**UNITED STATES**

**SECURITIES AND 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 September 30,2010**

 

**Commission File Number1-03439**

 

**SMURFIT-STONE CONTAINER 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

 

Indicateby check mark whether the registrant has filed all documents and reportsrequired to be filed by Section 12, 13 or 15(d) of the Securities ExchangeAct of 1934 subsequent to the distribution of securities under a plan confirmedby a court.  Yes x  No o

 

APPLICABLEONLY TO CORPORATE ISSUERS:

 

Asof November 4, 2010, the registrant had outstanding 91,628,552 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)**

 
| ** **                                                        | ** ** | **Successor**                | ** ** | **Predecessor**              | ** ** |
|-------------------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                                        | ** ** | **Three Months  Ended** | ** ** | **Three Months  Ended** | ** ** | **Six Months  Ended** | ** ** | **Nine Months  Ended** | ** ** |
| ** **                                                        | ** ** | **September 30,**       | ** ** | **September 30,**       | ** ** | **June 30,** | ** ** | **September 30,** | ** ** |
| **(In millions, except per share data)** | ** ** | **2010**                     | ** ** | **2009**                     | ** ** | **2010** | ** ** | **2009** | ** ** |
| Net sales                                                         | ** ** | **$**                        | **1,634**  |                         | $          | 1,417 | ** ** | **$** | **3,024** |   | $ | 4,195 |   |
| Costs and expenses                                                | ** ** | ** **                   |       |                         | ** ** | ** ** |   |   |   |
| Cost of goods sold                                                | ** ** | **1,344**                    |       | 1,284                        | ** ** | **2,763** |   | 3,757 |   |
| Selling and administrative expenses                               | ** ** | **141**                      |       | 137                          | ** ** | **294** |   | 428 |   |
| Restructuring expenses                                            | ** ** | **7**                        |       | 14                           | ** ** | **15** |   | 38 |   |
| Loss on disposal of assets                                        |       |                         |       | 2                            | ** ** | ** ** |   | 3 |   |
| Other operating income                                            |       |                         |       | (179                         | )          | **(11** | **)** | (455 | ) |
| Operating income (loss)                                           | ** ** | **142**                      |       | 159                          | ** ** | **(37** | **)** | 424 |   |
| Other income (expense)                                            | ** ** | ** **                   |       |                         | ** ** | ** ** |   |   |   |
| Interest expense, net                                             | ** ** | **(23**                      | **)**      | (72                          | )          | **(23** | **)** | (217 | ) |
| Debtor-in-possession debt issuance costs                          | ** ** | ** **                   |       |                         | ** ** | ** ** |   | (63 | ) |
| Loss on early extinguishment of debt                              | ** ** | ** **                   |       |                         | ** ** | ** ** |   | (20 | ) |
| Foreign currency exchange gains (losses)                          | ** ** | ** **                   |       | (11                          | )          | **3** |   | (10 | ) |
| Other, net                                                        | ** ** | **2**                        |       | 6                            | ** ** | **4** |   | 10 |   |
| Income (loss) before reorganization items and  income taxes       | ** ** | **121**                      |       | 82                           | ** ** | **(53** | **)** | 124 |   |
| Reorganization items income (expense), net                        | ** ** | **(7**                       | **)**      | (16                          | )          | **1,178** |   | (109 | ) |
| Income before income taxes                                        | ** ** | **114**                      |       | 66                           | ** ** | **1,125** |   | 15 |   |
| (Provision for) benefit from income taxes                         | ** ** | **(49**                      | **)**      | 2                            | ** ** | **199** |   | (3 | ) |
| Net income                                                        | ** ** | **65**                       |       | 68                           | ** ** | **1,324** |   | 12 |   |
| Preferred stock dividends and accretion                           | ** ** | ** **                   |       | (3                           | )          | **(4** | **)** | (9 | ) |
| Net income attributable to common stockholders                    | ** ** | **$**                        | **65**     |                         | $          | 65 | ** ** | **$** | **1,320** |   | $ | 3 |   |
|                                                              |       |                         |       |                         |       |   |   |   |   |
| Basic earnings per common share                                   | ** ** | ** **                   |       |                         | ** ** | ** ** |   |   |   |
| Net income attributable to common stockholders                    | ** ** | **$**                        | **0.65**   |                         | $          | 0.25 | ** ** | **$** | **5.12** |   | $ | 0.01 |   |
| Weighted average shares outstanding                               | ** ** | **100**                      |       | 257                          | ** ** | **258** |   | 257 |   |
|                                                              |       |                         |       |                         |       |   |   |   |   |
| Diluted earnings per common share                                 | ** ** | ** **                   |       |                         | ** ** | ** ** |   |   |   |
| Net income attributable to common stockholders                    | ** ** | **$**                        | **0.65**   |                         | $          | 0.25 | ** ** | **$** | **5.07** |   | $ | 0.01 |   |
| Weighted average shares outstanding                               | ** ** | **100**                      |       | 257                          | ** ** | **261** |   | 257 |   |

 

See notes to consolidated financial statements.

 

1

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**SMURFIT-STONE CONTAINER CORPORATION**

**CONSOLIDATED BALANCE SHEETS**

 
| ** **                                                                                                                                      | ** ** | **Successor**          | ** ** | **Predecessor**       | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                      | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
| **(In millions, except share data)**                                                                                        | ** ** | **2010**               | ** ** | **2009**              | ** ** |
| ** **                                                                                                                                      | ** ** | **(Unaudited)**        | ** ** | ** **            | ** ** |
| **Assets**                                                                                                                                      |       |                   | ** ** | ** **            | ** ** |
|                                                                                                                                            |       |                   |       |                  |       |
| Current assets                                                                                                                                  | ** ** | ** **             |       |                  |       |
| Cash and cash equivalents                                                                                                                       | ** ** | **$**                  | **464**    |                  | $          | 704 |   |
| Restricted cash                                                                                                                                 | ** ** | ** **             |       | 9                     |       |
| Receivables, less allowance of $13 in 2010 and $24  in 2009                                                                                     | ** ** | **750**                |       | 615                   |       |
| Receivable for alternative energy tax credits                                                                                                   | ** ** | **11**                 |       | 59                    |       |
| Inventories                                                                                                                                     | ** ** | ** **             |       |                  |       |
| Work-in-process and finished goods                                                                                                              | ** ** | **153**                |       | 105                   |       |
| Materials and supplies                                                                                                                          | ** ** | **376**                |       | 347                   |       |
|                                                                                                                                            | ** ** | **529**                |       | 452                   |       |
| Refundable income taxes                                                                                                                         | ** ** | **16**                 |       | 23                    |       |
| Prepaid expenses and other current assets                                                                                                       | ** ** | **35**                 |       | 43                    |       |
| Total current assets                                                                                                                            | ** ** | **1,805**              |       | 1,905                 |       |
| Net property, plant and equipment                                                                                                               | ** ** | **4,370**              |       | 3,081                 |       |
| Deferred income taxes                                                                                                                           |       |                   |       | 23                    |       |
| Goodwill                                                                                                                                        | ** ** | **96**                 |       |                  |       |
| Intangible assets, net                                                                                                                          | ** ** | **76**                 |       |                  |       |
| Other assets                                                                                                                                    | ** ** | **162**                |       | 68                    |       |
|                                                                                                                                            | ** ** | **$**                  | **6,509**  |                  | $          | 5,077 |   |
| **Liabilities and Stockholders’  Equity (Deficit)**                                                                                        | ** ** | ** **             |       |                  |       |
|                                                                                                                                            |       |                   |       |                  |       |
| Liabilities not subject to compromise                                                                                                           | ** ** | ** **             |       |                  |       |
| Current liabilities                                                                                                                             | ** ** | ** **             |       |                  |       |
| Current maturities of long-term debt                                                                                                            | ** ** | **$**                  | **16**     |                  | $          | 1,354 |   |
| Accounts payable                                                                                                                                | ** ** | **519**                |       | 387                   |       |
| Accrued compensation and payroll taxes                                                                                                          | ** ** | **165**                |       | 145                   |       |
| Interest payable                                                                                                                                | ** ** | **2**                  |       | 12                    |       |
| Other current liabilities                                                                                                                       | ** ** | **83**                 |       | 164                   |       |
| Total current liabilities                                                                                                                       | ** ** | **785**                |       | 2,062                 |       |
| Long-term debt, less current maturities                                                                                                         | ** ** | **1,176**              |       |                  |       |
| Pension and postretirement benefits, net of  current portion                                                                                    | ** ** | **1,632**              |       |                  |       |
| Other long-term liabilities                                                                                                                     | ** ** | **138**                |       | 117                   |       |
| Deferred income taxes                                                                                                                           | ** ** | **352**                |       |                  |       |
| Total liabilities not subject to compromise                                                                                                     | ** ** | **4,083**              |       | 2,179                 |       |
|                                                                                                                                            |       |                   |       |                  |       |
| Liabilities subject to compromise                                                                                                               | ** ** | ** **             |       | 4,272                 |       |
| Total liabilities                                                                                                                               | ** ** | **4,083**              |       | 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; 91,062,636 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 $.01 per  share; 400,000,000 shares authorized; 257,482,839 issued and outstanding in  2009                 | ** ** | ** **             |       | 3                     |       |
| Additional paid-in capital                                                                                                                      | ** ** | **2,357**              |       | 4,081                 |       |
| Retained earnings (deficit)                                                                                                                     | ** ** | **65**                 |       | (4,883                | )          |
| Accumulated other comprehensive income (loss)                                                                                                   | ** ** | **4**                  |       | (679                  | )          |
| Total stockholders’ equity (deficit)                                                                                                       | ** ** | **2,426**              |       | (1,374                | )          |
|                                                                                                                                            | ** ** | **$**                  | **6,509**  |                  | $          | 5,077 |   |

 

See notes to consolidated financial statements.

 

2

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**SMURFIT-STONE CONTAINER CORPORATION**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

 
| ** **                                                                                     | ** ** | **Successor**                | ** ** | **Predecessor**            | ** ** |
|------------------------------------------------------------------------------------------------|------------|------------------------------|------------|----------------------------|------------|
| ** **                                                                                     | ** ** | **Three Months  Ended** | ** ** | **Six Months  Ended** | ** ** | **Nine Months  Ended** | ** ** |
| ** **                                                                                     | ** ** | **September 30,**       | ** ** | **June 30,**          | ** ** | **September 30,** | ** ** |
| **(In millions)**                                                                         | ** ** | **2010**                     | ** ** | **2010**                   | ** ** | **2009** | ** ** |
| **Cash flows from operating  activities**                                                      |       |                         | ** ** | ** **                 |       |   |   |
| Net income                                                                                     | ** ** | **$**                        | **65**     | ** **                 | **$**      | **1,324** |   | $ | 12 |   |
| Adjustments to reconcile net income to net cash  provided by (used for) operating activities   | ** ** | ** **                   |       |                       |       |   |   |
| Loss on early extinguishment of debt                                                           | ** ** | ** **                   |       |                       |       | 20 |   |
| Depreciation, depletion and amortization                                                       | ** ** | **84**                       | ** ** | **168**                    |       | 273 |   |
| Debtor-in-possession debt issuance costs                                                       | ** ** | ** **                   |       |                       |       | 63 |   |
| Amortization of deferred debt issuance costs and  original issue discount                      | ** ** | **3**                        |       |                       |       | 5 |   |
| Deferred income taxes                                                                          | ** ** | **58**                       | ** ** | **(201**                   | **)**      | 1 |   |
| Pension and postretirement benefits                                                            | ** ** | **(16**                      | **)**      | **50**                     |       | 49 |   |
| Loss on disposal of assets                                                                     | ** ** | ** **                   |       |                       |       | 3 |   |
| Non-cash restructuring expense                                                                 | ** ** | ** **                   | ** ** | **7**                      |       | 6 |   |
| Non-cash stock-based compensation                                                              | ** ** | **5**                        | ** ** | **3**                      |       | 7 |   |
| Non-cash foreign currency exchange (gains) losses                                              | ** ** | ** **                   | ** ** | **(3**                     | **)**      | 10 |   |
| 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**                    |       | 65 |   |
| Change in restricted cash for utility deposits                                                 | ** ** | **7**                        | ** ** | **2**                      |       | (9 | ) |
| Change in operating assets and liabilities, net of  effects from acquisitions and dispositions | ** ** | ** **                   |       |                       |       |   |   |
| Receivables and retained interest in receivables  sold                                         | ** ** | **(7**                       | **)**      | **(129**                   | **)**      | (50 | ) |
| Receivable for alternative energy tax credits                                                  | ** ** | ** **                   | ** ** | **48**                     |       | (58 | ) |
| Inventories                                                                                    | ** ** | **(30**                      | **)**      | **1**                      |       | 35 |   |
| Prepaid expenses and other current assets                                                      | ** ** | **12**                       | ** ** | **1**                      |       | (13 | ) |
| Accounts payable and accrued liabilities                                                       | ** ** | **(9**                       | **)**      | **57**                     |       | 200 |   |
| Interest payable                                                                               | ** ** | **(2**                       | **)**      | **2**                      |       | 128 |   |
| Other, net                                                                                     | ** ** | **(9**                       | **)**      | **8**                      |       | 46 |   |
| Net cash provided by (used for) operating  activities                                          | ** ** | **161**                      | ** ** | **(85**                    | **)**      | 793 |   |
| **Cash flows from investing  activities**                                                      | ** ** | ** **                   |       |                       |       |   |   |
| Expenditures for property, plant and equipment                                                 | ** ** | **(39**                      | **)**      | **(83**                    | **)**      | (112 | ) |
| Proceeds from property disposals                                                               | ** ** | **5**                        | ** ** | **10**                     |       | 16 |   |
| Advances to affiliates, net                                                                    | ** ** | ** **                   |       |                       |       | (15 | ) |
| Net cash used for investing activities                                                         | ** ** | **(34**                      | **)**      | **(73**                    | **)**      | (111 | ) |
| **Cash flows from financing  activities**                                                      | ** ** | ** **                   |       |                       |       |   |   |
| Proceeds from exit credit facilities                                                           | ** ** | ** **                   | ** ** | **1,200**                  |       |   |   |
| Original issue discount                                                                        | ** ** | ** **                   | ** ** | **(12**                    | **)**      |   |   |
| Net borrowings of debtor-in-possession financing                                               | ** ** | ** **                   |       |                       |       | 130 |   |
| Net borrowings (repayments) of long-term debt                                                  | ** ** | **(3**                       | **)**      | **(1,347**                 | **)**      | 71 |   |
| 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 used for financing activities                                                         | ** ** | **(3**                       | **)**      | **(206**                   | **)**      | (247 | ) |
|                                                                                           |       |                         |       |                       |       |   |   |
| **Increase (decrease) in cash and  cash equivalents**                                          | ** ** | **124**                      | ** ** | **(364**                   | **)**      | 435 |   |
| Cash and cash equivalents                                                                      | ** ** | ** **                   |       |                       |       |   |   |
| Beginning of period                                                                            | ** ** | **340**                      | ** ** | **704**                    |       | 126 |   |
| End of period                                                                                  | ** ** | **$**                        | **464**    | ** **                 | **$**      | **340** |   | $ | 561 |   |

