Table
of Contents
United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-K
x
Annual
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the
fiscal year ended December 31, 2009
or
o
Transition
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the
transition period from
to
Commission
file number 0-23876
Smurfit-Stone Container Corporation
(Exact name of
registrant as specified in its charter)
Delaware
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43-1531401
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(State of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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222
North LaSalle Street
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Chicago,
Illinois
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60601
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(Address of
principal executive offices)
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(Zip Code)
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Registrants
Telephone Number:
(312) 346-6600
Securities registered pursuant to
Section 12(b) of the Act:
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None
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Securities registered pursuant to
Section 12(g) of the Act:
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Common Stock, $0.01 Par Value
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7% Series A Cumulative Exchangeable
Redeemable Convertible Preferred Stock, $0.01 Par Value
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Indicate by check mark if
the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. Yes
o
No
x
Indicate by check mark if
the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of
the Act. Yes
o
No
x
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
if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrants
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K.
x
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.
Large
accelerated filer
o
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Accelerated
filer
o
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Non-accelerated filer
o
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Smaller
Reporting Company
x
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Indicate by check mark
whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes
o
No
x
The aggregate market
value of the voting stock held by non-affiliates of the registrant as of the
last business day of the registrants most recently completed second fiscal
quarter was $44 million, based on the closing price of $0.17 per share of such
stock on the Pink Sheets Electronic Quotation Service on June 30, 2009.
The number of shares
outstanding of the registrants common stock as of February 26, 2010: 256,811,073
DOCUMENTS INCORPORATED BY
REFERENCE:
Document
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Part of
Form 10-K Into Which
Document Is Incorporated
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None
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Table of Contents
SMURFIT-STONE
CONTAINER CORPORATION
ANNUAL REPORT ON FORM 10-K
December 31,
2009
TABLE OF CONTENTS
FORWARD-LOOKING STATEMENTS
Except
for the historical information contained in this Annual Report on Form 10-K,
certain matters discussed herein contain forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended.
Although we believe that, in making any such statements, our expectations are
based on reasonable assumptions, any such statements may be influenced by
factors that could cause actual outcomes and results to be materially different
from those contained in such forward-looking statements. When used in this
document, the words anticipates, believes, expects, intends and similar
expressions as they relate to Smurfit-Stone Container Corporation, its
operations or its management are intended to identify such forward-looking
statements. These forward-looking statements are subject to numerous risks and
uncertainties. There are important factors that could cause actual results to
differ materially from those in forward-looking statements, certain of which
are beyond our control. These factors, risks and uncertainties are discussed in
Part I, Item 1A, Risk Factors.
Our actual results, performance or achievement could differ materially
from those expressed in, or implied by, these forward-looking statements.
Accordingly, we can give no assurances that any of the events anticipated by
the forward-looking statements will transpire or occur or, if any of them do
so, what impact they will have on our results of operations or financial
condition. We expressly decline any obligation to publicly revise any
forward-looking statements that have been made to reflect the occurrence of
events after the date hereof.
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PART I
ITEM 1.
BUSINESS
Unless the context
otherwise requires, we, us, our, Company and Smurfit-Stone refer to
the business of Smurfit-Stone Container Corporation and its subsidiaries.
GENERAL
Smurfit-Stone Container
Corporation, incorporated in Delaware in 1989, is one of the industrys leading
integrated manufacturers of paperboard and paper-based packaging in North
America, including containerboard and corrugated containers, and is one of the
worlds largest paper recyclers. We have a complete line of graphics capabilities
for packaging. For the year ended December 31, 2009, our net sales were
$5,574 million and our net loss attributable to common stockholders was $3
million.
Smurfit-Stone is a
holding company with no business operations of its own. Smurfit-Stone conducts
its business operations through its wholly-owned subsidiary, Smurfit-Stone
Container Enterprises, Inc. (SSCE), a Delaware corporation.
BANKRUPTCY PROCEEDINGS
Chapter 11 Bankruptcy Filings
On January 26, 2009 (the Petition Date), we and
our 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, our
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). Our
operations in Mexico and Asia and certain
U.S. and Canadian legal entities (the Non-Debtor Subsidiaries) were not
included in the filing and will continue to operate outside of the Chapter 11
process.
Effective as of the opening of business on February 4,
2009, our common stock and our 7% Series A Cumulative Exchangeable
Redeemable Convertible Preferred Stock (Preferred Stock) were delisted from the
NASDAQ Global Select Market and the trading of these securities was suspended. Our
common stock and
Preferred Stock are now quoted on the Pink Sheets Electronic Quotation Service
(Pink Sheets) under the ticker symbols SSCCQ.PK and SSCJQ.PK, respectively.
The filing of the
Chapter 11 Petition and the Canadian Petition constituted an event of
default under our debt obligations, and those debt obligations became
automatically and immediately due and payable, although any actions to enforce
such payment obligations were stayed as a result of the filing of the Chapter
11 Petition and the Canadian Petition.
We and our U.S. and Canadian subsidiaries are
currently 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, the
Debtors are authorized to continue to operate as ongoing businesses, but may
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, we and certain of our affiliates filed a motion
with the Bankruptcy Courts seeking approval to enter into a Post-Petition
Credit Agreement (the DIP Credit Agreement). 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.
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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.
Under the DIP Credit
Agreement, on January 28, 2009, we borrowed $440 million, consisting of a
$400 million U.S. DIP Term Loan, a $35 million Canadian DIP Term loan and $5
million from the Canadian DIP Revolver. In accordance with the terms of the DIP Credit
Agreement, on January 28, 2009, we 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 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.
During 2009, we made voluntary
prepayments of $383 million on the U.S. DIP Term Loan with available cash
provided by operating activities. In addition, during 2009, we repaid $17
million on the U.S. DIP Term Loan with proceeds from property sales. As of December 31,
2009, no borrowings were outstanding under the U.S. DIP Term Loan or the U.S.
DIP Revolver.
During 2009, we repaid
$35 million on the Canadian DIP Term Loan primarily with proceeds from property
sales including $27 million from the sale of our Canadian timberlands. In
addition, during 2009, we repaid $5 million on the Canadian DIP Revolver. As of
December 31, 2009, no borrowings were outstanding under the Canadian DIP
Term Loan or the Canadian DIP Revolver.
As all borrowings under
the DIP Credit Agreement were paid in full as of December 31, 2009, we
allowed the DIP Credit Agreement to expire on the maturity date of January 28,
2010.
Reorganization Process
The Bankruptcy Courts
approved payment of certain of our 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 our
business. We have retained legal and financial professionals to advise us on
the bankruptcy proceedings.
Immediately after filing
the Chapter 11 Petition and Canadian Petition, we notified all known current or
potential 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 of any judicial or administrative
proceedings or other actions against us or our 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 us, or to create, perfect or enforce any lien
against our property, or to collect on monies owed or otherwise exercise rights
or remedies with respect to a pre-petition claim are enjoined unless and until
the Bankruptcy Courts lift 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
have a right to be heard on all matters that come before the U.S. Court with
respect to us. A monitor was appointed by the Canadian Court with respect to
proceedings before the Canadian Court.
Under the Bankruptcy Code, the Debtors generally must
assume or reject pre-petition executory contracts, including but not limited to
real property leases, subject to the approval of the Bankruptcy Courts and
certain other conditions. In this context, assumption means that we agree to
perform our obligations and cure all existing defaults under the contract or
lease, and rejection means that we are
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relieved from our obligations to perform further under
the contract or lease, but are subject to a pre-petition claim for damages for
the breach thereof subject to certain limitations. Any damages resulting from
rejection of executory contracts that are permitted to be recovered under the
Bankruptcy Code will be treated as liabilities subject to compromise unless
such claims were secured prior to the Petition Date.
Since the Petition Date,
we received approval from the Bankruptcy Courts to reject a number of leases
and other executory contracts of various types. We are continuing to review all
of our executory contracts and unexpired leases to determine which additional
contracts and leases we will reject. We expect that additional liabilities
subject to compromise will arise due to rejection of executory contracts,
including 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. We also expect that the assumption of additional executory contracts
and unexpired leases will convert certain of the liabilities shown on the
accompanying consolidated balance sheet as liabilities subject to compromise to
liabilities not subject to compromise. Due to the uncertain nature of many of
the potential claims, we cannot project the magnitude of such claims with
certainty.
In June 2009, the Bankruptcy Courts entered an
order establishing August 28, 2009, as the bar date for potential
creditors to file claims. The bar date is the date by which certain
claims against us must be filed if the claimants wish to receive any
distribution in the bankruptcy cases. Proof of claim forms received after the
bar date are typically not eligible for consideration of recovery as part of
our bankruptcy cases. Creditors were notified of the bar date and the
requirement to file a proof of claim with the Bankruptcy Courts. Differences
between liability amounts estimated by us and claims filed by creditors are
being investigated and, if necessary, the Bankruptcy Courts will make a final
determination of the allowable claim. The determination of how liabilities will
ultimately be treated cannot be made until the Bankruptcy Courts approve a plan
of reorganization. Accordingly, the ultimate amount or treatment of such
liabilities is not determinable at this time.
In September 2009,
the U.S. Trustee denied a request by certain holders of our common stock and
Preferred Stock to form an official equity committee to represent the interests
of equity holders on matters before the U.S. Court. The equity holders
subsequently filed a motion for the appointment of an equity committee with the
U.S. Court. In December 2009, the U.S. Court entered an order denying the
motion for an order appointing an official committee of equity security
holders.
Proposed
Plan of Reorganization and Exit Credit Facilities
In order to successfully
emerge from bankruptcy, we must propose and obtain confirmation by the
Bankruptcy Courts of a plan of reorganization that satisfies the requirements
of the Bankruptcy Code and the CCAA. A plan of reorganization would resolve our
pre-petition obligations, set forth the revised capital structure of the newly
reorganized entity and provide for corporate governance subsequent to our exit
from bankruptcy.
Under the priority scheme
established by the Bankruptcy Code and the CCAA, unless creditors agree
otherwise, pre-petition liabilities and post-petition liabilities must be
satisfied in full before stockholders are entitled to receive any distribution
or retain any property under a plan of reorganization. The ultimate recovery to
creditors and/or stockholders, if any, will not be determined until
confirmation of a plan 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 or amounts of distributions, if any, they would receive. Because of
such possibilities, the value of our liabilities and securities, including our
common stock, is highly speculative. Appropriate caution should be exercised
with respect to existing and future investments in any of our liabilities
and/or securities.
The Proposed Plan of
Reorganization
On December 1, 2009, the Debtors filed their Joint Proposed Plan of
Reorganization and Plan of Compromise and Arrangement 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 Proposed Plan of Reorganization (the
Proposed Plan of Reorganization) and to the Disclosure Statement. Key elements
of the Proposed Plan of Reorganization were as follows:
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·
we and our subsidiary, SSCE, would merge
and become the reorganized company (Reorganized Smurfit-Stone) that would be
governed by a board of directors that will include Patrick J. Moore, our
current Chairman and Chief Executive Officer, Steven J. Klinger, our current
President and Chief Operating Officer, and a number of independent directors,
including a non-executive chairman, to be selected by the Creditors Committee
in consultation with the Debtors;
·
all of the existing secured debt of the
Debtors would be fully repaid with cash;
·
substantially all of the existing
unsecured debt and claims against SSCE, including all of the outstanding
unsecured senior notes, would be exchanged for common stock of the Reorganized
Smurfit-Stone, which would be traded on either the New York Stock Exchange
(NYSE) or the NASDAQ market, with holders of unsecured claims against SSCE of
less than or equal to $10,000 entitled to receive payment of 100% of such
claims in cash, and eligible cash-out participants having the opportunity to
indicate on their ballot the percentage amount of their allowed claim they
would be willing to receive in cash in lieu of common stock;
·
all of our existing equity securities
would be cancelled and existing shareholders of our common and Preferred Stock
would receive no distribution on account of their shares;
·
the assets of the Canadian Debtors would
be 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 if they vote to accept the
Proposed Plan of Reorganization and (iii) the assumption of certain
liabilities and obligations of the Canadian Debtors; and
·
Reorganized Smurfit-Stone and our
newly-formed Canadian subsidiary would assume 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.
The Proposed Plan of
Reorganization will not become effective until certain conditions are satisfied
or waived, including: (i) entry of an order by the Bankruptcy Courts
confirming the Proposed Plan of Reorganization, (ii) all actions,
documents and agreements necessary to implement the Proposed Plan of
Reorganization having been effected or executed, (iii) access of the
Debtors to funding under the exit credit facility and (iv) specified
claims of the Debtors secured lenders having been paid in full pursuant to the
Proposed Plan of Reorganization.
On January 14, 2010,
the U.S. Court granted approval to extend the Debtors exclusive right to file
a 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 period lapses, any party in interest would be
able to file a plan of reorganization. In addition to being voted on by holders
of impaired claims and equity interests, a plan of reorganization must satisfy
certain 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 containing
adequate information for the holders of impaired claims and equity interests,
who are entitled to vote to accept or reject the Debtors Proposed Plan of
Reorganization.
The Bankruptcy Code
requires the U.S. Court, after appropriate notice, to hold a hearing on
confirmation of a plan of reorganization. The confirmation hearing on the
Proposed Plan of Reorganization is scheduled to begin on April 14, 2010. The
confirmation hearing may be adjourned from time to time by the Bankruptcy Court
without further notice except for an announcement of the adjourned date made at
the confirmation hearing or any subsequent adjourned confirmation hearing.
There can be no assurance at this time that the Proposed Plan of Reorganization
will be confirmed by the Bankruptcy Courts or that any such 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 into
an exit term loan facility engagement and arrangement letter and fee letters, (ii) pay
associated fees and expenses
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and (iii) furnish
related indemnities. On February 1, 2010, we filed a motion with the U.S.
Court seeking approval to enter into a senior secured term loan exit facility
(Term Loan Facility).
On
February 16, 2010, the U.S. Court granted the motion and authorized us and
certain of our affiliates to enter into the Term Loan Facility. On the same
date, the U.S. Court also granted our 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 Facility, the Exit Credit Facilities). Based on such approvals, on February 22,
2010, we and certain of our subsidiaries entered into the Term Loan Facility
that provides for an aggregate term loan commitment of $1,200 million. In
addition, we entered into a commitment letter and related fee letters for the
ABL Revolving Facility with aggregate commitments of $650 million (including a
$100 million Canadian Tranche), which we expect to enter into prior to exiting
bankruptcy. The ABL Revolving Facility will include a $150 million sub-limit
for letters of credit. The commitments for the Term Loan Facility and the ABL
Revolving Facility will terminate on July 16, 2010 unless our emergence
from bankruptcy and satisfaction of certain funding date conditions under the Term
Loan Facility and the ABL Revolving Facility occur on or prior to such date,
and the Term Loan Facility is funded.
We are 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.
On the date we emerge
from bankruptcy, the Term Loan will be funded and borrowings are expected to be available under the ABL Revolving
Facility. The proceeds of the borrowings under the Term Loan Facility,
together with available cash will be used to repay our outstanding secured
indebtedness under our pre-petition Credit Facility and pay fees, costs and
expenses of approximately $50 million related to and contemplated by the Exit
Credit Facilities and the Proposed Plan of Reorganization. Borrowings under the
ABL Revolver Facility will be available for working capital purposes, capital
expenditures, permitted acquisitions and general corporate purposes.
The term loan (Term Loan)
matures six years from the funding date of the Term Loan Facility and is
repayable 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 percentages of our 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 will also require
us 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 will bear
interest at our option at a rate equal to: (A) 3.75% plus the alternate
base rate (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.
The ABL revolver loan (ABL Revolver) will mature four years from the
funding date of the ABL Revolving Facility. We will have 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 rate could be adjusted in the future from 3.25% to a
rate as high as 3.75% based on the average historical utilization under the ABL
Revolving Facility. We would 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.
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Borrowings under the Exit Credit Facilities will be
guaranteed by us and certain of our subsidiaries, and would be secured by first
priority liens and second priority liens on substantially all our presently
owned and hereafter acquired assets and those of each of our 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 our financial and business
operations and those of certain of our subsidiaries, including their ability to
incur indebtedness, incur liens, make investments, sell assets, pay dividends
or make acquisitions. The Exit Credit Facilities contain events of default
customary for financings of this type.
Going
Concern Matters
The consolidated
financial statements and related notes have been prepared assuming that we will
continue as a going concern, although our bankruptcy filings raise substantial
doubt about our ability to continue as a going concern. Our ability to continue
as a going concern is dependent on our ability to restructure our obligations in
a manner that allows us to obtain confirmation of a plan of reorganization by
the Bankruptcy Courts. The consolidated financial statements do not include any
adjustments related to the recoverability and classification of recorded assets
or to the amounts and classification of liabilities or any other adjustments
that might be necessary should we be unable to continue as a going concern.
Financial Reporting
Considerations
For periods subsequent to
the bankruptcy filings, we have 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 statement of operations. In addition, pre-petition obligations
that may be impacted by the bankruptcy reorganization process have been
classified on the consolidated balance sheet in liabilities subject to
compromise. These liabilities are reported at the amounts expected to be
allowed by the Bankruptcy Courts, even if they may be settled for lesser or
greater amounts.
Reorganization Items
Our reorganization items
directly related to the process of our reorganizing under Chapter 11 and the
CCAA, as recorded in our 2009 consolidated statement of operations, consist of
the following:
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2009
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Provision for
rejected/settled executory contracts and leases
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$
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(78
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)
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Professional
fees
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(56
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)
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Accounts payable
settlement gains
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11
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Reversal of
accrued post-petition unsecured interest expense
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163
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Total
reorganization items
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$
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40
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|
Provision for
rejected/settled executory contracts and leases for 2009 includes a $9 million
special termination benefits charge due to funding obligations related to
certain non-qualified pension plans.
Professional fees
directly related to the reorganization include fees associated with advisors to
us, the Creditors Committee and certain secured creditors.
Under the Proposed Plan
of Reorganization, interest expense on the unsecured senior notes subsequent to
the Petition Date would not be paid. In addition, holders of our Preferred
Stock would not be entitled to receive any amounts under the Proposed Plan of
Reorganization. As a result, we concluded it is not probable that interest
expense or Preferred Stock dividends that were accrued from the Petition Date
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through November 30,
2009 would be allowed claims. In December 2009, we recorded income in
reorganization items for the reversal of $163 million of accrued post-petition
unsecured interest expense in the consolidated statement of operations. Preferred
stock dividends that were accrued post-petition and included in liabilities
subject to compromise were reversed in December 2009.
Net cash paid for
reorganization items for 2009 totaled $41 million related to professional fees.
Reorganization items
exclude employee severance and other restructuring charges recorded during
2009.
Other Bankruptcy Related Costs
Debtor-in-possession debt
issuance costs of $63 million were incurred and paid during 2009 in connection
with entering into the DIP Credit Agreement, and are separately presented in
the 2009 consolidated statement of operations.
Liabilities Subject to Compromise
Liabilities subject to
compromise consist of the following:
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December 31, 2009
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Unsecured debt
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$
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2,439
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Accounts payable
|
|
339
|
|
Interest payable
|
|
47
|
|
Retiree medical
obligations
|
|
176
|
|
Pension
obligations
|
|
1,136
|
|
Unrecognized tax
benefits
|
|
46
|
|
Executory
contracts and leases
|
|
72
|
|
Other
|
|
17
|
|
Liabilities
subject to compromise
|
|
$
|
4,272
|
|
Liabilities subject to
compromise represent pre-petition unsecured obligations that will be settled
under a plan of reorganization. Generally, actions to enforce or otherwise
effect payment of pre-Chapter 11 or CCAA liabilities are stayed. Pre-petition
liabilities that are subject to compromise are reported at the amounts expected
to be allowed, even if they may be settled for lesser or greater amounts. These
liabilities represent the amounts expected to be allowed on known or potential
claims to be resolved through the Chapter 11 and CCAA process, and remain
subject to future adjustments arising from negotiated settlements, actions of
the Bankruptcy Courts, rejection of executory contracts and unexpired leases,
the determination as to the value of collateral securing the claims, proofs of claim,
or other events. Liabilities subject to compromise also include certain items,
such as qualified defined benefit pension and retiree medical obligations that
may be assumed under the Proposed Plan of Reorganization, and as such, may be
subsequently reclassified to liabilities not subject to compromise.
The Bankruptcy Courts
approved payment of certain pre-petition obligations, including employee wages,
salaries and benefits, and the payment of vendors and other providers in the
ordinary course for goods and services received after the filing of the Chapter
11 Petition and the Canadian Petition and other business-related payments
necessary to maintain the operation of our business. Obligations associated
with these matters are not classified as liabilities subject to compromise.
We have rejected certain pre-petition executory
contracts and unexpired leases with respect to our operations with the approval
of the Bankruptcy Courts and may reject additional contracts or unexpired
leases in the future. Damages resulting from rejection of executory contracts
and unexpired leases are generally treated as general unsecured claims and are
classified as liabilities subject to compromise.
FINANCIAL INFORMATION CONCERNING
INDUSTRY SEGMENTS
We operate as one segment. For financial information for the last three
fiscal years, including our net sales to external customers by country of
origin and total long-lived assets by country, see the information set forth in
Note 26 of the Notes to Consolidated Financial Statements.
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PRODUCTS
Our operations include 12
paper mills (10 located in the United States and two in Canada), 110 container
plants (90 located in the United States, 14 in Canada, three in Mexico, two in
China and one in Puerto Rico), 29 reclamation plants located in the United
States and one lamination plant located in Canada. Also, we operate wood harvesting facilities
in Canada and the United States. Our
primary products include:
·
containerboard;
·
corrugated containers;
·
market pulp;
·
kraft paper; and
·
reclaimed and brokered fiber.
We produce a full range
of high quality corrugated containers designed to protect, ship, store and
display products made to our customers merchandising and distribution
specifications. Corrugated containers
are sold to a broad range of manufacturers of consumer goods. Corrugated containers are used to transport such
diverse products as home appliances, electric motors, small machinery, grocery
products, produce, books and furniture.
We provide customers with innovative
packaging solutions to advertise and sell their products. In addition, we manufacture and sell a
variety of retail ready, point of purchase displays and a full line of
specialty products, including pizza boxes, corrugated clamshells for the food
industry, Cordeck® recyclable pallets and custom die-cut boxes to display
packaged merchandise on the sales floor.
We also provide custom, proprietary and standard automated packaging
machines, offering customers turn-key installation, automation, line
integration and packaging solutions. Our
container plants serve local customers and large national accounts. Net sales of corrugated containers for 2009,
2008 and 2007 represented 71%, 63% and 60%, respectively, of our total net
sales.
Our containerboard mills
produce a full line of containerboard, which is used primarily in the
production of corrugated packaging. We
produced 3,395,000 tons of unbleached kraft linerboard, 794,000 tons of white
top linerboard and 1,844,000 tons of medium in 2009. Our containerboard mills and corrugated
container operations are highly integrated, with the majority of our
containerboard used internally by our corrugated container operations. In 2009, our corrugated container plants
consumed 4,406,000 tons of containerboard.
Net sales of containerboard to third parties for 2009, 2008 and 2007
represented 17%, 20% and 21%, respectively, of our total net sales.
Our paper mills also
produce market pulp, solid bleached liner (SBL), kraft paper, and other
specialty products. We produce southern
hardwood pulp, bleached southern softwood pulp and fluff pulp, which are sold
to manufacturers of paper products, including specialty papers, as well as the
printing and writing sectors. Kraft
paper is used in numerous products, including consumer and industrial bags,
grocery and shopping bags, counter rolls, handle stock and refuse bags.
Our reclamation
operations procure fiber resources for our paper mills as well as other
producers. We operate 29 reclamation
facilities that collect, sort, grade and bale recovered paper. We also collect aluminum and plastics for
resale to manufacturers of these products.
In addition, we operate a nationwide brokerage system whereby we
purchase and resell recovered paper to our recycled paper mills and other
producers on a regional and national contract basis. Our waste reduction services extract
additional recyclables from the waste stream by partnering with customers to reduce
their waste expenses and increase efficiencies.
Brokerage contracts provide bulk purchasing, often resulting in lower
prices and cleaner recovered paper. Many
of our reclamation facilities are located close to our recycled paper mills,
ensuring availability of supply with minimal shipping costs. In 2009, our paper mills consumed 1,952,000
tons of the fiber reclaimed and brokered by our reclamation operations,
representing an integration level of approximately 38%.
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Production for our paper
mills, sales volume for our corrugated container facilities and fiber reclaimed
and brokered for the last three years were:
(In thousands of
tons, except as noted)
|
|
2009
|
|
2008
|
|
2007
|
|
Mill
Production
|
|
|
|
|
|
|
|
Containerboard
|
|
6,033
|
|
6,853
|
|
7,336
|
|
Market
pulp
|
|
294
|
|
470
|
|
574
|
|
Solid
bleached sulfate (SBS/SBL)
|
|
130
|
|
125
|
|
269
|
|
Kraft
paper
|
|
110
|
|
145
|
|
177
|
|
Corrugated
containers sold (in billion square feet)
|
|
67.1
|
|
71.5
|
|
74.8
|
|
Fiber
reclaimed and brokered
|
|
5,182
|
|
6,462
|
|
6,842
|
|
RAW
MATERIALS
Wood
fiber and reclaimed fiber are the principal raw materials used in the
manufacture of our paper products. We
satisfy the majority of our need for wood fiber through purchases on the open
market or under supply agreements. We
satisfy essentially all of our need for reclaimed fiber through our reclamation
facilities and nationwide brokerage system.
MARKETING
AND DISTRIBUTION
Our
marketing strategy is to sell a broad range of paper-based packaging products
to manufacturers of industrial and consumer products. We seek to meet the quality and service needs
of the customers of our converting plants at the most efficient cost, while balancing
those needs against the demands of our open market paperboard customers. Our converting plants focus on supplying both
specialized packaging with high value graphics that enhance a products market
appeal and high-volume commodity products.
We serve a broad customer
base. We serve thousands of accounts
from our plants and sell packaging and other products directly to end users and
converters, as well as through resellers.
Our corrugated container sales organization is centralized with sales
responsibilities for all converting plants.
This allows us to better focus on revenue growth and assign the
appropriate resources to the best opportunities. Marketing of containerboard and
pulp to third parties is centralized in our board sales group. Total tons of containerboard and
market pulp sold to third parties in 2009, 2008 and 2007 were 2,245,000,
3,024,000 and 3,381,000, respectively.
Our
business is not dependent upon a single customer or upon a small number of
major customers. We do not believe the
loss of any one customer would have a material adverse effect on our business.
COMPETITION
The
markets in which we sell our principal products are highly competitive and
comprised of many participants. Although
no single company is dominant, we do face significant competitors, including
large vertically integrated companies as well as numerous smaller
companies. The markets in which we
compete have historically been sensitive to price fluctuations brought about by
shifts in industry capacity and other cyclical industry conditions. While we compete primarily on the basis of
price in many of our product lines, other competitive factors include design,
quality and service, with varying emphasis depending on product line.
BACKLOG
Demand
for our major product lines is relatively constant throughout the year, and
seasonal fluctuations in marketing, production, shipments and inventories are
not significant. Backlog orders are not
a significant factor in the industry. We
do not have a significant backlog of orders as most orders are placed for
delivery within 30 days.
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RESEARCH
AND NEW PRODUCT DEVELOPMENT
The
majority of our research and new product development activities are performed
at our facility located in Carol Stream, Illinois. We use advanced technology to assist all
levels of the manufacturing and sales processes, from raw material supply
through finished packaging performance.
Research programs have provided improvements in coatings and barriers,
stiffeners, inks and printing. Our
technical staff conducts basic, applied and diagnostic research, develops
processes and products and provides a wide range of other technical
services. In each of 2009, 2008 and
2007, we spent approximately $3 million on research and new product development
activities.
INTELLECTUAL
PROPERTY
We
actively pursue applications for patents on new technologies and designs and attempt
to protect our patents against infringement.
Nevertheless, we believe our success and growth are more dependent on
the quality of our products and our relationships with customers than on the
extent of our patent protection. We hold
or are licensed to use certain patents, licenses, trademarks and trade names on
our products, but do not consider the successful continuation of any material
aspect of our business to be dependent upon such intellectual property.
EMPLOYEES
We
had approximately 19,000 employees at December 31, 2009, of which
approximately 11,000 (58%) were employees represented by collective bargaining
units. Approximately 15,400 (81%) of our
total employees are employed at U.S. operations. The expiration dates of union contracts for our
paper mills are as follows:
·
Florence, South Carolina - August 2009
·
La Tuque,
Quebec, Canada - August 2009
·
West Point, Virginia - September 2009
·
Hodge, Louisiana - June 2010
·
Jacksonville, Florida - June 2010
·
Matane, Quebec, Canada April 2011
·
Hopewell, Virginia - July 2011
·
Panama City, Florida - March 2012
·
Fernandina Beach, Florida - June 2012
·
Coshocton, Ohio - July 2012
Labor
agreements covering approximately 1,200 employees at our Florence, South
Carolina, La Tuque, Quebec and West Point, Virginia paper mills expired in
2009. Negotiations to reach new
agreements have been unsuccessful. While
we consider relations with these employees to be good and we do not expect a
work stoppage to occur, the outcome of the negotiations regarding the
expired labor agreements are not entirely within our control and, therefore, we
can provide no assurance regarding the outcome or the timing of the
negotiations or their effect on our results of operations.
We
believe our employee relations are generally good. While the terms of our collective bargaining
agreements may vary, we believe the material terms of the agreements are
customary for the industry, the type of facility, the classification of the
employees and the geographic location covered thereby.
ENVIRONMENTAL
COMPLIANCE
Our
operations are subject to extensive environmental regulation by federal, state,
local and foreign authorities. In the
past, we have made significant capital expenditures to comply with water, air,
solid and hazardous waste and other environmental laws and regulations. We expect to make significant expenditures in
the future for environmental compliance.
Because various environmental standards are subject to change, it is
difficult to predict with certainty the amount of capital expenditures that will
ultimately be required to comply with future standards.
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The U.S. Congress and
several states in which we operate are considering legislation that would
mandate the reduction of greenhouse gas emissions from facilities in various
sectors of the economy, including manufacturing. The United States
Environmental Protection Agency (EPA) is also taking steps to regulate
greenhouse gas emissions under certain Clean Air Act programs. Enactment of new climate change laws or
regulations may require capital expenditures to modify assets to meet
greenhouse gas reduction requirements, increase energy costs above the level of
general inflation, and could result in direct compliance and other costs. It is not yet known when such greenhouse gas
emission laws or regulations may come into effect, nor is it currently possible
to estimate the costs of compliance with such laws or regulations. We have taken voluntary actions to reduce
greenhouse gas emissions from our manufacturing operations and, with our
membership in the Chicago Climate Exchange, have committed to reduce these
emissions by 6% over baseline (emissions from 1998 to 2001) by the end of
2010. We expect that we will not be
disproportionately affected by new climate change laws or regulations as
compared to our competitors who have comparable, energy-intensive operations in
the United States.
In 2004, EPA promulgated
a Maximum Achievable Control Technology (MACT) regulation to limit hazardous
air pollutant emissions from certain industrial boilers (Boiler MACT). Several of our mills were required to install
new pollution control equipment in order to meet the compliance deadline of September 13,
2007. The Boiler
MACT rule was
challenged by third parties in litigation, and the United States District Court
of Appeals for the D.C. Circuit issued a decision vacating Boiler MACT and
remanding the rule to the EPA. All
projects required to bring us into compliance with the now vacated Boiler MACT
requirements were completed. We spent approximately $80 million on Boiler
MACT projects principally through 2007 with insignificant amounts spent in 2008
and 2009 as the projects neared completion.
It is presently
unclear whether future rulemaking
will require us to install additional pollution control equipment on industrial
boilers at our facilities.
Excluding the spending on
Boiler MACT projects described above and other one-time compliance costs, for
the past three years we spent an average of approximately $4 million annually
on capital expenditures for environmental purposes. We anticipate additional
capital expenditures related to environmental compliance in the future. Since our principal competitors are subject
to comparable environmental standards, it is our opinion, based on current
information, that compliance with existing environmental standards should not
adversely affect our competitive position or operating results. However, we could incur significant
expenditures due to changes in law or the discovery of new information, which
could have a material adverse effect on our operating results. See Part I, Item 3. Legal Proceedings - Environmental
Matters.
EXECUTIVE
OFFICERS OF THE REGISTRANT
Set forth below is
certain information relating to our current executive officers:
Mathew
Blanchard
,
born September 9, 1959, was appointed Senior Vice
President and General Manager - Board Sales Division in March 2008, and prior
to that had been Vice President and General Manager Board Sales Division
since July 2000.
Matthew T. Denton
,
born December 11,
1962,
was appointed Senior Vice President -
Business Planning and Analysis in February 2010. He had been Vice
President - Business Planning and Analysis since January 2007 and prior to
that had been Vice President of Business Transformation since he joined
Smurfit-Stone in June 2006. Prior
to joining Smurfit-Stone, Mr. Denton was employed by Georgia-Pacific
Corporation from 1992 to 2006, where he held positions of increasing
responsibility, including Vice President of Strategic Sourcing for
Georgia-Pacifics North American consumer products and bleached pulp and paper
operations, and Vice President of Finance for the containerboard and packaging
segment and pulp division.
Michael
P. Exner
,
born June 20, 1954, was appointed Senior Vice
President and General Manager Containerboard Mill Division on January 1,
2010. Prior to joining Smurfit-Stone, Mr. Exner
was employed by International Paper Company, most recently as the Vice
President of Manufacturing Containerboard since July 2003, Director of
Manufacturing Commercial Printing and Imaging Papers from February 1997
to June 2003 and Mill Manager from June 1992 to January 1997.
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Ronald D.
Hackney
,
born November 9, 1946, was appointed Senior Vice President Human Resources on February 23,
2005, and prior to that had been Vice President - Human Resources since July 2003. He was Division Human Resource Manager for
the Containerboard Mill and Forest Resources Division from April 1995 to July 2003.
Craig A.
Hunt
, born May 31,
1961, was appointed Senior Vice President,
Secretary and General Counsel on February 23, 2005, and prior to that had been
Vice President, Secretary and General Counsel since November 1998.
Paul K.
Kaufmann
, born May 11,
1954, was appointed Senior Vice President and
Corporate Controller on February 23, 2005, and prior to that had been
Vice President and Corporate Controller since November 1998.
Steven J.
Klinger
, born March 5,
1959, was appointed President and Chief
Operating Officer on May 11, 2006. He was appointed to the board of
Smurfit-Stone Container Corporation on December 11, 2008 and is a director
of Navistar International Corporation.
Prior to joining Smurfit-Stone, Mr. Klinger was employed by Georgia
Pacific Corporation for 23 years, most recently as Executive Vice President,
Packaging from February 2003 to May 2006 and President, Packaging and
Containerboard Sales / Logistics from August 2001 to January 2003.
John L.
Knudsen
, born August 29,
1957, was appointed Senior Vice President of Corporate Strategy in November 2008.
He had been Senior Vice President of Manufacturing for the Container Division
since October 2005. He was Vice
President of Strategic Planning for the Container Division from April 2005
to October 2005. Prior to that, he
was Vice President and Regional Manager for the Container Division from August 2000
to April 2005.
Patrick J. Moore
, born September 7, 1954, has served
as Chairman and Chief Executive Officer since May 2006. Mr. Moore has
announced his intention to retire as Chairman and Chief Executive Officer
within one year after our emergence from bankruptcy. He had been Chairman, President and Chief
Executive Officer since May 2003, and prior to that he was President and
Chief Executive Officer since January 2002, when he was also elected as a
Director. He was Vice President and
Chief Financial Officer from November 1998 until January 2002. Mr. Moore is a director of Archer
Daniels Midland Company.
John R.
Murphy
, born June 28,
1950, was appointed Senior Vice President and Chief Financial Officer on May 18,
2009. Mr. Murphy announced his
resignation, which was effective as of February 25, 2010. Prior to joining Smurfit-Stone, Mr. Murphy
was employed by Accuride Corporation, most recently as the President, Chief
Executive Officer and Director from October 2007 to September 2008,
President and Chief Operating Officer from January 2007 to October 2007,
President and Chief Financial Officer from February 2006 to December 2006
and Executive Vice President/Finance and Chief Financial Officer from March 1998
to January 2006. Mr. Murphy is
a director of OReilly Automotive, Inc..
Susan M.
Neumann
, born February 5,
1954, was appointed Senior Vice President,
Corporate Communications on November 15, 2006. Prior to joining Smurfit-Stone, Ms. Neumann
was employed by Albertsons, Inc., most recently as Senior Vice President,
Education, Communications and Public Affairs from November 2003 to November 2006,
Group Vice President, Communications and Education from January 2002 to November 2003
and Vice President, Communications from January 1996 to January 2002.
Mark R. OBryan
, born January 15, 1963, was
appointed Senior Vice President Strategic Initiatives and Chief Information
Officer in April 2007. He had been
Senior Vice President Strategic Initiatives since July 2005 and prior to
that had been Vice President - Operational Improvement for the Consumer
Packaging Division from April 2004 to July 2005. He was Vice President Procurement from October 1999
to April 2004.
Michael
R. Oswald
, born October 29,
1956, was appointed Senior Vice President and General Manager of the
Reclamation Division in August 2005.
Prior to that, he was Vice President of Operations for the Reclamation
Division from January 1997 to August 2005.
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Steven
C. Strickland
,
born July 12, 1952, was appointed Senior Vice President of Container
Operations in November 2008. He had
been Senior Vice President of Sales for the Container Division since October 27,
2006. Prior to joining Smurfit-Stone, Mr. Strickland
was employed by Unisource, most recently as Senior Vice President of Packaging
and Supply from September 2006 to October 2006, Senior Vice President
of Packaging from March 2004 to August 2006, Senior Vice President of
Operations East from March 2003 to March 2004 and Vice President of
National Sales from September 1999 to March 2003.
On January 26, 2009,
the date of the filing of the Chapter 11 Petition and the Canadian Petition,
each of the executive officers listed, other than Messrs. Denton, Exner
and Murphy, served as an executive officer of the Company.
AVAILABLE
INFORMATION
We make available free of
charge our annual report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and amendments to those reports filed or
furnished as required by Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended (the Exchange Act), through our
Internet Website (www.smurfit-stone.com) as soon as reasonably practicable
after we electronically file such material with, or furnish it to, the
Securities and Exchange Commission (SEC).
You may access these SEC filings via the hyperlink that we provide on
our Website to a third-party SEC filings Website.
ITEM 1A.
RISK FACTORS
We are subject to certain
risks and events that, if one or more of them occur, could adversely affect our
business, our financial condition and results of operations. You should
consider the following risk factors, in addition to the other information
presented in this report, as well as the other reports and registration
statements we file from time to time with the SEC, in evaluating us, our
business and an investment in our securities. The risks below are not the only
ones we face. Additional risks not currently known to us or that we currently
deem immaterial also may adversely impact our business.
Bankruptcy
Related Risk Factors
We filed
for protection under Chapter 11 of the Bankruptcy Code and our Canadian
subsidiaries filed to reorganize under the CCAA on January 26, 2009.
During our bankruptcy
proceedings, our operations and our ability to execute our business plan are
subject to the risks and uncertainties associated with bankruptcy. Risks and
uncertainties associated with our bankruptcy proceedings include the following:
·
Our ability to obtain court approval with respect to motions filed in
the bankruptcy proceedings from time to time;
·
Our ability to obtain confirmation and consummate our Proposed Plan of
Reorganization with respect to the bankruptcy proceedings;
·
Our ability to obtain and maintain commercially reasonable terms with
vendors and service providers;
·
Our ability to renew contracts that are critical to our operations;
·
Our ability to retain management and other key individuals;
·
There can be no assurance that the Creditors Committee will support
our positions on matters to be presented to the Bankruptcy Courts in the
future; and
·
Disagreements between us and the Creditors Committee could protract
the Chapter 11 proceedings, negatively impact our ability to operate and delay
our emergence from the Chapter 11 proceedings.
·
Objections to the Plan of Reorganization could protract the Chapter 11
proceedings.
These risks and
uncertainties could affect our business and operations in various ways. For
example, negative events or publicity associated with our bankruptcy
proceedings could adversely affect our sales and relationships with our
customers, as well as with vendors and employees, which in turn could adversely
affect our operations and financial condition, particularly if the bankruptcy
proceedings are protracted. Also, transactions outside the ordinary course of
business are subject to the prior approval of the Bankruptcy Courts, which may
limit our ability to respond timely to certain events or take advantage of
certain opportunities.
