**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

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

 

**For Quarter Ended March 31, 2010**

** **

**Commission File Number 1-3439**

 

**SMURFIT-STONECONTAINER ENTERPRISES, INC.**

(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 principalexecutive 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 reporting company. Seethe definitions of “large accelerated filer,” “accelerated filer” and “smallerreporting company” in Rule 12b-2 of the Exchange Act.

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

 

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

 

APPLICABLEONLY TO CORPORATE ISSUERS:

 

Asof May 3, 2010, the registrant had outstanding 770 shares of common stock, $.01par value per share, all of which are owned by Smurfit-Stone ContainerCorporation.

 

 

 

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**PART I - FINANCIAL INFORMATION**

 

**Item 1.    Financial Statements**

 

**SMURFIT-STONECONTAINER ENTERPRISES, INC.**

**(DEBTOR-IN-POSSESSION)**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(Unaudited)**

 
| **Three  Months Ended March 31, (In millions)** | ** ** | **2010**   | ** ** | **2009** | ** ** |
|------------------------------------------------------|------------|------------|------------|----------|------------|
| Net  sales                                           | ** ** | **$**      | **1,461**  |     | $          | 1,371 |   |
| Costs  and expenses                                  | ** ** | ** ** |       |     |       |
| Cost  of goods sold                                  | ** ** | **1,356**  |       | 1,217    |       |
| Selling  and administrative expenses                 | ** ** | **151**    |       | 145      |       |
| Restructuring  (income) expense                      | ** ** | **(4**     | **)**      | 13       |       |
| Loss  on disposal of assets                          |       |       |       | 2        |       |
| Other  operating income                              | ** ** | **(11**    | **)**      |     |       |
| Operating  loss                                      | ** ** | **(31**    | **)**      | (6       | )          |
| Other  income (expense)                              | ** ** | ** ** |       |     |       |
| Interest  expense, net                               | ** ** | **(13**    | **)**      | (71      | )          |
| Debtor-in-possession  debt issuance costs            | ** ** | ** ** |       | (63      | )          |
| Loss  on early extinguishment of debt                | ** ** | ** ** |       | (20      | )          |
| Foreign  currency exchange gains (losses)            | ** ** | **(6**     | **)**      | 3        |       |
| Other,  net                                          | ** ** | **2**      |       | (2       | )          |
| Loss  before reorganization items and income taxes   | ** ** | **(48**    | **)**      | (159     | )          |
| Reorganization  items                                | ** ** | **(41**    | **)**      | (54      | )          |
| Loss  before income taxes                            | ** ** | **(89**    | **)**      | (213     | )          |
| Provision  for income taxes                          | ** ** | ** ** |       | (1       | )          |
| Net  loss                                            | ** ** | **$**      | **(89**    | **)**    | $          | (214 | ) |

 

See notes toconsolidated financial statements.

 

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**SMURFIT-STONECONTAINER ENTERPRISES, INC.**

**(DEBTOR-IN-POSSESSION)**

**CONSOLIDATEDBALANCE SHEETS**

 
| ** **                                                                                                     | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| **(In  millions, except share data)**                                                                          | ** ** | **2010**           | ** ** | **2009**              | ** ** |
| ** **                                                                                                     | ** ** | **(Unaudited)**    | ** ** | ** **            | ** ** |
| **Assets**                                                                                                     | ** ** | ** **         |       |                  |       |
| Current  assets                                                                                                | ** ** | ** **         |       |                  |       |
| Cash  and cash equivalents                                                                                     | ** ** | **$**              | **702**    |                  | $          | 704 |   |
| Restricted  cash                                                                                               | ** ** | **22**             |       | 9                     |       |
| Receivables,  less allowances of $23 in 2010 and $24 in 2009                                                   | ** ** | **711**            |       | 615                   |       |
| Receivable  for alternative energy tax credits                                                                 | ** ** | **11**             |       | 59                    |       |
| Inventories                                                                                                    | ** ** | ** **         |       |                  |       |
| Work-in-process  and finished goods                                                                            | ** ** | **114**            |       | 105                   |       |
| Materials  and supplies                                                                                        | ** ** | **358**            |       | 347                   |       |
|                                                                                                           | ** ** | **472**            |       | 452                   |       |
| Refundable  income taxes                                                                                       | ** ** | **25**             |       | 23                    |       |
| Prepaid  expenses and other current assets                                                                     | ** ** | **46**             |       | 43                    |       |
| Total  current assets                                                                                          | ** ** | **1,989**          |       | 1,905                 |       |
| Net  property, plant and equipment                                                                             | ** ** | **3,029**          |       | 3,081                 |       |
| Timberland,  less timber depletion                                                                             | ** ** | **2**              |       | 2                     |       |
| Other  assets                                                                                                  | ** ** | **60**             |       | 66                    |       |
|                                                                                                           | ** ** | **$**              | **5,080**  |                  | $          | 5,054 |   |
| **Liabilities and Stockholder’s Equity (Deficit)**                                                        | ** ** | ** **         |       |                  |       |
|                                                                                                           | ** ** | ** **         |       |                  |       |
| Liabilities  not subject to compromise                                                                         | ** ** | ** **         |       |                  |       |
| Current  liabilities                                                                                           | ** ** | ** **         |       |                  |       |
| Current  maturities of long-term debt                                                                          | ** ** | **$**              | **1,353**  |                  | $          | 1,354 |   |
| Accounts  payable                                                                                              | ** ** | **463**            |       | 387                   |       |
| Accrued  compensation and payroll taxes                                                                        | ** ** | **140**            |       | 145                   |       |
| Interest  payable                                                                                              | ** ** | **14**             |       | 12                    |       |
| Other  current liabilities                                                                                     | ** ** | **143**            |       | 164                   |       |
| Total  current liabilities                                                                                     | ** ** | **2,113**          |       | 2,062                 |       |
| Other  long-term liabilities                                                                                   | ** ** | **119**            |       | 117                   |       |
| Deferred  income taxes                                                                                         | ** ** | **121**            |       | 121                   |       |
| Total  liabilities not subject to compromise                                                                   | ** ** | **2,353**          |       | 2,300                 |       |
|                                                                                                           | ** ** | ** **         |       |                  |       |
| Liabilities  subject to compromise                                                                             | ** ** | **4,306**          |       | 4,271                 |       |
| Total  liabilities                                                                                             | ** ** | **6,659**          |       | 6,571                 |       |
|                                                                                                           | ** ** | ** **         |       |                  |       |
| Stockholder’s  equity                                                                                     | ** ** | ** **         |       |                  |       |
| Common  stock, par value $.01 per share; 1,000 shares authorized; 770 issued and outstanding  in 2010 and 2009 | ** ** | ** **         |       |                  |       |
| Additional  paid-in capital                                                                                    | ** ** | **3,677**          |       | 3,676                 |       |
| Retained  earnings (deficit)                                                                                   | ** ** | **(4,603**         | **)**      | (4,514                | )          |
| Accumulated  other comprehensive income (loss)                                                                 | ** ** | **(653**           | **)**      | (679                  | )          |
| Total  stockholder’s equity (deficit)                                                                     | ** ** | **(1,579**         | **)**      | (1,517                | )          |
|                                                                                                           | ** ** | **$**              | **5,080**  |                  | $          | 5,054 |   |

 

See notes toconsolidated financial statements.

 

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**SMURFIT-STONE CONTAINER ENTERPRISES, INC.**

**(DEBTOR-IN-POSSESSION)**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

 
| **Three  Months Ended March 31, (In millions)**                                           | ** ** | **2010**   | ** ** | **2009** | ** ** |
|------------------------------------------------------------------------------------------------|------------|------------|------------|----------|------------|
| **Cash flows from operating  activities**                                                      | ** ** | ** ** |       |     |       |
| Net loss                                                                                       | ** ** | **$**      | **(89**    | **)**    | $          | (214 | ) |
| Adjustments to reconcile net loss to net cash  provided by operating activities                | ** ** | ** ** |       |     |       |
| Loss on early extinguishment of debt                                                           | ** ** | ** ** |       | 20       |       |
| Depreciation, depletion and amortization                                                       | ** ** | **85**     |       | 90       |       |
| Debtor-in-possession debt issuance costs                                                       |       |       |       | 63       |       |
| Amortization of deferred debt issuance costs                                                   |       |       |       | 2        |       |
| Deferred income taxes                                                                          | ** ** | **(2**     | **)**      | (1       | )          |
| Pension and postretirement benefits                                                            | ** ** | **28**     |       | (7       | )          |
| Loss on disposal of assets                                                                     | ** ** | ** ** |       | 2        |       |
| Non-cash restructuring (income) expense                                                        | ** ** | **(3**     | **)**      | 1        |       |
| Non-cash stock-based compensation                                                              | ** ** | **1**      |       | 2        |       |
| Non-cash foreign currency exchange (gains) losses                                              | ** ** | **6**      |       | (3       | )          |
| Non-cash reorganization items                                                                  | ** ** | **26**     |       | 38       |       |
| Change in restricted cash for utility deposits                                                 | ** ** | **2**      |       |     |       |
| Change in operating assets and liabilities, net of  effects from acquisitions and dispositions | ** ** | ** ** |       |     |       |
| Receivables and retained interest in receivables  sold                                         | ** ** | **(93**    | **)**      | (61      | )          |
| Receivable for alternative energy tax credits                                                  | ** ** | **48**     |       |     |       |
| Inventories                                                                                    | ** ** | **(19**    | **)**      | (15      | )          |
| Prepaid expenses and other current assets                                                      | ** ** | **(3**     | **)**      | (3       | )          |
| Accounts payable and accrued liabilities                                                       | ** ** | **46**     |       | 159      |       |
| Interest payable                                                                               | ** ** | **3**      |       | 26       |       |
| Other, net                                                                                     | ** ** | **14**     |       | 12       |       |
| Net cash provided by operating activities                                                      | ** ** | **50**     |       | 111      |       |
| **Cash flows from investing  activities**                                                      | ** ** | ** ** |       |     |       |
| Expenditures for property, plant and equipment                                                 | ** ** | **(34**    | **)**      | (39      | )          |
| Proceeds from property disposals                                                               | ** ** | **6**      |       | 1        |       |
| Advances to affiliates, net                                                                    | ** ** | ** ** |       | (15      | )          |
| Net cash used for investing activities                                                         | ** ** | **(28**    | **)**      | (53      | )          |
| **Cash flows from financing  activities**                                                      | ** ** | ** ** |       |     |       |
| Proceeds from debtor-in-possession financing                                                   | ** ** | ** ** |       | 440      |       |
| Net borrowings (repayments) of long-term debt                                                  | ** ** | **(1**     | **)**      | 72       |       |
| Repurchase of receivables                                                                      | ** ** | ** ** |       | (385     | )          |
| Debtor-in-possession debt issuance costs                                                       | ** ** | ** ** |       | (63      | )          |
| Deferred debt issuance costs                                                                   | ** ** | **(9**     | **)**      |     |       |
| Change in restricted cash for collateralizing  outstanding letters of credit                   | ** ** | **(15**    | **)**      |     |       |
| Net cash provided by (used for) financing  activities                                          | ** ** | **(25**    | **)**      | 64       |       |
|                                                                                           | ** ** | ** ** |       |     |       |
| Effect of exchange rate changes on cash                                                        | ** ** | **1**      |       |     |       |
| **Increase (decrease) in cash and  cash equivalents**                                          | ** ** | **(2**     | **)**      | 122      |       |
| Cash and cash equivalents                                                                      | ** ** | ** ** |       |     |       |
| Beginning of period                                                                            | ** ** | **704**    |       | 126      |       |
| End of period                                                                                  | ** ** | **$**      | **702**    |     | $          | 248 |   |

 

See notes to consolidated financial statements.

 

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**SMURFIT-STONECONTAINER ENTERPRISES, INC.**

**(DEBTOR-IN-POSSESSION)**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

(Tabular amounts in millions)

 

**1.****             ****Bankruptcy Proceedings**

 

**Chapter 11 Bankruptcy Filings**

On January 26, 2009 (the “Petition Date”),Smurfit-Stone Container Corporation (“SSCC”), Smurfit-Stone ContainerEnterprises, Inc. (“SSCE” or the “Company”) and its U.S. and Canadiansubsidiaries (collectively, the “Debtors”) filed a voluntary petition (the “Chapter11 Petition”) for relief under Chapter 11 of the United States Bankruptcy Code(the “Bankruptcy Code”) in the United States Bankruptcy Court in Wilmington,Delaware (the “U.S. Court”).  On the sameday, the Company’s Canadian subsidiaries also filed to reorganize (the “CanadianPetition”) under the Companies’ Creditors Arrangement Act (the “CCAA”) in theOntario Superior Court of Justice in Canada (the “Canadian Court”).  The Company’s operations in Mexico and Asia andcertain U.S. and Canadian legal entities (the “Non-Debtor Subsidiaries”) werenot included in the filing and will continue to operate outside of the Chapter11 process.

 

The filing of theChapter 11 Petition and the Canadian Petition constituted an event ofdefault under the Company’s debt obligations, and those debt obligations becameautomatically and immediately due and payable, although any actions to enforcesuch payment obligations were stayed as a result of the filing of the Chapter11 Petition and the Canadian Petition. Since January 26, 2009, the date of the bankruptcy filings, theCompany discontinued interest payments on its unsecured senior notes andcertain other unsecured debt.

 

SSCC, the Company and its U.S. and Canadiansubsidiaries are currently operating as “debtors-in-possession” under thejurisdiction of the U.S. Court and Canadian Court (the “Bankruptcy Courts”) andin accordance with the applicable provisions of the Bankruptcy Code and theCCAA.  In general, the Debtors areauthorized to continue to operate as ongoing businesses, but may not engage intransactions outside the ordinary course of business without the approval ofthe Bankruptcy Courts.

 

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

In connection with filing the Chapter 11 Petitionand the Canadian Petition on the Petition Date, the Company, SSCC and certainof its affiliates filed a motion with the Bankruptcy Courts seeking approval toenter into a Post-Petition Credit Agreement (the “DIP Credit Agreement”). Finalapproval of the DIP Credit Agreement was granted by the U.S. Court on February 23,2009 and by the Canadian Court on February 24, 2009.  Amendments to the DIP Credit Agreement wereentered into on February 25 and 27, 2009.

 

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

 

Under the DIP CreditAgreement, on January 28, 2009, the Company 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 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 

 

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related to the DIP Credit Agreement were paid forwith proceeds of $5 million from the Canadian DIP Revolver and available cash.

 

The outstanding principal amount of the loans underthe DIP Credit Agreement, plus interest accrued and unpaid, were due andpayable in full at maturity, which was January 28, 2010.  As all borrowings under the DIP Credit Agreement werepaid in full as of December 31, 2009, the Company allowed the DIP CreditAgreement to expire on the maturity date of January 28, 2010.  Prior to the maturity of the DIP CreditAgreement on January 28, 2010, the Company transferred $15 million ofavailable cash to a restricted cash account to secure letters of credit underthe DIP Credit Agreement.

 

**Reorganization Process**

The Bankruptcy Courtsapproved payment of certain of the Company’s 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 theCompany’s business.  The Company retainedlegal and financial professionals to advise it on the bankruptcy proceedings.