 

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 CCAAprocesses.  As described below, on June 21,2010, the U.S. Court entered an order (“Confirmation Order”) approving andconfirming the Joint Plan of Reorganization for Smurfit-Stone ContainerCorporation and its Debtor Subsidiaries and Plan of Compromise and Arrangementfor Smurfit-Stone Container Canada Inc. and Affiliated Canadian Debtors (“Planof Reorganization”).  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 the Canadian Court (the “Bankruptcy Courts”)and in 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 of Reorganizationbegan in the U.S. Court on April 15, 2010, and concluded on May 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;  

 

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Under the Plan of Reorganization, the Company issued an aggregate of91,014,189 shares of Common Stock.  Noneof the Preferred Stock was 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 2,171,935shares.  All shares of common stock andpreferred stock 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.  On or about October 29, 2010, theCompany issued an additional 648,363 shares and cancelled 34,000 sharespreviously issued in the first distribution, leaving approximately 8.4 millionshares of Common Stock held in reserve. These shares will be distributed as these claims are liquidated orresolved, in accordance with the Plan of Reorganization and ConfirmationOrder.  To the extent that suchunliquidated or disputed claims are settled for less than the number of sharesreserved, additional distributions may also be made with respect to previouslyallowed claims under the terms and conditions of the Plan of Reorganization andConfirmation 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 LoanFacility.  On the same date, the U.S.Court also granted the Company’s February 3, 2010 motion seeking approvalto enter into a commitment letter and fee letters for 

 

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anasset-based revolving credit facility (the “ABL Revolving Facility”) (togetherwith the Term Loan Facility, the “Exit Credit Facilities”).  Based on such approvals, on February 22,2010, the Company and certain of its subsidiaries entered into the Term LoanFacility that provides for an aggregate term loan commitment of $1,200million.  In addition, the Companyentered into the ABL Revolving Facility with aggregate commitments of $650million (including a $100 million Canadian Tranche) on April 15,2010.   The ABL Revolving Facilityincludes 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) any newlender 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 September 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 September 30, 2010, the Company’s borrowing base under theABL Revolving Facility was $625 million and the amount available for borrowingsafter considering outstanding letters of credit was $528 million.

 

As of September 30, 2010, the Company also hadavailable unrestricted cash and cash equivalents of $464 million primarilyinvested in money market funds at a variable interest rate of 0.18%.

 

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 “Term Loan ABR”) defined as the greater of: (i) theU.S. prime rate, (ii) the overnight federal funds rate plus 0.50%, or (iii) theone month adjusted LIBOR rate plus 1.0%, provided that the 

 

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TermLoan ABR shall never be lower than 3.00% per annum, or (B) the adjustedLIBOR rate plus 4.75%, provided that the adjusted LIBOR rate shall never belower than 2.00% per annum.  The interestrate at September 30, 2010 was 6.75%

 

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, definedas 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, which is theapplicable margin as of September 30, 2010. The applicable margin can beadjusted in the future from 2.25% to a rate as high as 2.75% for base loans and3.25% to a rate as high as 3.75% for LIBOR loans based on the averagehistorical 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**

Subsequentto the Petition Date, the Company applied the Financial Accounting StandardsBoard (“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 of operations.  In addition, pre-petition obligations thatwere impacted by the bankruptcy reorganization process were classified on theconsolidated balance sheet at December 31, 2009 in liabilities subject tocompromise.

 

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*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:

 
| ** **                                                     | ** ** | **Successor**                                    | ** ** | **Predecessor**                                  | ** ** |
|----------------------------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                     | ** ** | **Three Months  Ended  September 30,** | ** ** | **Three Months  Ended  September 30,** | ** ** | **Six Months  Ended  June 30,** | ** ** | **Nine Months  Ended  September 30,** | ** ** |
| ** **                                                     | ** ** | **2010**                                         | ** ** | **2009**                                         | ** ** | **2010** | ** ** | **2009** | ** ** |
| *Income (Expense)*                                             |       |                                             |       |                                             |       |   |   |   |   |
| Provision for rejected/settled executory contracts  and leases |       | $                                                |       |                                             | $          | (9 | ) | $ | (106 | ) | $ | (73 | ) |
| Professional fees                                              |       | (7                                               | )          | (12                                              | )          | (43 | ) | (44 | ) |
| Accounts payable settlement gains                              |       |                                             |       | 5                                                |       | 5 |   | 8 |   |
| Gain due to plan effects                                       |       |                                             |       |                                             |       | 580 |   |   |   |
| Gain due to fresh start accounting adjustments                 |       |                                             |       |                                             |       | 742 |   |   |   |
| Total reorganization items                                     |       | $                                                | (7         | )                                                | $          | (16 | ) | $ | 1,178 |   | $ | (109 | ) |

 

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

 

Professionalfees directly related to the reorganization include fees associated withadvisors to the Company, the Creditors’ Committee and certain securedcreditors.  During the three months endedSeptember 30, 2010, the Company continued to incur costs related toprofessional fees that are directly attributable to the reorganization.

 

Netcash paid for reorganization items related to professional fees for the threemonths ended September 30, 2010 and six months ended June 30, 2010totaled $30 million and $32 million, respectively, and $9 million and $26million for the three and nine months ended September 30, 2009,respectively.

 

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

 

Interestexpense recorded on the Predecessor unsecured debt was zero for the six monthsended June 30, 2010, and $49 million and $147 million for the three andnine months ended September 30, 2009, respectively.  Contractual interest expense on unsecureddebt was $98 million for the six months ended June 30, 2010.  Under the Plan of Reorganization, interestexpense on the unsecured senior notes subsequent to the Petition Date was notpaid.  In the fourth quarter of 2009, theCompany concluded it was not probable that interest expense on the Predecessorunsecured senior notes subsequent to the Petition Date would be an allowedclaim.  As a result, during the fourthquarter of 2009, the Company recorded income in reorganization items for thereversal of accrued post-petition unsecured interest expense and discontinuedrecording 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.  Preferred Stock dividends inarrears were $13 million at the Effective Date and $9 million as of December 31,2009.  The Preferred Stock dividends inarrears since 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.

 

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* *

*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.

 

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 “FreshStart 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 reorganized consolidated balancesheet as of June 30, 2010, included herein, reflects the implementation ofthe Plan of Reorganization, including the discharge of liabilities subject tocompromise and the adoption of fresh start accounting.  The Predecessor results of operations of theCompany for the six months ended June 30, 2010 include $1,178 million ofreorganization items, net, including a pre-tax emergence gain on plan effectsof $580 million, a gain related to fresh start accounting adjustments of $742million, and other reorganization expenses of $144 million.  In addition, the benefit from income taxesincludes a $200 million benefit related to the plan effect adjustments.

 

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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 bankruptcyproceedings, a third party financial advisor provided an enterprise value ofthe Company of approximately $3,145 million to $3,445 million with a midpointof $3,295 million.  The preliminaryequity value set forth by the third party was $2,360 million, using themidpoint enterprise value of $3,295 million and adjusting for expected cash anddebt balances upon emergence and expected cash proceeds from the sale ofnon-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.

 

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 the Company’ssignificant pension obligations, the comparable company and DCF valuationsincluded scenarios designed to account for the Company’s pension liabilitiesand 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 significant business,economic and competitive uncertainties, many of which are beyond the Company’scontrol and, therefore, may not be realized. Changes in these estimates and assumptions may have had a significanteffect on the determination of the Company’s enterprise value. The assumptionsused in the calculations for the discounted cash flow analysis includedprojected revenue, cost and cash flows for the years ending December 31,2010 through 2014 and represented the Company’s best estimates at the time theanalysis was prepared.  The DCF analysiswas completed using discount rates of 9.0% through 11.0%.  There can be no assurance that the estimates,assumptions and values reflected in the valuations will be realized and actualresults could vary materially.

 

The precedent transactions analysis identified relevantmerger and acquisition transactions in the paperboard and containerboardindustry.  This analysis involvedcalculating the total enterprise value of the acquired company as a multiple ofEBITDA 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 

 

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goods. Finished goods were valued at estimated selling prices less the sum ofselling costs, shipping costs and a reasonable profit allowance for the sellingeffort.

 

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.  As a result, new purchases of long-livedstoreroom supplies will be classified as property, plant and equipment on theconsolidated 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 as of June 30,2010 based on a third party valuation. In establishing fair value for the vast majority of the Company’sproperty, plant and equipment, the cost approach was utilized.  The cost approach considers the amountrequired to replace an asset by constructing or purchasing a new asset withsimilar utility, adjusted for depreciation as of the appraisal date asdescribed below:

 

·                  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 commodity pricing,changes in the supply and demand relationships in the marketplace and othermarket 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.

 

For property, plant and equipment existing at June 30,2010, the depreciable lives were revised to reflect the estimated remaininguseful lives as follows:

 
| Buildings  and leasehold improvements |   | 20 years           |
|---------------------------------------|--------|--------------------|
| Papermill  machines                   |   | 14 years           |
| Major  converting equipment           |   | 10 – 15 years |

 

*Intangible Assets* —The Company identified the following intangible assets to be valued based upona third party valuation: (i) trade name, (ii) proprietary technologyand (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 lost profitmethod under the income approach which seeks to measure the profit that wouldbe 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 and assigneda definite life of two years.

 

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*Equity Investments* —Equity investments were valued, based upon a third party valuation, at fairvalue of approximately $34 million as of June 30, 2010, using the guidelinetransaction and guideline public companies methods under the marketapproach.  Under these approaches,valuation multiples 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.  Goodwill allocated to the Company’s Canadianoperations is adjusted quarterly to record the effect of currency translationadjustments.

 

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.

 

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**SMURFIT-STONECONTAINER CORPORATION**

**REORGANIZEDCONSOLIDATED 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 |   |

 

15

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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.

 

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

 

(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 accrued professional fees.

 

(7)         Represents accrual under the Company’s 2009 long-term incentive planand other employee compensation benefits of $19 million and thereclassification of the current portion of pension and postretirement benefitsof $15 million from liabilities subject to compromise.

 

16

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(8)         Reinstatement of pension and postretirement obligations, net ofsettlement.

 
| 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 | ) |

 

(10)   Reconciliation of enterprisevalue 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  |   |

 

17

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(11)  As aresult 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)  The following table summarizes the allocationof the reorganization value to the Company’s assets at the date of emergence asshown in the reorganized consolidated 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)  The adjustments required to report assets andliabilities at fair value under fresh start accounting resulted in a gain of$742 million, which was reported in reorganization items income (expense), netin the consolidated statements of operations for the six months ended June 30,2010.  The gain includes the write-off ofOCI losses of $632 million, resulting in a net impact on retained earnings(deficit) of $110 million.