14
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Because of the risks and
uncertainties associated with our bankruptcy proceedings, the ultimate impact
that events that occur during these proceedings will have on our business,
financial condition and results of operations cannot be accurately
predicted or quantified. We cannot provide any assurance as to what values, if any,
will be ascribed in our bankruptcy proceedings to our various pre-petition
liabilities, common stock and other securities. As a result of the bankruptcy
proceedings, our currently outstanding common and Preferred Stock is expected
to have no value and would be canceled under our Proposed Plan of
Reorganization and, therefore, we believe that the value of our various
pre-petition liabilities and other securities is highly speculative.
Accordingly, caution should be exercised with respect to existing and future
investments in any of these liabilities or securities.
Our
stock is no longer listed on a national securities exchange. It will likely be
more difficult for stockholders and investors to sell our common stock or to
obtain accurate quotations of the share price of our common stock.
Effective February 4,
2009, the NASDAQ Global Select Market delisted our common stock from trading.
Our stock is now traded over the counter and is quoted on the Pink Sheets. The trading of our common stock over the
counter negatively impacts the trading price of our common stock. In addition, securities that trade on the
Pink Sheets are not eligible for margin loans and make our common stock subject
to the provisions of Rule 15g-9 of the Securities Exchange Act of 1934,
commonly referred to as the penny stock rule. In connection with the
delisting of our stock, there may also be other negative implications,
including the potential loss of confidence in our Company by suppliers,
customers and employees and the loss of institutional investor interest in our
common stock.
Failure to obtain
confirmation of the Proposed Plan of Reorganization may result in liquidation
or alternative plan on less favorable terms.
Although we believe that the Proposed Plan of
Reorganization will satisfy all requirements for confirmation under the
Bankruptcy Code and sanction under the CCAA, there can be no assurance that the
Bankruptcy Courts will reach the same conclusion. In addition, confirmation of the Proposed
Plan of Reorganization is subject to certain conditions. Failure to meet any of these conditions could
result in the Proposed Plan of Reorganization not being confirmed. If the Proposed Plan of Reorganization is not
confirmed there can be no assurance that the Chapter 11 Petition will continue
rather than be converted into Chapter 7 liquidation cases or that any
alternative plan or plans of reorganization would be on terms as favorable to
the holders of claims. If a liquidation
or protracted reorganization of our business or operations were to occur, there
is a substantial risk that our going concern value would be substantially
eroded to the detriment of all stakeholders.
The
market for the new common stock of the Reorganized Smurfit-Stone may not
develop. The common stock might also
have certain restrictions and could incur significant price fluctuations,
depression, dilution or liquidity.
There can be no
assurance that an active market for the Reorganized Smurfit-Stone common stock
(New Common Stock) will develop, nor can any assurance be given as to the
prices at which New Common Stock will trade.
It is not known to what extent some stockholders will sell our New
Common Stock shortly after issuance. Any
sales of substantial amounts of the New Common Stock in the public market, or
the perception that such sales might occur, could cause declines in the market
price. We do not anticipate that cash
dividends or other distributions will be made by Reorganized Smurfit-Stone with
respect to the New Common Stock in the near future. Further, such restrictions on dividends may
have an adverse impact on the market demand for the New Common Stock as certain
institutional investors may invest only in dividend-paying equity securities or
may operate under other restrictions that may prohibit or limit their ability
to invest in the New Common Stock. The
trading prices of our New Common Stock may fluctuate significantly, depending
on these and many other factors, some of which may be beyond our control and
may not be directly related to our operating performance.
Although we have agreed to use our reasonable efforts
to obtain the listing of New Common Stock for trading on the NYSE or the NASDAQ
Stock Market, there can be no assurance that we will be able to
15
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obtain this listing or, even if such listing is
obtained, that an active or liquid trading market will develop for our New
Common Stock.
The New Common Stock to be issued under the Proposed
Plan of Reorganization has not been registered under the Securities Act of
1933, as amended, any state securities laws or blue sky laws or the laws of
any other jurisdiction. Absent such
registration, the New Common Stock may be offered or sold only in certain
transactions. In addition, the New
Common Stock to be issued to any Canadian residents would be issued under an
exemption from the prospectus requirements under applicable Canadian securities
laws. Any resale of our New Common Stock
may be subject to resale restrictions under applicable Canadian securities
laws.
Other Risk Factors
Global
economic conditions and credit tightening materially and adversely affect our
business.
Our business has been
materially and adversely affected by changes in regional, national and global
economic conditions. Such changes have included or may include reduced consumer
spending, reduced availability of capital, inflation, deflation, adverse
changes in interest rates, reduced energy availability and increased energy
costs and government initiatives to manage economic conditions. Continuing
instability in financial markets and the deterioration of other national and
global economic conditions may have further materially adverse effects on our
operations, financial results or liquidity, including the following:
·
the financial stability of our customers
or suppliers may be compromised, which could result in additional bad debts for
us or non-performance by suppliers; or
·
one or more of the financial institutions
that make available our Exit Credit Facilities may become unable to fulfill
their funding obligations, which could materially and adversely affect our
liquidity.
Uncertainty about current
economic conditions may cause consumers of our products to postpone or refrain
from spending in response to tighter credit, negative financial news, declines
in income or asset values, or other adverse economic events or conditions,
which could materially reduce demand for our products and materially and
adversely affect our financial condition and operating results. Further
deterioration of economic conditions would likely exacerbate these adverse
effects, result in wide-ranging, adverse and prolonged effects on general
business conditions, and materially and adversely affect our operations,
financial results and liquidity.
Our
industry is cyclical and highly competitive.
Our operating results
reflect the industrys general cyclical pattern. In addition, the industry is
capital intensive, which leads to high fixed costs. These conditions have contributed to
substantial price competition and volatility in the industry. The majority of our products have been and
are likely to continue to be subject to extreme price competition. Some
segments of our industry have capacity in excess of demand, which may require
us to take downtime periodically to reduce inventory levels during periods of
weak demand. Decreases in prices for our products may adversely impact our
ability to respond to competition and to other market conditions or to
otherwise take advantage of business opportunities.
The paperboard and
packaging products industries are highly competitive and are particularly
sensitive to price fluctuations as well as other factors including innovation,
design, quality and service, with varying emphasis on these factors depending
on the product line. To the extent that one or more of our competitors become
more successful with respect to any key competitive factor, our ability to
attract and retain customers could be materially adversely affected. Some of
our competitors are less leveraged, have financial and other resources greater
than ours and are more capable to withstand the adverse nature of the business
cycle. In addition, our filing the Chapter 11 Petition and the Canadian
Petition and the associated risks and uncertainties may be used by competitors
in an attempt to divert our existing customers or may discourage future
customers from purchasing our products under long-term
16
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arrangements. If our
facilities are not as cost efficient as those of our competitors, we may need
to temporarily or permanently close such facilities and suffer a resulting
reduction in our revenues.
Our capital
structure in our Proposed Plan of Reorganization will include a significant
amount of indebtedness.
Although the Proposed
Plan of Reorganization will result in the reduction of debt, we will continue
to have a significant amount of indebtedness that could have significant
consequences for us. A substantial
portion of our cash flow from operations may be needed to meet the payment of
principal and interest on our indebtedness and other obligations and may not be
available for our working capital, capital expenditures and other general
corporate purposes. In addition our
level of debt makes us vulnerable to economic downturns and may reduce our
operational and business flexibility in responding to changing business and
economic conditions and opportunities, including obtaining additional financing
for working capital, capital expenditures, product development, debt service
requirements, acquisitions and general corporate or other purposes important to
our growth and productivity improvement programs. To the extent that we are more highly
leveraged than our competitors, this may place us at a competitive
disadvantage.
Our Exit Credit Facilities may
limit our ability to plan for or respond to changes in our business.
Our Exit Credit
Facilities may include financial and other covenants that impose restrictions
on our financial and business operations and those of our subsidiaries. These covenants may have a material adverse
impact on our operations. Our failure to
comply with any of these covenants could result in an event of default that, if
not cured or waived, requires us to repay the borrowings under the Exit Credit
Facilities before their due date. The
Exit Credit Facilities may also contain other events of default customary for
similar financings. If we are unable to
repay or otherwise refinance our borrowings when due, the lenders could
foreclose on our assets. If we are
unable to refinance these borrowings on favorable terms, our costs of borrowing
could increase significantly.
There can be no
assurance that we will have sufficient liquidity to repay or refinance
borrowings under the Exit Credit Facilities if such borrowings were accelerated
upon an event of default.
Factors
beyond our control could hinder our ability to service our debt and meet our
operating requirements.
Our ability to meet our
obligations and to comply with the terms contained in our debt instruments will
largely depend on our future performance. Our performance will be subject to
financial, business and other factors affecting us. Many of these factors are
beyond our control, such as:
·
the state of the economy;
·
the financial markets;
·
demand for, and selling prices of, our
products;
·
performance of our major customers;
·
costs of raw materials and energy;
·
hurricanes and other major
weather-related disruptions; and
·
legislation and other factors relating to
the paperboard and packaging products industries generally or to specific
competitors.
If operating cash flows,
net proceeds from borrowings, divestitures or other financing sources do not
provide us with sufficient liquidity to meet our operating and debt service
requirements, we will be required to pursue other alternatives to repay debt
and improve liquidity. Such alternatives may include:
·
sales of assets;
·
cost reductions;
·
deferral of certain discretionary capital expenditures and benefit
payments; and
·
amendments or waivers to our debt instruments.
17
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We might not successfully
complete any of these measures or they may not generate the liquidity we
require to operate our business and service our obligations.
Our
pension plans are underfunded and will require additional cash contributions.
We have made substantial
contributions to our pension plans in the past five years and expect to make
substantial contributions in the coming years in order to ensure that our
funding levels remain adequate in light of projected liabilities and to meet
the requirements of the Pension Protection Act of 2006. Future contributions to
our pension and other postretirement plans will be dependent on future
regulatory changes, future changes in discount rates, the earnings performance
of our plan assets, and the impact of the bankruptcy filings. These
contributions reduce the amount of cash available for us to repay indebtedness
or make capital investments.
At
December 31, 2009, the qualified defined benefit retirement plans
maintained by us were under funded by approximately $1,129 million. We will likely be required to make
significant cash contributions to these plans under applicable U.S. and
Canadian laws over the next several years following emergence from bankruptcy
in order to amortize the existing under funding and satisfy current service
obligations under the plans. These
contributions will significantly impact future cash flows that might otherwise
be available for repayment of debt, capital expenditures, and other corporate
purposes. We currently estimate that
these cash contributions under the United States and Canadian qualified pension
plans will be approximately $77 million in 2010, and potentially up to approximately
$107 million depending upon how unpaid Canadian contributions for 2009 are
impacted by the Proposed Plan of Reorganization. We currently estimate that contributions will
be in the range of approximately $290 million to $330 million annually in 2011
through 2013, and will then decrease to approximately $280 million in 2014,
approximately $240 million in 2015, $170 million in 2016 and $60 million in
2017, at which point almost all of the shortfall would be funded. 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, and could also be
impacted by future changes in the laws and regulations applicable to plan
funding.
Price
fluctuations in energy costs and raw materials could adversely affect our
manufacturing costs.
The cost of producing and
transporting our products is highly sensitive to the price of energy. Energy
prices, in particular oil and natural gas, have experienced significant
volatility in recent years, with a corresponding effect on our production and
transportation costs. Energy prices may continue to fluctuate and may rise to
higher levels in future years. This could adversely affect our production costs
and results of operations.
Wood fiber and reclaimed
fiber, the principal raw materials used in the manufacture of our paper
products, are purchased in highly competitive, price sensitive markets, which
have historically exhibited price and demand cyclicality. Adverse weather,
conservation regulations and the shutdown of a number of sawmills have caused,
and will likely continue to cause, a decrease in the supply of wood fiber and
higher wood fiber costs in some of the regions in which we procure wood fiber.
Fluctuations in supply and demand for reclaimed fiber, particularly export
demand from Asian producers, have occasionally caused tight supplies of
reclaimed fiber. At such times, we may experience an increase in the cost of
fiber or may temporarily have difficulty obtaining adequate supplies of
fiber. If we are not able to obtain wood
fiber and reclaimed fiber at favorable prices or at all, our results of
operations may be materially adversely affected.
Work stoppage and
other labor relations matters may have an adverse effect on our financial
results.
A significant number of our employees in North America
are governed by collective bargaining agreements that have either already
expired or will do so before 2013.
Expired contracts are in the process of renegotiation. We may not be able to successfully negotiate
new union contracts without work stoppages or labor difficulties. If we are unable to successfully renegotiate
the terms of any of these agreements or an industry association is unable to
successfully negotiate a national agreement when
18
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they expire, or if we experience any extended
interruption of operations at any of our facilities as a result of strikes or
other work stoppages, our results of operations and financial condition could
be materially adversely affected.
We are
subject to environmental regulations and liabilities that could weaken our
operating results and financial condition.
Federal, state,
provincial, foreign and local environmental requirements, particularly those
relating to air and water quality, are a significant factor in our business. Maintaining compliance with existing
environmental laws, as well as complying with requirements imposed by new or
changed environmental laws, including greenhouse gas emissions, may require
capital expenditures for compliance. In addition, ongoing remediation costs and
future remediation liability at sites where we may be a potentially responsible
party (PRP) for cleanup activity under the Comprehensive Environmental
Response, Compensation and Liability Act of 1980 (CERCLA) and analogous state
and other laws may materially adversely affect our results of operations and
financial condition.
Foreign
currency risks and exchange rate fluctuations could hinder the results of our
Canadian operations.
Our assets and
liabilities outside the United States are primarily located in Canada. Our
principal foreign exchange exposure is the Canadian dollar. The functional
currency for our Canadian operations is the U.S. dollar. Our net income could
be reduced to the extent we have un-hedged positions, our hedging procedures do
not perform as planned or the Canadian dollar strengthens. Our financial
performance is directly affected by exchange rates because:
·
certain of our products are manufactured in Canada, but sold in U.S.
dollars; and
·
the monetary assets and liabilities of our Canadian operations are
translated into U.S. dollars for financial reporting purposes.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.
19
Table of Contents
ITEM 2.
PROPERTIES
The
manufacturing facilities of our consolidated subsidiaries are located primarily
in North America. We believe that our
facilities are adequately insured, properly maintained and equipped with
machinery suitable for our use. We have invested significant capital in our
operations to upgrade or replace corrugators and converting machines, while
closing higher cost facilities. See Part II,
Item 7. Managements Discussion and Analysis of Financial Condition and Results
of Operations - Restructuring Activities.
Our manufacturing facilities as of December 31, 2009 are summarized
below:
|
|
Number of Facilities
|
|
State
|
|
|
|
Total
|
|
Owned
|
|
Leased
|
|
Locations(a)
|
|
United States
|
|
|
|
|
|
|
|
|
|
Paper
mills
|
|
10
|
|
10
|
|
|
|
7
|
|
Corrugated
container plants
|
|
90
|
|
62
|
|
28
|
|
29
|
|
Reclamation
plants
|
|
29
|
|
15
|
|
14
|
|
14
|
|
Subtotal
|
|
129
|
|
87
|
|
42
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
Canada and Other North America
|
|
|
|
|
|
|
|
|
|
Paper
mills
|
|
2
|
|
2
|
|
|
|
N/A
|
|
Corrugated
container plants
|
|
18
|
|
14
|
|
4
|
|
N/A
|
|
Laminating
plant
|
|
1
|
|
1
|
|
|
|
N/A
|
|
Subtotal
|
|
21
|
|
17
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
China
|
|
|
|
|
|
|
|
|
|
Corrugated
container plants
|
|
2
|
|
2
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
152
|
|
106
|
|
46
|
|
N/A
|
|
(a) Reflects
the number of states in which we have at least one manufacturing facility.
Our
paper mills represent approximately 66% of our investment in property, plant
and equipment. In addition to
manufacturing facilities, we operate wood harvesting facilities in Canada and
the United States. The approximate
annual tons of productive capacity of our paper mills at December 31, 2009
were:
|
|
Annual Capacity (in thousands)
|
|
|
|
United States
|
|
Canada
|
|
Total
|
|
Containerboard
|
|
5,723
|
|
492
|
|
6,215
|
|
Market
pulp
|
|
276
|
|
|
|
276
|
|
SBL
|
|
|
|
129
|
|
129
|
|
Kraft
paper
|
|
114
|
|
|
|
114
|
|
Total
|
|
6,113
|
|
621
|
|
6,734
|
|
Substantially all of our North American operating
facilities have been pledged as collateral under our various credit agreements.
See Part II, Item 7. Managements Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources Net
Cash Provided By (Used For) Financing Activities.
20
Table of Contents
ITEM 3.
LEGAL
PROCEEDINGS
LITIGATION
On January 26, 2009, we and our U.S. and
Canadian subsidiaries filed the Chapter 11 Petition for relief under Chapter 11
of the Bankruptcy Code in the U.S. Court.
On the same day, our Canadian subsidiaries also filed the Canadian
Petition under the CCAA in the Canadian Court.
Our
operations
in Mexico and Asia were not included in the filing and will continue to operate
outside of the Chapter 11 process. See Part I,
Item 1. Business Bankruptcy Proceedings.
In January 2009, we
settled two putative class action cases filed in California state court on
behalf of current and former hourly employees at our California corrugated
container facilities. These cases alleged violations of the California
on-duty meal break and rest period statutes. The court approved a
settlement for a total of $9 million for both cases on January 21,
2009. The cases were automatically stayed due to the filing of the
Chapter 11 Petition on January 26, 2009. We had established reserves
of $9 million during 2008 related to these matters. It is anticipated that our liability for the
settlement of these cases will be satisfied as an unsecured claim in the U.S.
bankruptcy proceedings.
In May 2009, a lawsuit was filed in the United
States District Court for the Northern District of Illinois against the four
individual committee members of the Administrative Committee (Administrative
Committee) of our savings plans and Patrick Moore, our Chief Executive Officer
(together, the Defendants). The suit
alleges violations of the Employee Retirement Income Security Act (ERISA) (the
2009 ERISA Case) between January 2008 and the date it was filed. The plaintiffs in the 2009 ERISA Case brought
the complaint on behalf of themselves and a class of similarly situated
participants and beneficiaries of four of our savings plans (the Savings
Plans). The plaintiffs assert that the
Defendants breached their fiduciary duties to the Savings Plans participants
and beneficiaries by allegedly making imprudent investments with the Savings
Plans assets, making misrepresentations and failing to disclose material
adverse facts concerning our business conditions, debt management and
viability, and not taking appropriate action to protect the Savings Plans
assets. Even though we are not a named
defendant in the 2009 ERISA Case, management believes that any indemnification
obligations to the Defendants would be covered by applicable insurance.
On January 11, 2010,
a second ERISA class action lawsuit was filed in the United States District
Court for the Western District of Missouri.
The defendants in this case are the individual committee members of the
Administrative Committee, several of our other executives and the individual
members of our Board of Directors. The
suit has similar allegations as the 2009 ERISA Case described above, with the
addition of breach of fiduciary duty claims related to our pension plans. We expect that both of these matters will be
consolidated in some manner as they purport to represent a similar class of
employees and former employees and seek recovery under similar allegations and
any of our indemnification obligations would be covered by applicable
insurance.
We are a defendant in a
number of other lawsuits and claims arising out of the conduct of our
business. All litigation that arose or may arise out of pre-petition
conduct or acts is subject to the automatic stay provision of the bankruptcy
laws and any recovery by plaintiffs in those matters will be paid consistent
with all other general unsecured claims in bankruptcy. As a result, we
believe that these matters will not have a material adverse effect on our
consolidated financial condition, results of our operations or cash flows.
ENVIRONMENTAL MATTERS
Federal, state, local and
foreign environmental requirements are a significant factor in our
business. We employ processes in the
manufacture of pulp, paperboard and other products which result in various
discharges, emissions and wastes. These
processes are subject to numerous federal, state, local and foreign
environmental laws and regulations, including reporting and disclosure
obligations. We operate and expect to
continue to operate under permits and similar authorizations from various
governmental authorities that regulate such discharges, emissions and wastes.
We also face potential
liability as a result of releases, or threatened releases, of hazardous
substances into the environment from various sites owned and operated by third
parties at which Company-generated
21
Table
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wastes have allegedly
been deposited. Generators of hazardous
substances sent to off-site disposal locations at which environmental problems
exist, as well as the owners of those sites and certain other classes of
persons, all of whom are referred to as PRPs, are, in most instances, subject
to joint and several liability for response costs for the investigation and
remediation of such sites under CERCLA and analogous state laws, regardless of
fault or the lawfulness of the original disposal. We have received notice that we are or may be
a PRP at a number of federal and/or state sites where response action may be required
and as a result may have joint and several liability for cleanup costs at such
sites. However, liability for CERCLA
sites is typically shared with other PRPs and costs are commonly allocated
according to relative amounts of waste deposited. In estimating our reserves for environmental
remediation and future costs, our estimated liability of $5 million reflects
our expected share of costs after consideration for the relative percentage of
waste deposited at each site, the number of other PRPs, the identity and
financial condition of such parties and experience regarding similar
matters. In addition to participating in
the remediation of sites owned by third parties, we are conducting the
investigation and/or remediation of certain of our owned properties.
Based on current
information, we believe the costs of the potential environmental enforcement
matters discussed above, response costs under CERCLA and similar state laws,
and the remediation of owned property will not have a material adverse effect
on our financial condition or results of operations. As of December 31, 2009, we had
approximately $28 million reserved for environmental liabilities. We believe our liability for these matters
was adequately reserved at December 31, 2009, and that the possibility is
remote that we would incur any material liabilities for which we have not
recorded adequate reserves.
The U.S. Congress and
several states in which we operate are considering legislation that would
mandate the reduction of greenhouse gas emissions from facilities in various
sectors of the economy, including manufacturing. The EPA is also taking steps
to regulate greenhouse gas emissions under certain Clean Air Act programs. Enactment of new climate change laws or
regulations may require capital expenditures to modify assets to meet
greenhouse gas reduction requirements, increase energy costs above the level of
general inflation, and could result in direct compliance and other costs. It is not yet known, when such greenhouse gas
emission laws or regulations may come into effect, nor is it currently possible
to estimate the costs of compliance with such laws or regulations. We have taken voluntary actions to reduce
greenhouse gas emissions from our manufacturing operations and, with our membership
in the Chicago Climate Exchange, have committed to reduce these emissions by 6%
over baseline (emissions from 1998 to 2001) by the end of 2010. We expect that we will not be
disproportionately affected by new climate change laws or regulations as compared
to our competitors who have comparable, energy-intensive operations in the
United States.
ITEM 4.
RESERVED
22
Table
of Contents
PART II
ITEM 5.
MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
MARKET
INFORMATION
Effective
February 4, 2009, the NASDAQ delisted our common stock as a result of our
filing of the Chapter 11 Petition. Our
common stock is now quoted on the Pink Sheets under the ticker symbol SSCCQ.PK. Prior to February 4, 2009, our common
stock traded on the NASDAQ under the symbol SSCC.
At
February 24, 2010, approximately 9,077 stockholders of record held our
common stock. In addition, there were
approximately 140 nominee shareholders on such date representing the beneficial
owners of 252,903,598 shares of our common stock. The high and low sales prices of our common
stock in 2009 and 2008 were:
|
|
2009
|
|
2008
|
|
|
|
High
|
|
Low
|
|
High
|
|
Low
|
|
First
Quarter
|
|
$
|
0.43
|
|
$
|
0.02
|
|
$
|
10.66
|
|
$
|
7.49
|
|
Second
Quarter
|
|
$
|
0.27
|
|
$
|
0.04
|
|
$
|
7.91
|
|
$
|
4.07
|
|
Third
Quarter
|
|
$
|
0.56
|
|
$
|
0.11
|
|
$
|
6.80
|
|
$
|
3.89
|
|
Fourth
Quarter
|
|
$
|
0.99
|
|
$
|
0.09
|
|
$
|
4.19
|
|
$
|
0.24
|
|
DIVIDENDS
ON COMMON STOCK
During
the period covered by this report, we have not paid cash dividends on our
common stock. Under applicable
bankruptcy law, we may not pay dividends on our common stock while we are in
bankruptcy.
23
Table
of Contents
STOCK PERFORMANCE
GRAPH
The information set forth
under this caption shall not be deemed to be filed or incorporated by
reference into any of our other filings with the SEC.
The graph below compares
the cumulative total stockholder return on an investment for the five-year
period ended December 31, 2009 in the Common Stock, the S&P 500 Index,
a new peer group of four companies, which are International Paper Company,
Packaging Corporation of America, Rock-Tenn Company and Temple-Inland, Inc.
(New Peer Group) and our old peer group of four companies, which were
International Paper Company, Packaging Corporation of America, Temple-Inland
Inc. and Weyerhaeuser Company (Old Peer Group).
The New Peer Group is comprised of the four medium- to large-sized
companies whose primary business is the manufacture and sale of paper products
and packaging. In determining the New Peer Group, Weyerhaeuser Company was
removed from the Old Peer Group comparison due to the sale of its
containerboard, packaging and recycling business in August 2008 and
Rock-Tenn was added due to its recent acquisition of a company with similar
lines of business as ours. The graph
assumes the value of an investment in the Common Stock and each index was
$100.00 at December 31, 2004 and that all dividends were reinvested.
INDEXED RETURNS
|
|
Base
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
|
|
|
|
|
|
|
|
|
|
|
|
Company
Name / Index
|
|
12/31/04
|
|
12/31/05
|
|
12/31/06
|
|
12/31/07
|
|
12/31/08
|
|
12/31/09
|
|
Smurfit-Stone Container
Corporation
|
|
100
|
|
75.86
|
|
56.53
|
|
56.53
|
|
1.37
|
|
1.47
|
|
S&P 500 Index
|
|
100
|
|
104.91
|
|
121.48
|
|
128.16
|
|
80.74
|
|
102.11
|
|
New Peer Group
|
|
100
|
|
91.74
|
|
97.45
|
|
98.08
|
|
42.40
|
|
96.35
|
|
Old Peer Group
|
|
100
|
|
95.43
|
|
101.74
|
|
107.00
|
|
43.57
|
|
84.74
|
|
24
Table
of Contents
ITEM 6.
SELECTED FINANCIAL DATA
(In millions, except per
share and statistical data)
|
|
2009(a)
|
|
2008(b)
|
|
2007(c)
|
|
2006
|
|
2005
|
|
Summary of Operations
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
5,574
|
|
$
|
7,042
|
|
$
|
7,420
|
|
$
|
7,157
|
|
$
|
6,812
|
|
Operating
income (loss)(d)
|
|
293
|
|
(2,764
|
)
|
295
|
|
276
|
|
(253
|
)
|
Income
(loss) from continuing operations
|
|
8
|
|
(2,818
|
)
|
(103
|
)
|
(70
|
)
|
(381
|
)
|
Discontinued
operations, net of income tax provision
|
|
|
|
|
|
|
|
11
|
|
51
|
|
Net
loss attributable to common stockholders
|
|
(3
|
)
|
(2,830
|
)
|
(115
|
)
|
(71
|
)
|
(342
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted earnings per share of common stock
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
|
(.01
|
)
|
(11.01
|
)
|
(.45
|
)
|
(.32
|
)
|
(1.54
|
)
|
Discontinued
operations
|
|
|
|
|
|
|
|
.04
|
|
.20
|
|
Net
loss attributable to common stockholders
|
|
(.01
|
)
|
(11.01
|
)
|
(.45
|
)
|
(.28
|
)
|
(1.34
|
)
|
Weighted
average basic and diluted shares outstanding
|
|
257
|
|
257
|
|
256
|
|
255
|
|
255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
$
|
1,094
|
|
$
|
198
|
|
$
|
243
|
|
$
|
265
|
|
$
|
221
|
|
Net
cash provided by (used for) investing activities
|
|
(139
|
)
|
(385
|
)
|
68
|
|
706
|
|
(277
|
)
|
Net
cash provided by (used for) financing activities
|
|
(377
|
)
|
306
|
|
(313
|
)
|
(967
|
)
|
55
|
|
Depreciation,
depletion and amortization
|
|
364
|
|
357
|
|
360
|
|
377
|
|
408
|
|
Capital
investments and acquisitions
|
|
172
|
|
394
|
|
384
|
|
274
|
|
285
|
|
Working
capital, net (e)
|
|
(157
|
)
|
(3,798
|
)
|
13
|
|
(141
|
)
|
(4
|
)
|
Net
property, plant, equipment and timberland
|
|
3,083
|
|
3,541
|
|
3,486
|
|
3,774
|
|
4,289
|
|
Total
assets
|
|
5,077
|
|
4,594
|
|
7,387
|
|
7,777
|
|
9,114
|
|
Total
debt (e)(f)
|
|
3,793
|
|
3,718
|
|
3,359
|
|
3,634
|
|
4,571
|
|
Redeemable
Preferred Stock
|
|
105
|
|
101
|
|
97
|
|
93
|
|
89
|
|
Stockholders
equity (deficit)
|
|
(1,374
|
)
|
(1,405
|
)
|
1,855
|
|
1,779
|
|
1,854
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statistical Data (tons in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Containerboard
production (tons)
|
|
6,033
|
|
6,853
|
|
7,336
|
|
7,402
|
|
7,215
|
|
Market
pulp production (tons)
|
|
294
|
|
470
|
|
574
|
|
564
|
|
563
|
|
SBS/SBL
production (tons)
|
|
130
|
|
125
|
|
269
|
|
313
|
|
283
|
|
Kraft
paper production (tons)
|
|
110
|
|
145
|
|
177
|
|
199
|
|
204
|
|
Corrugated
containers sold (billion square feet)
|
|
67.1
|
|
71.5
|
|
74.8
|
|
80.0
|
|
81.3
|
|
Fiber
reclaimed and brokered (tons)
|
|
5,182
|
|
6,462
|
|
6,842
|
|
6,614
|
|
6,501
|
|
Number
of employees (g)
|
|
19,000
|
|
21,300
|
|
22,700
|
|
25,200
|
|
33,500
|
|
25
Table
of Contents
Notes to Selected Financial Data
(a)
In
2009, we recorded other operating income of $633 million, net of fees and
expenses, associated with an excise tax credit for alternative fuel mixtures
produced. See Part II, Item 7.
Managements Discussion and Analysis of Financial Condition and Results of
Operations - Alternative Fuel Tax Credit.
(b)
In
2008, we recorded goodwill and other intangible assets impairment charges of
$2,757 million, net of an income tax benefit of $4 million. See Part II,
Item 7. Managements Discussion and Analysis of Financial Condition and Results
of Operations - Goodwill and Other Intangible Assets Impairment Charges in
2008.
(c)
In
2007, we recorded a loss of $65 million (after-tax loss of approximately $97
million) related to the sale of our Brewton, Alabama mill. As a result, we no longer produce solid
bleached sulfate (SBS).
(d)
In 2009, 2008, 2007, 2006, and 2005, we recorded
restructuring charges of $319 million, $67 million, $16 million, $43 million,
and $321 million, respectively.
(e)
The filing of the
Chapter 11 Petition and the Canadian Petition constituted an event of
default under our debt obligations, and those debt obligations became
automatically and immediately due and payable.
As a result, the accompanying consolidated balance sheet as of December 31,
2008 includes a reclassification of $3,032 million to current maturities of
long-term debt from long-term debt. As
of December 31, 2009, secured debt of $1,354 million is classified as a
current liability in the accompanying consolidated balance sheet. At December 31,
2009, total debt includes unsecured debt of $2,439 million which is
recorded in liabilities subject to compromise.
(f)
In 2009, 2008, 2007, 2006, and 2005, debt includes
obligations under capital leases of $3 million, $5 million, $7 million, $7
million, and $12 million, respectively.
(g)
Number of employees for 2006 excludes approximately
6,600 employees of our former Consumer Packaging division, which was sold on June 30,
2006.
26
Table
of Contents
ITEM 7.
MANAGEME
NTS DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
On January 26, 2009,
Smurfit-Stone and its U.S. and Canadian subsidiaries filed for relief under
Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court in
Wilmington, Delaware. On the same day,
our Canadian subsidiaries also filed to reorganize under the Companies Creditors
Arrangement Act in the Ontario Superior Court of Justice in Canada.
Our operations in Mexico and Asia were not included in
the filing and will continue to operate outside of the Chapter 11 process. See Part I,
Item 1. Business - Bankruptcy Proceedings.
Smurfit-Stone Container
Corporation is an integrated manufacturer of paperboard and paper-based
packaging. Our major products are
containerboard, corrugated containers, market pulp, reclaimed fiber and kraft
paper. We operate in one reportable industry segment. Our mill operations supply paper to our
corrugated container converting operations.
The products of our converting operations, as well as the mill and
reclamation tonnage in excess of what is consumed internally, are the main
products sold to third parties. Our
operating facilities and customers are located primarily in the United States
and Canada.
Market conditions and
demand for our products are subject to cyclical changes in the economy and
changes in industry capacity, both of which can significantly impact selling
prices and our profitability. In recent
years, the loss of domestic manufacturing to offshore competition and the
changing retail environment in the U.S. has played a key role in reducing
growth in domestic packaging demand. The
influence of superstores and discount retailing giants, as well as the impact
from online shopping, has resulted in a shifting of demand to packaging which
is more condensed, lighter weight and less expensive. These factors have greatly influenced the
corrugated industry.
The U.S. economy
experienced a severe downturn in the fourth quarter of 2008 with minimal
improvement seen in 2009. Industry-wide
shipments of corrugated products decreased 7.7% in 2009 compared to 2008. Reported 2009 industry containerboard
production decreased 7.3% compared to 2008.
In 2009, industry published prices for containerboard declined during
the first half of 2009 and were down $70 per ton for the year compared to the December 2008
price. Reported industry containerboard inventories at the end of December 2009
were approximately 345,000 tons, or 13.9% below December 2008 levels.
Our operating results improved
in 2009 compared to 2008 primarily as a result of the alternative fuel tax
credit and lower costs, but were significantly impacted by lower sales volume
and lower average sales prices as a result of the weak economic
conditions. We experienced significant
declines in sales volume and sales prices for containerboard, corrugated
containers and reclaimed material. In response to the weak economic conditions,
we took approximately one million tons of market related downtime in 2009.
For 2009, we had a net
loss attributable to common stockholders of $3 million, or $0.01 per share,
compared to a net loss of $2,830 million, or $11.01 per share, for 2008. The 2009 results benefited from the
alternative fuel tax credit income of $633 million, or $2.46 per share, and
lower costs, but were negatively impacted by the lower sales volumes, lower
average selling prices and higher restructuring expense. The higher
restructuring expense was due primarily to the permanent closure of two
containerboard mills. The 2008 loss
includes goodwill and other intangible asset impairment charges of $2,761
million, or $10.74 per share, but includes a benefit of $84 million, or $0.33
per share, from the resolution of Canadian income tax examination matters, and
$36 million of foreign currency exchange gains.
In the second quarter of
2010, we expect to emerge from bankruptcy. Excluding the impact of the
alternative fuel tax credit, which expired in December 2009, we expect our
operating performance to improve in 2010.
As the economy continues to improve, we expect higher selling prices for
containerboard and corrugated containers compared to December 2009 levels.
In 2010, we project slightly higher production of containerboard and shipments
of corrugated containers. We expect our
2010 results to benefit from lower costs related to operating improvements and
reduced market related
27
Table
of Contents
downtime. However, we
expect the improvement will be partially offset by higher costs, including
reclaimed fiber and energy.
ALTERNATIVE FUEL TAX CREDIT
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 taxpayers 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 was approved by the Internal Revenue
Service. We subsequently submitted
refund claims of approximately $654 million for the period December 1,
2008 through December 31, 2009 related to production at ten of our U.S.
mills, of which $595 million of this refund request was received during
2009. We recorded other operating income
of $633 million, net of fees and expenses, in our consolidated statements of
operations related to this matter during 2009.
RESTRUCTURING ACTIVITIES
We continue to review and
evaluate various restructuring and other alternatives to streamline operations,
improve efficiencies and reduce costs.
These actions subject us to additional short-term costs, which may
include facility shutdown costs, asset impairment charges, lease commitment
costs, severance costs and other closing costs.
In 2009, we closed 11
converting facilities and permanently ceased production at the Ontonagon,
Michigan medium mill and the Missoula, Montana linerboard mill. As a result of these closures and other
ongoing initiatives, we reduced our headcount by approximately 2,350
employees. We recorded restructuring
charges of $319 million, net of gains of $4 million from the sale of properties
related to previously closed facilities.
Restructuring charges included non-cash charges of $254 million 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 of $69 million were
primarily for severance and benefits.
The net sales of the closed converting facilities in 2009 prior to closure
and for the years ended December 31, 2008 and 2007 were $62 million, $217
million and $258 million, respectively.
The majority of these net sales are expected to be transferred to other
operating facilities. The Ontonagon,
Michigan medium mill had annual production capacity of 280,000 tons and the
Missoula, Montana linerboard mill had annual production capacity of 620,000
tons. Additional charges of up to $2
million are expected to be recorded in future periods for severance and
benefits related to the closure of mill and converting facilities.
In 2008, we closed eight
converting facilities, announced the closure of two additional converting
facilities and permanently ceased operations of our containerboard machine at
the Snowflake, Arizona mill and production at the Pontiac pulp mill located in
Portage-du-Fort, Quebec. As a result of
these closures and other ongoing strategic initiatives, the Company reduced its
headcount by approximately 1,230 employees.
We recorded restructuring charges of $67 million, net of a gain of $2
million from the sale of a previously closed facility. Restructuring charges included non-cash
charges of $23 million related to the write-down of assets, primarily property,
plant and equipment, to estimated net realizable values and the acceleration of
depreciation for mill and converting equipment expected to be abandoned or
taken out of service. The remaining
charges of $46 million were primarily for severance and benefits. The net sales of the announced and closed
converting facilities in 2008 prior to closure and for the year ended December 31,
2007 were $264 million and $393 million, respectively. The Snowflake, Arizona containerboard machine
had the capacity to produce 135,000 tons of medium annually. The Pontiac pulp mill had annual production
capacity of 253,000 tons of northern bleached hardwood kraft paper-grade pulp,
which was non-core to our primary business.
In 2007, we closed 12
converting facilities and the Carthage, Indiana and Los Angeles, California
medium mills and reduced our headcount by approximately 1,750 employees. We recorded restructuring charges of $16
million, net of gains of $69 million from the sale of properties related to
previously closed facilities.
Restructuring charges include non-cash charges of $48 million related to
the write-down of assets, primarily property, plant and equipment, to estimated
net realizable values and the acceleration of depreciation for equipment
expected to be abandoned or taken out of service. The remaining charges of $37 million were
primarily for severance and benefits.
The net sales of the closed converting facilities in 2007 prior to
closure were $65 million. The production
of the two medium mills, which had combined
28
Table
of Contents
annual capacity of
200,000 tons, was partially offset by restarting the previously idled machine
at the Jacksonville, Florida mill with annual capacity to produce 170,000 tons
of medium.
REORGANIZATION ITEMS AND OTHER
BANKRUPTCY COSTS
During 2009, we recorded
income for reorganization items of $40 million which was directly related to
the process of our reorganizing under Chapter 11 and the CCAA. Debtor-in-possession debt issuance costs of
$63 million were incurred and paid during 2009 in connection with entering into
the DIP Credit Agreement, and are separately disclosed in the consolidated
statements of operations. For additional
information, see Part I, Item 1. Business Bankruptcy Proceedings
Financial Reporting Considerations- Reorganization Items and Other
Bankruptcy Related Costs.
GOODWILL AND OTHER INTANGIBLE
ASSETS IMPAIRMENT CHARGES IN 2008
As the result of the
significant decline in value of our equity securities and our debt instruments
and downward pressure placed on earnings by the weakening U.S. economy, we
evaluated the carrying amount of our goodwill and other intangible assets for
potential impairment in the fourth quarter of 2008. We obtained third-party valuation reports as
of December 31, 2008 that indicated the carrying amounts of our goodwill
and other intangible assets were fully impaired based on declines in current
and projected operating results and cash flows due to the current economic
conditions. As a result, we recognized pretax impairment charges on goodwill
and other intangible assets of $2,727 million and $34 million, respectively,
during 2008. The goodwill consisted primarily
of amounts recorded in connection with our merger with Stone Container
Corporation in November of 1998.