 

Immediately after filingthe Chapter 11 Petition and Canadian Petition, the Company notified all knowncurrent or potential creditors of the bankruptcy filings.  Subject to certain exceptions under theBankruptcy Code and the CCAA, the Company’s bankruptcy filings automaticallyenjoined, or stayed, the continuation of any judicial or administrative proceedingsor other actions against the Company or its property to recover, collect orsecure a claim arising prior to the filing of the Chapter 11 Petition andCanadian Petition.  Thus, for example,most creditor actions to obtain possession of property from the Company, or tocreate, perfect or enforce any lien against its property, or to collect onmonies owed or otherwise exercise rights or remedies with respect to apre-petition claim are enjoined unless and until the Bankruptcy Courts lift theautomatic stay.

 

As required by theBankruptcy Code, the United States Trustee for the District of Delaware (the “U.S.Trustee”) appointed an official committee of unsecured creditors (the “Creditors’Committee”). The Creditors’ Committee and its legal representatives have aright to be heard on all matters that come before the U.S. Court with respectto the Company.  A monitor was appointedby the Canadian Court with respect to proceedings before the Canadian Court.

 

Under the Bankruptcy Code, the Debtors generally mustassume or reject pre-petition executory contracts, including but not limited toreal property leases, subject to the approval of the Bankruptcy Courts andcertain other conditions.  In thiscontext, “assumption” means that the Company agrees to perform its obligationsand cure all existing defaults under the contract or lease, and “rejection”means that it is relieved from its obligations to perform further under thecontract or lease, but is subject to a pre-petition claim for damages for thebreach thereof subject to certain limitations. Any damages resulting from rejection of executory contracts that arepermitted to be recovered under the Bankruptcy Code will be treated asliabilities subject to compromise unless such claims were secured prior to thePetition Date.

 

Since the Petition Date,the Company received approval from the Bankruptcy Courts to reject a number ofleases and executory contracts of various types.  Liabilities subject to compromise have beenrecorded related to the rejection of executory contracts and unexpired leases,and from the determination of the U.S. Court (or agreement by parties ininterest) of allowed claims for contingencies and other disputed amounts.  Due to the uncertain nature of many of theunresolved claims and rejection damages, the Company cannot project themagnitude of such claims and rejection damages with certainty.

 

On May 4, 2010, theU.S. Court granted the Company’s motion for an order authorizing the assumptionof certain executory contracts and unexpired leases and finalizing all but aninsignificant amount of the cure amounts related to these assumed executorycontracts and unexpired leases.  As aresult, the Company concluded its review of its executory contracts andunexpired leases and does not expect to reject any additional executorycontracts or unexpired leases.  TheCompany expects that the assumption of the executory contracts and unexpiredleases in the May 4, 2010 court order will convert certain of theliabilities shown on the accompanying consolidated balance sheets asliabilities subject to compromise to liabilities not subject to compromise.

 

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In June 2009, the Bankruptcy Courts entered anorder establishing August 28, 2009, as the bar date for potentialcreditors to file claims.  The bar date is the date by which certainclaims against the Company must be filed if the claimants wish to receive anydistribution in the bankruptcy cases. Proof of claim forms received after thebar date are typically not eligible for consideration of recovery as part ofthe Company’s bankruptcy cases. Creditors were notified of the bar date and the requirement to file aproof of claim with the Bankruptcy Courts. Differences between liabilityamounts estimated by the Company and claims filed by creditors are beinginvestigated and, if necessary, the Bankruptcy Courts will make a finaldetermination of the allowable claim. The determination of how liabilities willultimately be treated cannot be made until the Bankruptcy Courts approve a planof reorganization. Accordingly, the ultimate amount or treatment of suchliabilities is not determinable at this time.

 

In September 2009,the U.S. Trustee denied a request by certain holders of SSCC’s common stock and7% Series A Cumulative Exchangeable Redeemable Convertible Preferred Stock(“Preferred Stock”) to form an official equity committee to represent theinterests of equity holders on matters before the U.S. Court. The equityholders subsequently filed a motion for the appointment of an equity committeewith the U.S. Court.  In December 2009,the U.S. Court entered an order denying the motion for an order appointing anofficial committee of equity security holders.

 

**ProposedPlan of Reorganization and Exit Credit Facilities**

In order to successfullyemerge from bankruptcy, the Company must propose and obtain confirmation by theBankruptcy Courts of a plan of reorganization that satisfies the requirementsof the Bankruptcy Code and the CCAA.  Aplan of reorganization would resolve the Company’s pre-petition obligations,set forth the revised capital structure of the newly reorganized entity andprovide for corporate governance subsequent to the Company’s exit frombankruptcy.

 

Under the priority schemeestablished by the Bankruptcy Code and the CCAA, unless creditors agreeotherwise, pre-petition liabilities and post-petition liabilities must besatisfied in full before SSCC’s stockholders are entitled to receive anydistribution or retain any property under a plan of reorganization.  The ultimate recovery to creditors and/orSSCC’s stockholders, if any, will not be determined until confirmation of aplan or plans of reorganization. No assurance can be given as to what values,if any, will be ascribed to each of these constituencies or what types oramounts of distributions, if any, they would receive. Because of suchpossibilities, the value of the Company’s liabilities and securities, includingSSCC’s common stock, is highly speculative. Appropriate caution should be exercised with respect to existing andfuture investments in any of the Company’s liabilities and/or securities.

 

*The Proposed Plan ofReorganization*

On December 1, 2009,the Debtors filed their Joint Plan of Reorganization and Plan of Compromise andArrangement and Disclosure Statement with the U.S. Court.  On December 22, 2009, January 27,2010 and February 4, 2010, the Debtors filed amendments to the proposedPlan of Reorganization (the “Proposed Plan of Reorganization”) and to theDisclosure Statement (the “Disclosure Statement”).  Also, on March 19, 2010, the Debtorsfiled a Supplement to the Proposed Plan of Reorganization.  Key elements of the Proposed Plan ofReorganization were as follows:

 

·                  the Company and SSCC, would merge andbecome the Reorganized Smurfit-Stone that would be governed by a board ofdirectors that will include Patrick J. Moore, SSCC’s current Chairman and ChiefExecutive Officer, Steven J. Klinger, SSCC’s current President and ChiefOperating Officer, and a number of independent directors, including anon-executive chairman selected by the Creditors’ Committee in consultationwith the Debtors;

 

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

 

·                  substantially all of the existingunsecured debt and claims against the Company, including all of the outstandingunsecured senior notes, would be exchanged for common stock of the ReorganizedSmurfit-Stone, which is expected to be traded on the New York Stock Exchange, 

 

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with holders ofunsecured claims against the Company of less than or equal to $10,000 entitledto receive payment of 100% of such claims in cash, and eligible cash-outparticipants having the opportunity to indicate on their ballot the percentageamount of their allowed claim they would be willing to receive in cash in lieuof common stock;

 

·                  all of SSCC’s existing equity securitieswould be cancelled and existing shareholders of SSCC’s common and PreferredStock would receive no distribution on account of their shares;

 

·                  the assets of the Canadian Debtors, otherthan Stone Container Finance Company II, would be 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 of the secured debt obligations of theCanadian Debtors, (ii) cash to the Canadian Debtors’ unsecured creditorsif they vote to accept the Proposed Plan of Reorganization and (iii) theassumption of certain liabilities and obligations of the Canadian Debtors; and

 

·                  Reorganized Smurfit-Stone and itsnewly-formed Canadian subsidiary would assume all of the existing obligationsunder the qualified defined benefit pension plans in the United States andCanada sponsored by the Debtors, as well as all of the collective bargainingagreements in the United States and Canada between the Debtors and their laborunions.

 

The Proposed Plan ofReorganization will not become effective until certain conditions are satisfiedor waived, including: (i) entry of an order by the Bankruptcy Courtsconfirming the Proposed Plan of Reorganization, (ii) all actions,documents and agreements necessary to implement the Proposed Plan ofReorganization having been effected or executed, (iii) access of theDebtors to funding under the exit credit facility and (iv) specifiedclaims of the Debtors’ secured lenders having been paid in full pursuant to theProposed Plan of Reorganization.

 

On January 14, 2010,the U.S. Court granted approval to extend the Debtors’ exclusive right to filea plan of reorganization to July 21, 2010, and granted the Debtorsapproval to solicit acceptance of a plan of reorganization until May 21,2011.  If the Debtors’ exclusivity periodlapses, any party in interest would be able to file a plan ofreorganization.  In addition to beingvoted on by holders of impaired claims and equity interests, a plan ofreorganization must satisfy certain requirements of the Bankruptcy Code and theCCAA and must be approved, or confirmed, by the Bankruptcy Courts in order tobecome effective.

 

On January 29, 2010,the U.S. Court approved the Debtors’ Disclosure Statement as containingadequate information for the holders of impaired claims and equity interests,who are entitled to vote to accept or reject the Proposed Plan ofReorganization.

 

The deadline for votingand objections to the Proposed Plan of Reorganization was March 29,2010.  The Proposed Plan of Reorganization was overwhelmingly approvedby number and dollar amount of the required classes of creditors ofeach of the Debtors, with the exception of Stone Container Finance CompanyII.  Stone Container Finance Company II will be removed from the ProposedPlan of Reorganization.  The failure to confirm the Proposed Plan ofReorganization of Stone Container Finance Company II will not impact theability of the Debtors to confirm the Proposed Plan of Reorganization for allother Debtors.  A meeting of creditors was held for the Canadian debtorsubsidiaries on April 6, 2010, at which the necessary votes were receivedto confirm the Proposed Plan of Reorganization by all requisite classes ofcreditors other than Stone Container Finance Company II.

 

The Bankruptcy Coderequires the U.S. Court, after appropriate notice, to hold a hearing onconfirmation of a plan of reorganization. The confirmation hearing with respect to the Proposed Plan ofReorganization commenced in the U.S. Court on April 15, 2010, andconcluded on May 4, 2010, and a hearing was conducted in the CanadianCourt on May 3, 2010.  The Companyanticipates that rulings from the U.S. Court and the Canadian Court on theconfirmation will be issued and the Debtors will emerge from Chapter 11 andCCAA proceedings during the second quarter of 2010, following the issuance oforders confirming the Proposed Plan of Reorganization.  There can be no assurance at this 

 

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time that the ProposedPlan of Reorganization will be confirmed by the Bankruptcy Courts or that anysuch plan will be implemented successfully.

 

*Exit Credit Facilities*

On January 14, 2010,the U.S. Court entered an order authorizing the Debtors to (i) enter intoan exit term loan facility engagement and arrangement letter and fee letters, (ii) payassociated fees and expenses and (iii) furnish related indemnities.   On February 1, 2010, the Company fileda motion with the U.S. Court seeking approval to enter into a senior securedterm loan exit facility (the “Term Loan Facility”).

 

On February 16,2010, the U.S. Court granted the motion and authorized the Company and certainof its affiliates to enter into the Term Loan Facility.  On the same date, the U.S. Court also grantedthe Company’s February 3, 2010 motion seeking approval to enter into acommitment letter and fee letters for an asset-based revolving credit facility (the“ABL Revolving Facility”) (together with the Term Loan Facility, the “ExitCredit Facilities”).  Based on suchapprovals, on February 22, 2010, the Company and certain of itssubsidiaries entered into the Term Loan Facility that provides for an aggregateterm loan commitment of $1,200 million. In addition, the Company entered into an ABL Revolving Facility withaggregate commitments of $650 million (including a $100 million CanadianTranche) on April 15, 2010.   TheABL Revolving Facility includes a $150 million sub-limit for letters ofcredit.  The commitments for the TermLoan Facility and the ABL Revolving Facility will terminate on July 16,2010 unless the Company’s emergence from bankruptcy and satisfaction of certainfunding date conditions under the Term Loan Facility and the ABL RevolvingFacility occur on or prior to such date.

 

The Company is permitted, subject to obtaining lendercommitments, to add one or more incremental facilities to the Term LoanFacility 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.

 

The Company is permitted,subject to obtaining lender commitments, to add incremental commitments underthe ABL Revolving 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) theCompany shall not increase the commitments more than three times in theaggregate, (e) if the interest rate margins and commitment fees withrespect to the incremental commitments are higher than those applicable to theexisting commitments under the ABL Revolving facility, then the interest ratemargins and commitment fees for the existing commitments under the ABLRevolving Facility will be increased to match those for the incrementalcommitments, and (f) the satisfaction of other customary closingconditions.

 

On the date the Companyemerges from bankruptcy, the Term Loan will be funded and borrowings will beavailable under the ABL Revolving Facility.  The proceeds of the borrowings under the Term Loan Facility, togetherwith available cash, will be used to repay the Company’s outstanding securedindebtedness under its pre-petition Credit Facility and pay remaining fees,costs and expenses related to and contemplated by the Exit Credit Facilitiesand the Proposed Plan of Reorganization. Total fees, costs and expenses relatedto the Exit Credit Facilities are estimated to be approximately $50 million, ofwhich $9 million was paid during the first quarter of 2010.  Borrowings under the ABL Revolver Facilitywill be available for working capital purposes, capital expenditures, permittedacquisitions and general corporate purposes.

 

8

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The term loan (the “TermLoan”) matures six years from the funding date of the Term Loan Facility and isrepayable in equal quarterly installments of $3 million beginning on September 30,2010, with the balance payable at maturity. 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 will also require the Company to use the net proceeds of assetsales and the net proceeds of the incurrence of indebtedness to repayoutstanding borrowings under the Term Loan Facility.

 

The Term Loan will bearinterest at the Company’s option at a rate equal to: (A) 3.75% plus thealternate base rate  (the “Term Loan ABR”)defined as the greater of: (i) the U.S. prime rate, (ii) the overnightfederal funds rate plus 0.50%, or (iii) the one month adjusted LIBOR rateplus 1.0%, provided that the Term Loan ABR shall never be lower than 3.00% perannum, or (B) the adjusted LIBOR rate plus 4.75%, provided that theadjusted LIBOR rate shall never be lower than 2.00% per annum.

 

The ABL revolver loan(the “ABL Revolver”) will mature four years from the funding date of the ABLRevolving Facility. The Company will have the option to borrow at a rate equalto: (A) the base rate, defined as the greater of 2.50% plus:(i) theUS Prime Rate, (ii) the overnight federal funds rate plus 0.50% or (iii) LIBORrate plus 1.0%, or (B) the LIBOR rate plus 3.50% for the first 90 daysthen 3.25% thereafter. The applicable margin could be adjusted in the future from2.25% to a rate as high as 2.75% for base loans and 3.25% to a rate as high as3.75% for LIBOR loans based on the average historical utilization under the ABLRevolving Facility.   The Company wouldalso pay either a 0.50% or 0.75% per annum unused commitment fee based on theaverage historical utilization under the ABL Revolving Facility.  The ABL Revolving Facility borrowings aresubject to a borrowing base derived from a formula based on certain eligibleaccounts receivable and inventory, less certain reserves.

 

Borrowings under the ExitCredit Facilities will be guaranteed by the Company and certain of itssubsidiaries, and would be 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.

 

The Exit CreditFacilities contain affirmative and negative covenants that impose restrictionson the Company’s financial and business operations and those of certain of itssubsidiaries, including their ability to incur indebtedness, incur liens, makeinvestments, sell assets, pay dividends or make acquisitions.  The Exit Credit Facilities contain events ofdefault customary for financings of this type.

 

**GoingConcern Matters**

The consolidatedfinancial statements and related notes have been prepared assuming that theCompany will continue as a going concern, although its bankruptcy filings raisesubstantial doubt about its ability to continue as a going concern.  The Company’s ability to continue as a goingconcern is dependent on restructuring its obligations in a manner that allowsit to obtain confirmation of the Proposed Plan of Reorganization by theBankruptcy Courts.  The consolidatedfinancial statements do not include any adjustments related to therecoverability and classification of recorded assets or to the amounts andclassification of liabilities or any other adjustments that might be necessaryshould the Company be unable to continue as a going concern.

