UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

For Quarter Ended June 30, 2010

Commission File Number 1-03439

SMURFIT-STONE CONTAINER CORPORATION

(Exact name of registrant as specified in its charter)

(312) 346-6600

(Registrant’s telephone number, including area code)

Not Applicable

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

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

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

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

APPLICABLE ONLY TO CORPORATE ISSUERS:

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

PART I - FINANCIAL INFORMATION

Item 1.    Financial Statements

SMURFIT-STONE CONTAINER CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

See notes to consolidated financial statements.

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SMURFIT-STONE CONTAINER CORPORATION

CONSOLIDATED BALANCE SHEETS

See notes to consolidated financial statements.

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SMURFIT-STONE CONTAINER CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

See notes to consolidated financial statements.

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SMURFIT-STONE CONTAINER CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tabular amounts in millions, except per share data)

1.              Bankruptcy Proceedings

Chapter 11 Bankruptcy Filings

On January 26, 2009 (the “Petition Date”), Smurfit-Stone Container Corporation (“SSCC” or the “Company”) and its U.S. and Canadian subsidiaries (collectively, the “Debtors”) filed a voluntary petition (the “Chapter 11 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 same day, the Company’s Canadian subsidiaries also filed to reorganize (the “Canadian Petition”) under the Companies’ Creditors Arrangement Act (the “CCAA”) in the Ontario Superior Court of Justice in Canada (the “Canadian Court”).  The Company’s operations in Mexico and Asia and certain U.S. and Canadian legal entities (the “Non-Debtor Subsidiaries”) were not included in the filings and continued to operate outside of the Chapter 11 and CCAA processes.  As described below, on June 21, 2010, the U.S. Court entered an order (“Confirmation Order”) approving and confirming the Joint Plan of Reorganization for Smurfit-Stone Container Corporation and its Debtor Subsidiaries and Plan of Compromise and Arrangement for Smurfit-Stone Container Canada Inc. and Affiliated Canadian Debtors (“Plan of Reorganization”).  The Company emerged from its Chapter 11 and CCAA bankruptcy proceedings on June 30, 2010 (“Effective Date”).  As of the Effective Date and pursuant to the Plan of Reorganization, the Company merged with and into its wholly-owned subsidiary, Smurfit-Stone Container Enterprises, Inc. (“SSCE”).  SSCE changed its name to Smurfit-Stone Container Corporation and became the Reorganized Smurfit-Stone Container Corporation (“Reorganized Smurfit-Stone”).

The term “Predecessor” refers only to the Company and its subsidiaries prior to the Effective Date, and the term “Successor” refers only to the Reorganized Smurfit-Stone and its subsidiaries subsequent to the Effective Date.  Unless the context indicates otherwise, the terms “SSCC” and the “Company” are used interchangeably in this Quarterly Report on Form 10-Q to refer to both the Predecessor and Successor Company.

Until its emergence on the Effective Date, the Debtors were operating as debtors-in-possession under the jurisdiction of the U.S. Court and Canadian Court (the “Bankruptcy Courts”) and in accordance with the applicable provisions of the Bankruptcy Code and the CCAA.  In general, as debtors-in-possession, the Debtors were authorized to continue to operate as ongoing businesses, but could not engage in transactions outside the ordinary course of business without the approval of the Bankruptcy Courts.

Debtor-In-Possession (“DIP”) Financing

In connection with filing the Chapter 11 Petition and the Canadian Petition on the Petition Date, the Company and certain of its affiliates filed a motion with the Bankruptcy Courts seeking approval to enter into a Post-Petition Credit Agreement (the “DIP Credit Agreement”). Based on interim approval, the Company and certain affiliates entered into the DIP Credit Agreement on January 28, 2009.  Final approval 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 were entered into on February 25 and 27, 2009.

The DIP Credit Agreement, as amended, provided for borrowings 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 SSCE; a $35 million Canadian term loan (“Canadian DIP Term Loan”) for borrowings by Smurfit-Stone Container Canada Inc. (“SSC Canada”); a $250 million U.S. revolving loan (“U.S. DIP Revolver”) for borrowings by SSCE and/or SSC Canada; and a $65 million Canadian revolving loan (“Canadian DIP Revolver”) for borrowings by SSCE and/or SSC Canada.

