conditioned on (a) there existing no defaults, (b) anynew lender providing an incremental commitment shall require the consent of theAdministrative Agent, each Issuing Lender, the Swingline Lender and theFronting Lender, (c) the minimum amount of any increase must be at least$25 million, (d) the Company shall not increase the commitments more thanthree times in the aggregate, (e) if the interest rate margins andcommitment fees with respect to the incremental commitments are higher thanthose applicable to the existing commitments under the ABL Revolving facility,then the interest rate margins and commitment fees for the existing commitmentsunder the ABL Revolving Facility will be increased to match those for theincremental commitments, and (f) the satisfaction of other customaryclosing conditions.

 

OnJune 30, 2010, the Term Loan Facility was funded and borrowings becameavailable under the ABL Revolving Facility. The proceeds of the borrowings under the Term Loan Facility of $1,200million, together with available cash, were used to repay the Company’soutstanding secured indebtedness under its pre-petition Credit Facility and payremaining fees, costs and expenses related to and contemplated by the ExitCredit Facilities and the Plan of Reorganization.  See “Fresh Start Accounting” below forsources and uses of funds.  On June 30,2010, the Company had no borrowings under the ABL Revolving Facility.  Borrowings under the ABL Revolving Facilityare available for working capital purposes, capital expenditures, permittedacquisitions and general corporate purposes. As of June 30, 2010, the Company’s borrowing base under the ABLRevolving Facility was $586 million and the amount available for borrowingsafter considering outstanding letters of credit was $489 million.

 

Theterm loan (the “Term Loan”) is repayable in equal quarterly installments of $3million beginning on September 30, 2010, with the balance payable atmaturity on June 30, 2016. Additionally, following the end of each fiscal year, varying percentagesof the Company’s excess cash flow, as defined in the Term Loan Facility, basedon certain agreed levels of secured leverage ratios, must be used to repayoutstanding principal amounts under the Term Loan.  Subject to specified exceptions, the TermLoan Facility also requires the Company to use the net proceeds of asset salesand the net proceeds of the incurrence of indebtedness to repay outstandingborrowings under the Term Loan Facility.

 

TheTerm Loan bears interest at the Company’s option at a rate equal to: (A) 3.75%plus the alternate base rate  (the “TermLoan ABR”) defined as the greater of: (i) the U.S. prime rate, (ii) theovernight federal funds rate plus 0.50%, or (iii) the one month adjustedLIBOR rate plus 1.0%, provided that the Term Loan ABR shall never be lower than3.00% per annum, or (B) the adjusted LIBOR rate plus 4.75%, provided thatthe adjusted LIBOR rate shall never be lower than 2.00% per annum.

 

8

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TheABL revolver loan (the “ABL Revolver”) matures on June 30, 2014. TheCompany has the option to borrow at a rate equal to: (A) the base rate,defined as the greater of 2.50% plus:(i) the US Prime Rate, (ii) theovernight federal funds rate plus 0.50% or (iii) LIBOR rate plus 1.0%, or (B) theLIBOR rate plus 3.50% for the first 90 days then 3.25% thereafter. Theapplicable margin can be adjusted in the future from 2.25% to a rate as high as2.75% for base loans and 3.25% to a rate as high as 3.75% for LIBOR loans basedon the average historical utilization under the ABL Revolving Facility.   The Company will also pay either a 0.50% or0.75% per annum unused commitment fee based on the average historicalutilization under the ABL Revolving Facility. The ABL Revolving Facility borrowings are subject to a borrowing basederived from a formula based on certain eligible accounts receivable andinventory, less certain reserves.

 

Borrowingsunder the Exit Credit Facilities are guaranteed by the Company and certain ofits subsidiaries, and are secured by first priority liens and second priorityliens on substantially all its presently owned and hereafter acquired assetsand those of each of its subsidiaries party to the Exit Credit Facilities,subject to certain exceptions and permitted liens.

 

TheExit Credit Facilities contain affirmative and negative covenants that imposerestrictions on the Company’s financial and business operations and those ofcertain of its subsidiaries, including their ability to incur indebtedness,incur liens, make investments, sell assets, pay dividends or makeacquisitions.  The Exit Credit Facilitiescontain events of default customary for financings of this type.

 

**FinancialReporting Considerations**

Betweenthe Petition Date and through June 30, 2010, the Company applied theFinancial Accounting Standards Board (“FASB”) Accounting Standards Codification(“ASC”) 852, “Reorganizations” (“ASC 852”), in preparing the consolidatedfinancial statements.  ASC 852 requiresthat the financial statements distinguish transactions and events that aredirectly associated with the reorganization from the ongoing operations of thebusiness.  Accordingly, certain revenues,expenses (including professional fees), realized gains and losses andprovisions for losses that are realized or incurred in the bankruptcyproceedings have been recorded in reorganization items in the consolidatedstatements of operations.  In addition,pre-petition obligations that were impacted by the bankruptcy reorganizationprocess were classified on the consolidated balance sheet at December 31,2009 in liabilities subject to compromise.

 

*ReorganizationItems*

TheCompany’s reorganization items directly related to the process of reorganizingthe Company under Chapter 11 and the CCAA, and its emergence on June 30,2010, as recorded in its consolidated statements of operations, consist of thefollowing:

 
| ** **                                                     | ** ** | **Predecessor**                       | ** ** |
|----------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                     | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
| ** **                                                     | ** ** | **2010**                              | ** ** | **2009** | ** ** | **2010** | ** ** | **2009** | ** ** |
| *Income (Expense)*                                             |       |                                  |       |   |   |   |   |   |   |
| Provision for rejected/settled executory contracts  and leases |       | $                                     | (77        | ) | $ | (25 | ) | $ | (106 | ) | $ | (64 | ) |
| Professional fees                                              |       | (28                                   | )          | (16 | ) | (43 | ) | (32 | ) |
| Accounts payable settlement gains                              |       | 2                                     |       | 2 |   | 5 |   | 3 |   |
| Gain due to plan effects                                       |       | 580                                   |       |   |   | 580 |   |   |   |
| Gain due to fresh start accounting adjustments                 |       | 742                                   |       |   |   | 742 |   |   |   |
| Total reorganization items                                     |       | $                                     | 1,219      |   | $ | (39 | ) | $ | 1,178 |   | $ | (93 | ) |

 

Inaddition, an income tax benefit of $200 million related to plan effectadjustments was recorded in the three and six months ended June 30, 2010.

 

9

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Professionalfees directly related to the reorganization include fees associated withadvisors to the Company, the Creditors’ Committee and certain securedcreditors.

 

Netcash paid for reorganization items related to professional fees for the threeand six months ended June 30, 2010 totaled $16 million and $32 million,respectively, and $11 million and $17 million for the three and six monthsended June 30, 2009, respectively.

 

Reorganizationitems exclude employee severance and other restructuring charges recordedduring 2009 and 2010.

 

Interestexpense recorded on unsecured debt was zero for the three and six months endedJune 30, 2010 and $50 million and $98 million for the three and six monthsended June 30, 2009, respectively. Contractual interest expense on unsecured debt was $49 million and $98million for the three and six months ended June 30, 2010,respectively.  Under the Plan ofReorganization, interest expense on the unsecured senior notes subsequent tothe Petition Date was not paid.  In thefourth quarter of 2009, the Company concluded it was not probable that interestexpense on the unsecured senior notes subsequent to the Petition Date would bean allowed claim.  As a result, duringthe fourth quarter of 2009, the Company recorded income in reorganization itemsfor the reversal of accrued post-petition unsecured interest expense anddiscontinued recording unsecured interest expense.

 

Inaddition, in the fourth quarter of 2009, the Company concluded it was notprobable that Preferred Stock dividends that were accrued subsequent to thePetition Date would be allowed claims. Preferred Stock dividends that were accrued post-petition and includedin liabilities subject to compromise were reversed in the fourth quarter of2009.  ASC 505-10-50-5, “Equity,”requires entities to disclose in the financial statements the aggregate amountof cumulative preferred dividends in arrears. Preferred Stock dividends in arrears were $11 million at the EffectiveDate and $9 million as of December 31, 2009.  The Preferred Stock dividends in arrearssince the Petition Date are presented in the Predecessor consolidatedstatements of operations only to reflect preferred stockholders’ rights todividends over common stockholders and are not reflected in the Preferred Stockvalue in the December 31, 2009 consolidated balance sheet.

 

*OtherBankruptcy Related Costs*

Debtor-in-possessiondebt issuance costs of $63 million were incurred and paid during the firstquarter of 2009 in connection with entering into the DIP Credit Agreement, andare separately presented in the 2009 consolidated statements of operations.

 

*LiabilitiesSubject to Compromise*

Liabilitiessubject to compromise represent pre-petition unsecured obligations that weresettled under the Plan of Reorganization. These liabilities represented theamounts expected to be allowed on known or potential claims to be resolvedthrough the Chapter 11 and CCAA process. Liabilities subject to compromise also included certain items, such asqualified defined benefit pension and retiree medical obligations that wereassumed under the Plan of Reorganization, and as such, have been recorded inliabilities under the Reorganized Smurfit-Stone.

 

The Company rejected certainexecutory contracts and unexpired leases with respect to the Company’soperations with the approval of the Bankruptcy Courts.  Damages resulting from rejection of executorycontracts and unexpired leases are generally treated as general unsecuredclaims and were classified as liabilities subject to compromise.

 

10

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Liabilitiessubject to compromise at December 31, 2009 consisted of the following:

 
| ** **                        | ** ** | **Predecessor**            | ** ** |
|-----------------------------------|------------|----------------------------|------------|
| ** **                        | ** ** | **December 31, 2009** | ** ** |
|                              |       |                       |       |
| Unsecured debt                    |       | $                          | 2,439      |   |
| Accounts payable                  |       | 339                        |       |
| Interest payable                  |       | 47                         |       |
| Retiree medical obligations       |       | 176                        |       |
| Pension obligations               |       | 1,136                      |       |
| Unrecognized tax benefits         |       | 46                         |       |
| Executory contracts and leases    |       | 72                         |       |
| Other                             |       | 17                         |       |
| Liabilities subject to compromise |       | $                          | 4,272      |   |

 

Forinformation regarding the discharge of liabilities subject to compromise, see“Fresh Start Accounting” below.

 

**Fresh Start Accounting**

The Company, in accordance with ASC 852, adoptedfresh start accounting as of the close of business on June 30, 2010,because the reorganization value of the assets of the Predecessor Companyimmediately before the date of confirmation of the Plan of Reorganization wasless than the total of all post-petition liabilities and allowed claims, andthe holders of the Predecessor Company’s voting shares immediately beforeconfirmation of the Plan of Reorganization received less than 50 percent of thevoting shares of the Successor Company. Upon adoption of fresh start accounting, the Company became a new entityfor financial reporting purposes reflecting the Successor capitalstructure.  As such, a new accountingbasis in the identifiable assets and liabilities assumed was established withno retained earnings or accumulated other comprehensive income (loss) (“OCI”).

 

The Successor consolidated balance sheet as of June 30,2010, included herein, reflects the implementation of the Plan ofReorganization, including the discharge of liabilities subject to compromise andthe adoption of fresh start accounting. The Predecessor results of operations of the Company for the six monthsended June 30, 2010 include $1,178 million of reorganization items, net,including a pre-tax emergence gain on plan effects of $580 million, a gainrelated to fresh start accounting adjustments of $742 million, and otherreorganization expenses of $144 million. In addition, the benefit from income taxes includes a $200 millionbenefit related to the plan effect adjustments.

 

Fresh start accounting provides, among otherthings, for a determination of the value to be assigned to the equity of theemerging company as of a date selected for financial reporting purposes.  In conjunction with the bankruptcy proceedings,a third party financial advisor provided an enterprise value of the Company ofapproximately $3,145 million to $3,445 million with a midpoint of $3,295million.  The preliminary equity valueset forth by the third party was $2,360 million, using the midpoint enterprisevalue of $3,295 million and adjusting for expected cash and debt balances uponemergence and expected cash proceeds from the sale of non-operating assets.

 

The final equity value of $2,352 was determinedconsistent with the third party methodology using the midpoint enterprise valueof $3,295 million.  See reconciliation ofthe enterprise value to the final equity value below in Note 10 of theExplanatory Notes to the reorganized consolidated balance sheet.  Reorganization value, comprised of equity anddebt, represents the amount of resources available for the satisfaction ofpost-petition liabilities and allowed claims, as negotiated between the Debtorsand creditors.  Reorganization value isintended to approximate the amount a willing buyer would pay for the assets ofthe Company immediately after reorganization.

 

11

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Enterprise value of the Company was estimated usingvarious valuation methods including: (i) comparable public companyanalysis, (ii) discounted cash flow analysis (“DCF”) and (iii) precedenttransaction analysis.  Due to theCompany’s significant pension obligations, the comparable company and DCFvaluations included scenarios designed to account for the Company’s pensionliabilities and expense.

 

The comparable public company analysis identified agroup of comparable companies giving considerations to lines of business,markets, similar business risks, growth prospects, maturity of business andsize and scale of business.  Thisanalysis involved the selection of the appropriate earnings before interest,taxes, depreciation and amortization (“EBITDA”) market multiples to be the mostrelevant when analyzing the peer group. A range of valuation multiples was then identified and applied to theCompany’s projections to derive a range of implied enterprise value.

 

The basis of the discounted cash flow analysis usedin developing the enterprise value was based on Company prepared projectionswhich included a variety of estimates and assumptions.  While the Company considers such estimatesand assumptions reasonable, they are inherently subject to significantbusiness, economic and competitive uncertainties, many of which are beyond the Company’s control and, therefore, may not be realized.  Changes in these estimates and assumptionsmay have had a significant effect on the determination of the Company’senterprise value. The assumptions used in the calculations for the discountedcash flow analysis included projected revenue, cost and cash flows for theyears ending December 31, 2010 through 2014 and represented the Company’sbest estimates at the time the analysis was prepared.  The DCF analysis was completed using discountrates of 9.0% through 11.0%.  There canbe no assurance that the estimates, assumptions and values reflected in thevaluations will be realized and actual results could vary materially.

 

The precedent transactions analysis identifiedrelevant merger and acquisition transactions in the paperboard andcontainerboard industry.  This analysisinvolved calculating the total enterprise value of the acquired company as amultiple of EBITDA for the last twelve months prior to announcement.  A range of valuation multiples was thenidentified and applied to the Company’s projected EBITDA for the 12 monthperiod ended April 30, 2010, to determine an estimate of enterprisevalues.

 

The Company’s reorganization value was allocated toits assets and liabilities in conformity with the procedures specified by ASC805, “Business Combinations.”  Thesignificant assumptions related to the valuation of the Company’s assets andliabilities in connection with fresh start accounting include the following:

 

*Inventories*—Raw materials were valued at current replacement cost.  Work-in-process was valued at estimatedselling prices of finished goods less the sum of costs to complete, sellingcosts, shipping costs and a reasonable profit allowance for completing andselling effort based on profit for similar finished goods.  Finished goods were valued at estimatedselling prices less the sum of selling costs, shipping costs and a reasonableprofit allowance for the selling effort.

 

Prior to emerging from bankruptcy, the Companyrecorded long-lived storeroom supplies as an inventory item and charged expensewhen the storeroom item was issued from the storeroom into production. Underfresh start accounting, the Company determined the long-lived storeroomsupplies principally represent critical spares which have the physicalcharacteristics of property, plant, and equipment, and a useful life similar tothe underlying equipment.  As a result,new purchases of long-lived storeroom supplies will be classified as property,plant and equipment on the consolidated balance sheet and depreciated over 12 years.  Upon emergence, the Company includedlong-lived storeroom supplies with a fair value of approximately $36 million inproperty, plant and equipment with a depreciable life of 7 years.

 

*Property, plant and equipment*— Property, plant and equipment was valued at fair value of $4,405 million asof June 30, 2010 based on a third party valuation.  In establishing fair value for the vastmajority of the Company’s property, plant and equipment, the cost approach wasutilized.  The cost approach considersthe amount required to replace an asset by constructing or purchasing a newasset with similar utility, adjusted for depreciation as of the appraisal dateas described below:

 

12

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·                  Physical depreciation — the loss in value or usefulness attributablesolely to the use of the asset and physical causes such as wear and tear andexposure to the elements.

·                  Functional obsolescence — the loss in value due to changes intechnology, discovery of new materials and improved manufacturing processes.

·                  Economic obsolescence — the loss in value caused by external forcessuch as legislative enactments, overcapacity in the industry, low commoditypricing, changes in the supply and demand relationships in the marketplace andother market inadequacies.

 

The cost approach relies on management’sassumptions regarding current material and labor costs required to rebuild andrepurchase significant components of the Company’s property, plant andequipment along with assumptions regarding the age and estimated useful livesof the Company’s property, plant and equipment.

 

*Intangible Assets*— The Company identified the following intangible assets to be valued basedupon a third party valuation: (i) trade name, (ii) proprietarytechnology and (iii) non-compete agreements.

 

Trade name and proprietary technology were valuedusing the relief from royalty method under the income approach.  Under this method, the asset value wasdetermined by estimating the royalty income that could be generated if it waslicensed to a third party in an arm’s-length transaction.  The royalty income rate was selected based onconsideration of several factors, including recent prevailing royalty ratesused by companies in similar industries, profit margins and independentresearch of comparable royalty agreements, among other considerations.  The Company’s trade name was valued at $56million under this approach using a discount rate of 12% and assigned anindefinite life.  The Company’sproprietary technology was valued at $15 million under this approach using adiscount rate of 12% and assigned a life of 8 years.

 

Non-compete agreements were valued using the lostprofit method under the income approach which seeks to measure the profit thatwould be lost if the non-compete agreement did not exist.  The Company’s non-compete agreements werevalued at $5 million under this approach using a 10.5% discount rate andassigned a definite life of two years.

 

*Equity Investments*— Equity investments were valued, based upon a third party valuation, at fairvalue of approximately $34 million as of June 30, 2010, using theguideline transaction and guideline public companies methods under the marketapproach.  Under these approaches, valuationmultiples were determined based on capital market data and marketcapitalization of peer companies and acquisition transactions within theindustry.  The step-up in fair value overthe Company’s current carrying value will be amortized over 10 years.

 

*Long-Term Debt*— Long-term debt was valued at fair value using quoted market prices.

 

*Pension and postretirement benefits* — Pension and post-retirement benefits were fair valued based on planassets and employee benefit obligations at June 30, 2010.  The benefit obligations were computed usingthe applicable June 30, 2010 discount rate.  In conjunction with fresh start accounting,the Company updated its mortality rate table assumptions which increased itsemployer benefit liabilities by approximately $58 million.

 

As a result of adopting fresh start accounting, theCompany recorded goodwill of $93 million which represents the excess ofreorganization value over amounts assigned to the other assets.

 

The adjustments presented below relate to theCompany’s June 30, 2010 balance sheet. The balance sheet reorganization adjustments presented below summarizethe impact of the Plan of Reorganization and the adoption of fresh startaccounting as of the Effective Date.