 

9

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**Financial ReportingConsiderations**

For periods subsequent tothe bankruptcy filings, the Company has applied the Financial AccountingStandards Board (“FASB”) Accounting Standards Codification (“ASC”) 852, “Reorganizations”(“ASC 852”), in preparing the consolidated financial statements.  ASC 852 requires that the financialstatements distinguish transactions and events that are directly associatedwith the reorganization from the ongoing operations of the business.  Accordingly, certain revenues, expenses(including professional fees), realized gains and losses and provisions forlosses that are realized or incurred in the bankruptcy proceedings have beenrecorded in reorganization items in the consolidated statements ofoperations.  In addition, pre-petitionobligations that may be impacted by the bankruptcy reorganization process havebeen classified on the consolidated balance sheets in liabilities subject to compromise.  These liabilities are reported at the amountsexpected to be allowed by the Bankruptcy Courts, even if they may be settledfor lesser or greater amounts.

 

*Reorganization Items*

The Company’sreorganization items directly related to the process of reorganizing theCompany under Chapter 11 and the CCAA, as recorded in its consolidatedstatements of operations, consist of the following:

 
| ** **                                                     | ** ** | **Three months ended  March 31,** | ** ** |
|----------------------------------------------------------------|------------|----------------------------------------|------------|
| **(Income) Expense**                                           | ** ** | **2010**                               | ** ** | **2009** | ** ** |
| Provision for  rejected/settled executory contracts and leases |       | $                                      | 29         |   | $ | 39 |   |
| Professional  fees                                             |       | 15                                     |       | 16 |   |
| Accounts payable  settlement gains                             |       | (3                                     | )          | (1 | ) |
| Total  reorganization items                                    |       | $                                      | 41         |   | $ | 54 |   |

 

Professional feesdirectly related to the reorganization include fees associated with advisors tothe Company, the Creditors’ Committee and certain secured creditors.

 

Net cash paid forreorganization items related to professional fees totaled $16 million and $6million, respectively, for the three months ended March 31, 2010 and 2009.

 

Reorganization itemsexclude employee severance and other restructuring charges recorded during 2009and 2010.

 

Under the Proposed Planof Reorganization, interest expense on the unsecured senior notes subsequent tothe Petition Date would not be paid.  Asa result, in the fourth quarter of 2009, the Company concluded it was notprobable that interest expense on the unsecured senior notes subsequent to thePetition Date would be an allowed claim. During the fourth quarter of 2009, the Company recorded income inreorganization items for the reversal of accrued post-petition unsecuredinterest expense and discontinued recording unsecured interest expense.  Interest expense recorded on unsecured debtwas zero and $48 million for the first quarter of 2010 and 2009, respectively.

 

*Other Bankruptcy Related Costs*

During the first quarterof 2010, the Company recorded $6 million in selling and administrative expensesrelated to amounts accrued under the Company’s 2009 long-term incentive plan.

 

Debtor-in-possession debtissuance costs of $63 million were incurred and paid during the first quarterof 2009 in connection with entering into the DIP Credit Agreement, and areseparately presented in the 2009 consolidated statements of operations.

 

10

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*Liabilities Subject to Compromise*

Liabilities subject tocompromise consist of the following:

 
| ** **                         | ** ** | **March 31, 2010** | ** ** | **December 31, 2009** | ** ** |
|------------------------------------|------------|-------------------------|------------|----------------------------|------------|
|                               |       |                    |       |                       |       |
| Unsecured  debt                    |       | $                       | 2,439      |                       | $          | 2,439 |   |
| Accounts  payable                  |       | 325                     |       | 339                        |       |
| Interest  payable                  |       | 47                      |       | 47                         |       |
| Retiree  medical obligations       |       | 178                     |       | 176                        |       |
| Pension  obligations               |       | 1,146                   |       | 1,136                      |       |
| Unrecognized  tax benefits         |       | 47                      |       | 46                         |       |
| Executory  contracts and leases    |       | 102                     |       | 72                         |       |
| Other                              |       | 22                      |       | 16                         |       |
| Liabilities  subject to compromise |       | $                       | 4,306      |                       | $          | 4,271 |   |

 

Liabilities subject tocompromise represent pre-petition unsecured obligations that will be settledunder the Proposed Plan of Reorganization. Generally, actions to enforce orotherwise effect payment of pre-Chapter 11 or CCAA liabilities are stayed.  Pre-petition liabilities that are subject tocompromise are reported at the amounts expected to be allowed, even if they maybe settled for lesser or greater amounts. These liabilities represent the amounts expected to be allowed on knownor potential claims to be resolved through the Chapter 11 and CCAA process, andremain subject to future adjustments arising from negotiated settlements,actions of the Bankruptcy Courts, rejection of executory contracts andunexpired leases, the determination as to the value of collateral securing theclaims, proofs of claim, or other events. Liabilities subject to compromise also include certain items, such asqualified defined benefit pension and retiree medical obligations that may beassumed under the Proposed Plan of Reorganization, and as such, may besubsequently reclassified to liabilities not subject to compromise.

 

The Bankruptcy Courtsapproved payment of certain pre-petition obligations, including employee wages,salaries and benefits, and the payment of vendors and other providers in theordinary course for goods and services received after the filing of the Chapter11 Petition and the Canadian Petition and other business-related paymentsnecessary to maintain the operation of the Company’s business. Obligationsassociated with these matters are not classified as liabilities subject tocompromise.

 

The Company has rejected certain executory contractsand unexpired leases with respect to the Company’s operations with the approvalof the Bankruptcy Courts.  Damagesresulting from rejection of executory contracts and unexpired leases aregenerally treated as general unsecured claims and are classified as liabilitiessubject to compromise.

 

**Debtor Financial Statements**

The following condensedcombined financial statements represent the financial statements for the Debtorsonly.  The Company’s Non-DebtorSubsidiaries are accounted for as non-consolidated subsidiaries in thesefinancial statements and, as such, their net loss is included in “equity inlosses of Non-Debtor Subsidiaries,” in the condensed combined statements ofoperations and their net assets are included as “Investments in and advances toNon-Debtor Subsidiaries” in the condensed combined balance sheets.  The Debtor’s financial statements have beenprepared in accordance with the guidance in ASC 852.

 

Intercompany transactionsbetween the Debtors have been eliminated in the financial statements.Intercompany transactions between the Debtors and Non-Debtor Subsidiaries havenot been eliminated in the Debtors’ financial statements.

 

11

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**SMURFIT-STONE CONTAINER ENTERPRISES, INC.**

**CONDENSED COMBINED STATEMENTS OF OPERATIONS — DEBTORS**

**(Unaudited)**

 
| **Three  Months Ended March 31, (In millions)** | ** ** | **2010**   | ** ** | **2009** | ** ** |
|------------------------------------------------------|------------|------------|------------|----------|------------|
| Net sales                                            | ** ** | **$**      | **1,436**  |     | $          | 1,338 |   |
| Costs and expenses                                   | ** ** | ** ** |       |     |       |
| Cost of goods sold                                   | ** ** | **1,336**  |       | 1,186    |       |
| Selling and administrative expenses                  | ** ** | **146**    |       | 141      |       |
| Restructuring (income) expense                       | ** ** | **(4**     | **)**      | 12       |       |
| Loss on disposal of assets                           |       |       |       | 2        |       |
| Other operating income                               | ** ** | **(11**    | **)**      |     |       |
| Operating loss                                       | ** ** | **(31**    | **)**      | (3       | )          |
| Other income (expense)                               | ** ** | ** ** |       |     |       |
| Interest expense, net                                | ** ** | **(12**    | **)**      | (71      | )          |
| Debtor-in-possession debt issuance costs             | ** ** | ** ** |       | (63      | )          |
| Loss on early extinguishment of debt                 | ** ** | ** ** |       | (20      | )          |
| Foreign currency exchange gains (losses)             | ** ** | **(6**     | **)**      | 3        |       |
| Equity in losses of non-debtor subsidiaries          | ** ** | ** ** |       | (4       | )          |
| Other, net                                           | ** ** | **1**      |       | (1       | )          |
| Loss before reorganization items and income taxes    | ** ** | **(48**    | **)**      | (159     | )          |
| Reorganization items                                 | ** ** | **(41**    | **)**      | (54      | )          |
| Loss before income taxes                             | ** ** | **(89**    | **)**      | (213     | )          |
| Provision for income taxes                           | ** ** | ** ** |       | (1       | )          |
| Net loss                                             | ** ** | **$**      | **(89**    | **)**    | $          | (214 | ) |

 

12

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**SMURFIT-STONECONTAINER ENTERPRISES, INC.**

**CONDENSEDCOMBINED BALANCE SHEETS — DEBTORS**

 
| ** **                                              | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| **(In  millions)**                                      | ** ** | **2010**           | ** ** | **2009**              | ** ** |
| ** **                                              | ** ** | **(Unaudited)**    | ** ** | ** **            | ** ** |
| **Assets**                                              | ** ** | ** **         | ** ** | ** **            | ** ** |
| Current  assets                                         | ** ** | ** **         | ** ** | ** **            | ** ** |
| Cash  and cash equivalents                              | ** ** | **$**              | **684**    |                  | $          | 683 |   |
| Restricted  cash                                        | ** ** | **22**             |       | 9                     |       |
| Receivables                                             | ** ** | **677**            |       | 583                   |       |
| Receivable  for alternative energy tax credits          | ** ** | **11**             |       | 59                    |       |
| Inventories                                             | ** ** | **452**            |       | 436                   |       |
| Refundable  income taxes                                | ** ** | **24**             |       | 23                    |       |
| Prepaid  expenses and other current assets              | ** ** | **44**             |       | 41                    |       |
| Total  current assets                                   | ** ** | **1,914**          |       | 1,834                 |       |
| Net  property, plant and equipment                      | ** ** | **2,997**          |       | 3,049                 |       |
| Timberland,  less timber depletion                      | ** ** | **2**              |       | 2                     |       |
| Investments  in and advances to non-debtor subsidiaries | ** ** | **80**             |       | 76                    |       |
| Other  assets                                           | ** ** | **60**             |       | 66                    |       |
|                                                    | ** ** | **$**              | **5,053**  |                  | $          | 5,027 |   |
| **Liabilities and Stockholders’ Equity (Deficit)** | ** ** | ** **         |       |                  |       |
|                                                    | ** ** | ** **         |       |                  |       |
| Liabilities  not subject to compromise                  | ** ** | ** **         |       |                  |       |
| Current  liabilities                                    | ** ** | ** **         |       |                  |       |
| Current  maturities of long-term debt                   | ** ** | **$**              | **1,348**  |                  | $          | 1,350 |   |
| Accounts  payable                                       | ** ** | **446**            |       | 370                   |       |
| Accrued  compensation and payroll taxes                 | ** ** | **138**            |       | 142                   |       |
| Interest  payable                                       | ** ** | **14**             |       | 12                    |       |
| Other  current liabilities                              | ** ** | **139**            |       | 159                   |       |
| Total  current liabilities                              | ** ** | **2,085**          |       | 2,033                 |       |
| Other  long-term liabilities                            | ** ** | **119**            |       | 117                   |       |
| Deferred  income taxes                                  | ** ** | **122**            |       | 123                   |       |
| Total  liabilities not subject to compromise            | ** ** | **2,326**          |       | 2,273                 |       |
|                                                    | ** ** | ** **         |       |                  |       |
| Liabilities  subject to compromise                      | ** ** | **4,306**          |       | 4,271                 |       |
| Total  liabilities                                      | ** ** | **6,632**          |       | 6,544                 |       |
|                                                    | ** ** | ** **         |       |                  |       |
| Total  equity (deficit)                                 | ** ** | **(1,579**         | **)**      | (1,517                | )          |
|                                                    | ** ** | **$**              | **5,053**  |                  | $          | 5,027 |   |

 

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**SMURFIT-STONECONTAINER ENTERPRISES, INC.**

**CONDENSEDCOMBINED STATEMENTS OF CASH FLOWS — DEBTORS**

**(Unaudited)**

 
| **Three  Months Ended March 31, (In millions)**                                           | ** ** | **2010**   | ** ** | **2009**   | ** ** |
|------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| **Cash flows from operating activities**                                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net  loss                                                                                      | ** ** | **$**      | **(89**    | **)**      | $          | (214 | ) |
| Adjustments  to reconcile net loss to net cash provided by operating activities                | ** ** | ** ** |       |       |       |
| Loss  on early extinguishment of debt                                                          |       |       |       | 20         |       |
| Depreciation,  depletion and amortization                                                      | ** ** | **83**     |       | 89         |       |
| Debtor-in-possession  debt issuance costs                                                      |       |       |       | 63         |       |
| Amortization  of deferred debt issuance costs                                                  |       |       |       | 2          |       |
| Deferred  income taxes                                                                         | ** ** | **(2**     | **)**      |       |       |
| Pension  and postretirement benefits                                                           | ** ** | **28**     |       | (7         | )          |
| Loss  on disposal of assets                                                                    |       |       |       | 2          |       |
| Non-cash  restructuring (income) expense                                                       | ** ** | **(3**     | **)**      | 1          |       |
| Non-cash  stock-based compensation                                                             | ** ** | **1**      |       | 2          |       |
| Non-cash  foreign currency exchange (gains) losses                                             | ** ** | **6**      |       | (3         | )          |
| Non-cash  reorganization items                                                                 | ** ** | **26**     |       | 38         |       |
| Change  in restricted cash for utility deposits                                                | ** ** | **2**      |       |       |       |
| Change  in operating assets and liabilities,net of effects from acquisitions and  dispositions |       |       |       |       |       |
| Receivables  and retained interest in receivables sold                                         | ** ** | **(91**    | **)**      | (65        | )          |
| Receivable  for alternative energy tax credit                                                  | ** ** | **48**     |       |       |       |
| Inventories                                                                                    | ** ** | **(15**    | **)**      | (12        | )          |
| Prepaid  expenses and other current assets                                                     | ** ** | **(3**     | **)**      | (5         | )          |
| Accounts  payable and accrued liabilities                                                      | ** ** | **47**     |       | 166        |       |
| Intercompany  receivable with non-debtors                                                      | ** ** | **(1**     | **)**      | (21        | )          |
| Interest  payable                                                                              | ** ** | **3**      |       | 26         |       |
| Other,  net                                                                                    | ** ** | **13**     |       | 15         |       |
| Net  cash provided by operating activities                                                     | ** ** | **53**     |       | 97         |       |
| **Cash flows from investing activities**                                                       |       |       |       |       |       |
| Expenditures  for property, plant and equipment                                                | ** ** | **(33**    | **)**      | (38        | )          |
| Proceeds  from property disposals                                                              | ** ** | **6**      |       | 1          |       |
| Advances  to affiliates                                                                        |       |       |       | (18        | )          |
| Net  cash used for investing activities                                                        | ** ** | **(27**    | **)**      | (55        | )          |
| **Cash flows from financing activities**                                                       |       |       |       |       |       |
| Proceeds  from debtor-in-possession financing                                                  |       |       |       | 440        |       |
| Net  borrowings (repayments) of long-term debt                                                 | ** ** | **(1**     | **)**      | 72         |       |
| Repurchase  of receivables                                                                     |       |       |       | (385       | )          |
| Debtor-in-possession  debt issuance costs                                                      |       |       |       | (63        | )          |
| Deferred  debt issuance costs                                                                  | ** ** | **(9**     | **)**      |       |       |
| Change  in restricted cash for collateralizing outstanding letters of credit                   | ** ** | **(15**    | **)**      |       |       |
| Net  cash provided by (used for) financing activities                                          | ** ** | **(25**    | **)**      | 64         |       |
|                                                                                           | ** ** | ** ** |       |       |       |
| **Increase in cash and cash equivalents**                                                      | ** ** | **1**      |       | 106        |       |
| Cash  and cash equivalents                                                                     |       |       |       |       |       |
| Beginning  of period                                                                           | ** ** | **683**    |       | 120        |       |
| End  of period                                                                                 | ** ** | **$**      | **684**    |       | $          | 226 |   |

 

14

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**2.****             ****Significant Accounting Policies**

 

**Basis of Presentation:**  The accompanyingconsolidated financial statements and notes of the Company have been preparedin accordance with the instructions to Form 10-Q and reflect alladjustments 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 SSCE 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.