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Under the DIP Credit Agreement, on January 28, 2009, the Company borrowed $440 million, consisting of a $400 million U.S. DIP Term Loan, a $35 million Canadian DIP Term loan and $5 million from the Canadian DIP Revolver.  In accordance with the terms of the DIP Credit Agreement, 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 Loan proceeds of $30 million, net of lenders’ fees of $5 million, to terminate the receivables securitization programs and repay all indebtedness outstanding under the programs of $385 million and to pay other expenses of $1 million.  In addition, other fees and expenses of $17 million related to the DIP Credit Agreement were paid for with proceeds of $5 million from the Canadian DIP Revolver and available cash.

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

Reorganization Process

The Bankruptcy Courts approved payment of certain of the Company’s pre-petition obligations, including employee wages, salaries and benefits, and the payment of vendors and other providers in the ordinary course for goods received and services rendered subsequent to the filing of the Chapter 11 Petition and Canadian Petition and other business-related payments necessary to maintain the operation of the Company’s business.  The Company retained legal and financial professionals to advise it on the bankruptcy proceedings.

Immediately after filing the Chapter 11 Petition and Canadian Petition, the Company notified all known current or potential creditors of the bankruptcy filings.  Subject to certain exceptions under the Bankruptcy Code and the CCAA, the Company’s bankruptcy filings automatically enjoined, or stayed, the continuation of any judicial or administrative proceedings or other actions against the Company or its property to recover, collect or secure a claim arising prior to the filing of the Chapter 11 Petition and Canadian Petition.  Thus, for example, most creditor actions to obtain possession of property from the Company, or to create, perfect or enforce any lien against its property, or to collect on monies owed or otherwise exercise rights or remedies with respect to a pre-petition claim were enjoined unless and until the Bankruptcy Courts lifted the automatic stay.

As required by the Bankruptcy 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 had a right to be heard on all matters that came before the U.S. Court with respect to the Debtors.  A monitor was appointed by the Canadian Court with respect to proceedings before the Canadian Court.

Under the Bankruptcy Code, the Debtors either assumed or rejected pre-petition executory contracts, including real property leases, subject to the approval of the Bankruptcy Courts and certain other conditions.  In this context, “assumption” meant that the Company agreed to perform its obligations and cure all existing defaults under the contract or lease, and “rejection” meant that it was relieved from its obligations to perform further under the contract or lease, but was subject to a pre-petition claim for damages for the breach thereof, subject to certain limitations.  Any damages resulting from rejection of executory contracts and unexpired leases, and from the determination of the U.S. Court (or agreement by parties in interest) of allowed claims for contingencies and other disputed amounts, that were permitted to be recovered under the Bankruptcy Code were treated as liabilities subject to compromise unless such claims were secured prior to the Petition Date.

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Plan of Reorganization and Exit Credit Facilities

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

Plan of Reorganization

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

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

The Plan of Reorganization was overwhelmingly approved by number and dollar amount of the required classes of creditors of each of the Debtors, with the exception of Stone Container Finance Company of Canada II.  Stone Container Finance Company of Canada II was removed from the Plan of Reorganization.  A meeting of creditors was held for the Canadian debtor subsidiaries on April 6, 2010, at which the necessary votes were received to confirm the Plan of Reorganization by all requisite classes of creditors other than Stone Container Finance Company of Canada II.

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

On May 24, 2010, the Debtors announced that they reached a resolution with certain holders of the Company’s preferred and common stock that had filed objections to the confirmation of the Plan of Reorganization.  On May 28, 2010, the U.S. Court approved notice procedures with respect to this resolution.  On June 21, 2010, the U.S. Court entered the Confirmation Order which approved and confirmed the Plan of Reorganization.  The Company emerged from its Chapter 11 and CCAA bankruptcy proceedings on June 30, 2010, the Effective Date.