SALE OF ASSETS IN 2007
In
September 2007, we
completed the sale of the Brewton, Alabama, mill assets for $355 million. We received cash proceeds of $338 million,
which excluded $16 million of accounts receivable previously sold to Stone
Receivables Corporation under the accounts receivable securitization program
and was net of $1 million of other closing adjustments. The Brewton mill had annual production
capacity of approximately 300,000 tons of white top linerboard and 190,000 tons
of SBS. We continue to produce white top
linerboard at two of our mills.
Substantially all of the proceeds were applied directly to debt
reduction. We recorded a pretax loss of
$65 million, and a $32 million income tax provision, resulting in a net loss of
$97 million. The after-tax loss was the
result of a provision for income taxes that was higher than the statutory
income tax rate due to non-deductible goodwill of $146 million.
RESULTS OF OPERATIONS
Recently Adopted Accounting
Standards
The FASBs ASC 105 was
released on July 1, 2009 and became the single source of authoritative
U.S. Generally Accepted Accounting Principles (GAAP). The change was established by ASC 105,
Generally Accepted Accounting Principles (ASC 105). Pursuant to the provisions of ASC 105, we
have updated our references to GAAP in our consolidated financial statements
issued for the period ended December 31, 2009. The adoption of ASC 105 did not impact our
financial position, results of operations or cash flows.
Effective June 15,
2009, we adopted the provisions of ASC 855, Subsequent Events (ASC 855). ASC 855 requires entities to evaluate subsequent
events through the date the consolidated financial statements were issued. We
have determined that no material subsequent events have occurred.
Effective January 1,
2009, we adopted the provisions of ASC 810-10-65-1, Transition Related to FASB
Statement No. 160, Non-controlling Interest in Consolidated Financial
Statements An Amendment of ARB No. 51 (ASC 810-10-65-1). ASC 810-10-65-1 changes the accounting for
non-controlling (minority) interests in consolidated financial statements,
requires non-controlling interests to be reported as part of equity and changes
the income statement presentation of income or losses attributable to
non-controlling interests. ASC
810-10-65-1 did not have a material impact on our consolidated financial
statements.
29
Table
of Contents
Effective December 31,
2009, we adopted the provisions of ASC 715-20-65-2, Compensation - Retirement
Benefits, which requires further disclosures about plan assets of a defined
benefit pension or other post-retirement plan, including the employers
investment policies and strategies, major categories of plan assets, inputs and
valuation techniques used to measure the fair value of plan assets, the effect
of fair value measurements using significant unobservable inputs on changes in
plan assets for the period and concentrations of risk within plan assets.
Financial Data
|
|
2009
|
|
2008
|
|
2007
|
|
(In
millions)
|
|
Net
Sales
|
|
Profit/
(Loss)
|
|
Net
Sales
|
|
Profit/
(Loss)
|
|
Net
Sales
|
|
Profit/
(Loss)
|
|
Containerboard,
corrugated containers and reclamation operations
|
|
$
|
5,574
|
|
$
|
243
|
|
$
|
7,042
|
|
$
|
317
|
|
$
|
7,420
|
|
$
|
604
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring
expense
|
|
|
|
(319
|
)
|
|
|
(67
|
)
|
|
|
(16
|
)
|
Goodwill
and intangible asset impairment charges
|
|
|
|
|
|
|
|
(2,761
|
)
|
|
|
|
|
Gain
(loss) on sale of assets
|
|
|
|
(3
|
)
|
|
|
5
|
|
|
|
(62
|
)
|
Alternative
fuel tax credit
|
|
|
|
633
|
|
|
|
|
|
|
|
|
|
Interest
expense, net
|
|
|
|
(265
|
)
|
|
|
(262
|
)
|
|
|
(285
|
)
|
Debtor-in-possession
debt issuance costs
|
|
|
|
(63
|
)
|
|
|
|
|
|
|
|
|
Loss
on early extinguishment of debt
|
|
|
|
(20
|
)
|
|
|
|
|
|
|
(29
|
)
|
Foreign
currency exchange gains (losses)
|
|
|
|
(14
|
)
|
|
|
36
|
|
|
|
(52
|
)
|
Reorganization
items
|
|
|
|
40
|
|
|
|
|
|
|
|
|
|
Corporate
expenses and other (Note 1)
|
|
|
|
(247
|
)
|
|
|
(263
|
)
|
|
|
(236
|
)
|
Loss
before income taxes
|
|
|
|
$
|
(15
|
)
|
|
|
$
|
(2,995
|
)
|
|
|
$
|
(76
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 1: Corporate
expenses and other include corporate expenses and other expenses that are not
allocated to operations.
2009 COMPARED TO 2008
We had a net loss
attributable to common stockholders of $3 million, or $0.01 per share, compared
to a net loss of $2,830 million, or $11.01 per share, for 2008. The 2009 results benefited from the
alternative fuel tax credit income of $633 million and lower costs, but were
negatively impacted by higher restructuring expense of $252 million and lower
sales prices and sales volume for corrugated containers and containerboard. The 2008 loss includes goodwill and other
intangible assets impairment charges of $2,761 million, or $10.74 per share,
but includes a benefit of $84 million, or $0.33 per share, from the resolution
of Canadian income tax examination matters and $36 million of foreign currency
exchange gains.
Net sales decreased 20.8%
in 2009 compared to last year. Net sales
were $846 million lower in 2009, as a result of lower third-party sales volume
of containerboard, corrugated containers and reclaimed fiber. Third-party shipments of containerboard were
lower due primarily to weaker demand in the markets in which we operate. North American shipments of corrugated
containers in 2009 were negatively impacted by weaker market conditions and
container plant closures. Net sales were
also impacted by lower average selling prices ($622 million) for
containerboard, corrugated containers and reclaimed fiber. The average price for old corrugated
containers (OCC) decreased approximately $45 per ton compared to last year.
Our containerboard mills
operated at 85.4% of capacity in 2009, compared to 95.5% in 2008. Containerboard production was 12.0% lower
compared to last year due primarily due to the market related downtime taken by
our mills as a result of lower demand in 2009.
In response to the
weaker market conditions in 2009, we took approximately 1,029,000 tons of
containerboard market related downtime compared to 245,000 tons in 2008.
Production of market pulp decreased by 37.4% compared to last year due
primarily to the closure of the Pontiac pulp mill in October 2008.
Production of kraft paper decreased 24.1% compared to last year due primarily
to lower demand, which resulted in market related
30
Table
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downtime incurred during
the first half of 2009.
Total tons of fiber reclaimed and
brokered decreased 19.8% compared to last year due to the lower containerboard
production and weaker demand.
Cost of goods sold
as a percent of net sales in 2009 was 90.1%, comparable to 90.0% last
year. Cost of goods sold decreased from
$6,338 million in 2008 to $5,023 million in 2009 due primarily to lower sales
volumes ($761 million) for containerboard, corrugated containers and reclaimed
materials and lower costs as a result of the additional market related downtime
taken in 2009. In addition, we had lower
costs of reclaimed material ($268 million), freight ($64 million) and energy
($53 million).
Selling and
administrative expense decreased $76 million in 2009 compared to 2008 primarily
due to cost reductions from ongoing and prior year initiatives. In addition, 2008 includes the impact of the
Calpine Corrugated charges totaling $22 million (See Note 6 of the Notes to
Consolidated Financial Statements).
Selling and administrative expense as a percent of net sales increased
to 10.2% in 2009 from 9.2% in 2008 due primarily to the lower sales volume.
Interest expense, net was
$265 million in 2009. The $3 million
increase compared to 2008 was impacted by higher average borrowings ($35
million), which were partially offset by lower average interest rates ($20
million) in 2009. The higher average
borrowings in 2009 were primarily due to borrowings under the DIP Credit
Agreement, which were repaid in the second half of 2009. Our overall average effective interest rate
in 2009 was lower than 2008 by 0.50%. In
2009, interest expense on unsecured debt of $180 million was stayed and not
paid as a result of the bankruptcy proceedings.
In December 2009, we recorded income in reorganization items for the
reversal of $163 million of accrued post-petition unsecured interest expense in
the consolidated statement of operations. For additional information on
reorganization items, see Part I, Item 1. Business Bankruptcy
Proceedings Financial Reporting Considerations Reorganization Items. In
2008, a portion of our interest rate swap contracts were deemed to be
ineffective and were marked-to-market, resulting in $12 million of additional
interest expense.
In 2009, we recorded a
loss on early extinguishment of debt of $20 million for the non-cash write-off
of deferred debt issuance costs related to the Stevenson, Alabama mill
industrial revenue bonds, which were repaid.
In 2009, we recorded
non-cash foreign currency exchange losses of $14 million compared to gains of
$36 million for the same period in 2008.
For 2009, we recorded a
gain of $40 million related to the process of reorganizing under Chapter 11 and
the CCAA. For additional information on
reorganization items, see Part I, Item 1. Business Bankruptcy
Proceedings Financial Reporting Considerations Reorganization Items.
The
benefit from income taxes for the year ended December 31, 2009 of $23
million differed from the amount computed by applying the statutory U.S.
federal income tax rate to loss before income taxes due primarily to the effect
of
refunds for
previously unrecognized alternative minimum tax (AMT) credits that we expect to
receive in 2010.
2008 COMPARED TO 2007
We had a net loss
attributable to common stockholders of $2,830 million, or $11.01 per diluted
share, for 2008 compared to a net loss of $115 million, or $0.45 per diluted
share, for 2007. The higher loss in 2008
compared to 2007 was due primarily to the goodwill and other intangible asset
impairment charges of $2,761 million, lower segment operating profits of $287
million and higher restructuring charges of $51 million. The 2008 results
benefited $84 million from the resolution of certain Canadian income tax
examination matters and from $36 million of foreign currency exchange
gains. The 2007 results were negatively
impacted by the after-tax loss on the sale of our Brewton, Alabama mill and
from $52 million of foreign currency exchange losses.
Net sales decreased 5.1%
in 2008 compared to 2007. Net sales were
negatively impacted by $623 million in 2008 as a result of the sale of the
Brewton, Alabama mill in September 2007, lower corrugated container sales
volume and lower third-party sales of containerboard. Net sales were favorably impacted by higher
average selling prices ($245 million) for corrugated containers and
containerboard. Average domestic
linerboard prices for 2008 were 7.1% higher compared to 2007. Our average North American selling price for
corrugated containers increased by 3.6% compared to 2007. Our average sales prices for market pulp,
SBS/SBL and kraft paper increased 2.4%, 1.8% and 6.2%, respectively, compared
to
31
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2007. The average price for OCC decreased
approximately $10 per ton compared to 2007. Third party shipments of containerboard
decreased 8.8% compared to 2007. North
American shipments of corrugated containers on a total and a per day basis were
4.3% and 4.7% lower, respectively, compared to 2007 due primarily to container
plant closures, actions to improve margins by exiting unprofitable accounts and
weaker market conditions.
Our containerboard mills
operated at 95.5% of capacity in 2008, while containerboard production was 6.6%
lower compared to 2007 due primarily to the sale of the Brewton, Alabama mill,
other mill closures and the market related downtime taken by our mills in the
fourth quarter of 2008. In the fourth
quarter of 2008, our containerboard mill operating rate declined to 83.6% due
to lower demand. Production of market
pulp decreased by 18.1% compared to 2007 due primarily to the closure of the
Pontiac pulp mill in October 2008 and market related downtime taken in the
fourth quarter of 2008. Production of kraft paper decreased 18.1% compared to
2007.
Production
of SBS/SBL
decreased by
53.5%
compared to 2007 due primarily to the sale of the Brewton, Alabama mill.
Total tons of fiber
reclaimed and brokered decreased 5.6% compared to 2007 due to weakening export
market conditions.
Cost of goods sold
as a percent of net sales in 2008 was 90.0%, compared to 86.3% in 2007. The increase was due primarily to higher
costs for our major inputs and the negative impact of lower sales volume and
market related downtime. Cost of goods
sold decreased from $6,404 million in 2007 to $6,338 million in 2008 due
primarily to cost reductions resulting from the sale of the Brewton, Alabama
mill and the market related downtime taken at our mills in the fourth quarter
of 2008, and lower costs of reclaimed material ($26 million), which was offset
by higher costs of energy ($142 million), freight ($63 million), wood fiber
($77 million), and chemicals ($41 million).
Selling and
administrative expense increased $2 million in 2008 compared to 2007. Selling and administrative expense as a
percent of net sales increased from 8.7% in 2007 to 9.2% in 2008 due primarily
to the lower sales volume.
Interest expense, net was
$262 million in 2008. The $23 million
decrease compared to 2007 was positively impacted by lower average borrowings
($7 million) and lower average interest rates ($28 million). The lower average borrowings were primarily
due to debt reduction from the sale of the Brewton, Alabama mill. Our overall average effective interest rate
in 2008 was lower than 2007 by 0.85%.
Our Tranche B and Tranche C term loans were expected to be refinanced
prior to their current maturity. As a
result, a portion of our interest rate swap contracts were deemed to be
ineffective and were marked-to-market, resulting in $12 million of additional
interest expense during 2008.
In 2007, we recorded a
loss on early extinguishment of debt of $29 million including $23 million for
tender premiums and $6 million for the non-cash write-off of deferred debt
issuance cost.
In 2008, we recorded
non-cash foreign currency exchange gains of $36 million compared to losses of
$52 million for the same period in 2007.
The
benefit from income taxes for the year ended December 31, 2008 differed
from the amount computed by applying the statutory U.S. federal income tax rate
to loss before income taxes due primarily to the non-deductibility of goodwill
and other intangible assets impairment charges, the $84 million benefit related
to the favorable resolution of the Canadian income tax examination matters,
non-cash foreign currency exchange gains, state income taxes, lower effective
tax rates in certain foreign jurisdictions and the effect of other permanent
differences.
LIQUIDITY AND CAPITAL RESOURCES
Since the Petition Date,
our liquidity position has improved significantly. At December 31, 2009, we had unrestricted
cash and cash equivalents of $704 million compared to $126 million at December 31,
2008. As of December 31, 2009, we had no outstanding borrowings under the
DIP Credit Agreement. The improvement in
liquidity primarily resulted from the favorable impact from the receipt of $595
million for the alternative fuel tax credit and the stay of payment of
liabilities subject to compromise resulting from the bankruptcy filings.
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The following table
presents a summary of our cash flows for the years ended December 31:
(In
millions)
|
|
2009
|
|
2008
|
|
2007
|
|
Net
cash provided by (used for):
|
|
|
|
|
|
|
|
Operating
activities
|
|
$
|
1,094
|
|
$
|
198
|
|
$
|
243
|
|
Investing
activities
|
|
(139
|
)
|
(385
|
)
|
68
|
|
Financing
activities
|
|
(377
|
)
|
306
|
|
(313
|
)
|
Net
increase (decrease) in cash
|
|
$
|
578
|
|
$
|
119
|
|
$
|
(2
|
)
|
Net Cash Provided By (Used For)
Operating Activities
The net cash provided by
operating activities for the year ended December 31, 2009 was higher than
2008 due primarily to the alternative fuel tax credit receipts of $595 million
and the impact of the bankruptcy filing.
Our 2009 cash flow from operating activities was favorably impacted by
the stay of payment of liabilities subject to compromise, including accounts
payable and interest payable, resulting from the bankruptcy filings. In addition, we discontinued interest
payments since the Petition Date on our unsecured senior notes and certain
other unsecured debt.
Net Cash Provided By (Used For)
Investing Activities
Net cash used for
investing activities was $139 million for the year ended December 31,
2009. Expenditures for property, plant
and equipment were $172 million for 2009, compared to $394 million for
2008. The amount expended for property,
plant and equipment in 2009 included $169 million for projects related to
upgrades, cost reductions and ongoing initiatives and $3 million for
environmental projects. During 2009, we
received proceeds of $48 million primarily related to the sale of our Canadian
timberlands ($27 million) and previously closed facilities. In 2008, we received proceeds of $9 million
primarily from the sale of properties of previously closed facilities. Advances to affiliates, net in 2009 of $15
million are principally related to funding an obligation pertaining to a
guarantee for a previously non-consolidated affiliate.
Net Cash Provided By (Used For)
Financing Activities
Net cash used for
financing activities for 2009 was $377 million.
Proceeds from the DIP Credit Agreement of $440 million were used to
terminate our receivables securitization programs and repay all indebtedness
under the programs of $385 million. DIP
debt issuance costs of $63 million were incurred and paid with the DIP Credit
Agreement proceeds and available cash.
During 2009, letters of credit in the amount of $71 million were drawn
on to fund obligations principally related to non-qualified pension plans,
commodity derivative instruments and a guarantee for a previously
non-consolidated affiliate which increased borrowings under our credit
agreement. During 2009, amounts borrowed
under the DIP Credit Agreement were repaid in full. In 2008, we had net increase of debt of $314
million. The net increase in debt primarily funded our capital
investments. No dividends were paid in
2009 as we were prohibited from paying dividends under the DIP Credit
Agreement. Preferred dividends paid in
2008 were $8 million.
Event of Default
The filing of the
Chapter 11 Petition and the Canadian Petition constituted an event of
default under our debt obligations, and those debt obligations became
automatically and immediately due and payable.
Any efforts to enforce such payment obligations are stayed as a result
of the filing of the Chapter 11 Petition and the Canadian Petition. The accompanying consolidated balance sheet
as of December 31, 2008 includes a reclassification of $3,032 million to
current maturities of long-term debt from long-term debt. Due to the filing of the bankruptcy
petitions, our unsecured long-term debt of $2,439 million is included in
liabilities subject to compromise at December 31, 2009.
Bank Credit Facilities
We as guarantor, and SSCE
and its subsidiary, SSC Canada, as borrowers, entered into a credit agreement,
as amended (the Credit Agreement) on November 1, 2004. The Credit Agreement provided for (i) a
revolving credit facility of $600 million to SSCE (U.S. Revolver), of which
$512 million was borrowed as of December 31, 2009 and (ii) a revolving
credit facility of $200 million to SSCE and SSC Canada (SSC Canada Revolver),
of which $198 million was borrowed as of December 31, 2009. Each of these revolving credit facilities
matured on November 1, 2009. The
Credit Agreement provided for a Tranche B term loan to SSCE in the aggregate
principal amount of $975 million, with an outstanding balance of $137 million
at December 31, 2009. The Credit
Agreement also provided to SSC Canada a
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Tranche C term loan in
the aggregate principal amount of $300 million and a Tranche C-1 term loan in
the aggregate principal amount of $90 million, with outstanding balances of
$258 million and $78 million, respectively, at December 31, 2009. The term loans are payable in quarterly
installments ending on November 1, 2011.
Borrowings at a rate equal to LIBOR plus 2.25% or alternate base rate
(ABR) plus 1.25% for the term loan facilities and LIBOR plus 2.50% or ABR plus
1.50% for the revolving credit facilities (the Applicable Rate).
The obligations of SSCE
under the Credit Agreement are unconditionally guaranteed by us and the
material U.S. subsidiaries of SSCE. The
obligations of SSC Canada under the Credit Agreement are unconditionally
guaranteed by us, SSCE, the material U.S. subsidiaries of SSCE and the material
Canadian subsidiaries of SSC Canada. The
obligations of SSCE under the Credit Agreement are secured by a security
interest in substantially all of our assets and properties, and those of SSCE
and the material U.S. subsidiaries of SSCE, by a pledge of all of the capital
stock of SSCE and the material U.S. subsidiaries of SSCE and by a pledge of 65%
of the capital stock of SSC Canada that is directly owned by SSCE. The security interests securing SSCEs
obligation under the Credit Agreement exclude cash, cash equivalents, certain
trade receivables and the land and buildings of certain corrugated container facilities. The obligations of SSC Canada under the
Credit Agreement are secured by a security interest in substantially all of the
assets and properties of SSC Canada and the material Canadian subsidiaries of
SSC Canada, by a pledge of all of the capital stock of the material Canadian
subsidiaries of SSC Canada and by the same U.S. assets, properties and capital
stock that secure SSCEs obligations under the Credit Agreement. The security interests securing SSC Canadas
obligation under the Credit Agreement excludes certain other real property
located in New Brunswick and Quebec.
The Credit Agreement
contains various covenants and restrictions including (i) limitations on
dividends, redemptions and repurchases of capital stock, (ii) limitations
on the incurrence of indebtedness, liens, leases and sale-leaseback
transactions, (iii) limitations on capital expenditures and (iv) maintenance
of certain financial covenants. The
Credit Agreement also requires prepayments if we have excess cash flows, as
defined therein, or receive proceeds from certain asset sales, insurance or
incurrence of certain indebtedness.
As of December 31,
2009, as a result of our default, we had no availability for borrowings under
SSCEs revolving credit facilities after giving consideration to outstanding
letters of credit of $87 million. As of December 31, 2009, we had available
unrestricted cash and cash equivalents of $704 million primarily invested in
money market funds at a variable interest rate of 0.13%.
The Credit Agreement
provided for a deposit funded letter of credit facility, related to the
variable rate industrial revenue bonds, for approximately $122 million that was
due to mature on November 1, 2010.
In February 2009, due to an event of default under the bond indentures,
this credit facility was drawn on to fully repay the industrial revenue bonds
in the aggregate principal amount of $120 million.
DIP Credit Agreement
In connection with filing the Chapter 11 Petition
and the Canadian Petition, on January 26, 2009 we and certain of our
affiliates filed a motion with the Bankruptcy Courts seeking approval to enter
into a DIP Credit Agreement. 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. DIP Term Loan for borrowings by SSCE; a $35 million Canadian
DIP Term Loan for borrowings by SSC Canada; a $250 million U.S. DIP Revolver
for borrowings by SSCE and/or SSC Canada; and a $65 million Canadian DIP
Revolver for borrowings by SSCE and/or SSC Canada.
The use of proceeds under the DIP Credit Agreement
was limited to (i) working capital, letters of credit and capital
expenditures; (ii) other general corporate purposes of ours and certain of
our subsidiaries (including certain intercompany loans); (iii) the
refinancing in full of indebtedness outstanding under our receivables
securitization programs; (iv) payment of any related transaction costs,
fees and expenses;
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and (v) the costs of administration of the
cases arising out of the Chapter 11 Petition and the Canadian Petition.
Under the DIP Credit
Agreement, on January 28, 2009, we borrowed $440 million, consisting of a
$400 million U.S. DIP Term Loan, a $35 million Canadian DIP Term loan and $5
million from the Canadian DIP Revolver. In accordance with the
terms of the DIP Credit Agreement, on January 28, 2009, we 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 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.
During 2009, we made
voluntary prepayments of $383 million on the U.S. DIP Term Loan with available
cash provided by operating activities.
In addition, during 2009, we repaid $17 million of the U.S. DIP Term
Loan with proceeds from property sales.
As of December 31, 2009, no borrowings were outstanding under the
U.S. DIP Term Loan or the U.S. DIP Revolver.
During
2009, we repaid $35 million on the Canadian DIP Term Loan primarily with
proceeds from property sales including $27 million from the sale of our
Canadian Timberlands. In addition, we
repaid $5 million on the Canadian DIP Revolver.
As of December 31, 2009, no borrowings are outstanding under the
Canadian DIP Term Loan or the Canadian DIP Revolver.
At December 31,
2009, we had outstanding letters of credit of $15 million under the DIP Credit
Agreement. Prior to the maturity of the
DIP Credit Agreement on January 28, 2010, we transferred $15 million of
available cash to a restricted cash account to secure these letters of credit.
U.S. and Canadian
borrowings were each subject to a borrowing base derived from a formula based
on certain eligible accounts receivable and inventory, and an amount
attributable to real property and equipment, less certain reserves. As of December 31, 2009, the applicable
borrowing base was $680 million and the amount available for borrowings under
the DIP Credit Agreement was $300 million. As all borrowings under the
DIP Credit Agreement were paid in full, we allowed the DIP Credit Agreement to
expire on the maturity date of January 28, 2010.
Exit
Credit Facilities
On
February 16, 2010, the U.S. Court granted the motion and authorized us and
certain of our affiliates to enter into the Term Loan Facility. On the same date, the U.S. Court also granted
our 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 Facility, the Exit Credit
Facilities). Based on such approvals, on
February 22, 2010, we and certain of our subsidiaries entered into the
Term Loan Facility that provides for an aggregate term loan commitment of
$1,200 million. In addition, we entered
into a commitment letter and related fee letters for the ABL Revolving Facility
with aggregate commitments of $650 million (including a $100 million Canadian
Tranche), which we expect to enter into prior to exiting bankruptcy. The ABL Revolving Facility will include a
$150 million sub-limit for letters of credit.
The commitments for the Term Loan Facility and the ABL Revolving Facility
will terminate on July 16, 2010 unless our emergence from bankruptcy and
satisfaction of certain funding date conditions under the Term Loan Facility
and the ABL Revolving Facility occur on or prior to such date, and the Term
Loan Facility is funded.
We are 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.
On the date we emerge from bankruptcy, the Term Loan
will be funded and borrowings are
expected to be available under the ABL Revolving Facility.
The
proceeds of the borrowings under the Term Loan
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Facility, together with available cash will be used to
repay our outstanding secured indebtedness under our pre-petition Credit
Facility and pay fees, costs and expenses of approximately $50 million related
to and contemplated by the Exit Credit Facilities and the Proposed Plan of
Reorganization. Borrowings under the ABL Revolver Facility will be available
for working capital purposes, capital expenditures, permitted acquisitions and
general corporate purposes.
For additional information on the Exit Credit
Facilities, see Part I, Item 1. Business - Bankruptcy Proceedings -
Proposed Plan of Reorganization and Exit Credit Facilities - Exit Credit
Facilities.
FUTURE CASH FLOWS
Contractual Obligations and
Commitments
In addition to our debt
commitments at December 31, 2009, we had other commitments and contractual
obligations that require us to make specified payments in the future. The
filing of the Chapter 11 Petition and Canadian Petition constituted an
event of default under our debt obligations, and those debt obligations became
automatically and immediately due and payable, subject to an automatic stay of
any action to collect, assert, or recover a claim against us and the
application of applicable bankruptcy law. The following table summarizes the
total amounts due as of December 31, 2009 under all debt agreements,
commitments and other contractual obligations.
We are in the process of evaluating our executory contracts in order to
determine which contracts will be assumed in our bankruptcy proceedings. The
table indicates the years in which payments are due under the contractual
obligations.
|
|
|
|
Amounts Payable During
|
|
(In
millions)
|
|
Total
|
|
2010
|
|
2011-12
|
|
2013-14
|
|
2015 &
Beyond
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt, including capital leases (1)
|
|
$
|
3,793
|
|
$
|
3,793
|
|
$
|
|
$
|
|
$
|
|
Operating
leases
|
|
333
|
|
61
|
|
86
|
|
58
|
|
128
|
|
Purchase
obligations (2)
|
|
338
|
|
109
|
|
103
|
|
62
|
|
64
|
|
Commitments
for capital expenditures (3)
|
|
147
|
|
147
|
|
|
|
|
|
|
|
Net
unrecognized tax benefits (4)
|
|
|
|
|
|
|
|
|
|
|
|
Other
long-term liabilities (5)
|
|
1,212
|
|
128
|
|
657
|
|
411
|
|
16
|
|
Total
contractual obligations
|
|
$
|
5,823
|
|
$
|
4,238
|
|
$
|
846
|
|
$
|
531
|
|
$
|
208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Projected contractual interest payments
are excluded. Based on interest rates in
effect and long-term debt balances outstanding as of December 31, 2009,
hypothetical projected contractual interest payments would be approximately
$232 million in 2010 and for each future year.
However, due to the bankruptcy proceedings, we do not expect to pay
interest on our unsecured senior notes ($182 million) and certain other
unsecured debt ($10 million). For the
purpose of this disclosure, our variable and fixed rate long-term debt would be
replaced at maturity with similar long-term debt. This disclosure does not
attempt to predict future cash flows or changes in interest rates. See Item 7A, Quantitative and Qualitative
Disclosures About Market Risk, Interest Rate Risk. Outstanding secured debt of $1,354 million at
December 31, 2009 is expected to be paid in cash with proceeds from our
Exit Credit Facilities. In addition,
unsecured debt of $2,439 million is expected to be exchanged for common stock
of Reorganized Smurfit-Stone upon our emergence from bankruptcy in the second
quarter of 2010.
(2)
Amounts shown consist primarily of
national supply contracts to purchase steam and other energy resources, the
processing of wood and to purchase containerboard. Compared to 2008, our
purchase obligations have declined significantly due primarily to the rejection
of executory contracts for electricity, natural gas and coal. We do not aggregate open purchase orders
executed in the normal course of business by each of our operating locations
and such purchase orders are therefore excluded from the table.
(3)
Amounts shown are estimates of future
spending on capital projects which were committed to prior to December 31,
2009, but were not completed by December 31, 2009.
(4)
As of December 31, 2009, our ASC
740, Income Taxes (ASC 740), net unrecognized tax benefits totaled $37 million,
which are excluded from the table since we cannot make a reasonably reliable
estimate of the timing of future payments.
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(5)
Amounts shown consist primarily of future
minimum pension contributions, severance costs and other rationalization
expenditures and environmental liabilities which have been recorded in our December 31,
2009 consolidated balance sheet. The table does not include our deferred income
tax liability and accruals for self-insured losses because it is not certain
when these liabilities will become due.
See Future Cash Flows - Pension Obligations.
Contingent
Obligations
We issue standby letters
of credit primarily for performance bonds and for self-insurance. Letters of credit are issued under SSCEs
revolving credit facilities, generally have a one-year maturity and are renewed
annually. As of December 31, 2009,
SSCE had approximately $102 million of letters of credit outstanding, including
$15 million under our DIP Credit Agreement.
We have certain woodchip
processing contracts, which provide for guarantees of third party contractors
debt outstanding, with a security interest in the chipping equipment. Guarantee payments would be triggered in the
event of a loan default by any of the contractors. The maximum potential amount of future
payments related to all of such arrangements as of December 31, 2009 was
$25 million. Cash proceeds received from
liquidation of the chipping equipment would be based on market conditions at
the time of sale, and we may not recover in full the guarantee payments made.
Pension Obligations
As
of December 31, 2009, our pension benefit obligations exceeded the fair
value of pension plan assets by $1,129 million, an increase of $123 million
from $1,006 million at the end December 31, 2008. The majority of the increase was due to lower
discount rates in 2009.
Approximately $1,020 million of this amount
relates to qualified defined benefit pension plans, which are expected to be
assumed under the Proposed Plan of Reorganization.
We currently estimate that
these cash contributions under the U.S. and Canadian qualified pension plans
will be approximately $77 million in 2010, and potentially up to approximately
$107 million depending upon how unpaid Canadian contributions for 2009 are
impacted by the Proposed Plan of Reorganization. We currently estimate that contributions will
be in the range of approximately $290 million to $330 million annually in 2011
through 2013, and will then decrease to approximately $280 million in 2014,
approximately $240 million in 2015, $170 million in 2016 and $60 million in
2017, at which point almost all of the shortfall would be funded. 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, and could also be
impacted by future changes in the laws and regulations applicable to plan
funding.
Exit
Liabilities
We recorded restructuring
charges of $319 million in 2009, net of gains of $4 million from the sale of
properties related to previously closed facilities. Restructuring charges include non-cash
charges of $254 million 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 of $69 million were primarily for severance and benefits. In 2009, we incurred cash expenditures of $31
million for these exit liabilities.
We had $33 million of
exit liabilities as of December 31, 2008, related to the restructuring of
our operations. During 2009, we incurred
cash expenditures of $10 million for these exit liabilities and reduced lease
commitment exit liabilities by $7 million.
The exit liabilities remaining as of December 31, 2009, including
the 2009 restructuring activities, totaled $54 million. Future cash outlays,
principally for severance and benefits cost and long-term lease commitments and
facility closure cost, are expected to be $49 million in 2010, $3 million in
2011, an insignificant amount in 2012 and $2 million thereafter. We intend to continue funding exit
liabilities through operations as originally planned.
Environmental
Matters
As discussed in Part I,
Item 1. Business, Environmental
Compliance, we completed all projects required to bring us into compliance
with the now vacated Boiler MACT.
However, we could incur significant expenditures due to changes in law
or discovery of new information. In
addition, it is not yet known when greenhouse gas emission laws or regulations
may come into effect, nor is it currently possible to estimate the cost of
compliance with such laws or regulations.
Excluding the spending on the Boiler MACT projects and other one-time
compliance costs, we have spent an average of approximately $4 million in each
of the last three years on capital expenditures for environmental purposes and,
we expect to spend approximately $6 million in 2010.
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OFF-BALANCE
SHEET ARRANGEMENT
At December 31,
2009, we had one off-balance sheet financing arrangement.
We sold 980,000 acres of
owned and leased timberland in October 1999. The final purchase price, after adjustments,
was $710 million. We received $225 million in cash and $485 million in the form
of installment notes. Under our program
to monetize the installment notes receivable, the notes were sold, without
recourse, to Timber Note Holdings LLC (TNH), a qualified special purpose entity
under the provisions of ASC 860, Transfers and Servicing (ASC 860), for $430
million in cash proceeds and a residual interest in the notes. The residual interest included in other
assets in the accompanying consolidated balance sheet was $36 million at December 31,
2009. TNH and its creditors have no
recourse to us in the event of a default on the installment notes.
EFFECTS
OF INFLATION
Increases in costs for
fiber, energy, freight, chemicals and other materials including corn starch and
ink have had an adverse impact on our operating results. Although we
experienced lower costs for these items in 2009, we expect to see increases in
these costs in 2010. Fiber, energy and
freight cost increases are strongly influenced by supply and demand factors
including competition in global markets and from hurricanes or other natural
disasters in certain regions of the United States, and when supplies become
tight, we have experienced increases in the cost of these items. We continue to seek ways to mitigate the
impact of such cost increases and, to the extent permitted by competition, pass
the increased cost on to customers by increasing sales prices over time.
We used the last-in,
first-out method of accounting for approximately 41% of our inventories at December 31,
2009. Under this method, the cost of
goods sold reported in the financial statements approximates current cost and
thus provides a closer matching of revenue and expenses in periods of
increasing costs.
Replacement of existing
fixed assets in future years will be at higher costs, but this will take place
over many years. New assets will result
in higher depreciation charges; but, in many cases, due to technological
improvements, there may be operating cost savings as well.
CRITICAL
ACCOUNTING POLICIES AND USE OF ESTIMATES
Our consolidated
financial statements have been prepared in accordance with U.S. GAAP. The preparation of financial statements in
accordance with U.S. GAAP requires our management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Our
estimates and assumptions are based on historical experiences and changes in
the business environment. However,
actual results may differ from these estimates.
Critical accounting policies and estimates are defined as those that are
both most important to the portrayal of our financial condition and results and
require managements most subjective judgments.
Our most critical accounting policies and use of estimates are described
below.
Going Concern
The consolidated
financial statements and related notes have been prepared assuming that we will
continue as a going concern, although our bankruptcy filings raise substantial
doubt about our ability to continue as a going concern. The consolidated financial statements do not
include any adjustments related to the recoverability and classification of
recorded assets or to the amounts and classification of liabilities or any
other adjustments that might be necessary should we be unable to continue as a
going concern.
Long-Lived
Assets
We conduct impairment reviews of long-lived assets in
accordance with ASC 360-10, Impairment or Disposal of Long-Lived Assets. Based upon our review as of December 31,
2009, we determined that there was no impairment of long-lived assets. Such reviews require us to make estimates of
future cash flows and fair values. Our
cash flow projections include significant assumptions about economic
conditions, demand and pricing for our products and costs. Our estimates of
fair value are determined using a variety of valuation techniques, including
cash flows. While significant judgment is required, we
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believe that our estimates of future cash flows and fair
value are reasonable. However, should our
assumptions change in future years, our fair value models could indicate lower
fair values for long-lived assets, which could materially affect the carrying
value of property, plant and equipment and results of operations.
Restructurings
In recent years, we have
closed a number of operating facilities, including paper mills, and exited
non-core businesses. Identifying and
calculating the cost to exit these businesses requires certain assumptions to
be made, the most significant of which are anticipated future liabilities,
including leases and other contractual obligations, and the adjustment of
property, plant and equipment to net realizable value. We believe our estimates are reasonable,
considering our knowledge of the paper industry, previous experience in exiting
activities and valuations received from independent third parties in the
calculation of such estimates. Although
our estimates have been reasonably accurate in the past, significant judgment
is required, and these estimates and assumptions may change as additional
information becomes available and facts or circumstances change.
Allowance for Doubtful Accounts
We
evaluate the collectibility of accounts receivable on a case-by-case basis and
make adjustments to the bad debt reserve for expected losses. We also estimate reserves for bad debts based
on historical experience and past due status of the accounts. We perform credit evaluations and adjust
credit limits based upon each customers payment history and credit
worthiness. While credit losses have
historically been within our expectations and the provisions established,
actual bad debt write-offs may differ from our estimates, resulting in higher
or lower charges in the future for our allowance for doubtful accounts.
Pension and Postretirement Benefits
We have significant
long-term liabilities related to our defined benefit pension and postretirement
benefit plans. The determination of
pension obligations and expense is dependent upon our selection of certain assumptions,
the most significant of which are the expected long-term rate of return on plan
assets and the discount rates applied to plan liabilities. Consulting actuaries assist us in determining
these assumptions, which are described in Note 15 of the Notes to Consolidated
Financial Statements. In 2009, the
expected long-term rates of return on our U.S. plan assets and foreign plan
assets were 8.50% and 7.50%, respectively, which were consistent with
2008. The weighted average discount
rates used to determine the benefit obligations for the U.S. and foreign
retirement plans at December 31, 2009 were 5.88% and 6.30%,
respectively. The assumed rate for the
long-term return on plan assets was determined based upon target asset
allocations and expected long-term rates of return by asset class. For determination of the discount rate, the
present value of the cash flows as of the measurement date is determined using
the spot rates from the Mercer Yield Curve, and based on the present values, a
single equivalent discount rate is developed. This rate is the single uniform
discount rate that, when applied to the same cash flows, results in the same
present value of the cash flows as of the measurement date. A decrease in the assumed rate of return of
0.50% would increase pension expense by approximately $12 million. A decrease in the discount rate of 0.50%
would increase our pension expense by approximately $17 million and our pension
benefit obligations by approximately $182 million.
Related to our
postretirement benefit plans, we make assumptions for future trends for medical
care costs. The effect of a 1% change in
the assumed health care cost trend rate would increase our accumulated
postretirement benefit obligation as of December 31, 2009 by $10 million
and would increase the annual net periodic postretirement benefits cost by $1
million for 2009.
Income Taxes
We apply the provisions
of ASC 740 which creates a single model to address accounting for uncertainty
in tax positions and clarifies the accounting for income taxes by prescribing a
minimum recognition threshold a tax position is required to meet before being
recognized in the financial statements.
Under the provisions of ASC 740, we elected to classify interest and
penalties related to our unrecognized tax benefits in the income tax provision
(See Note 14 of the Notes to Consolidated Financial Statements).
At December 31,
2009, we had $37 million of net unrecognized tax benefits. The primary differences between gross
unrecognized tax benefits and net unrecognized tax benefits are associated with
offsetting benefits in other jurisdictions related to transfer pricing and the
U.S. federal tax benefit from state tax
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deductions. (See Note 14
of the Notes to Consolidated Financial Statements for a reconciliation of 2009
activity).
For the year ended December 31,
2009, $3 million of interest was recorded related to tax positions taken during
the current and prior years. The interest was computed on the difference
between the tax position recognized in accordance with ASC 740 and the amount
previously taken or expected to be taken in our tax returns, adjusted to
reflect the impact of net operating loss and other tax carryforward items. During 2009, no penalties were recorded
related to current and prior year tax positions. At December 31, 2009, $25 million of
interest and penalties are recognized in the consolidated balance sheet. All net unrecognized tax benefits, if
recognized, would affect our effective tax rate.
Deferred tax assets and
liabilities reflect our assessment of future taxes to be paid in the
jurisdictions in which we operate. These
assessments involve temporary differences resulting from differing treatment of
items for tax and accounting purposes.
In addition, unrecognized tax benefits under the provisions of ASC 740
reflect estimates of our current tax exposures.
Based on our evaluation of our tax positions, we believe we were
adequately reserved for these matters at December 31, 2009.
At December 31,
2009, we had deferred tax assets of $1,353 million. A valuation allowance of $382 million
has been established on a portion of these deferred tax assets based on the
expected timing of deferred tax liability reversals and the expiration dates of
the tax loss carryforwards. The valuation allowance increased during 2009,
primarily to offset higher deferred tax assets related to tax losses on our
investment in our Canadian subsidiaries. At December 31, 2009, we expect
our deferred tax assets, net of the valuation allowance, will be fully realized
through the reversal of net taxable temporary differences.