 

TheCompany is a wholly-owned subsidiary of SSCC. The Company has domestic and international operations.

 

**Recently Adopted Accounting Standards: **Effective January 1, 2010, theCompany adopted the amendments to 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 theCompany’s consolidated financial statements.

 

Effective January 1, 2010, the Companyadopted the amendments to ASC 820, “Fair Value Measurements and Disclosures” (“ASC820”).  The amendments require newdisclosures for transfers in and out of fair value hierarchy Levels 1 and 2 andactivity within fair value hierarchy Level 3. The amendments also clarify existing disclosures regarding thedisaggregation for each class of assets and liabilities, and the disclosuresabout inputs and valuation techniques. The amendments to ASC 820 did not have a material impact on the Company’sconsolidated financial statements.

 

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

 

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

 

**4.****             ****Restructuring Activities**

 

The Company continues toreview and evaluate various restructuring and other alternatives to streamlineoperations, improve efficiencies and reduce costs.  These actions subject the Company toadditional short-term costs, which may include facility shutdown costs, assetimpairment charges, lease commitment costs, severance costs and other closingcosts.

 

During the first quarterof 2010, the Company closed one converting facility, announced the closure oftwo additional converting facilities and sold four previously closedfacilities.  The Company recordedrestructuring income of $4 million, including an $11 million gain related tothe sale of previously closed facilities, of which $8 million resulted from thelegal release of environmental liability obligations.  The remaining offsetting charges of $7million were primarily for severance and benefits.  As a result of the closure activities in thefirst quarter of 2010 and other ongoing initiatives, the Company reduced itsheadcount by approximately 760 employees. The net sales of the announced and closed converting facilities in 2010prior to closure and for the year ended December 31, 2009 were $16 millionand $92 million, respectively.  Themajority of these net sales are expected to be transferred to other operatingfacilities.  Additional charges of up to$3 million are expected to be recorded in future periods for severance andbenefits related to the closure of these and previously closed facilities.

 

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During the first quarterof 2009, the Company recorded restructuring charges of $13 million, includingnon-cash charges of $1 million related to the acceleration of depreciation forconverting equipment expected to be abandoned or taken out of service. Theremaining charges of $12 million were primarily for severance and benefits.

 

At December 31,2009, the Company had $54 million of accrued exit liabilities related to therestructuring of operations.  For thethree months ended March 31, 2010, the Company incurred $20 million ofcash disbursements, primarily severance and benefits, related to these exitliabilities.  In addition, these exitliabilities decreased by $8 million resulting from the release of environmentalliability obligations upon the sale of previously closed facilities.  During the three months ended March 31,2010, the Company incurred $4 million of cash disbursements, primarilyseverance and benefits, related to exit liabilities established during 2010.

 

**5.****             ****Alternative Energy Tax Credits**

 

The U.S. Internal Revenue Code allowed an excise taxcredit for alternative fuel mixtures produced by a taxpayer for sale, or foruse as a fuel in a taxpayer’s trade or business through December 31, 2009,at which time the credit expired.  In May 2009,the Company was notified that its registration as an alternative fuel mixer wasapproved by the Internal Revenue Service. The Company subsequently submitted refund claims of approximately $654million for 2009 related to production at ten of its U.S. mills.  The Company received refund claims of $595million in 2009 and $59 million during the first quarter of 2010.  During 2009, the Company recorded otheroperating income of $633 million, net of fees and expenses, in its consolidatedstatements of operations related to this matter.  In March 2010, the Company recordedother operating income of $11 million relating to an adjustment of refundclaims submitted in 2009.  The Companyexpects to receive the refund claim in the fourth quarter of 2010.

 

**6.****             ****Restricted Cash**

 

At March 31, 2010,the Company had restricted cash of $22 million as approved by the U.S. Court,including $7 million to provide financial assurance to certain utility vendorsand $15 million to collateralize outstanding letters of credit.

 

**7.****             ****Accounts ReceivableSecuritization Programs**

 

On January 28, 2009,in conjunction with the filing of the Chapter 11 Petition and the CanadianPetition, the accounts receivable securitization programs were terminated andall outstanding receivables previously sold to the non-consolidated financingentities were repurchased with proceeds from borrowings under the DIP CreditAgreement (See Note 1).  The repurchaseof receivables of $385 million was included in the cash flows from financingactivities in the consolidated statement of cash flows for the three monthsended March 31, 2009.

 

**8.****             ****Guarantees and Commitments**

 

The Company has certainwood chip processing contracts extending from 2012 through 2018 with minimumpurchase commitments.  As part of theagreements, the Company guarantees the third party contractors’ debtoutstanding and has a security interest in the chipping equipment.  At March 31, 2010, the maximum potentialamount of future payments related to these guarantees was approximately $24million, which decreases ratably over the life of the contracts.  In the event the guarantees on thesecontracts are called, proceeds from the liquidation of the chipping equipmentwould be based on current market conditions and the Company may not recover infull the guarantee payments made.

 

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The Company wascontingently liable for $18 million under a one year letter of credit, whichwas to expire in April 2009, which supported the borrowings of apreviously non-consolidated affiliate. On March 4, 2009, this letter of credit was drawn on, whichincreased borrowings under the Company’s pre-petition credit facilities by $18million.

 

**9.****             ****Long-Term Debt**

 

As of March 31,2010, as a result of the Company’s default, the Company had no availability forborrowings under the Company’s revolving credit facilities, after givingconsideration to outstanding letters of credit of $87 million.  As of March 31,2010, the Company had available unrestricted cash and cash equivalents of $702million primarily invested in money market funds at a variable interest rate of0.10%.

 

**10.****      ****Employee Benefit Plans**

 

The Company sponsorsnoncontributory defined benefit pension plans for its U.S. employees and alsosponsors noncontributory and contributory defined benefit pension plans for itsCanadian employees.  The Company’sdefined benefit pension plans cover substantially all hourly employees, as wellas salaried employees hired prior to January 1, 2006.  The U.S. and Canadian defined benefit pensionplans for salaried employees were frozen effective January 1, 2009 and March 1,2009, respectively.

 

The Company’spostretirement plans provide certain health care and life insurance benefitsfor all retired salaried and certain retired hourly employees, and for salariedand certain hourly employees who reached the age of 60 with ten years ofservice as of January 1, 2007.

 

The components ofnet periodic costs for the defined benefit plans and the components of thepostretirement benefit costs are as follows:

 
| ** **                                    | ** ** | **Three months ended March 31,** | ** ** |
|-----------------------------------------------|------------|---------------------------------------|------------|
| ** **                                    | ** ** | **Defined  Benefit Plans**            | ** ** | **Postretirement  Plans** | ** ** |
| ** **                                    | ** ** | **2010**                              | ** ** | **2009** | ** ** | **2010** | ** ** | **2009** | ** ** |
| Service  cost                                 |       | $                                     | 7          |   | $ | 6 |   | $ | 1 |   | $ | 1 |   |
| Interest  cost                                |       | 51                                    |       | 50 |   | 2 |   | 3 |   |
| Expected  return on plan assets               |       | (51                                   | )          | (50 | ) |   |   |   |   |
| Amortization  of prior service cost (benefit) |       | 1                                     |       | 1 |   | (1 | ) | (1 | ) |
| Amortization  of net (gain) loss              |       | 23                                    |       | 20 |   |   |   | (1 | ) |
| Multi-employer  plans                         |       | 1                                     |       | 1 |   |   |   |   |   |
| Net  periodic benefit cost                    |       | $                                     | 32         |   | $ | 28 |   | $ | 2 |   | $ | 2 |   |

 

**PatientProtection and Affordable Care Act**

In March 2010,the Patient Protection and Affordable Care Act (“PPACA”) was enacted,potentially impacting the Company’s cost to provide healthcare benefits to itseligible active and retired employees.  ThePPACA has both short-term and long-term implications on benefit planstandards.  Implementation of thislegislation is planned to occur in phases, beginning in 2010, but to a greaterextent with the 2011 benefit plan year and extending through 2018.

 

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

 

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**11.****      ****Derivative Instruments and Hedging Activities**

 

OnJanuary 26, 2009, the Chapter 11 Petition and the Canadian Petitioneffectively 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 $60 million, recorded in other current liabilities in theconsolidated balance sheet at March 31, 2010.  These derivative liabilities were stayed dueto the filing of the Chapter 11 Petition and the Canadian Petition, at whichtime, these liabilities were adjusted through other comprehensive income (loss)(“OCI”) for derivative instruments qualifying for hedge accounting and cost ofgoods sold for derivative instruments not qualifying for hedge accounting.  Subsequently, the amounts adjusted throughOCI were recorded in earnings during the period when the underlying transactionwas recognized or when the underlying transaction was no longer expected tooccur.  As of March 31, 2010, allamounts in OCI have been recognized through earnings.

 

TheCompany’s derivative instruments previously used for its hedging activitieswere designed as cash flow hedges and related to minimizing exposures tofluctuations in the price of commodities used in its operations, the movementin foreign currency exchange rates and the fluctuations in the interest rate onvariable rate debt.  All cash flowsassociated with the Company’s derivative instruments were classified asoperating activities in the consolidated statements of cash flows.

 

#### **CommodityDerivative Instruments**

The Company usedderivative instruments, including fixed price swaps, to manage fluctuations incash flows resulting from commodity price risk in the procurement of naturalgas and other commodities, including fuel oil and diesel fuel.  The objective was to fix the price of aportion of the Company’s purchases of these commodities used in themanufacturing process.  The changes inthe market value of such derivative instruments historically offset the changesin the price of the hedged item.

 

For the threemonths ended March 31, 2010 and 2009, the Company reclassified animmaterial amount and an $11 million loss (net of tax), respectively, from OCIto cost of goods sold when the hedged items were recognized.

 

For the threemonths ended March 31, 2009, the Company recorded a $3 million gain (netof tax) in cost of goods sold related to the change in fair value, prior to thePetition Date, of certain commodity derivative instruments not qualifying forhedge accounting.

 

For the threemonths ended March 31, 2009, the Company recorded a $3 million loss (netof tax) in cost of goods sold, prior to the Petition Date, on settled commodityderivative instruments not qualifying for hedge accounting.

 

#### **ForeignCurrency Derivative Instruments**

**The Company’s principal foreign exchange exposure is theCanadian dollar.  The Company usedforeign currency derivative instruments, including forward contracts andoptions, primarily to protect against Canadian currency exchange risk associatedwith expected future cash flows.**

** **

**For the three months ended March 31, 2009, theCompany reclassified a $2 million loss (net of tax) from OCI to cost of goodssold when the hedged items were recognized.**

** **

#### **InterestRate Swap Contracts**

The Company used interestrate swap contracts to manage interest rate exposure on $300 million of thecurrent Tranche B and Tranche C floating rate bank term debt.  The accounting for the cash flow impact ofthe swap contracts is recorded as an adjustment to interest expense eachperiod.

 

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For each of the threemonths ended March 31, 2010 and 2009, the Company reclassified a $1million loss (net of tax) from OCI to interest expense when the hedged itemswere recognized.

 

**12.****      ****Income Taxes**

 

Duringthe first quarter of 2009, the Company recorded a $1 million income taxprovision for Canadian withholding taxes and interest on unrecognized taxbenefits. The Company has recorded valuation allowances related to the taxbenefits generated for the three months ended March 31, 2010 and 2009because it is more likely than not that substantially all of the deferred taxassets generated in 2010 and 2009 may not be realized.

 

As previously disclosedin the Company’s 2009 Form 10-K, the Canada Revenue Agency (“CRA”)examined the Company’s income tax returns for tax years 1999 through 2005.  In connection with the examination, the CRAissued assessments of additional income taxes, interest and penalties relatedto transfer prices of inventory sold by the Company’s Canadian subsidiaries toits U.S. subsidiaries.  Additionally, theCRA considered certain significant adjustments related principally to taxableincome related to the Company’s acquisition of a Canadian company.

 

In April 2010, theCompany entered into an agreement with the CRA and other provincial taxauthorities to settle all Canadian income tax matters through January 26,2009.  As a result of this agreement, theCRA will retain approximately $20 million of a tax deposit made by the Companyin 2008 to appeal the transfer price assessments.  The remainder of the tax deposit,approximately $10 million, will be refunded to the Company.  In addition, the Company will pay the Provinceof Quebec approximately $3 million to settle their claims.  GST and QST tax withholdings subsequent to January 26,2009  will be refunded to theCompany.  The settlement agreement willbecome effective at the time the Canadian subsidiaries emerge from CCAAproceedings, and transfers of funds are expected to take place as soon aspossible thereafter. Upon emergence from bankruptcy, the Company expects to recordan income tax benefit of approximately $17 million to reflect the outcome ofthis agreement.

 

**13.****      ****Comprehensive Income (Loss)**

 

Comprehensiveincome (loss) is as follows:

 
| ** **                                                             | ** ** | **Three months ended  March 31,** | ** ** |
|------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                             | ** ** | **2010**                               | ** ** | **2009** | ** ** |
| Net  loss                                                              |       | $                                      | (89        | ) | $ | (214 | ) |
| Other  comprehensive income (loss), net of tax:                        |       |                                   |       |   |   |
| Net  changes in fair value of hedging instruments                      |       |                                   |       | (1 | ) |
| Net  hedging loss reclassified into earnings                           |       | 1                                      |       | 14 |   |
| Net  deferred employee benefit plan expense reclassified into earnings |       | 23                                     |       | 11 |   |
| Foreign  currency translation adjustment                               |       | 2                                      |       |   |   |
| Comprehensive  loss                                                    |       | $                                      | (63        | ) | $ | (190 | ) |

 

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

 

Certain financial assetsand liabilities are recorded at fair value on a recurring basis, includingderivative instruments prior to termination (See Note 11) and the Company’sresidual interest in the Timber Note Holdings (“TNH”) investment.

 

Fair value is defined asthe price that would be received to sell an asset or paid to transfer aliability in an orderly transaction between market participants at themeasurement date.  In determining fairvalue, the Company uses various valuation approaches, including market, incomeand/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 inactive markets for identical assets or liabilities that the Company has theability to access.  The Company has noassets or liabilities measured at fair value on a recurring basis utilizingLevel 1 inputs.

 

*Level 2* — Valuations based on quoted prices inmarkets that are not active or for which all significant inputs are observable,either directly or indirectly.  TheCompany has no assets or liabilities measured at fair value on a recurringbasis utilizing Level 2 inputs.

 

*Level 3* — Valuations based on inputs that areunobservable and 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.