As of the Effective Date, the Company substantially consummated the various transactions contemplated under the Plan of Reorganization and the Confirmation Order, including the following:

·                  the Company merged with and into SSCE, with SSCE being the survivor entity and renaming itself Smurfit-Stone Container Corporation, and becoming the Reorganized Smurfit-Stone.  Reorganized Smurfit-Stone is governed by a board of directors that includes Patrick J. Moore, the Company’s Chief Executive Officer, Steven J. Klinger, the Company’s President and Chief Operating Officer, and nine independent directors, including a non-executive chairman selected by the Creditors’ Committee in consultation with the Debtors;

·                  Reorganized Smurfit-Stone filed the Amended and Restated Certificate of Incorporation of the Company, which authorized Reorganized Smurfit-Stone to issue 160,000,000 shares, consisting of 150,000,000 shares of common stock, par value $.001 per share (“Common Stock”) and 10,000,000 shares of preferred stock, par value $.001 per share (Preferred Stock”).  Reorganized Smurfit-Stone issued or reserved for issuance 100,000,000 shares of Common Stock for distribution to creditors and interest holders pursuant to the Plan of Reorganization.  Under the

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Plan of Reorganization, 89,854,782 shares were issued on June 30, 2010 and an additional 1,159,407 shares were subsequently issued through August 13, 2010.  None of the Preferred Stock was issued or outstanding as of the Effective Date;

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

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

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

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

·                  Reorganized Smurfit-Stone adopted the Equity Incentive Plan, pursuant to which, among other things, it reserved for issuance 8,695,652 shares of Common Stock representing eight percent of the fully diluted new Common Stock.  In accordance with the terms of the Equity Incentive Plan, 2,895,909 stock options and 914,498 Restricted Stock Units (“RSU’s”) were granted to executive officers and other key employees of Reorganized Smurfit-Stone on the Effective Date;

·                  the assets of the Canadian Debtors, other than Stone Container Finance Company of Canada II, were sold to a newly-formed Canadian subsidiary of Reorganized Smurfit-Stone free and clear of existing claims, liens and interests in exchange for (i) the repayment in cash of the secured debt obligations of the Canadian Debtors, (ii) cash to the Canadian Debtors’ unsecured creditors and (iii) the assumption of certain liabilities and obligations of the Canadian Debtors;

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

·                  Pursuant to the Plan of Reorganization and after the initial distribution, the Company reserved approximately 9.0 million shares of Common Stock for future distribution to holders of unsecured non-priority claims that were unliquidated or subject to dispute.  These shares will be distributed as these claims are liquidated or resolved, in accordance with the Plan of Reorganization and Confirmation Order.  To the extent that such unliquidated or disputed claims are settled for less than the number of shares reserved, additional distributions may also be made with respect to previously allowed claims under the terms and conditions of the Plan of Reorganization and Confirmation Order.

Exit Credit Facilities

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

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

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Facility, the “Exit Credit Facilities”).  Based on such approvals, on February 22, 2010, the Company and certain of its subsidiaries entered into the Term Loan Facility that provides for an aggregate term loan commitment of $1,200 million.  In addition, the Company entered into the 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 $150 million sub-limit for letters of credit.

The Company is permitted, subject to obtaining lender commitments, to add one or more incremental facilities to the Term Loan Facility in an aggregate amount up to $400 million.  Each incremental facility is conditioned on (a) there existing no defaults, (b) in the case of incremental term loans, such loans have a final maturity no earlier than, and a weighted average life no shorter than, the Term Loan Facility, and (c) after giving effect to one or more incremental facilities, the consolidated senior secured leverage ratio shall be less than 3.00 to 1.00.  If the interest rate spread applicable to any incremental facility exceeds the interest 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 be increased to equal the interest rate spread applicable to the incremental facility.

The Company is permitted, subject to obtaining lender commitments, to add incremental commitments under the 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 an incremental commitment shall require the consent of the Administrative Agent, each Issuing Lender, the Swingline Lender and the Fronting Lender, (c) the minimum amount of any increase must be at least $25 million, (d) the Company shall not increase the commitments more than three times in the aggregate, (e) if the interest rate margins and commitment fees with respect to the incremental commitments are higher than those applicable to the existing commitments under the ABL Revolving facility, then the interest rate margins and commitment fees for the existing commitments under the ABL Revolving Facility will be increased to match those for the incremental commitments, and (f) the satisfaction of other customary closing conditions.