 

18

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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 Container Corporation,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.

 

**Foreign Currency**

Prior to emerging from bankruptcy, the Company’sfunctional currency for its Canadian operations was the U.S. dollar.  Fluctuations in Canadian dollar monetaryassets and liabilities resulted in gains or losses which were credited orcharged to income.  Upon emergence, theCompany reviewed the primary economic indicators for its Canadian operationsunder the Reorganized Smurfit-Stone, including cash flow indicators, salesprice indicators, sales market indicators, expense indicators, financingindicators and intercompany transactions as required by ASC 830, “ForeignCurrency Matters.” Based on its analysis, including current operations andfinancing availability within Canada, the Company determined the functionalcurrency for its Canadian operations to be the local currency.  As a result, effective July 1, 2010, theassets and liabilities for the Canadian operations are translated at theexchange rate in effect at the balance sheet date and income and expenses aretranslated at average exchange rates prevailing during the year.  Translation gains or losses are includedwithin stockholders’ equity as part of OCI.

 

**Stock-Based Compensation**

Prior to emerging from bankruptcy, the Company useda lattice option pricing model to estimate the fair value of stockoptions.  The Company elected to use theBlack-Scholes valuation method for stock option grants issued during the thirdquarter 2010 under the Equity Incentive Plan, as it provided a better estimateof fair value because historical patterns for the Successor Company’s commonstock have not yet been established, as required for the assumptions used bythe lattice model.

 

19

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**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 third quarter of 2010, the Company announced the closure of two convertingfacilities and sold two previously closed facilities.  In addition, the Company initiated a plan toreduce its selling, general and administrative costs, primarily through reductionsin its workforce in these functions.  TheCompany recorded restructuring charges of $7 million, primarily for severanceand benefits and reduced its headcount by approximately 460 employees.  The net sales of the announced convertingfacilities in 2010 prior to closure and for the year ended December 31,2009 were $48 million and $44 million, respectively.  The majority of these net sales are expectedto be transferred to other operating facilities.  Additional charges of approximately $20million are expected to be recorded in the fourth quarter of 2010, primarilyfor severance and benefits related to the closure of these facilities and thereductions in the selling and administrative workforce, including chargesrelated to the October 27, 2010 announced resignation of Steven J.Klinger, the Company’s President and Chief Operating Officer, which iseffective December 31, 2010.

 

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 a $12 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 $16 million were forseverance and benefits, lease commitments and facility closure costs.  The net sales of these 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 $14 million and $38 million for thethree and nine months ended September 30, 2009, respectively, which werenet of a $2 million gain on the sale of previously closed facilities in thethird quarter of 2009.  Restructuringcharges included non-cash charges of $4 million and $8 million for the threeand nine months ended September 30, 2009, respectively, related to thewrite-down of assets, primarily property, plant and equipment, to estimated netrealizable values and the acceleration of depreciation for converting equipmentexpected to be abandoned or taken out of service. The remaining charges wereprimarily for severance and benefits, including pension settlement costs of $3million.

 

20

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Thefollowing is a summary of the restructuring liabilities, including thetermination of employees and liabilities for environmental and leasecommitments at the closed facilities.

 
| ** **                                     | ** ** | **Write-down of  Property,  Equipment and  Inventory to  Net Realizable  Value** | ** ** | **Severance  and  Benefits** | ** ** | **Lease  Commitments** | ** ** | **Facility  Closure  Costs** | ** ** | **Other**  | ** ** | **Total**  | ** ** |
|------------------------------------------------|------------|------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|------------------------|------------|------------------------------|------------|------------|------------|------------|------------|
| Balance at January 1, 2010 (Predecessor)  |       | $                                                                                                    |       |                         | $          | 34                     |       | $                            | 1          |       | $          | 19         |       | $ |   |   | $ | 54 |   |
|                                           |       |                                                                                                 |       |                         |       |                   |       |                         |       |       |       |       |       |
| (Income) expense                               |       | 11                                                                                                   |       | 7                            |       | 4                      |       | 5                            |       | (12        | )          | 15         |       |
| Payments                                       |       |                                                                                                 |       | (28                          | )          | (1                     | )          | (5                           | )          |       |       | (34        | )          |
| Non-cash reduction                             |       | (11                                                                                                  | )          | (3                           | )          |                   |       | (8                           | )          |       |       | (22        | )          |
| Net gain on sale of assets                     |       |                                                                                                 |       |                         |       |                   |       |                         |       | 12         |       | 12         |       |
| Balance at June 30, 2010 (Successor)      |       |                                                                                                 |       | 10                           |       | 4                      |       | 11                           |       |       |       | 25         |       |
| ** **                                     | ** ** | ** **                                                                                           | ** ** | ** **                   | ** ** | ** **             | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Expense                                        |       |                                                                                                 |       | 7                            |       |                   |       |                         |       |       |       | 7          |       |
| Payments                                       |       |                                                                                                 |       | (7                           | )          | (1                     | )          | (2                           | )          |       |       | (10        | )          |
| Balance at September 30, 2010 (Successor) | ** ** | **$**                                                                                                | ** ** | ** **                   | **$**      | **10**                 | ** ** | **$**                        | **3**      | ** ** | **$**      | **9**      | ** ** | **$** | ** ** | ** ** | **$** | **22** | ** ** |

 

The$3 million non-cash reduction to severance and benefits is due to thePredecessor Company reclassification of multi-employer pension plan liabilitiesto liabilities subject to compromise.

 

**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 the three and nine months ended September 30, 2009, theCompany recorded other operating income of $179 million and $455 million,respectively, net of fees and expenses, in its consolidated statements ofoperations related 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 $11 million refund claim adjustmentin the fourth quarter of 2010.

 

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

 

InSeptember 2009, the Company completed the sale of its Canadiantimberlands.  The net proceeds from thesale of approximately $28 million were used to prepay a portion of the CanadianDIP Term Loan.  The Company recorded apretax loss of $2 million.

 

21

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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 nine months ended September 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 September 30, 2010,the maximum potential amount of future payments related to these guarantees wasapproximately $23 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 life insurancebenefits for all retired salaried and certain retired hourly employees, and forsalaried and certain hourly employees who reached the age of 60 with ten yearsof 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 based on actual asset values and the discountrates effective on June 30, 2010. The weighted average discount rates used at June 30, 2010 for theU.S. and Canadian qualified defined benefit plans were 5.31% and 5.23%,respectively.  The Companycurrently estimates that its minimum required cash contributions under the U.S.and Canadian qualified pension plans will be approximately $100 million in2010, of which $31 million and $12 million were paid during the three monthsended September 30, 2010 and six months ended June 30, 2010,respectively; and an additional $57 million, which is expected to be paid inthe fourth quarter of 2010. Contributions are expected to be in the range of $235 million to $305million annually in 2011 through 2015. Projected pension contributions assume the Company elects funding reliefunder the Preservation of Access to Care for Medicare Beneficiaries and PensionRelief Act of 2010, enacted in June 2010. The actual required amounts and timing of such future cash contributionswill be highly sensitive to changes in the applicable discount rates andreturns on plan assets.

 

22

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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:

 
| ** **                          | ** ** | **Successor**                                          | ** ** | **Predecessor**                                        | ** ** |
|-------------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------|------------|
| **Defined Benefit Plans** | ** ** | **Three Months  Ended  September 30,  2010** | ** ** | **Three Months  Ended  September 30,  2009** | ** ** | **Six Months  Ended  June 30,  2010** | ** ** | **Nine Months  Ended  September 30,  2009** | ** ** |
| Service cost                        |       | $                                                      | 10         |                                                   | $          | 8 |   | $ | 15 |   | $ | 19 |   |
| Interest cost                       |       | 50                                                     |       | 52                                                     |       | 106 |   | 153 |   |
| Expected return on plan assets      |       | (46                                                    | )          | (51                                                    | )          | (105 | ) | (150 | ) |
| Amortization of prior service cost  |       |                                                   |       | 1                                                      |       | 1 |   | 2 |   |
| Amortization of net loss            |       |                                                   |       | 22                                                     |       | 48 |   | 64 |   |
| Special termination benefits charge |       |                                                   |       |                                                   |       |   |   | 9 |   |
| Settlements                         |       |                                                   |       | 3                                                      |       | 1 |   | 3 |   |
| Multi-employer plans                |       |                                                   |       | 1                                                      |       | 3 |   | 3 |   |
| Multi-employer plan adjustments     |       | 4                                                      |       |                                                   |       | 3 |   |   |   |
| Net periodic benefit cost           |       | $                                                      | 18         |                                                   | $          | 36 |   | $ | 72 |   | $ | 103 |   |

 
| ** **                            | ** ** | **Successor**                                          | ** ** | **Predecessor**                                        | ** ** |
|---------------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------|------------|
| **Post Retirement Plans**   | ** ** | **Three Months  Ended  September 30,  2010** | ** ** | **Three Months  Ended  September 30,  2009** | ** ** | **Six Months  Ended  June 30,  2010** | ** ** | **Nine Months  Ended  September 30,  2009** | ** ** |
| Service cost                          |       | $                                                      | 1          |                                                   | $          | 1 |   | $ | 1 |   | $ | 2 |   |
| Interest cost                         |       | 2                                                      |       | 2                                                      |       | 5 |   | 7 |   |
| Amortization of prior service benefit |       |                                                   |       | (1                                                     | )          | (2 | ) | (2 | ) |
| Amortization of net gain              |       |                                                   |       | (1                                                     | )          | (1 | ) | (3 | ) |
| Net periodic benefit cost             |       | $                                                      | 3          |                                                   | $          | 1 |   | $ | 3 |   | $ | 4 |   |

 

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

 

The2010 and 2009 settlement losses are related to closed facilities and areincluded as part of restructuring charges (See Note 4).

 

The2010 multi-employer plan adjustments for the three months ended September 30,2010, include a $4 million charge related to the withdrawal from amulti-employer pension plan through a collective bargaining agreement.  The 2010 multi-employer plan adjustments forthe six months ended June 30, 2010, include a $3 million charge related tosettlements of various multi-employer pension plans in connection with theCompany’s bankruptcy proceedings and is included in reorganization items in theconsolidated statements 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, beginningin 2010, but to a greater extent with the 2011 benefit plan year and extendingthrough 2018.

 

23

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TheCompany has analyzed this legislation to determine the impact of the requiredplan standard changes on its employee healthcare plans and the resultingcosts.  The Company does not expect thislegislation to have a material impact on the Company’s consolidated financialstatements through 2013.

 

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

 

**Successor Company**

Duringthe three months ended September 30, 2010, the Company entered intoforeign currency exchange derivative contracts to minimize the exposure tocurrency exchange rate fluctuations on a $255 million Canadian dollardenominated inter-company note established upon emergence between a U.S.subsidiary and a Canadian subsidiary, whereby the U.S subsidiary is thelender.  The inter-company note matureson June 29, 2015 and the interest is payable quarterly.  The derivative contracts are monthly orquarterly instruments with a notional amount equal to the inter-company noteprincipal, plus accrued interest.  Thederivative contracts are marked-to-market through earnings on a quarterlybasis.

 

Forthe three months ended September 30, 2010, the Company’s U.S subsidiaryrecorded a $4 million foreign currency gain (net of tax) in other, net in theconsolidated statements of operations related to the revaluation of theinter-company note.

 

Forthe three months ended September 30, 2010, the Company recorded a $4million loss (net of tax) in other, net in the consolidated statements of operationson the settlement of the derivative contracts.

 

Forthe three months ended September 30, 2010, the Company recorded animmaterial amount in other, net in the consolidated statements of operationsrelated to the change in fair value of the derivative contracts.

 

**Predecessor Company**

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 were 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.

 

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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 ninemonths ended September 30, 2009, the Company reclassified a $5 millionloss (net of tax) and a $24 million loss (net of tax), respectively, from OCIto cost of goods sold when the hedged items were recognized.

 

For the nine months ended September 30, 2009, the Company recordeda $3 million gain (net of tax) in cost of goods sold related to the change infair value, prior to the Petition Date, of certain commodity derivativeinstruments not qualifying for hedge accounting.

 

For the nine months ended September 30, 2009, the Company recordeda $3 million 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 protectagainst Canadian currency exchange risk associated with expected future cashflows.

 

For the nine months ended September 30, 2009, the Companyreclassified a $4 million loss (net of tax) from OCI to cost of goods sold whenthe hedged items were recognized. Additionally, the Company reclassified the remaining foreign currencyderivative instruments from OCI to cost of goods sold since the underlyingtransactions were no longer expected to occur, resulting in an additional lossof $2 million (net of tax).