 

**Fair Value on a Recurring Basis**

Assets and liabilitiesmeasured at fair value on a recurring basis are categorized in the table belowbased upon the level of input to the valuations.

 
| ** **                           | ** ** | **March 31, 2010** | ** ** |
|--------------------------------------|------------|-------------------------|------------|
| ** **                           | ** ** | **Level 1**             | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** |
|                                 |       |                    |       |   |   |   |   |   |   |
| Residual  interest in TNH investment |       | $                       |       | $ |   |   | $ | 21 |   | $ | 21 |   |
|                                      |            |                         |            |  |  |  |  |  |  |  |  |  |

 

The following tablepresents the changes in Level 3 assets (liabilities) measured at fair value on arecurring basis for the three months ended March 31, 2010:

 
| ** **                       | ** ** | **Residual  Interest in  TNH  Investment** | ** ** |
|----------------------------------|------------|--------------------------------------------|------------|
| Balance  at January 1, 2010 |       | $                                          | 36         |   |
| Dividend  received               |       | (15                                        | )          |
| Balance  at March 31, 2010  |       | $                                          | 21         |   |

 

**Financial Instruments NotMeasured At Fair Value**

Some of the Company’s financial instruments are notmeasured at fair value on a recurring basis but are recorded at amounts thatapproximate fair value due to their liquid or short-term nature.  The carrying 

 

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amount of cash equivalents approximates fair value becauseof the short maturity of those instruments. The fair values of notes receivable are based on discounted future cashflows or the applicable quoted market price.

 

The Company’s borrowings are recorded at historicalamounts.  The fair value of the Company’sdebt is estimated based on the quoted market prices for the same or similarissues or on the current rates offered to the Company for debt of the sameremaining maturities.  At March 31,2010, the carrying value and fair value of the Company’s secured borrowingswere $1,353 million and $1,349 million, respectively.  At March 31, 2010, the carrying valueand the fair value of the Company’s unsecured borrowings, included inliabilities subject to compromise, were $2,439 and $2,193, 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 faces 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 faces 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.  In estimating its reserves for environmentalremediation and future costs, the Company’s estimated liability of $6 millionreflects the Company’s expected share of costs after consideration for therelative percentage of waste deposited at each site, the number of other PRPs,the identity and financial condition of such parties and experience regardingsimilar matters.  As of March 31,2010, the Company had approximately $20 million reserved for environmentalliabilities, of which $5 million is included in other long-term liabilities, $9million in other current liabilities and $6 million in liabilities subject tocompromise in the consolidated balance sheets. The Company believes the liability for these matters was adequatelyreserved at March 31, 2010.

 

If all or most of theother PRPs are unable to satisfy their portion of the clean-up costs at one ormore of the significant sites in which the Company is involved or the Company’sexpected share increases, the resulting liability could have a material adverseeffect on the Company’s consolidated financial condition, results of operationsor cash flows.

 

In January 2009, theCompany settled two putative class action cases filed in California state courton behalf of current and former hourly employees at the Company’s Californiacorrugated container facilities.  Thesecases alleged violations of the California on-duty meal break and rest periodstatutes.  The court approved asettlement for a total of $9 million for both cases on January 21,2009.  The cases were automaticallystayed due to the filing of the Chapter 11 Petition on January 26, 2009(See Note 1).  The Company establishedreserves of $9 million during 2008 related to these matters.  It is anticipated that the Company’sliability for the settlement of these cases will be satisfied as an unsecuredclaim in the U.S. bankruptcy proceedings.

 

In May 2009, a lawsuit was filed in the UnitedStates District Court for the Northern District of Illinois against the fourindividual committee members of the Administrative Committee (“AdministrativeCommittee”) of the Company’s savings plans and Patrick Moore, the Company’sChief 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’ 

 

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assets.  Eventhough the Company is not a named defendant in the 2009 ERISA Case, managementbelieves that any indemnification obligations to the Defendants would becovered by applicable insurance.

 

During the first quarterof 2010, two additional ERISA class action lawsuits were filed in the UnitedStates District Court for the Western District of Missouri and the UnitedStates District Court for the District of Delaware, respectively.  The defendants in these cases are theindividual committee members of the Administrative Committee, several other ofthe Company’s executives and the individual members of its Board ofDirectors.  The suits have similarallegations as the 2009 ERISA Case described above, with the addition of breachof fiduciary duty claims related to the Company’s pension plans.  The Company expects that all of these matterswill be consolidated in some manner as they purport to represent a similarclass of employees and former employees and seek recovery under similar allegationsand any of the Company’s indemnification obligations would be covered byapplicable insurance.

 

The Company is adefendant in a number of other lawsuits and claims arising out of the conductof its business.  All litigation thatarose or may arise out of pre-petition conduct or acts is subject to theautomatic stay provision of the bankruptcy laws and any recovery by plaintiffsin those matters will be paid consistent with all other general unsecuredclaims in the bankruptcy.  As a result,the Company believes that these matters will not have a material adverse effecton its consolidated financial condition, results of operations or cash flows.

 

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**ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

**FORWARD-LOOKING STATEMENTS**

 

Some information includedin this report may contain forward-looking statements within the meaning of Section 21Eof the Securities Exchange Act of 1934, as amended.  Although we believe that, in making any suchstatements, our expectations are based on reasonable assumptions, any suchstatement may be influenced by factors that could cause actual outcomes andresults to be materially different from those projected.  When used in this document, the words “anticipates,”“believes,” “expects,” “intends” and similar expressions as they relate toSmurfit-Stone Container Enterprises, Inc. or its management, are intendedto identify such forward-looking statements. These forward-looking statements are subject to numerous risks anduncertainties.  There are importantfactors that could cause actual results to differ materially from those inforward-looking statements, certain of which are beyond our control.  These factors, risks and uncertainties arediscussed in our Annual Report on Form 10-K for the year ended December 31,2009 (2009 Form 10-K) filed with the Securities and Exchange Commission.

 

Our actual results,performance or achievements could differ materially from those expressed in, orimplied by, these forward-looking statements. Accordingly, we can give no assurances that any of the eventsanticipated by the forward-looking statements will occur, or if any of them do,what impact they will have on our results of operations or financialcondition.  We expressly decline anyobligation to publicly revise any forward-looking statements that have beenmade to reflect the occurrence of events after the date hereof.

 

# **GENERAL**

#  

We are a wholly-ownedsubsidiary of Smurfit-Stone Container Corporation (Smurfit-Stone), a holdingcompany with no business operations of its own. Smurfit-Stone conducts its business operations through us.

 

**RECENTLY ADOPTED ACCOUNTINGSTANDARDS**

 

Effective January 1, 2010, we adopted theamendments to 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.

 

Effective January 1, 2010, we adopted theamendments to ASC 820, “Fair Value Measurements and Disclosures” (ASC820).  The amendments require newdisclosures for transfers in and out of fair value hierarchy Levels 1 and 2 andactivity within fair value hierarchy Level 3. The amendments also clarify existing disclosures regarding thedisaggregation for each class of assets and liabilities, and the disclosuresabout inputs and valuation techniques. The amendments to ASC 820 did not have a material impact on ourconsolidated financial statements.

 

**BANKRUPTCYPROCEEDINGS**

 

**Chapter11 Bankruptcy Filings**

 

On January 26, 2009 (the Petition Date), we,Smurfit-Stone 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 Companies’ CreditorsArrangement Act (the CCAA) in the Ontario Superior Court of Justice in Canada(the Canadian Court).  Our operations in Mexico and Asia 

 

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and certain U.S. andCanadian legal entities (the Non-Debtor Subsidiaries) were not included in thefiling and will continue to operate outside of the Chapter 11 process.

 

The filing of theChapter 11 Petition and the Canadian Petition constituted an event ofdefault under our debt obligations, and those debt obligations becameautomatically and immediately due and payable, although any actions to enforcesuch payment obligations were stayed as a result of the filing of the Chapter11 Petition and the Canadian Petition. Since January 26, 2009, the date of the bankruptcy filings, wediscontinued interest payments on our unsecured senior notes and certain otherunsecured debt.

 

We, Smurfit-Stone and our U.S. and Canadiansubsidiaries are currently operating as “debtors-in-possession” under thejurisdiction of the U.S. Court and Canadian Court (the Bankruptcy Courts) andin accordance with the applicable provisions of the Bankruptcy Code and theCCAA.  In general, the Debtors areauthorized to continue to operate as ongoing businesses, but may not engage intransactions outside the ordinary course of business without the approval ofthe Bankruptcy Courts.

 

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

 

In connection with filing the Chapter 11 Petitionand the Canadian Petition on the Petition Date, we, Smurfit-Stone and certainof our affiliates filed a motion with the Bankruptcy Courts seeking approval toenter into a Post-Petition Credit Agreement (the DIP Credit Agreement).  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.  Amendmentsto the DIP Credit Agreement were entered into on February 25 and 27, 2009.

 

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

 

Under the DIP CreditAgreement, on January 28, 2009, we borrowed $440 million, consisting of a$400 million U.S. DIP Term Loan, a $35 million Canadian DIP Term loan and $5million from the Canadian DIP Revolver.  In accordance with theterms of the DIP Credit Agreement, in January 2009, we used U.S. DIP TermLoan proceeds of $360 million, net of lenders’ fees of $40 million, andCanadian DIP Term Loan proceeds of $30 million, net of lenders’ fees of $5million, to terminate the receivables securitization programs and repay allindebtedness outstanding 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 principal amount of the loans underthe DIP Credit Agreement, plus interest accrued and unpaid, were due andpayable in full at maturity, which was January 28, 2010.  As all borrowings under the DIP Credit Agreement werepaid in full as of December 31, 2009, we allowed the DIP Credit Agreementto expire on the maturity date of January 28, 2010.  Prior to the maturity of the DIP CreditAgreement on January 28, 2010, we transferred $15 million of availablecash to a restricted cash account to secure letters of credit under the DIPCredit Agreement.

 

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**Reorganization Process**

 

The Bankruptcy Courtsapproved payment of certain of our pre-petition obligations, including employeewages, salaries and benefits, and the payment of vendors and other providers inthe ordinary course for goods received and services rendered subsequent to thefiling of the Chapter 11 Petition and Canadian Petition and otherbusiness-related payments necessary to maintain the operation of ourbusiness.  We have retained legal andfinancial professionals to advise us on the bankruptcy proceedings.

 

Immediately after filingthe Chapter 11 Petition and Canadian Petition, we notified all known current orpotential creditors of the bankruptcy filings. Subject to certain exceptions under the Bankruptcy Code and the CCAA,our bankruptcy filings automatically enjoined, or stayed, the continuation ofany judicial or administrative proceedings or other actions against us or ourproperty to recover, collect or secure a claim arising prior to the filing ofthe Chapter 11 Petition and Canadian Petition. Thus, for example, most creditor actions to obtain possession ofproperty from us, or to create, perfect or enforce any lien against ourproperty, or to collect on monies owed or otherwise exercise rights or remedieswith respect to a pre-petition claim are enjoined unless and until theBankruptcy Courts lift the automatic stay.

 

As required by theBankruptcy Code, the United States Trustee for the District of Delaware (theU.S. Trustee) appointed an official committee of unsecured creditors (theCreditors’ Committee).  The Creditors’Committee and its legal representatives have a right to be heard on all mattersthat come before the U.S. Court with respect to us.  A monitor was appointed by the Canadian Courtwith respect to proceedings before the Canadian Court.

 

Under the BankruptcyCode, the Debtors generally must assume or reject pre-petition executorycontracts, including but not limited to real property leases, subject to theapproval of the Bankruptcy Courts and certain other conditions.  In this context, “assumption” means that weagree to perform our obligations and cure all existing defaults under thecontract or lease, and “rejection” means that we are relieved from ourobligations to perform further under the contract or lease, but are subject toa pre-petition claim for damages for the breach thereof subject to certainlimitations.  Any damages resulting fromrejection of executory contracts that are permitted to be recovered under theBankruptcy Code will be treated as liabilities subject to compromise unlesssuch claims were secured prior to the Petition Date.

 

Since the Petition Date,we received approval from the Bankruptcy Courts to reject a number of leasesand executory contracts of various types. Liabilities subject to compromise have been recorded related to therejection of executory contracts and unexpired leases, and from thedetermination of the U.S. Court (or agreement by parties in interest) ofallowed claims for contingencies and other disputed amounts.  Due to the uncertain nature of many of theunresolved claims and rejection damages, we cannot project the magnitude ofsuch claims and rejection damages with certainty.

 

On May 4, 2010, theU.S. Court granted our motion for an order authorizing the assumption ofcertain executory contracts and unexpired leases and finalizing all but aninsignificant amount of the cure amounts related to these assumed executorycontracts and unexpired leases.  As aresult, we concluded our review of our executory contracts and unexpired leasesand do not expect to reject any additional executory contracts or unexpiredleases.  We expect that the assumption ofthe executory contracts and unexpired leases in the May 4, 2010 courtorder will convert certain of the liabilities shown on the accompanying consolidatedbalance sheets as liabilities subject to compromise to liabilities not subjectto compromise.

 

In June 2009, the Bankruptcy Courts entered anorder establishing August 28, 2009, as the bar date for potentialcreditors to file claims.  The bar date is the date by which certainclaims against us must be filed if the claimants wish to receive anydistribution in the bankruptcy cases. Proof of claim forms received after the bar date are typically noteligible for consideration of recovery as part of our bankruptcy cases.  Creditors were notified of the bar date andthe requirement to file a proof of claim with the Bankruptcy Courts.  Differences between liability amounts estimatedby us and claims filed by creditors are being investigated and, if necessary,the Bankruptcy Courts will make a final determination of the allowableclaim.  The determination of howliabilities will ultimately be treated cannot be made until the BankruptcyCourts approve a plan of reorganization. Accordingly, the ultimate amount or treatment of such liabilities is notdeterminable at this time.

 

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In September 2009,the U.S. Trustee denied a request by certain holders of Smurfit-Stone’s commonstock and 7% Series ACumulative Exchangeable Redeemable Convertible Preferred Stock (PreferredStock) to form an official equity committee to represent the interestsof equity holders on matters before the U.S. Court.  The equity holders subsequently filed amotion for the appointment of an equity committee with the U.S. Court.  In December 2009, the U.S. Court enteredan order denying the motion for an order appointing an official committee ofequity security holders.

 

**ProposedPlan of Reorganization and Exit Credit Facilities**

 

In order to successfullyemerge from bankruptcy, we must propose and obtain confirmation by theBankruptcy Courts of a plan of reorganization that satisfies the requirementsof the Bankruptcy Code and the CCAA.  Aplan of reorganization would resolve our pre-petition obligations, set forththe revised capital structure of the newly reorganized entity and provide forcorporate governance subsequent to our exit from bankruptcy.

 

Under the priority schemeestablished by the Bankruptcy Code and the CCAA, unless creditors agreeotherwise, pre-petition liabilities and post-petition liabilities must besatisfied in full before Smurfit-Stone’s stockholders are entitled to receiveany distribution or retain any property under a plan of reorganization.  The ultimate recovery to creditors and/orSmurfit-Stone’s stockholders, if any, will not be determined until confirmationof a plan or plans of reorganization.  Noassurance can be given as to what values, if any, will be ascribed to each ofthese constituencies or what types or amounts of distributions, if any, theywould receive.  Because of suchpossibilities, the value of our liabilities and securities, includingSmurfit-Stone’s common stock, is highly speculative.  Appropriate caution should be exercised withrespect to existing and future investments in any of our liabilities and/orsecurities.