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

The term loan (the “Term Loan”) is repayable in equal quarterly installments of $3 million beginning on September 30, 2010, with the balance payable at maturity on June 30, 2016.  Additionally, following the end of each fiscal year, varying percentages of the Company’s excess cash flow, as defined in the Term Loan Facility, based on certain agreed levels of secured leverage ratios, must be used to repay outstanding principal amounts under the Term Loan.  Subject to specified exceptions, the Term Loan Facility also requires the Company to use the net proceeds of asset sales and the net proceeds of the incurrence of indebtedness to repay outstanding borrowings under the Term Loan Facility.

The Term Loan bears interest at the Company’s option at a rate equal to: (A) 3.75% plus the alternate base rate  (the “Term Loan ABR”) defined as the greater of: (i) the U.S. prime rate, (ii) the overnight federal funds rate 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) the adjusted LIBOR rate plus 4.75%, provided that the adjusted LIBOR rate shall never be lower than 2.00% per annum.

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The ABL revolver loan (the “ABL Revolver”) matures on June 30, 2014. The Company has the option to borrow at a rate equal to: (A) the base rate, defined as the greater of 2.50% plus:(i) the US Prime Rate, (ii) the overnight federal funds rate plus 0.50% or (iii) LIBOR rate plus 1.0%, or (B) the LIBOR rate plus 3.50% for the first 90 days then 3.25% thereafter. The applicable margin can be adjusted in the future from 2.25% to a rate as high as 2.75% for base loans and 3.25% to a rate as high as 3.75% for LIBOR loans based on the average historical utilization under the ABL Revolving Facility.   The Company will also pay either a 0.50% or 0.75% per annum unused commitment fee based on the average historical utilization under the ABL Revolving Facility.  The ABL Revolving Facility borrowings are subject to a borrowing base derived from a formula based on certain eligible accounts receivable and inventory, less certain reserves.

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

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

Financial Reporting Considerations

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

Reorganization Items

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

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

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

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

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

Interest expense recorded on unsecured debt was zero for the three and six months ended June 30, 2010 and $50 million and $98 million for the three and six months ended June 30, 2009, respectively.  Contractual interest expense on unsecured debt was $49 million and $98 million for the three and six months ended June 30, 2010, respectively.  Under the Plan of Reorganization, interest expense on the unsecured senior notes subsequent to the Petition Date was not paid.  In the fourth quarter of 2009, the Company concluded it was not probable that interest expense on the unsecured senior notes subsequent to the Petition Date would be an allowed claim.  As a result, during the fourth quarter of 2009, the Company recorded income in reorganization items for the reversal of accrued post-petition unsecured interest expense and discontinued recording unsecured interest expense.

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

Other Bankruptcy Related Costs

Debtor-in-possession debt issuance costs of $63 million were incurred and paid during the first quarter of 2009 in connection with entering into the DIP Credit Agreement, and are separately presented in the 2009 consolidated statements of operations.

Liabilities Subject to Compromise

Liabilities subject to compromise represent pre-petition unsecured obligations that were settled under the Plan of Reorganization. These liabilities represented the amounts expected to be allowed on known or potential claims to be resolved through the Chapter 11 and CCAA process.  Liabilities subject to compromise also included certain items, such as qualified defined benefit pension and retiree medical obligations that were assumed under the Plan of Reorganization, and as such, have been recorded in liabilities under the Reorganized Smurfit-Stone.

The Company rejected certain executory contracts and unexpired leases with respect to the Company’s operations with the approval of the Bankruptcy Courts.  Damages resulting from rejection of executory contracts and unexpired leases are generally treated as general unsecured claims and were classified as liabilities subject to compromise.

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

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

Fresh Start Accounting

The Company, in accordance with ASC 852, adopted fresh start accounting as of the close of business on June 30, 2010, because the reorganization value of the assets of the Predecessor Company immediately before the date of confirmation of the Plan of Reorganization was less than the total of all post-petition liabilities and allowed claims, and the holders of the Predecessor Company’s voting shares immediately before confirmation of the Plan of Reorganization received less than 50 percent of the voting shares of the Successor Company.  Upon adoption of fresh start accounting, the Company became a new entity for financial reporting purposes reflecting the Successor capital structure.  As such, a new accounting basis in the identifiable assets and liabilities assumed was established with no retained earnings or accumulated other comprehensive income (loss) (“OCI”).