As previously disclosed,
the Canada Revenue Agency (CRA) is examining our income tax returns for tax
years 1999 through 2005. In connection
with the examination, the CRA has issued assessments of additional income
taxes, interest and penalties related to transfer prices of inventory sold by
our Canadian subsidiaries to our U.S. subsidiaries. Additionally, the CRA is considering certain
significant adjustments related principally to taxable income related to our
acquisition of a Canadian company. We
have appealed the assessments related to the transfer pricing matter. In order to appeal the assessments, we made
payments of $25 million to the CRA in 2008.
The remaining matters may be resolved at the examination level or
subsequently upon appeal within the next twelve months. While the final outcome of the remaining CRA examination
matters, including an estimate of the range of the reasonably possible changes
to unrecognized tax benefits, is not yet determinable, we believe that the
examination or subsequent appeals will not have a material adverse effect on
our consolidated financial condition or results of operations.
The U.S. federal statute
of limitations is closed through 2005, except for any potential correlative
adjustments for the years 1999 through 2005 relating to the CRA examinations
noted above. There are currently no
federal examinations in progress. In
addition, we file tax returns in numerous states. The states statutes of limitations are
generally open for the same years as the federal statute of limitations.
Federal income taxes have
not been provided on undistributed earnings of our foreign subsidiaries during
2007 through 2009, as we intend to indefinitely reinvest such earnings into our
foreign subsidiaries. The restrictions
on remittance of these earnings, pursuant to our bankruptcy status, make it not
practicable to determine the amount of the unrecognized deferred tax liability
on these undistributed foreign earnings.
Legal and Environmental Contingencies
Accruals for legal and
environmental matters are recorded when it is probable that a liability has
been incurred and the amount of loss can be reasonably estimated. Such liabilities are developed based on
currently available information and require judgments as to probable outcomes. Assumptions are based on historical
experience and recommendations of legal counsel. Environmental estimates include assumptions
and judgments about particular sites, remediation alternatives and
environmental regulations. We believe
our accruals are adequate. However, due
to uncertainties associated with these assumptions and judgments, as well as
potential changes to governmental regulations and environmental technologies,
and the impact of our bankruptcy on these matters, actual costs could differ
materially from the estimated amounts.
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Self-Insurance
We self-insure a majority
of our workers compensation costs.
Other workers compensation and general liability costs are subject to
specific retention levels for certain policies and coverage. Losses above these retention levels are
transferred to insurance companies. In
addition, we self-insure the majority of our group health care costs. All of the workers compensation, general
liability and group health care claims are handled by third-party
administrators. Consulting actuaries and administrators assist us in
determining our liability for self-insured claims. Losses are accrued based upon the aggregate
self-insured claims determined by the third-party administrators, actuarial
assumptions and our historical experience.
While we believe that our assumptions are appropriate, significant
differences in our actual experience or significant changes in our assumptions
may materially affect our workers compensation, general liability and group
health care costs.
Liabilities Subject to Compromise
Liabilities subject to compromise represent unsecured
obligations that will be accounted for under a plan of reorganization.
Generally, actions to enforce or otherwise effect payment of pre-Chapter 11 or
CCAA liabilities are stayed.
Pre-petition liabilities that are subject to compromise are reported at
the amounts expected to be allowed, even if they may be settled for lesser
amounts. These liabilities represent the
amounts expected to be allowed on known or potential claims to be resolved
through the Chapter 11 and CCAA process, and remain subject to future
adjustments arising from negotiated settlements, actions of the Bankruptcy
Courts, rejection of executory contracts and unexpired leases, the
determination as to the value of collateral securing the claims, proofs of
claim, or other events. Liabilities
subject to compromise also include certain items that may be assumed under the
Proposed Plan of Reorganization, and as such, may be subsequently reclassified
to liabilities not subject to compromise.
Differences between liability amounts estimated by us and claims filed
by creditors are being investigated and, if necessary, the Bankruptcy Courts
will make a final determination of the allowable claim. The determination of how liabilities will
ultimately be treated cannot be made until the Bankruptcy Courts approve a plan
of reorganization. Accordingly, the
ultimate amount or treatment of such liabilities is not determinable at this
time.
PROSPECTIVE
ACCOUNTING STANDARDS
In June 2009, the FASB issued amendments to ASC
860, effective for fiscal years beginning after November 15, 2009. The amendments remove 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. We do not expect these amendments to have a
material impact on our consolidated financial statements.
ITEM 7A.
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to various market risks,
including commodity price risk, foreign currency risk and interest rate
risk. To manage the volatility related to
these risks, we have on a periodic basis entered into various derivative
contracts. The majority of these
contracts are settled in cash. However,
such settlements have not had a significant effect on our liquidity in the
past, nor are they expected to be significant in the future. We do not use derivatives for speculative or
trading purposes.
On January 26, 2009, the Chapter 11
Petition and the Canadian Petition effectively terminated all existing
derivative instruments. Termination fair
values were calculated based on the potential settlement value. During 2009, a letter of credit in the amount
of $18 million was drawn on related to the settlement of certain commodity
derivative instruments. Excluding these
settled liabilities, the Companys termination value related to its remaining
derivative liabilities was approximately $60 million, recorded in other current
liabilities in the consolidated balance sheet at December 31, 2009. These derivative liabilities were stayed due
to the filing of the Chapter 11 Petition and the Canadian Petition at which
time, these liabilities were adjusted through OCI for derivative instruments
qualifying for hedge accounting and cost of goods sold for derivative
instruments not qualifying for hedge accounting. Subsequently, the amounts adjusted through
OCI were recorded in earnings during 2009 when the underlying transaction was
recognized or when the underlying transaction was no longer expected to occur,
except for a $1 million loss (net of tax) which remained in OCI at December 31,
2009. See Note 10 of the Notes to
Consolidated Financial Statements.
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Commodity
Price Risk
We historically used
financial derivative instruments, including fixed price swaps and options, to
manage fluctuations in cash flows resulting from commodity price risk in the
procurement of natural gas and other commodities including fuel and heating oil. Our objective was to fix the price of a
portion of the purchases of these commodities used in the manufacturing
process. The changes in the market value
of such derivative instruments have historically been, and are expected to
continue to be, highly effective at offsetting changes in price of the hedged
item. Excluding the impact of derivative
instruments, the potential change in our expected 2009 and 2008 natural gas
cost, based upon our expected annual usage and unit cost, resulting from a
hypothetical 10% adverse price change, would be approximately $9 million and $9
million, respectively. The changes in
energy cost discussed in Item 7, Managements Discussion and Analysis of
Financial Condition and Results of Operations include the impact of the
natural gas derivative instruments. See
Note 10 of the Notes to Consolidated Financial Statements.
Foreign
Currency Risk
Our principal foreign exchange exposure
is the Canadian dollar. Assets and
liabilities outside the United States are primarily located in Canada. The
functional currency for our Canadian operations is the U.S. dollar. Our investments in foreign subsidiaries with
a functional currency other than the U.S. dollar are not hedged.
We have historically used
financial derivative instruments, including forward contracts and options,
primarily to protect against Canadian currency exchange risk associated with
expected future cash flows. These
instruments typically have maturities of twelve months or less. In 2009, 2008 and 2007, the average exchange
rates for the Canadian dollar strengthened (weakened) against the U.S. dollar
by 7.1%, (1.0)% and 5.2%, respectively.
We performed a sensitivity analysis as of
December 31, 2009 and 2008 that measures the change in the book value of our net monetary
Canadian liability
arising
from a hypothetical 10% adverse movement in the exchange rate of the Canadian
dollar relative to the U.S. dollar with all other variables held constant. Excluding the impact of derivative
instruments, the potential change in fair value resulting from a hypothetical
10% adverse change in the Canadian dollar exchange rate at December 31,
2009 and 2008, would be $11 million and $10 million, respectively. Fluctuations in Canadian dollar monetary
assets and liabilities result in gains or losses, which are credited or charged
to income.
Interest
Rate Risk
Our earnings and cash flow are
significantly affected by the amount of interest on our indebtedness. Our financing arrangements include both fixed
and variable rate debt in which changes in interest rates will impact the fixed
and variable rate debt differently. A
change in the interest rate of fixed rate debt will impact the fair value of
the debt, whereas a change in the interest rate on the variable rate debt will
impact interest expense and cash flows.
Our objective is to mitigate interest rate volatility and reduce or cap
interest expense within acceptable levels of market risk. We have historically entered into interest
rate swaps, caps or options to hedge interest rate exposure and manage risk
within Company policy. Any derivative
would be specific to the debt instrument, contract or transaction, which would
determine the specifics of the hedge.
We performed a sensitivity analysis as of
December 31, 2009 and 2008 that measures the change in interest expense on
our variable rate debt arising from a hypothetical 100 basis point adverse
movement in interest rates. Based on our
outstanding variable rate debt as of December 31, 2009 and 2008, a
hypothetical 100 basis point adverse change in interest rates would increase
interest expense by approximately $14 million and $10 million, respectively.
The filing of the Chapter 11
Petition and Canadian Petition constituted an event of default under our debt
obligations, and those debt obligations became automatically and immediately
due and payable, subject to an automatic stay of any action to collect, assert,
or recover a claim against us and the application of applicable bankruptcy law.
The following table presents principal amounts for our debt obligations and
related average interest rates based on the weighted average interest rates at
the end of the period. Variable interest
rates disclosed do not attempt to project future interest rates and do not
reflect the
42
Table
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impact of our interest rate swap
contracts. This information should be
read in conjunction with Note 9 of the Notes to Consolidated Financial
Statements.
Current
Maturities of Debt
As of
December 31, 2009 (in millions)
|
|
Outstanding
|
|
Fair
Value
|
|
Bank
term loans and revolver 3.2% average interest rate (variable)
|
|
$
|
1,303
|
|
$
|
1,296
|
|
U.S.
senior notes 8.0% average interest rate (fixed)
|
|
2,275
|
|
2,008
|
|
U.S.
industrial revenue bonds 6.4% average interest rate (fixed)
|
|
164
|
|
164
|
|
Other
U.S
|
|
51
|
|
51
|
|
Total
debt
|
|
$
|
3,793
|
|
$
|
3,519
|
|
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Table
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ITEM 8.
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
All other schedules specified under
Regulation S-X have been omitted because they are not applicable, because they
are not required or because the information required is included in the
financial statements or notes thereto.
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Table
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Managements Report on Internal
Control Over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting for Smurfit-Stone Container Corporation, as
such term is defined in Rule 13a-15(f) under the Exchange Act. As required by Rule 13a-15(c) under
the Exchange Act, we carried out an evaluation, with the participation of our
principal executive officer and principal financial officer, of the
effectiveness of our internal control over financial reporting as of the end of
the latest fiscal year. The framework on
which such evaluation was based is contained in the report entitled Internal Control - Integrated Framework
issued by the Committee of
Sponsoring Organizations of the Treadway Commission. This evaluation included review of the
documentation of controls, evaluation of the design effectiveness of controls,
testing of the operating effectiveness of controls and a conclusion on this
evaluation. Although there are inherent
limitations in the effectiveness of any system of internal control over
financial reporting, based on our evaluation, we have concluded that our
internal control over financial reporting was effective as of December 31,
2009.
The effectiveness of our
internal control over financial reporting as of December 31, 2009 has been
audited by Ernst & Young LLP, our independent registered public
accounting firm. Their report, which expresses an unqualified opinion on the
effectiveness of our internal control over financial reporting as of December 31,
2009, is included herein.
/s/ Patrick J. Moore
|
|
Patrick J. Moore
|
|
Chairman and Chief
Executive Officer
|
|
(Principal Executive
Officer)
|
|
|
|
|
|
/s/ Paul K. Kaufmann
|
|
Paul K. Kaufmann
|
|
Senior Vice President
and Corporate Controller
|
|
(Principal Financial
and Accounting Officer)
|
|
45
Table
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REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of
Smurfit-Stone Container Corporation
We have audited
Smurfit-Stone Container Corporations (the Companys) internal control over
financial reporting as of December 31, 2009, based on criteria established
in
Internal Control Integrated Framework
,
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(the COSO criteria). The Companys management is responsible for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting included in the
accompanying Managements Report on Internal Control over Financial Reporting.
Our responsibility is to express an opinion on the Companys internal control
over financial reporting based on our audit.
We conducted our audit in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. Our audit included
obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on the assessed
risk, and performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A companys internal
control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally
accepted accounting principles. A companys internal control over financial
reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors
of the company; and (3) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the financial statements.
Because of its inherent
limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate
because of changes in conditions or that the degree of compliance with the
policies or procedures may deteriorate.
In our opinion,
Smurfit-Stone Container Corporation maintained, in all material respects,
effective internal control over financial reporting as of December 31,
2009, based on the COSO criteria.
We also have audited, in
accordance with the standards of the Public Company Accounting Oversight Board
(United States), the consolidated balance sheets as of December 31, 2009
and 2008, and the related consolidated statements of operations, stockholders
equity, and cash flows of the Company for each of the three years in the period
ended December 31, 2009. Our report dated March 2, 2010, expressed an
unqualified opinion thereon and included an explanatory paragraph related to
the Companys ability to continue as a going concern.
|
/s/ Ernst &
Young LLP
|
|
Ernst & Young
LLP
|
St. Louis, Missouri
March 2, 2010
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Table
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REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of
Smurfit-Stone Container Corporation
We have audited the
accompanying consolidated balance sheets of Smurfit-Stone Container Corporation
(the Company) as of December 31, 2009 and 2008, and the related
consolidated statements of operations, stockholders equity, and cash flows for
each of the three years in the period ended December 31, 2009. Our audits
also included the financial statement schedule listed in the Index at Item
15(a). These financial statements and schedule are the responsibility of the
Companys management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits
in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the
financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Smurfit-Stone Container
Corporation at December 31, 2009 and 2008, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 2009, in conformity with U.S. generally accepted
accounting principles. Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
The accompanying
consolidated financial statements have been prepared assuming that Smurfit
Stone Container Corporation will continue as a going concern. As more fully
described in Note 1 to the consolidated financial statements, the Company
filed a voluntary petition for reorganization under Chapter 11 of the United
States Bankruptcy Code and Companies Creditors Arrangement Act in Canada on January 26,
2009, which raises substantial doubt about the Companys ability to continue as
a going concern. Managements plans in regard to this matter are also described
in Note 1. The consolidated financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of the liabilities
that may result from the outcome of this uncertainty.
We have also audited, in
accordance with the standards of the Public Company Accounting Oversight Board
(United States), the effectiveness of Smurfit-Stone Container Corporations
internal control over financial reporting as of December 31, 2009, based
on criteria established in Internal Control Integrated Framework, issued
by the Committee of Sponsoring Organizations of the Treadway Commission, and
our report dated March 2, 2010, expressed an unqualified opinion thereon.
|
/s/ Ernst &
Young LLP
|
|
Ernst & Young
LLP
|
St. Louis, Missouri
March 2, 2010
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SMURFIT-STONE CONTAINER CORPORATION
(DEBTOR-IN-POSSESSION)
CONSOLIDATED
BALANCE SHEETS
December 31, (In millions, except share data)
|
|
2009
|
|
2008
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
704
|
|
$
|
126
|
|
Restricted
cash
|
|
9
|
|
|
|
Receivables,
less allowances of $24 in 2009 and $7 in 2008
|
|
615
|
|
96
|
|
Receivable
for alternative energy tax credits
|
|
59
|
|
|
|
Retained
interest in receivables sold
|
|
|
|
120
|
|
Inventories
|
|
|
|
|
|
Work-in-process
and finished goods
|
|
105
|
|
112
|
|
Materials
and supplies
|
|
347
|
|
400
|
|
|
|
452
|
|
512
|
|
Refundable
income taxes
|
|
23
|
|
|
|
Prepaid
expenses and other current assets
|
|
43
|
|
27
|
|
Total
current assets
|
|
1,905
|
|
881
|
|
Net
property, plant and equipment
|
|
3,081
|
|
3,509
|
|
Timberland,
less timber depletion
|
|
2
|
|
32
|
|
Deferred
income taxes
|
|
23
|
|
55
|
|
Other
assets
|
|
66
|
|
117
|
|
|
|
$
|
5,077
|
|
$
|
4,594
|
|
Liabilities and Stockholders Equity (Deficit)
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
not subject to compromise
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
Current
maturities of long-term debt
|
|
$
|
1,354
|
|
$
|
3,718
|
|
Accounts
payable
|
|
387
|
|
506
|
|
Accrued
compensation and payroll taxes
|
|
145
|
|
164
|
|
Interest
payable
|
|
12
|
|
66
|
|
Income
taxes payable
|
|
|
|
9
|
|
Current
deferred income taxes
|
|
|
|
21
|
|
Other
current liabilities
|
|
164
|
|
195
|
|
Total
current liabilities
|
|
2,062
|
|
4,679
|
|
Other
long-term liabilities
|
|
117
|
|
1,320
|
|
Total
liabilities not subject to compromise
|
|
2,179
|
|
5,999
|
|
|
|
|
|
|
|
Liabilities
subject to compromise
|
|
4,272
|
|
|
|
Total
liabilities
|
|
6,451
|
|
5,999
|
|
|
|
|
|
|
|
Stockholders
equity
|
|
|
|
|
|
Preferred
stock, aggregate liquidation preference of $124; 25,000,000 shares
authorized; 4,599,300 issued and outstanding
|
|
104
|
|
101
|
|
Common
stock, par value $.01 per share; 400,000,000 shares authorized, 257,482,839
and 257,087,296 issued and outstanding in 2009 and 2008, respectively
|
|
3
|
|
3
|
|
Additional
paid-in capital
|
|
4,081
|
|
4,073
|
|
Retained
earnings (deficit)
|
|
(4,883
|
)
|
(4,888
|
)
|
Accumulated
other comprehensive income (loss)
|
|
(679
|
)
|
(694
|
)
|
Total
stockholders equity (deficit)
|
|
(1,374
|
)
|
(1,405
|
)
|
|
|
$
|
5,077
|
|
$
|
4,594
|
|
See notes to
consolidated financial statements
48
Table of Contents
SMURFIT-STONE
CONTAINER CORPORATION
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS
Year
Ended December 31, (In
millions, except per share data)
|
|
2009
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
5,574
|
|
$
|
7,042
|
|
$
|
7,420
|
|
Costs
and expenses
|
|
|
|
|
|
|
|
Cost
of goods sold
|
|
5,023
|
|
6,338
|
|
6,404
|
|
Selling
and administrative expenses
|
|
569
|
|
645
|
|
643
|
|
Restructuring
expense
|
|
319
|
|
67
|
|
16
|
|
Goodwill
and intangible asset impairment charges
|
|
|
|
2,761
|
|
|
|
(Gain)
loss on disposal of assets
|
|
3
|
|
(5
|
)
|
62
|
|
Other
operating income
|
|
(633
|
)
|
|
|
|
|
Operating
income (loss)
|
|
293
|
|
(2,764
|
)
|
295
|
|
Other
income (expense)
|
|
|
|
|
|
|
|
Interest
expense, net
|
|
(265
|
)
|
(262
|
)
|
(285
|
)
|
Debtor-in-possession
debt issuance costs
|
|
(63
|
)
|
|
|
|
|
Loss
on early extinguishment of debt
|
|
(20
|
)
|
|
|
(29
|
)
|
Foreign
currency exchange gains (losses)
|
|
(14
|
)
|
36
|
|
(52
|
)
|
Other,
net
|
|
14
|
|
(5
|
)
|
(5
|
)
|
Loss
before reorganization items and income taxes
|
|
(55
|
)
|
(2,995
|
)
|
(76
|
)
|
Reorganization
items
|
|
40
|
|
|
|
|
|
Loss
before income taxes
|
|
(15
|
)
|
(2,995
|
)
|
(76
|
)
|
(Provision
for) benefit from income taxes
|
|
23
|
|
177
|
|
(27
|
)
|
Net
income (loss)
|
|
8
|
|
(2,818
|
)
|
(103
|
)
|
Preferred
stock dividends and accretion
|
|
(11
|
)
|
(12
|
)
|
(12
|
)
|
Net
loss attributable to common stockholders
|
|
$
|
(3
|
)
|
$
|
(2,830
|
)
|
$
|
(115
|
)
|
|
|
|
|
|
|
|
|
Basic and diluted earnings per common share
|
|
|
|
|
|
|
|
Net
loss attributable to common stockholders
|
|
$
|
(.01
|
)
|
$
|
(11.01
|
)
|
$
|
(.45
|
)
|
Weighted
average shares outstanding
|
|
257
|
|
257
|
|
256
|
|
See notes to
consolidated financial statements.
49
Table of Contents
SMURFIT-STONE CONTAINER CORPORATION
(DEBTOR-IN-POSSESSION)
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT)
|
|
Common
Stock
|
|
Preferred
Stock
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
Number
|
|
Par
|
|
Number
|
|
|
|
Additional
|
|
Retained
|
|
Other
|
|
|
|
|
|
of
|
|
Value,
|
|
of
|
|
|
|
Paid-In
|
|
Earnings
|
|
Comprehensive
|
|
|
|
(In millions, except share data)
|
|
Shares
|
|
$.01
|
|
Shares
|
|
Amount
|
|
Capital
|
|
(Deficit)
|
|
Income
(Loss)
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2007
|
|
255,300,904
|
|
$
|
3
|
|
4,599,300
|
|
$
|
93
|
|
$
|
4,040
|
|
$
|
(1,945
|
)
|
$
|
(412
|
)
|
$
|
1,779
|
|
Comprehensive
income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
(103
|
)
|
|
|
(103
|
)
|
Other
comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
hedge adjustments, net of tax expense of $3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5
|
|
5
|
|
Employee
benefit plan liability adjustments, net of tax expense of $99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
154
|
|
154
|
|
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56
|
|
Adjustment
to initially apply FIN No. 48
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
2
|
|
Issuance
of common stock under stock option and restricted stock plans
|
|
900,875
|
|
|
|
|
|
|
|
26
|
|
|
|
|
|
26
|
|
Preferred
stock dividends and accretion
|
|
|
|
|
|
|
|
4
|
|
|
|
(12
|
)
|
|
|
(8
|
)
|
Balance at December 31, 2007
|
|
256,201,779
|
|
3
|
|
4,599,300
|
|
97
|
|
4,066
|
|
(2,058
|
)
|
(253
|
)
|
1,855
|
|
Comprehensive
income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
(2,818
|
)
|
|
|
(2,818
|
)
|
Other
comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
hedge adjustments, net of tax benefit of $22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(34
|
)
|
(34
|
)
|
Foreign
currency translation adjustment, net of tax benefit of $4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6
|
)
|
(6
|
)
|
Employee
benefit plan liability adjustments, net of tax benefit of $241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(401
|
)
|
(401
|
)
|
Comprehensive
income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,259
|
)
|
Issuance
of common stock under stock option and restricted stock plans
|
|
885,517
|
|
|
|
|
|
|
|
7
|
|
|
|
|
|
7
|
|
Preferred
stock dividends and accretion
|
|
|
|
|
|
|
|
4
|
|
|
|
(12
|
)
|
|
|
(8
|
)
|
Balance at December 31, 2008
|
|
257,087,296
|
|
3
|
|
4,599,300
|
|
101
|
|
4,073
|
|
(4,888
|
)
|
(694
|
)
|
(1,405
|
)
|
Comprehensive
income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
8
|
|
|
|
8
|
|
Other
comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
hedge adjustments, net of tax expense of $23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36
|
|
36
|
|
Foreign
currency translation adjustment, net of tax expense of $1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
3
|
|
Employee
benefit plan liability adjustments, net of tax benefit of $6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24
|
)
|
(24
|
)
|
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
|
|
Issuance
of common stock under stock option and restricted stock plans
|
|
395,543
|
|
|
|
|
|
|
|
8
|
|
|
|
|
|
8
|
|
Preferred
stock accretion
|
|
|
|
|
|
|
|
3
|
|
|
|
(3
|
)
|
|
|
|
|
Balance at December 31, 2009
|
|
257,482,839
|
|
$
|
3
|
|
4,599,300
|
|
$
|
104
|
|
$
|
4,081
|
|
$
|
(4,883
|
)
|
$
|
(679
|
)
|
$
|
(1,374
|
)
|
See notes to
consolidated financial statements.
50
Table of Contents
SMURFIT-STONE CONTAINER CORPORATION
(DEBTOR-IN-POSSESSION)
CONSOLIDATED
STATEMENTS OF CASH FLOWS
Year
Ended December 31, (In
millions)
|
|
2009
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
8
|
|
$
|
(2,818
|
)
|
$
|
(103
|
)
|
Adjustments
to reconcile net income (loss) to net cash provided by operating activities:
|
|
|
|
|
|
|
|
Non-cash
goodwill and intangible asset impairment charges
|
|
|
|
2,761
|
|
|
|
Loss
on early extinguishment of debt
|
|
20
|
|
|
|
29
|
|
Depreciation,
depletion and amortization
|
|
364
|
|
357
|
|
360
|
|
Debtor-in-possession
debt issuance costs
|
|
63
|
|
|
|
|
|
Amortization
of deferred debt issuance costs
|
|
6
|
|
7
|
|
8
|
|
Deferred
income taxes
|
|
(26
|
)
|
(221
|
)
|
11
|
|
Pension
and postretirement benefits
|
|
76
|
|
(30
|
)
|
(59
|
)
|
(Gain)
loss on disposal of assets
|
|
3
|
|
(5
|
)
|
62
|
|
Non-cash
restructuring (income) expense
|
|
250
|
|
21
|
|
(21
|
)
|
Non-cash
stock-based compensation
|
|
9
|
|
3
|
|
21
|
|
Non-cash
foreign currency exchange (gains) losses
|
|
14
|
|
(36
|
)
|
52
|
|
Non-cash
reorganization items
|
|
(96
|
)
|
|
|
|
|
Change
in restricted cash
|
|
(9
|
)
|
|
|
|
|
Change
in operating assets and liabilities, net of effects from acquisitions and
dispositions
|
|
|
|
|
|
|
|
Receivables
and retained interest in receivables sold
|
|
(4
|
)
|
199
|
|
(71
|
)
|
Receivable
for alternative energy tax credits
|
|
(59
|
)
|
|
|
|
|
Inventories
|
|
55
|
|
3
|
|
(6
|
)
|
Prepaid
expenses and other current assets
|
|
(13
|
)
|
3
|
|
7
|
|
Accounts
payable and accrued liabilities
|
|
219
|
|
(78
|
)
|
(39
|
)
|
Interest
payable
|
|
165
|
|
1
|
|
(13
|
)
|
Other,
net
|
|
49
|
|
31
|
|
5
|
|
Net
cash provided by operating activities
|
|
1,094
|
|
198
|
|
243
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
Expenditures
for property, plant and equipment
|
|
(172
|
)
|
(394
|
)
|
(384
|
)
|
Proceeds
from property disposals and sale of businesses
|
|
48
|
|
9
|
|
452
|
|
Advances
to affiliates, net
|
|
(15
|
)
|
|
|
|
|
Net
cash provided by (used for) investing activities
|
|
(139
|
)
|
(385
|
)
|
68
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
Proceeds
from debtor-in-possession financing
|
|
440
|
|
|
|
|
|
Repayments
of debtor-in-possession financing
|
|
(440
|
)
|
|
|
|
|
Proceeds
from long-term debt
|
|
|
|
|
|
675
|
|
Net
borrowings (repayments) of long-term debt
|
|
71
|
|
314
|
|
(952
|
)
|
Debt
repurchase premiums
|
|
|
|
|
|
(23
|
)
|
Repurchase
of receivables
|
|
(385
|
)
|
|
|
|
|
Debtor-in-possession
debt issuance costs
|
|
(63
|
)
|
|
|
|
|
Preferred
dividends paid
|
|
|
|
(8
|
)
|
(8
|
)
|
Proceeds
from exercise of stock options
|
|
|
|
|
|
2
|
|
Deferred
debt issuance costs
|
|
|
|
|
|
(7
|
)
|
Net
cash provided by (used for) financing activities
|
|
(377
|
)
|
306
|
|
(313
|
)
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
578
|
|
119
|
|
(2
|
)
|
Cash
and cash equivalents
|
|
|
|
|
|
|
|
Beginning
of year
|
|
126
|
|
7
|
|
9
|
|
End
of year
|
|
$
|
704
|
|
$
|
126
|
|
$
|
7
|
|
See notes to
consolidated financial statements.
51
Table of Contents
SMURFIT-STONE CONTAINER CORPORATION
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in millions, except 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 Companys 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 Companys operations in Mexico and Asia and certain U.S. and
Canadian legal entities (the Non-Debtor Subsidiaries) were not included in
the filing and will continue to operate outside of the Chapter 11 process.
Effective as of the opening of
business on February 4, 2009, the Companys common stock and its 7% Series A
Cumulative Exchangeable Redeemable Convertible Preferred Stock (Preferred
Stock) were delisted from the NASDAQ Global Select Market and the trading of
these securities was suspended.
The Companys
common stock and Preferred Stock are now quoted on the Pink Sheets Electronic
Quotation Service under the ticker symbols SSCCQ.PK and SSCJQ.PK,
respectively.
The
filing of the Chapter 11 Petition and the Canadian Petition constituted an
event of default under the Companys debt obligations, and those debt
obligations became automatically and immediately due and payable, although any
actions to enforce such payment obligations were stayed as a result of the
filing of the Chapter 11 Petition and the Canadian Petition.
The Company and its U.S. and
Canadian subsidiaries are currently 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, the Debtors are authorized
to continue to operate as ongoing businesses, but may 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). 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 Smurfit-Stone Container Enterprises, Inc. (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.
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
52
Table of Contents
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.
During 2009, the Company
made voluntary prepayments of $383 million on the U.S. DIP Term Loan with
available cash provided by operating activities. In addition, the Company
repaid $17 million on the U.S. DIP Term Loan with proceeds from property
sales. As of December 31, 2009, no
borrowings were outstanding under the U.S. DIP Term Loan or the U.S. DIP
Revolver.
During
2009, the Company repaid $35 million on the Canadian DIP Term Loan primarily
with proceeds from property sales including $27 million from the sale of the
Companys Canadian timberlands. In
addition, during 2009, the Company repaid $5 million on the Canadian DIP
Revolver. As of December 31, 2009, no borrowings were outstanding under
the Canadian DIP Term Loan or the Canadian DIP Revolver.
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 (See Note 9).
Reorganization Process
The
Bankruptcy Courts approved payment of certain of the Companys 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 Companys 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 Companys 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 are enjoined unless and until the Bankruptcy Courts lift 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 have a right to be heard on all matters that come before the
U.S. Court with respect to the Company.
A monitor was appointed by the Canadian Court with respect to
proceedings before the Canadian Court.
Under the Bankruptcy Code,
the Debtors generally must assume or reject pre-petition executory contracts,
including but not limited to real property leases, subject to the approval of
the Bankruptcy Courts and certain other conditions. In this context, assumption means that the
Company agrees to perform its obligations and cure all existing defaults under
the contract or lease, and rejection means that it is relieved from its
obligations to perform further under the contract or lease, but is subject to a
pre-petition claim for damages for the breach thereof subject to certain
limitations. Any damages resulting
53
Table of Contents
from rejection of executory
contracts that are permitted to be recovered under the Bankruptcy Code will be
treated as liabilities subject to compromise unless such claims were secured
prior to the Petition Date.
Since
the Petition Date, the Company received approval from the Bankruptcy Courts to
reject a number of leases and other executory contracts of various types. The Company is continuing to review all of
its executory contracts and unexpired leases to determine which additional
contracts and leases it will reject. The Company expects that additional
liabilities subject to compromise will arise due to rejection of executory
contracts, including 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. The Company also
expects that the assumption of additional executory contracts and unexpired
leases will convert certain of the liabilities shown on the accompanying
consolidated balance sheet as liabilities subject to compromise to liabilities
not subject to compromise. Due to the
uncertain nature of many of the potential claims, the Company cannot project
the magnitude of such claims with certainty.
In June 2009, the
Bankruptcy Courts entered an order establishing August 28, 2009, as the
bar date for potential creditors to file claims. The bar date is the date
by which certain claims against the Company must be filed if the claimants wish
to receive any distribution in the bankruptcy cases. Proof of claim forms
received after the bar date are typically not eligible for consideration of
recovery as part of the Companys bankruptcy cases. Creditors were notified of the bar date and
the requirement to file a proof of claim with the Bankruptcy Courts.
Differences between liability amounts estimated by the Company and claims filed
by creditors are being investigated and, if necessary, the Bankruptcy Courts
will make a final determination of the allowable claim. The determination of
how liabilities will ultimately be treated cannot be made until the Bankruptcy
Courts approve a plan of reorganization. Accordingly, the ultimate amount or
treatment of such liabilities is not determinable at this time.
In
September 2009, the U.S. Trustee denied a request by certain holders of
the Companys common stock and Preferred Stock to form an official equity
committee to represent the interests of equity holders on matters before the
U.S. Court. The equity holders subsequently filed a motion for the appointment
of an equity committee with the U.S. Court.
In December 2009, the U.S. Court entered an order denying the
motion for an order appointing an official committee of equity security
holders.
Proposed Plan of Reorganization and Exit Credit Facilities
In
order to successfully emerge from bankruptcy, the Company must propose and
obtain confirmation by the Bankruptcy Courts of a plan of reorganization that
satisfies the requirements of the Bankruptcy Code and the CCAA. A plan of reorganization would resolve the
Companys pre-petition obligations, set forth the revised capital structure of
the newly reorganized entity and provide for corporate governance subsequent to
the Companys exit from bankruptcy.
Under
the priority scheme established by the Bankruptcy Code and the CCAA, unless
creditors agree otherwise, pre-petition liabilities and post-petition
liabilities must be satisfied in full before stockholders are entitled to
receive any distribution or retain any property under a plan of
reorganization. The ultimate recovery to
creditors and/or stockholders, if any, will not be determined until
confirmation of a plan 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 or amounts of distributions, if any, they would receive. Because of
such possibilities, the value of the Companys liabilities and securities,
including its common stock, is highly speculative. Appropriate caution should be exercised with
respect to existing and future investments in any of the Companys liabilities
and/or securities.
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Table of Contents
The Proposed Plan of Reorganization
On
December 1, 2009, the Debtors filed their Joint Plan of Reorganization and
Plan of Compromise and Arrangement 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 Proposed
Plan of Reorganization (the Proposed Plan of Reorganization) and to the Disclosure
Statement (the Disclosure Statement).
Key elements of the Proposed Plan of Reorganization were as follows:
·
the Company and its subsidiary, SSCE, would
merge and become the reorganized company (Reorganized Smurfit-Stone) that
would be governed by a board of directors that will include Patrick J. Moore,
the Companys current Chairman and Chief Executive Officer, Steven J. Klinger,
the Companys current President and Chief Operating Officer, and a number of
independent directors, including a non-executive chairman, to be selected by
the Creditors Committee in consultation with the Debtors;
·
all of the existing secured debt of the
Debtors would be fully repaid with cash;
·
substantially all of the existing unsecured
debt and claims against SSCE, including all of the outstanding unsecured senior
notes, would be exchanged for common stock of the Reorganized Smurfit-Stone,
which would be traded on either the New York Stock Exchange or the NASDAQ
market, with holders of unsecured claims against SSCE of less than or equal to
$10,000 entitled to receive payment of 100% of such claims in cash, and
eligible cash-out participants having the opportunity to indicate on their
ballot the percentage amount of their allowed claim they would be willing to
receive in cash in lieu of common stock;
·
all of the Companys existing equity
securities would be cancelled and existing shareholders of the Companys common
and Preferred Stock would receive no distribution on account of their shares;
·
the assets of the Canadian Debtors would be
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 if they vote to accept the Proposed Plan of
Reorganization and (iii) the assumption of certain liabilities and
obligations of the Canadian Debtors; and
·
Reorganized Smurfit-Stone and its
newly-formed Canadian subsidiary would assume 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.
The
Proposed Plan of Reorganization will not become effective until certain
conditions are satisfied or waived, including: (i) entry of an order by
the Bankruptcy Courts confirming the Proposed Plan of Reorganization, (ii) all
actions, documents and agreements necessary to implement the Proposed Plan of
Reorganization having been effected or executed, (iii) access of the
Debtors to funding under the exit credit facility and (iv) specified
claims of the Debtors secured lenders having been paid in full pursuant to the
Proposed Plan of Reorganization.
On
January 14, 2010, the U.S. Court granted approval to extend the Debtors
exclusive right to file a 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 period lapses, any party in interest would be able to file a plan
of reorganization. In addition to being
voted on by holders of impaired claims and equity interests, a plan of
reorganization must satisfy certain requirements of the Bankruptcy Code and the
CCAA and must be approved, or confirmed, by the Bankruptcy Courts in order to
become effective.
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Table of Contents
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 interest, who are entitled to vote to accept or reject the Proposed
Plan of Reorganization.
The
Bankruptcy Code requires the U.S. Court, after appropriate notice, to hold a
hearing on confirmation of a plan of reorganization. The confirmation hearing on the Proposed Plan
of Reorganization is scheduled to begin on April 14, 2010. The confirmation hearing may be adjourned
from time to time by the Bankruptcy Court without further notice except for an
announcement of the adjourned date made at the confirmation hearing or any
subsequent adjourned confirmation hearing. There can be no assurance at this
time that the Proposed Plan of Reorganization will be confirmed by the
Bankruptcy Courts or that any such 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 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 Companys 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
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 a
commitment letter and related fee letters for the ABL Revolving Facility with
aggregate commitments of $650 million (including a $100 million Canadian
Tranche), which the Company expects to enter into prior to exiting
bankruptcy. The ABL Revolving Facility
will include a $150 million sub-limit for letters of credit. The commitments for the Term Loan Facility and
the ABL Revolving Facility will terminate on July 16, 2010 unless the
Companys emergence from bankruptcy and satisfaction of certain funding date
conditions under the Term Loan Facility and the ABL Revolving Facility occur on
or prior to such date, and the Term Loan Facility is funded.
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.
On
the date the Company emerges from bankruptcy, the Term Loan will be funded and
borrowings are expected to be available under the ABL Revolving Facility. The proceeds of the borrowings under the
Term Loan Facility, together with available cash will be used to repay the
Companys outstanding secured indebtedness under its pre-petition Credit
Facility and pay fees, costs and expenses of approximately $50 million related
to and contemplated by the Exit Credit Facilities and the Proposed Plan of
Reorganization. Borrowings under the ABL Revolver Facility will be available
for working capital purposes, capital expenditures, permitted acquisitions and
general corporate purposes.
The
term loan (the Term Loan) matures six years from the funding date of the Term
Loan Facility and is repayable 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 percentages of the Companys excess cash flow,
as defined in the Term Loan Facility, based on certain agreed levels of
56
Table of Contents
secured
leverage ratios, must be used to repay outstanding principal amounts under
the Term Loan. Subject to specified
exceptions, the Term Loan Facility will also require 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 will bear interest at the Companys 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.
The
ABL revolver loan (the ABL Revolver) will mature four years from the funding
date of the ABL Revolving Facility. The Company will have 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 rate could be adjusted
in the future from 3.25% to a rate as high as 3.75% based on the average
historical utilization under the ABL Revolving Facility. The Company would 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 will be guaranteed by the Company and certain
of its subsidiaries, and would be 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 Companys 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.
Going Concern Matters
The
consolidated financial statements and related notes have been prepared assuming
that the Company will continue as a going concern, although its bankruptcy
filings raise substantial doubt about its ability to continue as a going
concern. The Companys ability to
continue as a going concern is dependent on restructuring its obligations in a
manner that allows it to obtain confirmation of a plan of reorganization by the
Bankruptcy Courts. The consolidated
financial statements do not include any adjustments related to the
recoverability and classification of recorded assets or to the amounts and
classification of liabilities or any other adjustments that might be necessary
should the Company be unable to continue as a going concern.
Financial Reporting Considerations
For
periods subsequent to the bankruptcy filings, the Company has 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
statement of operations. In addition,
pre-petition obligations that may be impacted by the bankruptcy reorganization
process have been classified on the consolidated balance sheet in liabilities
subject to compromise . These
liabilities are reported at the amounts expected to be allowed by the
Bankruptcy Courts, even if they may be settled for lesser or greater amounts.