 

*InterestRate Swap Contracts*

TheCompany used interest rate swap contracts to manage interest rate exposure on$300 million of the Tranche B and Tranche C floating rate bank term debt whichwas paid on June 30, 2010 in connection with the Company’s emergence fromChapter 11 and CCAA bankruptcy proceedings. The accounting for the cash flow impact of the swap contracts wasrecorded as an adjustment to interest expense each period.

 

Forthe six months ended June 30, 2010, the Company reclassified a $1 millionloss (net of tax) from OCI to interest expense when the hedged items wererecognized.  For the three and ninemonths ended September 30, 2009, the Company reclassified a $1 millionloss (net of tax) and a $3 million loss (net of tax), respectively, from OCI tointerest expense when the hedged items were recognized.

 

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

 

**Successor Company**

TheCompany recorded an income tax provision of $49 million for the three monthsended September 30, 2010.  Theprovision for income taxes differed from the amount computed by applying thestatutory U.S. federal income tax rate to income before income taxes dueprimarily to adjustments resulting from reconciling filed tax returns torecorded tax provision, state income taxes, and the effects of foreign taxrates.

 

**Predecessor Company**

TheCompany recorded a net tax benefit of $199 million for the six months ended June 30,2010.  This included $200 million of netbenefit related to the effects of the Plan of Reorganization, which includedadjustments for valuation allowance ($427 million benefit), unrecognized taxbenefits ($39 million benefit) and cancellation of indebtedness and other planeffects ($266 million provision).

 

Certaindebt obligations of the Company were discharged upon emergence frombankruptcy.  Discharge of a debtobligation for an amount less than the adjusted issue price generally createscancellation of indebtedness income (“CODI”), which must be included in taxableincome.  However, CODI is excluded fromtaxable income for a taxpayer that is a debtor in a reorganization case if thedischarge is granted by the court or pursuant to a plan of reorganization approvedby the court.  The Plan of Reorganizationfiled 

 

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bythe 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 September 30, 2010, a valuation allowance remains in placerelated to certain 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 six months ended June 30,2010 related to the final settlement of the Canadian tax claims and the releaseof the previously accrued unrecognized tax benefits related to the Canadianaudit.

 

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 six months ended June 30,2010.  A reserve of $254 million wasrecorded related to this unrecognized tax benefit.

 

**DeferredIncome Tax Assets and Liabilities**

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 U.S. Internal Revenue Code, which can impose annual limitations onutilization of NOLs and tax credits.  TheCompany does not expect the provisions of Section 382 to significantlylimit its ability to utilize NOLs or tax credits in the carryforward periods.

 

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**12.****      ****Comprehensive Income**

 

Comprehensiveincome is as follows:

** **
| ** **                                                             | ** ** | **Successor**                                    | ** ** | **Predecessor**                                  | ** ** |
|------------------------------------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                             | ** ** | **Three Months  Ended  September 30,** | ** ** | **Three Months  Ended  September 30,** | ** ** | **Six Months  Ended  June 30,** | ** ** | **Nine Months  Ended  September 30,** | ** ** |
| ** **                                                             | ** ** | **2010**                                         | ** ** | **2009**                                         | ** ** | **2010** | ** ** | **2009** | ** ** |
| Net income                                                             |       | $                                                | 65         |                                             | $          | 68 |   | $ | 1,324 |   | $ | 12 |   |
| Other comprehensive income, net of tax:                                |       |                                             |       |                                             |       |   |   |   |   |
| Net changes in fair value of hedging instruments                       |       |                                             |       |                                             |       |   |   | (1 | ) |
| Net hedging loss reclassified into earnings                            |       |                                             |       | 6                                                |       | 1 |   | 33 |   |
| Net deferred employee benefit plan expense  reclassified into earnings |       |                                             |       | 11                                               |       | 46 |   | 35 |   |
| Foreign currency translation adjustment                                |       | 4                                                |       |                                             |       |   |   | 1 |   |
| Fresh start accounting adjustments                                     |       |                                             |       |                                             |       | 632 |   |   |   |
| Comprehensive income                                                   |       | $                                                | 69         |                                             | $          | 85 |   | $ | 2,003 |   | $ | 80 |   |

 

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

 

Asdiscussed in Note 1, “Bankruptcy Proceedings”, Predecessor Company preferredand common stock were cancelled as a result of the Company’s emergence fromChapter 11 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.

 

Thefollowing table sets forth the computation of the Company’s basic and dilutedearnings per share:

 
| ** **                                                                                            | ** ** | **Successor**                                    | ** ** | **Predecessor**                                  | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                                            | ** ** | **Three Months  Ended  September 30,** | ** ** | **Three Months  Ended  September 30,** | ** ** | **Six Months  Ended  June 30,** | ** ** | **Nine Months  Ended  September 30,** | ** ** |
| ** **                                                                                            | ** ** | **2010**                                         | ** ** | **2009**                                         | ** ** | **2010** | ** ** | **2009** | ** ** |
| **Numerator:**                                                                                        |       |                                             |       |                                             |       |   |   |   |   |
| Net income                                                                                            |       | $                                                | 65         |                                             | $          | 68 |   | $ | 1,324 |   | $ | 12 |   |
| Preferred stock dividends and accretion                                                               |       |                                             |       | (3                                               | )          | (4 | ) | (9 | ) |
| Net income attributable to common stockholders                                                        |       | 65                                               |       | 65                                               |       | 1,320 |   | 3 |   |
| Effect of dilutive securities: Preferred stock  dividends                                             |       |                                             |       |                                             |       | 4 |   |   |   |
| Net income attributable to common stockholders and  assumed conversion                                |       | $                                                | 65         |                                             | $          | 65 |   | $ | 1,324 |   | $ | 3 |   |
|                                                                                                  |       |                                             |       |                                             |       |   |   |   |   |
| **Denominator:**                                                                                      |       |                                             |       |                                             |       |   |   |   |   |
| Denominator for basic earnings per share -  weighted average shares                                   |       | 100                                              |       | 257                                              |       | 258 |   | 257 |   |
| Effect of dilutive securities: Preferred Stock                                                        |       |                                             |       |                                             |       | 3 |   |   |   |
| Denominator for diluted earnings per share -  adjusted weighted average shares and assumed conversion |       | 100                                              |       | 257                                              |       | 261 |   | 257 |   |
|                                                                                                  |       |                                             |       |                                             |       |   |   |   |   |
| Basic earnings per share                                                                              |       | $                                                | 0.65       |                                             | $          | 0.25 |   | $ | 5.12 |   | $ | 0.01 |   |
| Diluted earnings per share                                                                            |       | $                                                | 0.65       |                                             | $          | 0.25 |   | $ | 5.07 |   | $ | 0.01 |   |

 

Totalweighted average shares of 100 million for the Successor Company includereserved, but unissued shares of approximately 9 million.  These reserved shares will be distributed asclaims are liquidated or resolved in accordance with the Plan of Reorganizationand Confirmation Order.

 

Sharesof SSCC preferred stock convertible into three million shares of common stockwith an earnings effect of $3 million and $9 million were excluded from thePredecessor Company diluted earnings per share computations for the three andnine months ended September 30, 2009 because they were antidilutive.

 

Employeestock options and non-vested restricted stock were excluded from the dilutedearnings per share calculations for all periods presented because they wereantidilutive.

 

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ASC260, “Earnings Per Share” (“ASC 260”), addresses whether instruments granted inshare-based payment awards that entitle their holders to receive nonforfeitabledividends or dividend equivalents before vesting should be consideredparticipating securities, and as a result, included in the earnings allocationin computing earnings per share under the “two-class method.”  The two-class method is an earningsallocation formula that determines earnings per share for each class of commonstock and participating security according to dividends declared (oraccumulated) and participation rights in undistributed earnings.  In accordance with ASC 260, the SuccessorCompany’s unvested RSU’s are considered participating securities because theyentitle holders to receive nonforfeitable dividends during the vestingterm.  In applying the two-class method,undistributed earnings are allocated between common shares and unvested RSU’s.  ASC 260 did not have a material impact on theCompany’s earnings per share calculation for the three months ended September 30,2010.

 

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

 

Certainfinancial assets and liabilities are recorded at fair value on a recurringbasis, including derivative instruments prior to termination (See Note 9) 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 the Company’s adoption of fresh start accounting.  The gains and losses related to these fairvalue adjustments were recorded in the statements 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 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 material assets or liabilities measured at fair value on a recurring basisutilizing Level 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.

 

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**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**                    | ** ** |
|-------------------------------------|------------|----------------------------------|------------|
| ** **                          | ** ** | **September 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 months ended September 30,2010 and the 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                                              |       |
| Realized gains (losses)                        |       |                                            |       |
| Balance at September 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 Successor Company’s debt was adjusted to fair value of $1,194million, net of original issue discount of $12 million, using quoted marketprices which is consistent with par value (Level 1) (See Note 1, “BankruptcyProceedings —  Fresh Start Accounting”).  At September 30, 2010, the carryingvalue and fair value of the Company’s borrowings were $1,192 million and $1,201million, respectively.

 

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

 

The Company’s past andpresent operations include activities which are subject to federal, state andlocal environmental requirements, particularly relating to air and waterquality.  The Company faced potentialenvironmental liability as a result of violations of these environmentalrequirements, environmental permit terms and similar authorizations that haveoccurred from time to time at its facilities. In addition, the Company faced potential liability for remediation atcertain owned and formerly owned facilities, as well as response costs atvarious sites for which it has received notice as being a potentiallyresponsible party (“PRP”) concerning hazardous substance contamination.  The matters relating to the third party PRPsites and certain formerly owned facilities will be satisfied as unsecuredclaims in the Company’s bankruptcy proceedings.  As of September 30,2010, the Company had approximately $12 million reserved for environmentalliabilities, of which $5 million is included in other long-term liabilities and$7 million in other current liabilities in the consolidated balancesheets.  The Company believes the liability for these matters wasadequately reserved at September 30, 2010.

 

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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 the Predecessor CompanyBoard of Directors.  The suits havesimilar allegations as the 2009 ERISA Case described above, with the additionof breach of fiduciary duty claims related to the Company’s pension plans.  The Company continues to expect that all ofthese matters will be consolidated in some manner as they purport to representa similar class of employees and former employees and seek recovery undersimilar allegations and any of the Company’s indemnification obligations wouldbe covered 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’Creditors Arrangement 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 Accounting StandardsCodification (ASC) 860, “Transfers and Servicing” (ASC 860).  The amendments removed the concept of aqualifying special-purpose entity and the related impact on consolidation,thereby potentially requiring consolidation of such special-purpose entitiespreviously excluded from the consolidated financial statements.  The amendments to ASC 860 did not impact ourconsolidated 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 andliabilities, 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-StoneContainer Canada Inc. and Affiliated Canadian Debtors (Plan ofReorganization).  We emerged from ourChapter 11 and CCAA bankruptcy proceedings on June 30, 2010 (EffectiveDate).  As of the Effective Date andpursuant to the Plan of Reorganization, we merged with and into ourwholly-owned subsidiary, SSCE.  SSCEchanged its name to Smurfit-Stone Container Corporation and became theReorganized 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 our 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 the 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, most creditoractions to obtain possession of property from us, or to create, perfect orenforce any lien against our property, or to collect on monies owed orotherwise exercise rights or remedies with respect to a pre-petition claim wereenjoined 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, we issuedan aggregate of 91,014,189 shares of Common Stock.  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 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, 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.  On or about October 29, 2010, we issuedan additional 648,363 shares and cancelled 34,000 shares previously issued inthe first distribution, leaving approximately 8.4 million shares of CommonStock held in reserve. These shares will be distributed as these claims areliquidated or resolved, in accordance with the Plan of Reorganization andConfirmation Order.  To the extent thatsuch unliquidated or disputed claims are settled for less than the number ofshares reserved, additional distributions may also be made with respect topreviously allowed claims under the terms and conditions of the Plan ofReorganization 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 

 

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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) 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 September 30, 2010 we had noborrowings 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 September 30,2010, our borrowing base under the ABL Revolving Facility was $625 million andthe amount available for borrowings after considering outstanding letters ofcredit was $528 million.

 

As of September 30, 2010, we also had availableunrestricted cash and cash equivalents of $464 million primarily invested inmoney market funds at a variable interest rate of 0.18%.

 

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) theU.S. prime rate, (ii) the overnight federal funds rate plus 0.50%, or (iii) theone month adjusted LIBOR rate plus 1.0%, provided that the Term Loan ABR shallnever be lower than 3.00% per annum, or (B) the adjusted LIBOR rate plus4.75%, provided that the adjusted LIBOR rate shall never be lower than 2.00%per annum.  The interest rate at September 30,2010 was 6.75%.