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

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

The final equity value of $2,352 was determined consistent with the third party methodology using the midpoint enterprise value of $3,295 million.  See reconciliation of the enterprise value to the final equity value below in Note 10 of the Explanatory Notes to the reorganized consolidated balance sheet.  Reorganization value, comprised of equity and debt, represents the amount of resources available for the satisfaction of post-petition liabilities and allowed claims, as negotiated between the Debtors and creditors.  Reorganization value is intended to approximate the amount a willing buyer would pay for the assets of the Company immediately after reorganization.

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Enterprise value of the Company was estimated using various valuation methods including: (i) comparable public company analysis, (ii) discounted cash flow analysis (“DCF”) and (iii) precedent transaction analysis.  Due to the Company’s significant pension obligations, the comparable company and DCF valuations included scenarios designed to account for the Company’s pension liabilities and expense.

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

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

The precedent transactions analysis identified relevant merger and acquisition transactions in the paperboard and containerboard industry.  This analysis involved calculating the total enterprise value of the acquired company as a multiple of EBITDA for the last twelve months prior to announcement.  A range of valuation multiples was then identified and applied to the Company’s projected EBITDA for the 12 month period ended April 30, 2010, to determine an estimate of enterprise values.

The Company’s reorganization value was allocated to its assets and liabilities in conformity with the procedures specified by ASC 805, “Business Combinations.”  The significant assumptions related to the valuation of the Company’s assets and liabilities in connection with fresh start accounting include the following:

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

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

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

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

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

·                  Economic obsolescence — the loss in value caused by external forces such as legislative enactments, overcapacity in the industry, low commodity pricing, changes in the supply and demand relationships in the marketplace and other market inadequacies.

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

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

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

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

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

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

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

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

The adjustments presented below relate to the Company’s June 30, 2010 balance sheet.  The balance sheet reorganization adjustments presented below summarize the impact of the Plan of Reorganization and the adoption of fresh start accounting as of the Effective Date.

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SMURFIT-STONE CONTAINER CORPORATION

REORGANIZED CONSOLIDATED BALANCE SHEET

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Explanatory Notes

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

(2)          Cash effects of the Plan of Reorganization:

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

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

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

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

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

(6)   Primarily represents accrued professional fees.

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

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

(9)   Represents the disposition of liabilities subject to compromise:

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

(10)   Reconciliation of enterprise value to determination of equity:

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

(12)   The following table summarizes the allocation of the reorganization value to the Company’s assets at the date of emergence as shown in the reorganized consolidated balance sheet as of June 30, 2010.

Liabilities were also adjusted to fair value in the application of fresh start accounting resulting in an increase in liabilities of $793 million.

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

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2.              Significant Accounting Policies

Basis of Presentation

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

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

Recently Adopted Accounting Standards

Effective January 1, 2010, the Company adopted the amendments to ASC 860, “Transfers and Servicing” (“ASC 860”).  The amendments removed the concept of a qualifying special-purpose entity and the related impact on consolidation, thereby potentially requiring consolidation of such special-purpose entities previously excluded from the consolidated financial statements.  The amendments to ASC 860 did not impact the Company’s consolidated financial statements.

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

3.              Reclassifications

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

4.              Restructuring Activities

The Company continues to review and evaluate various restructuring and other alternatives to streamline operations, improve efficiencies and reduce costs.  These actions subject the Company to additional short-term costs, which may include facility shutdown costs, asset impairment charges, lease commitment costs, severance costs and other closing costs.

During the second quarter of 2010, the Company closed three converting facilities and sold one previously closed facility.  The Company recorded restructuring charges of $19 million.  Restructuring charges included non-cash charges of $11 million related to the acceleration of depreciation for converting equipment abandoned or taken out of service.  The remaining charges of $8 million were primarily for severance and benefits and lease commitments.  As a result of the closure activities in the second quarter of 2010 and other ongoing initiatives, the Company reduced its headcount by approximately 140 employees.