57
Table of Contents
Reorganization Items
The
Companys reorganization items directly related to the process of reorganizing
the Company under Chapter 11 and the CCAA, as recorded in its 2009 consolidated
statement of operations, consist of the following:
Provision for rejected/settled executory contracts
and leases
|
|
$
|
(78
|
)
|
Professional fees
|
|
(56
|
)
|
Accounts payable settlement gains
|
|
11
|
|
Reversal of accrued post-petition unsecured
interest expense
|
|
163
|
|
Total reorganization items
|
|
$
|
40
|
|
Provision
for rejected/settled executory contracts and leases for 2009 includes a $9
million special termination benefits charge due to funding obligations related
to certain non-qualified pension plans.
Professional
fees directly related to the reorganization include fees associated with
advisors to the Company, the Creditors Committee and certain secured
creditors.
Under
the Proposed Plan of Reorganization, interest expense on the unsecured senior
notes subsequent to the Petition Date would not be paid. In addition, holders of the Companys Preferred
Stock would not be entitled to receive any amounts under the Proposed Plan of
Reorganization. As a result, the Company
concluded it was not probable that interest expense or preferred stock
dividends that were accrued from the Petition Date through November 30,
2009 would be allowed claims. In December 2009,
the Company recorded income in reorganization items for the reversal of $163
million of accrued post-petition unsecured interest expense in the consolidated
statements of operations. Preferred
stock dividends that were accrued post-petition and included in liabilities
subject to compromise were reversed in December 2009.
Net
cash paid for reorganization items for 2009 totaled $41 million related to
professional fees.
Reorganization
items exclude employee severance and other restructuring charges recorded
during 2009.
Other Bankruptcy Related Costs
Debtor-in-possession
debt issuance costs of $63 million were incurred and paid during 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 consist of the following:
|
|
December 31, 2009
|
|
|
|
|
|
Unsecured debt
|
|
$
|
2,439
|
|
Accounts payable
|
|
339
|
|
Interest payable
|
|
47
|
|
Retiree medical obligations
|
|
176
|
|
Pension obligations
|
|
1,136
|
|
Unrecognized tax benefits
|
|
46
|
|
Executory contracts and leases
|
|
72
|
|
Other
|
|
17
|
|
Liabilities subject to compromise
|
|
$
|
4,272
|
|
58
Table of Contents
Liabilities
subject to compromise represent pre-petition unsecured obligations that will be
settled under a plan of reorganization. Generally, actions to enforce or
otherwise effect payment of pre-Chapter 11 or CCAA liabilities are stayed. Pre-petition liabilities that are subject to
compromise are reported at the amounts expected to be allowed, even if they may
be settled for lesser or greater amounts.
These liabilities represent the amounts expected to be allowed on known
or potential claims to be resolved through the Chapter 11 and CCAA process, and
remain subject to future adjustments arising from negotiated settlements,
actions of the Bankruptcy Courts, rejection of executory contracts and
unexpired leases, the determination as to the value of collateral securing the
claims, proofs of claim, or other events.
Liabilities subject to compromise also include certain items, such as
qualified defined benefit pension and retiree medical obligations that may be
assumed under the Proposed Plan of Reorganization, and as such, may be
subsequently reclassified to liabilities not subject to compromise.
The
Bankruptcy Courts approved payment of certain pre-petition obligations,
including employee wages, salaries and benefits, and the payment of vendors and
other providers in the ordinary course for goods and services received after
the filing of the Chapter 11 Petition and the Canadian Petition and other
business-related payments necessary to maintain the operation of the Companys
business. Obligations associated with these matters are not classified as
liabilities subject to compromise.
The Company has rejected
certain pre-petition executory contracts and unexpired leases with respect to
the Companys operations with the approval of the Bankruptcy Courts and may
reject additional contracts or unexpired leases in the future. Damages resulting from rejection of executory
contracts and unexpired leases are generally treated as general unsecured
claims and are classified as liabilities subject to compromise.
Debtor Financial Statements
The
following condensed combined financial statements
represent the financial
statements for the Debtors only. The
Companys Non-Debtor Subsidiaries are accounted for as non-consolidated
subsidiaries in these financial statements and, as such, their net loss is
included in equity in losses of Non-Debtor Subsidiaries, in the condensed
combined statement of operations and their net assets are included as Investments
in and advances to Non-Debtor Subsidiaries in the condensed combined balance
sheet. The Debtors financial statements
have been prepared in accordance with the guidance in ASC 852.
Intercompany
transactions between the Debtors have been eliminated in the financial
statements. Intercompany transactions between the Debtors and Non-Debtor
Subsidiaries have not been eliminated in the Debtors financial statements
.
59
Table of
Contents
SMURFIT-STONE
CONTAINER CORPORATION
CONDENSED
COMBINED BALANCE SHEET DEBTORS
|
|
December 31,
|
|
(In
millions)
|
|
2009
|
|
Assets
|
|
|
|
|
|
|
|
Current
assets
|
|
|
|
Cash
and cash equivalents
|
|
$
|
683
|
|
Restricted
cash
|
|
9
|
|
Receivables
|
|
583
|
|
Receivable
for alternative energy tax credits
|
|
59
|
|
Inventories
|
|
436
|
|
Refundable
income taxes
|
|
23
|
|
Prepaid
expenses and other current assets
|
|
41
|
|
Total
current assets
|
|
1,834
|
|
Net
property, plant and equipment
|
|
3,049
|
|
Timberland,
less timber depletion
|
|
2
|
|
Deferred
income taxes
|
|
21
|
|
Investments
in and advances to non-debtor subsidiaries
|
|
76
|
|
Other
assets
|
|
66
|
|
|
|
$
|
5,048
|
|
Liabilities and Stockholders Equity (Deficit)
|
|
|
|
|
|
|
|
Liabilities
not subject to compromise
|
|
|
|
Current
liabilities
|
|
|
|
Current
maturities of long-term debt
|
|
$
|
1,350
|
|
Accounts
payable
|
|
370
|
|
Accrued
compensation and payroll taxes
|
|
142
|
|
Interest
payable
|
|
12
|
|
Other
current liabilities
|
|
159
|
|
Total
current liabilities
|
|
2,033
|
|
Other
long-term liabilities
|
|
117
|
|
Total
liabilities not subject to compromise
|
|
2,150
|
|
|
|
|
|
Liabilities
subject to compromise
|
|
4,272
|
|
Total
liabilities
|
|
6,422
|
|
|
|
|
|
Total
equity (deficit)
|
|
(1,374
|
)
|
|
|
$
|
5,048
|
|
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Table of Contents
SMURFIT-STONE CONTAINER CORPORATION
CONDENSED COMBINED STATEMENT OF OPERATIONS DEBTORS
Year
Ended December 31, (In millions)
|
|
2009
|
|
Net sales
|
|
$
|
5,476
|
|
Costs and expenses
|
|
|
|
Cost of goods sold
|
|
4,941
|
|
Selling and administrative expenses
|
|
551
|
|
Restructuring expenses
|
|
318
|
|
Loss on disposal of assets
|
|
3
|
|
Other operating income
|
|
(633
|
)
|
Operating income
|
|
296
|
|
Other income (expense)
|
|
|
|
Interest expense, net
|
|
(264
|
)
|
Debtor-in-possession debt issuance costs
|
|
(63
|
)
|
Loss on early extinguishment of debt
|
|
(20
|
)
|
Foreign currency exchange losses
|
|
(14
|
)
|
Equity in losses of non-debtor subsidiaries
|
|
(5
|
)
|
Other, net
|
|
14
|
|
Loss before reorganization items and income taxes
|
|
(56
|
)
|
Reorganization items
|
|
40
|
|
Loss before income taxes
|
|
(16
|
)
|
Benefit from income taxes
|
|
24
|
|
Net income
|
|
8
|
|
Preferred stock dividends and accretion
|
|
(11
|
)
|
Net loss attributable to common stockholders
|
|
$
|
(3
|
)
|
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Table of Contents
SMURFIT-STONE CONTAINER CORPORATION
CONDENSED COMBINED STATEMENT OF CASH FLOWS DEBTORS
Year
Ended December 31, (In millions)
|
|
2009
|
|
Cash flows from operating
activities
|
|
|
|
Net income
|
|
$
|
8
|
|
Adjustments to reconcile net income to net cash
provided by operating activities
|
|
|
|
Loss on early extinguishment of debt
|
|
20
|
|
Depreciation, depletion and amortization
|
|
360
|
|
Debtor-in-possession debt issuance costs
|
|
63
|
|
Amortization of deferred debt issuance costs
|
|
6
|
|
Deferred income taxes
|
|
(26
|
)
|
Pension and postretirement benefits
|
|
76
|
|
Loss on disposal of assets
|
|
3
|
|
Non-cash restructuring expenses
|
|
249
|
|
Non-cash stock-based compensation
|
|
9
|
|
Non-cash foreign currency exchange losses
|
|
14
|
|
Non-cash reorganization items
|
|
(96
|
)
|
Change in restricted cash
|
|
(9
|
)
|
Change in operating assets and liabilities, net of
effects from acquisitions and dispositions
|
|
|
|
Receivables
|
|
(9
|
)
|
Receivable for alternative energy tax credit
|
|
(59
|
)
|
Inventories
|
|
55
|
|
Prepaid expenses and other current assets
|
|
(15
|
)
|
Accounts payable and accrued liabilities
|
|
223
|
|
Intercompany receivable with non-debtors
|
|
(11
|
)
|
Interest payable
|
|
165
|
|
Other, net
|
|
54
|
|
Net cash provided by operating activities
|
|
1,080
|
|
Cash flows from investing
activities
|
|
|
|
Expenditures for property, plant and equipment
|
|
(170
|
)
|
Proceeds from property disposals
|
|
48
|
|
Advances to affiliates
|
|
(18
|
)
|
Net cash used for investing activities
|
|
(140
|
)
|
Cash flows from financing
activities
|
|
|
|
Proceeds from debtor-in-possession financing
|
|
440
|
|
Repayments of debtor-in-possession financing
|
|
(440
|
)
|
Net borrowings of long-term debt
|
|
71
|
|
Repurchase of receivables
|
|
(385
|
)
|
Debtor-in-possession debt issuance costs
|
|
(63
|
)
|
Net cash used for financing activities
|
|
(377
|
)
|
|
|
|
|
Increase in cash and cash
equivalents
|
|
563
|
|
Cash and cash equivalents
|
|
|
|
Beginning of period
|
|
120
|
|
End of period
|
|
$
|
683
|
|
62
Table of Contents
2. Significant Accounting Policies
Basis of Presentation:
The Company is a holding company that owns 100% of the equity interest
in SSCE. The Company has no operations
other than its investment in SSCE. SSC
Canada is a wholly owned subsidiary of SSCE.
Nature of Operations:
The Companys major operations are containerboard, corrugated containers
and reclamation. The Companys
paperboard mills procure virgin and reclaimed fiber and produce paperboard for
conversion into corrugated containers at Company-owned facilities and
third-party converting operations. Paper
product customers represent a diverse range of industries including paperboard
packaging and a broad range of manufacturers of consumer goods. Recycling operations collect or broker
wastepaper for sale to Company-owned and third-party paper mills. Customers and operations are located
principally in North America.
Principles of Consolidation:
The consolidated financial statements include the accounts of the
Company and majority-owned and controlled subsidiaries. Investments in non-majority owned affiliates
are accounted for using the equity method.
Significant intercompany accounts and transactions are eliminated in
consolidation.
Cash and Cash Equivalents:
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
At December 31, 2009,
the Company had restricted cash of $9 million as approved by the U.S. Court to
provide financial assurance to certain utility vendors. Changes in restricted cash are reflected in
operating activities in the consolidated statements of cash flows.
Revenue Recognition:
The Company recognizes revenue at the time persuasive evidence of an
agreement exists, price is fixed and determinable, title passes to external
customers and collectibility is reasonably assured. Shipping and handling costs are included in
cost of goods sold.
The Company records certain
inventory buy/sell transactions between counterparties within the same line of
business as a single exchange transaction on a net basis in the consolidated
statements of operations.
Receivables, Less Allowances:
Credit is extended to customers based on an evaluation of their
financial condition. The Company
evaluates the collectibility of accounts receivable on a case-by-case basis and
makes adjustments to the bad debt reserve for expected losses, considering such
things as ability to pay, bankruptcy, credit ratings and payment history. The Company also estimates reserves for bad
debts based on historical experience and past due status of the accounts.
Inventories:
Inventories are valued at the lower of cost or market under the last-in,
first-out (LIFO) method, except for $268 million in 2009 and $296 million in
2008, which are valued at the lower of average cost or market. First-in, first-out (FIFO) costs (which
approximate replacement costs) exceed the LIFO value by $94 million and $120
million at December 31, 2009 and 2008, respectively.
Net Property, Plant and
Equipment:
Property, plant and equipment are carried at
cost. The costs of additions,
improvements and major replacements are capitalized, while maintenance and
repairs are charged to expense as incurred.
Provisions for depreciation and amortization are made using
straight-line rates over the estimated useful lives of the related assets and
the shorter of useful lives or terms of the applicable leases for leasehold
improvements. Papermill machines have
been assigned a useful life of 18 to 23 years, while major converting equipment
has been assigned a useful life ranging from 12 to 20 years (See Note 7).
Timberland, Less Timber
Depletion:
Timberland is stated at cost less accumulated
cost of timber harvested. The portion of
the costs of timberland attributed to standing timber is charged against income
as timber is cut, at rates determined annually, based on the relationship of
unamortized timber costs to
63
Table of Contents
the estimated volume of
recoverable timber. The costs of
seedlings and reforestation of timberland are capitalized.
Deferred Debt Issuance Costs and
Losses From Extinguishment of Debt:
Deferred debt
issuance costs are amortized over the terms of the respective debt obligations
using the interest method.
Long-Lived Assets:
Long-lived assets held and used by the Company are reviewed for
impairment when events or changes in circumstances indicate that their carrying
amount may not be recoverable.
Circumstances which could trigger a review include, but are not limited
to: significant decreases in the market price of the asset; significant adverse
changes in the business climate or legal factors; accumulation of costs
significantly in excess of the amount originally expected for the acquisition
or construction of the asset; current period cash flow or operating losses
combined with a history of losses or a forecast of continuing losses associated
with the use of the asset; and current expectation that the asset will more
likely than not be sold or disposed of significantly before the end of its
estimated useful life.
Recoverability is
assessed based on the carrying amount of the asset compared to the sum of the
undiscounted cash flows expected to result from the use and the eventual
disposal of the asset, as well as specific appraisal in certain instances. An impairment loss is recognized when the
carrying amount is not recoverable and exceeds fair value.
Once the Company commits
to a plan to abandon or take out of service a long-lived asset before the end
of its previously estimated useful life, depreciation estimates are revised to reflect
the use of the asset over its shortened useful life (See Note 3).
Income Taxes:
The Company accounts for income taxes in accordance with the liability
method of accounting for income taxes.
Under the liability method, deferred assets and liabilities are
recognized based upon anticipated future tax consequences attributable to
differences between financial statement carrying amounts of assets and
liabilities and their respective tax bases.
The Company applies the
provisions of ASC 740, Income Taxes (ASC 740), which creates a single model
to address accounting for uncertainty in tax positions and clarifies the
accounting for income taxes by prescribing a minimum recognition threshold a
tax position is required to meet before being recognized in the financial
statements. Under the provisions of ASC
740, the Company elected to classify interest and penalties related to
unrecognized tax benefits in the Companys income tax provision (See Note 14).
Foreign Currency:
The functional currency for Canadian operations is the U.S. dollar. Fluctuations in Canadian dollar monetary
assets and liabilities result in gains or losses which are credited or charged
to income. Foreign currency
transactional gains or losses are also credited or charged to income.
The Companys remaining
foreign operations functional currency is the applicable local currency. Assets and liabilities for these foreign
operations are translated at the exchange rate in effect at the balance sheet
date, and income and expenses are translated at average exchange rates
prevailing during the year. Translation
gains or losses are included within stockholders equity as part of accumulated
other comprehensive income (loss) (OCI) (See Note 19).
Derivatives and Hedging
Activities:
The Companys derivative instruments were
effectively terminated upon the filing of the Chapter 11 Petition and the
Canadian Petition. Termination values
were calculated based on potential settlement value. Prior to the bankruptcy filing, the Company
recognized all derivatives on the balance sheet at fair value. Derivatives not qualifying for hedge
accounting were adjusted to fair value through income. Derivatives qualifying for cash flow hedge
accounting were recognized in OCI until the hedged item was recognized in
earnings. Hedges related to anticipated
transactions were designated and documented at hedge inception as cash flow
hedges and evaluated for hedge effectiveness quarterly (See Note 10).
64
Table of Contents
Transfers of Financial Assets:
Certain financial assets were transferred to qualifying special-purpose
entities and variable interest entities where the Company is not the primary
beneficiary. The assets and liabilities
of such entities are not reflected in the consolidated financial statements of
the Company. Gains or losses on sale of
financial assets depend in part on the previous carrying amount of the
financial assets involved in the transfer, allocated between the assets sold
and the retained interests based on their relative fair value at the date of
transfer. Quoted market prices are not
available for retained interests, so the Company estimates fair value based on
the present value of expected cash flows estimated by using managements best
estimates of key assumptions (See Note 8).
Stock-Based Compensation:
The Company has stock-based employee compensation
plans, including stock options and restricted stock units (RSUs), which are
recognized in the financial statements based on the fair values as of the grant
date (See Note 17).
Environmental Matters:
The Company expenses environmental expenditures related to existing
conditions resulting from past or current operations from which no current or
future benefit is discernible.
Expenditures that extend the life of the related property or mitigate or
prevent future environmental contamination are capitalized. The Company records a liability at the time
when it is probable and can be reasonably estimated. Such liabilities are not discounted or
reduced for potential recoveries from insurance carriers.
Asset Retirement Obligations:
The Company accounts for asset retirement obligations in accordance with
ASC 410, Accounting for Asset Retirement and Environmental Obligations, which
established accounting standards for the recognition and measurement of an
asset retirement obligation and its associated asset retirement cost. It also provides accounting guidance for
legal obligations associated with the retirement of tangible long-lived
assets. Asset retirement obligations
recorded consist primarily of landfill capping and closure and post-closure
maintenance on the landfills. The
Company has other asset retirement obligations upon closure of facilities,
principally costs for the closure of wastewater treatment ponds and the removal
of asbestos and chemicals, for which retirement obligations are not recorded
because the fair value of the liability could not be reliably measured due to
the uncertainty and timing of facility closures or demolition. These asset retirement obligations have
indeterminate settlement dates because the period over which the Company may
settle these obligations is unknown and cannot be estimated. The Company will recognize a liability when
sufficient information is available to reasonably estimate its fair value (See
Note 13).
Restructuring:
Costs associated with exit or disposal activities are generally
recognized when they are incurred rather than at the date of a commitment to an
exit or disposal plan (See Note 3).
Employee Benefit Plans:
Under the provisions of ASC 715, Compensation
Retirement Benefits (ASC 715), the funded status of the Companys defined
benefit pension plans and postretirement plans, measured as the difference
between plan assets at fair value and the benefit obligations, is recorded as
an asset or liability with the after-tax impact recorded to OCI based on an
actuarial valuation as of the balance sheet date. Subsequent changes in the funded status of
the plans are recognized in OCI in the year in which the changes occur (See
Note 15).
Use of Estimates:
The preparation of financial statements in conformity with U.S.
generally accepted accounting principles (GAAP) requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual
results could differ from those estimates.
Reclassifications:
Certain reclassifications of prior year presentations have been made to
conform to the 2009 presentation.
Recently
Adopted Accounting Standards:
The FASBs Accounting Standards Codification 105
was released on July 1, 2009 and became the single source of authoritative
U.S. GAAP. The change was established by
ASC 105, Generally Accepted Accounting Principles (ASC 105). Pursuant to the
65
Table of Contents
provisions
of ASC 105, the Company has updated its references to GAAP in its consolidated
financial statements issued for the period ended December 31, 2009. The adoption of ASC 105 did not impact the
Companys financial position, results of operations or cash flows.
Effective
June 15, 2009, the Company adopted the provisions of ASC 855, Subsequent
Events (ASC 855). ASC 855 requires
entities to
evaluate
subsequent
events through the date the consolidated financial statements were issued. The Company has determined that no material
subsequent events have occurred.
Effective
January 1, 2009, the Company adopted the provisions of ASC 810-10-65-1, Transition
Related to FASB Statement No. 160, Non-controlling Interest in
Consolidated Financial Statements An Amendment of ARB No. 51 (ASC
810-10-65-1). ASC 810-10-65-1 changes
the accounting for non-controlling (minority) interests in consolidated
financial statements, requires non-controlling interests to be reported as part
of equity and changes the income statement presentation of income or losses
attributable to non-controlling interests.
ASC 810-10-65-1 did not have a material impact on the Companys
consolidated financial statements.
Effective
December 31, 2009, the Company adopted the provisions of ASC 715-20-65-2, Compensation
- Retirement Benefits, which requires further disclosures about plan assets of
a defined benefit pension or other post-retirement plan, including the employers
investment policies and strategies, major categories of plan assets, inputs and
valuation techniques used to measure the fair value of plan assets, the effect
of fair value measurements using significant unobservable inputs on changes in
plan assets for the period and concentrations of risk within plan assets (See
Note 15).
Prospective Accounting Pronouncements:
In June 2009, the FASB issued amendments to
ASC 860, Transfers and Servicing
(ASC 860), effective for fiscal years
beginning after November 15, 2009. The
amendments remove 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 Company does
not expect these amendments to have a material impact on the consolidated
financial statements.
3. 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.
In 2009, the Company
closed 11 converting facilities and
permanently ceased production at the Ontonagon, Michigan medium mill and the
Missoula, Montana linerboard mill. As a
result of these closures and other ongoing initiatives, the Company reduced its
headcount by approximately 2,350 employees.
The Company recorded restructuring charges of $319 million, net of gains
of $4 million from the sale of properties related to previously closed
facilities. Restructuring charges
included non-cash charges of $254 million 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 of $69 million were primarily for severance and
benefits. The net sales of the closed
converting facilities in 2009 prior to closure and for the years ended December 31,
2008 and 2007 were $62 million, $217 million and $258 million,
respectively. The majority of these net
sales are expected to be transferred to other operating facilities. The Ontonagon, Michigan medium mill had
annual production capacity of 280,000 tons and the Missoula, Montana linerboard
mill had annual production capacity of 620,000 tons. Additional charges of up to $2 million are
expected to be recorded in future periods for severance and benefits related to
the closure of mill and converting facilities.
66
Table of Contents
In 2008, the Company
closed eight converting facilities,
announced the closure of two additional converting facilities and permanently
ceased operations of its containerboard machine at the Snowflake, Arizona mill
and production at the Pontiac pulp mill located in Portage-du-Fort,
Quebec. As a result of these closures
and other ongoing initiatives, the Company reduced its headcount by
approximately 1,230 employees. The
Company recorded restructuring charges of $67 million, net of a gain of $2
million from the sale of a previously closed facility. Restructuring charges included non-cash
charges of $23 million related to the write-down of assets, primarily property,
plant and equipment, to estimated net realizable values and the acceleration of
depreciation for mill and converting equipment expected to be abandoned or
taken out of service. The remaining charges
of $46 million were primarily for severance and benefits. The net sales of the announced and closed
converting facilities in 2008 prior to closure and for the years ended December 31,
2007 were $264 million and $393 million, respectively. The Snowflake, Arizona containerboard machine
had the capacity to produce 135,000 tons of medium annually. The Pontiac pulp mill had annual production
capacity of 253,000 tons of northern bleached hardwood kraft paper-grade pulp,
which was non-core to the Companys primary business.
In 2007, the Company
closed 12 converting facilities and the Carthage, Indiana and Los Angeles,
California medium mills and reduced its headcount by approximately 1,750
employees. The Company recorded
restructuring charges of $16 million, net of gains of $69 million from the sale
of properties related to previously closed facilities. Restructuring charges include non-cash
charges of $48 million related to the write-down of assets, primarily property,
plant and equipment, to estimated net realizable values and the acceleration of
depreciation for equipment expected to be abandoned or taken out of
service. The remaining charges of $37
million were primarily for severance and benefits. The net sales of the closed converting
facilities in 2007 prior to closure were $65 million. The production of the two medium mills, which
had combined annual capacity of 200,000 tons, was partially offset by
restarting the previously idled machine at the Jacksonville, Florida mill with
annual capacity to produce 170,000 tons of medium.
67
Table of
Contents
The following is a
summary of the restructuring liabilities recorded as part of the
rationalization of the Companys mill and converting operations, including the
termination of employees and liabilities for environmental and lease
commitments at the closed facilities.
|
|
Write-down of
Property,
Equipment and
Inventory to
Net Realizable
Value
|
|
Severance
and
Benefits
|
|
Lease
Commitments
|
|
Facility
Closure
Costs
|
|
Other
|
|
Total
|
|
Balance
at January 1, 2007
|
|
$
|
|
$
|
19
|
|
$
|
17
|
|
$
|
9
|
|
$
|
|
$
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Income)
expense
|
|
48
|
|
30
|
|
|
|
7
|
|
(69
|
)
|
16
|
|
Payments
|
|
|
|
(43
|
)
|
(6
|
)
|
(5
|
)
|
|
|
(54
|
)
|
Non-cash
reduction
|
|
(48
|
)
|
|
|
|
|
|
|
|
|
(48
|
)
|
Net
gain on sale of
assets
|
|
|
|
|
|
|
|
|
|
69
|
|
69
|
|
Balance
at
December 31,
2007
|
|
|
|
6
|
|
11
|
|
11
|
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Income)
expense
|
|
23
|
|
34
|
|
2
|
|
10
|
|
(2
|
)
|
67
|
|
Payments
|
|
|
|
(25
|
)
|
(5
|
)
|
(11
|
)
|
|
|
(41
|
)
|
Non-cash
reduction
|
|
(23
|
)
|
|
|
|
|
|
|
|
|
(23
|
)
|
Net
gain on sale of
assets
|
|
|
|
|
|
|
|
|
|
2
|
|
2
|
|
Balance
at
December 31,
2008
|
|
|
|
15
|
|
8
|
|
10
|
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Income)
expense
|
|
254
|
|
46
|
|
3
|
|
20
|
|
(4
|
)
|
319
|
|
Payments
|
|
|
|
(27
|
)
|
(3
|
)
|
(11
|
)
|
|
|
(41
|
)
|
Non-cash
reduction
|
|
(254
|
)
|
|
|
(7
|
)
|
|
|
|
|
(261
|
)
|
Net
gain on sale of
assets
|
|
|
|
|
|
|
|
|
|
4
|
|
4
|
|
Balance
at
December 31,
2009
|
|
$
|
|
$
|
34
|
|
$
|
1
|
|
$
|
19
|
|
$
|
|
$
|
54
|
|
The $7 million non-cash
reduction to lease commitments in 2009 relates to the transfer of lease
accruals to liabilities subject to compromise for unexpired leases on closed
facilities rejected during the bankruptcy process (See Note 1).
Cash Requirements
Future cash outlays under
the restructuring of operations are anticipated to be $49 million in 2010, $3
million in 2011, an insignificant amount in 2012 and $2 million thereafter.
4. 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 taxpayers 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 the
period December 1, 2008 through December 31, 2009 related to
production at ten of its U.S. mills. The
Company received refund claims of approximately $595 million in
68
Table of Contents
2009. 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.
5. (Gain) Loss on Disposal of Assets
In September 2009,
the Company completed the sale of its Canadian timberlands for approximately
$28 million, of which $1 million remained in escrow at December 31, 2009,
pending completion of the title registration process on certain parcels. The proceeds from the sale were used to
prepay a portion of the Canadian DIP Term Loan (See Note 9). The Company recorded a pretax loss of $2
million.
In September 2007,
the Company completed the sale of its Brewton, Alabama, mill assets for $355
million. The Company received cash proceeds of $338 million, which excluded $16
million of accounts receivable previously sold to Stone Receivables Corporation
(SRC) under the accounts receivable securitization program and was net of $1
million of other closing adjustments.
Substantially all of the proceeds from the sale were applied directly to
debt reduction. The Company recorded a
pretax loss of $65 million, and a $32 million income tax provision, resulting
in a net loss of $97 million. The after-tax
loss was the result of a provision for income taxes that was higher than the
statutory income tax rate due to non-deductible goodwill of $146 million.
6. Calpine Corrugated LLC
In the first
quarter of 2008, the Company recorded a charge of $22 million to fully reserve
all amounts due from Calpine Corrugated LLC (Calpine Corrugated). Calpine Corrugated, formerly an independent
corrugated container producer in Fresno, California for which the Company was
the primary containerboard supplier, experienced start-up losses since it began
operations in 2006.
On July 29,
2008, the Company acquired a 90 percent ownership interest in Calpine
Corrugated. In conjunction with the
acquisition, the Company guaranteed approximately $45 million of Calpine
Corrugateds third party outstanding debt.
There was no cash consideration paid.
The transaction was accounted for as a purchase business combination and
the results of operations of Calpine Corrugated are included in the
consolidated statements of operations beginning July 29, 2008. The purchase price allocation completed in
the fourth quarter of 2008 resulted in assets and liabilities of approximately
$50 million, including approximately $45 million of debt. No goodwill was recorded for the
transaction. The acquisition of Calpine
Corrugateds operations enabled the Company to accelerate the optimization of
its Northern California business unit and improve its position in the
agricultural market segment.
In 2007, the Company
recorded charges of $10 million to reserve for amounts due from Calpine
Corrugated.
7. Net Property, Plant and Equipment
Net property, plant and
equipment at December 31 consist of:
|
|
2009
|
|
2008
|
|
Land
and land improvements
|
|
$
|
145
|
|
$
|
151
|
|
Buildings
and leasehold improvements
|
|
593
|
|
598
|
|
Machinery,
fixtures and equipment
|
|
5,205
|
|
5,598
|
|
Construction
in progress
|
|
117
|
|
169
|
|
|
|
6,060
|
|
6,516
|
|
Less
accumulated depreciation
|
|
(2,979
|
)
|
(3,007
|
)
|
Net
property, plant and equipment
|
|
$
|
3,081
|
|
$
|
3,509
|
|
69
Table of Contents
Depreciation expense was
$364 million, $351 million and $355 million for 2009, 2008 and 2007,
respectively. Property, plant and
equipment include capitalized leases of $19 million and $20 million and related
accumulated amortization of $17 million and $16 million at December 31,
2009 and 2008, respectively.
8. Transfers of Financial Assets
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 9). The repurchase of receivables of $385 million
has been included in the cash flows from financing activities in the
consolidated statement of cash flows.
Receivables Securitization
Program
Prior to termination, the
Company had a $450 million accounts receivable securitization program whereby
the Company sold, without recourse, on an ongoing basis, certain of its
accounts receivable to SRC, a wholly-owned non-consolidated subsidiary of the
Company.
SRC transferred the
receivables to a non-consolidated subsidiary, a limited liability company which
had issued notes to third-party investors.
The Company had retained servicing responsibilities and a subordinated
interest in the limited liability company.
The Company received annual servicing fees of 1% of the unpaid balance
of the receivables and rights to future cash flows arising after the investors
in the securitization limited liability company had received the return for
which they had contracted.
SRC was a qualified
specialpurpose entity under the provisions of ASC 860, Transfers and
Servicing (ASC 860). Accordingly,
accounts receivable sold to SRC, for which the Company did not retain an
interest, were not included in the accompanying consolidated balance sheets.
At December 31,
2008, $465 million of accounts receivable had been sold to SRC, of which $97
million were retained by the Company as a subordinated interest. The off-balance sheet SRC debt at December 31,
2008 was $365 million. The Companys
retained interest was carried at fair value and was included in retained
interest in receivables sold in the accompanying consolidated balance sheet at December 31,
2008. The Company recognized a loss on
sales of receivables to SRC of $14 million in 2008 which was included in other,
net in the consolidated statements of operations.
Canadian Securitization Program
Prior to termination, the
Company had a $70 million Canadian (approximately $57 million U.S. as of December 31,
2008) accounts receivable securitization program, whereby the Company sold,
without recourse, on an ongoing basis, certain of its Canadian accounts
receivable to a trust in which the Company held a variable interest, but was
not the primary beneficiary. Accordingly,
under ASC 810, Consolidation, accounts receivable sold to the trust, for
which the Company was not the primary beneficiary, were not included in the
accompanying consolidated balance sheets.
The Company had retained servicing responsibilities and a subordinated
interest in future cash flows from the receivables. The Company received rights to future cash
flows arising after the investors in the securitization trust had received the
return for which they had contracted.
The Companys residual
interest in the securitization program was recorded at fair value and was based
upon the total outstanding receivables sold, adjusted for dilution and loss
reserves of approximately 4.0% at December 31, 2008 less the amount funded
to the Company.
At December 31,
2008, $58 million of accounts receivable had been sold under the program, of
which $23 million were retained by the Company as a subordinated interest. The amount funded to the Company at December 31,
2008 was $33 million. The Companys
retained interest was included in retained interest in receivables sold in the
accompanying consolidated balance sheet at December 31,
70
Table of Contents
2008. The Company recognized a loss on sales of
receivables to the trust of $3 million in 2008 which was included in other, net
in the consolidated statements of operations.
Timberland Sale and Note
Monetization
The Company sold
approximately 980,000 acres of owned and leased timberland in Florida, Georgia
and Alabama in October 1999. The
final purchase price, after adjustments, was $710 million. The Company received $225 million in cash,
with the balance of $485 million in the form of installment notes. The Company entered into a program to
monetize the installment notes receivable.
The notes were sold without recourse to Timber Note Holdings LLC (TNH),
a qualified special-purpose entity under the provisions of ASC 860, for $430
million cash proceeds and a residual interest in the notes. The transaction was accounted for as a sale
under ASC 860. The cash proceeds from
the sale and monetization transactions were used to prepay borrowings under the
Companys Credit Agreement. The residual
interest was $36 million and $34 million at December 31, 2009 and 2008,
respectively, and is included in other assets in the accompanying consolidated
balance sheets. Cash flows received on
the Companys retained interest in TNH were $1 million and $13 million in 2009
and 2008, respectively. The key economic
assumption used in measuring the residual interest at the date of monetization
was the rate at which the residual cash flows were discounted (9%). At December 31, 2009, the sensitivity on
the current fair value of the residual cash flows to immediate 10% and 20%
adverse changes in the assumed rate at which the residual cash flows were
discounted (9%) was an insignificant amount and $1 million, respectively.
71
Table of Contents
9. Long-Term Debt
Long-term debt as of December 31
is as follows:
|
|
2009
|
|
2008
|
|
Secured Debt
|
|
|
|
|
|
|
|
|
|
|
|
Bank Credit Facilities
|
|
|
|
|
|
Tranche
B Term Loan (2.5% weighted average variable rate), due
in various installments through
November 1, 2011
|
|
$
|
137
|
|
$
|
137
|
|
Tranche
C Term Loan (2.5% weighted average variable rate), due
in various installments through
November 1, 2011
|
|
258
|
|
258
|
|
Tranche
C-1 Term Loan (2.5% weighted average variable rate), due
in various installments through
November 1, 2011
|
|
78
|
|
78
|
|
SSCE
revolving credit facility (2.9% weighted average variable rate), due
November 1, 2009
|
|
512
|
|
461
|
|
SSC
Canada revolving credit facility (3.1% weighted average variable rate), due
November 1, 2009
|
|
198
|
|
172
|
|
Deposit
Funded Drawn Letters of Credit (4.5% weighted average variable rate), due
November 1, 2009
|
|
120
|
|
|
|
|
|
1,303
|
|
1,106
|
|
Other Secured Debt
|
|
|
|
|
|
Other
(including obligations under capitalized leases of $3 and $5)
|
|
51
|
|
53
|
|
Variable
rate industrial revenue bonds
|
|
|
|
120
|
|
Total
secured debt, not subject to compromise
|
|
1,354
|
|
1,279
|
|
|
|
|
|
|
|
Unsecured Debt
|
|
|
|
|
|
|
|
|
|
|
|
Senior Notes
|
|
|
|
|
|
8.375%
unsecured senior notes, due July 1, 2012
|
|
400
|
|
400
|
|
8.25%
unsecured senior notes, due October 1, 2012
|
|
700
|
|
700
|
|
7.50%
unsecured senior notes, due June 1, 2013
|
|
300
|
|
300
|
|
7.375%
unsecured senior notes, due July 15, 2014
|
|
200
|
|
200
|
|
8.00%
unsecured senior notes, due March 15, 2017
|
|
675
|
|
675
|
|
|
|
2,275
|
|
2,275
|
|
|
|
|
|
|
|
Other Unsecured Debt
|
|
|
|
|
|
Fixed
rate utility systems and pollution control revenue bonds (fixed rates
ranging from 5.1% to 7.5%), payable in
varying annual payments through 2027
|
|
164
|
|
164
|
|
Total
unsecured debt, subject to compromise
|
|
2,439
|
|
2,439
|
|
|
|
|
|
|
|
Total
debt
|
|
3,793
|
|
3,718
|
|
Less
liabilities subject to compromise
|
|
(2,439
|
)
|
|
|
Less
current maturities
|
|
(1,354
|
)
|
(3,718
|
)
|
Total long-term debt
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
The filing of the
Chapter 11 Petition and the Canadian Petition constituted an event of
default under the Companys debt obligations, and those debt obligations became
automatically and immediately due and payable.
Any efforts to enforce such payment obligations are stayed as a result
of the filing of the Chapter 11 Petition and the Canadian Petition. The accompanying consolidated balance sheet
as of December 31, 2008 includes a reclassification of $3,032 million to
current maturities of long-term debt from long-term debt. Due to the filing of the bankruptcy
petitions, the Companys unsecured long-term debt of $2,439 million is included
in liabilities subject to compromise at December 31, 2009 (See Note 1).
72
Table of Contents
Bank Credit Facilities
The Company, as guarantor, and SSCE and its
subsidiary, SSC Canada, as borrowers, entered into a credit agreement, as
amended (the Credit Agreement) on November 1, 2004. The Credit Agreement provided for (i) a
revolving credit facility of $600 million to SSCE (U.S. Revolver), of which
$512 million was borrowed as of December 31, 2009 and (ii) a
revolving credit facility of $200 million to SSCE and SSC Canada (SSC Canada
Revolver), of which $198 million was borrowed as of December 31,
2009. Each of these revolving credit
facilities matured on November 1, 2009.
The Credit Agreement provided for a Tranche B term loan to SSCE in the
aggregate principal amount of $975 million, with an outstanding balance of $137
million at December 31, 2009. The
Credit Agreement also provided to SSC Canada a Tranche C term loan in the
aggregate principal amount of $300 million and a Tranche C-1 term loan in the
aggregate principal amount of $90 million, with outstanding balances of $258
million and $78 million, respectively, at December 31, 2009. The term loans are payable in quarterly
installments and mature on November 1, 2011. The Company has the option to borrow at a
rate equal to LIBOR plus 2.25% or ABR plus 1.25% for the term loan facilities
and LIBOR plus 2.50% or ABR plus 1.50% for the revolving credit facilities (the
Applicable Rate).
The obligations of SSCE
under the Credit Agreement are unconditionally guaranteed by the Company and
the material U.S. subsidiaries of SSCE.
The obligations of SSC Canada under the Credit Agreement are
unconditionally guaranteed by the Company, SSCE, the material U.S. subsidiaries
of SSCE and the material Canadian subsidiaries of SSC Canada. The obligations of SSCE under the Credit
Agreement are secured by a security interest in substantially all of the assets
and properties of the Company, SSCE and the material U.S. subsidiaries of SSCE,
by a pledge of all of the capital stock of SSCE and the material U.S.
subsidiaries of SSCE and by a pledge of 65% of the capital stock of SSC Canada that
is directly owned by SSCE. The security
interests securing SSCEs obligation under the Credit Agreement exclude cash,
cash equivalents, certain trade receivables and the land and buildings of
certain corrugated container facilities.
The obligations of SSC Canada under the Credit Agreement are secured by
a security interest in substantially all of the assets and properties of SSC
Canada and the material Canadian subsidiaries of SSC Canada, by a pledge of all
of the capital stock of the material Canadian subsidiaries of SSC Canada and by
the same U.S. assets, properties and capital stock that secure SSCEs
obligations under the Credit Agreement.
The security interests securing SSC Canadas obligation under the Credit
Agreement exclude certain other real property located in New Brunswick and
Quebec.