 

13

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SMURFIT-STONE CONTAINER CORPORATION

REORGANIZED CONSOLIDATED BALANCE SHEET

 
| ** **                                                   | ** ** | **June 30, 2010** | ** ** |
|--------------------------------------------------------------|------------|------------------------|------------|
| **(In  millions)**                                           | ** ** | **Predecessor**        | ** ** | **Plan Effect********Adjustments****(1)** | ** ** | **Fresh Start********Adjustments** | ** ** | **Successor** | ** ** |
| **Assets**                                                   |       |                   | ** ** | ** ** |   |   |   |   |   |
|                                                         |       |                   |       |   |   |   |   |   |   |
| Current assets                                               | ** ** | ** **             |       |   |   |   |   |   |   |
| Cash and cash equivalents                                    |       | $                      | 721        |   | $ | (381 | )(2) | $ |   |   | $ | 340 |   |
| Restricted cash                                              |       | 18                     |       | (11 | )(2) |   |   | 7 |   |
| Receivables                                                  |       | 739                    |       |   |   |   |   | 739 |   |
| Receivable for  alternative energy tax credits               |       | 11                     |       |   |   |   |   | 11 |   |
| Inventories                                                  |       | 449                    |       |   |   | 47 | (12) | 496 |   |
| Refundable income taxes                                      |       | 24                     |       | 7 | (3) |   |   | 31 |   |
| Prepaid expenses and  other current assets                   |       | 42                     |       |   |   | 5 | (12) | 47 |   |
| Total current assets                                         |       | 2,004                  |       | (385 | ) | 52 |   | 1,671 |   |
| Net property, plant and  equipment                           |       | 2,979                  |       |   |   | 1,426 | (12) | 4,405 |   |
| Deferred income taxes                                        |       | 22                     |       | 148 | (3) | (170 | )(12) |   |   |
| Goodwill                                                     |       |                   |       |   |   | 93 | (12) | 93 |   |
| Intangible assets, net                                       |       |                   |       |   |   | 77 | (12) | 77 |   |
| Other assets                                                 |       | 75                     |       | 31 | (4) | 57 | (12) | 163 |   |
|                                                         |       | $                      | 5,080      |   | $ | (206 | ) | $ | 1,535 |   | $ | 6,409 |   |
| **Liabilities  and Stockholders’ Equity (Deficit)**     |       |                   |       |   |   |   |   |   |   |
|                                                         |       |                   |       |   |   |   |   |   |   |
| Liabilities not subject  to compromise                       |       |                   |       |   |   |   |   |   |   |
| Current liabilities                                          |       |                   |       |   |   |   |   |   |   |
| Current maturities of  long-term debt                        |       | $                      | 1,352      |   | $ | (1,334 | )(5) | $ |   |   | $ | 18 |   |
| Accounts payable                                             |       | 488                    |       | 27 | (6) |   |   | 515 |   |
| Accrued compensation  and payroll taxes                      |       | 139                    |       | 34 | (7) | 3 | (12) | 176 |   |
| Interest payable                                             |       | 12                     |       | (7 | )(2) |   |   | 5 |   |
| Other current  liabilities                                   |       | 141                    |       | (59 | )(2) | (1 | )(12) | 81 |   |
| Total current  liabilities                                   |       | 2,132                  |       | (1,339 | ) | 2 |   | 795 |   |
| Long-term debt, less  current maturities                     |       |                   |       | 1,176 | (5) |   |   | 1,176 |   |
| Pension and  postretirement benefits, net of current portion |       |                   |       | 1,179 | (8) | 460 | (12) | 1,639 |   |
| Other long-term  liabilities                                 |       | 116                    |       |   | (3) | 24 | (12) | 140 |   |
| Deferred income taxes                                        |       |                   |       |   |   | 307 | (12) | 307 |   |
| Total liabilities not  subject to compromise                 |       | 2,248                  |       | 1,016 |   | 793 |   | 4,057 |   |
|                                                         |       |                   |       |   |   |   |   |   |   |
| Liabilities subject to  compromise                           |       | 4,354                  |       | (4,354 | )(9) |   |   |   |   |
| Total liabilities                                            |       | 6,602                  |       | (3,338 | ) | 793 |   | 4,057 |   |
|                                                         |       |                   |       |   |   |   |   |   |   |
| Stockholders’ equity                                    |       |                   |       |   |   |   |   |   |   |
| Preferred stock  successor                                   |       |                   |       |   | (10) |   |   |   |   |
| Common stock successor                                       |       |                   |       |   | (10) |   |   |   |   |
| Preferred stock  predecessor                                 |       | 104                    |       | (104 | )(11) |   |   |   |   |
| Common stock  predecessor                                    |       | 3                      |       | (3 | )(11) |   |   |   |   |
| Additional paid-in  capital                                  |       | 4,084                  |       | (1,732 | )(10)(11) |   |   | 2,352 | (10) |
| Retained earnings  (deficit)                                 |       | (5,081                 | )          | 4,971 | (11) | 110 | (13) |   |   |
| Accumulated other  comprehensive income (loss)               |       | (632                   | )          |   |   | 632 | (13) |   |   |
| Total stockholders’  equity (deficit)                   |       | (1,522                 | )          | 3,132 |   | 742 | (13) | 2,352 |   |
|                                                         |       | $                      | 5,080      |   | $ | (206 | ) | $ | 1,535 |   | $ | 6,409 |   |

 

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Explanatory Notes

 

(1)          Represents amounts recorded on the Effective Date for theimplementation of the Plan of Reorganization, including the settlement ofliabilities subject to compromise and related payments, the issuance of newdebt and repayment of old debt, distribution of cash and new shares of commonstock, and the cancellation of Predecessor Company’s common and preferredstock.

 

(2)          Cash effects of the Plan of Reorganization:

 
| Amounts borrowed under the Exit Credit Facilities                                   |   | $      | 1,200  |   |
|-------------------------------------------------------------------------------------|--------|--------|--------|--------|
| Less: original issue discount                                                       |   | (12    | )      |
| Net proceeds from borrowings                                                        |   | 1,188  |   |
|                                                                                |   |   |   |
| Repayment of secured Bank Credit Facilities                                         |   | (1,139 | )      |
| Repayment of other secured debt                                                     |   | (207   | )      |
| Repayment of interest on secured debt                                               |   | (7     | )      |
| Payment of derivative contract termination  liabilities                             |   | (59    | )      |
| Payment of liabilities subject to compromise  claims                                |   | (136   | )      |
| Payment of debt issuance costs on Exit Credit  Facilities and other financing costs |   | (32    | )      |
| Net change in cash and cash equivalents                                             |   | $      | (392   | )      |

 

On June 30, 2010, $11 million of restrictedcash for collateralizing outstanding letters of credit was released to theCompany’s operating cash funds.

 

As of June 30, 2010, the Company had availableunrestricted cash and cash equivalents of $340 million primarily invested inmoney market funds at a variable interest rate of 0.15%.

 

(3)          Represents income tax adjustments resulting from the Plan ofReorganization.  Unrecognized taxbenefits of $45 million were reclassified from liabilities subject to compromiseto other long-term liabilities and were subsequently eliminated as part of theincome tax adjustments from plan effects (See Note 11 — Income Taxes).

 

(4)          Represents payment of debt issuance costs on the Exit Credit Facilitiesand other financing costs at emergence of $32 million, net of write-off ofremaining deferred debt issuance costs on Predecessor secured debt of $1million.

 

(5)          Represents the repayment of Predecessor secured debt and borrowingsunder the Exit Credit Facilities.

 
| Repayment of secured term loan debt     |   | $     | (503   | ) |
|-----------------------------------------|--------|-------|--------|---|
| Repayment of secured revolver debt      |   | (636  | )      |
| Repayment of drawn letters of credit    |   | (44   | )      |
| Repayment of Stevenson IRB              |   | (120  | )      |
| Repayment of other secured debt         |   | (43   | )      |
| Borrowings under Exit Credit Facilities |   | 1,200 |   |
| Original issue discount                 |   | (12   | )      |
|                                    |   | $     | (158   | ) |

 

(6)   Primarily represents accruedprofessional fees.

 

15

----

 

(7)   Representsaccrual under the Company’s 2009 long-term incentive plan and other employeecompensation benefits of $19 million and the reclassification of the currentportion of pension and postretirement benefits of $15 million from liabilitiessubject to compromise.

 

(8)   Reinstatementof pension and postretirement obligations, net of settlement.

 
| Reclassification from liabilities subject to  compromise               |   | $     | 1,306  |   |
|------------------------------------------------------------------------|--------|-------|--------|--------|
| Settlement of non-qualified pension liabilities  upon emergence        |   | (112  | )      |
| Successor pension and postretirement benefits                          |   | 1,194 |   |
| Less: current portion                                                  |   | (15   | )      |
| Successor pension and postretirement benefits, net  of current portion |   | $     | 1,179  |   |

 

(9)   Represents the disposition ofliabilities subject to compromise:

 
| Liabilities subject to compromise discharged at  emergence |   |   |   |
|------------------------------------------------------------|--------|--------|--------|
| Unsecured debt                                             |   | $      | (2,439 | ) |
| Accounts payable                                           |   | (184   | )      |
| Interest payable                                           |   | (47    | )      |
| Non-qualified pension obligations                          |   | (110   | )      |
| Executory contracts and leases and other                   |   | (196   | )      |
|                                                       |   | (2,976 | )      |
|                                                            |        |        |        |  |

 
| Liabilities subject to compromise paid in cash or  reinstated at emergence |   |   |   |
|----------------------------------------------------------------------------|--------|--------|--------|
| Accounts payable                                                           |   | (130   | )      |
| Retiree medical obligations                                                |   | (176   | )      |
| Pension obligations                                                        |   | (1,027 | )      |
| Unrecognized tax benefits                                                  |   | (45    | )      |
|                                                                       |   | (1,378 | )      |
|                                                                       |   | $      | (4,354 | ) |
|                                                                            |        |        |        |  |

 

Pursuantto the Plan of Reorganization and after the initial distribution, the Companyreserved approximately 9.0 million shares of Common Stock for futuredistribution to holders of unsecured non-priority claims that were unliquidatedor subject to dispute.  These shares willbe distributed as these claims are liquidated or resolved, in accordance withthe Plan of Reorganization and Confirmation Order.  To the extent that such unliquidated ordisputed claims are settled for less than the number of shares reserved,additional distributions may also be made with respect to previously allowedclaims under the terms and conditions of the Plan of Reorganization andConfirmation Order.

 

(10)   Reconciliationof enterprise value to determination of equity:

 
| Total enterprise value                      |                                                     | $      | 3,295  |   |
|---------------------------------------------|----------------------------------------------------------|--------|--------|--------|
| Plus:                                       | Cash                                                     |   | 347    |   |
|                                        | Expected net proceeds from sale of non-operating  assets |   | 10     |   |
| Less:                                       | Fair value of debt                                       |   | (1,206 | )      |
|                                        | Accrued emergence fees and expenses                      |   | (94    | )      |
| Common stock and additional paid-in-capital |                                                     | $      | 2,352  |   |

 

16

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(11)   Asa result of the Plan of Reorganization, the adjustment to retained earnings(deficit) reflects the elimination of the Predecessor Company’s preferredstock, common stock, and additional paid-in-capital, in addition to theafter-tax gain due to plan effects.

 
| Pre-tax gain due to plan effects                       |   | $      | 580    |   |
|--------------------------------------------------------|--------|--------|--------|--------|
| Tax benefit due to plan effects                        |   | 200    |   |
| Gain due to plan effects, net of tax                   |   | 780    |   |
|                                                   |   |   |   |
| Elimination of Predecessor preferred stock             |   | 104    |   |
| Elimination of Predecessor common stock                |   | 3      |   |
| Elimination of Predecessor additional  paid-in-capital |   | 4,084  |   |
|                                                   |   | $      | 4,971  |   |

 

(12)   Thefollowing table summarizes the allocation of the reorganization value to theCompany’s assets at the date of emergence as shown in the reorganizedconsolidated balance sheet as of June 30, 2010.

 
| Enterprise value                                                   |                                                     | $      | 3,295  |   |
|--------------------------------------------------------------------|----------------------------------------------------------|--------|--------|--------|
| Add:                                                               | Cash                                                     |   | 347    |   |
|                                                               | Expected net proceeds from sale of non-operating  assets |   | 10     |   |
| Less:                                                              | Accrued emergence fees and expenses                      |   | (94    | )      |
| Reorganization value                                               |                                                     | 3,558  |   |
|                                                               |                                                     |   |   |
| Add fair value of non-debt liabilities                             |                                                     | 2,851  |   |
|                                                               |                                                     |   |   |
| Less fair value of:                                                |                                                     |   |   |
| Property, plant and equipment                                      |                                                     | 4,405  |   |
| Intangibles                                                        |                                                     | 77     |   |
| Current assets                                                     |                                                     | 1,671  |   |
| Other non-current assets                                           |                                                     | 163    |   |
|                                                               |                                                     | 6,316  |   |
|                                                               |                                                     |   |   |
| Reorganization value of assets in excess of fair  value (goodwill) |                                                     | $      | 93     |   |

 

Liabilities were also adjusted to fair value in theapplication of fresh start accounting resulting in an increase in liabilitiesof $793 million.

 

(13)   Theadjustments required to report assets and liabilities at fair value under freshstart accounting resulted in a gain of $742 million, which was reported inreorganization items income (expense), net in the consolidated statements ofoperations for the three and six months ended June 30, 2010.  The gain includes the write-off of OCI lossesof $632 million, resulting in a net impact on retained earnings (deficit) of$110 million.

 

17

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**2.****             ****SignificantAccounting Policies**

 

**Basisof Presentation**

Theaccompanying consolidated financial statements and notes of the Company havebeen prepared in accordance with the instructions to Form 10-Q and reflectall adjustments which management believes necessary (which include only normalrecurring accruals) to present fairly the Company’s financial position, resultsof operations and cash flows.  Thesestatements, however, do not include all information and notes necessary for acomplete presentation of financial position, results of operations and cashflows in conformity with U.S. generally accepted accounting principles.  Interim results may not necessarily beindicative of results that may be expected for any other interim period or forthe year as a whole.  These financialstatements should be read in conjunction with the audited consolidatedfinancial statements and notes included in the SSCC Annual Report on Form 10-Kfor the year ended December 31, 2009 (“2009 Form 10-K”) filed March 2,2010 with the Securities and Exchange Commission.

 

As of the Effective Date, the Company merged with and into SSCE, withSSCE being the survivor entity and renaming itself Smurfit-Stone ContainerCorporation, and becoming the Reorganized Smurfit-Stone.  The Company has domestic and international operations.

 

**RecentlyAdopted Accounting Standards**

EffectiveJanuary 1, 2010, the Company adopted the amendments to ASC 860, “Transfersand Servicing” (“ASC 860”).  Theamendments removed the concept of a qualifying special-purpose entity and therelated impact on consolidation, thereby potentially requiring consolidation ofsuch special-purpose entities previously excluded from the consolidatedfinancial statements.  The amendments toASC 860 did not impact the Company’s consolidated financial statements.

 

EffectiveJanuary 1, 2010, the Company adopted the amendments to ASC 820, “FairValue Measurements and Disclosures” (“ASC 820”).  The amendments require new disclosures fortransfers in and out of fair value hierarchy Levels 1 and 2 and activity withinfair value hierarchy Level 3.  Theamendments also clarify existing disclosures regarding the disaggregation foreach class of assets and liabilities, and the disclosures about inputs andvaluation techniques.  The amendments toASC 820 did not have a material impact on the Company’s consolidated financialstatements.

 

**3.****             ****Reclassifications**

 

Certainprior year amounts have been reclassified to conform to the current yearpresentation.

 

**4.****             ****RestructuringActivities**

 

TheCompany continues to review and evaluate various restructuring and otheralternatives to streamline operations, improve efficiencies and reducecosts.  These actions subject the Companyto additional short-term costs, which may include facility shutdown costs,asset impairment charges, lease commitment costs, severance costs and otherclosing costs.

 

Duringthe second quarter of 2010, the Company closed three converting facilities andsold one previously closed facility.  TheCompany recorded restructuring charges of $19 million.  Restructuring charges included non-cashcharges of $11 million related to the acceleration of depreciation forconverting equipment abandoned or taken out of service.  The remaining charges of $8 million wereprimarily for severance and benefits and lease commitments.  As a result of the closure activities in thesecond quarter of 2010 and other ongoing initiatives, the Company reduced itsheadcount by approximately 140 employees.

 

18

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Forthe six months ended June 30, 2010, the Company closed four convertingfacilities and sold five previously closed facilities.  As a result of these closure activities andother ongoing initiatives, the Company reduced its headcount by approximately900 employees.  The Company recordedrestructuring charges of $15 million, including an $11 million gain related tothe sale of previously closed facilities, of which $8 million resulted from thelegal release of environmental liability obligations.  Restructuring charges included non-cashcharges of $11 million related to the acceleration of depreciation forconverting equipment abandoned or taken out of service.  The remaining charges of $15 million wereprimarily for severance and benefits and lease commitments.  The net sales of the closed convertingfacilities in 2010 prior to closure and for the year ended December 31,2009 were $21 million and $97 million, respectively.  The majority of these net sales are expectedto be transferred to other operating facilities.

 

TheCompany recorded restructuring charges of $11 million and $24 million for thethree and six months ended June 30, 2009, respectively.  Restructuring charges included non-cashcharges of $3 million and $4 million for the three and six months ended June 30,2009, respectively, related to the write-down of assets, primarily property,plant and equipment, to estimated net realizable values and the acceleration ofdepreciation for converting equipment expected to be abandoned or taken out ofservice. The remaining charges were primarily for severance and benefits.

 

AtDecember 31, 2009, the Company had $54 million of accrued exit liabilitiesrelated to the restructuring of operations. For the three and six months ended June 30, 2010, the Companyincurred $3 million and $23 million, respectively, of cash disbursements,primarily severance and benefits, related to these exit liabilities.  In addition, these exit liabilities decreasedby $8 million resulting from the release of environmental liability obligationsupon the sale of previously closed facilities, $3 million due to thereclassification of multi-employer pension plan liabilities to liabilitiessubject to compromise, and $4 million due to adjustments to severance andbenefit reserves based on current information. During the three and six months ended June 30, 2010, the Companyincurred $7 million and $11 million, respectively, of cash disbursements,primarily severance and benefits, related to exit liabilities establishedduring 2010.