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For the six months ended June 30, 2010, the Company closed four converting facilities and sold five previously closed facilities.  As a result of these closure activities and other ongoing initiatives, the Company reduced its headcount by approximately 900 employees.  The Company recorded restructuring charges of $15 million, including an $11 million gain related to the sale of previously closed facilities, of which $8 million resulted from the legal release of environmental liability obligations.  Restructuring charges included non-cash charges of $11 million related to the acceleration of depreciation for converting equipment abandoned or taken out of service.  The remaining charges of $15 million were primarily for severance and benefits and lease commitments.  The net sales of the closed converting facilities in 2010 prior to closure and for the year ended December 31, 2009 were $21 million and $97 million, respectively.  The majority of these net sales are expected to be transferred to other operating facilities.

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

At December 31, 2009, the Company had $54 million of accrued exit liabilities related to the restructuring of operations.  For the three and six months ended June 30, 2010, the Company incurred $3 million and $23 million, respectively, of cash disbursements, primarily severance and benefits, related to these exit liabilities.  In addition, these exit liabilities decreased by $8 million resulting from the release of environmental liability obligations upon the sale of previously closed facilities, $3 million due to the reclassification of multi-employer pension plan liabilities to liabilities subject to compromise, and $4 million due to adjustments to severance and benefit reserves based on current information.  During the three and six months ended June 30, 2010, the Company incurred $7 million and $11 million, respectively, of cash disbursements, primarily severance and benefits, related to exit liabilities established during 2010.

5.              Alternative Energy Tax Credits

The U.S. Internal Revenue Code allowed an excise tax credit for alternative fuel mixtures produced by a taxpayer for sale, or for use 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 was approved by the Internal Revenue Service.  The Company subsequently submitted refund claims of approximately $654 million for 2009 related to production at ten of its U.S. mills.  The Company received refund claims of $595 million in 2009 and $59 million during the first quarter of 2010.  During 2009, the Company recorded other operating income of $633 million, net of fees and expenses, in its consolidated statements of operations related to this matter.  In March 2010, the Company recorded other operating income of $11 million relating to an adjustment of refund claims submitted in 2009.  The Company expects to receive the refund claim in the fourth quarter of 2010.

6.              Restricted Cash

At June 30, 2010, the Company had restricted cash of $7 million as approved by the U.S. Court to provide financial assurance to certain utility vendors.  During July 2010, the $7 million of restricted cash was released to the Company’s operating cash funds.

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7.              Accounts Receivable Securitization Programs

On January 28, 2009, in conjunction with the filing of the Chapter 11 Petition and the Canadian Petition, the accounts receivable securitization programs were terminated and all outstanding receivables previously sold to the non-consolidated financing entities were repurchased with proceeds from borrowings under the DIP Credit Agreement (See Note 1).  The repurchase of receivables of $385 million was included in the cash flows from financing activities in the consolidated statement of cash flows for the six months ended June 30, 2009.

8.              Guarantees and Commitments

The Company has certain wood chip processing contracts extending from 2012 through 2018 with minimum purchase commitments.  As part of the agreements, the Company guarantees the third party contractors’ debt outstanding and has a security interest in the chipping equipment.  At June 30, 2010, the maximum potential amount of future payments related to these guarantees was approximately $24 million, which decreases ratably over the life of the contracts.  In the event the guarantees on these contracts are called, proceeds from the liquidation of the chipping equipment would be based on current market conditions and the Company may not recover in full the guarantee payments made.

9.              Employee Benefit Plans

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

The Company’s postretirement benefit plans provide certain health care and life insurance benefits for all retired salaried and certain retired hourly employees, and for salaried and certain hourly employees who reached the age of 60 with ten years of service as of January 1, 2007.

At June 30, 2010, the qualified defined benefit plans, which were assumed under the Plan of Reorganization, were underfunded by approximately $1,450 million.  The Company currently estimates that its minimum required cash contributions under the U.S. and Canadian qualified pension plans will be approximately $95 million in 2010 and in the range of $235 million to $305 million annually in 2011 through 2015.  Projected pension contributions assume the Company elects funding relief under the Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010, enacted in June 2010.  The actual required amounts and timing of such future cash contributions will be highly sensitive to changes in the applicable discount rates and returns on plan assets.

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