 

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, which is the applicable margin as of September 30,2010. The applicable margin can be adjusted in the future from 2.25% to a rateas high as 2.75% for base loans and 3.25% to a rate as high as 3.75% for LIBORloans based on the average historical utilization under the ABL RevolvingFacility.  We will also pay either a0.50% or 0.75% per annum unused commitment fee based

 

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onthe average historical 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 hereafter acquired assets and those of each of our subsidiariesparty to the Exit Credit Facilities, subject to certain exceptions andpermitted 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**

 

Subsequentto the Petition Date, we applied the Financial Accounting Standards Board(FASB) 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, 2009in liabilities subject to compromise.

 

*ReorganizationItems*

Ourreorganization items directly related to the process of our reorganizing underChapter 11 and the CCAA, and our emergence on June 30, 2010, as recorded in ourconsolidated statements of operations, consist of the following:

 
| ** **                                                     | ** ** | **Successor**                                                | ** **   | **Predecessor**                                  | ** ** |
|----------------------------------------------------------------|------------|--------------------------------------------------------------|--------------|--------------------------------------------------|------------|
| ** **                                                     | ** ** | **Three Months   Ended   September 30,** | ** **   | **Three Months  Ended  September 30,** | ** ** | **Six Months  Ended  June 30,** | ** ** | **Nine Months  Ended  September 30,** | ** ** |
| ** **                                                     | ** ** | **2010**                                                     | ** **   | **2009**                                         | ** ** | **2010** | ** ** | **2009** | ** ** |
| *Income (Expense)*                                             |       |                                                         |         |                                             |       |   |   |   |   |
| Provision for rejected/settled executory contracts  and leases |       | $                                                            |    |                                             | $          |  (9 | ) | $ | (106 | ) | $ | (73 | ) |
| Professional fees                                              |       | (7                                                           | )            | (12                                              | )          | (43 | ) | (44 | ) |
| Accounts payable settlement gains                              |       |                                                         |         | 5                                                |       | 5 |   | 8 |   |
| Gain due to plan effects                                       |       |                                                         |         |                                             |       | 580 |   |   |   |
| Gain due to fresh start accounting adjustments                 |       |                                                         |         |                                             |       |  742 |   |   |   |
| Total reorganization items                                     |       | $                                                            | (7           | )                                                | $          | (16 | ) | $ |  1,178 |   | $ | (109 | ) |

 

Inaddition, an income tax benefit of $200 million related to plan effectadjustments was recorded in the 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.  During the three months ended September 30,2010, the Company continued to incur costs related to professional fees thatare directly attributable to the reorganization.

 

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Netcash paid for reorganization items related to professional fees for the threemonths ended September 30, 2010 and six months ended June 30, 2010 totaled $30million and $32 million, respectively, and $9 million and $26 million for thethree and nine months ended September 30, 2009, respectively.

 

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

 

Interestexpense recorded on the Predecessor unsecured debt was zero for the six monthsended June 30, 2010, and $49 million and $147 million for the three and ninemonths ended September 30, 2009, respectively. Contractual interest expense on unsecured debt was $98 million for thesix months ended June 30, 2010.  Underthe Plan of Reorganization, interest expense on the Predecessor unsecuredsenior notes subsequent to the Petition Date was not paid.  In the fourth quarter of 2009, we concludedit was not probable that interest expense on the Predecessor unsecured seniornotes 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.  Preferred Stock dividends in arrears were $13million at the Effective Date and $9 million as of December 31, 2009.  The Preferred Stock dividends in arrearssince the Petition Date are presented in the Predecessor consolidated statementsof operations only to reflect preferred stockholders’ rights to dividends overcommon stockholders and are not reflected in the Preferred Stock value in theDecember 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.

 

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.

 

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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, seeNote 1 of the Notes to Consolidated Financial Statements - Fresh StartAccounting.

 

**Fresh Start Accounting**

 

Inaccordance with ASC 852, we adopted fresh start accounting as of the close ofbusiness on June 30, 2010, because the reorganization value of the assets ofthe Predecessor Company immediately before the date of confirmation of the Planof Reorganization was less than the total of all post-petition liabilities andallowed claims, and the holders of the Predecessor Company’s voting sharesimmediately before confirmation of the Plan of Reorganization received lessthan 50 percent of the voting shares of the Successor Company.  Upon adoption of fresh start accounting, theCompany became a new entity for financial reporting purposes reflecting theSuccessor capital structure. As such, a new accounting basis in theidentifiable assets and liabilities assumed was established with no retainedearnings or accumulated other comprehensive income (loss) (OCI).

 

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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 attributable to common stockholders theeffects of reorganization items (income) expense, debtor-in-possessionfinancing costs, alternative fuel mixture tax credits, loss on earlyextinguishment of debt, non-cash foreign currency exchange (gains) losses,interest on Predecessor unsecured debt, restructuring charges, loss on disposalof assets and a multi-employer pension plan withdrawal charge.  EBITDA is defined as net income 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, restructuring charges, loss on disposal ofassets, a multi-employer pension plan withdrawal charge 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 (1) the three months ended September 30,2010 of the Successor, (2) the six months ended June 30, 2010 of the Predecessorand (3) the three and nine months ended September 30, 2009 of the Predecessor,as well as the reasons management believes each of these items is notindicative 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.

 

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·                              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 consideredindicative of ongoing operating performance and are not used by us to assessour 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 - Through June 30, 2010, the functional currency for ourCanadian operations was the U.S. dollar.  Fluctuations in Canadiandollar-denominated monetary assets and liabilities resulted in non-cash gainsor losses.  We excluded the impact of foreign currency exchange gains andlosses because the impact of foreign exchange is highly variable and difficultto predict from period to period and is not tied to our operatingperformance.  These gains or losses are not considered indicative ofongoing operating performance and are not used by us to assess our operatingperformance.

 

·                              Interest on Predecessorunsecured debt - These amounts represent the post-petition interest accrued onunsecured debt from the time of our bankruptcy filing, which was stayed and notpaid as a result of the bankruptcy proceedings. In the fourth quarter of 2009, we concluded it was not probable thatinterest expense that was accrued from the Petition Date through November 30,2009, would be an allowed claim.  Thisexpense was not considered indicative of our ongoing operating performance andwas excluded 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.

 

·                              Loss on disposal of assets -These amounts represent losses we recognized related to the sale ofnon-strategic assets.  These losses werenot considered indicative of ongoing operating performance and were excluded bymanagement in assessing our operating profit.

 

·                              Multi-employer pension planwithdrawal charge - This amount represents the charge associated with thewithdrawal from a multi-employer pension plan. This expense item was not considered indicative of our ongoing operatingperformance and was excluded by management in assessing our operatingperformance.

 

·                              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.  These limitations are primarily due to the exclusionof certain amounts that are material to our consolidated results of operations,as discussed above.  In addition, these adjusted net income (loss) andEBITDA measures may differ from adjusted net income (loss) and EBITDAcalculations of other companies in our industry, limiting their usefulness ascomparative measures.  Because of theselimitations, adjusted net income (loss), adjusted net income (loss) per dilutedshare, EBITDA and adjusted EBITDA should be read in conjunction with ourconsolidated financial statements prepared in accordance with GAAP.  Wecompensate for these limitations by relying primarily on our GAAP results andusing adjusted net income (loss), adjusted net income (loss) per diluted share,EBITDA and adjusted EBITDA only as supplemental 

 

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measuresof our operating performance.  The presentation of this additionalinformation is not meant to be considered in isolation or as a substitute forfinancial 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 evaluate the methodology used by our management to evaluateand measure our operating performance, and the methodology and financialmeasures used by our board of directors to assess management’s performance.

 

Thefollowing financial presentation includes a reconciliation of net incomeattributable to common stockholders and net income per diluted shareattributable to common stockholders, the most directly comparable GAAPfinancial measures, to adjusted net income (loss) attributable to commonstockholders and adjusted net income (loss) per diluted share attributable tocommon stockholders, respectively.  Theadjustments to GAAP net income attributable to common stockholders for thePredecessor periods, other than reorganization items (income) expense, were nottax effected because it was more likely than not that substantially all of thedeferred tax assets that were generated during bankruptcy would not be realizedand we did not record any additional tax benefit for 2009 and the six monthsended June 30, 2010.  Due to the effectsof the Plan of Reorganization, we concluded that it was more likely than notthat substantially all of the deferred tax assets would be realized and werecognized an income tax benefit related to reorganization items in the sixmonths ended June 30, 2010.  For thethree months ended September 30, 2010, we recorded a provision for income taxesrelated to the Successor statement of operations.  As a result, the Successor period adjustmentsto net income attributable to stockholders are presented on a net of tax basis.

 

Areconciliation of net income to EBITDA and adjusted EBITDA is also presented.

 

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**Reconciliation to GAAP Financial Measures**

 
| ** **                                                                        | ** ** | **Successor**                                                | ** ** | **Predecessor**                                        | ** ** |
|-----------------------------------------------------------------------------------|------------|--------------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                                        | ** ** | **Three Months   Ended   September 30,** | ** ** | **Three Months   Ended  September 30,** | ** ** | **Six Months   Ended   June 30,** | ** ** | **Nine Months   Ended   September 30,** | ** ** |
| **(In millions, except per share data)**                 | ** ** | **2010**                                                     | ** ** | **2009**                                               | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                                                              |       |                                                         |       |                                                   |       |   |   |   |   |
| **Net income attributable to  common stockholders (GAAP)**                        |       | $                                                            | 65         |                                                   | $          | 65 |   | $ | 1,320 |   | $ | 3 |   |
| Reorganization items (income) expense, net of  income taxes                       |       | 4                                                            |       | 16                                                     |       | (1,378 | ) | 109 |   |
| Debtor-in-possession financing costs                                              |       |                                                         |       |                                                   |       |   |   | 63 |   |
| Alternative fuel mixture tax credits                                              |       |                                                         |       | (179                                                   | )          | (11 | ) | (455 | ) |
| Loss on early extinguishment of debt                                              |       |                                                         |       |                                                   |       |   |   | 20 |   |
| Non-cash foreign currency exchange (gains) losses                                 |       |                                                         |       | 11                                                     |       | (3 | ) | 10 |   |
| Interest on Predecessor unsecured debt                                            |       |                                                         |       | 48                                                     |       |   |   | 131 |   |
| Restructuring charges, net of income taxes                                        |       | 4                                                            |       | 14                                                     |       | 15 |   | 38 |   |
| Loss on disposal of assets                                                        |       |                                                         |       | 2                                                      |       |   |   | 2 |   |
| Multi-employer pension plan withdrawal charge, net  of income taxes               |       | 3                                                            |       |                                                   |       |   |   |   |   |
| Adjusted net income (loss) attributable to common  stockholders                   |       | $                                                            | 76         |                                                   | $          | (23 | ) | $ | (57 | ) | $ | (79 | ) |
|                                                                              |       |                                                         |       |                                                   |       |   |   |   |   |
| **Net income per diluted share  attributable to common stockholders (GAAP)**      |       | $                                                            | 0.65       |                                                   | $          | 0.25 |   | $ | 5.07 |   | $ | 0.01 |   |
| Reorganization items (income) expense, net of  income taxes                       |       | 0.04                                                         |       | 0.06                                                   |       | (5.28 | ) | 0.42 |   |
| Debtor-in-possession financing costs                                              |       |                                                         |       |                                                   |       |   |   | 0.24 |   |
| Alternative fuel mixture tax credits                                              |       |                                                         |       | (0.70                                                  | )          | (0.04 | ) | (1.77 | ) |
| Loss on early extinguishment of debt                                              |       |                                                         |       |                                                   |       |   |   | 0.08 |   |
| Non-cash foreign currency exchange (gains) losses                                 |       |                                                         |       | 0.04                                                   |       | (0.01 | ) | 0.04 |   |
| Interest on Predecessor unsecured debt                                            |       |                                                         |       | 0.19                                                   |       |   |   | 0.51 |   |
| Restructuring charges, net of income taxes                                        |       | 0.04                                                         |       | 0.06                                                   |       | 0.06 |   | 0.15 |   |
| Loss on disposal of assets                                                        |       |                                                         |       | 0.01                                                   |       |   |   | 0.01 |   |
| Multi-employer pension plan withdrawal charge, net  of income taxes               |       | 0.03                                                         |       |                                                   |       |   |   |   |   |
| Adjusted net income (loss) per diluted share  attributable to common stockholders |       | $                                                            | 0.76       |                                                   | $          | (0.09 | ) | $ | (0.20 | ) | $ | (0.31 | ) |
|                                                                              |       |                                                         |       |                                                   |       |   |   |   |   |
| **Net income (GAAP)**                                                             |       | $                                                            | 65         |                                                   | $          | 68 |   | $ | 1,324 |   | $ | 12 |   |
| (Benefit from) provision for income taxes                                         |       | 49                                                           |       | (2                                                     | )          | (199 | ) | 3 |   |
| Interest expense net                                                              |       | 23                                                           |       | 72                                                     |       | 23 |   | 217 |   |
| Depreciation, depletion and amortization                                          |       | 84                                                           |       | 91                                                     |       | 168 |   | 273 |   |
| EBITDA                                                                            |       | 221                                                          |       | 229                                                    |       | 1,316 |   | 505 |   |
| Reorganization items (income) expense                                             |       | 7                                                            |       | 16                                                     |       | (1,178 | ) | 109 |   |
| Debtor-in-possession financing costs                                              |       |                                                         |       |                                                   |       |   |   | 63 |   |
| Alternative fuel mixture tax credits                                              |       |                                                         |       | (179                                                   | )          | (11 | ) | (455 | ) |
| Loss on early extinguishment of debt                                              |       |                                                         |       |                                                   |       |   |   | 20 |   |
| Non-cash foreign currency exchange (gains) losses                                 | ** ** | ** **                                                   |       | 11                                                     |       | (3 | ) | 10 |   |
| Restructuring charges                                                             |       | 7                                                            |       | 14                                                     |       | 15 |   | 38 |   |
| Loss on disposal of assets                                                        |       |                                                         |       | 2                                                      |       |   |   | 3 |   |
| Multi-employer pension plan withdrawal charge                                     |       | 4                                                            | ** ** | ** **                                             |       |   |   |   |   |
| Other                                                                             | ** ** | ** **                                                   |       | 1                                                      |       | 9 |   | 2 |   |
| Adjusted EBITDA                                                                   |       | $                                                            | 239        |                                                   | $          | 94 |   | $ | 148 |   | $ | 295 |   |