 

**5.****             ****AlternativeEnergy Tax Credits**

 

The U.S. Internal RevenueCode allowed an excise tax credit for alternative fuel mixtures produced by ataxpayer for sale, or for use as a fuel in a taxpayer’s trade or businessthrough December 31, 2009, at which time the credit expired.  In May 2009, the Company was notifiedthat its registration as an alternative fuel mixer was approved by the InternalRevenue Service.  The Companysubsequently submitted refund claims of approximately $654 million for 2009related to production at ten of its U.S. mills. The Company received refund claims of $595 million in 2009 and $59million during the first quarter of 2010. During 2009, the Company recorded other operating income of $633million, net of fees and expenses, in its consolidated statements of operationsrelated to this matter.  In March 2010,the Company recorded other operating income of $11 million relating to anadjustment of refund claims submitted in 2009. The Company expects to receive the refund claim in the fourth quarter of2010.

 

**6.****             ****RestrictedCash**

 

AtJune 30, 2010, the Company had restricted cash of $7 million as approvedby the U.S. Court to provide financial assurance to certain utilityvendors.  During July 2010, the $7million of restricted cash was released to the Company’s operating cash funds.

 

19

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**7.****             ****AccountsReceivable Securitization Programs**

 

OnJanuary 28, 2009, in conjunction with the filing of the Chapter 11Petition and the Canadian Petition, the accounts receivable securitizationprograms were terminated and all outstanding receivables previously sold to thenon-consolidated financing entities were repurchased with proceeds fromborrowings under the DIP Credit Agreement (See Note 1).  The repurchase of receivables of $385 millionwas included in the cash flows from financing activities in the consolidatedstatement of cash flows for the six months ended June 30, 2009.

 

**8.****             ****Guaranteesand Commitments**

 

TheCompany has certain wood chip processing contracts extending from 2012 through2018 with minimum purchase commitments. As part of the agreements, the Company guarantees the third partycontractors’ debt outstanding and has a security interest in the chippingequipment.  At June 30, 2010, themaximum potential amount of future payments related to these guarantees wasapproximately $24 million, which decreases ratably over the life of thecontracts.  In the event the guaranteeson these contracts are called, proceeds from the liquidation of the chippingequipment would be based on current market conditions and the Company may notrecover in full the guarantee payments made.

 

**9.****             ****EmployeeBenefit Plans**

 

TheCompany sponsors noncontributory defined benefit pension plans for its U.S.employees and also sponsors noncontributory and contributory defined benefitpension plans for its Canadian employees. The Company’s defined benefit pension plans cover substantially allhourly employees, as well as salaried employees hired prior to January 1,2006.  The U.S. and Canadian definedbenefit pension plans for salaried employees were frozen effective January 1,2009 and March 1, 2009, respectively.

 

TheCompany’s postretirement benefit plans provide certain health care and lifeinsurance benefits for all retired salaried and certain retired hourlyemployees, and for salaried and certain hourly employees who reached the age of60 with ten years of service as of January 1, 2007.

 

At June 30, 2010, the qualified defined benefitplans, which were assumed under the Plan of Reorganization, were underfunded byapproximately $1,450 million.  The Companycurrently estimates that its minimum required cash contributions under the U.S.and Canadian qualified pension plans will be approximately $95 million in 2010and in the range of $235 million to $305 million annually in 2011 through2015.  Projected pension contributionsassume the Company elects funding relief under the Preservation of Access toCare for Medicare Beneficiaries and Pension Relief Act of 2010, enacted in June 2010.  The actual required amounts and timing ofsuch future cash contributions will be highly sensitive to changes in theapplicable discount rates and returns on plan assets.

 

20

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The components of net periodic costs for the defined benefit plans andthe components of the postretirement benefit costs are as follows:

 
| ** **                                   | ** ** | **Predecessor**                 | ** ** |
|----------------------------------------------|------------|---------------------------------|------------|
| ** **                                   | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
| ** **                                   | ** ** | **Defined  Benefit Plans**      | ** ** | **Postretirement  Plans** | ** ** | **Defined  Benefit Plans** | ** ** | **Postretirement  Plans** | ** ** |
| ** **                                   | ** ** | **2010**                        | ** ** | **2009** | ** ** | **2010** | ** ** | **2009** | ** ** | **2010** | ** ** | **2009** | ** ** | **2010** | ** ** | **2009** | ** ** |
| Service cost                                 |       | $                               | 8          |   | $ | 5 |   | $ |   |   | $ |   |   | $ |   | 15 |   | $ | 11 |   | $ | 1 |   | $ | 1 |   |
| Interest cost                                |       | 55                              |       | 51 |   | 3 |   | 2 |   | 106 |   | 101 |   | 5 |   | 5 |   |
| Expected return on plan assets               |       | (54                             | )          | (49 | ) |   |   |   |   | (105 | ) | (99 | ) |   |   |   |   |
| Amortization of prior service cost (benefit) |       |                            |       |   |   | (1 | ) |   |   | 1 |   | 1 |   | (2 | ) | (1 | ) |
| Amortization of net (gain) loss              |       | 25                              |       | 22 |   | (1 | ) | (1 | ) | 48 |   | 42 |   | (1 | ) | (2 | ) |
| Settlements                                  |       | 1                               |       |   |   |   |   |   |   | 1 |   |   |   |   |   |   |   |
| Special termination benefits charge          |       |                            |       | 9 |   |   |   |   |   |   |   | 9 |   |   |   |   |   |
| Multi-employer plans                         |       | 2                               |       | 1 |   |   |   |   |   | 3 |   | 2 |   |   |   |   |   |
| Multi-employer plan adjustments              |       | 3                               |       |   |   |   |   |   |   | 3 |   |   |   |   |   |   |   |
| Net periodic benefit cost                    |       | $                               | 40         |   | $ | 39 |   | $ | 1 |   | $ | 1 |   | $ | 72 |   | $ | 67 |   | $ | 3 |   | $ | 3 |   |

 

The2010 settlement losses are related to closed facilities and are included aspart of restructuring charges (See Note 4).

 

The2010 multi-employer plan adjustments include $3 million related to settlementsof various multi-employer pension plans in connection with the Company’sbankruptcy proceedings and is included in reorganization items in theconsolidated statement of operations (See Note 1).

 

The 2009 special terminationbenefits charge is due to funding obligations related to certain non-qualifiedpension plans and is included in reorganization items in the consolidatedstatement of operations (See Note 1).

 

**Patient Protection and Affordable Care Act**

InMarch 2010, the Patient Protection and Affordable Care Act (“PPACA”) wasenacted, potentially impacting the Company’s cost to provide healthcarebenefits to its eligible active and retired employees.  The PPACA has both short-term and long-termimplications on benefit plan standards. Implementation of this legislation is planned to occur in phases,beginning in 2010, but to a greater extent with the 2011 benefit plan year andextending through 2018.

 

TheCompany is currently analyzing this legislation to determine the full extent ofthe impact of the required plan standard changes on its employee healthcareplans and the resulting costs.  While theCompany anticipates that costs to provide healthcare to eligible activeemployees and certain retired employees will increase in future years, it isuncertain at this time how significant the increase will be.

 

21

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**10.****      ****Derivative Instruments andHedging Activities**

 

On January 26, 2009, the Chapter 11 Petition and the CanadianPetition effectively terminated all existing derivative instruments.  Termination fair values were calculated basedon the potential settlement value.  TheCompany’s termination value related to its remaining derivative liabilities wasapproximately $59 million.  Thesederivative liabilities were stayed due to the filing of the Chapter 11 Petitionand the Canadian Petition, at which time these liabilities were adjustedthrough OCI for derivative instruments qualifying for hedge accounting and costof goods sold for derivative instruments not qualifying for hedgeaccounting.  Subsequently, the amountsadjusted through OCI were recorded in earnings during the period when theunderlying transaction was recognized or when the underlying transaction was nolonger expected to occur.  As of June 30,2010, all amounts in OCI have been recognized through earnings.  On June 30, 2010, the derivativecontract termination liabilities of $59 million were paid in connection withthe Company’s emergence from its Chapter 11 and CCAA bankruptcy proceedings(See Note 1 — Fresh Start Accounting).

 

The Company’s derivative instruments previously used for its hedgingactivities were designed as cash flow hedges and related to minimizingexposures to fluctuations in the price of commodities used in its operations,the movement in foreign currency exchange rates and the fluctuations in theinterest rate on variable rate debt.  Allcash flows associated with the Company’s derivative instruments were classifiedas operating activities in the consolidated statements of cash flows. Thederivative instruments and hedging activities for all periods presented belowrelate to the Predecessor Company.

 

**CommodityDerivative Instruments**

The Company used derivative instruments, including fixed price swaps,to manage fluctuations in cash flows resulting from commodity price risk in theprocurement of natural gas and other commodities, including fuel oil and dieselfuel.  The objective was to fix the priceof a portion of the Company’s purchases of these commodities used in themanufacturing process.  The changes inthe market value of such derivative instruments historically offset the changesin the price of the hedged item.

 

For the six months ended June 30, 2010, the Company reclassifiedan immaterial amount from OCI to cost of goods sold when the hedged items wererecognized.  For the three and six monthsended June 30, 2009, the Company reclassified an $8 million loss (net oftax) and a $19 million loss (net of tax), respectively, from OCI to cost ofgoods sold when the hedged items were recognized.

 

For the six months ended June 30, 2009, the Company recorded a $3million gain (net of tax) in cost of goods sold related to the change in fairvalue, prior to the Petition Date, of certain commodity derivative instrumentsnot qualifying for hedge accounting.

 

For the six months ended June 30, 2009, the Company recorded a $3million loss (net of tax) in cost of goods sold on commodity derivativeinstruments, settled prior to the Petition Date, not qualifying for hedgeaccounting.

 

**ForeignCurrency Derivative Instruments**

TheCompany’s principal foreign exchange exposure is the Canadian dollar.  The Company used foreign currency derivativeinstruments, including forward contracts and options, primarily to protect againstCanadian currency exchange risk associated with expected future cash flows.

 

Forthe three and six months ended June 30, 2009, the Company reclassified a$2 million loss (net of tax) and a $4 million loss (net of tax), respectively,from OCI to cost of goods sold when the hedged items were recognized.

 

22

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During the second quarter of 2009, the Company reclassified theremaining foreign currency derivative instruments from OCI to cost of goodssold since the underlying transactions were no longer expected to occur,resulting in an additional loss of $2 million (net of tax).

 

**InterestRate Swap Contracts**

ThePredecessor Company used interest rate swap contracts to manage interest rateexposure on $300 million of the Tranche B and Tranche C floating rate bank termdebt which was paid on June 30, 2010 in connection with the Company’semergence from Chapter 11 and CCAA bankruptcy proceedings.  The accounting for the cash flow impact ofthe swap contracts was recorded as an adjustment to interest expense eachperiod.

 

Forthe three and six months ended June 30, 2010, the Company reclassified animmaterial amount and a $1 million loss (net of tax), respectively, from OCI tointerest expense when the hedged items were recognized.  For the three and six months ended June 30,2009, the Company reclassified a $1 million loss (net of tax) and a $2 millionloss (net of tax), respectively, from OCI to interest expense when the hedgeditems were recognized.

 

**11.****      ****Income Taxes**

 

TheCompany recorded a net tax benefit of $199 million for the three and six monthsended June 30, 2010.  This includes$200 million of net benefit related to the effects of the Plan ofReorganization, which includes adjustments for valuation allowance ($427million benefit), unrecognized tax benefits ($39 million benefit) andcancellation of indebtedness and other plan effects ($266 million provision).

 

Certaindebt obligations of the Company were discharged upon emergence from bankruptcy.  Discharge of a debt obligation for an amountless than the adjusted issue price generally creates cancellation ofindebtedness income (CODI), which must be included in taxable income.  However, CODI is excluded from taxable incomefor a taxpayer that is a debtor in a reorganization case if the discharge isgranted by the court or pursuant to a plan of reorganization approved by thecourt.  The Plan of Reorganization filedby the Company enabled it and its debtor subsidiaries to qualify for thisbankruptcy exclusion rule.  Based uponcurrent projections, the CODI triggered by discharge of debt under the Plan ofReorganization will not create current taxable income, but will reduce theCompany’s net operating losses (NOLs) for the year of discharge and netoperating loss carryforwards.  None ofthe Company’s other U.S. income tax attributes are expected to be reduced.

 

Pursuantto the Plan of Reorganization, the assets of all Canadian subsidiaries weresold to a new wholly-owned Canadian subsidiary for fair value.  All pre-emergence Canadian subsidiaries willbe liquidated in accordance with the Plan of Reorganization and allpre-emergence Canadian income tax attributes will be eliminated following theirdissolution.

 

Dueto the effects of the Plan of Reorganization, the Company concluded it is morelikely than not that the majority of deferred income tax assets will berealized.  Management considered thereversal of deferred tax liabilities in making this assessment.  As a result, the Company recognized an incometax benefit for release of pre-emergence valuation allowance on its netdeferred tax assets in the U.S. and Canada. At June 30, 2010, a valuation allowance remains in place related tocertain state NOLs.

 

Aspreviously reported, the Company entered into an agreement with the CanadaRevenue Agency and other provincial tax authorities that took effect upon theCompany’s emergence from bankruptcy. This agreement settled the open Canadian income tax matters through January 26,2009.  As a result of this agreement, theCompany reported a $39 million net income tax benefit for the three and sixmonths ended June 30, 2010 related to the final settlement of the Canadiantax claims and the release of the previously accrued unrecognized tax benefitsrelated to the Canadian audit.

 

23

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Basedon the Company’s current tax position that the alternative fuel mixture creditsare not taxable, the Company increased the tax value of its federal NOLcarryforwards by $254 million during the three and six months ended June 30,2010.  A reserve of $254 million wasrecorded related to this unrecognized tax benefit.

 

AtJune 30, 2010, the Company had federal NOL carryforwards net ofunrecognized tax benefits of $722 million, with a tax value of $253million.  The Company had NOLcarryforwards for state purposes with a tax value of $61 million.  Additionally, the Company had $68 million ofalternative minimum tax credit carryforwards and $6 million of other federaland state tax credit carryforwards available.

 

Asa result of the issuance of new common shares upon emergence from bankruptcy,the Company realized a change of ownership for purposes of Section 382 ofthe Internal Revenue Code, which can impose annual limitations on utilizationof NOLs and tax credits.  The Companydoes not expect the provisions of Section 382 to significantly limit itsability to utilize NOLs or tax credits in the carryforward periods.

 

AtJune 30, 2010, the other significant components of deferred income taxeswere related to property, plant and equipment (liability of $1,119 million),pension and post retirement benefits (asset of $511 million) and inventories(liability of $85 million).

 

**12.****      ****Comprehensive Income (Loss)**

 

Comprehensiveincome (loss) is as follows:

** **
| ** **                                                             | ** ** | **Predecessor**                       | ** ** |
|------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                             | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
| ** **                                                             | ** ** | **2010**                              | ** ** | **2009** | ** ** | **2010** | ** ** | **2009** | ** ** |
| Net income (loss)                                                      |       | $                                     | 1,413      |   | $ | 158 |   | $ | 1,324 |   | $ | (56 | ) |
| Other comprehensive income (loss), net of tax:                         |       |                                  |       |   |   |   |   |   |   |
| Net changes in fair value of hedging instruments                       |       |                                  |       |   |   |   |   | (1 | ) |
| Net hedging loss reclassified into earnings                            |       |                                  |       | 13 |   | 1 |   | 27 |   |
| Net deferred employee benefit plan expense  reclassified into earnings |       | 23                                    |       | 13 |   | 46 |   | 24 |   |
| Foreign currency translation adjustment                                |       | (2                                    | )          | 1 |   |   |   | 1 |   |
| Fresh start accounting adjustments                                     |       | 632                                   |       |   |   | 632 |   |   |   |
| Comprehensive income (loss)                                            |       | $                                     | 2,066      |   | $ | 185 |   | $ | 2,003 |   | $ | (5 | ) |

 

**13.****      ****Earnings Per Share**

 

Asdiscussed in Note 1, Bankruptcy Proceedings, Predecessor Company preferred andcommon stock was cancelled as a result of the Company’s emergence from Chapter11 and CCAA bankruptcy proceedings on the Effective Date.  The Successor Company common stock was issuedon June 30, 2010.  As such, theearnings per share information for the Predecessor Company is not meaningful toshareholders of the Successor Company’s common shares, or to potentialinvestors in such common shares.

 

24

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Thefollowing table sets forth the computation of the Predecessor Company basic anddiluted earnings per share:

 
| ** **                                                                                                 | ** ** | **Predecessor**                        | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                                 | ** ** | **Three months ended   June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
| ** **                                                                                                 | ** ** | **2010**                               | ** ** | **2009** | ** ** | **2010** | ** ** | **2009** | ** ** |
| **Numerator:**                                                                                             |       |                                   |       |   |   |   |   |   |   |
| Net income (loss)                                                                                          |       | $                                      | 1,413      |   | $ | 158 |   | $ | 1,324 |   | $ | (56 | ) |
| Preferred stock dividends and accretion                                                                    |       | (2                                     | )          | (3 | ) | (4 | ) | (6 | ) |
| Net income (loss) attributable to common  stockholders                                                     |       | 1,411                                  |       | 155 |   | 1,320 |   | (62 | ) |
| Effect of dilutive securities:                                                                             |       |                                   |       |   |   |   |   |   |   |
| Preferred stock dividends                                                                                  |       | 2                                      |       |   |   | 4 |   |   |   |
| Net income (loss) attributable to common  stockholders and assumed conversion                              |       | $                                      | 1,413      |   | $ | 155 |   | $ | 1,324 |   | $ | (62 | ) |
|                                                                                                       |       |                                   |       |   |   |   |   |   |   |
| **Denominator:**                                                                                           |       |                                   |       |   |   |   |   |   |   |
| Denominator for basic earnings per share –  adjusted weighted average shares                          |       | 258                                    |       | 257 |   | 258 |   | 257 |   |
| Effect of dilutive securities:                                                                             |       |                                   |       |   |   |   |   |   |   |
| Preferred Stock                                                                                            |       | 3                                      |       |   |   | 3 |   |   |   |
| Denominator for diluted earnings per share –  adjusted weighted average shares and assumed conversion |       | 261                                    |       | 257 |   | 261 |   | 257 |   |
|                                                                                                       |       |                                   |       |   |   |   |   |   |   |
| Basic earnings per share                                                                                   |       | $                                      | 5.47       |   | $ | 0.60 |   | $ | 5.12 |   | $ | (0.24 | ) |
| Diluted earnings per share                                                                                 |       | $                                      | 5.41       |   | $ | 0.60 |   | $ | 5.07 |   | $ | (0.24 | ) |

 

Sharesof SSCC preferred stock convertible into three million shares of common stockwith an earnings effect of $3 million and $6 million were excluded from thediluted earnings per share computations for the three and six months ended June 30,2009 because they were antidilutive.

 

Employeestock options and non-vested restricted stock were excluded from the dilutedearnings per share calculations for the three and six months ended June 30,2010 and 2009, respectively, because they were antidilutive.

 

**14.****      ****Fair Value Measurements**

 

Certainfinancial assets and liabilities are recorded at fair value on a recurringbasis, including derivative instruments prior to termination (See Note 11) andthe Company’s residual interest in the Timber Note Holdings (“TNH”) investment.