 

*The Proposed Plan ofReorganization*

On December 1, 2009,the Debtors filed their Joint Plan of Reorganization and Plan of Compromise andArrangement and Disclosure Statement with the U.S. Court.  On December 22, 2009, January 27,2010 and February 4, 2010, the Debtors filed amendments to the proposedPlan of Reorganization (the Proposed Plan of Reorganization) and to theDisclosure Statement (the Disclosure Statement).  Also, on March 19, 2010, the Debtorsfiled a Supplement to the Proposed Plan of Reorganization.  Key elements of the Proposed Plan ofReorganization were as follows:

 

·                  we and Smurfit-Stone would merge andbecome the Reorganized Smurfit-Stone that would be governed by a board ofdirectors that will include Patrick J. Moore, Smurfit-Stone’s current Chairmanand Chief Executive Officer, Steven J. Klinger, Smurfit-Stone’s currentPresident and Chief Operating Officer, and a number of independent directors,including a non-executive chairman selected by the Creditors’ Committee inconsultation with the Debtors;

 

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

 

·                  substantially all of the existingunsecured debt and claims against us, including all of the outstandingunsecured senior notes, would be exchanged for common stock of the ReorganizedSmurfit-Stone, which is expected to be traded on the New York Stock Exchange,with holders of unsecured claims against us of less than or equal to $10,000entitled to receive payment of 100% of such claims in cash, and eligiblecash-out participants having the opportunity to indicate on their ballot thepercentage amount of their allowed claim they would be willing to receive incash in lieu of common stock;

 

·                  all of Smurfit-Stone’s existing equitysecurities would be cancelled and existing shareholders of Smurfit-Stone’scommon and Preferred Stock would receive no distribution on account of theirshares;

 

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·                  the assets of the Canadian Debtors, otherthan Stone Container Finance Company II, would be 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 of the secured debt obligations of theCanadian Debtors, (ii) cash to the Canadian Debtors’ unsecured creditorsif they vote to accept the Proposed Plan of Reorganization and (iii) theassumption of certain liabilities and obligations of the Canadian Debtors; and

 

·                  Reorganized Smurfit-Stone and ournewly-formed Canadian subsidiary would assume all of the existing obligationsunder the qualified defined benefit pension plans in the United States andCanada sponsored by the Debtors, as well as all of the collective bargainingagreements in the United States and Canada between the Debtors and their laborunions.

 

The Proposed Plan ofReorganization will not become effective until certain conditions are satisfiedor waived, including: (i) entry of an order by the Bankruptcy Courtsconfirming the Proposed Plan of Reorganization, (ii) all actions,documents and agreements necessary to implement the Proposed Plan ofReorganization having been effected or executed, (iii) access of theDebtors to funding under the exit credit facility and (iv) specifiedclaims of the Debtors’ secured lenders having been paid in full pursuant to theProposed Plan of Reorganization.

 

On January 14, 2010,the U.S. Court granted approval to extend the Debtors’ exclusive right to filea plan of reorganization to July 21, 2010, and granted the Debtors’approval to solicit acceptance of a plan of reorganization until May 21,2011.  If the Debtors’ exclusivity periodlapses, any party in interest would be able to file a plan of reorganization.  In addition to being voted on by holders ofimpaired claims and equity interests, a plan of reorganization must satisfycertain requirements of the Bankruptcy Code and the CCAA and must be approved,or confirmed, by the Bankruptcy Courts in order to become effective.

 

On January 29, 2010,the U.S. Court approved the Debtors’ Disclosure Statement as containingadequate information for the holders of impaired claims and equity interests,who are entitled to vote to accept or reject the Debtors’ Proposed Plan ofReorganization.

 

The deadline for votingand objections to the Proposed Plan of Reorganization was March 29,2010.  The Proposed Plan of Reorganization was overwhelmingly approvedby number and dollar amount of the required classes of creditors ofeach of the Debtors, with the exception of Stone Container Finance CompanyII.  Stone Container Finance Company II will be removed from the ProposedPlan of Reorganization.  The failure to confirm the Proposed Plan ofReorganization of Stone Container Finance Company II will not impact theability of the Debtors to confirm the Proposed Plan of Reorganization for allother Debtors.  A meeting of creditors was held for the Canadian debtorsubsidiaries on April 6, 2010, at which the necessary votes were receivedto confirm the Proposed Plan of Reorganization by all requisite classes ofcreditors other than Stone Container Finance Company II.

 

The Bankruptcy Coderequires the U.S. Court, after appropriate notice, to hold a hearing onconfirmation of a plan of reorganization. The confirmation hearing with respect to the Proposed Plan ofReorganization commenced in the U.S Court on April 15, 2010, and concludedon May 4, 2010, and a hearing was conducted in the Canadian Court on May 3,2010.  We anticipate that rulings fromthe U.S. Court and the Canadian Court on the confirmation will be issued andthe Debtors will emerge from Chapter 11 and CCAA proceedings during the secondquarter of 2010, following the issuance of orders confirming the Proposed Planof Reorganization.  There can be noassurance at this time that the Proposed Plan of Reorganization will beconfirmed by the Bankruptcy Courts or that any such plan will be implementedsuccessfully.

 

*Exit Credit Facilities*

On January 14, 2010,the U.S. Court entered an order authorizing the Debtors to (i) enter intoan exit term loan facility engagement and arrangement letter and fee letters, (ii) payassociated fees and expenses and (iii) furnish related 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).

 

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OnFebruary 16, 2010, the U.S. Court granted the motion and authorized us andcertain of our affiliates to enter into the Term Loan Facility.  On the same date, the U.S. Court also grantedour February 3, 2010 motion seeking approval to enter into a commitmentletter and fee letters for an asset-based revolving credit facility (the ABLRevolving Facility) (together with the Term Loan Facility, the Exit CreditFacilities).  Based on such approvals, onFebruary 22, 2010, we and certain of our subsidiaries entered into theTerm Loan Facility that provides for an aggregate term loan commitment of$1,200 million.  In addition, we enteredinto an ABL Revolving Facility with aggregate commitments of $650 million(including a $100 million Canadian Tranche), on April 15, 2010.  The ABL Revolving Facility includes a $150million sub-limit for letters of credit. The commitments for the Term Loan Facility and the ABL RevolvingFacility will terminate on July 16, 2010 unless our emergence frombankruptcy and satisfaction of certain funding date conditions under the TermLoan Facility and the ABL Revolving Facility occur on or prior to such date.

 

We are permitted, subject to obtaining lendercommitments, to add one or more incremental facilities to the Term LoanFacility 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 to obtaining lendercommitments, to add incremental commitments under the ABL Revolving Facility inan aggregate amount up to $150 million. Each incremental commitment is conditioned on (a) there existing nodefaults, (b) any new lender providing an incremental commitment shallrequire the consent of the Administrative Agent, each Issuing Lender, theSwingline Lender and the Fronting Lender, (c) the minimum amount of anyincrease must be at least $25 million, (d) we shall not increase thecommitments more than three times in the aggregate, (e) if the interestrate margins and commitment fees with respect to the incremental commitmentsare higher than those applicable to the existing commitments under the ABLRevolving Facility, then the interest rate margins and commitment fees for theexisting commitments under the ABL Revolving Facility will be increased tomatch those for the incremental commitments, and (f) the satisfaction ofother customary closing conditions.

 

On the date we emergefrom bankruptcy, the Term Loan will be funded and borrowings will be availableunder the ABL Revolving Facility.  Theproceeds of the borrowings under the Term Loan Facility, together withavailable cash, will be used to repay our outstanding secured indebtednessunder our pre-petition Credit Facility and pay remaining fees, costs andexpenses related to and contemplated by the Exit Credit Facilities and theProposed Plan of Reorganization.  Totalfees, costs and expenses related to the Exit Credit Facilities are estimated tobe approximately $50 million, of which $9 million was paid during the firstquarter of 2010.  Borrowings under theABL Revolver Facility will be available for working capital purposes, capitalexpenditures, permitted acquisitions and general corporate purposes.

 

The term loan (Term Loan)matures six years from the funding date of the Term Loan Facility and isrepayable in equal quarterly installments of $3 million beginning on September 30,2010, with the balance payable at maturity. 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 will also require us to use the net proceeds of asset sales andthe net proceeds of the incurrence of indebtedness to repay outstandingborrowings under the Term Loan Facility.

 

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The Term Loan will bearinterest at our option at a rate equal to: (A) 3.75% plus the alternatebase rate  (Term Loan ABR) defined as thegreater of: (i) the U.S. prime rate, (ii) the overnight federal fundsrate plus 0.50%, or (iii) the one month adjusted LIBOR rate plus 1.0%,provided that the Term Loan ABR shall never be lower than 3.00% per annum, or (B) theadjusted LIBOR rate plus 4.75%, provided that the adjusted LIBOR rate shallnever be lower than 2.00% per annum.

 

The ABL revolver loan(ABL Revolver) will mature four years from the funding date of the ABL RevolvingFacility.  We will have the option toborrow at a rate equal to: (A) the base rate, defined as the greater of2.50% plus: (i) the US Prime Rate, (ii) the overnight federal fundsrate plus 0.50% or (iii) LIBOR rate plus 1.0%, or (B) the LIBOR rateplus 3.50% for the first 90 days then 3.25% thereafter. The applicable margincould be adjusted in the future from 2.25% to a rate as high as 2.75% for baseloans and 3.25% to a rate as high as 3.75% for LIBOR loans based on the averagehistorical utilization under the ABL Revolving Facility.  We would also pay either a 0.50% or 0.75% perannum unused commitment fee based on the average historical utilization underthe ABL Revolving Facility.  The ABL RevolvingFacility borrowings are subject to a borrowing base derived from a formulabased on certain eligible accounts receivable and inventory, less certainreserves.

 

Borrowings under the Exit Credit Facilities will beguaranteed by us and certain of our subsidiaries, and would be secured by firstpriority liens and second priority liens on substantially all our presentlyowned and hereafter acquired assets and those of each of our subsidiaries partyto the Exit Credit Facilities, subject to certain exceptions and permittedliens.

 

The Exit Credit Facilities contain affirmative andnegative covenants that impose restrictions on our financial and businessoperations and those of certain of our subsidiaries, including their ability toincur indebtedness, incur liens, make investments, sell assets, pay dividendsor make acquisitions.  The Exit CreditFacilities contain events of default customary for financings of this type.

 

**GoingConcern Matters**

 

The consolidatedfinancial statements and related notes have been prepared assuming that we willcontinue as a going concern, although our bankruptcy filings raise substantialdoubt about our ability to continue as a going concern.  Our ability to continue as a going concern isdependent on our ability to restructure our obligations in a manner that allowsus to obtain confirmation of the Proposed Plan of Reorganization by theBankruptcy Courts.  The consolidatedfinancial statements do not include any adjustments related to therecoverability and classification of recorded assets or to the amounts andclassification of liabilities or any other adjustments that might be necessaryshould we be unable to continue as a going concern.

 

**Financial ReportingConsiderations**

 

For periods subsequent tothe bankruptcy filings, we have applied the Financial Accounting StandardsBoard (FASB) Accounting Standards Codification (ASC) 852, Reorganizations (ASC852), in preparing the consolidated financial statements.  ASC 852 requires that the financialstatements distinguish transactions and events that are directly associatedwith the reorganization from the ongoing operations of the business.  Accordingly, certain revenues, expenses(including professional fees), realized gains and losses and provisions forlosses that are realized or incurred in the bankruptcy proceedings have beenrecorded in reorganization items in the consolidated statements ofoperations.  In addition, pre-petitionobligations that may be impacted by the bankruptcy reorganization process havebeen classified on the consolidated balance sheets in liabilities subject tocompromise.  These liabilities arereported at the amounts expected to be allowed by the Bankruptcy Courts, evenif they may be settled for lesser or greater amounts.

 

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*Reorganization Items*

Our reorganization itemsdirectly related to the process of our reorganizing under Chapter 11 and theCCAA, as recorded in our consolidated statements of operations, consist of thefollowing:

 
| ** **                                                     | ** ** | **Three months ended March 31,** | ** ** |
|----------------------------------------------------------------|------------|---------------------------------------|------------|
| **(Income) Expense**                                      | ** ** | **2010**                              | ** ** | **2009** | ** ** |
| Provision  for rejected/settled executory contracts and leases |       | $                                     | 29         |   | $ | 39 |   |
| Professional  fees                                             |       | 15                                    |       | 16 |   |
| Accounts  payable settlement gains                             |       | (3                                    | )          | (1 | ) |
| Total  reorganization items                                    |       | $                                     | 41         |   | $ | 54 |   |

 

Professional feesdirectly related to the reorganization include fees associated with advisors tous, the Creditors’ Committee and certain secured creditors.

 

Net cash paid forreorganization items related to professional fees totaled $16 million and $6million, respectively, for the three months ended March 31, 2010 and 2009.

 

Reorganization itemsexclude employee severance and other restructuring charges recorded during 2009and 2010.

 

Under the Proposed Planof Reorganization, interest expense on the unsecured senior notes subsequent tothe Petition Date would not be paid.  Asa result, in the fourth quarter of 2009, we concluded it was not probable thatinterest expense on the unsecured senior notes subsequent to the Petition Datewould be an allowed claim.  During thefourth quarter of 2009, we recorded income in reorganization items for thereversal of accrued post-petition unsecured interest expense and discontinuedrecording unsecured interest expense. Interest expense recorded on unsecured debt was zero and $48 million forthe first quarter of 2010 and 2009, respectively.

 

*Other Bankruptcy Related Costs*

During the first quarterof 2010, we recorded $6 million in selling and administrative expenses relatedto amounts accrued under our 2009 long-term incentive plan.

 

Debtor-in-possession debtissuance costs of $63 million were incurred and paid during the first quarterof 2009 in connection with entering into the DIP Credit Agreement, and areseparately presented in the 2009 consolidated statement of operations.

 

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*Liabilities Subject to Compromise*

Liabilities subject tocompromise consist of the following:

 
| ** **                         | ** ** | **March 31, 2010** | ** ** | **December 31, 2009** | ** ** |
|------------------------------------|------------|-------------------------|------------|----------------------------|------------|
|                               |       |                    |       |                       |       |
| Unsecured  debt                    |       | $                       | 2,439      |                       | $          | 2,439 |   |
| Accounts  payable                  |       | 325                     |       | 339                        |       |
| Interest  payable                  |       | 47                      |       | 47                         |       |
| Retiree  medical obligations       |       | 178                     |       | 176                        |       |
| Pension  obligations               |       | 1,146                   |       | 1,136                      |       |
| Unrecognized  tax benefits         |       | 47                      |       | 46                         |       |
| Executory  contracts and leases    |       | 102                     |       | 72                         |       |
| Other                              |       | 22                      |       | 16                         |       |
| Liabilities  subject to compromise |       | $                       | 4,306      |                       | $          | 4,271 |   |

 

Liabilities subject tocompromise represent pre-petition unsecured obligations that will be settledunder the Proposed Plan of Reorganization. Generally, actions to enforce or otherwise effect payment of pre-Chapter11 or CCAA liabilities are stayed.  Pre-petitionliabilities that are subject to compromise are reported at the amounts expectedto be allowed, even if they may be settled for lesser or greater amounts.  These liabilities represent the amountsexpected to be allowed on known or potential claims to be resolved through theChapter 11 and CCAA process, and remain subject to future adjustments arisingfrom negotiated settlements, actions of the Bankruptcy Courts, rejection ofexecutory contracts and unexpired leases, the determination as to the value ofcollateral securing the claims, proofs of claim, or other events.  Liabilities subject to compromise alsoinclude certain items, such as qualified defined benefit pension and retireemedical obligations that may be assumed under the Proposed Plan ofReorganization, and as such, may be subsequently reclassified to liabilitiesnot subject to compromise.