 

44

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**Combined Financial Results of the Predecessor and Successor**

 

Inconnection with our emergence from Chapter 11 and CCAA bankruptcy proceedingsand the adoption of fresh start accounting on June 30, 2010, theaccompanying consolidated statements of operations include the results ofoperations for (1) the three months ended September 30, 2010 of theSuccessor, (2) the six months ended June 30, 2010 of the Predecessorand (3) the three and nine months ended September 30, 2009 of thePredecessor.

 

Althoughthe 2010 Successor and Predecessor Periods are distinct reporting periods, forpurposes of Management’s Discussion and Analysis of the results of operationsfor the nine months ended September 30, 2010 in this Form 10-Q, wecombined the results of operations for the six months ended June 30, 2010of the Predecessor with the three months ended September 30, 2010 of theSuccessor.  We then compared the combinedresults of operations for the nine months ended September 30, 2010 withthe corresponding period in the prior year of the Predecessor.

 

Webelieve that combining the results of operations for the nine months ended September 30,2010 enhances the comparability for management and investors of Smurfit-Stone’songoing financial and operational performance and trends than if we did notcombine the results of operations of the Predecessor and Successor in thismanner.  Similarly, we combined thefinancial results of the Predecessor and Successor when discussing ourliquidity and capital resources for the nine months ended September 30,2010.

 

**Overview**

 

Wehad net income of $65 million, or $0.65 per diluted share, for the thirdquarter of 2010 compared to net income attributable to common stockholders of$65 million, or $0.25 per diluted share, for the third quarter of 2009.  The 2010 results compared to the thirdquarter of 2009 were positively impacted by higher segment profits of $156million, lower interest expense of $49 million, lower restructuring expenses of$7 million and lower reorganization items, net of $9 million. The 2010 segmentprofits benefited from a decrease in pension and postretirement benefit expenseof $16 million due primarily to elimination of the amortization of net lossesassociated with the plans’ underfunded levels upon emergence.  These benefits were partially offset by lowerother operating income related to the alternative fuel tax credit of $179million recorded in 2009. We recorded an income tax provision of $49 million in2010 compared to an income tax benefit of $2 million in 2009.

 

Wehad operating income of $142 million for the third quarter of 2010, compared tooperating income of $159 million in the third quarter of 2009.  The third quarter of 2010 operating incomewas positively impacted by higher segment profits principally due to higheraverage selling prices for containerboard and corrugated containers and reducedmarket-related downtime, which were partially offset by higher costs forreclaimed fiber.  The third quarter of2009 was positively impacted by other operating income of $179 million relatedto the alternative fuel tax credits.

 

Wehad adjusted net income of $76 million, or $0.76 per diluted share, for thethird quarter of 2010 compared to an adjusted net loss attributable to commonstockholders of $23 million, or $0.09 per diluted share, for the third quarterof 2009. Adjusted EBITDA for the third quarter of 2010 was $239 millioncompared with $94 million in the third quarter of 2009.

 

Wehad combined operating income of $105 million for the nine months ended September 30,2010, compared to operating income of $424 million for the same period lastyear.  The 2010 operating income waspositively impacted by higher segment profits principally due to higher averageselling prices for containerboard, higher third-party sales volume ofcontainerboard and corrugated containers and reduced market-related downtime,which were offset by higher costs for reclaimed fiber and slightly loweraverage sales prices for corrugated containers. The 2009 operating profit was positively impacted by other operatingincome of $455 million related to the alternative fuel tax credits.

 

Forthe nine months ended September 30, 2010, we had adjusted net incomeattributable to common stockholders of $19 million compared to an adjusted netloss attributable to common stockholders of $79 

 

45

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millionfor the nine months ended September 30, 2009.  Adjusted EBITDA for the nine months ended September 30,2010 was $387 million compared with $295 million for the nine months ended September 30,2009.

 

Weexpect moderately lower sequential earnings in the fourth quarter from thethird quarter, as continued price improvement will be more than offset byadditional mill maintenance costs, normal seasonal demand declines and higherenergy usage.  We also expect higherrecycled fiber costs in the fourth quarter.

 

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

 

For the three months ended September 30,2010, we recorded reorganization items expense of $7 million as we continued toincur costs related to professional fees that are directly attributable to thereorganization.

 

Reorganization items incomeof $1,178 million for the six months ended June 30, 2010, include a gainfrom the bankruptcy emergence plan effects of $580 million and a gain on freshstart accounting adjustments of $742 million, which were partially offset byother reorganization charges including provision for rejected/settled executorycontracts and leases and professional fees. The gain due to plan effects represents the net gains recorded as aresult of implementing the Plan of Reorganization, including eliminatingapproximately $2,439 million of debt. The gain due to fresh start accounting represents the net gainsrecognized as a result of adjusting all assets and liabilities to fairvalue.  See Note 1 of the Notes to ConsolidatedFinancial Statements.

 

**Alternative Fuel Tax Credit**

 

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, we were notified that ourregistration as an alternative fuel mixer was approved by the Internal RevenueService.  We subsequently submittedrefund claims of approximately $654 million for 2009 related to production atten of our U.S. mills.  We receivedrefund claims of $595 million in 2009 and $59 million during the first quarterof 2010.  During the three and ninemonths ended September 30, 2009, we recorded other operating income of$179 million and $455 million, respectively, net of fees and expenses, in ourconsolidated statements of operations related to this matter.  In March 2010, we recorded otheroperating income of $11 million relating to an adjustment of refund claimssubmitted in 2009.  We expect to receivethe $11 million refund claim adjustment 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 third quarter of 2010, we announced the closure of two convertingfacilities and sold two previously closed facilities.  In addition, we initiated a plan to reduceour selling, general and administrative costs, primarily through reductions inour workforce in these functions.  Werecorded restructuring charges of $7 million, primarily for severance andbenefits and reduced our headcount by approximately 460 employees.  The net sales of the announced convertingfacilities in 2010 prior to closure and for the year ended December 31,2009 were $48 million and $44 million, respectively.  The majority of these net sales are expectedto be transferred to other operating facilities.  Additional charges of approximately $20million are expected to be recorded in the fourth quarter of 2010, primarilyfor severance and benefits related to the closure of these facilities and thereductions in the selling and administrative workforce, including chargesrelated to the October 27, 2010 announced resignation of Steven J.Klinger, the Company’s President and Chief Operating Officer, which iseffective December 31, 

 

46

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2010.We expect to realize net savings of more than $50 million in our selling,general and administrative costs in 2011 compared to 2010 and have identifiedopportunities for additional savings impacting 2012.

 

Forthe six months ended June 30, 2010, we closed four converting facilitiesand sold five previously closed facilities. As a result of these closure activities and other ongoing initiatives,we reduced our headcount by approximately 900 employees.  We recorded restructuring charges of $15million, including a $12 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$16 million were for severance and benefits, lease commitments and facilityclosure costs.  The net sales of theseclosed converting 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.

 

Werecorded restructuring charges of $14 million and $38 million for the three andnine months ended September 30, 2009, respectively, which were net of a $2million gain on the sale of previously closed facilities in the third quarterof 2009.  Restructuring charges includednon-cash charges of $4 million and $8 million for the three and nine monthsended September 30, 2009, respectively, related to the write-down ofassets, primarily property, plant and equipment, to estimated net realizablevalues and the acceleration of depreciation for converting equipment expectedto be abandoned or taken out of service. The remaining charges were primarilyfor severance and benefits, including pension settlement costs of $3 million.

 

47

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**Third Quarter 2010 Compared to Third Quarter 2009**

 
| ** **                                                        | ** ** | **Successor**                                                      | ** ** | **Predecessor**                                                    | ** ** |
|-------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                        | ** ** | **Three Months   Ended   September 30,  2010** | ** ** | **Three Months   Ended   September 30,  2009** | ** ** |
| **(In millions)**                                            | ** ** | **Net  Sales**                                                     | ** ** | **Profit/  (Loss)**                                                | ** ** | **Net  Sales** | ** ** | **Profit/  (Loss)** | ** ** |
|                                                              |       |                                                               |       |                                                               |       |   |   |   |   |
| Containerboard, corrugated containers and  reclamation operations |       | $                                                                  | 1,634      |                                                               | $          | 216 |   | $ | 1,417 |   | $ | 60 |   |
|                                                              |       |                                                               |       |                                                               |       |   |   |   |   |
| Restructuring expenses                                            |       |                                                               |       | (7                                                                 | )          |   |   | (14 | ) |
| Loss on disposal of assets                                        |       |                                                               |       |                                                               |       |   |   | (2 | ) |
| Other operating income                                            |       |                                                               |       |                                                               |       |   |   | 179 |   |
| Interest expense, net                                             |       |                                                               |       | (23                                                                | )          |   |   | (72 | ) |
| Non-cash foreign currency exchange losses                         |       |                                                               |       |                                                               |       |   |   | (11 | ) |
| Reorganization items expense, net                                 |       |                                                               |       | (7                                                                 | )          |   |   | (16 | ) |
| Corporate expenses and other (Note 1)                             |       |                                                               |       | (65                                                                | )          |   |   | (58 | ) |
| Income before income taxes                                        |       |                                                               |       | $                                                                  | 114        |   |   |   | $ | 66 |   |
|                                                                   |            |                                                                    |            |                                                                    |            |  |  |  |  |  |  |  |  |

 

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

 

Netsales increased 15.3% in the third quarter of 2010 compared to last year.  Net sales were positively impacted by higheraverage selling prices ($178 million) for containerboard, corrugated containersand reclaimed material. The average price for old corrugated containers (OCC)increased approximately $50 per ton compared to last year.  Net sales were also favorably impacted by $39million in 2010 as a result of higher third-party sales volume ofcontainerboard and corrugated containers.

 

Ourcontainerboard mills operated at 99.7% of capacity in the third quarter of2010, compared to 87.2% of capacity in the third quarter of 2009.  As a result of less market related downtime,containerboard production was 3.4% higher compared to last year despite theclosure of two containerboard mills in December 2009.  Total tons of fiber reclaimed and brokeredincreased 13.4% compared to last year due to higher demand.

 

Cost of goods sold as a percent of net sales in the third quarter of2010 was 82.3%, compared to 90.6% for the same period last year due primarilyto the impact of higher average selling prices. Cost of goods sold increased from $1,284 million in the third quarter of2009 to $1,344 million in third quarter of 2010 due primarily to higher costsof reclaimed material ($62 million).

 

Sellingand administrative expenses increased $4 million in the third quarter of 2010compared to the third quarter of 2009 primarily due to an increase in outsideservices and stock compensation expense recorded for the newly issued sharesunder the Equity Incentive Plan.

 

Inthe third quarter of 2009, we recorded other operating income of $179 million,net of expected fees, related to the alternative fuel tax credit.

 

Interestexpense, net was $23 million in the third quarter of 2010.  The $49 million decrease compared to thethird quarter of 2009 was due to lower average borrowings.  The lower average borrowings were primarilydue to the repayment of our secured borrowings and the DIP Credit Facility, anddischarge of our unsecured debt upon emergence. Our overall average effective interest rate in the third quarter of 2010was higher than the third quarter of 2009, excluding the Predecessor unsecureddebt, by 1.6%.