 

Asdiscussed in Note 1, “Bankruptcy Proceedings — Fresh Start Accounting”, all ofthe Company’s assets and liabilities were fair valued as of June 30, 2010in connection with our adoption of fresh start accounting.  The gains and losses related to these fairvalue adjustments were recorded in the statement of operations of thePredecessor Company.

 

Fairvalue is defined as the price that would be received to sell an asset or paidto transfer a liability in an orderly transaction between market participantsat the measurement date.  In determiningfair value, the Company uses various valuation approaches, including market,income and/or cost approaches.  ASC 

 

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820establishes a hierarchy for inputs used in measuring fair value that maximizesthe use of observable inputs and minimizes the use of unobservable inputs byrequiring that the most observable inputs be used when available.  Observable inputs are inputs that marketparticipants would use in pricing the asset or liability based on market dataobtained from sources independent of the Company.  Unobservable inputs are inputs that reflectthe Company’s assumptions about the assumptions market participants would usein pricing the asset or liability developed based on the best informationavailable in the circumstances.  Thehierarchy for inputs is broken down into three levels based on theirreliability as follows:

 

*Level 1* — Valuations based on quoted prices in activemarkets for identical assets or liabilities that the Company has the ability toaccess.  The Company has no assets orliabilities measured at fair value on a recurring basis utilizing Level 1inputs.

 

*Level 2* — Valuations based on quoted prices in markets thatare not active or for which all significant inputs are observable, eitherdirectly or indirectly.  The Company hasno assets or liabilities measured at fair value on a recurring basis utilizingLevel 2 inputs.

 

*Level 3* — Valuations based on inputs that are unobservableand significant to the overall fair value measurement.  The Company’s assets and liabilitiesutilizing Level 3 inputs include the residual interest in the TNHinvestment.  The fair value of theresidual interest in the TNH investment is estimated using discounted residualcash flows.

 

**FairValue on a Recurring Basis**

Assetsand liabilities measured at fair value on a recurring basis are categorized inthe table below based upon the level of input to the valuations.

 
| ** **                          | ** ** | **Successor**          | ** ** |
|-------------------------------------|------------|------------------------|------------|
| ** **                          | ** ** | **June 30, 2010** | ** ** |
| ** **                          | ** ** | **Level 1**            | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** |
|                                |       |                   |       |   |   |   |   |   |   |
| Residual interest in TNH investment |       | $                      |       |   | $ |   |   | $ | 21 |   | $ | 21 |   |
|                                     |            |                        |            |  |  |  |  |  |  |  |  |  |  |

 

Thefollowing table presents the changes in Level 3 assets (liabilities) measuredat fair value on a recurring basis for the three and six months ended June 30,2010:

 
| ** **                                    | ** ** | **Residual   Interest in  TNH   Investment** | ** ** |
|-----------------------------------------------|------------|----------------------------------------------|------------|
| Balance at January 1, 2010 (Predecessor) |       | $                                            | 36         |   |
| Dividend received                             |       | (15                                          | )          |
| Balance at March 31, 2010 (Predecessor)  |       | 21                                           |       |
| Realized gains (losses)                       |       |                                         |       |
| Balance at June 30, 2010 (Successor)     |       | $                                            | 21         |   |

 

**Financial Instruments Not Measured At Fair Value**

Some of the Company’s financial instruments are not measured at fairvalue on a recurring basis but are recorded at amounts that approximate fairvalue due to their liquid or short-term nature. The carrying amount of cash equivalents approximates fair value becauseof the short maturity of those instruments.

 

Prior to emergence, the Predecessor Company’s borrowings were recordedat historical amounts.  On the EffectiveDate, the Company’s debt was adjusted to fair value of $1,206 million usingquoted market prices which is consistent with par value (Level 1) (See Note 1 —Fresh Start Accounting).

 

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**15.****      ****Contingencies**

 

TheCompany’s past and present operations include activities which are subject tofederal, state and local environmental requirements, particularly relating toair and water quality.  The Company facedpotential environmental liability as a result of violations of theseenvironmental requirements, environmental permit terms and similarauthorizations that have occurred from time to time at its facilities.  In addition, the Company faced potentialliability for remediation at certain owned and formerly owned facilities, aswell as response costs at various sites for which it has received notice asbeing a potentially responsible party (“PRP”) concerning hazardous substancecontamination.  The matters relating tothe third party PRP sites and certain formerly owned facilities will besatisfied as unsecured claims in the Company’s bankruptcy proceedings.  As of June 30, 2010, the Company hadapproximately $14 million reserved for environmental liabilities, of which $5million is included in other long-term liabilities and $9 million in othercurrent liabilities in the consolidated balance sheets.  The Company believes the liability for thesematters was adequately reserved at June 30, 2010.

 

InJanuary 2009, the Company settled two putative class action cases filed inCalifornia state court on behalf of current and former hourly employees at theCompany’s California corrugated container facilities.  These cases alleged violations of the Californiaon-duty meal break and rest period statutes. The court approved a settlement for approximately $9 million for bothcases on January 21, 2009.  Thecases were satisfied as an unsecured claim in the Company’s bankruptcyproceedings.

 

In May 2009, a lawsuitwas filed in the United States District Court for the Northern District ofIllinois against the four individual committee members of the AdministrativeCommittee (“Administrative Committee”) of the Company’s savings plans andPatrick Moore, the Company’s Chief Executive Officer (together, the “Defendants”).  The suit alleges violations of the EmployeeRetirement Income Security Act (“ERISA”) (the “2009 ERISA Case”) between January 2008and the date it was filed.  Theplaintiffs in the 2009 ERISA Case brought the complaint on behalf of themselvesand a class of similarly situated participants and beneficiaries of four of theCompany’s savings plans (the “Savings Plans”). The plaintiffs assert that the Defendants breached their fiduciaryduties to the Savings Plans’ participants and beneficiaries by allegedly makingimprudent investments with the Savings Plans’ assets, making misrepresentationsand failing to disclose material adverse facts concerning the Company’sbusiness conditions, debt management and viability, and not taking appropriateaction to protect the Savings Plans’ assets. Even though the Company is not a named defendant in the 2009 ERISA Case,management believes that any indemnification obligations to the Defendantswould be covered by applicable insurance.

 

Duringthe first quarter of 2010, two additional ERISA class action lawsuits werefiled in the United States District Court for the Western District of Missouriand one in the United States District Court for the District of Delaware.  The defendants in these cases are theindividual committee members of the Administrative Committee, several other ofthe Company’s executives and the individual members of its Board ofDirectors.  The suits have similarallegations as the 2009 ERISA Case described above, with the addition of breachof fiduciary duty claims related to the Company’s pension plans.  The Company expects that all of these matterswill be consolidated in some manner as they purport to represent a similarclass of employees and former employees and seek recovery under similarallegations and any of the Company’s indemnification obligations would becovered by applicable insurance.

 

TheCompany is a defendant in a number of other lawsuits and claims arising out ofthe conduct of its business.  Alllitigation that arose out of pre-petition conduct or acts was subject to theautomatic stay provision of the bankruptcy laws and any recovery by plaintiffsin those matters was paid consistent with all other general unsecured claims inthe bankruptcy.  As a result, the Companybelieves that these matters will not have a material adverse effect on itsconsolidated financial condition, results of operations or cash flows.

 

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**ITEM2.    MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

**FORWARD-LOOKINGSTATEMENTS**

 

Someinformation included in this report may contain forward-looking statementswithin the meaning of Section 21E of the Securities Exchange Act of 1934,as amended.  Although we believe that, inmaking any such statements, our expectations are based on reasonableassumptions, any such statement may be influenced by factors that could causeactual outcomes and results to be materially different from thoseprojected.  When used in this document,the words “anticipates,” “believes,” “expects,” “intends” and similarexpressions as they relate to Smurfit-Stone Container Corporation or itsmanagement, are intended to identify such forward-looking statements.  These forward-looking statements are subjectto numerous risks and uncertainties. There are important factors that could cause actual results to differmaterially from those in forward-looking statements, certain of which arebeyond our control.  These factors, risksand uncertainties are discussed in our Annual Report on Form 10-K for theyear ended December 31, 2009 (2009 Form 10-K) filed with theSecurities and Exchange Commission.

 

Ouractual results, performance or achievements could differ materially from thoseexpressed in, or implied by, these forward-looking statements.  Accordingly, we can give no assurances thatany of the events anticipated by the forward-looking statements will occur, orif any of them do, what impact they will have on our results of operations orfinancial condition.  We expresslydecline any obligation to publicly revise any forward-looking statements thathave been made to reflect the occurrence of events after the date hereof.

 

**GENERAL**

 

Smurfit-StoneContainer Corporation (SSCC or the Company), incorporated in Delaware in 1989,was a holding company with no business operations of its own.  SSCC conducted its business operationsthrough its wholly-owned subsidiary, Smurfit-Stone Container Enterprises, Inc.(SSCE), a Delaware corporation.  On June 30,2010 (Effective Date), SSCC emerged from its Chapter 11 and Companies’ CreditorsArrangement Act (CCAA) bankruptcy proceedings.  As of the Effective Date and pursuant to thePlan of Reorganization, the Company merged with and into SSCE.  SSCE changed its name to Smurfit-StoneContainer Corporation and became the Reorganized Smurfit-Stone ContainerCorporation (Reorganized Smurfit-Stone).

 

**RECENTLYADOPTED ACCOUNTING STANDARDS**

 

EffectiveJanuary 1, 2010, we adopted the amendments to ASC 860, “Transfers andServicing” (ASC 860).  The amendmentsremoved the concept of a qualifying special-purpose entity and the relatedimpact on consolidation, thereby potentially requiring consolidation of suchspecial-purpose entities previously excluded from the consolidated financialstatements.  The amendments to ASC 860did not impact our consolidated financial statements.

 

EffectiveJanuary 1, 2010, we adopted the amendments to ASC 820, “Fair ValueMeasurements and Disclosures” (ASC 820). The amendments require new disclosures for transfers in and out of fairvalue hierarchy Levels 1 and 2 and activity within fair value hierarchy Level3.  The amendments also clarify existingdisclosures regarding the disaggregation for each class of assets and liabilities,and the disclosures about inputs and valuation techniques.  The amendments to ASC 820 did not have amaterial impact on our consolidated financial statements.

 

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**BANKRUPTCY PROCEEDINGS**

 

**Chapter 11 Bankruptcy Filings**

 

On January 26, 2009 (thePetition Date), we and our U.S. and Canadian subsidiaries (collectively, theDebtors) filed a voluntary petition (the Chapter 11 Petition) for relief underChapter 11 of the United States Bankruptcy Code (the Bankruptcy Code) in theUnited States Bankruptcy Court in Wilmington, Delaware (the U.S. Court).  On the same day, our Canadian subsidiariesalso filed to reorganize (the Canadian Petition) under the CCAA in the OntarioSuperior Court of Justice in Canada (the Canadian Court).  Our operations in Mexico andAsia and certain U.S. and Canadian legal entities (the Non-Debtor Subsidiaries)were not included in the filings and continued to operate outside of theChapter 11 and CCAA processes. As described below, on June 21, 2010, theU.S. Court entered an order (Confirmation Order) approving and confirming theJoint Plan of Reorganization for Smurfit-Stone Container Corporation and itsDebtor Subsidiaries and Plan of Compromise and Arrangement for Smurfit-Stone ContainerCanada Inc. and Affiliated Canadian Debtors (Plan of Reorganization).  We emerged from our Chapter 11 and CCAAbankruptcy proceedings on June 30, 2010 (Effective Date).  As of the Effective Date and pursuant to thePlan of Reorganization, we merged with and into our wholly-owned subsidiary,SSCE.  SSCE changed its name toSmurfit-Stone Container Corporation and became the Reorganized Smurfit-Stone.

 

Theterm “Predecessor” refers only to us and our subsidiaries prior to theEffective Date, and the term “Successor” refers only to the ReorganizedSmurfit-Stone and its subsidiaries subsequent to the Effective Date.  Unless the context indicates otherwise, theterms “we”, “us”, “SSCC” and the “Company” are used interchangeably in thisQuarterly Report on Form 10-Q to refer to both the Predecessor andSuccessor Company.

 

Until emergence frombankruptcy on the Effective Date, the Debtors were operating asdebtors-in-possession under the jurisdiction of the U.S. Court and CanadianCourt (the Bankruptcy Courts) and in accordance with the applicable provisionsof the Bankruptcy Code and the CCAA.  Ingeneral, as debtors-in-possession, the Debtors were authorized to continue tooperate as ongoing businesses, but could not engage in transactions outside theordinary course of business without the approval of the Bankruptcy Courts.

 

**Debtor-In-Possession (DIP) Financing**

 

In connection with filing theChapter 11 Petition and the Canadian Petition on the Petition Date, we andcertain of our affiliates filed a motion with the Bankruptcy Courts seekingapproval to enter into a Post-Petition Credit Agreement (the DIP CreditAgreement).  Based on interim approval,we and certain of our affiliates entered into the DIP Credit Agreement on January 28,2009.  Final approval of the DIP CreditAgreement was granted by the U.S. Court on February 23, 2009 and by theCanadian Court on February 24, 2009. Amendments to the DIP Credit Agreement were entered into on February 25and 27, 2009.

 

The DIP Credit Agreement, asamended, provided for borrowings up to an aggregate committed amount of $750million, consisting of a $400 million U.S. term loan (U.S. DIP Term Loan) forborrowings by SSCE; a $35 million Canadian term loan (Canadian DIP Term Loan)for borrowings by Smurfit-Stone Container Canada Inc. (SSC Canada); a $250million U.S. revolving loan (U.S. DIP Revolver) for borrowings by SSCE and/orSSC Canada; and a $65 million Canadian revolving loan (Canadian DIP Revolver)for borrowings by SSCE and/or SSC Canada.

 

Underthe DIP Credit Agreement, on January 28, 2009, we borrowed $440 million,consisting of a $400 million U.S. DIP Term Loan, a $35 million Canadian DIPTerm loan and $5 million from the Canadian DIP Revolver.  In accordance with the terms of the DIP CreditAgreement, in January 2009, we used U.S. DIP Term Loan proceeds of $360million, net of lenders’ fees of $40 million, and Canadian DIP Term Loanproceeds of $30 million, net of lenders’ fees of $5 million, to terminate ourreceivables securitization programs and repay all indebtedness outstanding of$385 million and to pay other expenses of $1 million.  

 

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In addition, other fees andexpenses of $17 million related to the DIP Credit Agreement were paid for withproceeds of $5 million from the Canadian DIP Revolver and available cash.

 

The outstanding principalamount of the loans under the DIP Credit Agreement, plus interest accrued andunpaid, were due and payable in full at maturity, which was January 28,2010.  As all borrowings under theDIP Credit Agreement were paid in full as of December 31, 2009, we allowedthe DIP Credit Agreement to expire on the maturity date of January 28,2010.  Prior to the maturity of the DIPCredit Agreement on January 28, 2010, we transferred $15 million ofavailable cash to a restricted cash account to secure letters of credit underthe DIP Credit Agreement.

 

**ReorganizationProcess**

 

TheBankruptcy Courts approved payment of certain of our pre-petition obligations,including employee wages, salaries and benefits, and the payment of vendors andother providers in the ordinary course for goods received and services renderedsubsequent to the filing of the Chapter 11 Petition and Canadian Petition andother business-related payments necessary to maintain the operation of ourbusiness.  We retained legal andfinancial professionals to advise us on the bankruptcy proceedings.

 

Immediatelyafter filing the Chapter 11 Petition and Canadian Petition, we notified allknown current or potential creditors of the bankruptcy filings.  Subject to certain exceptions under theBankruptcy Code and the CCAA, our bankruptcy filings automatically enjoined, orstayed, the continuation of any judicial or administrative proceedings or otheractions against us or our property to recover, collect or secure a claimarising prior to the filing of the Chapter 11 Petition and CanadianPetition.  Thus, for example, mostcreditor actions to obtain possession of property from us, or to create,perfect or enforce any lien against our property, or to collect on monies owedor otherwise exercise rights or remedies with respect to a pre-petition claimwere enjoined unless and until the Bankruptcy Courts lifted the automatic stay.

 

Asrequired by the Bankruptcy Code, the United States Trustee for the District ofDelaware (the U.S. Trustee) appointed an official committee of unsecuredcreditors (the Creditors’ Committee). The Creditors’ Committee and its legal representatives had a right to beheard on all matters that came before the U.S. Court with respect to us.  A monitor was appointed by the Canadian Courtwith respect to proceedings before the Canadian Court.

 

Underthe Bankruptcy Code, the Debtors either assumed or rejected pre-petitionexecutory contracts, including real property leases, subject to the approval ofthe Bankruptcy Courts and certain other conditions.  In this context, “assumption” meant that weagreed to perform our obligations and cure all existing defaults under thecontract or lease, and “rejection” meant that we were relieved from ourobligations to perform further under the contract or lease, but were subject toa pre-petition claim for damages for the breach thereof, subject to certainlimitations.  Any damages resulting fromrejection of executory contracts and unexpired leases, and from thedetermination of the U.S. Court (or agreement by parties of interest) ofallowed claims for contingencies and other disputed amounts, that werepermitted to be recovered under the Bankruptcy Code were treated as liabilitiessubject to compromise unless such claims were secured prior to the PetitionDate.

 

**Plan of Reorganization and Exit Credit Facilities**

 

Inorder for the Debtors to successfully emerge from bankruptcy, the BankruptcyCourts had to first confirm a plan of reorganization that satisfied therequirements of the Bankruptcy Code and the CCAA.  A plan of reorganization was required to,among other things, resolve the Debtor’s pre-petition obligations, set forththe revised capital structure of the newly reorganized entity and provide forcorporate governance subsequent to our exit from bankruptcy.

 

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*Plan ofReorganization*

OnDecember 1, 2009, the Debtors filed their Plan of Reorganization andDisclosure Statement (Disclosure Statement) with the U.S. Court.  On December 22, 2009, January 27,2010, and February 4, 2010, the Debtors filed amendments to the Plan ofReorganization and the Disclosure Statement. On March 19, 2010, the Debtors filed a supplement to the Plan ofReorganization, and on May 27, 2010, the Debtors filed the final Plan ofReorganization reflecting the resolution of certain objections by equitysecurity holders and other non-material modifications.

 

OnJanuary 29, 2010, the U.S. Court approved the Debtors’ DisclosureStatement as containing adequate information for the holders of impaired claimsand equity interests, who were entitled to vote to accept or reject the Plan ofReorganization.

 

ThePlan of Reorganization was overwhelmingly approved by number and dollaramount of the required classes of creditors of each of the Debtors, withthe exception of Stone Container Finance Company of Canada II.  StoneContainer Finance Company of Canada II was removed from the Plan ofReorganization.  A meeting of creditors was held for the Canadian debtorsubsidiaries on April 6, 2010, at which the necessary votes were receivedto confirm the Plan of Reorganization by all requisite classes of creditorsother than Stone Container Finance Company of Canada II.