 

The Bankruptcy Courtsapproved payment of certain pre-petition obligations, including employee wages,salaries and benefits, and the payment of vendors and other providers in theordinary course for goods and services received after the filing of the Chapter11 Petition and the Canadian Petition and other business-related paymentsnecessary to maintain the operation of our business.  Obligations associated with these matters arenot classified as liabilities subject to compromise.

 

We have rejected certain executory contracts andunexpired leases with respect to our operations with the approval of theBankruptcy Courts.  Damages resultingfrom rejection of executory contracts and unexpired leases are generallytreated as general unsecured claims and are classified as liabilities subjectto compromise.

 

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**RESULTS OF OPERATIONS**

 

# **Overview**

 

We had a net loss of $89million for the first quarter of 2010 compared to a net loss of $214 millionfor the first quarter of 2009.  The 2010results were favorably impacted by lower interest expense ($58 million), lower restructuringcharges ($17 million), lower reorganization cost ($13 million) and higher otheroperating income related to the alternative fuel tax credit ($11 million).  The 2009 results includeddebtor-in-possession debt issuance cost of $63 million and a loss on earlyextinguishment of debt of $20 million. The 2010 segment profits decreased $32 million compared to 2009.  The segment operating results for 2010 werenegatively impacted by lower average sales prices for containerboard andcorrugated containers and higher costs for reclaimed fiber, which werepartially offset by operating improvements and reduced market related downtime.

 

In the second quarter of2010, we expect to emerge from bankruptcy. We expect our operating performance to improve compared to the firstquarter of 2010 levels due to higher selling prices for containerboard andcorrugated containers, which are expected to be partially offset by highercosts, including reclaimed fiber.  In thesecond quarter of 2010, we project slightly higher shipments of corrugatedcontainers while projecting slightly lower production of containerboard, due toplanned maintenance downtime.  Assumingour Proposed Plan of Reorganization is confirmed and we emerge from bankruptcy,our second quarter 2010 results will be significantly impacted by theaccounting for the effects of the Proposed Plan of Reorganization and adoptionof fresh start accounting.

 

# **Alternative Fuel Tax Credit**

#  

The U.S. Internal Revenue Code allowed an excise taxcredit for alternative fuel mixtures produced by a taxpayer for sale, or foruse as a fuel in a taxpayer’s trade or business through December 31, 2009,at which time the credit expired.  In May 2009,we were notified that our registration as an alternative fuel mixer wasapproved by the Internal Revenue Service. We subsequently submitted refund claims of approximately $654 millionfor 2009 related to production at ten of our U.S. mills.  We received refund claims of $595 million in2009 and $59 million during the first quarter of 2010.  During 2009, we recorded other operatingincome of $633 million, net of fees and expenses, in our consolidatedstatements 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 refund claim in the fourth quarter of 2010.

 

# **Restructuring Activities**

#  

We continue to review andevaluate various restructuring and other alternatives to streamline ouroperations, 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, employee retention and severance costs andother closing costs.

 

During the first quarterof 2010, we closed one converting facility, announced the closure of twoadditional converting facilities and sold four previously closedfacilities.  We recorded restructuringincome of $4 million, including an $11 million gain related to the sale ofpreviously closed facilities, of which $8 million resulted from the legalrelease of environmental liability obligations. The remaining offsetting charges of $7 million were primarily forseverance and benefits.  As a result ofthe closures in the first quarter of 2010 and other ongoing initiatives, wereduced our headcount by approximately 760 employees.  The net sales of the announced and closedconverting facilities as of March 31, 2010 prior to closure and for theyear ended December 31, 2009 were $16 million and $92 million,respectively.  The majority of these netsales are expected to be transferred to other operating facilities.  Additional charges of up to $3 million areexpected to be recorded in future periods for severance and benefits related tothe closure of these and previously closed facilities.

 

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**FirstQuarter 2010 Compared to First Quarter 2009**

** **
| ** **                                                        | ** ** | **Three months ended March 31,** | ** ** |
|-------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                        | ** ** | **2010**                              | ** ** | **2009** | ** ** |
| **(In  millions)**                                                | ** ** | **Net  Sales**                        | ** ** | **Profit/  (Loss)** | ** ** | **Net  Sales** | ** ** | **Profit/  (Loss)** | ** ** |
|                                                              |       |                                  |       |   |   |   |   |   |   |
| Containerboard,  corrugated containers and reclamation operations |       | $                                     | 1,461      |   | $ | 34 |   | $ | 1,371 |   | $ | 66 |   |
|                                                              |       |                                  |       |   |   |   |   |   |   |
| Restructuring  income (charges)                                   |       |                                  |       | 4 |   |   |   | (13 | ) |
| Loss  on sale of assets                                           |       |                                  |       |   |   |   |   | (2 | ) |
| Other  operating income                                           |       |                                  |       | 11 |   |   |   |   |   |
| Interest  expense, net                                            |       |                                  |       | (13 | ) |   |   | (71 | ) |
| Loss  on early extinguishment of debt                             |       |                                  |       |   |   |   |   | (20 | ) |
| Non-cash  foreign currency exchange gains (losses)                |       |                                  |       | (6 | ) |   |   | 3 |   |
| Debtor-in-possession  debt issuance costs                         |       |                                  |       |   |   |   |   | (63 | ) |
| Reorganization  items                                             |       |                                  |       | (41 | ) |   |   | (54 | ) |
| Corporate  expenses and other (Note 1)                            |       |                                  |       | (78 | ) |   |   | (59 | ) |
| Loss  before income taxes                                         |       |                                  |       | $ | (89 | ) |   |   | $ | (213 | ) |
|                                                                   |            |                                       |            |  |  |  |  |  |  |  |  |  |  |

 

Note 1: Amounts includecorporate expenses and other expenses not allocated to operations.

 

Net sales increased 6.6%in the first quarter of 2010 compared to last year.  Net sales were positively impacted by $112million in 2010 as a result of higher third-party sales volume ofcontainerboard and corrugated containers. Third party shipments of containerboardwere higher due primarily to stronger demand in both the domestic and exportmarket.  Net sales were negativelyimpacted by lower average selling prices ($99 million) primarily forcontainerboard and corrugated containers, which were partially offset by higheraverage selling prices for reclaimed material ($77 million). The average pricefor old corrugated containers (OCC) increased approximately $110 per toncompared to last year.

 

Our containerboard millsoperated at 100% of capacity in the first quarter of 2010, compared to 82.4% ofcapacity in the first quarter of 2009. As a result of less market related downtime, containerboard productionwas 10.5% higher compared to last year despite the closure of twocontainerboard mills in December 2009. Production of market pulp decreased by 6.1% compared to last year dueprimarily to maintenance downtime taken in the first quarter of 2010.  Production of kraft paper increased 52.6%compared to last year due primarily to higher demand and no market related downtimein 2010.** **Totaltons of fiber reclaimed and brokered increased 14.7% compared to last year dueto higher demand.

 

Cost of goods soldas a percent of net sales in the first quarter of 2010 was 92.8%, compared to88.8% last year.  Cost of goods soldincreased from $1,217 million in 2009 to $1,356 million in 2010 due primarilyto higher costs of reclaimed material ($132 million) in 2010.

 

Selling andadministrative expense increased $6 million in the first quarter of 2010compared to the first quarter of 2009 primarily due to amounts accrued underour 2009 long-term incentive plan.

 

Interest expense, net was$13 million in the first quarter of 2010. The $58 million decrease compared to the first quarter of 2009 wasimpacted by the discontinuation of accrued interest on unsecured debt ($48 million),lower average borrowings ($7 million) and lower average interest rates ($3million).  Since the Petition Date, wediscontinued interest payments on our unsecured notes and certain otherunsecured debt.  The lower averageborrowings were primarily due to the repayment of the DIP Credit Facility.  Our overall average effective interest ratein the first quarter of 2010 was lower than the first quarter of 2009 by1.75%.  For additional information on thediscontinuation of accrued interest on unsecured debt, see Part I, Item 2.Management’s Discussion and Analysis of Financial Condition and Results ofOperations — Bankruptcy Proceedings — Financial Reporting Considerations — “ReorganizationItems.”

 

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In the first quarter of2009, we recorded debtor-in-possession debt issuance costs of $63 million inconnection with entering into the DIP Credit Agreement.

 

In the first quarter of2009, we recorded a loss on early extinguishment of debt of $20 million for thenon-cash write-off of deferred debt issuance cost related to the Stevenson,Alabama mill industrial revenue bonds, which were repaid.

 

In the first quarter of2010, we recorded non-cash foreign currency exchange losses of $6 millioncompared to gains of $3 million for the same period in 2009.

 

Reorganization itemsexpense decreased $13 million in the first quarter of 2010 compared to thefirst quarter of 2009 due primarily to a lower provision for rejected/settledexecutory contracts and leases.

 

Inthe first quarter of 2009, we recorded a $1 million income tax provision forCanadian withholding taxes and interest on unrecognized tax benefits.  We recorded valuation allowances related to the taxbenefits generated for the three months ended March 31, 2010 and 2009because it is more likely than not that substantially all of the deferred taxassets generated in 2010 and 2009 may not be realized.

 

#### **Statistical Data**

 
| ** **                                                   | ** ** | **Three months ended  March 31,** | ** ** |
|--------------------------------------------------------------|------------|----------------------------------------|------------|
| **(In  thousands of tons, except as noted)**                 | ** ** | **2010**                               | ** ** | **2009** | ** ** |
| Mill  production                                             |       |                                   |       |   |   |
| Containerboard  (1)                                          |       | 1,585                                  |       | 1,435 |   |
| Market  pulp                                                 |       | 62                                     |       | 66 |   |
| SBL                                                          |       | 35                                     |       | 33 |   |
| Kraft  paper                                                 |       | 29                                     |       | 19 |   |
| North  American corrugated containers sold (billion sq. ft.) |       | 16.4                                   |       | 16.6 |   |
| Fiber  reclaimed and brokered                                |       | 1,423                                  |       | 1,241 |   |

 

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(1) Forthe three months ended March 31, 2010 and 2009, our corrugated containerplants consumed 1,116,000 tons and 1,135,000 tons of containerboard,respectively.

 

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#### **LIQUIDITYAND CAPITAL RESOURCES**

 

At March 31, 2010, we had unrestricted cash andcash equivalents of $702 million compared to $704 million at December 31,2009.

 

The following tablesummarizes our cash flows for the three months ended March 31:

 
| **(In  millions)**                       | ** ** | **2010** | ** ** | **2009** | ** ** |
|------------------------------------------|------------|----------|------------|----------|------------|
| Net  cash provided by (used for):        |       |     |       |     |       |
| Operating  activities                    |       | $        | 50         |     | $          | 111 |   |
| Investing  activities                    |       | (28      | )          | (53      | )          |
| Financing  activities                    |       | (25      | )          | 64       |       |
| Effect  of exchange rate changes on cash |       | 1        |       |     |       |
| Net  increase (decrease) in cash         |       | $        | (2         | )        | $          | 122 |   |

 

**Net Cash Provided By (Used For)Operating Activities**

The net cash provided byoperating activities for the three months ended March 31, 2010 was lowercompared to the same period in 2009 due primarily to lower segment profits andless favorable working capital changes. Working capital, principally accounts payable, was favorably impacted inthe first quarter of 2009 by the stay of payment of liabilities subject tocompromise resulting from the bankruptcy filings.  The first quarter of 2010 was favorablyimpacted by a reduction of $48 million in the receivable for alternative fueltax credits.

 

**Net Cash Provided By (Used For)Investing Activities**

Net cash used forinvesting activities was $28 million for the three months ended March 31,2010.  Expenditures for property, plantand equipment were $34 million for the first three months of 2010, compared to$39 million for the same period last year. The amount expended for property, plant and equipment in the first threemonths of 2010 was principally for projects related to upgrades, costreductions and ongoing initiatives.  Thenet proceeds from sales of previously closed facilities were $6 million in thefirst quarter of 2010 compared to $1 million in the first quarter of 2009.  Advances to affiliates, net in the firstquarter of 2009 of $15 million is principally related to funding an obligationpertaining to a guarantee for a previously non-consolidated affiliate.  See Note 8 of the Notes to ConsolidatedFinancial Statements.

 

**Net Cash Provided By (Used For)Financing Activities**

Net cash used forfinancing activities for the three months ended March 31, 2010 of $25million included $9 million for debt issuance cost related to our Exit CreditFacilities and $15 million transferred to restricted cash to collateralizeoutstanding letters of credit.  Net cashprovided by financing activities for the three months ended March 31, 2009was $64 million.  Proceeds from the DIPCredit Agreement of $440 million were used to terminate our receivablessecuritization programs and repay all indebtedness outstanding under theprograms of $385 million.  Debt issuancecost of $63 million was incurred and paid with the proceeds and availablecash.  In addition, letters of credit inthe amount of $71 million were drawn on to fund obligations principally relatedto non-qualified pension plans, commodity derivative instruments and aguarantee for a previously non-consolidated affiliate which increasedborrowings under our credit agreement.

 

**Bank Credit Facilities**

Smurfit-Stone asguarantor, and we and our subsidiary, SSC Canada, as borrowers, entered into acredit agreement, as amended (the Credit Agreement) on November 1,2004.  Our obligations under the CreditAgreement are unconditionally guaranteed by Smurfit-Stone and our material U.S.subsidiaries.  The obligations of SSCCanada under the Credit Agreement are unconditionally guaranteed bySmurfit-Stone, us, our material U.S. subsidiaries and the material Canadiansubsidiaries of SSC Canada.  Ourobligations under the Credit Agreement are secured by a security interest insubstantially all of our assets and properties, and those of Smurfit-Stone andour material U.S. subsidiaries, by a pledge of all of our 

 

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capital stock and ourmaterial U.S. subsidiaries and by a pledge of 65% of the capital stock of SSCCanada that is directly owned by us.  Thesecurity interests securing our obligation under the Credit Agreement excludecash, cash equivalents, certain trade receivables and the land and buildings ofcertain corrugated container facilities.  The obligations of SSC Canada under the CreditAgreement are secured by a security interest in substantially all of the assetsand properties of SSC Canada and the material Canadian subsidiaries of SSCCanada, by a pledge of all of the capital stock of the material Canadiansubsidiaries of SSC Canada and by the same U.S. assets, properties and capitalstock that secure our obligations under the Credit Agreement.  The security interests securing SSC Canada’sobligation under the Credit Agreement excluded certain other real propertieslocated in New Brunswick and Quebec, which were sold during the first quarterof 2010.

 

The Credit Agreementcontains various covenants and restrictions including (i) limitations ondividends, redemptions and repurchases of capital stock, (ii) limitationson the incurrence of indebtedness, liens, leases and sale-leasebacktransactions, (iii) limitations on capital expenditures and (iv) maintenanceof certain financial covenants.  TheCredit Agreement also requires prepayments if we have excess cash flows, asdefined therein, or receive proceeds from certain asset sales, insurance orincurrence of certain indebtedness.

 

As of March 31,2010, as a result of our default, we had no availability for borrowings underour revolving credit facilities after giving consideration to outstandingletters of credit of $87 million.  As of March 31, 2010, we had availableunrestricted cash and cash equivalents of $702 million primarily invested inmoney market funds at a variable interest rate of 0.10%.