The Credit Agreement
contains various covenants and restrictions including (i) limitations on
dividends, redemptions and repurchases of capital stock, (ii) limitations
on the incurrence of indebtedness, liens, leases and sale-leaseback
transactions, (iii) limitations on capital expenditures and (iv) maintenance
of certain financial covenants. The
Credit Agreement also requires prepayments if the Company has excess cash
flows, as defined, or receives proceeds from certain asset sales, insurance or
incurrence of certain indebtedness.
As of December 31,
2009, as a result of the Companys default, the Company had no availability for
borrowings under SSCEs revolving credit facilities, after giving consideration
to outstanding letters of credit of $87 million. As of December 31, 2009, the
Company had available unrestricted cash and cash equivalents of $704 million
primarily invested in money market funds at a variable interest rate of 0.13%.
During the year ended December 31,
2009, letters of credit in the amount of $71 million were drawn on to fund
obligations principally related to non-qualified pension plans, commodity
derivative instruments and a guarantee for a previously non-consolidated
affiliate, which increased borrowings under the Companys U.S. Revolver and SSC
Canada Revolver by $44 million and $27 million, respectively.
The Companys Credit
Agreement provided for a deposit funded letter of credit facility, related to
the variable rate industrial revenue bonds, for approximately $122 million that
was due to mature on November 1, 2010.
In February 2009, due to an event of default under the bond
indentures, this credit facility was drawn on to fully repay the industrial
revenue bonds in the aggregate principal amount of $120
73
Table of Contents
million. A loss on the early extinguishment of debt of
$20 million was recorded to write-off the unamortized deferred debt issuance
costs related to the industrial revenue bonds.
At December 31,
2009, the Company had interest rate swap contracts effectively fixing the
interest rate at 4.3% for $300 million of the Tranche B and Tranche C variable
rate term loans (See Note 10).
DIP Credit Agreement
In connection with filing the Chapter 11 Petition
and the Canadian Petition, on January 26, 2009 the Company and certain of
its affiliates filed a motion with the Bankruptcy Courts seeking approval to
enter into a DIP Credit Agreement. 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. DIP Term Loan for borrowings by SSCE; a $35 million Canadian
DIP Term Loan for borrowings by SSC Canada; a $250 million U.S. DIP Revolver
for borrowings by SSCE and/or SSC Canada; and a $65 million Canadian DIP
Revolver for borrowings by SSCE and/or SSC Canada.
The use of proceeds under the DIP Credit Agreement
was limited to (i) working capital, letters of credit and capital
expenditures; (ii) other general corporate purposes of the Company and
certain of its subsidiaries (including certain intercompany loans); (iii) the
refinancing in full of indebtedness outstanding under the receivables
securitization programs; (iv) payment of any related transaction costs,
fees and expenses; and (v) the costs of administration of the cases
arising out of the Chapter 11 Petition and the Canadian Petition.
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.
During 2009, the Company
made voluntary prepayments of approximately $383 million on the $400 million
U.S. DIP Term Loan with available cash provided by operating activities. In addition, during 2009, the Company repaid
$17 million of the U.S. DIP Term Loan with proceeds from property sales. As of December 31, 2009, no borrowings
were outstanding under the U.S. DIP Term Loan or the U.S. DIP Revolver.
During 2009, the Company
repaid $35 million on the Canadian DIP Term Loan primarily with proceeds from
property sales, including $27 million from the sale of the Companys Canadian
timberlands. In addition, during 2009,
the Company repaid $5 million on the Canadian DIP Revolver. As of December 31,
2009, no borrowings were outstanding under the Canadian DIP Term Loan or the
Canadian DIP Revolver.
At December 31,
2009, the Company had outstanding letters of credit of $15 million under the
DIP Credit Agreement. 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 these letters of credit.
U.S. and Canadian
borrowings under the DIP Credit Agreement were each subject to a borrowing base
derived from a formula based on certain eligible accounts receivable and
inventory, and an amount
74
Table of Contents
attributable to real
property and equipment, less certain reserves.
As of December 31, 2009, the applicable borrowing base was $680
million and the amount available for borrowings under the DIP Credit Agreement
was $300 million. As all borrowings under the DIP Credit Agreement were paid in
full, the Company allowed the DIP Credit Agreement to expire on the maturity
date of January 28, 2010.
Other Secured Debt
In conjunction with the
acquisition of Calpine Corrugated in July 2008 (See Note 6), the Company
guaranteed approximately $45 million of Calpine Corrugateds third party
outstanding debt. The balance at December 31,
2009 consisted of a $35 million term loan (4.24% weighted average variable
rate), due on June 30, 2009 and a revolving credit facility (2.75%
weighted average variable rate) with an outstanding balance of $9 million due
on June 30, 2009. The Companys
obligation under the guarantee was stayed as a result of the filing of the
Chapter 11 Petition.
Senior Notes
The 8.375% unsecured
senior notes of $400 million are redeemable in whole or in part at the option
of SSCE at a price of 101.396% plus accrued interest. The redemption price will decline each year
after 2008 and beginning on July 1, 2010 will be 100% of the principal
amount, plus accrued interest.
The 8.25% unsecured
senior notes of $700 million are redeemable in whole or in part at the option
of SSCE at a price of 101.375% plus accrued interest. The redemption price will decline each year
after 2008 and beginning on October 1, 2010 will be 100% of the principal
amount, plus accrued interest.
The 7.50% unsecured
senior notes of $300 million are redeemable in whole or in part at the option
of SSCE at a price of 103.75% plus accrued interest. The redemption price will decline each year
after 2008 and beginning on June 1, 2011 will be 100% of the principal
amount, plus accrued interest.
The 7.375% unsecured
senior notes of $200 million are redeemable in whole or in part at the option
of SSCE at a price of 103.688% plus accrued interest. The redemption price will decline each year
after 2009 and beginning on July 15, 2012 will be 100% of the principal
amount, plus accrued interest.
The 8.00% unsecured
senior notes of $675 million are redeemable in whole or in part at the option
of SSCE beginning on March 15, 2012 at a price of 104.0% plus accrued
interest. The redemption price will decline each year after 2012 and beginning
on March 15, 2015 will be 100% of the principal amount, plus accrued
interest.
The senior notes contain
business and financial covenants which are less restrictive than those
contained in the Credit Agreement.
2007 Transactions
In March 2007, SSCE
completed an offering of $675 million of 8.00% unsecured senior notes due March 15,
2017. The Company used the proceeds of
this issuance to repay $546 million of the 9.75% unsecured senior notes due
2011, which were purchased in connection with a cash tender offer, pay related
tender premiums and accrued interest of $19 million and $8 million,
respectively, and repay $95 million of the SSCE revolving credit facility. In addition, the Company used the proceeds to
pay fees and expenses of $7 million related to this transaction. A loss on early extinguishment of debt of $23
million was recorded in the first quarter of 2007, including $19 million for
tender premiums and a $4 million write-off of unamortized deferred debt issuance
costs.
In May 2007, the
Company redeemed the remaining $102 million of the 9.75% Senior Notes at a
redemption price of 103.25% plus accrued interest. Borrowings under the SSCE revolving credit
facility were used to redeem the notes and pay related call premiums and
accrued interest. A loss on early
extinguishment of debt of $5 million was recorded in the second quarter of
2007, including $4 million for tender premiums and a $1 million write-off of
unamortized deferred debt issuance costs.
75
Table of Contents
Other
Interest costs
capitalized on construction projects in 2009, 2008 and 2007 totaled $9 million,
$17 million and $10 million, respectively.
Interest payments on all debt instruments for 2009, 2008 and 2007 were
$103 million, $259 million and $302 million, respectively.
10. Derivative Instruments and Hedging Activities
On January 26, 2009, the
Chapter 11 Petition and the Canadian Petition effectively terminated all
existing derivative instruments.
Termination fair values were calculated based on the potential
settlement value. During 2009, a letter
of credit in the amount of $18 million was drawn on related to the settlement
of certain commodity derivative instruments (See Note 9). Excluding these settled liabilities, the
Companys termination value related to its remaining derivative liabilities was
approximately $60 million, recorded in other current liabilities in the
consolidated balance sheet at December 31, 2009. These derivative liabilities were stayed due
to the filing of the Chapter 11 Petition and the Canadian Petition, at which
time, these liabilities were adjusted through OCI for derivative instruments
qualifying for hedge accounting and cost of goods sold for derivative
instruments not qualifying for hedge accounting. Subsequently, the amounts adjusted through
OCI were recorded in earnings during 2009 when the underlying transaction was
recognized or when the underlying transaction was no longer expected to occur,
except for a $1 million loss (net of tax) which remained in OCI at December 31,
2009.
The Companys derivative
instruments previously used for its hedging activities were designed as cash
flow hedges and related to minimizing exposures to fluctuations in the price of
commodities used in its operations, the movement in foreign currency exchange
rates and the fluctuations in the interest rate on variable rate debt. All cash flows associated with the Companys
derivative instruments were classified as operating activities in the
consolidated statements of cash flows.
Commodity Derivative Instruments
The Company used
derivative instruments, including fixed price swaps, to manage fluctuations in
cash flows resulting from commodity price risk in the procurement of natural
gas and other commodities, including fuel oil and diesel fuel. The objective was to fix the price of a
portion of the Companys purchases of these commodities used in the
manufacturing process. The changes in
the market value of such derivative instruments historically offset the changes
in the price of the hedged item.
For the years ended December 31,
2009 and 2008, the Company reclassified a $27 million loss (net of tax) and an
$8 million loss (net of tax), respectively, from OCI to cost of goods sold when
the hedged items were recognized.
For the years ended December 31,
2009 and 2008, the Company recorded a $3 million gain (net of tax), prior to
the Petition Date, and an $8 million loss (net of tax), respectively, in cost
of goods sold related to the change in fair value of certain commodity
derivative instruments not qualifying for hedge accounting.
For the years ended December 31,
2009 and 2008, the Company recorded a $3 million loss (net of tax), prior to
the Petition Date, and a $9 million loss (net of tax), respectively, in cost of
goods sold on settled commodity derivative instruments not qualifying for hedge
accounting.
Foreign Currency Derivative
Instruments
The Companys principal
foreign exchange exposure is the Canadian dollar. The Company used foreign currency derivative
instruments, including forward contracts and options, primarily to protect
against Canadian currency exchange risk associated with expected future cash
flows.
For the years ended December 31,
2009 and 2008, the Company reclassified a $4 million loss (net of tax) and a $2
million gain (net of tax), respectively, from OCI to cost of goods sold when
the hedged items were recognized.
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Table of Contents
In addition, during the
second quarter 2009, the Company reclassified the remaining foreign currency
derivative instruments from OCI to cost of goods sold since the underlying
transactions were no longer expected to occur, resulting in a loss of $2
million (net of tax).
Interest Rate Swap Contracts
The Company used interest
rate swap contracts to manage interest rate exposure on $300 million of the
current Tranche B and Tranche C floating rate bank term debt. The accounting for the cash flow impact of
the swap contracts is recorded as an adjustment to interest expense each
period.
For the years ended December 31,
2009 and 2008, the Company reclassified a $4 million loss (net of tax) and a $2
million loss (net of tax), respectively, from OCI to interest expense when the
hedged items were recognized.
During the fourth quarter
of 2008, the Company expected that its Tranche B and Tranche C term loans would
be refinanced prior to their current maturity.
As a result, a portion of the interest rate swap contracts were deemed
to be ineffective and were marked-to-market, resulting in $12 million of
additional interest expense.
Deferred Hedge Gain (Loss)
The cumulative deferred
hedge loss in OCI on all derivative instruments was $1 million (net of tax) at December 31,
2009, consisting of a $1 million loss (net of tax) on interest rate swap
contracts. The cumulative deferred hedge
loss in OCI on all derivative instruments was $37 million (net of tax) at December 31,
2008, including a $26 million loss (net of tax) on commodity derivative
instruments, a $6 million loss (net of tax) on foreign currency derivative
instruments and a $5 million loss (net of tax) on interest rate swap
contracts. The Company expects to
reclassify the remaining $1 million loss (net of tax) into interest expense
during 2010 related to the interest rate swap contracts.
11. Leases
The Company leases
certain facilities and equipment for production, selling and administrative
purposes under operating leases. Certain
leases contain renewal options for varying periods, and others include options
to purchase the leased property during or at the end of the lease term. Future minimum rental commitments (exclusive
of real estate taxes and other expenses) under operating leases having initial
or remaining noncancelable terms in excess of one year, excluding lease
commitments on closed facilities, are reflected below:
2010
|
|
$
|
61
|
|
2011
|
|
48
|
|
2012
|
|
38
|
|
2013
|
|
31
|
|
2014
|
|
27
|
|
Thereafter
|
|
128
|
|
Total
minimum lease commitments
|
|
$
|
333
|
|
Net rental expense for
operating leases, including leases having a duration of less than one year, was
approximately $119 million, $132 million and $132 million for 2009, 2008 and
2007, respectively. Under the Bankruptcy
Code, the Company may assume or reject certain unexpired leases, including,
without limitation, leases of real property and equipment. Since the Petition Date, the Company has
received Bankruptcy Court approval to reject a number of leases (See Note 1).
77
Table of Contents
12. 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 December 31, 2009 and 2008, the
maximum potential amount of future payments related to these guarantees was
approximately $25 million and $28 million, respectively, and decreases ratably
over the life of the contracts. In the event
the guarantees on these contracts were 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.
The
Company was contingently liable for $18 million under a one year letter of
credit, which was to expire in April 2009, which supported the borrowings
of a previously non-consolidated affiliate.
On March 4, 2009, this letter of credit was drawn on, which
increased borrowings under the Companys pre-petition credit facilities by $18
million (See Note 9). As a result of
providing substantial financial support for the affiliate, in accordance with
ASC 810-10-05, Consolidation of Variable Interest Entities, the Company
consolidated the affiliates balance sheet and results of operations into its
consolidated financial statements in March 2009.
13. Asset Retirement Obligations
The following table
provides a reconciliation of the asset retirement obligations:
Balance
at January 1, 2007
|
|
$
|
14
|
|
Accretion
expense
|
|
1
|
|
Adjustments
|
|
(2
|
)
|
Payments
|
|
(2
|
)
|
Balance
at December 31, 2007
|
|
11
|
|
Accretion
expense
|
|
1
|
|
Balance
at December 31, 2008
|
|
12
|
|
Accretion
expense
|
|
1
|
|
Balance
at December 31, 2009
|
|
$
|
13
|
|
The 2007 adjustments
relate to the reclassification of the Brewton, Alabama, mill asset retirement
obligations to a liability related to the Brewton sale agreement.
78
Table of Contents
14. Income Taxes
Significant components of
the Companys deferred tax assets and liabilities at December 31 are as
follows:
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
Deferred
tax liabilities
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment and timberland
|
|
$
|
(684
|
)
|
$
|
(821
|
)
|
Inventory
|
|
(42
|
)
|
(37
|
)
|
Timber
installment sale
|
|
(93
|
)
|
(91
|
)
|
Other
|
|
(129
|
)
|
(42
|
)
|
Total
deferred tax liabilities
|
|
(948
|
)
|
(991
|
)
|
|
|
|
|
|
|
Deferred
tax assets
|
|
|
|
|
|
Employee
benefit plans
|
|
537
|
|
466
|
|
Net
operating loss, alternative minimum tax and tax credit carryforwards
|
|
676
|
|
479
|
|
Purchase
accounting liabilities and restructuring
|
|
23
|
|
21
|
|
Other
|
|
117
|
|
101
|
|
Total
deferred tax assets
|
|
1,353
|
|
1,067
|
|
Valuation
allowance for deferred tax assets
|
|
(382
|
)
|
(42
|
)
|
|
|
|
|
|
|
Deferred
tax assets, net of valuation allowance
|
|
971
|
|
1,025
|
|
|
|
|
|
|
|
Net
deferred tax assets
|
|
$
|
23
|
|
$
|
34
|
|
At December 31,
2009, the Company had $1.1 billion of net operating loss (NOL) carryforwards
for U.S. federal income tax purposes that expire from 2024 through 2029, with a
tax value of $391 million. The Company
had NOL carryforwards for state purposes which expire from 2009 to 2028 with a
tax value of $81 million and state tax credits that expire from 2009 to 2039,
with a tax value of $4 million. Further,
the Company had $396 million of NOL carryforwards for Canadian tax purposes
that expire from 2017 to 2029, with a tax value of $115 million, and Canadian
investment tax credits that expire from 2015 to 2018, with a tax value of $15
million. The Company had $68 million of
alternative minimum tax credit carryforwards for U.S. federal income tax
purposes, which are available indefinitely.
In addition, the Company had other tax carryforwards of $2 million at December 31,
2009, which can be carried forward indefinitely. Deferred income taxes related to NOL carryforwards
have been classified as noncurrent to reflect the expected utilization of the
carryforwards.
At December 31, 2009
and 2008, the Company had a valuation allowance of $382 million and $42
million, respectively, for a portion of the deferred tax assets. The valuation allowance increased during 2009
primarily to offset higher deferred tax assets related to tax losses on the
Companys investment in its Canadian subsidiary.
Federal income taxes have
not been provided on undistributed earnings of the Companys foreign
subsidiaries during 2009, as the Company intends to indefinitely reinvest such
earnings into its foreign subsidiaries.
The restrictions on remittance of these earnings,
pursuant to the Companys bankruptcy status, make it not practicable to
determine the amount of the unrecognized deferred tax liability on these
undistributed foreign earnings.
79
Table of Contents
(Provision for) benefit
from income taxes on loss before income taxes is as follows:
|
|
2009
|
|
2008
|
|
2007
|
|
Current
|
|
|
|
|
|
|
|
Federal
|
|
$
|
26
|
|
$
|
|
$
|
(6
|
)
|
State
and local
|
|
(1
|
)
|
(6
|
)
|
(1
|
)
|
Foreign
|
|
1
|
|
(5
|
)
|
(5
|
)
|
Total
current (provision for) benefit from income taxes
|
|
26
|
|
(11
|
)
|
(12
|
)
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
Federal
|
|
|
|
63
|
|
(2
|
)
|
State
and local
|
|
(1
|
)
|
21
|
|
(7
|
)
|
Foreign
|
|
(2
|
)
|
104
|
|
(6
|
)
|
Total
deferred (provision for) benefit from income taxes
|
|
(3
|
)
|
188
|
|
(15
|
)
|
Total
(provision for) benefit from income taxes
|
|
$
|
23
|
|
$
|
177
|
|
$
|
(27
|
)
|
|
|
|
|
|
|
|
|
|
|
|
The Companys (provision
for) benefit from income taxes differed from the amount computed by applying
the statutory U.S. federal income tax rate to loss before income taxes as
follows:
|
|
2009
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
Tax
benefit at statutory U.S. income tax rate
|
|
$
|
5
|
|
$
|
1,048
|
|
$
|
26
|
|
Permanent
differences and other items
|
|
333
|
|
(2
|
)
|
23
|
|
State
income taxes, net of federal income tax effect
|
|
38
|
|
9
|
|
(5
|
)
|
Foreign
taxes
|
|
(7
|
)
|
(37
|
)
|
(2
|
)
|
Valuation
allowance
|
|
(343
|
)
|
|
|
|
|
Non-deductibility
of goodwill and other intangible assets impairment
|
|
|
|
(934
|
)
|
|
|
Release
of unrecognized tax benefits
|
|
|
|
82
|
|
|
|
Non-deductibility
of goodwill on the sale of Brewton, Alabama mill
|
|
|
|
|
|
(51
|
)
|
Non-cash
foreign currency exchange income (loss)
|
|
(3
|
)
|
11
|
|
(18
|
)
|
Total
(provision for) benefit from income taxes
|
|
$
|
23
|
|
$
|
177
|
|
$
|
(27
|
)
|
The components of the
loss before income taxes are as follows:
|
|
2009
|
|
2008
|
|
2007
|
|
United
States
|
|
$
|
61
|
|
$
|
(2,421
|
)
|
$
|
(31
|
)
|
Foreign
|
|
(76
|
)
|
(574
|
)
|
(45
|
)
|
Loss
before income taxes
|
|
$
|
(15
|
)
|
$
|
(2,995
|
)
|
$
|
(76
|
)
|
At December 31, 2009
and 2008, the Company had $37 million and $38 million, respectively, of net
unrecognized tax benefits. The primary
differences between gross unrecognized tax benefits and net unrecognized tax
benefits are associated with offsetting benefits in other jurisdictions related
to transfer pricing and the U.S. federal tax benefit from state tax deductions.
80
Table of Contents
A reconciliation of the
beginning and ending amount of gross unrecognized tax benefits is as follows:
Balance
at January 1, 2008
|
|
$
|
185
|
|
Additions
based on tax positions taken in prior years
|
|
12
|
|
Additions
for tax positions taken in current year
|
|
1
|
|
Reductions
relating to settlements with taxing authorities
|
|
(84
|
)
|
Reductions
relating to lapses of applicable statute of limitations
|
|
(8
|
)
|
Foreign
currency exchange loss on Canadian tax positions
|
|
(18
|
)
|
Balance
at December 31, 2008
|
|
88
|
|
Reductions
based on tax positions taken in prior years
|
|
(4
|
)
|
Additions
for tax positions taken in current year
|
|
1
|
|
Reductions
relating to settlements with taxing authorities
|
|
(6
|
)
|
Foreign
currency exchange gain on Canadian tax positions
|
|
8
|
|
Balance
at December 31, 2009
|
|
$
|
87
|
|
For the years ended December 31,
2009, 2008 and 2007, $3 million, $6 million and $11 million, respectively, of
interest was recorded related to tax positions taken during the current and
prior years. During 2008, $12 million of
interest was released due to settlements with taxing authorities. The interest was computed on the difference
between the tax position recognized in accordance with ASC 740 and the amount
previously taken or expected to be taken in the Companys tax returns, adjusted
to reflect the impact of net operating loss and other tax carryforward
items. During 2009, no penalties were
recorded related to current and prior year tax positions. During 2008, $3 million of penalties were
recorded related to these tax positions.
At December 31, 2009 and 2008, $25 million and $22 million,
respectively, of interest and penalties are recognized in the consolidated
balance sheet. All net unrecognized tax
benefits, if recognized, would affect the Companys effective tax rate.
As previously disclosed,
the Canada Revenue Agency (CRA) is continuing its examination of the Companys
income tax returns for tax years 1999 through 2005. In connection with the examination, the CRA
has issued assessments of additional income taxes, interest and penalties
related to transfer prices of inventory sold by the Companys Canadian
subsidiaries to its U.S. subsidiaries.
Additionally, the CRA is considering certain significant adjustments
related principally to taxable income related to the Companys acquisition of a
Canadian company. The Company has
appealed the assessments related to the transfer pricing matter. In order to appeal the assessment, the
Company made payments totaling $25 million to the CRA in 2008. The remaining matters may be resolved at the
examination level or subsequently upon appeal within the next twelve
months. While the final outcome of the
remaining CRA examination matters, including an estimate of the range of the
reasonably possible changes to unrecognized tax benefits, is not yet
determinable, the Company believes that the examination or subsequent appeals
will not have a material adverse effect on its consolidated financial condition
or results of operations.
The U.S. federal statute
of limitations is closed through 2005, except for any potential correlative
adjustments for the years 1999 through 2005 relating to the CRA examinations
noted above. There are currently no
federal examinations in progress. In
addition, the Company files tax returns in numerous states. The states statutes of limitations are
generally open for the same years as the federal statute of limitations.
The Company made income
tax payments of $12 million, $55 million and $17 million in 2009, 2008 and
2007, respectively.
81
Table of Contents
15. Employee Benefit Plans
Defined
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 Companys
defined benefit pension plans cover substantially all hourly employees, as well
as salaried employees hired prior to January 1, 2006.
On August 31, 2007,
the Company announced the freeze of its defined benefit pension plans for
salaried employees. The U.S. and
Canadian defined benefit pension plans for salaried employees were frozen
effective January 1, 2009 and March 1, 2009, respectively. In accordance with ASC 715, Compensation-Retirement
Benefits, the Company accounted for this freeze as a plan curtailment,
remeasured its assets and obligation as of August 31, 2007 and recognized
a curtailment gain of $3 million during the third quarter of 2007. Upon remeasurement, the Company reduced its
benefit obligation in other long-term liabilities by $106 million, decreased
accumulated other comprehensive loss by $64 million and increased deferred
income tax liability by $42 million.
Defined
Benefit Plans Assets
The Companys pension
plans weighted-average asset allocations at December 31 by asset category
are as follows:
|
|
U.S. Plans
|
|
Canadian Plans
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
Cash
equivalents
|
|
4
|
%
|
3
|
%
|
1
|
%
|
1
|
%
|
Debt
securities
|
|
42
|
%
|
49
|
%
|
49
|
%
|
50
|
%
|
Equity
securities
|
|
52
|
%
|
46
|
%
|
46
|
%
|
45
|
%
|
Real
estate
|
|
|
|
|
|
4
|
%
|
4
|
%
|
Other
|
|
2
|
%
|
2
|
%
|
|
|
|
|
Total
|
|
100
|
%
|
100
|
%
|
100
|
%
|
100
|
%
|
At December 31,
2009, no SSCC common stock shares were included in the U.S. plan assets. Equity
securities for the U.S. plans at December 31, 2008 included 2.7 million
shares of SSCC common stock with a market value of $1 million (less than 1% of
total U.S. plan assets).
The primary objective of
the Companys investment policy is to provide eligible employees with scheduled
pension benefits. The basic strategy of
this investment policy is to earn the highest risk adjusted rate of return on
assets consistent with prudent investor standards identified in the Employee
Retirement Income Security Act of 1974 for the U.S. plans and the Quebec
Supplemental Pension Plans Act and other applicable legislation in Canada for
the Canadian plans.
The fair value of plan
assets is based on a hierarchy of inputs, both observable and unobservable, as
follows:
Level 1
Valuations based on quoted prices in
active markets for identical assets or liabilities that the Company has the
ability to access.
Level 2
Valuations based on quoted prices in
markets that are not active or for which all significant inputs are observable,
either directly or indirectly.
Level 3
Valuations based on inputs that are
unobservable and significant to the overall fair value measurement.
82
Table of Contents
The fair values of the
Companys pension plan assets at December 31, 2009, by asset category, are
as follows:
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
$
|
|
$
|
72
|
|
$
|
|
$
|
72
|
|
Debt securities -
Government
|
|
82
|
|
338
|
|
|
|
420
|
|
Debt securities
Corporate (a)
|
|
|
|
649
|
|
|
|
649
|
|
Equity securities
U.S. (b)
|
|
575
|
|
98
|
|
|
|
673
|
|
Equity securities
International (c)
|
|
157
|
|
373
|
|
|
|
530
|
|
Private equity
|
|
|
|
|
|
39
|
|
39
|
|
Real estate
|
|
|
|
|
|
27
|
|
27
|
|
Other
|
|
|
|
31
|
|
|
|
31
|
|
|
|
$
|
814
|
|
$
|
1,561
|
|
$
|
66
|
|
$
|
2,441
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
Comprised primarily of investment grade
U.S. and Canadian corporate debt issues.
(b)
Comprised primarily of diversified U.S.
equity securities held in both separate accounts and common/collective trust
funds.
(c)
Comprised primarily of diversified
international equity securities held in both separate accounts and
common/collective trust funds.
Cash equivalents and Corporate
and Government debt securities
Certain investments in
government fixed income securities are valued at the closing price reported on
the major market on which the individual security is traded on and classified
within Level 1 of the valuation hierarchy. The remaining investments in fixed
income securities are valued by third-party pricing services using credit risk
spreads determined from the new issue market and dealer quotes, which is then
added to the U.S. treasury curve. Such
investments are classified within Level 2 of the valuation hierarchy.
Common stocks and
Common/collective trusts
Common stocks are valued
at the closing price reported on the major market on which the individual
securities are traded. Such investments are classified within Level 1 of the
valuation hierarchy. Common/collective trusts
are valued using the net asset value (NAV) provided by the administrator of
the fund. The NAV is based on the value of the underlying assets owned by the
fund, minus its liabilities, and then divided by the number of shares
outstanding. The NAV is a quoted price in a market that is not active and
classified within Level 2 of the valuation hierarchy.
Private Equity
Private equity is valued
by deriving the Company pension plans proportionate share of equity investment
from audited financial statements from the previous calendar year updated with
changes in value, withdrawals and contributions for the current year. These investments primarily consist of
private equity investments that require significant judgment on the part of the
general partner due to the absence of quoted market prices, inherent lack of
liquidity, and the long-term nature of such investments. Such investments are
classified within Level 3 of the valuation hierarchy.
83
Table of Contents
The following table
presents the changes in Level 3 pension plan assets for the year ended December 31,
2009:
|
|
Private Equity
|
|
Real Estate
|
|
Total
|
|
Balance
at January 1, 2009
|
|
$
|
36
|
|
$
|
27
|
|
$
|
63
|
|
Actual
returns on plan assets:
|
|
|
|
|
|
|
|
Relating
to assets still held at December 31, 2009
|
|
(2
|
)
|
|
|
(2
|
)
|
Purchases,
sales, and settlements
|
|
5
|
|
|
|
5
|
|
Balance
at December 31, 2009
|
|
$
|
39
|
|
$
|
27
|
|
$
|
66
|
|
In identifying the target
asset allocation that would best meet the Companys investment policy,
consideration is given to a number of factors including the various pension
plans demographic characteristics, the long-term nature of the liabilities,
the sensitivity of the liabilities to interest rates and inflation, the
long-term return expectations and risks associated with key asset classes as
well as their return correlation with each other, diversification among asset
classes and other practical considerations for investing in certain asset
classes.
The target asset
allocation for the pension plans during a complete market cycle is as follows:
|
|
U.S. Plans
|
|
Canadian Plans
|
|
Equity
securities
|
|
53
|
%
|
33
|
%
|
Debt
securities
|
|
45
|
%
|
63
|
%
|
Alternative
asset classes
|
|
2
|
%
|
4
|
%
|
The Company has approved
a revised Canadian target asset allocation, increasing the debt securities
percentage effective January 1, 2010.
Postretirement
Health Care and Life Insurance Benefits
The Company provides
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.
The assumed health care
cost trend rates used in measuring the accumulated postretirement benefit
obligation (APBO) at December 31 are as follows:
|
|
2009
|
|
2008
|
U.S. Plans
|
|
|
|
|
Health
care cost trend rate assumed for next year
|
|
8.00%
|
|
8.00%
|
Rate
to which the cost trend rate is assumed to
decline (the ultimate trend rate)
|
|
4.50%
|
|
5.00%
|
Year
the rate reaches the ultimate trend rate
|
|
2030
|
|
2015
|
|
|
|
|
|
Canadian Plans
|
|
|
|
|
Health
care cost trend rate assumed for next year
|
|
7.80-9.40%
|
|
7.90-8.60%
|
Rate
to which the cost trend rate is assumed to
decline (the ultimate trend rate)
|
|
4.70-4.90%
|
|
4.80-4.90%
|
Year
the rate reaches the ultimate trend rate
|
|
2029
|
|
2015
|
The effect of a 1% change
in the assumed health care cost trend rate would increase and decrease the APBO
as of December 31, 2009 by $10 million and $9 million, respectively, and
would increase and decrease the annual net periodic postretirement benefit cost
for 2009 by $1 million and $1 million, respectively.
84
Table of Contents
The following provides a
reconciliation of benefit obligations, plan assets and funded status of the
plans:
|
|
Defined Benefit
|
|
Postretirement
|
|
|
|
Plans
|
|
Plans
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Change in benefit obligation:
|
|
|
|
|
|
|
|
|
|
Benefit
obligation at January 1
|
|
$
|
3,194
|
|
$
|
3,526
|
|
$
|
163
|
|
$
|
189
|
|
Service
cost
|
|
26
|
|
44
|
|
2
|
|
3
|
|
Interest
cost
|
|
205
|
|
201
|
|
10
|
|
10
|
|
Amendments
|
|
1
|
|
7
|
|
|
|
(1
|
)
|
Settlements
|
|
(41
|
)
|
(10
|
)
|
|
|
|
|
Curtailments
|
|
(2
|
)
|
(8
|
)
|
(1
|
)
|
(1
|
)
|
Actuarial
(gain) loss
|
|
280
|
|
(170
|
)
|
10
|
|
(13
|
)
|
Plan
participants contributions
|
|
3
|
|
4
|
|
8
|
|
8
|
|
Benefits
paid and expected expenses
|
|
(218
|
)
|
(220
|
)
|
(22
|
)
|
(23
|
)
|
Foreign
currency rate changes
|
|
122
|
|
(180
|
)
|
6
|
|
(9
|
)
|
Benefit
obligation at December 31
|
|
$
|
3,570
|
|
$
|
3,194
|
|
$
|
176
|
|
$
|
163
|
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
|
Fair
value of plan assets at January 1
|
|
$
|
2,188
|
|
$
|
3,119
|
|
$
|
|
$
|
|
Actual
return on plan assets
|
|
371
|
|
(625
|
)
|
|
|
|
|
Settlements
|
|
(41
|
)
|
(10
|
)
|
|
|
|
|
Employer
contributions
|
|
37
|
|
69
|
|
14
|
|
15
|
|
Plan
participants contributions
|
|
3
|
|
4
|
|
8
|
|
8
|
|
Benefits
paid and expenses
|
|
(218
|
)
|
(216
|
)
|
(22
|
)
|
(23
|
)
|
Foreign
currency rate changes
|
|
101
|
|
(153
|
)
|
|
|
|
|
Fair
value of plan assets at December 31
|
|
$
|
2,441
|
|
$
|
2,188
|
|
$
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Under funded status:
|
|
$
|
(1,129
|
)
|
$
|
(1,006
|
)
|
$
|
(176
|
)
|
$
|
(163
|
)
|
85
Table of Contents
|
|
Defined Benefit
|
|
Postretirement
|
|
|
|
Plans
|
|
Plans
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Amounts recognized in the balance sheet:
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
$
|
(1
|
)
|
$
|
(9
|
)
|
$
|
(14
|
)
|
$
|
(15
|
)
|
Non-current
liabilities
|
|
(1,128
|
)
|
(997
|
)
|
(162
|
)
|
(148
|
)
|
Net
liability recognized in balance sheet
|
|
$
|
(1,129
|
)
|
$
|
(1,006
|
)
|
$
|
(176
|
)
|
$
|
(163
|
)
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of amounts recognized in
accumulated
OCI to net liability recognized in balance
sheet:
|
|
|
|
|
|
|
|
|
|
Prior
service credit (cost)
|
|
$
|
(9
|
)
|
$
|
(12
|
)
|
$
|
22
|
|
$
|
24
|
|
Net
actuarial gain (loss)
|
|
(1,093
|
)
|
(1,078
|
)
|
13
|
|
29
|
|
Accumulated
other comprehensive income (loss)
|
|
(1,102
|
)
|
(1,090
|
)
|
35
|
|
53
|
|
Prepaid
(unfunded accrued) benefit cost
|
|
18
|
|
99
|
|
(212
|
)
|
(214
|
)
|
Foreign
currency remeasurement
|
|
(45
|
)
|
(15
|
)
|
1
|
|
(2
|
)
|
Net
liability recognized in balance sheet
|
|
$
|
(1,129
|
)
|
$
|
(1,006
|
)
|
$
|
(176
|
)
|
$
|
(163
|
)
|
|
|
|
|
|
|
|
|
|
|
Change in accumulated OCI:
|
|
|
|
|
|
|
|
|
|
Accumulated
other comprehensive income (loss)
at January 1
|
|
$
|
(1,090
|
)
|
$
|
(442
|
)
|
$
|
53
|
|
$ 47
|
|
Prior
service (cost) credit arising during the period
|
|
(1
|
)
|
(6
|
)
|
|
|
1
|
|
Net
(loss) gain arising during the period
|
|
(115
|
)
|
(688
|
)
|
(10
|
)
|
12
|
|
Amortization
of prior service (credit) cost
|
|
4
|
|
3
|
|
(4
|
)
|
(4
|
)
|
Amortization
of net (gain) loss
|
|
100
|
|
43
|
|
(4
|
)
|
(3
|
)
|
Accumulated
other comprehensive income (loss)
at December 31
|
|
(1,102
|
)
|
(1,090
|
)
|
35
|
|
53
|
|
Deferred
income taxes
|
|
405
|
|
405
|
|
(13
|
)
|
(19
|
)
|
Accumulated
other comprehensive income (loss),
net of tax
|
|
$
|
(697
|
)
|
$
|
(685
|
)
|
$
|
22
|
|
$
|
34
|
|
|
|
|
|
|
|
|
|
|
|
Estimated amounts to be amortized from
accumulated OCI over the next fiscal year:
|
|
|
|
|
|
|
|
|
|
Prior
service credit (cost)
|
|
$
|
(2
|
)
|
$
|
(3
|
)
|
$
|
3
|
|
$
|
3
|
|
Net
actuarial gain (loss)
|
|
(93
|
)
|
(79
|
)
|
2
|
|
3
|
|
Total
|
|
$
|
(95
|
)
|
$
|
(82
|
)
|
$
|
5
|
|
$
|
6
|
|
The accumulated benefit
obligation for all defined benefit pension plans was $3,522 million and $3,161
million at December 31, 2009 and 2008, respectively.
The projected benefit
obligation, accumulated benefit obligation and fair value of plan assets for
the pension plans with accumulated benefit obligations in excess of plan assets
were $3,564 million, $3,516 million and $2,434 million, respectively, as of December 31,
2009 and $3,103 million, $3,076 million, and $2,100 million, respectively, as
of December 31, 2008.
The projected benefit
obligation and fair value of plan assets for the pension plans with projected
benefit obligations in excess of plan assets were $3,564 million and $2,434
million, respectively, as of December 31, 2009 and $3,190 million and
$2,183 million, respectively, as of December 31, 2008.
86
Table of Contents
The components of net
pension expense for the defined benefit plans and the components of the
postretirement benefit costs are as follows:
|
|
Defined Benefit Plans
|
|
Postretirement Plans
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
2009
|
|
2008
|
|
2007
|
|
Service
cost
|
|
$
|
26
|
|
$
|
44
|
|
$
|
53
|
|
$
|
2
|
|
$
|
3
|
|
$
|
3
|
|
Interest
cost
|
|
205
|
|
201
|
|
198
|
|
10
|
|
10
|
|
11
|
|
Expected
return on plan assets
|
|
(201
|
)
|
(245
|
)
|
(238
|
)
|
|
|
|
|
|
|
Amortization
of prior service cost (benefit)
|
|
2
|
|
3
|
|
6
|
|
(3
|
)
|
(3
|
)
|
(3
|
)
|
Amortization
of net (gain) loss
|
|
86
|
|
41
|
|
54
|
|
(4
|
)
|
(3
|
)
|
(1
|
)
|
Curtailment
(gain) loss
|
|
2
|
|
1
|
|
|
|
(1
|
)
|
(1
|
)
|
(3
|
)
|
Settlement
loss
|
|
11
|
|
2
|
|
2
|
|
|
|
|
|
|
|
Multi-employer
plans
|
|
6
|
|
7
|
|
4
|
|
|
|
|
|
|
|
Net
periodic benefit cost
|
|
$
|
137
|
|
$
|
54
|
|
$
|
79
|
|
$
|
4
|
|
$
|
6
|
|
$
|
7
|
|
In 2007, closed
facilities resulted in a $3 million curtailment loss related to the defined
benefit plans and a $3 million curtailment gain related to the postretirement
plans. The salaried defined benefit plan
freeze, resulting in a $3 million gain, offset the impact of the closed
facilities.
The settlement losses in
each year and the 2008 and 2009 curtailment (gains) losses are related to
closed facilities and are included as part of restructuring charges (See Note
3).