 

TheBankruptcy Code required the U.S. Court, after appropriate notice, to hold ahearing on confirmation of a plan of reorganization.  The confirmation hearing on the Plan ofReorganization began in the U.S. Court on April 15, 2010, and concluded onMay 4, 2010, and a hearing was conducted in the Canadian Court on May 3,2010.  On May 13, 2010, the CanadianCourt issued an order approving the Plan of Reorganization in the CCAAproceedings in Canada.

 

OnMay 24, 2010, the Debtors announced that they reached a resolution withcertain holders of the Company’s preferred and common stock that had filedobjections to the confirmation of the Plan of Reorganization.  On May 28, 2010, the U.S. Court approvednotice procedures with respect to this resolution.  On June 21, 2010, the U.S. Court enteredthe Confirmation Order which approved and confirmed the Plan ofReorganization.  We emerged from ourChapter 11 and CCAA bankruptcy proceedings on June 30, 2010, the EffectiveDate.

 

Asof the Effective Date, we substantially consummated the various transactionscontemplated under the Plan of Reorganization and the Confirmation Order,including the following:

 

·                  we merged with and into SSCE, with SSCE beingthe survivor entity and renaming itself Smurfit-Stone Container Corporation,and becoming the Reorganized Smurfit-Stone. Reorganized Smurfit-Stone is governed by a board of directors thatincludes Patrick J. Moore, our Chief Executive Officer, Steven J. Klinger, ourPresident and Chief Operating Officer, and nine independent directors,including a non-executive chairman selected by the Creditors’ Committee inconsultation with the Debtors;

 

·                  Reorganized Smurfit-Stone filed the Amendedand Restated Certificate of Incorporation of the Company, which authorizedReorganized Smurfit-Stone to issue 160,000,000 shares, consisting of150,000,000 shares of common stock, par value $.001 per share (Common Stock)and 10,000,000 shares of preferred stock, par value $.001 per share (PreferredStock).  Reorganized Smurfit-Stone issuedor reserved for issuance 100,000,000 shares of Common Stock for distribution tocreditors and interest holders pursuant to the Plan of Reorganization.  Under the Plan of Reorganization, 89,854,782shares were issued on June 30, 2010 and an additional 1,159,407 shareswere subsequently issued through August 13, 2010.  None of the Preferred Stock was issued oroutstanding as of the Effective Date;

 

·                  all of the existing secured debt of theDebtors was fully repaid with cash;

 

·                  substantially all of the general unsecuredclaims against SSCE, and us, including all of the outstanding unsecured seniornotes, were exchanged for Common Stock;

 

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·                  holders of unsecured claims against SSCE ofless than or equal to $10,000 received payment of 100% of such claims in cash,and eligible cash-out participants who so indicated on their ballot receivedthe percentage amount of their allowed claim they elected to receive in cash inlieu of Common Stock;

 

·                  holders of our 7% Series A CumulativeExchangeable Redeemable Convertible preferred stock received a pro-ratadistribution of 2,172,166 shares of Common Stock and holders of our commonstock received a pro-rata distribution of 2,171,935 shares.  All shares of common stock and preferredstock of the Predecessor Company were cancelled;

 

·                  Reorganized Smurfit-Stone adopted the EquityIncentive Plan, pursuant to which, among other things, it reserved for issuance8,695,652 shares of Common Stock representing eight percent of the fullydiluted new Common Stock.  In accordancewith the terms of the Equity Incentive Plan, 2,895,909 stock options and 914,498Restricted Stock Units (RSU’s) were granted to executive officers and other keyemployees of Reorganized Smurfit-Stone on the Effective Date;

 

·                  the assets of the Canadian Debtors, otherthan Stone Container Finance Company of Canada II, were sold to a newly-formedCanadian subsidiary of Reorganized Smurfit-Stone free and clear of existingclaims, liens and interests in exchange for (i) the repayment in cash ofthe secured debt obligations of the Canadian Debtors, (ii) cash to theCanadian Debtors’ unsecured creditors and (iii) the assumption of certainliabilities and obligations of the Canadian Debtors;

 

·                  Reorganized Smurfit-Stone and its newly-formedCanadian subsidiary assumed all of the existing obligations under the qualifieddefined benefit pension plans in the United States and Canada sponsored by theDebtors, as well as all of the collective bargaining agreements in the UnitedStates and Canada between the Debtors and their labor unions;

 

·                  Pursuant to the Plan of Reorganization andafter the initial distribution, we reserved approximately 9.0 million shares ofCommon Stock for future distribution to holders of unsecured non-priorityclaims that were unliquidated or subject to dispute.  These shares will be distributed as theseclaims are liquidated or resolved, in accordance with the Plan ofReorganization and Confirmation Order. To the extent that such unliquidated or disputed claims are settled forless than the number of shares reserved, additional distributions may also bemade with respect to previously allowed claims under the terms and conditionsof the Plan of Reorganization and Confirmation Order.

 

*ExitCredit Facilities*

OnJanuary 14, 2010, the U.S. Court entered an order authorizing the Debtorsto (i) enter into an exit term loan facility engagement and arrangementletter and fee letters, (ii) pay associated fees and expenses and (iii) furnishrelated indemnities**. ** On February 1, 2010, we filed a motionwith the U.S. Court seeking approval to enter into a senior secured term loanexit facility (Term Loan Facility).

 

On February 16, 2010, the U.S. Court grantedthe motion and authorized us and certain of our affiliates to enter into theTerm Loan Facility.  On the same date,the U.S. Court also granted our February 3, 2010 motion seeking approvalto enter into a commitment letter and fee letters for an asset-based revolvingcredit facility (the ABL Revolving Facility) (together with the Term LoanFacility, the Exit Credit Facilities). Based on such approvals, on February 22, 2010, we and certain ofour subsidiaries entered into the Term Loan Facility that provides for anaggregate term loan commitment of $1,200 million.  In addition, we entered into the ABLRevolving Facility with aggregate commitments of $650 million (including a $100million Canadian Tranche), on April 15, 2010.  The ABL Revolving Facility includes a $150million sub-limit for letters of credit.

 

We are permitted, subject toobtaining lender commitments, to add one or more incremental facilities to theTerm Loan Facility in an aggregate amount up to $400 million.  Each incremental facility is conditioned on (a) thereexisting no defaults, (b) in the case of incremental term loans, suchloans have a final maturity no earlier than, and a weighted average life noshorter than, the Term Loan Facility, and (c) 

 

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after giving effect to oneor more incremental facilities, the consolidated senior secured leverage ratioshall be less than 3.00 to 1.00.  If theinterest rate spread applicable to any incremental facility exceeds theinterest rate spread applicable to the Term Loan Facility by more than 0.25%,then the interest rate spread applicable to the Term Loan Facility will beincreased to equal the interest rate spread applicable to the incrementalfacility.

 

We are permitted, subject toobtaining lender commitments, to add incremental commitments under the ABLRevolving Facility in an aggregate amount up to $150 million.  Each incremental commitment is conditioned on(a) there existing no defaults, (b) any new lender providing anincremental commitment shall require the consent of the Administrative Agent,each Issuing Lender, the Swingline Lender and the Fronting Lender, (c) theminimum amount of any increase must be at least $25 million, (d) we shallnot increase the commitments more than three times in the aggregate, (e) ifthe interest rate margins and commitment fees with respect to the incrementalcommitments are higher than those applicable to the existing commitments underthe ABL Revolving Facility, then the interest rate margins and commitment feesfor the existing commitments under the ABL Revolving Facility will be increasedto match those for the incremental commitments, and (f) the satisfactionof other customary closing conditions.

 

On June 30, 2010, theTerm Loan Facility was funded and borrowings became available under the ABLRevolving Facility.   The proceeds of theborrowings under the Term Loan Facility of $1,200 million, together withavailable cash, were used to repay our outstanding secured indebtedness underour pre-petition Credit Facility and pay remaining fees, costs and expensesrelated to and contemplated by the Exit Credit Facilities and the Plan ofReorganization.  See Note 1 of the Notesto Consolidated Financial Statements - Fresh Start Accounting.  On June 30, 2010 we had no borrowingsunder the ABL Revolving Facility. Borrowings under the ABL Revolving Facility are available for workingcapital purposes, capital expenditures, permitted acquisitions and generalcorporate purposes.  As of June 30,2010, our borrowing base under the ABL Revolving Facility was $586 million andthe amount available for borrowings after considering outstanding letters ofcredit was $489 million.

 

Theterm loan (Term Loan) is repayable in equal quarterly installments of $3million beginning on September 30, 2010, with the balance payable atmaturity on June 30, 2016. Additionally, following the end of each fiscal year, varying percentagesof our excess cash flow, as defined in the Term Loan Facility, based on certainagreed levels of secured leverage ratios, must be used to repayoutstanding principal amounts under the Term Loan.  Subject to specified exceptions, the TermLoan Facility also requires us to use the net proceeds of asset sales and thenet proceeds of the incurrence of indebtedness to repay outstanding borrowingsunder the Term Loan Facility.

 

TheTerm Loan bears interest at our option at a rate equal to: (A) 3.75% plusthe alternate base rate  (Term Loan ABR)defined as the greater of: (i) the U.S. prime rate, (ii) theovernight federal funds rate plus 0.50%, or (iii) the one month adjustedLIBOR rate plus 1.0%, provided that the Term Loan ABR shall never be lower than3.00% per annum, or (B) the adjusted LIBOR rate plus 4.75%, provided thatthe adjusted LIBOR rate shall never be lower than 2.00% per annum.

 

TheABL revolver loan (ABL Revolver) matures on June 30, 2014.  We have the option to borrow at a rate equalto: (A) the base rate, defined as the greater of 2.50% plus: (i) theUS Prime Rate, (ii) the overnight federal funds rate plus 0.50% or (iii) LIBORrate plus 1.0%, or (B) the LIBOR rate plus 3.50% for the first 90 daysthen 3.25% thereafter. The applicable margin can be adjusted in the future from2.25% to a rate as high as 2.75% for base loans and 3.25% to a rate as high as3.75% for LIBOR loans based on the average historical utilization under the ABLRevolving Facility.  We will also payeither a 0.50% or 0.75% per annum unused commitment fee based on the averagehistorical utilization under the ABL Revolving Facility.  The ABL Revolving Facility borrowings are subject toa borrowing base derived from a formula based on certain eligible accountsreceivable and inventory, less certain reserves.

 

Borrowings under the ExitCredit Facilities are guaranteed by us and certain of our subsidiaries, and aresecured by first priority liens and second priority liens on substantially allour presently owned and 

 

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hereafter acquired assets andthose of each of our subsidiaries party to the Exit Credit Facilities, subjectto certain exceptions and permitted liens.

 

The Exit Credit Facilitiescontain affirmative and negative covenants that impose restrictions on ourfinancial and business operations and those of certain of our subsidiaries,including their ability to incur indebtedness, incur liens, make investments,sell assets, pay dividends or make acquisitions.  The Exit Credit Facilities contain events ofdefault customary for financings of this type.

 

**FinancialReporting Considerations**

 

Betweenthe Petition Date and through June 30, 2010, we applied the FinancialAccounting Standards Board (FASB) Accounting Standards Codification (ASC) 852, “Reorganizations”(ASC 852), in preparing the consolidated financial statements.  ASC 852 requires that the financialstatements distinguish transactions and events that are directly associatedwith the reorganization from the ongoing operations of the business.  Accordingly, certain revenues, expenses(including professional fees), realized gains and losses and provisions forlosses that are realized or incurred in the bankruptcy proceedings have beenrecorded in reorganization items in the consolidated statements ofoperations.  In addition, pre-petitionobligations that were impacted by the bankruptcy reorganization process wereclassified on the consolidated balance sheet at December 31, 2009 inliabilities subject to compromise.

 

*ReorganizationItems*

Ourreorganization items directly related to the process of our reorganizing underChapter 11 and the CCAA, as recorded in our consolidated statements ofoperations, consist of the following:

 
| ** **                                                     | ** ** | **Predecessor**                       | ** ** |
|----------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                     | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
| ** **                                                     | ** ** | **2010**                              | ** ** | **2009** | ** ** | **2010** | ** ** | **2009** | ** ** |
| *Income (Expense)*                                             |       |                                  |       |   |   |   |   |   |   |
| Provision for rejected/settled executory contracts  and leases |       | $                                     | (77        | ) | $ | (25 | ) | $ | (106 | ) | $ | (64 | ) |
| Professional fees                                              |       | (28                                   | )          | (16 | ) | (43 | ) | (32 | ) |
| Accounts payable settlement gains                              |       | 2                                     |       | 2 |   | 5 |   | 3 |   |
| Gain due to plan effects                                       |       | 580                                   |       |   |   | 580 |   |   |   |
| Gain due to fresh start accounting adjustments                 |       | 742                                   |       |   |   | 742 |   |   |   |
| Total reorganization items                                     |       | $                                     | 1,219      |   | $ | (39 | ) | $ | 1,178 |   | $ | (93 | ) |

 

Inaddition, an income tax benefit of $200 million related to plan effectadjustments was recorded in the three and six months ended June 30, 2010.

 

Professionalfees directly related to the reorganization include fees associated withadvisors to us, the Creditors’ Committee and certain secured creditors.

 

Netcash paid for reorganization items related to professional fees for the threeand six months ended June 30, 2010 totaled $16 million and $32 million,respectively, and $11 million and $17 million for the three and six monthsended June 30, 2009, respectively.

 

Reorganizationitems exclude employee severance and other restructuring charges recordedduring 2009 and 2010.

 

Interestexpense recorded on unsecured debt was zero for the three and six months ended June 30,2010 and $50 million and $98 million for the three and six months ended June 30,2009, respectively.  Contractual interestexpense on unsecured debt was $49 million and $98 million for the three and six

 

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monthsended June 30, 2010, respectively. Under the Plan of Reorganization,interest expense on the unsecured senior notes subsequent to the Petition Datewas not paid.  In the fourth quarter of2009, we concluded it was not probable that interest expense on the unsecuredsenior notes subsequent to the Petition Date would be an allowed claim.  As a result, during the fourth quarter of2009, we recorded income in reorganization items for the reversal of accruedpost-petition unsecured interest expense and discontinued recording unsecuredinterest expense.

 

Inaddition, in the fourth quarter of 2009, we concluded it was not probable thatPreferred Stock dividends that were accrued subsequent to the Petition Datewould be allowed claims.  Preferred Stockdividends that were accrued post-petition and included in liabilities subjectto compromise were reversed in the fourth quarter of 2009.  ASC 505-10-50-5, “Equity,” requires entitiesto disclose in the financial statements the aggregate amount of cumulative preferreddividends in arrears.  Preferred Stockdividends in arrears were $11 million at the Effective Date and $9 million asof December 31, 2009.  The PreferredStock dividends in arrears since the Petition Date are presented in thePredecessor consolidated statements of operations only to reflect preferredstockholders’ rights to dividends over common stockholders and are notreflected in the Preferred Stock value in the December 31, 2009consolidated balance sheet.

 

*OtherBankruptcy Related Costs*

Debtor-in-possessiondebt issuance costs of $63 million were incurred and paid during the firstquarter of 2009 in connection with entering into the DIP Credit Agreement, andare separately presented in the 2009 consolidated statements of operations.

 

*LiabilitiesSubject to Compromise*

Liabilitiessubject to compromise represent pre-petition unsecured obligations that weresettled under the Plan of Reorganization. These liabilities represented theamounts expected to be allowed on known or potential claims to be resolvedthrough the Chapter 11 and CCAA process. Liabilities subject to compromise also included certain items, such asqualified defined benefit pension and retiree medical obligations that wereassumed under the Plan of Reorganization, and as such, have been recorded inliabilities under the Reorganized Smurfit-Stone.

 

We rejected certainexecutory contracts and unexpired leases with respect to our operations withthe approval of the Bankruptcy Courts. Damages resulting from rejection of executory contracts and unexpiredleases are generally treated as general unsecured claims and were classified asliabilities subject to compromise.

 

Liabilitiessubject to compromise at December 31, 2009 consisted of the following:

 
| ** **                        | ** ** | **Predecessor**            | ** ** |
|-----------------------------------|------------|----------------------------|------------|
| ** **                        | ** ** | **December 31, 2009** | ** ** |
|                              |       |                       |       |
| Unsecured debt                    |       | $                          | 2,439      |   |
| Accounts payable                  |       | 339                        |       |
| Interest payable                  |       | 47                         |       |
| Retiree medical obligations       |       | 176                        |       |
| Pension obligations               |       | 1,136                      |       |
| Unrecognized tax benefits         |       | 46                         |       |
| Executory contracts and leases    |       | 72                         |       |
| Other                             |       | 17                         |       |
| Liabilities subject to compromise |       | $                          | 4,272      |   |

 

Forinformation regarding the discharge of liabilities subject to compromise, seeNote 1 of the Notes to Consolidated Financial Statements - Fresh StartAccounting.

 

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**Fresh Start Accounting**

In accordance with ASC 852, we adopted fresh startaccounting as of the close of business on June 30, 2010, because thereorganization value of the assets of the Predecessor Company immediatelybefore the date of confirmation of the Plan of Reorganization was less than thetotal of all post-petition liabilities and allowed claims, and the holders ofthe Predecessor Company’s voting shares immediately before confirmation of thePlan of Reorganization received less than 50 percent of the voting shares ofthe Successor Company.  Upon adoption offresh start accounting, the Company became a new entity for financial reportingpurposes reflecting the Successor capital structure. As such, a new accountingbasis in the identifiable assets and liabilities assumed was established withno retained earnings or accumulated other comprehensive income (loss)(OCI).  The Successor consolidatedbalance sheet as of June 30, 2010 reflects the implementation of the Planof Reorganization, including discharge of liabilities subject to compromise andthe adoption of fresh start accounting. The Predecessor results of operations of the Company for the three andsix months ended June 30, 2010 include gains related to the plan effectsand fresh start accounting adjustments.

 

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**RESULTSOF OPERATIONS**

 

**Non-GAAPFinancial Measures**

 

Inthe accompanying analysis of financial information, we use the financialmeasures “adjusted net income (loss) attributable to common stockholders”(adjusted net income (loss)), “adjusted net income (loss) per diluted shareattributable to common stockholders” (adjusted net income (loss) per dilutedshare), “EBITDA” and “adjusted EBITDA” which are derived from our consolidatedfinancial information but are not presented in our financial statementsprepared in accordance with U.S. generally accepted accounting principles(GAAP). These measures are considered “non-GAAP financial measures” under theU.S. Securities and Exchange Commission (SEC) rules.  Adjusted net income(loss) and adjusted net income (loss) per diluted share are non-GAAP financialmeasures that exclude from net income (loss) attributable to commonstockholders the effects of reorganization items (income) expense,debtor-in-possession financing costs, alternative fuel mixture tax credits,loss on early extinguishment of debt, non-cash foreign currency exchange(gains) losses, interest on unsecured debt and restructuring charges.  EBITDA is defined as net income (loss) before(provision for) benefit from income taxes, interest expense, net anddepreciation, depletion and amortization. Adjusted EBITDA is defined as EBITDA adjusted for reorganization items(income) expense, debtor-in-possession financing costs, alternative fuelmixture tax credits, loss on early extinguishment of debt, non-cash foreigncurrency exchange (gains) losses, gain (loss) on sale of assets, restructuringcharges and other adjustments.