 

**DIP Credit Agreement**

In connection with filing the Chapter 11 Petitionand the Canadian Petition, on January 26, 2009 we, Smurfit-Stone andcertain of our affiliates filed a motion with the Bankruptcy Courts seekingapproval to enter into a DIP Credit Agreement. Final approval of the DIP Credit Agreement was granted by the U.S. Courton February 23, 2009 and by the Canadian Court on February 24,2009.  Amendments to the DIP CreditAgreement were entered into on February 25 and 27, 2009.

 

The DIP Credit Agreement, as amended, provided forborrowings up to an aggregate committed amount of $750 million, consisting of a$400 million U.S. DIP Term Loan for borrowings by us; a $35 million CanadianDIP Term Loan for borrowings by SSC Canada; a $250 million U.S. DIP Revolverfor borrowings by us and/or SSC Canada; and a $65 million Canadian DIP Revolverfor borrowings by us and/or SSC Canada.

 

As of December 31,2009, no borrowings were outstanding under the U.S. DIP Term Loan, the U.S. DIPRevolver, the Canadian DIP Term Loan or the Canadian DIP Revolver.  As all borrowings under the DIP CreditAgreement were paid in full as of December 31, 2009, we allowed the DIPCredit Agreement to expire on the maturity date of January 28, 2010.

 

**Exit Credit Facilities**

OnFebruary 16, 2010, the U.S. Court granted the motion and authorized us andcertain of our affiliates to enter into the Term Loan Facility.  On the same date, the U.S. Court also grantedour February 3, 2010 motion seeking approval to enter into a commitmentletter and fee letters for an asset-based revolving credit facility (the ABLRevolving Facility) (together with the Term Loan Facility, the Exit CreditFacilities).  Based on such approvals, onFebruary 22, 2010, we and certain of our subsidiaries entered into theTerm Loan Facility that provides for an aggregate term loan commitment of$1,200 million.  In addition, we enteredinto an ABL Revolving Facility with aggregate commitments of $650 million(including a $100 million Canadian Tranche), on April 15, 2010.   The ABL Revolving Facility includes a $150million sub-limit for letters of credit. The commitments for the Term Loan Facility and the ABL RevolvingFacility will terminate on July 16, 2010 unless our emergence frombankruptcy and satisfaction of certain funding date conditions under the TermLoan Facility and the ABL Revolving Facility occur on or prior to such date.

 

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We are permitted, subject to obtaining lendercommitments, to add one or more incremental facilities to the Term LoanFacility 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 to obtaining lendercommitments, to add incremental commitments under the ABL Revolving Facility inan aggregate amount up to $150 million. Each incremental commitment is conditioned on (a) there existing nodefaults, (b) any new lender providing an incremental commitment shallrequire the consent of the Administrative Agent, each Issuing Lender, theSwingline Lender and the Fronting Lender, (c) the minimum amount of anyincrease must be at least $25 million, (d) we shall not increase thecommitments more than three times in the aggregate, (e) if the interestrate margins and commitment fees with respect to the incremental commitmentsare higher than those applicable to the existing commitments under the ABLRevolving Facility, then the interest rate margins and commitment fees for theexisting commitments under the ABL Revolving Facility will be increased tomatch those for the incremental commitments, and (f) the satisfaction ofother customary closing conditions.

 

On the date we emergefrom bankruptcy, the Term Loan will be funded and borrowings will be available under the ABL Revolving Facility.**** The proceeds of the borrowings under the TermLoan Facility, together with available cash, will be used to repay ouroutstanding secured indebtedness under our pre-petition Credit Facility and payremaining fees, costs and expenses related to and contemplated by the ExitCredit Facilities and the Proposed Plan of Reorganization.  Total fees, costs and expenses related to theExit Credit Facilities are estimated to be approximately $50 million, of which$9 million was paid during the first quarter of 2010.

 

For additionalinformation on the Exit Credit Facilities, see Part I, Item 2. Management’sDiscussion and Analysis of Financial Condition and Results of Operations —Bankruptcy Proceedings — Proposed Plan of Reorganization and Exit CreditFacilities — “Exit Credit Facilities.”

 

**FutureCash Flows**

 

We recorded restructuringincome of $4 million during the first quarter of 2010, including an $11 milliongain related to the sale of previously closed facilities of which $8 millionresulted from the release of legal environmental liability obligations.  The remaining offsetting charges of $7million were principally for severance and benefits.  During the three months ended March 31,2010, we incurred cash expenditures of $4 million for these exitliabilities.  The remaining exitliabilities are expected to be paid principally in the second quarter of 2010.

 

At December 31,2009, we had $54 million of exit liabilities related principally torestructuring activities.  During thethree months ended March 31, 2010, we incurred cash expenditures of $20million for these exit liabilities.  Theremaining cash expenditures in connection with our restructuring activitieswill continue to be funded through operations as originally planned.

 

In March 2010, werecorded other operating income of $11 million relating to an adjustment ofrefund claims for the alternative fuel tax credit submitted in 2009.  We expect to receive the refund claim in the fourthquarter of 2010.

 

In the first quarter of 2010, we contributedapproximately $2 million to our defined benefit plans.

 

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**Pension Plan Contributions**

 

AtDecember 31, 2009, the qualified defined benefit plans, which are expectedto be assumed under the Proposed Plan of Reorganization, were underfunded byapproximately $1,020 million.  Weestimate that this level of under funding increased by approximately $40million during the three months ended March 31, 2010, due primarily to a decreasein the Canadian discount rate assumption used to determine the amount ofbenefit obligations, which was partially offset by positive returns on planassets.  We currently estimate thatcash contributions under the U.S. and Canadian qualified pension plans will beapproximately $82 million in 2010, and potentially up to approximately $112million depending upon how unpaid Canadian contributions for 2009 are impactedby the Proposed Plan of Reorganization. We currently estimate that contributions will be in the range ofapproximately $300 million to $330 million annually in 2011 through 2013, andwill then decrease to approximately $280 million in 2014, approximately $230million in 2015 and $130 million in 2016, at which point almost all of theshortfall would be funded.  The actualrequired amounts and timing of such future cash contributions will be highlysensitive to changes in the applicable discount rates and returns on planassets, and could also be impacted by future changes in the laws andregulations applicable to plan funding.

 

#### **INCOMETAXES**

 

During the first quarter of 2009, we recorded a $1million income tax provision for Canadian withholding taxes and interest onunrecognized tax benefits.  We recordedvaluation allowances related to the tax benefits generated for the three monthsended March 31, 2010 and 2009 because it is more likely than not thatsubstantially all of the deferred tax assets generated in 2010 and 2009 may notbe realized.

 

As previously disclosedin our 2009 Form 10-K, the Canada Revenue Agency (CRA) examined our incometax returns for tax years 1999 through 2005. In connection with the examination, the CRA issued assessments ofadditional income taxes, interest and penalties related to transfer prices ofinventory sold by our Canadian subsidiaries to our U.S. subsidiaries.  Additionally, the CRA considered certainsignificant adjustments related principally to taxable income related to ouracquisition of a Canadian company.

 

In April 2010, weentered into an agreement with the CRA and other provincial tax authorities tosettle all Canadian income tax matters through January 26, 2009.  As a result of this agreement, the CRA willretain approximately $20 million of a tax deposit made by us in 2008 to appealthe transfer price assessments.  Theremainder of the tax deposit, approximately $10 million, will be refunded tous.  In addition, we will pay the Provinceof Quebec approximately $3 million to settle their claims.  GST and QST tax withholdings subsequent to January 26,2009 will be refunded to us.  Thesettlement agreement will become effective at the time the Canadiansubsidiaries emerge from CCAA proceedings, and transfers of funds are expectedto take place as soon as possible thereafter. Upon emergence from bankruptcy,we expect to record an income tax benefit of approximately $17 million toreflect the outcome of this agreement.

 

**ITEM 3.**                             **QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

We are exposed to various market risks, includingcommodity price risk, foreign currency risk and interest rate risk.  To manage the volatility related to theserisks, we have on a periodic basis entered into various derivativecontracts.  The majority of thesecontracts are settled in cash.  However,such settlements have not had a significant effect on our liquidity in thepast, nor are they expected to be significant in the future.  We do not use derivatives for speculative ortrading purposes.

 

In January 2009, the Chapter 11 Petition and theCanadian Petition effectively terminated all existing derivativeinstruments.  Termination fair valueswere calculated based on the potential settlement value.  Our termination value related to ourremaining derivative liabilities was approximately $60 million, recorded inother current liabilities in the consolidated balance sheet at March 31,2010.  These derivative liabilities werestayed due to the filing of the Chapter 11 Petition and the Canadian Petitionat which time, 

 

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these liabilities were adjusted through OCI forderivative instruments qualifying for hedge accounting and cost of goods soldfor 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 March 31, 2010, all amounts in OCIhave been recognized through earnings. See Note 11 of the Notes to Consolidated Financial Statements.

 

**Commodity Price Risk**

We used derivativeinstruments, including fixed price swaps, to manage fluctuations in cash flowsresulting from commodity price risk in the procurement of natural gas and othercommodities, including fuel oil and diesel fuel.  The objective was to fix the price of aportion of our purchases of these commodities used in the manufacturing process.  The changes in the market value of suchderivative instruments historically offset the changes in the price of thehedged item.

 

**Foreign Currency Risk**

Our principal foreignexchange exposure is the Canadian dollar. Assets and liabilities outside the United States are primarily locatedin Canada. The functional currency for our Canadian operations is the U.S.dollar.  Our investments in foreignsubsidiaries with a functional currency other than the U.S. dollar are nothedged.

 

We used financialderivative instruments, including forward contracts and options, primarily toprotect against Canadian currency exchange risk associated with expected futurecash flows.  The Canadian dollar as of March 31,2010, compared to December 31, 2009, strengthened 2.96% against the U.S.dollar.  We recognized non-cash foreigncurrency exchange losses of $6 million for the three month period ended March 31,2010 compared to gains of $3 million for the same period in 2009.

 

**InterestRate Risk**

Ourearnings and cash flow are significantly affected by the amount of interest onour indebtedness.  Our financingarrangements include both fixed and variable rate debt in which changes ininterest rates will impact the fixed and variable rate debt differently.  A change in the market interest rate of fixedrate debt will impact the fair value of the debt, whereas a change in theinterest rate on the variable rate debt will impact interest expense and cashflows.  Our objective is to mitigateinterest rate volatility and reduce or cap interest expense within acceptablelevels of market risk.  We periodicallyenter into interest rate swaps, caps or options to hedge interest rate exposureand manage risk within Company policy. Any derivative would be specific to the debt instrument, contract ortransaction, which would determine the specifics of the hedge.

 
| **ITEM 4.** | **CONTROLS AND PROCEDURES** |
|-------------|-----------------------------|

 

**Evaluation of Disclosure Controlsand Procedures**

Our management, with theparticipation of our principal executive officer and our principal financialofficer, evaluated the effectiveness of our disclosure controls and procedures(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of theend of the period covered by this report and concluded that, as of such date,our disclosure controls and procedures were adequate and effective.

 

**Changes in Internal Control**

There have not been anychanges in our internal control over financial reporting during the most recentquarter that have materially affected, or are reasonably likely to materiallyaffect, our internal control over financial reporting.

 

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**PART II - OTHER INFORMATION**

 
| **ITEM 1.** | **LEGAL PROCEEDINGS** |
|-------------|-----------------------|

 

On January 26, 2009, we, Smurfit-Stone and ourU.S. and Canadian subsidiaries filed the Chapter 11 Petition for relief underChapter 11 of the Bankruptcy Code in the U.S. Court.  On the same day, our Canadian subsidiariesalso filed the Canadian Petition under the CCAA in the Canadian Court.  Our operations in Mexico and Asia were not included in thefiling and will continue to operate outside of the Chapter 11 process.  See Part I, Item 2. Management’sDiscussion and Analysis of Financial Condition and Results of Operations — “BankruptcyProceedings.”

 

During the first quarterof 2010, an Employee Retirement Income Security Act (ERISA) class actionlawsuit was filed in the United States District Court for the District ofDelaware.  Two other such ERISA caseswere previously disclosed in our 2009 Form 10-K.  The defendants in this case are theindividual committee members of the Administrative Committee of our savingsplans, several of our other executives and the individual members ofSmurfit-Stone’s Board of Directors.  Thesuit has similar allegations as the two other ERISA class action lawsuits.  We expect that all of these matters will beconsolidated in some manner as they purport to represent a similar class ofemployees and former employees and seek recovery under similarallegations.  Even though we are not anamed defendant in these cases, management believes that any indemnificationobligations to the named defendants would be covered by applicable insurance.

 
| **ITEM 1A.** | **RISK FACTORS** |
|--------------|------------------|

 

There are no materialchanges to the risk factors as disclosed in our 2009 Form 10-K.

 
| **ITEM 2.** | **UNREGISTERED SALES OF EQUITY  SECURITIES AND USE OF PROCEEDS** |
|-------------|------------------------------------------------------------------|

 

None

 
| **ITEM 3.** | **DEFAULTS UPON SENIOR SECURITIES** |
|-------------|-------------------------------------|

 

The filing of theChapter 11 Petition and the Canadian Petition constituted an event ofdefault under our debt obligations, and those debt obligations becameautomatically and immediately due and payable. See Part I, Item 2. Management’s Discussion and Analysis ofFinancial Condition and Results of Operations — Bankruptcy Proceedings — “Chapter11 Bankruptcy Filings.”

 
| **ITEM 4.** | **RESERVED** |
|-------------|--------------|

 
| **ITEM 5.** | **OTHER INFORMATION**                                                                                                                                                                                       |
|-------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **  | ** **                                                                                                                                                                                                  |
| (b)         | There have been no  material changes to the procedures by which security holders may recommend  nominees to the Company’s Board of Directors implemented since the filing of  our 2009 Form 10-K. |

 

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| **ITEM 6.** | **EXHIBITS**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|-------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|        | The following exhibits  are included in this Form 10-Q:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.1        | Credit Agreement dated  as of February 22, 2010 among Smurfit-Stone Container Corporation and  Smurfit-Stone Container Enterprises, Inc., as Borrowers, J.P. Morgan  Chase Bank, N.A., as administrative agent, J.P. Morgan Securities Inc.,  Deutsche Bank Securities Inc. (DBSI) and Banc of America Securities LLC (BAS)  as Joint Bookrunners and Co-Lead Arrangers, DBSI as syndication agent, BAS as  documentation agent, and other lenders party thereto (incorporated by  reference to Exhibit 10.1 to Smurfit-Stone’s Current Report on  Form 8-K filed February 25, 2010 (File No. 0-23876)). |
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 31.1        | Certification pursuant  to Rules 13a—14(a) and 15d—14(a) under the Securities Exchange  Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 31.2        | Certification pursuant  to Rules 13a—14(a) and 15d—14(a) under the Securities Exchange  Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 32.1        | Certification pursuant  to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 32.2        | Certification pursuant  to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |

 

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Signature

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

 
|                         | SMURFIT-STONE CONTAINER  ENTERPRISES, INC. |
|------------------------------|--------------------------------------------|
|                         | (Registrant)                               |
|                         |                                       |
|                         |                                       |
| Date:  May 5, 2010 |                                       | /s/  Paul K. Kaufmann |
|                         |                                       | Paul K. Kaufmann |
|                         |                                       | Senior Vice  President and Corporate Controller |
|                         |                                       | (Principal  Accounting Officer) |

 

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