The weighted average
assumptions used to determine the benefit obligations at December 31 are
as follows:
|
|
Defined Benefit Plans
|
|
Postretirement Plans
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
U.S. Plans
|
|
|
|
|
|
|
|
|
|
Discount
rate
|
|
5.88
|
%
|
6.25
|
%
|
5.88
|
%
|
6.25
|
%
|
Rate
of compensation increase
|
|
3.13
|
%
|
3.04
|
%
|
N/A
|
|
N/A
|
|
Canadian Plans
|
|
|
|
|
|
|
|
|
|
Discount
rate
|
|
6.30
|
%
|
7.45
|
%
|
6.30
|
%
|
7.45
|
%
|
Rate
of compensation increase
|
|
3.20
|
%
|
3.20
|
%
|
N/A
|
|
N/A
|
|
The weighted average
assumptions used to determine net periodic benefit cost for the years ended December 31
are as follows:
|
|
Defined Benefit Plans
|
|
Postretirement Plans
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
U.S. Plans
|
|
|
|
|
|
|
|
|
|
Discount
rate
|
|
6.25
|
%
|
6.19
|
%
|
6.25
|
%
|
6.19
|
%
|
Expected
long-term return on plan
assets
|
|
8.50
|
%
|
8.50
|
%
|
N/A
|
|
N/A
|
|
Rate
of compensation increase
|
|
3.17
|
%
|
3.08
|
%
|
N/A
|
|
N/A
|
|
Canadian Plans
|
|
|
|
|
|
|
|
|
|
Discount
rate
|
|
7.45
|
%
|
5.50
|
%
|
7.45
|
%
|
5.50
|
%
|
Expected
long-term return on plan
assets
|
|
7.50
|
%
|
7.50
|
%
|
N/A
|
|
N/A
|
|
Rate
of compensation increase
|
|
3.20
|
%
|
3.20
|
%
|
N/A
|
|
N/A
|
|
The fundamental
assumptions behind the expected rate of return are the cumulative effect of
several estimates, including the anticipated yield on high quality debt
securities, the equity risk premium earned by investing in equity securities
over a long-term time horizon and active investment management. Based on adjustments to the future target
asset allocation, effective January 1, 2010, the expected long-term rate
of return for the Canadian plans is 6.30%.
87
Table of Contents
The Company expects to
contribute approximately $77 million to its defined benefit plans and $14
million to its postretirement plans in 2010.
Expected Future Benefit Plan
Payments
Expected future benefit
plan payments to participants, which reflect expected future service, are as
follows:
|
|
Defined Benefit Plans
|
|
Postretirement Plans
|
|
2010
|
|
$
|
223
|
|
$
|
14
|
|
2011
|
|
229
|
|
14
|
|
2012
|
|
233
|
|
14
|
|
2013
|
|
237
|
|
14
|
|
2014
|
|
252
|
|
15
|
|
2015-2019
|
|
1,291
|
|
75
|
|
|
|
|
|
|
|
|
|
Savings Plans
The Company sponsors
savings plans covering substantially all salaried and certain hourly
employees. The Company match is invested
according to the employees selected investment allocation. Effective January 1, 2009 for the
salaried plan, the Company contributes an additional amount equal to 1% of each
eligible employees salary. In addition,
the matching formula for the salaried plan was changed from 70% of the first 6%
of an employees deferral to 100% of the first 6% of an employees
deferral. The Companys expense for the
savings plans totaled $25 million, $17 million and $18 million in 2009, 2008
and 2007, respectively.
16. Preferred Stock
The Company was
prohibited from paying future dividends under the DIP Credit Agreement. Preferred stock dividends have been paid
through November 15, 2008. No
preferred stock dividends were declared or paid in 2009. At December 31, 2009, the amount of
dividends in arrears was $9 million.
Under the Proposed Plan of Reorganization, holders of the Companys
preferred stock would not be entitled to receive any amounts. As a result, the Company concluded it was not
probable that dividends on preferred stock would be an allowed claim.
The holders of the
Companys preferred stock are entitled to cumulative dividends of $0.4375 per
quarter, payable in cash except in certain circumstances. SSCC had approximately 4.6 million shares of
preferred stock issued and outstanding as of December 31, 2009 and
2008. Preferred stock dividends of $8
million were paid during 2008 and 2007.
Preferred stock accretion of $3 million in 2009 and $4 million in 2008
and 2007, respectively, was charged to stockholders equity. The holders of preferred stock are not
entitled to voting rights on matters submitted to the Companys
stockholders. The preferred stock is
convertible, at the option of the holder, into shares of SSCC common stock at a
conversion price of $34.28 (equivalent to a conversion rate of 0.729 shares of
SSCC common stock for each share of preferred stock), subject to adjustment
based on certain events. The preferred
stock may alternatively be exchanged, at the option of the Company, for new 7%
Convertible Subordinated Exchange Debentures due February 15, 2012. The preferred stock is redeemable at the
Companys option until February 15, 2012, at which time the preferred
stock must be redeemed. The preferred
stock may be redeemed, at the Companys option, with cash or SSCC common stock
with an equivalent fair value. The
redemption price is 100% of the liquidation preference. The liquidation preference is $25 per share
plus dividends accrued and unpaid.
88
Table of Contents
17. StockBased Compensation
The Company has stock
options and RSUs outstanding under several long-term incentive plans. The 1998 Long-Term Incentive Plan (the 1998
Plan) and the 2004 Long-Term Incentive Plan (the 2004 Plan) have reserved
16.5 million and 12.5 million shares, respectively, of Company common stock for
non-qualified stock options, RSUs and performance-based stock options to
officers, key employees and non-employee directors of the Company. The stock options are exercisable at a price
equal to the fair market value of the Companys stock on the date of
grant. The vesting schedule and other
terms and conditions of options granted under each plan are established
separately for each grant. The options
expire no later than seven to ten years from the date of grant.
Certain grants under the
1998 Plan and the 2004 Plan contain change in control provisions which provide
for immediate vesting and exercisability in the event that specific ownership
conditions are met. Grants issued before
December 31, 2005 allowed for immediate vesting and exercisability in the
event of retirement. For grants issued
after December 31, 2005, unvested awards do not vest upon retirement. Vested options remain exercisable until the
earlier of five years from retirement or ten years from the initial grant date.
The Company uses a
lattice option pricing model to estimate the fair value of stock options as it
more fully reflects the substantive characteristics of the Companys
stock-based compensation. The lattice
option pricing model considers a range of assumptions related to volatility,
risk-free interest rate and historical employee behavior. Expected volatility was based on historical
volatility on the Companys common stock and current implied volatilities from
traded options on the Companys common stock.
The risk-free interest rate was based on U.S. Treasury security yields
at the time of grant. The dividend yield
on the Companys common stock is assumed to be zero since the Company has not
paid dividends and has no current plans to do so in the future. The expected life was determined from the
lattice option pricing model. The
lattice option pricing model incorporates exercise and post-vesting forfeiture
assumptions based on analysis of historical data.
The following table
provides the assumptions used in determining the fair value of the stock-based
awards using a lattice option pricing model in 2008 and 2007. There were no stock-based awards granted in
2009.
|
|
2008
|
|
2007
|
|
Weighted-average
volatility
|
|
36.84
|
%
|
34.40
|
%
|
Weighted-average
risk-free interest rate
|
|
3.36
|
%
|
4.72
|
%
|
Weighted-average
dividend yield
|
|
0.00
|
%
|
0.00
|
%
|
Weighted-average
expected life in years
|
|
6
|
|
6
|
|
Total pretax
stock-based compensation costs recognized in selling and administrative
expenses in the consolidated statements of operations for 2009, 2008 and 2007
were $9 million, $3 million and $21 million, respectively. The related tax benefit for 2009, 2008 and
2007 was $3 million, $1 million and $8 million, respectively.
During 2008, the
Company reversed stock compensation expense of $13 million related to
performance-based stock options granted in 2006 and 2007 as the vesting
requirements were no longer attainable.
At December 31,
2009, the total compensation cost related to non-vested awards not yet
recognized was approximately $5 million to be recognized through December 31,
2011, with a weighted-average expense period of approximately 1 year.
89
Table of Contents
Stock Options
Grants issued subsequent
to June 2004 vest and become exercisable on the third anniversary of the
award date. The stock options granted
prior to January 2007 are fully vested and exercisable. Additional information relating to stock
options is as follows:
|
|
Options
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Term
(in years)
|
|
Outstanding
at January 1, 2007
|
|
17,588,959
|
|
$
|
14.08
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
1,331,190
|
|
12.74
|
|
|
|
Exercised
|
|
(167,046
|
)
|
12.03
|
|
|
|
Cancelled
|
|
(1,691,978
|
)
|
14.02
|
|
|
|
Outstanding
at December 31, 2007
|
|
17,061,125
|
|
14.00
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
2,406,500
|
|
6.36
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
Cancelled
|
|
(4,086,431
|
)
|
13.03
|
|
|
|
Outstanding
at December 31, 2008
|
|
15,381,194
|
|
13.06
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
Cancelled
|
|
(4,862,038
|
)
|
13.21
|
|
|
|
Outstanding
at December 31, 2009
|
|
10,519,156
|
|
12.99
|
|
4.72
|
|
|
|
|
|
|
|
|
|
Exercisable
at December 31, 2009
|
|
7,381,538
|
|
$
|
14.86
|
|
3.33
|
|
The weighted-average
grant date fair value of stock options granted during 2008 and 2007 was $2.24
and $4.69, respectively. There were no
stock options granted during 2009.
The total intrinsic value
of stock options exercised was immaterial in 2009, 2008 and 2007.
The aggregate intrinsic
value of stock options exercisable at December 31, 2009 was an immaterial
amount. The aggregate intrinsic value
represents the total pretax intrinsic value, based on options with an exercise
price less than the Companys closing stock price as of December 31, 2009,
which would have been received by the option holders had those option holders
exercised their options as of that date.
RSUs
Through December 31,
2008, the Company issued RSUs to pay a portion of employee bonuses under its
annual management incentive plan. These
RSUs vest immediately, but are not distributed to active employees until the
third anniversary of the award date.
Through December 31, 2008, the Company paid a premium on the
employee bonuses in the form of RSUs (Premium RSUs) to certain
employees. The Company also issued
non-vested RSUs under the 2004 Plan to certain employees. Non-employee directors were also annually
awarded non-vested RSUs as part of their director compensation. These non-vested RSUs and Premium RSUs vest
at the earlier of a change in control, death, disability or three years after
the award date. The RSUs are non-transferable
and do not have voting rights. There
were no RSUs issued during 2009.
90
Table of Contents
Additional information
relating to RSUs is as follows:
|
|
RSUs
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Vested RSUs
|
|
|
|
|
|
Outstanding
vested RSUs at January 1, 2007
|
|
576,578
|
|
$
|
15.04
|
|
|
|
|
|
|
|
Granted
|
|
348,040
|
|
10.89
|
|
Converted
|
|
(589,661
|
)
|
16.60
|
|
Transfer
from non-vested
|
|
381,668
|
|
17.15
|
|
Outstanding
vested RSUs at December 31, 2007
|
|
716,625
|
|
12.84
|
|
|
|
|
|
|
|
Granted
|
|
426,777
|
|
7.92
|
|
Converted
|
|
(680,906
|
)
|
13.34
|
|
Transfer
from non-vested
|
|
452,780
|
|
13.10
|
|
Outstanding
vested RSUs at December 31, 2008
|
|
915,276
|
|
10.31
|
|
|
|
|
|
|
|
Granted
|
|
|
|
|
|
Converted
|
|
(580,808
|
)
|
11.51
|
|
Canceled
|
|
(99,716
|
)
|
13.05
|
|
Transfer
from non-vested
|
|
492,103
|
|
11.76
|
|
Outstanding
vested RSUs at December 31, 2009
|
|
726,855
|
|
$
|
9.95
|
|
|
|
|
|
|
|
Non-Vested RSUs
|
|
|
|
|
|
Outstanding
non-vested RSUs at January 1, 2007
|
|
1,602,001
|
|
$
|
13.60
|
|
|
|
|
|
|
|
Granted
|
|
810,577
|
|
12.63
|
|
Forfeited
|
|
(132,688
|
)
|
12.51
|
|
Transfer
to vested
|
|
(381,668
|
)
|
17.15
|
|
Outstanding
non-vested RSUs at December 31, 2007
|
|
1,898,222
|
|
12.55
|
|
|
|
|
|
|
|
Granted
|
|
581,826
|
|
7.98
|
|
Forfeited
|
|
(116,974
|
)
|
11.48
|
|
Transfer
to vested
|
|
(452,780
|
)
|
13.10
|
|
Outstanding
non-vested RSUs at December 31, 2008
|
|
1,910,294
|
|
11.10
|
|
|
|
|
|
|
|
Granted
|
|
|
|
|
|
Forfeited
|
|
(245,333
|
)
|
12.30
|
|
Transfer
to vested
|
|
(492,103
|
)
|
11.76
|
|
Outstanding
non-vested RSUs at December 31, 2009
|
|
1,172,858
|
|
10.57
|
|
|
|
|
|
|
|
Total
outstanding RSUs at December 31, 2009
|
|
1,899,713
|
|
$
|
10.33
|
|
91
Table of Contents
18. Stockholder Rights Plan
In September 2002,
the Company adopted a stockholder rights plan under which the Board of
Directors declared a dividend of one preferred stock purchase right (Right)
for each outstanding share of the Companys common stock held of record as of
the close of business on September 17, 2002. Each Right entitles the holder to purchase
one one-thousandth of a share of Series B Junior Participating Preferred
Stock (Series B Preferred Stock).
The Rights become exercisable following a public announcement that an
acquiring person (Acquiring Person), as determined by the Board of Directors,
has obtained beneficial ownership of 15% or more of the outstanding shares of
the Companys common stock or commenced a tender or exchange offer that would
result in such ownership threshold being attained. Each Right, if and when it becomes
exercisable, will entitle holders of the Rights (other than an Acquiring
Person), upon payment of the exercise price, to the number of shares of Series B
Preferred Stock having a fair value equal to approximately two times the
exercise price. In addition, if after a
person or group becomes an Acquiring Person and the Company was acquired in a
merger or other business combination, each holder of Rights (other than an
Acquiring Person) will have the right to acquire, upon payment of the exercise
price, that number of shares of common stock of the acquiring company having a fair
value equal to approximately two times the exercise price. The Rights expire on September 9, 2012
unless earlier redeemed or exchanged by the Company.
19. Accumulated Other Comprehensive Income (Loss)
Accumulated other
comprehensive income (loss), net of tax is as follows:
|
|
Foreign
Currency
Translation
Adjustments
|
|
Employee
Benefit Plans
Liability
Adjustments
|
|
Deferred
Hedge
Adjustments
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
|
Balance
at January 1, 2007
|
|
$
|
|
$
|
(404
|
)
|
$
|
(8
|
)
|
$
|
(412
|
)
|
|
|
|
|
|
|
|
|
|
|
Net
loss reclassified into earnings
|
|
|
|
|
|
5
|
|
5
|
|
Current
period change
|
|
|
|
55
|
|
|
|
55
|
|
Net
impact of defined benefit plan
remeasurement (See Note 15)
|
|
|
|
64
|
|
|
|
64
|
|
Net
deferred employee benefit plan
expense reclassified into earnings
|
|
|
|
35
|
|
|
|
35
|
|
Balance
at December 31, 2007
|
|
|
|
(250
|
)
|
(3
|
)
|
(253
|
)
|
|
|
|
|
|
|
|
|
|
|
Net
changes in fair value of hedging
transactions
|
|
|
|
|
|
(42
|
)
|
(42
|
)
|
Net
loss reclassified into earnings
|
|
|
|
|
|
8
|
|
8
|
|
Current
period change
|
|
(6
|
)
|
(426
|
)
|
|
|
(432
|
)
|
Net
deferred employee benefit plan
expense reclassified into earnings
|
|
|
|
25
|
|
|
|
25
|
|
Balance
at December 31, 2008
|
|
(6
|
)
|
(651
|
)
|
(37
|
)
|
(694
|
)
|
|
|
|
|
|
|
|
|
|
|
Net
changes in fair value of hedging
transactions
|
|
|
|
|
|
(1
|
)
|
(1
|
)
|
Net
loss reclassified into earnings
|
|
|
|
|
|
37
|
|
37
|
|
Current
period change
|
|
3
|
|
(85
|
)
|
|
|
(82
|
)
|
Net
deferred employee benefit plan
expense reclassified into earnings
|
|
|
|
61
|
|
|
|
61
|
|
Balance
at December 31, 2009
|
|
$
|
(3
|
)
|
$
|
(675
|
)
|
$
|
(1
|
)
|
$
|
(679
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
92
Table of Contents
20. Earnings Per Share
The following table sets
forth the computation of basic and diluted earnings per share:
|
|
2009
|
|
2008
|
|
2007
|
|
Numerator:
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
|
$
|
8
|
|
$
|
(2,818
|
)
|
$
|
(103
|
)
|
Preferred
stock dividends and accretion
|
|
(11
|
)
|
(12
|
)
|
(12
|
)
|
Net
loss from continuing operations attributable to
common stockholders
|
|
$
|
(3
|
)
|
$
|
(2,830
|
)
|
$
|
(115
|
)
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
Denominator
for basic and diluted earnings per share
weighted average shares and assumed
conversions
|
|
257
|
|
257
|
|
256
|
|
|
|
|
|
|
|
|
|
Basic
and diluted earnings per share from continuing operations
|
|
$
|
(.01
|
)
|
$
|
(11.01
|
)
|
$
|
(.45
|
)
|
Convertible preferred
stock to acquire three million shares of common stock with an effect of $11
million, $12 million, and $12 million on net loss from continuing operations
attributable to common stockholders for 2009, 2008 and 2007, respectively, is
excluded from the diluted earnings per share computation because they are
antidilutive for all years presented.
Employee stock options and non-vested RSUs are excluded from the diluted
earnings per share calculation for 2009, 2008 and 2007 because they are
antidilutive.
21. Goodwill and Other Intangible Assets
The Company evaluates goodwill and other intangible
assets for impairment in accordance with ASC 350, Intangibles - Goodwill and
Other (ASC 350), annually or at other times when events and circumstances
indicate the carrying value of this asset may no longer be fully recoverable. In the fourth quarter of 2008, as the result
of the significant decline in value of the Companys equity securities and debt
instruments and the downward pressure placed on earnings by the weakening U.S.
economy, the Company determined that goodwill and other intangible assets were
potentially impaired.
The Company engaged a third-party to assist
with its impairment review. As outlined
in ASC 350, the amount of the goodwill impairment, if any, is measured by
comparing the implied fair value of goodwill to its book value, or carrying
amount. The third-party valuation report
as of December 31, 2008, indicated that the carrying amount of goodwill
was fully impaired based on declines in current and projected operating results
and cash flows due the current economic conditions. At December 31, 2008, the Company
recognized an impairment charge of $2,723 million, net of an income tax benefit
of $4 million, which eliminated all goodwill.
The goodwill consisted primarily of amounts recorded in connection with
the Companys merger with Stone Container Corporation in November 1998.
In addition, the Company also determined that the
carrying values of its other intangible assets were fully impaired. The other intangible assets at December 31,
2008 consisted of definite life customer relationships of $22 million and $12
million of an indefinite life trade name, which were primarily recorded in
connection with the Companys acquisition of the remaining 50% ownership in
Smurfit-MBI in 2003. As a result, the
Company recognized a pretax impairment charge on other intangible assets of $34
million in the fourth quarter of 2008.
There were no goodwill and other intangible assets
acquired during 2009. As a result, the
goodwill and intangible asset balances were zero at December 31, 2009 and December 31,
2008.
93
Table of Contents
22. Related Party Transactions
Transactions with
Non-consolidated Affiliates
The Company sold
paperboard, market pulp and fiber to and purchased containerboard and kraft
paper from various non-consolidated affiliates on terms generally similar to
those prevailing with unrelated parties.
The following table summarizes the Companys related party transactions
with its non-consolidated affiliates for each year presented:
|
|
2009
|
|
2008
|
|
2007
|
|
Product
sales
|
|
$
|
65
|
|
$
|
85
|
|
$
|
78
|
|
Product
and raw material purchases
|
|
40
|
|
57
|
|
50
|
|
Trade
receivables at December 31
|
|
6
|
|
7
|
|
9
|
|
Notes
receivable at December 31
|
|
1
|
|
|
|
1
|
|
Trade
payables at December 31
|
|
6
|
|
7
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Transactions
William D. Smithburg, a
member of the Companys Board of Directors, is a member of the Board of
Directors of Barry-Wehmiller Companies, Inc. (Barry-Wehmiller) and the
Board of Directors of Abbott Laboratories, (Abbott). Barry-Wehmiller sold the Company equipment
for $15 million, $28 million and $15 million during 2009, 2008 and 2007,
respectively. The Company sold products
to Abbott for $4 million, $5 million, and $5 million during 2009, 2008 and
2007, respectively. All such sales were
made on an arms-length basis.
James J. OConnor, a
member of the Companys Board of Directors, is a member of the Board of
Directors of Armstrong World Industries, Inc, (Armstrong). The Company sold products to Armstrong for $3
million, $4 million and $3 million in 2009, 2008 and 2007, respectively. All such sales were made on an arms-length
basis.
Patrick J. Moore,
Chairman and Chief Executive Officer and a member of the Companys Board of
Directors, is a member of the Board of Directors of Archer Daniels Midland
Company (ADM). ADM sold the Company
$12 million, $16 million and $13 million of supplies used in mill operations in
2009, 2008 and 2007, respectively. The
Company sold products to ADM of $3 million, $5 million and $7 million in 2009,
2008 and 2007, respectively. All such
sales were made on an arms-length basis.
23. Fair Value Measurements
Certain financial assets
and liabilities are recorded at fair value on a recurring basis, including
derivative instruments prior to termination (See Note 10), the Companys
retained interest in receivables sold to the accounts receivable programs (See
Note 8) prior to termination of these programs on January 28, 2009 and the
Companys residual interest in TNH (See Note 8).
Fair value is defined as
the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the
measurement date. In determining fair
value, the Company uses various valuation approaches, including market, income
and/or cost approaches. ASC 820, Fair
Value Measurements and Disclosures, establishes a hierarchy for inputs used in
measuring fair value that maximizes the use of observable inputs and minimizes
the use of unobservable inputs by requiring that the most observable inputs be
used when available. Observable inputs
are inputs that market participants would use in pricing the asset or liability
based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect
the Companys assumptions about the assumptions market participants would use
in pricing the asset or liability developed based on the best information
available in the circumstances. The
hierarchy for inputs is broken down into three levels based on their
reliability as follows:
94
Table of Contents
Level 1
Valuations based on quoted prices in
active markets for identical assets or liabilities that the Company has the
ability to access. The Company has no
assets or liabilities measured at fair value on a recurring basis utilizing
Level 1 inputs.
Level 2
Valuations based on quoted prices in
markets that are not active or for which all significant inputs are observable,
either directly or indirectly. The
Company has no assets or liabilities measured at fair value on a recurring
basis utilizing Level 2 inputs.
Level 3
Valuations based on inputs that are
unobservable and significant to the overall fair value measurement. The Companys assets and liabilities
utilizing Level 3 inputs include the residual interest in the TNH
investment. The fair value of the
residual interest in the TNH investment is estimated using discounted residual
cash flows.
Fair Value on a Recurring Basis
Assets and liabilities
measured at fair value on a recurring basis are categorized in the table below
based upon the level of input to the valuations.
|
|
December 31, 2009
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Residual
interest in TNH investment
|
|
$
|
|
$
|
|
$
|
36
|
|
$
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table
presents the changes in Level 3 assets (liabilities) measured at fair value on
a recurring basis for the year ended December 31, 2009:
|
|
Retained
Interest in
Receivables
Sold
|
|
Residual
Interest in
TNH
Investment
|
|
Derivative
Instruments
|
|
Total
|
|
Balance
at January 1, 2009
|
|
$
|
120
|
|
$
|
34
|
|
$
|
(87
|
)
|
$
|
67
|
|
Net
payments, sales and settlements
|
|
(119
|
)
|
(1
|
)
|
30
|
|
(90
|
)
|
Realized
gains/(losses)
|
|
(1
|
)
|
3
|
|
|
|
2
|
|
Unrealized
gains/(losses)
|
|
|
|
|
|
(3
|
)
|
(3
|
)
|
Termination
of derivative instruments
|
|
|
|
|
|
60
|
|
60
|
|
Balance
at December 31, 2009
|
|
$
|
|
$
|
36
|
|
$
|
|
$
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains (losses) associated with derivative
instruments represent the change in fair value included in OCI for derivative
instruments qualifying for hedge accounting and cost of goods sold for
derivative instruments not qualifying for hedge accounting (See Note 10).
The net settlements associated with retained interest in
receivables sold are due to the termination of the securitization programs (See
Note 8). The net payments associated
with derivative instruments relate to pre-bankruptcy filing contract
settlements and the settlement of contracts at termination, which were
supported by letters of credits (See Note 9).
Due to termination of all existing derivative instruments,
these liabilities are no longer measured at fair value on a recurring basis
(See Note 10).
Financial Instruments Not
Measured At Fair Value
Some of the Companys financial instruments are not
measured at fair value on a recurring basis but are recorded at amounts that
approximate fair value due to their liquid or short-term nature. The carrying amount of cash equivalents
approximates fair value because of the short maturity of those
instruments. The fair values of notes
receivable are based on discounted future cash flows or the applicable quoted
market price.
95
Table of Contents
The Companys borrowings are recorded at historical
amounts. The fair value of the Companys
debt is estimated based on the quoted market prices for the same or similar
issues or on the current rates offered to the Company for debt of the same
remaining maturities. At December 31,
2009, the carrying value and fair value of the Companys secured borrowings
were $1,354 million and $1,347 million, respectively. At December 31, 2009, the carrying value
and the fair value of the Companys unsecured borrowings, included in
liabilities subject to compromise, were $2,439 and $2,172, respectively. At December 31, 2008, the carrying value
and fair value of the Companys borrowings were $3,718 million and $1,678
million, respectively.
24. Other, Net
The significant
components of other, net in the Companys consolidated statements of operations
are as follows:
|
|
2009
|
|
2008
|
|
2007
|
|
Loss
on sales of receivables
|
|
$
|
|
$
|
(17
|
)
|
$
|
(27
|
)
|
Gain
on sale of emission credits and water rights
|
|
3
|
|
|
|
15
|
|
Other
|
|
11
|
|
12
|
|
7
|
|
Total
other, net
|
|
$
|
14
|
|
$
|
(5
|
)
|
$
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
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 by the Company (See Note
8).
25. Contingencies
The Companys past and
present operations include activities which are subject to federal, state and
local environmental requirements, particularly relating to air and water
quality. The Company faces potential
environmental liability as a result of violations of these environmental
requirements, environmental permit terms and similar authorizations that have
occurred from time to time at its facilities.
In addition, the Company faces potential liability for remediation at
certain owned and formerly owned facilities, as well as response costs at
various sites for which it has received notice as being a potentially
responsible party (PRP) concerning hazardous substance contamination. In estimating its reserves for environmental
remediation and future costs, the Companys estimated liability of $5 million
reflects the Companys expected share of costs after consideration for the
relative percentage of waste deposited at each site, the number of other PRPs,
the identity and financial condition of such parties and experience regarding
similar matters. As of December 31,
2009, the Company had approximately $28 million reserved for environmental
liabilities, of which $14 million is included in other long-term liabilities
and $14 million in other current liabilities, in the consolidated balance
sheets. The Company believes the
liability for these matters was adequately reserved at December 31, 2009.
If all or most of the
other PRPs are unable to satisfy their portion of the clean-up costs at one or
more of the significant sites in which the Company is involved or the Companys
expected share increases, the resulting liability could have a material adverse
effect on the Companys consolidated financial condition, results of operations
or cash flows.
In January 2009, the
Company settled two putative class action cases filed in California state court
on behalf of current and former hourly employees at the Companys California
corrugated container facilities. These
cases alleged violations of the California on-duty meal break and rest period
statutes. The court approved a
settlement for a total of $9 million for both cases on January 21,
2009. The cases were automatically
stayed due to the filing of the Chapter 11 Petition on January 26, 2009
(See Note 1). The Company established
reserves of $9 million during 2008 related to these matters, which was included
in
96
Table of Contents
selling and
administrative expenses in the accompanying consolidated statement of
operations. It is anticipated that the
Companys liability for the settlement of these cases will be satisfied as an
unsecured claim in the U.S. bankruptcy proceedings.
In May 2009, a lawsuit
was filed in the United States District Court for the Northern District of
Illinois against the four individual committee members of the Administrative
Committee (Administrative Committee) of the Companys savings plans and
Patrick Moore, the Companys Chief Executive Officer (together, the Defendants). The suit alleges violations of the Employee
Retirement Income Security Act (ERISA) (the 2009 ERISA Case) between January 2008
and the date it was filed. The
plaintiffs in the 2009 ERISA Case brought the complaint on behalf of themselves
and a class of similarly situated participants and beneficiaries of four of the
Companys savings plans (the Savings Plans).
The plaintiffs assert that the Defendants breached their fiduciary
duties to the Savings Plans participants and beneficiaries by allegedly making
imprudent investments with the Savings Plans assets, making misrepresentations
and failing to disclose material adverse facts concerning the Companys
business conditions, debt management and viability, and not taking appropriate
action to protect the Savings Plans assets.
Even though the Company is not a named defendant in the 2009 ERISA Case,
management believes that any indemnification obligations to the Defendants
would be covered by applicable insurance.
On
January 11, 2010, a second ERISA class action lawsuit was filed in the
United States District Court for the Western District of Missouri. The defendants in this case are the
individual committee members of the Administrative Committee, several other of
the Companys executives and the individual members of its Board of
Directors. The suit has similar
allegations as the 2009 ERISA Case described above, with the addition of breach
of fiduciary duty claims related to the Companys pension plans. The Company expects that both of these
matters will be consolidated in some manner as they purport to represent a
similar class of employees and former employees and seek recovery under similar
allegations and any of the Companys indemnification obligations would be
covered by applicable insurance.
The Company is a
defendant in a number of other lawsuits and claims arising out of the conduct
of its business. All litigation that
arose or may arise out of pre-petition conduct or acts is subject to the
automatic stay provision of the bankruptcy laws and any recovery by plaintiffs
in those matters will be paid consistent with all other general unsecured
claims in the bankruptcy. As a result,
the Company believes that these matters will not have a material adverse effect
on its consolidated financial condition, results of operations or cash flows.
26. Business Segment Information
The following table
presents net sales to external customers by country of origin:
|
|
2009
|
|
2008
|
|
2007
|
|
United
States
|
|
$
|
4,823
|
|
$
|
6,170
|
|
$
|
6,518
|
|
Canada
|
|
562
|
|
664
|
|
694
|
|
Other
|
|
189
|
|
208
|
|
208
|
|
Total
net sales
|
|
$
|
5,574
|
|
$
|
7,042
|
|
$
|
7,420
|
|
The following table
presents long-lived assets by country:
|
|
2009
|
|
2008
|
|
2007
|
|
United
States
|
|
$
|
2,612
|
|
$
|
3,012
|
|
$
|
2,931
|
|
Canada
|
|
437
|
|
513
|
|
537
|
|
Other
|
|
34
|
|
16
|
|
18
|
|
|
|
3,083
|
|
3,541
|
|
3,486
|
|
Goodwill
|
|
|
|
|
|
2,727
|
|
Total
long-lived assets
|
|
$
|
3,083
|
|
$
|
3,541
|
|
$
|
6,213
|
|
97
Table of Contents
The Companys export sales
from the United States were approximately $549 million for 2009, $768 million
for 2008 and $814 million for 2007.
27. Quarterly Results (Unaudited)
The following table is a
summary of the unaudited quarterly results of operations:
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
2009
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
1,371
|
|
$
|
1,407
|
|
$
|
1,417
|
|
$
|
1,379
|
|
Gross
profit
|
|
154
|
|
151
|
|
133
|
|
113
|
|
Income
(loss) from continuing operations (a) (b) (c)
|
|
(214
|
)
|
158
|
|
68
|
|
(4
|
)
|
Net
income (loss)
|
|
(214
|
)
|
158
|
|
68
|
|
(4
|
)
|
Preferred
stock dividends and accretion
|
|
(3
|
)
|
(3
|
)
|
(3
|
)
|
(2
|
)
|
Net
income (loss) attributable to common
stockholders
|
|
(217
|
)
|
155
|
|
65
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
|
$
|
(.84
|
)
|
$
|
.60
|
|
$
|
.25
|
|
$
|
(.02
|
)
|
Net
income (loss) attributable to common
stockholders
|
|
$
|
(.84
|
)
|
$
|
.60
|
|
$
|
.25
|
|
$
|
(.02
|
)
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
1,795
|
|
$
|
1,835
|
|
$
|
1,879
|
|
$
|
1,533
|
|
Gross
profit
|
|
212
|
|
176
|
|
183
|
|
133
|
|
Income
(loss) from continuing operations (d)
|
|
(13
|
)
|
(37
|
)
|
65
|
|
(2,833
|
)
|
Net
income (loss)
|
|
(13
|
)
|
(37
|
)
|
65
|
|
(2,833
|
)
|
Preferred
stock dividends and accretion
|
|
(3
|
)
|
(3
|
)
|
(3
|
)
|
(3
|
)
|
Net
income (loss) attributable to common
stockholders
|
|
(16
|
)
|
(40
|
)
|
62
|
|
(2,836
|
)
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
|
$
|
(.06
|
)
|
$
|
(.16
|
)
|
$
|
.24
|
|
$
|
(11.04
|
)
|
Net
income (loss) attributable to common
stockholders
|
|
$
|
(.06
|
)
|
$
|
(.16
|
)
|
$
|
.24
|
|
$
|
(11.04
|
)
|
(a)
Income (loss) from continuing operations
includes restructuring expense of $281 million in the fourth quarter of 2009.
(b)
Income (loss) from continuing operations
includes reversal of post-bankruptcy filing unsecured interest expense of $163
million in the fourth quarter of 2009.
(c)
Income (loss) from continuing operations
includes tax benefit of $28 million related to recognition of refunds of AMT
credits.
(d)
Income (loss) from continuing operations
includes goodwill and other intangible asset impairment charges of $2,761
million and restructuring expense of $40 million in the fourth quarter of 2008.
98
Table of Contents
SMURFIT-STONE
CONTAINER CORPORATION
SCHEDULE IIVALUATION AND QUALIFYING ACCOUNTS AND
RESERVES
(In millions)
Column A
|
|
Column B
|
|
Column C
|
|
Column D
|
|
Column E
|
|
Column F
|
|
Description
|
|
Balance at
Beginning of
Period
|
|
Additions
Charged to
Costs and
Expenses
|
|
Other
Describe
|
|
Deductions
Describe
|
|
Balance at
End of
Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts and
sales returns and allowances:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31, 2009
|
|
$
|
7
|
|
$
|
8
|
|
$
|
17
|
(a)
|
$
|
8
|
(b)
|
$
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31, 2008
|
|
$
|
7
|
|
$
|
5
|
|
$
|
|
$
|
5
|
(b)
|
$
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31, 2007
|
|
$
|
7
|
|
$
|
3
|
|
$
|
|
$
|
3
|
(b)
|
$
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31, 2009
|
|
$
|
33
|
|
$
|
319
|
(c)
|
$
|
4
|
(c)
|
$
|
302
|
(d)
|
$
|
54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31, 2008
|
|
$
|
28
|
|
$
|
67
|
(c)
|
$
|
2
|
(c)
|
$
|
64
|
(d)
|
$
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31, 2007
|
|
$
|
45
|
|
$
|
16
|
(c)
|
$
|
69
|
(c)
|
$
|
102
|
(d)
|
$
|
28
|
|
(a)
|
Includes the
establishment of reserves related to the repurchase of all outstanding
receivables upon termination of the accounts receivable securitization
programs (See Note 8).
|
(b)
|
Uncollectible amounts
written off, net of recoveries
|
(c)
|
Gain on sale of closed
properties reduces the charge by $4 million, $2 million and $69 million for
2009, 2008 and 2007, respectively, and
is added back to other, since there is no impact on exit
liabilities.
|
(d)
|
Charges against the
reserves.
|
99
Table of Contents
ITEM 9.
CHANGES IN AND
DISAGREEMENTS WITH AC
COUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM
9A(T).
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls
and Procedures
Our management, with the
participation of our principal executive officer and our principal financial
officer, evaluated the effectiveness of our disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the
end of the period covered by this report and have concluded that, as of such
date, our disclosure controls and procedures were adequate and effective.
Changes in Internal Control
There have not been any
changes in our internal control over financial reporting during the most recent
quarter that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
ITEM
9B.
OTHER INFORMATION
Pursuant to the
authorization of the U.S. Court to continue our performance-based short-term
and long-term incentive plans, on February 24, 2010, our Compensation
Committee adopted certain modifications to the 2009 MIP for the 2010 MIP (each
as defined below). Other than the
modifications described in this Item 9B. Other Information, all other terms
and conditions of the 2009 MIP will continue with respect to the 2010 MIP. The Committee reduced MIP performance targets
for the NEOs for the second six-month performance period under the 2010 MIP
due, in part, to the anticipated grants of equity described below upon our
emergence from bankruptcy. The MIP
targets for the second six-month performance period, expressed as a percentage
of base salary, for each of the NEOs will be as follows: 115% for Mr. Moore,
115% for Mr. Klinger, 60% for Mr. Hunt, and 70% for Mr. Strickland.
The Committee did not approve an adjusted 2010 MIP target for Mr. Murphy
because he resigned from the Company effective as of February 25, 2010,
but did approve a 70% post-emergence 2010 MIP target for any interim or new
Chief Financial Officer that may be appointed during 2010. In addition to the adjusted second six-month
performance period targets, the Committee also approved certain other
modifications to the 2010 MIP that will become effective after our emergence
from bankruptcy that will apply to the NEOs.
These additional modifications are: (1) the annual performance
period will be eliminated and each NEOs MIP bonus will be determined based upon
our performance for two six-month performance periods: (2) maximum Company
performance (140% of the performance target) will earn a 200% payout of the
NEOs target MIP bonus; and (3) earned MIP bonuses will be paid annually.
Also on February 24,
2010, the Committee approved, subject to confirmation of our Proposed Plan of
Reorganization, equity grants to certain of the currently employed NEOs upon
emergence from bankruptcy, including an award of 0.900% of our New Common Stock
for Mr. Klinger, and 0.153% of our New Common Stock for each of Messrs. Hunt
and Strickland. Approximately 76% of
each NEOs equity grant will be made in the form of a stock option award, and
approximately 24% in the form of restricted shares. Mr. Moore will not receive an equity
grant upon emergence from bankruptcy due to his anticipated retirement, and Mr. Murphy
will not receive an equity grant because of his resignation.
The Committee elected not
to evaluate base salaries for the NEOs until after our emergence from
bankruptcy, with the exception of Mr. Stricklands base salary, which the
Committee increased to $415,000 effective March 1, 2010 due to his
assumption of additional responsibilities.
The Committee also
approved two forms of amended and restated employment security agreements for Mr. Hunt
and Mr. Strickland and certain of our other Senior Vice Presidents other
than the NEOs.
PART III
ITEM 10.
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors
Set forth below is
certain information concerning Smurfit-Stones directors. In assembling the
Board, the Nominating and Governance Committee conducted thorough searches for
qualified nominees for election to the Board of Directors, and has engaged
prominent search firms to assist in that process. The Nominating and Governance
Committee has also relied upon the advice of independent legal counsel in
assessing the appropriate composition of the Board of Directors. The Nominating and Governance Committee seeks
to identify independent nominees that would, in combination with the other
directors, bring a strong balance of financial, sales and marketing,
manufacturing, and managerial expertise and experience to the Board of
Directors.
James R.
Boris,
born
October 25, 1944,
is the retired
Chairman and Chief Executive Officer of EVEREN Capital Corporation and its
primary subsidiary, EVEREN Securities, Inc. He is also the lead director of the Chicago
Board Options Exchange, is the former non-executive Chairman of the Board of
Integrys Energy Group, Inc., and previously served as a director of Peoples
Energy Corporation, Loyola University Health Systems, Inc. and Midwest Air
Group, Inc.
Connie K. Duckworth
, born November 3, 1954, has been
President and Chairman of Arzu, Inc. since August 2003 and became
Chief Executive Officer and Chairman in 2009.
She was a partner of Circle Financial Group, LLC from January 2003
to December 2004. Ms. Duckworth
retired from Goldman Sachs & Co. as Advisory Director in 2001. Ms. Duckworth is a director of
Northwestern Mutual Life Insurance Co. and Frank Russell Investment Group, and
previously served as a director of DNP Select Income Fund and Nuveen
Investments, Inc.
100
Table
of Contents
Steven J. Klinger,
born March 5, 1959, was appointed President and
Chief Operating Officer on May 11, 2006. He was appointed to the board of
Smurfit-Stone Container Corporation on December 11, 2008 and is a board
member of Navistar International Corporation.
Prior to joining Smurfit-Stone, Mr. Klinger was employed by Georgia
Pacific Corporation for 23 years, most recently as Executive Vice President,
Packaging from February 2003 to May 2006 and President, Packaging and
Containerboard Sales / Logistics from August 2001 to January 2003.