 

Weuse these supplemental non-GAAP measures to evaluate performance period overperiod, to analyze the underlying trends in our business, to assess ourperformance relative to our competitors and to establish operational goals andforecasts that are used in allocating resources. These non-GAAP measures ofoperating results are reported to our board of directors, chief executiveofficer and our president and chief operating officer and are used to makestrategic and operating decisions and assess performance.  These non-GAAPmeasures are presented to enhance an understanding of our operating results andare not intended to represent cash flows or results of operations.  Wealso believe these non-GAAP measures are beneficial to investors, potentialinvestors and other key stakeholders, including analysts and creditors who usethese measures in their evaluations of our performance from period to periodand against the performance of other companies in our industry. Our creditorsalso use these measures to evaluate our ability to service our debt.  The use of these non-GAAP financial measuresis beneficial to these stakeholders because they exclude certain items thatmanagement believes are not indicative of the ongoing operating performance ofour business, and including them would distort comparisons to our pastoperating performance.  Accordingly, we have excluded the adjustments, asdetailed below, for the purpose of calculating these non-GAAP measures.

 

Thefollowing is an explanation of each of the adjustments that we have made toarrive at these non-GAAP measures for the three and six months ended June 30,2010 and 2009, as well as the reasons management believes each of these itemsis not indicative of operating performance:

 

·                              Reorganization items(income) expense, net of income taxes - These income and expense items aredirectly related to the process of our reorganizing under Chapter 11 and theCCAA.  The items include gain due to planeffects, gain due to fresh start accounting adjustments, provision forrejected/settled executory contracts and leases, accounts payable settlementgains and professional fees.  Theseincome and expense items are not considered indicative of ongoing operatingperformance and are not used by us to assess our operating performance.

 

·                              Debtor-in-possessionfinancing costs - These expenses were incurred and paid during the firstquarter of 2009 in connection with entering into the DIP Credit Agreement.  These expense items are not consideredindicative of ongoing operating performance and are not used by us to assessour operating performance.

 

·                              Alternative fuel mixture taxcredits - These amounts represent an excise tax credit for alternative fuelmixtures produced by a taxpayer for sale, or for use as a fuel in a taxpayer’strade or business, through December 31, 2009, at which time the creditexpired.  These items are not considered 

 

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indicative of ongoing operating performance and arenot used by us to assess our operating performance.

 

·                              Loss on early extinguishmentof debt - These losses represent unamortized deferred debt issuance cost andcall premiums charged to expense in connection with our financingactivities.  These losses were not considered indicative of ongoingoperating performance because they related to specific financing activities andwere not used by us to assess our operating performance.

 

·                              Non-cash foreign currency(gains) losses - The functional currency for our Canadian operations was theU.S. dollar.  Fluctuations in Canadian dollar-denominated monetary assetsand liabilities resulted in non-cash gains or losses.  We excluded theimpact of foreign currency exchange gains and losses because the impact offoreign exchange is highly variable and difficult to predict from period toperiod and is not tied to our operating performance.  These gains orlosses are not considered indicative of ongoing operating performance and arenot used by us to assess our operating performance.

 

·                              Interest on unsecured debt -These amounts represent the post-petition interest accrued on unsecured debtfrom the time of our bankruptcy filing, which was stayed and not paid as aresult of the bankruptcy proceedings.  Inthe fourth quarter of 2009, we concluded it was not probable that interestexpense that was accrued from the Petition Date through November 30, 2009,would be an allowed claim.  This expensewas not considered indicative of our ongoing operating performance and wasexcluded by management in assessing our operating performance.

 

·                              Restructuring charges -These adjustments represent the write-down of assets, primarily property, plantand equipment, to estimated net realizable values, the acceleration ofdepreciation for equipment to be abandoned or taken out of service, severance costsand other costs associated with our restructuring activities. These income andexpense items were not considered indicative of our ongoing operatingperformance and were excluded by management in assessing our operatingperformance.

 

·                              Gain (loss) on sale ofassets - These amounts represent gains and losses we recognized related to thesale of non-strategic assets.  Thesegains and losses were not considered indicative of ongoing operatingperformance and were excluded by management in assessing our operating profit.

 

·                              Other - These adjustmentsprincipally represent amounts accrued under our 2009 long-term incentiveplan.  These income and expense itemswere not considered indicative of our ongoing operating performance and were excludedby management in assessing our operating performance.

 

Adjustednet income (loss), adjusted net income (loss) per diluted share, EBITDA andadjusted EBITDA have certain material limitations associated with their use ascompared to net income (loss).  These limitations are primarily due to theexclusion of certain amounts that are material to our consolidated results ofoperations, as discussed above.  In addition, these adjusted net income(loss) and EBITDA measures may differ from adjusted net income (loss) andEBITDA calculations of other companies in our industry, limiting theirusefulness as comparative measures. Because of these limitations, adjusted net income (loss), adjusted netincome (loss) per diluted share, EBITDA and adjusted EBITDA should be read inconjunction with our consolidated financial statements prepared in accordancewith GAAP.  We compensate for these limitations by relying primarily onour GAAP results and using adjusted net income (loss), adjusted net income(loss) per diluted share, EBITDA and adjusted EBITDA only as supplementalmeasures of our operating performance.  The presentation of thisadditional information is not meant to be considered in isolation or as asubstitute for financial statements prepared in accordance with GAAP.

 

Webelieve that providing these non-GAAP measures in addition to the related GAAPmeasures provides investors greater transparency to the information ourmanagement uses for financial and operational decision-making and allowsinvestors to see our results as management sees them. We also believe thatproviding this information better enables investors to understand our operatingperformance and to 

 

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evaluatethe methodology used by our management to evaluate and measure our operatingperformance, and the methodology and financial measures used by our board ofdirectors to assess management’s performance.

 

Thefollowing financial presentation includes a reconciliation of net income (loss)attributable to common stockholders and net income (loss) per diluted shareattributable to common stockholders, the most directly comparable GAAPfinancial measures, to adjusted net income (loss) and adjusted net income(loss) per diluted share, respectively.  Areconciliation of net income (loss) to EBITDA and adjusted EBITDA is alsopresented.

 

**Reconciliation to GAAP Financial Measures**

 
| ** **                                                                          | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|-------------------------------------------------------------------------------------|------------|---------------------------------------|------------|------------------------------------------|------------|
| **(In  millions, except per share data)**                                           | ** ** | **2010**                              | ** ** | **2009**                                 | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                                                                |       |                                  |       |                                     |       |   |   |   |   |
| **Net income (loss) attributable to  common stockholders****(GAAP)**                |       | $                                     | 1,411      |                                     | $          | 155 |   | $ | 1,320 |   | $ | (62 | ) |
| Reorganization items (income) expense, net of  income taxes                         |       | (1,419                                | )          | 39                                       |       | (1,378 | ) | 93 |   |
| Debtor-in-possession financing costs                                                |       |                                  |       |                                     |       |   |   | 63 |   |
| Alternative fuel mixture tax credits                                                |       |                                  |       | (276                                     | )          | (11 | ) | (276 | ) |
| Loss on early extinguishment of debt                                                |       |                                  |       |                                     |       |   |   | 20 |   |
| Non-cash foreign currency exchange (gains) losses                                   |       | (9                                    | )          | 2                                        |       | (3 | ) | (1 | ) |
| Interest on unsecured debt                                                          |       |                                  |       | 48                                       |       |   |   | 83 |   |
| Restructuring charges                                                               |       | 19                                    |       | 11                                       |       | 15 |   | 24 |   |
| Adjusted net income (loss) attributable to common stockholders                      |       | $                                     | 2          |                                     | $          | (21 | ) | $ | (57 | ) | $ | (56 | ) |
|                                                                                |       |                                  |       |                                     |       |   |   |   |   |
| **Net income (loss) per diluted  share attributable to common stockholders (GAAP)** |       | $                                     | 5.41       |                                     | $          | 0.60 |   | $ | 5.07 |   | $ | (0.24 | ) |
| Reorganization items (income) expense, net of  income taxes                         |       | (5.44                                 | )          | 0.15                                     |       | (5.28 | ) | 0.36 |   |
| Debtor-in-possession financing costs                                                |       |                                  |       |                                     |       |   |   | 0.24 |   |
| Alternative fuel mixture tax credits                                                |       |                                  |       | (1.07                                    | )          | (0.04 | ) | (1.07 | ) |
| Loss on early extinguishment of debt                                                |       |                                  |       |                                     |       |   |   | 0.08 |   |
| Non-cash foreign currency exchange (gains) losses                                   |       | (0.03                                 | )          | 0.01                                     |       | (0.01 | ) |   |   |
| Interest on unsecured debt                                                          |       |                                  |       | 0.19                                     |       |   |   | 0.32 |   |
| Restructuring charges                                                               |       | 0.07                                  |       | 0.04                                     |       | 0.06 |   | 0.09 |   |
| Adjusted net income (loss) per diluted share  attributable to common stockholders   |       | $                                     | 0.01       |                                     | $          | (0.08 | ) | $ | (0.20 | ) | $ | (0.22 | ) |
|                                                                                |       |                                  |       |                                     |       |   |   |   |   |
| **Net income (loss) (GAAP)**                                                        |       | $                                     | 1,413      |                                     | $          | 158 |   | $ | 1,324 |   | $ | (56 | ) |
| (Benefit from) provision for income taxes                                           |       | (199                                  | )          | 4                                        |       | (199 | ) | 5 |   |
| Interest expense net                                                                |       | 10                                    |       | 74                                       |       | 23 |   | 145 |   |
| Depreciation, depletion and amortization                                            |       | 83                                    |       | 92                                       |       | 168 |   | 182 |   |
| EBITDA                                                                              |       | 1,307                                 |       | 328                                      |       | 1,316 |   | 276 |   |
| Reorganization items (income) expense                                               |       | (1,219                                | )          | 39                                       |       | (1,178 | ) | 93 |   |
| Debtor-in-possession financing costs                                                |       |                                  |       |                                     |       |   |   | 63 |   |
| Alternative fuel mixture tax credits                                                |       |                                  |       | (276                                     | )          | (11 | ) | (276 | ) |
| Loss on early extinguishment of debt                                                |       |                                  |       |                                     |       |   |   | 20 |   |
| Non-cash foreign currency exchange (gains) losses                                   |       | (9                                    | )          | 2                                        |       | (3 | ) | (1 | ) |
| Restructuring charges                                                               |       | 19                                    |       | 11                                       |       | 15 |   | 24 |   |
| Gain (loss) on sale of assets                                                       |       |                                  |       |                                     |       |   |   | 1 |   |
| Other                                                                               |       | 4                                     |       | (1                                       | )          | 9 |   | 1 |   |
| Adjusted EBITDA                                                                     |       | $                                     | 102        |                                     | $          | 103 |   | $ | 148 |   | $ | 201 |   |

 

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**Overview**

 

Wehad net income attributable to common stockholders of $1,411 million, or $5.41per diluted share, for the second quarter of 2010 compared to net income of$155 million, or $0.60 per diluted share, for the second quarter of 2009.  The 2010 results were positively impacted byincome on reorganization items, net, of $1,219 million, lower interest expensecompared to the second quarter of 2009 of $64 million, and an income taxbenefit of $200 million related to income on reorganization items.  These benefits were partially offset by lowerother operating income related to the alternative fuel tax credit of $276million received in 2009.

 

Wehad an operating loss of $6 million for the second quarter of 2010, compared tooperating income of $271 million in the second quarter of 2009.  The second quarter of 2010 operating loss waspositively impacted by higher average selling prices for containerboard andreduced market-related downtime, which were partially offset by higher costsfor reclaimed fiber.  The second quarterof 2009 was positively impacted by other operating income of $276 millionrelated to the alternative fuel tax credits.

 

Wehad adjusted net income available to common stockholders of $2 million, or$0.01 per diluted share, for the second quarter of 2010 compared to an adjustednet loss of $21 million, or $0.08 per diluted share, for the second quarter of2009. Adjusted EBITDA for the second quarter of 2010 was $102 million comparedwith $103 million in the second quarter of 2009.

 

Forthe six months ended June 30, 2010, we had net income attributable tocommon stockholders of $1,320 million, or $5.07 per diluted share, compared toa net loss of $62 million, or $0.24 per diluted share, for the same period lastyear.  The 2010 results were positivelyimpacted by income on reorganization items, net, of $1,178 million, lowerinterest expense compared to 2009 of $122 million, an income tax benefit of$200 million related to income on reorganization items, lowerdebtor-in-possession debt issuance costs of $63 million and a lower loss onearly extinguishment of debt of $20 million. These benefits were partially offset by lower other operating incomecompared to 2009 of $265 million related to the alternative fuel tax credits.

 

Wehad an operating loss of $37 million for the six months ended June 30, 2010,compared to operating income of $265 million for the same period lastyear.  The 2010 operating loss waspositively impacted by higher average selling prices for containerboard andreduced market-related downtime, which were offset by higher costs forreclaimed fiber and lower average sales prices for corrugated containers.  The 2009 operating profit was positivelyimpacted by other operating income of $276 million related to the alternativefuel tax credits.

 

Forthe six months ended June 30, 2010, we had an adjusted net lossattributable to common stockholders of $57 million, or $0.20 per diluted share,compared to an adjusted net loss of $56 million, or $0.22 per diluted share,for the same period last year. Adjusted EBITDA for the six months ended June 30,2010 was $148 million compared with $201 million for the six months ended June 30,2009.

 

Weexpect our operating performance in the third quarter of 2010 to improvecompared to the second quarter of 2010 due to higher selling prices forcontainerboard and corrugated containers and lower maintenance costs related toa decrease in maintenance downtime.  Inthe third quarter of 2010, we expect increased shipments of corrugatedcontainers and higher production of containerboard.

 

**Reorganization Items Income(Expense), Net**

 

Reorganization items incomeof $1,219 million and $1,178 million, for the three and six months ended June 30,2010, respectively, include a gain from the bankruptcy emergence plan effectsof $580 million and a gain on fresh start accounting adjustments of $742million, which were partially offset by other reorganization charges includingprovision for rejected/settled executory contracts and leases and professionalfees.  The gain due to plan effectsrepresents the net gains recorded as a result of implementing the Plan ofReorganization including eliminating approximately $2,439 million of debt.  The 

 

40

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gain due to fresh startaccounting represents the net gains recognized as a result of adjusting allassets and liabilities to fair value. See Note 1 of the Notes to Consolidated Financial Statements.

 

**Alternative Fuel Tax Credit**

 

The U.S. Internal Revenue Code allowed an excise tax credit foralternative fuel mixtures produced by a taxpayer for sale, or for use as a fuelin a taxpayer’s trade or business through December 31, 2009, at which timethe credit expired.  In May 2009, wewere notified that our registration as an alternative fuel mixer was approvedby the Internal Revenue Service.  Wesubsequently submitted refund claims of approximately $654 million for 2009related to production at ten of our U.S. mills. We received refund claims of $595 million in 2009 and $59 million duringthe first quarter of 2010.  During 2009,we recorded other operating income of $633 million, net of fees and expenses,in our consolidated statements of operations related to this matter, of whichwe recorded $276 million during the second quarter of 2009.  In March 2010, we recorded otheroperating income of $11 million relating to an adjustment of refund claimssubmitted in 2009.  We expect to receivethe refund claim in the fourth quarter of 2010.

 

**Restructuring Activities**

 

Wecontinue to review and evaluate various restructuring and other alternatives tostreamline our operations, improve efficiencies and reduce cost.  These actions will subject us to additionalshort-term costs, which may include facility shutdown costs, asset impairmentcharges, lease commitment costs, severance costs and other closing costs.

 

Duringthe second quarter of 2010, we closed three converting facilities and sold onepreviously closed facility.  We recordedrestructuring expense of $19 million. Restructuring charges included non-cash charges of $11 million relatedto the acceleration of depreciation for converting equipment abandoned or takenout of service.  The remaining charges of$8 million were primarily for severance and benefits, and lease commitments.  As a result of the closures in the secondquarter of 2010 and other ongoing initiatives, we reduced our headcount byapproximately 140 employees.

 

Forthe six months ended June 30, 2010, we closed four converting facilitiesand sold five previously closed facilities. As a result of the closures in the first half of 2010 and other ongoinginitiatives, we reduced our headcount by approximately 900 employees.  We recorded restructuring expense of $15million, including an $11 million gain related to the sale of previously closedfacilities, of which $8 million resulted from the legal release ofenvironmental liability obligations. Restructuring charges included non-cash charges of $11 million relatedto the acceleration of depreciation for converting equipment abandoned or takenout of service.  The remaining charges of$15 million were primarily for severance and benefits, and leasecommitments.  The net sales of the closedconverting facilities in 2010 prior to closure and for the year ended December 31,2009 were $21 million and $97 million, respectively.  The majority of these net sales are expectedto be transferred to other operating facilities.

 

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**Second Quarter 2010 Compared to Second Quarter 2009**

** **
| ** **                                                        | ** ** | **Predecessor**                      | ** ** |
|-------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                        | ** ** | **Three months ended June 30,** | ** ** |
| ** **                                                        | ** ** | **2010**                             | ** ** | **2009** | ** ** |
| **(In  millions)**                                                | ** ** | **Net  Sales**                       | ** ** | **Profit/  (Loss)** | ** ** | **Net  Sales** | ** ** | **Profit/  (Loss)** | ** ** |
|                                                              |       |                                 |       |   |   |   |   |   |   |
| Containerboard, corrugated containers and  reclamation operations |       | $                                    | 1,563      |   | $ | 82 |   | $ | 1,407 |   | $ | 76 |   |
|                                                              |       |                                 |       |   |   |   |   |   |   |
| Restructuring charges                                             |       |                                 |       | (19 | ) |   |   | (11 | ) |
| Gain on sale of assets                                            |       |                                 |       |   |   |   |   | 1 |   |
| Other operating income                                            |       |                                 |       |   |   |   |   | 276 |   |
| Interest expense, net                                             |       |                                 |       | (10 | ) |   |   | (74 | ) |
| Non-cash foreign currency exchange gains (losses)                 |       |                                 |       | 9 |   |   |   | (2 | ) |
| Reorganization items income (expense), net                        |       |                                 |       | 1,219 |   |   |   | (39 | ) |
| Corporate expenses and other (Note 1)                             |       |                                 |       | (67 | ) |   |   | (65 | ) |
| Income before income taxes                                        |       |                                 |       | $ | 1,214 |   |   |   | $ | 162 |   |
|                                                                   |            |                                      |            |  |  |  |  |  |  |  |  |  |  |

 

Note1: Amounts include corporate expenses and other expenses not allocated tooperations.