 

48

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Inthe third quarter of 2009, we recorded non-cash foreign currency exchangelosses of $11 million.   Upon emergencefrom bankruptcy, we reviewed the primary economic indicators as defined by ASC 830, “Foreign Currency Matters” anddetermined the functional currency for our Canadian operations to be the localcurrency.  Beginning in third quarter of2010, translation gains or losses are included in stockholders’ equity as partof OCI.  For additional information onthe change in functional currency for our Canadian operations, see Part I, Item3. Quantitative and Qualitative Disclosures About Market Risk — “ForeignCurrency Risk.”

 

Werecorded an income tax provision of $49 million for the three months ended September 30,2010.  The provision for income taxesdiffered from the amount computed by applying the statutory U.S. federal incometax rate to income before income taxes due primarily to adjustments resultingfrom reconciling filed tax returns to recorded tax provision, state incometaxes, and the effects of foreign tax rates.

 

**Nine Months 2010 Compared to Nine Months 2009**

** **
| ** **                                                        | ** ** | **Successor**                                                      | ** ** | **Predecessor**                                       | ** ** |
|-------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                                        | ** ** | **Three Months   Ended   September 30,  2010** | ** ** | **Six Months   Ended  June 30,  2010** | ** ** | **Nine Months  Ended  September 30,  2009** | ** ** |
| **(In millions)**                                            | ** ** | **Net  Sales**                                                     | ** ** | **Profit/   (Loss)**                             | ** ** | **Net  Sales** | ** ** | **Profit/  (Loss)** | ** ** | **Net  Sales** | ** ** | **Profit/  (Loss)** | ** ** |
|                                                              |       |                                                               |       |                                                  |       |   |   |   |   |   |   |   |   |
| Containerboard, corrugated containers and  reclamation operations |       | $                                                                  | 1,634      |                                                  | $          | 216 |   | $ | 3,024 |   | $ | 116 |   | $ | 4,195 |   | $ | 202 |   |
|                                                              |       |                                                               |       |                                                  |       |   |   |   |   |   |   |   |   |
| Restructuring expenses                                            |       |                                                               |       | (7                                                    | )          |   |   | (15 | ) |   |   | (38 | ) |
| Loss on disposal of assets                                        |       |                                                               |       |                                                  |       |   |   |   |   |   |   | (3 | ) |
| Other operating income                                            |       |                                                               |       |                                                  |       |   |   | 11 |   |   |   | 455 |   |
| Interest expense, net                                             |       |                                                               |       | (23                                                   | )          |   |   | (23 | ) |   |   | (217 | ) |
| Debtor-in-possession debt issuance costs                          |       |                                                               |       |                                                  |       |   |   |   |   |   |   | (63 | ) |
| Loss on early extinguishment of debt                              |       |                                                               |       |                                                  |       |   |   |   |   |   |   | (20 | ) |
| Non-cash foreign currency exchange gains (losses)                 |       |                                                               |       |                                                  |       |   |   | 3 |   |   |   | (10 | ) |
| Reorganization items income (expense), net                        |       |                                                               |       | (7                                                    | )          |   |   | 1,178 |   |   |   | (109 | ) |
| Corporate expenses and other (Note 1)                             |       |                                                               |       | (65                                                   | )          |   |   | (145 | ) |   |   | (182 | ) |
| Income before income taxes                                        |       |                                                               |       | $                                                     | 114        |   |   |   | $ | 1,125 |   |   |   | $ | 15 |   |
|                                                                   |            |                                                                    |            |                                                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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

 

Netsales increased 11.0% in the first nine months of 2010 compared to lastyear.  Net sales were positively impactedby higher average selling prices ($267 million) for containerboard andreclaimed material.  The average pricefor old corrugated containers (OCC) increased approximately $80 per toncompared to last year.  Net sales werealso favorably impacted by $196 million in the first nine months of 2010 as aresult of higher third-party sales volume of containerboard and corrugatedcontainers. Third party shipments of containerboard were higher due primarilyto stronger demand in the domestic market.

 

Ourcontainerboard mills operated at 99.2% of capacity in the first nine months of2010, compared to 84.9% in the first nine months of 2009.  As a result of less market related downtime,containerboard production was 5.6% higher compared to last year despite the closureof two containerboard mills in December 2009.  Total tons of fiber reclaimed and brokeredincreased 14.3% compared to last year due to higher demand.

 

Cost of goods sold as a percent of net sales in the first nine monthsof 2010 was 88.2%, compared to 89.6% for the first nine months of 2009.  Cost of goods sold increased from $3,757million in 2009 to

 

49

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$4,107 million in 2010 due primarily to higher costs of reclaimedmaterial ($308 million) in the first nine months of 2010.

 

Sellingand administrative expenses increased $7 million in the first nine months of2010 compared to the first nine months of 2009 primarily due to an increase inoutside services and amounts accrued under our 2009 long-term incentive plan.

 

Duringthe nine months ended September 30, 2010, we recorded other operatingincome of $11 million related to the alternative fuel tax credit compared to$455 million for the same period last year.

 

Interestexpense, net was $46 million in the first nine months of 2010.  The $171 million decrease compared to thefirst nine months of 2009 was impacted by the discontinuation of recordinginterest on unsecured debt ($98 million) of the Predecessor Company, loweraverage borrowings ($66 million), lower average interest rates ($2 million) and$5 million in other interest expense reductions, including negotiatedsettlements on default interest rates.  Duringbankruptcy, we discontinued interest payments on our unsecured notes andcertain other unsecured debt.  The loweraverage borrowings were primarily due to the repayment of our securedborrowings and the DIP Credit Facility, and discharge of our unsecured debtupon emergence.  Our overall averageeffective interest rate in the first nine months of 2010 was lower than thefirst nine months of 2009, excluding the Predecessor unsecured debt, by 0.76%.  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.”

 

Inthe first nine months of 2009, we recorded debtor-in-possession debt issuancecosts of $63 million in connection with entering into the DIP CreditAgreement.  We also recorded a loss onearly extinguishment of debt of $20 million for the non-cash write-off ofdeferred debt issuance costs related to the Stevenson, Alabama mill industrialrevenue bonds, which were repaid.

 

Inthe first nine months of 2010, we recorded non-cash foreign currency exchangegains of $3 million compared to losses of $10 million for the same period in 2009.  Upon emergence from bankruptcy, we reviewedthe primary economic indicators as defined by ASC 830, “Foreign Currency Matters” and determined thefunctional currency for our Canadian operations to be the local currency.  Beginning in third quarter of 2010,translation gains or losses are included in stockholders’ equity as part ofOCI.

 

During the nine months ended September 30, 2010, we recorded a$150 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 nine months ended September 30,2009, we recorded a provision for income taxes of $3 million related toCanadian withholding taxes and interest on unrecognized tax benefits previouslyrecorded.  For additionalinformation on income taxes see Part I, Item 2. “Management’sDiscussion and Analysis of Financial Condition and Results of Operations —Income Taxes.”

 

50

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**Statistical Data**

 
| ** **                                                                | ** ** | **Successor**                                                | ** ** | **Predecessor**                                  | ** ** |
|---------------------------------------------------------------------------|------------|--------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                | ** ** | **Three Months   Ended   September 30,** | ** ** | **Three Months  Ended  September 30,** | ** ** | **Six Months  Ended  June 30,** | ** ** | **Nine Months  Ended  September 30,** | ** ** |
| **(In thousands of tons, except as noted)** | ** ** | **2010**                                                     | ** ** | **2009**                                         | ** ** | **2010** | ** ** | **2009** | ** ** |
| Mill Production                                                           |       |                                                         |       |                                             |       |   |   |   |   |
| Containerboard (1)                                                        |       | 1,603                                                        |       | 1,551                                            |       | 3,130 |   | 4,483 |   |
| Kraft paper                                                               |       | 26                                                           |       | 34                                               |       | 55 |   | 81 |   |
| Market pulp                                                               |       | 73                                                           |       | 78                                               |       | 134 |   | 220 |   |
| SBL                                                                       |       | 32                                                           |       | 29                                               |       | 66 |   | 94 |   |
| North American corrugated containers sold (billion  sq. ft.)              |       | 17.1                                                         |       | 16.7                                             |       | 33.7 |   | 50.0 |   |
| Fiber reclaimed and brokered                                              |       | 1,494                                                        |       | 1,317                                            |       | 2,891 |   | 3,838 |   |

 

----

(1) For the three months ended September 30,2010 and 2009, our corrugated container plants consumed 1,150,000 tons and1,107,000 tons of containerboard, respectively. For the nine months ended September 30, 2010 and 2009, ourcorrugated container plants consumed 3,415,000 tons and 3,354,000 tons ofcontainerboard, respectively.

 

51

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**LIQUIDITY AND CAPITAL RESOURCES**

 

At September 30, 2010,we had cash and cash equivalents of $464 million compared to $704 million at December 31,2009 and $340 million at June 30, 2010. Related to our Plan of Reorganization, our long-term debt was reducedfrom $3,793 million at December 31, 2009 to $1,194 million upon emergenceat June 30, 2010.  Long-term debt atSeptember 30, 2010 was $1,192 million. As of September 30, 2010, the amount available for borrowings underthe ABL Revolving Facility after considering outstanding letters of credit was$528 million.

 

Thefollowing table summarizes our cash flows:

 
| ** **                       | ** ** | **Successor**                                                | ** ** | **Predecessor**                                 | ** ** |
|----------------------------------|------------|--------------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                       | ** ** | **Three Months   Ended   September 30,** | ** ** | **Six Months   Ended  June 30,** | ** ** | **Nine Months   Ended   September 30,** | ** ** |
| **(In millions)**           | ** ** | **2010**                                                     | ** ** | **2010**                                        | ** ** | **2009** | ** ** |
| Net cash provided by (used for): |       |                                                         |       |                                            |       |   |   |
| Operating activities             |       | $                                                            | 161        |                                            | $          | (85 | ) | $ | 793 |   |
| Investing activities             |       | (34                                                          | )          | (73                                             | )          | (111 | ) |
| Financing activities             |       | (3                                                           | )          | (206                                            | )          | (247 | ) |
| Net increase (decrease) in cash  |       | $                                                            | 124        |                                            | $          | (364 | ) | $ | 435 |   |

 

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

Thenet cash provided by operating activities was $161 million for the three monthsended September 30, 2010 as a result of operating income of $142million.  The net cash provided byoperating activities for the nine months ended September 30, 2010 waslower compared to the same period in 2009 due primarily to lower alternativefuel tax credit receipts of $356 million, operating cash payments under thePlan of Reorganization of $202 million and unfavorable working capital changesof $63 million, which were partially offset by higher segment profits of $130million.  The unfavorable working capitalchange in 2010 was due to an increase in accounts receivable principally causedby the increase in selling prices and was partially offset by a reduction of$48 million in the receivable for alternative fuel tax credit.  Working capital, principally accountspayable, was favorably impacted in the first nine months of 2009 by the stay ofpayment of liabilities subject to compromise resulting from the bankruptcyfilings.

 

**NetCash Used For Investing Activities**

Netcash used for investing activities was $107 million for the nine months ended September 30,2010.  Expenditures for property, plantand equipment were $122 million for the first nine months of 2010, compared to$112 million for the same period last year. The amount expended for property, plant and equipment in the first ninemonths of 2010 was principally for projects related to upgrades, costreductions and ongoing initiatives.  Thenet proceeds from sales of previously closed facilities were $15 million in thefirst nine months of 2010 compared to $16 million in the first nine months of2009.  Advances to affiliates, net in thefirst nine months of 2009 of $15 million is principally related to funding anobligation pertaining to a guarantee for a previously non-consolidatedaffiliate.

 

**NetCash Used For Financing Activities**

Netcash used for financing activities for the nine months ended September 30,2010 was $209 million.  During the thirdquarter 2010, we paid $3 million on the Term Loan as required under the TermLoan Facility.  At emergence frombankruptcy on June 30, 2010, we obtained proceeds of $1,188 million (netof $12 million original issue discount) under the Term Loan Facility, whichtogether with available cash, were used to repay our outstanding securedindebtedness under our pre-petition Credit Facility and pay remaining fees,costs and expenses related to and contemplated by the Exit Credit Facilitiesand the Plan of Reorganization, including $32 million for debt issuance costsrelated to our Exit Credit Facilities. The net cash used for financing activities also included an additional$15 million for debt issuance costs which were paid prior to emergence.

 

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Netcash used for financing activities for the nine months ended September 30,2009 was $247 million, including proceeds from the DIP Credit Agreement of $440million which were used to terminate our receivables securitization programsand repay all indebtedness outstanding under the programs of $385 million.  During the nine months ended September 30,2009, we made $310 million of voluntary prepayments on the DIP credit agreementwith available cash provided by operating activities.  Debt issuance costs of $63 million wereincurred and paid with the DIP proceeds and available cash.  Letters of credit in the amount of $71million were drawn on to fund obligations principally related to non-qualifiedpension plans, commodity derivative instruments and a guarantee for apreviously non-consolidated affiliate which increased borrowings under ourcredit agreement.

 

**ExitCredit Facilities**

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) 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.  On September 30,2010 we 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 September 30, 2010, our borrowing base under the ABLRevolving Facility was $625 million and the amount available for borrowingsafter considering outstanding letters of credit was $528 million.

 

Foradditional information on the Exit Credit Facilities, see Part I, Item2. Management’s Discussion and Analysis of Financial Condition and Results ofOperations — Bankruptcy Proceedings — Plan of Reorganization and Exit CreditFacilities — “Exit Credit Facilities.”

 

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**Future Cash Flows**

We recorded restructuring charges of $22 millionduring the first nine months of 2010, including a $12 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 $23 million wereprincipally for severance and benefits. During the nine months ended September 30, 2010, we incurred cashexpenditures of $17 million for these exit liabilities.  The remaining exit liabilities are expectedto be paid principally in the fourth quarter of 2010.  At December 31, 2009, we had $54 millionof exit liabilities related principally to restructuring activities.  During the nine months ended September 30,2010, we incurred cash expenditures of $27 million for these exitliabilities.  In addition, these exitliabilities decreased by $8 million resulting from the release of environmentalliability obligations upon the sale of previously closed facilities and $3million due to the reclassification of multi-employer pension liabilities toliabilities subject to compromise.  Thecash expenditures in connection with our remaining exit liabilities willcontinue to be funded through operations as originally planned.

 

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

 

Uponemergence from bankruptcy, we had $94 million accrued for professional fees andother emergence fees and expenses related to our reorganization. During thethird quarter 2010, we incurred an additional $7 million of expense and paid$75 million related to these fees and expenses. As of September 30, 2010, our remaining accrual was $26 million,which we expect to pay in the fourth quarter of 2010 and first quarter of 2011.

 

**Pension Plan Contributions**

At June 30, 2010, the qualified defined benefitplans, which were assumed under the Plan of Reorganization, were underfunded byapproximately $1,450 million based on actual asset values and the discountrates effective on June 30, 2010. The weighted average discount rates used at June 30, 2010 for theU.S. and Canadian qualified defined benefit plans were 5.31% and 5.23%,respectively.  We currentlyestimate that our minimum required cash contributions under the U.S. andCanadian qualified pension plans will be approximately $100 million in 2010, ofwhich $31 million and $12 million were paid during the three months ended September 30,2010 and six months ended June 30, 2010, respectively; and an additional$57 million, which is expected to paid in the fourth quarter of 2010.  Contributions are expected to be in the rangeof $235 million to $305 million annually in 2011 through 2015.  Projected pension contributions assume weelect funding relief under the Preservation of Access to Care for MedicareBeneficiaries 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**

 

**Successor Company**

Werecorded an income tax provision of $49 million for the three months ended September 30,2010.  The provision for income taxesdiffered from the amount computed by applying the statutory U.S. federal incometax rate to income before income taxes due primarily to adjustments resultingfrom reconciling filed tax returns to recorded tax provision, state incometaxes and the effects of foreign tax rates.

 

**Predecessor Company**

Werecorded a net tax benefit of $199 million for the six months ended June 30,2010.  This included $200 million of netbenefit related to the effects of the Plan of Reorganization, which includedadjustments for valuation allowance ($427 million benefit), unrecognized taxbenefits ($39 million benefit) and cancellation of indebtedness and other planeffects ($266 million provision).

 

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Certaindebt obligations of ours 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 us enabled us and our debtor subsidiaries to qualify for this bankruptcyexclusion rule.  Based upon currentprojections, the CODI triggered by discharge of debt under the Plan ofReorganization will not create current taxable income, but will reduce our netoperating losses (NOLs) for the year of discharge and net operating losscarryforwards.  None of our 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, we concluded it is more likelythan not that the majority of deferred income tax assets will be realized.  Management considered the reversal ofdeferred tax liabilities in making this assessment.  As a result, we recognized an income taxbenefit for release of pre-emergence valuation allowance on its net deferredtax assets in the U.S. and Canada.  At September 30,2010, a valuation allowance remains in place related to certain state NOLs.

 

Aspreviously reported, we entered into an agreement with the Canada RevenueAgency and other provincial tax authorities that took effect upon our emergencefrom bankruptcy.  This agreement settledthe open Canadian income tax matters through January 26, 2009.  As a result of this agreement, we reported a$39 million net income tax benefit for the six months ended June 30, 2010related to the final settlement of the Canadian tax claims and the release ofthe previously accrued unrecognized tax benefits related to the Canadian audit.

 

Basedon our current tax position that the alternative fuel mixture credits are nottaxable, we increased the tax value of its federal NOL carryforwards by $254million during the six months ended June 30, 2010.  A reserve of $254 million was recordedrelated to this unrecognized tax benefit.

 

**DeferredIncome Tax Assets and Liabilities**

AtJune 30, 2010, we had federal NOL carryforwards net of unrecognized taxbenefits of $722 million, with a tax value of $253 million.  We had NOL carryforwards for state purposeswith 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.

 

Asa result of the issuance of new common shares upon emergence from bankruptcy,we realized a change of ownership for purposes of Section 382 of the U.S.Internal Revenue Code, which can impose annual limitations on utilization ofNOLs and tax credits.  We do not expectthe provisions of Section 382 to significantly limit its ability toutilize NOLs or tax credits in the carryforward periods.

 

**ITEM 3.**          **QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUTMARKET 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 a significanteffect on our liquidity in the past, nor are they expected to be significant inthe future.  We do not use derivativesfor speculative or trading purposes.

 

In January 2009, theChapter 11 Petition and the Canadian Petition effectively terminated allexisting derivative instruments. Termination fair values were calculated based on the potentialsettlement value.  Our termination valuerelated to our remaining derivative liabilities was approximately $59million.  These derivative liabilitieswere stayed due to the filing of the Chapter 11 Petition and the CanadianPetition at which time these liabilities were adjusted through OCI forderivative instruments qualifying for hedge 

 

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accounting and cost of goodssold for derivative instruments 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 OCIwere recognized through earnings.  On June 30,2010, the derivative contract termination liabilities of $59 million were paidin 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.

 

**ForeignCurrency Risk**

Ourprincipal foreign exchange exposure is the Canadian dollar.  Assets and liabilities outside the UnitedStates are primarily located in Canada. Our investments in foreign subsidiaries with a functional currency otherthan the U.S. dollar are not hedged.

 

Prior to emerging from bankruptcy, the functionalcurrency for our Canadian operations was the U.S. dollar.  Fluctuations in Canadian dollar monetaryassets and liabilities resulted in gains or losses which were credited orcharged to income.  Upon emergence, wereviewed the primary economic indicators for our Canadian operations under theReorganized Smurfit-Stone, including cash flow indicators, sales price indicators,sales market indicators, expense indicators, financing indicators andintercompany transactions as required by ASC 830, “Foreign Currency Matters”.  Based on our analysis, including currentoperations and financing availability within Canada, we determined thefunctional currency for our Canadian operations to be the local currency.  As a result, effective July 1, 2010, theassets and liabilities for the Canadian operations are translated at theexchange rate in effect at the balance sheet date and income and expenses aretranslated at average exchange rates prevailing during the year.  Translation gains or losses are includedwithin stockholders’ equity as part of OCI.

 

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, weakened1.3% against the U.S. dollar.  Under thePredecessor periods, we recognized non-cash foreign currency exchange gains of$3 million for the six month period ended June 30, 2010, and a loss of $11million and $10 million for the three and nine months ended September 30,2009, respectively.  The Canadian dollaras of September 30, 2010 compared to June 30, 2010 strengthened 2.9%against the U.S. dollar, and as a result, we recorded a $4 million gain in OCIrelated to the translation of our Canadian operations for the three monthsended September 30, 2010.

 

Duringthe three months ended September 30, 2010, we entered into foreigncurrency exchange derivative contracts to minimize the exposure to currencyexchange rate fluctuations on a $255 million Canadian dollar denominatedinter-company note established upon emergence between a U.S. subsidiary and aCanadian subsidiary, whereby the U.S subsidiary is the lender.  The inter-company note matures on June 29,2015 and interest is payable quarterly. The derivative contracts are monthly or quarterly instruments with anotional amount equal to the inter-company note principal, plus accruedinterest.  The derivative contracts aremarked-to-market through earnings on a quarterly basis.

 

Forthe three months ended September 30, 2010, our U.S subsidiary recorded a$4 million foreign currency gain (net of tax) in other, net in the consolidatedstatements of operations related to the revaluation of the inter-company note.

 

Forthe three months ended September 30, 2010, we recorded a $4 million loss(net of tax) in other, net in the consolidated statements of operations on thesettlement of the derivative contracts.

 

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Forthe three months ended September 30, 2010, we recorded an immaterialamount in other, net in the consolidated statements of operations related tothe change in fair value of the derivative contracts.

 

**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.          CONTROLS ANDPROCEDURES**

 

**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, weand our 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 sameday, our Canadian subsidiaries also filed the Canadian Petition under the CCAAin the Canadian Court.  Our operations in Mexico and Asia and certainNon-Debtor subsidiaries were not included in the filings and continued tooperate outside of the Chapter 11 and CCAA processes.  On June 21,2010, the U.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), the Plan of Reorganization became effective and theDebtors consummated their reorganization through a series of transactionscontemplated by the Plan of Reorganization and emerged from Chapter 11bankruptcy proceedings.  See Part I, Item 2. Management’sDiscussion and Analysis of Financial Condition and Results of Operations — “BankruptcyProceedings.”

 

In September 2010, fourputative class action complaints (the Complaints) were filed in the UnitedStates District Court for the Northern District of Illinois against us andseveral other paper and packaging companies (collectively referred to as theDefendants).  The Complaints allege thatwe and the Defendants engaged in anti-competitive activities and violation ofantitrust laws by reaching agreements in restraint of trade that affected themanufacture, sale and pricing of corrugated products.  The Complaints seek an unspecified amount ofdamages arising from the sale of corrugated products from 2005 to present.  We have filed an adversary proceeding in theU.S. Bankruptcy Court seeking a determination that the filing of theseComplaints violates the Confirmation Order, along with a motion for apreliminary injunction to prevent prosecution of the Complaints.

 

**ITEM 1A.       RISK FACTORS**

 

The“Bankruptcy Related Risk Factors” as disclosed in our 2009 Form 10-K areno longer 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, the Company issued an aggregate of 91,014,189 shares of CommonStock in its initial distribution.  On orabout October 29, 2010, the Company issued an additional 648,363 sharesand cancelled 34,000 shares previously issued in the first distribution.  Approximately 8.4 million shares of CommonStock continue to be held in reserve for future distribution to holders ofunsecured non-priority claims that are unliquidated or subject todispute.  These shares will be distributed as these claims are liquidated orresolved, in accordance with the Plan of Reorganization and ConfirmationOrder.  To the extent that such unliquidated or disputed claims aresettled for less than the number of shares reserved, additional distributionsmay also be made with respect to previously allowed claims under the terms andconditions of the Plan of Reorganization and Confirmation Order.

 

**ITEM 3.          DEFAULTS UPONSENIOR SECURITIES**

 

None

 

**ITEM 4.          RESERVED**

 

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

 

(b)                   There have beenno material changes to the procedures by which security holders may recommendnominees to the Company’s Board of Directors implemented since the filing ofour Quarterly Report on Form 10-Q for the quarter ended June 30,2010.

 

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

 

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

 

31.1                 Certificationpursuant to Rules 13a—14(a) and 15d—14(a) under the SecuritiesExchange Act of 1934, as adopted pursuant to Section 302 of theSarbanes-Oxley Act of 2002.

 

31.2                 Certificationpursuant to Rules 13a—14(a) and 15d—14(a) under the SecuritiesExchange Act of 1934, as adopted pursuant to Section 302 of theSarbanes-Oxley Act of 2002.

 

32.1                 Certificationpursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906of the Sarbanes-Oxley Act of 2002.

 

32.2                 Certificationpursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906of the Sarbanes-Oxley Act of 2002.

 

99.1                 Agreement andGeneral Release of Claims dated as of October 27, 2010 by and betweenSteven J. Klinger and Smurfit-Stone Container Corporation and its subsidiaries(incorporated by reference to Exhibit 10.1 to Smurfit-Stone’s CurrentReport on Form 8-K filed November 1, 2010 (file No. 1-03439)).

 

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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:  November 5, 2010 | /s/ Paul K. Kaufmann                           |
|                         | Paul K. Kaufmann                               |
|                         | Senior Vice President and Corporate Controller |
|                         | (Principal Accounting Officer)                 |

 

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