 

Netsales increased 11.1% in the second quarter of 2010 compared to last year.  Net sales were positively impacted by $54million in 2010 as a result of higher third-party sales volume ofcontainerboard and corrugated containers. Third party shipments ofcontainerboard were higher due primarily to stronger demand in the domesticmarket.  Net sales were also favorablyimpacted by higher average selling prices ($102 million) for containerboard andreclaimed material. The average price for old corrugated containers (OCC)increased approximately $90 per ton compared to last year.

 

Ourcontainerboard mills operated at 97.1% of capacity in the second quarter of2010, compared to 85.0% of capacity in the second quarter of 2009.  As a result of less market related downtime,containerboard production was 3.2% higher compared to last year despite theclosure of two containerboard mills in December 2009.  Production of kraft paper decreased 7.1%compared to last year due primarily to maintenance downtime in the secondquarter of 2010.** **Totaltons of fiber reclaimed and brokered increased 14.7% compared to last year dueto higher demand.

 

Cost of goods sold as a percent of net sales in the second quarter of2010 was 90.0%, compared to 89.3% last year. Cost of goods sold increased from $1,256 million in the second quarterof 2009 to $1,407 million in second quarter of 2010 due primarily to highercosts of reclaimed material ($114 million) in the second quarter of 2010.

 

Sellingand administrative expense decreased $3 million in the second quarter of 2010compared to the second quarter of 2009 primarily due to cost reduction efforts.

 

Interestexpense, net was $10 million in the second quarter of 2010.  The $64 million decrease compared to thesecond quarter of 2009 was impacted by the discontinuation of recordinginterest on unsecured debt ($50 million), lower average borrowings ($9 million)and $5 million in other interest expense reductions, including negotiatedsettlements on default interest rates. Since the Petition Date, we discontinued interest payments on ourunsecured notes and certain other unsecured debt.  The lower average borrowings were primarilydue to the repayment of the DIP Credit Facility.  Our overall average effective interest ratein the second quarter of 2010 was lower than the second quarter of 2009 by2.54%.  For additional information on thediscontinuation of recording interest on unsecured debt, see Part I, Item2. Management’s Discussion and Analysis of Financial Condition and Results ofOperations — Bankruptcy Proceedings — Financial Reporting Considerations — “ReorganizationItems.”

 

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Inthe second quarter of 2010, we recorded non-cash foreign currency exchangegains of $9 million compared to losses of $2 million for the same period in2009.

 

During the three months ended June 30, 2010, we recorded a$199 million income tax benefit primarily due to the $200 million income taxbenefit related to the effects of the plan of reorganization which principallyincludes adjustments for cancellation of indebtedness, valuation allowances andunrecognized tax benefits.  During the three months ended June 30,2009, we recorded a provision for income taxes of $4 million for U.S.alternative minimum income taxes, state and local taxes, Canadian withholdingtaxes and interest on unrecognized tax benefits previously recorded.  For additional information on incometaxes see Part I, Item 2, “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations — Income Taxes.”

 

**Six Months 2010 Compared to Six Months 2009**

** **
| ** **                                                        | ** ** | **Predecessor**                    | ** ** |
|-------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                        | ** ** | **Six months ended June 30,** | ** ** |
| ** **                                                        | ** ** | **2010**                           | ** ** | **2009** | ** ** |
| **(In  millions)**                                                | ** ** | **Net  Sales**                     | ** ** | **Profit/  (Loss)** | ** ** | **Net  Sales** | ** ** | **Profit/  (Loss)** | ** ** |
|                                                              |       |                               |       |   |   |   |   |   |   |
| Containerboard, corrugated containers and  reclamation operations |       | $                                  | 3,024      |   | $ | 116 |   | $ | 2,778 |   | $ | 142 |   |
|                                                              |       |                               |       |   |   |   |   |   |   |
| Restructuring charges                                             |       |                               |       | (15 | ) |   |   | (24 | ) |
| Gain (loss) on sale of assets                                     |       |                               |       |   |   |   |   | (1 | ) |
| Other operating income                                            |       |                               |       | 11 |   |   |   | 276 |   |
| Interest expense, net                                             |       |                               |       | (23 | ) |   |   | (145 | ) |
| Debtor-in-possession debt issuance costs                          |       |                               |       |   |   |   |   | (63 | ) |
| Loss on early extinguishment of debt                              |       |                               |       |   |   |   |   | (20 | ) |
| Non-cash foreign currency exchange gains (losses)                 |       |                               |       | 3 |   |   |   | 1 |   |
| Reorganization items income (expense), net                        |       |                               |       | 1,178 |   |   |   | (93 | ) |
| Corporate expenses and other (Note 1)                             |       |                               |       | (145 | ) |   |   | (124 | ) |
| Income (loss) before income taxes                                 |       |                               |       | $ | 1,125 |   |   |   | $ | (51 | ) |
|                                                                   |            |                                    |            |  |  |  |  |  |  |  |  |  |  |

 

Note1: Amounts include corporate expenses and other expenses not allocated tooperations.

 

Netsales increased 8.9% in the first six months of 2010 compared to lastyear.  Net sales were positively impactedby $161 million in the first six months of 2010 as a result of higher third-partysales volume of containerboard, corrugated containers and reclaimed fiber.  Third party shipments of containerboard werehigher due primarily to stronger demand in both the domestic and export market.  Net sales were also favorably impacted byhigher average selling prices ($85 million) for containerboard and reclaimedmaterial. The average price for old corrugated containers (OCC) increasedapproximately $100 per ton compared to last year.

 

Ourcontainerboard mills operated at 98.9% of capacity in the first six months of2010, compared to 83.7% in the first six months of 2009.  As a result of less market related downtime,containerboard production was 6.8% higher compared to last year despite theclosure of two containerboard mills in December 2009.  Production of kraft paper increased 17.0%compared to last year due primarily to higher demand and no market relateddowntime in 2010.** **Totaltons of fiber reclaimed and brokered increased 14.7% compared to last year dueto higher demand.

 

Cost of goods sold as a percent of net sales in the first six months of2010 was 91.4%, compared to 89.0% for the first six months of 2009.  Cost of goods sold increased from $2,473million in 2009 to

 

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$2,763 million in 2010 due primarily to higher costs of reclaimedmaterial ($246 million) in the first six months of 2010.

 

Sellingand administrative expense increased $3 million in the first six months of 2010compared to the first six months of 2009 primarily due to amounts accrued underour 2009 long-term incentive plan.

 

Duringthe six months ended June 30, 2010, we recorded other operating income of $11million, net of expected fees, related to the alternative fuel tax creditcompared to $276 million for the same period last year.

 

Interestexpense, net was $23 million in the first half of 2010.  The $122 million decrease compared to thefirst half of 2009 was impacted by the discontinuation of recording interest onunsecured debt ($98 million), lower average borrowings ($16 million), loweraverage interest rates ($3 million) and $5 million in other interest expensereductions, including negotiated settlements on default interest rates.  Since the Petition Date, we discontinuedinterest payments on our unsecured notes and certain other unsecured debt.  The lower average borrowings were primarilydue to the repayment of the DIP Credit Facility.  Our overall average effective interest ratein the first half of 2010 was lower than the first half of 2009 by 2.15%.  For additional information on thediscontinuation of recording interest on unsecured debt, see Part I, Item 2.Management’s Discussion and Analysis of Financial Condition and Results ofOperations — Bankruptcy Proceedings — Financial Reporting Considerations — “ReorganizationItems.”

 

Inthe first six months of 2009, we recorded debtor-in-possession debt issuancecosts of $63 million in connection with entering into the DIP Credit Agreement.

 

Inthe first six months of 2009, we recorded a loss on early extinguishment ofdebt of $20 million for the non-cash write-off of deferred debt issuance costrelated to the Stevenson, Alabama mill industrial revenue bonds, which wererepaid.

 

Inthe first six months of 2010, we recorded non-cash foreign currency exchangegains of $3 million compared to gains of $1 million for the same period in2009.

 

During the six months ended June 30, 2010, we recorded a$199 million income tax benefit primarily due to the $200 million income taxbenefit related to the effects of the plan of reorganization which principallyincludes adjustments for cancellation of indebtedness, valuation allowances andunrecognized tax benefits.  During the six months ended June 30, 2009, werecorded a provision for income taxes of $5 million for U.S. alternativeminimum income taxes, state and local taxes, Canadian withholding taxes andinterest on unrecognized tax benefits previously recorded.  For additional information on incometaxes see Part I, Item 2, “Management’s Discussion and Analysis of FinancialCondition and Results of Operations — Income Taxes.”

 

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**Statistical Data**

 
| ** **                                                   | ** ** | **Predecessor**                  | ** ** |
|--------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                   | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
| **(In thousands of tons, except as  noted)**                 | ** ** | **2010**                         | ** ** | **2009** | ** ** | **2010** | ** ** | **2009** | ** ** |
| Mill production                                              |       |                             |       |   |   |   |   |   |   |
| Containerboard (1)                                           |       | 1,545                            |       | 1,497 |   | 3,130 |   | 2,932 |   |
| Kraft paper                                                  |       | 26                               |       | 28 |   | 55 |   | 47 |   |
| Market pulp                                                  |       | 72                               |       | 76 |   | 134 |   | 142 |   |
| SBL                                                          |       | 31                               |       | 32 |   | 66 |   | 65 |   |
| North American corrugated containers sold (billion  sq. ft.) |       | 17.3                             |       | 16.7 |   | 33.7 |   | 33.3 |   |
| Fiber reclaimed and brokered                                 |       | 1,468                            |       | 1,280 |   | 2,891 |   | 2,521 |   |

 

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(1) For the three months ended June 30, 2010 and2009, our corrugated container plants consumed 1,149,000 tons and 1,112,000tons of containerboard, respectively. For the six months ended June 30, 2010 and 2009, our corrugatedcontainer plants consumed 2,265,000 tons and 2,247,000 tons of containerboard,respectively.

 

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**LIQUIDITY AND CAPITAL RESOURCES**

 

At June 30, 2010, we had unrestrictedcash and cash equivalents of $340 million compared to $704 million at December 31,2009.  The cash effects of the Plan ofReorganization were $392 million.  SeeNote 1 of the Notes to Consolidated Financial Statements - Fresh StartAccounting.  Related to our Plan ofReorganization, our long-term debt was reduced from $3,793 million at December 31,2009 to $1,194 million at June 30, 2010. As of June 30, 2010, the amount available for borrowings under the ABLRevolving Facility after considering outstanding letters of credit was $489million.

 

Thefollowing table summarizes our cash flows for the six months ended June 30:

 
| **(In millions)**                | ** ** | **2010** | ** ** | **2009** | ** ** |
|----------------------------------|------------|----------|------------|----------|------------|
| Net cash provided by (used for): |       |     |       |     |       |
| Operating activities             |       | $        | (85        | )        | $          | 492 |   |
| Investing activities             |       | (73      | )          | (80      | )          |
| Financing activities             |       | (206     | )          | 52       |       |
| Net increase (decrease) in cash  |       | $        | (364       | )        | $          | 464 |   |

 

**NetCash Provided By (Used For) Operating Activities**

Thenet cash provided by operating activities for the six months ended June 30,2010 was lower compared to the same period in 2009 due primarily to loweralternative fuel tax credit receipts of $146 million, operating cash paymentsunder the Plan of Reorganization of $202 million, lower segment profits of $26million and unfavorable working capital changes of $20 million.  Working capital, principally accountspayable, was favorably impacted in the first half of 2009 by the stay ofpayment of liabilities subject to compromise resulting from the bankruptcyfilings.  The first six months of 2010was favorably impacted by a reduction of $48 million in the receivable foralternative fuel tax credits.

 

**NetCash Provided By (Used For) Investing Activities**

Netcash used for investing activities was $73 million for the six months ended June30, 2010.  Expenditures for property,plant and equipment were $83 million for the first six months of 2010, comparedto $69 million for the same period last year. The amount expended for property, plant and equipment in the first sixmonths of 2010 was principally for projects related to upgrades, costreductions and ongoing initiatives.  Thenet proceeds from sales of previously closed facilities were $10 million in thefirst six months of 2010 compared to $4 million in the first six months of2009.  Advances to affiliates, net in thefirst half of 2009 of $15 million is principally related to funding anobligation pertaining to a guarantee for a previously non-consolidatedaffiliate.

 

**NetCash Provided By (Used For) Financing Activities**

Netcash used for financing activities for the six months ended June 30, 2010 was$206 million.  At emergence frombankruptcy on June 30, 2010, we obtained proceeds of $1,188 million (net of $12million original issue discount) under the Term Loan Facility, which togetherwith available cash, were used to repay our outstanding secured indebtednessunder our pre-petition Credit Facility and pay remaining fees, costs andexpenses related to and contemplated by the Exit Credit Facilities and the Planof Reorganization, including $32 million for debt issuance cost related to ourExit Credit Facilities.  The net cashused for financing activities also included an additional $15 million for debtissuance costs which were paid prior to emergence.

 

Netcash provided by financing activities for the six months ended June 30, 2009was $52 million.  Proceeds from the DIPCredit Agreement of $440 million were used to terminate our receivablessecuritization programs and repay all indebtedness outstanding under theprograms of $385 million.  Debt issuancecost of $63 million was incurred and paid with the proceeds and availablecash.  In addition, letters of credit inthe amount of $71 million were drawn on to fund obligations principally relatedto non-qualified pension plans, commodity derivative instruments and a guaranteefor a previously non-consolidated affiliate which increased borrowings underour credit agreement.

 

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**ExitCredit Facilities**

On February 16, 2010, the U.S. Court granted themotion and authorized us and certain of our affiliates to enter into the TermLoan Facility.  On the same date, theU.S. Court also granted our February 3, 2010 motion seeking approval to enterinto a commitment letter and fee letters for an asset-based revolving creditfacility (the ABL Revolving Facility) (together with the Term Loan Facility,the Exit Credit Facilities).  Based onsuch approvals, on February 22, 2010, we and certain of our subsidiariesentered into the Term Loan Facility that provides for an aggregate term loancommitment of $1,200 million.  Inaddition, we entered into the ABL Revolving Facility with aggregate commitmentsof $650 million (including a $100 million Canadian Tranche), on April 15,2010.  The ABL Revolving Facilityincludes a $150 million sub-limit for letters of credit.

 

We are permitted, subject toobtaining lender commitments, to add one or more incremental facilities to theTerm Loan Facility in an aggregate amount up to $400 million.  Each incremental facility is conditioned on (a)there existing no defaults, (b) in the case of incremental term loans, suchloans have a final maturity no earlier than, and a weighted average life noshorter than, the Term Loan Facility, and (c) after giving effect to one ormore incremental facilities, the consolidated senior secured leverage ratioshall be less than 3.00 to 1.00.  If theinterest rate spread applicable to any incremental facility exceeds theinterest rate spread applicable to the Term Loan Facility by more than 0.25%,then the interest rate spread applicable to the Term Loan Facility will beincreased to equal the interest rate spread applicable to the incrementalfacility.

 

We are permitted, subject toobtaining lender commitments, to add incremental commitments under the ABLRevolving Facility in an aggregate amount up to $150 million.  Each incremental commitment is conditioned on(a) there existing no defaults, (b) any new lender providing an incrementalcommitment shall require the consent of the Administrative Agent, each IssuingLender, the Swingline Lender and the Fronting Lender, (c) the minimum amount ofany increase must be at least $25 million, (d) we shall not increase thecommitments more than three times in the aggregate, (e) if the interest ratemargins and commitment fees with respect to the incremental commitments arehigher than those applicable to the existing commitments under the ABLRevolving Facility, then the interest rate margins and commitment fees for theexisting commitments under the ABL Revolving Facility will be increased tomatch those for the incremental commitments, and (f) the satisfaction of othercustomary closing conditions.

 

On June 30, 2010, the TermLoan Facility was funded and borrowings became available under the ABLRevolving Facility.   The proceeds of theborrowings under the Term Loan Facility of $1,200 million, together withavailable cash, were used to repay our outstanding secured indebtedness underour pre-petition Credit Facility and pay remaining fees, costs and expensesrelated to and contemplated by the Exit Credit Facilities and the Plan ofReorganization.  On June 30, 2010 we hadno borrowings under the ABL Revolving Facility. Borrowings under the ABL Revolving Facility are available for workingcapital purposes, capital expenditures, permitted acquisitions and generalcorporate purposes.  As of June 30, 2010,our borrowing base under the ABL Revolving Facility was $586 million and theamount available for borrowings after considering outstanding letters of creditwas $489 million.

 

Foradditional information on the Exit Credit Facilities, see Part I, Item 2.Management’s Discussion and Analysis of Financial Condition and Results ofOperations — Bankruptcy Proceedings — Plan of Reorganization and Exit CreditFacilities — “Exit Credit Facilities.”

 

**FutureCash Flows**

 

Wehave recorded approximately $94 million for professional fees and otheremergence fees and expenses related to our reorganization that are expected tobe paid principally in the third quarter of 2010.  See Note 1 of the Notes to ConsolidatedFinancial Statements.

 

Werecorded restructuring charges of $15 million during the first six months of2010, including an $11 million gain related to the sale of previously closedfacilities of which $8 million resulted from the release of legal environmentalliability obligations.  Restructuringcharges included non-cash charges of $11 

 

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millionrelated to the acceleration of depreciation for converting equipment abandonedor taken out of service.  The remainingcharges of $15 million were principally for severance and benefits.  During the six months ended June 30, 2010, weincurred cash expenditures of $11 million for these exit liabilities.  The remaining exit liabilities are expectedto be paid principally in the third quarter of 2010.

 

AtDecember 31, 2009, we had $54 million of exit liabilities related principallyto restructuring activities.  During thesix months ended June 30, 2010, we incurred cash expenditures of $23 millionfor these exit liabilities.  Theremaining cash expenditures in connection with our restructuring activitieswill continue to be funded through operations as originally planned.

 

InMarch 2010, we recorded other operating income of $11 million relating to anadjustment of refund claims for the alternative fuel tax credit submitted in2009.  We expect to receive the refundclaim in the fourth quarter of 2010.

 

In the first six months of2010, we contributed approximately $14 million to our defined benefit plans.

 

**PensionPlan Contributions**

 

At June 30, 2010, the qualified defined benefitplans, which were assumed under the Plan of Reorganization, were underfunded byapproximately $1,450 million.  We currentlyestimate that our minimum required cash contributions under the U.S. andCanadian qualified pension plans will be approximately $95 million in 2010 andin the range of $235 million to $305 million annually in 2011 through2015.  Projected pension contributionsassume we elect funding relief under the Preservation of Access to Care forMedicare Beneficiaries and Pension Relief Act of 2010, enacted in June 2010.  The actual required amounts and timing ofsuch future cash contributions will be highly sensitive to changes in theapplicable discount rates and returns on plan assets.

 

**INCOME TAXES**

 

We recorded a net tax benefit of $199 million forthe three and six months ended June 30, 2010. This includes $200 million of net benefit related to the effects of thePlan of Reorganization, which includes adjustments for valuation allowance($427 million benefit), unrecognized tax benefits ($39 million benefit) andcancellation of indebtedness and other plan effects ($266 million provision).

 

Certain debt obligations of ours were dischargedupon emergence from bankruptcy.  Dischargeof a debt obligation for an amount less than the adjusted issue price generallycreates cancellation of indebtedness income (CODI), which must be included intaxable income.  However, CODI isexcluded from taxable income for a taxpayer that is a debtor in areorganization case if the discharge is granted by the court or pursuant to aplan of reorganization approved by the court. The Plan of Reorganization filed by us enabled us and our debtorsubsidiaries to qualify for this bankruptcy exclusion rule.  Based upon current projections, the CODItriggered by discharge of debt under the Plan of Reorganization will not createcurrent taxable income, but will reduce our net operating losses (NOLs) for theyear of discharge and net operating loss carryforwards.  None of our other U.S. income tax attributesare expected to be reduced.

 

Pursuant to the Plan of Reorganization, the assetsof all Canadian subsidiaries were sold to a new wholly-owned Canadiansubsidiary for fair value.  Allpre-emergence Canadian subsidiaries will be liquidated in accordance with thePlan of Reorganization and all pre-emergence Canadian income tax attributeswill be eliminated following their dissolution.

 

Due to the effects of the Plan of Reorganization, weconcluded it is more likely than not that the majority of deferred income taxassets will be realized.  Managementconsidered the reversal of deferred tax liabilities in making thisassessment.  As a result, we recognizedan income tax benefit for release of pre-emergence valuation allowance on ournet deferred tax assets in the U.S. and Canada. At June 30, 2010, a valuation allowance remains in place related tocertain state NOLs.

 

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As previously reported, we entered into an agreementwith the Canada Revenue Agency and other provincial tax authorities that tookeffect upon our emergence from bankruptcy. This agreement settled the open Canadian income tax matters through January26, 2009.  As a result of this agreement,we reported a $39 million net income tax benefit for the three and six monthsended June 30, 2010 related to the final settlement of the Canadian tax claimsand the release of the previously accrued unrecognized tax benefits related tothe Canadian audit.

 

Based on our current tax position that thealternative fuel mixture credits are not taxable, we increased the tax value ofour federal NOL carryforwards by $254 million during the three and six monthsended June 30, 2010.  A reserve of $254million was recorded related to this unrecognized tax benefit.

 

At June 30, 2010, we had federal NOL carryforwardsnet of unrecognized tax benefits of $722 million, with a tax value of $253million.  We had NOL carryforwards forstate purposes with a tax value of $61 million. Additionally, we had $68 million of alternative minimum tax creditcarryforwards and $6 million of other federal and state tax creditcarryforwards available.

 

As a result of the issuance of new common sharesupon emergence from bankruptcy, we realized a change of ownership for purposesof Section 382 of the Internal Revenue Code, which can impose annuallimitations on utilization of NOLs and tax credits.  We do not expect the provisions of Section382 to significantly limit our ability to utilize NOLs or tax credits in thecarryforward periods.

 

At June 30, 2010, the other significant componentsof deferred income taxes were related to property, plant and equipment(liability of $1,119 million), pension and postretirement benefits (assets of$511 million) and inventories (liability of $85 million).

 

**ITEM 3.**          **QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

We are exposed to variousmarket risks, including commodity price risk, foreign currency risk andinterest rate risk.  To manage thevolatility related to these risks, we have on a periodic basis entered intovarious derivative contracts.  Themajority of these contracts are settled in cash.  However, such settlements have not had asignificant effect on our liquidity in the past, nor are they expected to besignificant in the future.  We do not usederivatives for speculative or trading purposes.

 

In January 2009, the Chapter11 Petition and the Canadian Petition effectively terminated all existingderivative instruments.  Termination fairvalues were calculated based on the potential settlement value.  Our termination value related to ourremaining derivative liabilities was approximately $59 million.  These derivative liabilities were stayed dueto the filing of the Chapter 11 Petition and the Canadian Petition at whichtime these liabilities were adjusted through OCI for derivative instrumentsqualifying for hedge accounting and cost of goods sold for derivativeinstruments not qualifying for hedge accounting.  Subsequently, the amounts adjusted throughOCI were recorded in earnings when the underlying transaction was recognized orwhen the underlying transaction was no longer expected to occur.  As of June 30, 2010, all amounts in OCI havebeen recognized through earnings.  On June30, 2010, the derivative contract termination liabilities of $59 million werepaid in connection with our emergence from our Chapter 11 and CCAA bankruptcyproceedings.  See Note 10 of the Notes toConsolidated Financial Statements.

 

**CommodityPrice Risk**

Weused derivative instruments, including fixed price swaps, to managefluctuations in cash flows resulting from commodity price risk in theprocurement of natural gas and other commodities, including fuel oil and dieselfuel.  The objective was to fix the priceof a portion of our purchases of these commodities used in the manufacturingprocess.  The changes in the market valueof such derivative instruments historically offset the changes in the price ofthe hedged item.

 

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**ForeignCurrency Risk**

Ourprincipal foreign exchange exposure is the Canadian dollar.  Assets and liabilities outside the UnitedStates are primarily located in Canada.  ThroughJune 30, 2010, the functional currency for our Canadian operations was the U.S.dollar.  Our investments in foreignsubsidiaries with a functional currency other than the U.S. dollar are nothedged.

 

Weused financial derivative instruments, including forward contracts and options,primarily to protect against Canadian currency exchange risk associated withexpected future cash flows.  The Canadiandollar as of June 30, 2010, compared to December 31, 2009, weakened 1.3%against the U.S. dollar.  We recognizednon-cash foreign currency exchange gains of $3 million for the six month periodended June 30, 2010 compared to gains of $1 million for the same period in2009.

 

**Interest Rate Risk**

Ourearnings and cash flow are significantly affected by the amount of interest onour indebtedness.  Upon emergence, ourfinancing arrangements include variable rate debt.  A change in the interest rate on the variablerate debt will impact interest expense and cash flows.  Our objective is to mitigate interest ratevolatility and reduce or cap interest expense within acceptable levels ofmarket risk.  We may enter into interestrate swaps, caps or options to hedge interest rate exposure and manage riskwithin Company policy.  Any derivativewould be specific to the debt instrument, contract or transaction, which woulddetermine the specifics of the hedge.

 

**ITEM 4.****         ****CONTROLSAND PROCEDURES**

 

**Evaluationof Disclosure Controls and Procedures**

Ourmanagement, with the participation of our principal executive officer and ourprincipal financial officer, evaluated the effectiveness of our disclosurecontrols and procedures (as defined in Exchange Act Rules 13a-15(e) and15d-15(e)) as of the end of the period covered by this report and concludedthat, as of such date, our disclosure controls and procedures were adequate andeffective.

 

**Changesin Internal Control**

Therehave not been any changes in our internal control over financial reportingduring the most recent quarter that have materially affected, or are reasonablylikely to materially affect, our internal control over financial reporting.

 

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**PART II - OTHERINFORMATION**

 

**ITEM 1.****         ****LEGALPROCEEDINGS**

 

On January 26, 2009, we andour U.S. and Canadian subsidiaries filed the Chapter 11 Petition for reliefunder Chapter 11 of the Bankruptcy Code in the U.S. Court.  On the same day, our Canadian subsidiariesalso filed the Canadian Petition under the CCAA in the Canadian Court.  Our operations in Mexico and Asia were notincluded in the filings and continued to operate outside of the Chapter 11 andCCAA processes.  On June 21, 2010, theU.S. Court entered the Findings of Fact, Conclusions of Law and OrderConfirming the Joint Plan for Smurfit-Stone Container Corporation and itsDebtor Subsidiaries and Plan of Compromise and Arrangement for Smurfit-StoneContainer Canada Inc. and Affiliated Canadian Debtors (the Confirmation Order),which approved and confirmed the Plan of Reorganization.  On June 30, 2010 (the Effective Date), thePlan of Reorganization became effective and the Debtors consummated theirreorganization through a series of transactions contemplated by the Plan ofReorganization and emerged from Chapter 11 bankruptcy proceedings.  See Part I, Item 2. Management’s Discussionand Analysis of Financial Condition and Results of Operations — “BankruptcyProceedings.”

 

In January 2009, the Companysettled two putative class action cases filed in California state court onbehalf of current and former hourly employees at the Company’s Californiacorrugated container facilities.  Thesecases alleged violations of the California on-duty meal break and rest periodstatutes.  The court approved asettlement for a total of approximately $9 million for both cases on January 21,2009.  The cases were satisfied asunsecured claims in the Company’s bankruptcy proceedings.

 

**ITEM 1A.****      ****RISKFACTORS**

 

The“Bankruptcy Related Risk Factors” as disclosed in our 2009 Form 10-K are nolonger applicable upon our emergence from bankruptcy proceedings.  There are no material changes to the “OtherRisk Factors” as disclosed in our 2009 Form 10-K.

 

**ITEM 2.****         ****UNREGISTEREDSALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

 

Pursuant to the Plan ofReorganization, on the Effective Date, the Company issued an aggregate of89,854,782 shares of Common Stock, par value $.001 per share, comprised of thefollowing:

 

·      71,638,902shares to holders of Prepetition Notes;

 

·      5,659,876shares to holders of Industrial Revenue Bonds;

 

·      2,172,166shares to holders of SSCC Preferred Interests;

 

·      2,171,935shares to holders of SSCC Common Interests; and

 

·      8,211,903shares to holders of General Unsecured Claims, other than Prepetition Notes, IndustrialRevenue Bonds, SSCC Preferred Interests and SSCC Common Interests

 

Subsequent to the EffectiveDate and to complete the initial distribution, the Company issued an aggregateof 1,159,407 shares of the Common Stock pursuant to the Plan of Reorganization.

 

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TheCompany relied on Section 1145(a)(1) of the Bankruptcy Code to exempt from theregistration requirements of the Securities Act of 1933, as amended (the “SecuritiesAct”) the issuance of the Common Stock.  Section1145(a)(1) of the Bankruptcy Code exempts the offer and sale of securitiesunder a plan of reorganization from registration under Section 5 of theSecurities Act and state laws if three principal requirements are satisfied:

 

·      the securities must be issued under a plan ofreorganization by the debtor, its successor under a plan or an affiliateparticipating in a joint plan of reorganization with the debtor;

 

·      the recipients of the securities must hold a claimagainst, an interest in, or a claim for administrative expense in the caseconcerning the debtor or such affiliate; and

 

·      the securities must be issued either (i) in exchangefor the recipient’s claim against, interest in or claim for administrativeexpense in the case concerning the debtor or such affiliate or (ii) “principally”in such exchange and “partly” for cash or property.

 

All of these shares wereissued in connection with the Plan of Reorganization, and the Company did notreceive any proceeds in connection with the issuance of the shares describedabove.

 

**ITEM 3.****       ****DEFAULTSUPON SENIOR SECURITIES**

 

None

 

**ITEM 4.****       ****RESERVED**

 

**ITEM 5.****       ****OTHERINFORMATION**

 

(b)                   There have been no materialchanges to the procedures by which security holders may recommend nominees tothe Company’s Board of Directors implemented since the filing of our QuarterlyReport on Form 10-Q for the quarter ended March 31, 2010.

 

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**ITEM 6.****       ****EXHIBITS**

 

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

 

2.1                   Joint Plan of Reorganizationfor Smurfit-Stone Container Corporation and its Debtor Subsidiaries and Plan ofCompromise and Arrangement for Smurfit-Stone Container Canada Inc. andAffiliated Canadian Debtors, as confirmed by the Bankruptcy Court on June 21,2010 (incorporated by reference to Exhibit 2.1 to Old SSCC’s Current Report on Form8-K dated June 22, 2010 (File No. 0- 23876)).

 

3.1                   Amended and Restated By-Lawsof Smurfit-Stone Container Corporation (incorporated by reference to Exhibit 3.1to the Company’s Current Report on Form 8-K dated July 7, 2010 (File No. 1-03439)).

 

3.2                   Amended and RestatedCertificate of Incorporation of Smurfit-Stone Container Corporation(incorporated by reference to Exhibit 4.1 to the Company’s RegistrationStatement on Form S-8 (File No. 333-167897)).

 

10.1                 Agreement and Plan ofMerger, dated as of June 30, 2010, between Smurfit-Stone Container Corporationand Smurfit-Stone Container Enterprises, Inc. (incorporated by reference toExhibit 10.1 to the Company’s Current Report on Form 8-K dated July 7, 2010(File No. 1- 03439)).

 

10.2                 Asset Purchase Agreement,dated as of June 30, 2010, among Smurfit-Stone Container Canada, L.P.,Smurfit-Stone Container Canada Inc., Smurfit-MBI, MBI Limited/Limitée, BCShipper Supplies Ltd. and Francobec Company (incorporated by reference toExhibit 10.2 to the Company’s Current Report on Form 8-K dated July 7, 2010(File No. 1-03439)).

 

10.3*               Smurfit-Stone ContainerCorporation Equity Incentive Plan (incorporated by reference to Exhibit 10.3 tothe Company’s Current Report on Form 8-K dated July 7, 2010 (File No. 1-03439)).

 

10.4*               Smurfit-Stone ContainerCorporation 2010 Management Incentive Plan (incorporated by reference toExhibit 10.4 to the Company’s Current Report on Form 8-K dated July 7, 2010(File No. 1-03439)).

 

10.5*               Smurfit-Stone ContainerCorporation 2009 Long-Term Incentive Plan (incorporated by reference to Exhibit10.5 to the Company’s Current Report on Form 8-K dated July 7, 2010 (File No. 1-03439)).

 

10.6*               Amended and RestatedEmployment Agreement, dated as of June 30, 2010, between the Company andPatrick J. Moore (incorporated by reference to Exhibit 10.6 to the Company’sCurrent Report on Form 8-K dated July 7, 2010 (File No. 1-03439)).

 

10.7*               Amended and Restated EmploymentAgreement, dated as of June 30, 2010, between the Company and Steven J. Klinger(incorporated by reference to Exhibit 10.7 to the Company’s Current Report on Form8-K dated July 7, 2010 (File No. 1-03439)).

 

10.8*               Amended and RestatedExecutive Retirement Agreement, dated as of June 30, 2010, between the Companyand Steven J. Klinger (incorporated by reference to Exhibit 10.8 to the Company’sCurrent Report on Form 8-K dated July 7, 2010 (File No. 1-03439)).

 

10.9*               Amended and RestatedEmployment Security Agreement, dated as of June 30, 2010, between the Companyand Craig A. Hunt (incorporated by reference to Exhibit 10.9 to the Company’sCurrent Report on Form 8-K dated July 7, 2010 (File No. 1-03439)).

 

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10.10*             Amended and RestatedEmployment Security Agreement, dated as of June 30, 2010, between the Companyand Steven C. Strickland (incorporated by reference to Exhibit 10.10 to theCompany’s Current Report on Form 8-K dated July 7, 2010 (File No. 1-03439)).

 

10.11*             Amended and RestatedEmployment Security Agreement, dated as of June 30, 2010, between the Companyand Paul K. Kaufmann (incorporated by reference to Exhibit 10.11 to the Company’sCurrent Report on Form 8-K dated July 7, 2010 (File No. 1-03439)).

 

10.12               Credit Agreement dated as ofFebruary 22, 2010 among Smurfit-Stone Container Corporation and Smurfit-StoneContainer Enterprises, Inc., as Borrowers, J.P. Morgan Chase Bank, N.A., asadministrative agent, J.P. Morgan Securities Inc., Deutsche Bank SecuritiesInc. (DBSI) and Banc of America Securities LLC (BAS) as Joint Bookrunners andCo-Lead Arrangers, DBSI as syndication agent, BAS as documentation agent, andother lenders party thereto (incorporated by reference to Exhibit 10.1 to OldSSCC’s Current Report on Form 8-K dated February 22, 2010 (File No. 0- 23876)).

 

10.13               ABL Credit Agreement datedas of April 15, 2010 among Smurfit-Stone Container Corporation, Smurfit-StoneContainer Enterprises, Inc. and certain of its subsidiaries, as Borrowers,Deutsche Bank AG New York Branch, as Administrative Agent and SecurityAgent,  Deutsche Bank AG New York Branch,JPMorgan Chase Bank N.A. and General Electric Capital Corporation, asCo-Collateral Agents, Deutsche Bank Securities Inc., J. P. Morgan SecuritiesInc., GE Capital Markets, Inc., Banc of America Securities, LLC and Wells FargoCapital Finance, LLC, as Joint Lead Arrangers and Joint Book-Runners, J. P.Morgan Securities Inc., as Syndication Agent, General Electric CapitalCorporation, Banc of America Securities, LLC and Wells Fargo Capital Finance,LLC, as Documentation Agents, and The Bank of Nova Scotia and Regions Bank, asSenior Managing Agents, and other lenders party thereto (incorporated byreference to Exhibit 10.1 to Old SSCC’s Current Report on Form 8-K dated April 15,2010 (File No. 0- 23876))

 

31.1                 Certification pursuant to Rules13a—14(a) and 15d—14(a) under the Securities Exchange Act of 1934, as adoptedpursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

31.2                 Certification pursuant to Rules13a—14(a) and 15d—14(a) under the Securities Exchange Act of 1934, as adoptedpursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

32.1                 Certification pursuant to 18U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-OxleyAct of 2002.

 

32.2                 Certification pursuant to 18U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-OxleyAct of 2002.

 

99.1                 Order Confirming Joint Planof Reorganization for Smurfit-Stone Container Corporation and its DebtorSubsidiaries and Plan of Compromise and Arrangement for Smurfit-Stone ContainerCanada Inc. and Affiliated Canadian Debtors, as entered by the Bankruptcy Courton June 21, 2010 (incorporated by reference to Exhibit 99.1 to Old SSCC’sCurrent Report on Form 8-K dated June 22, 2010 (File No. 0- 23876)).

 

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* Indicates a management contract or compensationplan or arrangement.

 

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Signature

 

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 theundersigned thereunto duly authorized.

 

 
|                   | SMURFIT-STONE  CONTAINER CORPORATION           |
|------------------------|------------------------------------------------|
|                   | (Registrant)                                   |
|                   |                                           |
|                   |                                           |
| Date:  August 16, 2010 | /s/ Paul K. Kaufmann                           |
|                   | Paul K. Kaufmann                               |
|                   | Senior Vice President and Corporate Controller |
|                   | (Principal Accounting Officer)                 |

 

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