William
T. Lynch, Jr.,
born
December 3, 1942, has been President and Chief Executive Officer of Liam
Holdings, LLC since April 1997. He
is the retired President and Chief Executive Officer of Leo Burnett
Company. Mr. Lynch is a director of
Pella Corporation and previously served as a director of Krispy Kreme Doughnuts, Inc.,
Ygomi LLC and SEI Information Technology.
Patrick
J. Moore
, born September 7,
1954, has served as Chairman and Chief Executive Officer since May 2006. He had been Chairman, President and Chief
Executive Officer since May 2003, and prior to that he was President and
Chief Executive Officer since January 2002, when he was also elected as a
Director. He was Vice President and
Chief Financial Officer from November 1998 until January 2002. Mr. Moore is a director of Archer
Daniels Midland Company.
James J.
OConnor
, born March 15,
1937, is the former Chairman and Chief Executive Officer of Unicom Corporation
and its subsidiary, Commonwealth Edison Company. Mr. OConnor is Chairman of the Board of
Directors of Armstrong World Industries, Inc., and is the lead independent
director of Corning, Incorporated and UAL Corporation. He previously served as a director of Trizec
Properties, Inc.
Jerry K.
Pearlman
, born March 27,
1939, is the retired Chairman of the Board and Chief Executive Officer of
Zenith Electronics Corporation. Mr. Pearlman
is a director of Nanophase Technologies Corporation and, from 1984 to 1998,
served as director of Stone Container, a predecessor of Smurfit-Stone. He previously served as a director of Ryerson, Inc.
Thomas A.
Reynolds, III
,
born May 12, 1952, has been a partner of Winston & Strawn LLP, a
law firm that regularly represents Smurfit-Stone on numerous matters, since
1984.
William
D. Smithburg,
born
July 9, 1938, is the retired Chairman, President and Chief Executive
Officer of The Quaker Oats Company. Mr. Smithburg
is a director of Abbott Laboratories, Northern Trust Corporation and Corning
Incorporated.
Executive
Officers
Certain
information concerning the executive officers of Smurfit-Stone is contained in Part I,
Item 1, of this annual report on Form 10-K under the caption Executive
Officers Of The Registrant and is incorporated by reference herein.
Audit Committee
We have a separately
designated standing Audit Committee established in accordance with Section 3(a)(58)(A) of
the Exchange Act. The members of the
Audit Committee are Mr. Pearlman (Chairman), Mr. Boris and Mr. OConnor.
Audit Committee Financial Expert
Our Board of Directors
has determined that Mr. Pearlman is an audit committee expert as defined
by Item 407(d)(5)(ii) of Regulation S-K of the Exchange Act and is
independent, as such term is defined in the listing standards of the NASDAQ
Stock Market.
Code of Ethics
We
have
adopted
a
Code
of
Ethics
for
Senior
Financial
Officers
(including
our
Principal
Executive
Officer,
Principal
Financial
Officer,
Principal
Accounting
Officer
and
Controller).
The
Code
of
Ethics
is
available
on
our
Internet
Website
(www.smurfit-stone.com).
We
intend
to
satisfy
our
disclosure
requirements
under
101
Table
of Contents
Item 5.05 of Form 8-K
regarding an amendment to, or a waiver from, a provision of our code of ethics
that applies to our Senior Financial Officers and that relates to any element
of the code of ethics definition enumerated in Item 406(b) of Regulation
S-K by posting such information on our Website.
Section 16(a) Beneficial
Ownership Reporting Compliance
Section 16(a) of
the Securities Exchange Act of 1934 requires the Executive Officers and
Directors, and persons who beneficially own more than ten percent of the Common
Stock, to file initial reports of ownership and reports of changes in ownership
with the SEC. Executive Officers, Directors and greater than ten percent
beneficial owners are required by SEC regulations to furnish the Company with
copies of all Section 16(a) forms they file. Based solely on a review
of the copies of such forms furnished to the Company and written
representations from the Executive Officers and Directors, the Company believes
that during the period from January 1, 2009 through December 31,
2009, its Executive Officers, Directors and greater than ten percent beneficial
owners complied with all Section 16(a) filing requirements applicable
to them.
Recommendation of Director
Nominees by Stockholders
There have been no
material changes to the procedures by which stockholders may recommend director
nominees to our Board of Directors since the filing of our Quarterly Report on Form 10-Q
for the quarter ended September 30, 2009.
ITEM 11.
EXECUTIVE
COMPENSATION
COMPENSATION DISCUSSION AND
ANALYSIS
Introduction
The purpose of this
discussion is to describe the compensation philosophy of SSCC and how this
philosophy is applied to the compensation of the named executive officers
(NEOs). As noted herein the
Compensation Committee (the Committee) has responsibility for evaluating and
determining the compensation of executive officers. The overall goal of the Committee is to
assure that compensation paid to the NEOs is fair, reasonable and competitive,
and is linked to increasing the long-term enterprise value of SSCC. The executives that this discussion covers
are:
Patrick J. Moore,
Chairman and Chief Executive Officer
Steven J. Klinger,
President and Chief Operating Officer
John R. Murphy, Former
Senior Vice President and Chief Financial Officer*
Craig A. Hunt,
Senior Vice President, Secretary and General Counsel
Steven C.
Strickland, Senior Vice President/General Manager - Container Division
Charles A.
Hinrichs, Former Senior Vice President and Chief Financial Officer*
* Mr. Murphy
resigned from his employment with us on February 25, 2010. Mr. Hinrichs
employment with us terminated on May 18, 2009.
Philosophy
and Objectives of Compensation Programs
In accordance with the
overall goal of the Committee described above, the Companys compensation
programs have followed the objectives listed below:
·
Compensation
should be competitive with the market.
·
Compensation
should be significantly performance-based.
·
Compensation
should have a significant long-term component.
102
Table
of Contents
To balance these
objectives, our executive compensation program uses the following elements:
·
Base
salary: to provide a minimum level of market competitiveness.
·
Short-term
incentives: to recognize short-term operating performance.
·
Long-term
incentives: to align executives with the
long-term value creation of the enterprise.
The significant impact of
the economic downturn on the Company and the Companys bankruptcy filing in January 2009
made it inappropriate to continue the equity-based component of the annual and
long-term incentive awards. We will
describe below how our 2009 and 2010 programs continued to meet these overall
objectives, despite this constraint.
Compensation
Committee Practices
The Committee typically
holds at least one meeting each year to review information prepared by its
consultant and management relevant to the establishment of the elements of
compensation for executive officers for the following year. The Committee then
holds meetings to review all of the elements of compensation of the executive
officers, individually and in comparison to each other, as well as benefits and
perquisites, benefits accrued under retirement plans, and compensation and
benefits payable following the termination of employment under employment and
severance agreements. The Committee then approves changes in all elements of
compensation for the executive officers at one time. The Committee held six
meetings in 2009 and has held two meetings in 2010. Due to the nature of the
bankruptcy proceedings the Committee met more frequently than normal in 2009.
Use of Consultants and
Benchmarking
The Committee has the
authority to retain, terminate and compensate consultants to provide information
and counsel to the Committee. The Committee has engaged Hewitt
Associates, LLC (Hewitt) to provide executive and director compensation
consulting services since 2003. Hewitt provides the Committee with research and
analysis on competitive data and guidance on overall compensation trends and
strategies. Hewitt collects and analyzes executive compensation data from two
comparator groups: a peer group of nine companies that the Committee believes
are the most relevant direct competitors of the Company, which have median
annual sales of $4.0 billion (Boise Cascade LLC, Graphic Packaging
Corporation, International Paper Company, MeadWestvaco Corporation, Packaging
Corporation of America, Pactiv Corporation, Sonoco Products Company, Temple
Inland Inc., and Weyerhaeuser Company) (the Peer Group), and a broader
group of 83 industrial companies of similar size and complexity to the Company,
which have median annual sales of approximately $7.6 billion (the General
Group). Hewitt annually conducts this analysis for the Committee in the
categories of base salaries, annual incentive targets and awards, long-term
incentives, total compensation, and target total compensation, and measures the
compensation of each of the executive officers against the median of their counterparts
of the Peer Group and the General Group. The Committee uses this analysis as
the basis for comparing the Companys compensation against general market
trends in light of the performance of the Company, the paper packaging
industry, and industrial companies in general. Hewitt does not make specific
recommendations as to the level of any element of compensation of any Executive
Officer. Hewitt also supported the
Committee in determining the appropriateness of its programs in the bankruptcy
context.
Role of Management
The Committee seeks the
recommendation of the Chairman and Chief Executive Officer as to adjustments in
the amount of base salary and the amount of long-term incentive awards for each
of the other executive officers. The Committee also seeks the recommendation of
the Chairman and Chief Executive Officer and the Senior Vice PresidentHuman
Resources as to the annual target levels and the design and weighting of
performance objectives for the annual incentives of the executive officers (other
than the Chairman and Chief Executive Officer). The Committee periodically
approves levels of long-term incentive awards and authorizes the Senior Vice
PresidentHuman Resources to grant such awards to non-executive officers,
including non-executive officers hired between the dates of meetings of the
Committee or the Board to the extent necessary to induce such employees to join
the Company. For
103
Table
of Contents
2009, the Committee
approved the design and the targets for both the short-term and long-term
incentive programs.
Elements of Compensation and 2009
and 2010 Compensation Decisions
General
The Committee has designed
each element of compensation for executive officers to further the philosophy
and objectives set forth above and to support and enhance the business strategy
of the Company.
Base Salaries
It is the intent of the
Committee to maintain base salary levels of executive officers at or near the
median levels of comparable companies (using the data for the two comparator
groups provided by Hewitt). The Committee makes adjustments in base salary once
per year, to be effective on April 1, except in case of promotions or
other exceptional circumstances that justify adjustments outside of the annual
review process. Adjustments in base salary are based on the performance of the
Executive Officer and the relationship of his or her salary to the median of
the comparator groups; however, it has been the practice of the Committee to
make gradual adjustments in base salaries over a multi-year period to address
market-based differences, rather than large one-year adjustments. In light of
the bankruptcy proceedings and the current economic environment, the Chairman
and Chief Executive Officer did not recommend any base salary increases for
NEOs in 2009, and the Committee approved no salary increases for NEOs in 2009
(including the Chairman and Chief Executive Officer). In light of our anticipated emergence from
bankruptcy proceedings in the second quarter of 2010, it is not anticipated
that base salaries for the NEOs for 2010 will be evaluated until after
emergence, with the exception of Mr. Stricklands base salary, which will
increase to $415,000 effective March 1, 2010 due to his assumption of
additional responsibilities.
Short-term Incentives
The Management Incentive
Plan (MIP) is generally designed to incentivize management to drive short-term
operating results. On April 22, 2009, the U.S. Court authorized the
Company to continue its performance-based short-term incentives for 2009
pursuant to the terms and conditions contained in the U.S. Courts order (the
Order). For 2009, annual and semi-annual
incentives were paid pursuant to the 2009 Management Incentive Plan (the 2009
MIP).
Because of the
significant uncertainty around the Companys business and the economy, the
Committee felt it appropriate to make certain modifications to the MIP for
2009. The 2009 MIP encompassed three performance periods, with the following
payout weights:
·
The period January 1, 2009 through June 30, 2009 was set at 40% of individual target.
·
The period July 1, 2009 through December 31, 2009 was set at
30% of individual target
·
The period January 1, 2009 through December 31, 2009 was set
at 30% of individual target
A financial goal was
established for each performance period.
Performance in each period was assessed against the same payout curve
(with interpolation between levels), outlined below:
·
Below threshold (less than 85%) performance: 0% payout
·
Threshold performance (85% of goal):
50% payout
·
Target performance (100% of goal): 100% payout
·
Maximum performance (140% of goal): 175% payout
For each performance
period, consistent with the Order, awards under the 2009 MIP for the executive
officers were based on the measurement of adjusted earnings before interest,
taxes, depreciation, amortization and restructuring charges, which was based on
the consolidated EBITDA budget (as defined in the DIP Credit Agreement (DCA))
approved in connection with the DIP Credit Agreement, adjusted to
104
Table
of Contents
reflect the agreement
between us and the Creditors Committee established in our bankruptcy
proceedings (DCA Adjusted EBITDAR).
Listed below are the goals for the three performance periods and the
Companys performance results:
(Dollars in thousands)
|
|
First half of 2009
|
|
Second half of 2009
|
|
Full Year 2009
|
|
EBITDAR
budget
|
|
$
|
199,074
|
|
$
|
271,928
|
|
$
|
471,002
|
|
EBITDAR
results
|
|
$
|
341,454
|
|
$
|
281,881
|
|
$
|
623,335
|
|
Percent
|
|
172
|
%
|
104
|
%
|
132
|
%
|
Additionally, the
Committee reviewed the individual targets for market appropriateness and
internal equity. This analysis resulted
in adjustments for the NEOs. The aggregate 2009 MIP targets, expressed as a
percentage of base salary, for each of the NEOs were as follows: 125% for Mr. Moore,
125% for Mr. Klinger, 100% for Mr. Murphy, 80% for Mr. Hinrichs,
100% for Mr. Hunt, and 100% for Mr. Strickland.
Prior to 2008 a portion
of the earned MIP award was paid in restricted shares. Due to the inappropriateness of using equity
as a payout vehicle during the bankruptcy process, the Committee (consistent
with the Order) designed the 2009 MIP payments to be paid entirely in cash.
Based upon the approved
2009 MIP, the first semi-annual payment (40% of target) was paid based upon
performance for the first semi-annual performance period (January 1
st
to June 30
th
). Performance
for the first semi-annual performance period exceeded the maximum DCA Adjusted
EBITDAR performance relative to budget, resulting in a 175% payout. Per the terms of the 2009 MIP, executives
were paid at target (100%). The
remaining 75% payment for the first semi-annual performance period was paid
after the end of the 2009 MIP plan year.
For the second semi-annual performance period from July 1, 2009
through December 31, 2009, we exceeded the DCA Adjusted EBITDAR performance
target.
As
a result, the NEOs earned incentive bonuses in amounts equal to 107% of the
portion of their target level incentive bonuses attributable to the second
semi-annual performance period. For the
annual performance period from January 1, 2009 through December 31,
2009, we exceeded the DCA Adjusted EBITDAR performance target. As a result, the NEOs earned incentive
bonuses in amounts equal to 161% of the portion of their target level incentive
bonuses attributable to the annual performance period. The total payments for 2009 performance are
as follows:
Name
|
|
Job Title
|
|
Total Amount
Earned Under
2009 MIP
|
|
|
|
|
|
|
|
Patrick J. Moore
|
|
Chairman and Chief
Executive Officer
|
|
$
|
2,079,104
|
|
Steven J. Klinger
|
|
President and Chief
Operating Officer
|
|
$
|
1,493,123
|
|
John R. Murphy*
|
|
Former Senior Vice
President and Chief Financial Officer
|
|
$
|
240,685
|
|
Craig A. Hunt
|
|
Senior Vice President,
Secretary and General Counsel
|
|
$
|
613,777
|
|
Steven C. Strickland
|
|
Senior Vice
President/General Manager - Container Division
|
|
$
|
536,397
|
|
Charles A. Hinrichs*
|
|
Former Senior Vice
President and Chief Financial Officer
|
|
$
|
89,173
|
|
* Mr. Murphy joined us
on May 18, 2009, and was not eligible to participate in the 2009 MIP for
the first semi-annual performance period.
Mr. Hinrichs employment with us terminated on May 18, 2009 and
he received a prorated MIP payment for the first semi-annual performance
period.
The Order also provided
for the continuation of the MIP into 2010, if the bankruptcy case was not
resolved by the beginning of the plan year.
For 2010, this plan would replicate the 2009 MIP (performance periods
and payout curve). The specific DCA
Adjusted EBITDAR targets and individual targets for the performance periods for
2010 were adjusted to reflect the business conditions for 2010 and were
developed in consultation with the Creditors Committee and reviewed by other
stakeholders, as defined in the Order.
The Committee reviewed
certain aspects of the 2010 MIP for continued market appropriateness and
internal equity in the anticipated event that we emerge from bankruptcy in
2010. This analysis resulted in
anticipated reductions of the 2010 MIP targets for the NEOs for the second six-month
performance period under the 2010 MIP due, in part, to the anticipated grants
of equity to the NEOs that are described below and are subject to confirmation
of our Proposed Plan of Reorganization.
The MIP targets for the second six-month performance period, expressed
as a percentage of base salary, for each of the NEOs will be as follows: 115%
for Mr. Moore, 115% for Mr. Klinger, 60% for Mr. Hunt, and 70% for Mr.
Strickland. The Committee did not
approve an adjusted 2010 MIP target for Mr. Murphy because he resigned from his
employment with us effective as of February 25, 2010 but did approve a 70%
post-emergence 2010 MIP target for any interim or new Chief Financial Officer
that may be appointed during 2010. In
addition to the post-emergence 2010 MIP targets, the Committee also approved
certain modifications to the 2010 MIP that will become effective after we
emergence from bankruptcy that will apply to the NEOs: (1) the annual performance period will be
eliminated and each NEOs MIP bonus will be determined based upon our
performance for two six-month performance periods: (2) maximum Company
performance (140% of the performance target) will earn a 200% payout of the
NEOs target MIP bonus; and (3) earned MIP bonuses will be paid annually.
105
Table
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Long-Term Incentives
As stated above, granting
equity to executives during the bankruptcy proceedings is not appropriate. The
Committee oversaw a redesign of the our long-term incentives that were historically
a mix of stock options and restricted stock (pursuant to the 2004 Long-Term
Incentive Plan) into a performance-based cash plan, the 2009 Long-Term
Incentive Plan (2009 LTIP).
2009 LTIP
. The 2009 LTIP was approved by the
Committee and the U.S. Court (in the Order described above). Each participant is eligible to receive a
potential payout subject to performance achieved in a two-year performance
cycle that began on January 1, 2009 and runs through the earlier of
emergence from bankruptcy or December 31, 2010. This plan is designed to incentivize
management to achieve a combination of operating performance and restructuring
goals which the Committee believes supports the goal of increasing the
enterprise value of SSCC.
Specifically, the
2009 LTIP has two metrics. Each metric
is weighted 50% for payout purposes.
Each metric will be assessed independently on the specific performance
criteria. The first metric is a
financial performance metric based upon the achievement of DCA Adjusted EBITDAR
for the full calendar years of 2009 and 2010 (pro-rated as appropriate for 2010
if we emerge from our bankruptcy proceedings in 2010). The second metric is a restructuring goal
based upon the average trading price of our publicly traded bonds during the
thirty days preceding our emergence from the bankruptcy proceedings. Additional information concerning these
performance metrics is set forth in our Proposed Plan of Reorganization filed
in our bankruptcy proceedings.
The Committee
reviewed the market data provided by Hewitt to set the compensation targets for
the 2009 LTIP. The market-based targets,
expressed as percentage of base salary, for the NEOs are as follows:
Patrick J. Moore: 375%
Steven J. Klinger: 375%
Craig A. Hunt: 150%
Steven C. Strickland: 120%
John R. Murphy: 100%
No LTIP payments were
made in 2009. The 2009 LTIP payments based
upon the financial performance metric described above will occur in accordance
with the plan upon the earlier of emergence from bankruptcy or December 31,
2010, and the payments based upon the restructuring goal described above will
occur upon our emergence from bankruptcy.
Equity Grants upon Emergence from
Bankruptcy
. As a result of our bankruptcy proceedings, we
have not had the ability to make any equity-based awards that provide
appropriate long-term incentives. Upon
emergence, however, we again plan to implement an equity-based compensation
vehicle to provide its executive management and other members of its management
team with appropriate, market-based, long-term incentive compensation
opportunities that will be substantially dependent on our performance. Subject to confirmation of our Proposed Plan
of Reorganization, the Committee has approved equity grants for certain of the
currently employed NEOs and other key employees that will be made following our
emergence from bankruptcy, with the following grants to be made to certain
NEOs:
Steven J. Klinger: 0.900% of our
New Common Stock
Craig A. Hunt: 0.153% of our New
Common Stock
Steven C. Strickland: 0.153% of
our New Common Stock
Approximately 76% of each
NEOs equity grant will be made in the form of a stock option award, and
approximately 24% of each grant will be made in the form of restricted
shares. Additional information
concerning the terms and conditions applicable to these equity grants is set
forth in our Proposed Plan of Reorganization filed in our bankruptcy
proceedings.
Mr. Moore will not be
receiving an equity grant upon emergence from bankruptcy due to his anticipated
retirement within one year of our emergence from bankruptcy. See the Employment Agreements and
Post-Termination Payments section below for additional information concerning
Mr. Moores post-emergence, long-term incentive compensation. Mr. Murphy will not be receiving an equity
grant upon emergence from bankruptcy because he resigned from his employment
with us prior to our emergence from bankruptcy.
Other Benefits and Perquisites
We provide customary
benefits to executive officers such as group insurance and company-sponsored
savings plans that are generally available to all other salaried employees. We
provide perquisites to executive officers not available to salaried employees
generally, which in most cases are limited to an additional level of group term
life insurance for Mr. Moore, and executive physicals, supplemental
disability benefits and reimbursement for financial, tax planning and certain
legal services for Messrs. Moore and Klinger. The perquisites provided to
NEOs are limited by the terms of their employment agreements and are more fully
described in footnote (f) to the Summary Compensation Table under Executive
Compensation.
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The Committee had also
established a policy as described below to allow the Chairman and Chief
Executive Officer to use the Company aircraft for personal use for up to
30 hours per year and to receive a gross-up payment in connection with the
taxable income attributed to him as the result of receiving this benefit. This
policy was intended to accommodate personal travel that may be adjunct to
business travel, in which the Chairman and Chief Executive Officer utilizes the
Company aircraft for security and convenience. This policy was eliminated in
2009 when we elected not to retain our Company aircraft.
Post-Termination Benefits
All of the executive
officers hired by us prior to January 1, 2006 participate in our qualified
pension plan for salaried employees. Depending on the date of hire and legacy
company, different executive officers participate in different supplemental
non-qualified pension plans for salaried employees. Mr. Moore participates
in the Jefferson Smurfit Corporation Supplemental Income Pension Plan II. Mr. Hunt participates in the Jefferson
Smurfit Corporation Supplemental Income Pension Plan III. Messrs. Murphy and Strickland are not
eligible to participate in any pension plan.
We entered into an Executive Retirement Agreement with Mr. Klinger
at the time of his employment in 2006 that provides substantial non-qualified
pension benefits equivalent to what he had in place with his prior employer,
offset by the benefits actually received from his prior employer
.
In 2007, we announced our intent to freeze
our salaried pension plan effective December 31, 2008 to address the
ongoing cost of the pension plan to us, and implemented an enhanced salaried
401(k) savings plan benefit as of January 1, 2009.
See Pension Plans for a more complete
description of each plan. It is
anticipated that all of the non-qualified post-termination benefits will be
considered pre-petition unsecured claims in our bankruptcy proceedings, except
as set forth in the employment and retirement agreements with Mr. Moore
and Mr. Klinger that are anticipated to become effective upon emergence
from bankruptcy proceedings that provide for the assumption of such benefits.
Employment and Severance
Agreements
Prior to commencement of
bankruptcy proceedings, the Board approved Employment Agreements for Mr. Moore,
Mr. Klinger and Mr. Hinrichs. See Employment Agreements and
Post-Termination Payments. The
agreement with Mr. Hinrichs was terminated in connection with his
resignation from the Company. In anticipation
of emergence from bankruptcy, the Committee approved amended and restated
Employment Agreements for Mr. Moore and Mr. Klinger, which will
become effective upon our emergence from bankruptcy. The Committee and the Board believe that
retention of these two executive officers is critical to the our success as we
transition from bankruptcy, and that these Employment Agreements are beneficial
to us by providing strong incentives on the part of these executive officers to
remain employed with us for the periods specified in the individual
arrangements.
Additionally, prior to
the bankruptcy filing, the Board or the Committee also had approved Employment
Security Agreements for each of our other Senior Vice Presidents, which provide
for payments under certain circumstances following a change of control of the
Company. See Employment Agreements and Post-Termination Payments. It is anticipated that these agreements will
not be assumed by us in the bankruptcy proceedings. Certain of these executives will be parties
to one of two forms of amended and restated employment security agreements
approved by the Committee to be effective upon our emergence from bankruptcy.
The Committee believes that these agreements are beneficial to us by providing
for the retention and continuity of service of these executive officers who
will continue to be critical to our success after we emerge from our bankruptcy
proceedings.
Policies
Related to Compensation
In addition to the
actions taken by the Committee in accordance with the philosophy and objectives
described above, we have in place some specific policies relating to
compensation matters that have been adopted as warranted in order to institute
and document controls over certain aspects of the compensation process.
Policies that impact the compensation of executive officers are adopted and
amended by the Board or the Committee, and policies applicable to all salaried
employees generally are adopted and amended by management, at the direction of
either the Chairman and Chief Executive Officer or the Senior Vice
PresidentHuman Resources. Policies that impact our retirement and savings
plans are approved by the Administrative Committee of such plans, which is
comprised of members of management.
107
Table
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Compensation-related
policies approved by the Board or the Committee (some of which have been
suspended due to our bankruptcy proceedings) include:
·
Executive
Stock Ownership Guidelines.
Each Executive Officer is
required to own Common Stock with a value equal to a multiple of his or her
base salary at the time of appointment or promotion into such a position. The
multiple for the Chairman and Chief Executive Officer is three times base
salary; the multiple for the President and Chief Operating Officer and the
Senior Vice President and Chief Financial Officer is two times base salary; and
the multiple for all other executive officers is one time base salary.
Compliance was required by the later of December 31, 2007 or within three
years of the date of promotion or appointment. This policy has been suspended
indefinitely due to the bankruptcy proceedings.
·
Limitation
on Severance Payments.
Unless approved or ratified by the
holders of a majority of our outstanding Common Stock, the Committee will not
approve any agreements with any Executive Officer that provide for the payment
upon retirement or other termination of employment of benefits (other than
those payable in the ordinary course pursuant to retirement plans) in excess of
2.99 times the aggregate amount of the Executive Officers then-current salary,
bonus and perquisites. We have suspended
this policy based upon our current circumstances, and expect to revisit this
policy upon emergence from bankruptcy.
·
Equity
Award Practices.
In December 2006, the Committee
adopted a set of practices that prescribe that a grant of stock options may
only be approved at meetings of the Board or the Committee, and not by written
consent in lieu of a meeting; that the grant date for options granted by the
Senior Vice PresidentHuman Resources pursuant to authority delegated to him by
the Committee relating to non-executive officers shall be the fifth business
day of the calendar month immediately following the first day worked, for any
newly-hired employee, or the effective date of any promotion or other change in
employment circumstance for any current employee; and that no discretionary
awards of stock options can be made to any Executive Officer. We do not grant
stock options based on the timing of the announcement of material non-public
information and prohibit the backdating or repricing of stock options. The
Committee does not expect to grant any additional stock options during the
pendency of the bankruptcy proceedings.
Tax
and Accounting Implications
The Committee reviews and
considers the deductibility of executive compensation under Section 162(m) of
the Internal Revenue Code, which provides that we may not deduct compensation
of more than $1 million to certain persons. We believe that payments under
the 2009 MIP are fully tax-deductible. The Committee considers accounting
treatment in the process of making decisions regarding executive compensation,
but makes executive compensation decisions based on the philosophy and
objectives set forth above, and not primarily on the basis of tax or accounting
treatment.
Conclusion
The Committee believes
that the total compensation of each of the executive officers, including the
NEOs discussed in the tabular presentations in this annual report on Form 10-K,
is reasonable and not excessive, and is in line with our Compensation Philosophy.
108
Table
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COMPENSATION
COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of the
Committee currently is or was during the year ended December 31, 2009, an
officer, former officer or employee of ours or any of our subsidiaries. During
the year ended December 31, 2009, no Executive Officer of ours served as a
member of (i) the compensation committee of another entity in which one of
the executive officers of such entity served on the Committee, (ii) the
board of directors of another entity in which one of the executive officers of
such entity served on the Committee, or (iii) the compensation committee
of another entity in which one of the executive officers of such entity served
as a member of the Board. During the
year ended December 31, 2009, no member of the Committee had any
relationship requiring disclosure by us under any paragraph of Item 404 of
Regulation S-K.
COMPENSATION
COMMITTEE REPORT
The Committee has
reviewed and discussed the Compensation Discussion and Analysis with management
and, based on such review and discussions, the Committee recommended to our
Board that the Compensation Discussion and Analysis be included in our Annual
Report on Form 10-K for the fiscal year ended December 31, 2009.
Submitted by the
Compensation Committee of the Board of Directors.
Compensation
Committee
|
William D. Smithburg,
Chairman
|
Connie K. Duckworth
|
William T.
Lynch, Jr.
|
Jerry K. Pearlman
|
Summary Compensation Table
The following
table sets forth the cash and non-cash compensation awarded to or earned by
each of our NEOs, for the fiscal year
ended December 31, 2009. The three primary elements of compensation (base
salary, short-term incentives and long-term incentives), as well as other
benefits and perquisites, are discussed in detail under Compensation
Discussion and Analysis. Pension benefits payable to the NEOs are discussed in
detail under Pension Plans, and detailed information regarding compensation
of the NEOs pursuant to their employment agreements or employment security
agreements is set forth under Employment Agreements and Post-Termination
Payments.
The Committee
established MIP target awards for fiscal 2009 at 125% for Messrs. Moore
and Klinger, 100% for Messrs. Murphy, Hunt and Strickland, and 80% for Mr. Hinrichs.
Actual MIP awards payable for fiscal 2009, approved on January 22, 2010,
were made at the discretion of the Committee. MIP awards earned by the NEOs for
the year ended December 31, 2009 were $2,079,104 for Mr. Moore;
$1,493,123 for Mr. Klinger; $240,685 for Mr. Murphy; $89,173 for Mr. Hinrichs;
$613,777 for Mr. Hunt and $536,397 for Mr. Strickland. These awards
were paid entirely in cash for 2009, were paid in two installments on July 31,
2009 and January 29, 2010 (except for Mr. Hinrichs, who was paid in
one installment on July 31, 2009), and are disclosed in the Non-Equity
Incentive Plan Compensation column of the Summary Compensation Table.
109
Table
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NAME &
PRINCIPAL
POSITION
|
|
YEAR
|
|
SALARY
($)
|
|
BONUS
($)(a)
|
|
STOCK
AWARDS
($)(b)
|
|
OPTION
AWARDS
($)(c)
|
|
NON-EQUITY
INCENTIVE
PLAN
COMPENSATION
($)(d)
|
|
CHANGE
IN
PENSION VALUE
& NON-
QUALIFIED
DEFERRED
COMPENSATION
EARNINGS
($)(e)
|
|
ALL
OTHER
COMPENSATION
($)(f)
|
|
TOTAL
($)
|
|
Patrick
J. Moore
|
|
2009
|
|
1,107,000
|
|
0
|
|
0
|
|
0
|
|
2,079,104
|
|
2,384,903
|
|
43,019
|
|
5,614,026
|
|
Chairman
and Chief
|
|
2008
|
|
1,089,000
|
|
0
|
|
894,000
|
|
900,000
|
|
553,500
|
|
63,285
|
|
93,527
|
|
3,593,312
|
|
Executive
Officer
|
|
2007
|
|
1,035,000
|
|
0
|
|
1,545,001
|
|
1,120,800
|
|
437,505
|
|
47,235
|
|
127,726
|
|
4,313,267
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John
R. Murphy
|
|
2009
|
|
250,000
|
|
25,000
|
|
0
|
|
0
|
|
240,685
|
|
0
|
|
44,828
|
|
560,513
|
|
Senior
Vice President
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
Chief
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Officer (Resigned)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steven
J. Klinger
|
|
2009
|
|
795,140
|
|
0
|
|
0
|
|
0
|
|
1,493,123
|
|
355,724
|
|
17,150
|
|
2,661,137
|
|
President
and Chief
|
|
2008
|
|
783,750
|
|
0
|
|
670,500
|
|
675,000
|
|
397,500
|
|
108,966
|
|
11,022
|
|
2,646,738
|
|
Operating
Officer
|
|
2007
|
|
750,000
|
|
0
|
|
1,146,001
|
|
840,600
|
|
317,504
|
|
92,990
|
|
17,684
|
|
3,164,778
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Craig
A. Hunt
|
|
2009
|
|
408,500
|
|
0
|
|
0
|
|
0
|
|
613,777
|
|
78,264
|
|
17,150
|
|
1,117,691
|
|
Senior
Vice President,
|
|
2008
|
|
403,875
|
|
0
|
|
116,220
|
|
117,000
|
|
204,250
|
|
70,660
|
|
11,403
|
|
923,408
|
|
General
Counsel
|
|
2007
|
|
386,250
|
|
50,000
|
|
199,351
|
|
112,080
|
|
81,123
|
|
21,032
|
|
17,923
|
|
867,758
|
|
and
Secretary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steven
C. Strickland
|
|
2009
|
|
357,206
|
|
116,703
|
|
0
|
|
0
|
|
536,397
|
|
0
|
|
17,150
|
|
1,027,456
|
|
Senior
Vice President
|
|
2008
|
|
349,000
|
|
65,000
|
|
143,040
|
|
144,000
|
|
129,000
|
|
0
|
|
7,750
|
|
837,790
|
|
Container
Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charles
A. Hinrichs
|
|
2009
|
|
424,646
|
|
0
|
|
0
|
|
0
|
|
89,173
|
|
286,049
|
|
17,150
|
|
817,018
|
|
Senior
Vice President
|
|
2008
|
|
415,875
|
|
0
|
|
89,400
|
|
90,000
|
|
130,000
|
|
75,410
|
|
11,840
|
|
812,525
|
|
and
Chief Financial
|
|
2007
|
|
409,500
|
|
0
|
|
204,971
|
|
112,080
|
|
85,816
|
|
82,594
|
|
20,758
|
|
915,719
|
|
Officer
(Resigned)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
Amounts shown under BONUS
for Mr. Hunt and Mr. Strickland in 2008 represent cash bonuses paid
in connection with significant corporate transactions, and for Mr. Strickland
in 2009 a payment in lieu of club initiation fees pursuant to our commitment in
connection with his joining us. The
amount shown under this column for Mr. Murphy in 2009 represents a
discretionary payment to Mr. Murphy in recognition of his service with us
from May 18, 2009, when he joined us, to June 30, 2009.
(b)
Amounts shown under STOCK
AWARDS reflect the grant date fair value, computed in accordance with FASBs
Accounting Standards Codification Topic 718
(formerly
SFAS 123(R)), of RSUs awarded to the NEOs
under the LTIP in 2007 and 2008. In
addition, the NEOs were required to defer 50% of their MIP award into RSUs for
the 2007 MIP, and we matched 20% of the amount deferred in the form of RSUs,
which vest after three years. The
deferred amount and Company match are included in the amounts shown in the
column titled STOCK AWARDS for 2007.
(c)
Amounts shown under OPTION
AWARDS include the grant date fair value, computed in accordance with FASBs
Accounting Standards Codification Topic 718 (formerly SFAS 123(R)),
of options granted to the NEOs in 2007 and 2008 under the LTIP. See Note 17 to the Consolidated Financial
Statements for a discussion of the assumptions used in the valuation of stock
options.
(d)
Amounts shown under NON-EQUITY
INCENTIVE PLAN COMPENSATION include the cash portion of each NEOs award under
the MIP.
(e)
Amounts shown under CHANGE
IN PENSION VALUE & NON-QUALIFIED DEFERRED COMPENSATION EARNINGS
include the change in pension value from January 1, 2009 to January 1,
2010, January 1, 2008 to January 1, 2009, and from January 1,
2007 to January 1, 2008, respectively, under our tax-qualified pension
plan for our salaried employees, and the
particular non-qualified supplemental pension plan in which each of the
respective NEOs participates. In addition, we have a non-qualified deferred
compensation plan in which Mr. Moore is the only active participant. For Mr. Moore, $38,167, $34,774 and
$30,851 of income accrued during 2009, 2008 and 2007, respectively, under the
non-qualified deferred compensation plan is also included in this column.
Calculations for the change in pension value are based on the assumptions used
for financial statement purposes as of the last day of the fiscal year except
that retirement is assumed to be normal retirement age as defined in the plans
(age 62 for Messrs. Moore, Klinger, Hinrichs and Hunt). Mr. Murphy
and Mr. Strickland are not participants in any of our pension plans. See Pension
Plans for a more detailed discussion of retirement benefits earned by the
NEOs.
(f)
Amounts shown under ALL
OTHER COMPENSATION for 2009 include all other compensation paid to the NEOs,
whether or not the particular element of compensation constitutes a perquisite
that is not generally available to all salaried employees on a
non-discriminatory basis and consist of (1) Contributions
of $17,150 to our Savings Plan for each of the NEOs, except Mr. Murphy
($17,117); (2) Company-paid split-dollar term life insurance premiums for Mr. Moore
($13,635); (3) financial planning services fees for Mr. Moore
($12,234); and (4) moving expense reimbursement ($16,196) and related tax
gross up ($11,515) for Mr. Murphy.
110
Table
of Contents
Grants of Plan-Based Awards Table
The following table sets forth additional
information about plan-based awards granted in the fiscal year ended December 31,
2009, or in the case of MIP awards, attributable to 2009.
|
|
|
|
ESTIMATED FUTURE PAYOUTS
UNDER NON-EQUITY
INCENTIVE PLAN AWARDS(a)
|
|
NAME
|
|
GRANT
DATE
|
|
THRESHOLD
($)
|
|
TARGET
($)
|
|
MAXIMUM
($)
|
|
Mr. Moore
|
|
*
|
|
$
|
691,875
|
|
$
|
2,079,104
|
|
$
|
2,421,563
|
|
|
|
|
|
|
|
|
|
|
|
Mr. Murphy
|
|
*
|
|
$
|
200,000
|
|
$
|
240,685
|
|
$
|
700,000
|
|
|
|
|
|
|
|
|
|
|
|
Mr. Klinger
|
|
*
|
|
$
|
496,875
|
|
$
|
1,493,123
|
|
$
|
1,739,063
|
|
|
|
|
|
|
|
|
|
|
|
Mr. Hunt
|
|
*
|
|
$
|
204,250
|
|
$
|
613,777
|
|
$
|
714,875
|
|
|
|
|
|
|
|
|
|
|
|
Mr. Strickland
|
|
*
|
|
$
|
178,500
|
|
$
|
536,397
|
|
$
|
624,750
|
|
|
|
|
|
|
|
|
|
|
|
Mr. Hinrichs
|
|
*
|
|
$
|
65,348
|
|
$
|
89,173
|
|
$
|
228,718
|
|
*
These awards under the 2009
MIP were paid in two installments on July 31, 2009 and January 29,
2010. Mr. Hinrichs received the
entire amount of his pro-rated 2009 MIP award on July 31, 2009.
(a)
Amounts shown in
this column under TARGET reflect the NEOs award under the MIP for 2009,
which may be more or less than the target MIP award established for the
respective NEO under the 2009 MIP.
Amounts shown in this column under THRESHOLD and MAXIMUM reflect the
minimum and maximum award the NEO could have received under the MIP for 2009.
Meeting the threshold performance level for MIP awards entitles the NEOs to the
minimum award (50% of the target MIP award), and MIP awards are capped at 1.75
times the target MIP award for each of the NEOs for 2009 (125% of salary for Messrs. Moore
and Klinger, 100% of salary for Messrs. Murphy, Hunt and Strickland and
80% of salary for Mr. Hinrichs).
111
Outstanding Equity Awards at
Fiscal Year-End Table
The following table discloses information
regarding outstanding awards under the LTIP and the 1998 Long-Term Incentive
Plan as of December 31, 2009.
|
|
OPTION
AWARDS(a)
|
|
STOCK
AWARDS
|
|
NAME
|
|
NUMBER
OF
SECURITIES
UNDERLYING
UNEXERCISED
OPTIONS
(#)
EXERCISABLE
|
|
NUMBER
OF
SECURITIES
UNDERLYING
UNEXERCISED
OPTIONS
(#)
UNEXERCISABLE
|
|
EQUITY
INCENTIVE
PLAN AWARDS:
NUMBER OF
SECURITIES
UNDERLYING
UNEXERCISED
UNEARNED
OPTIONS
(#)
|
|
OPTION
EXERCISE
PRICE
($)
|
|
OPTION
EXPIRATION
DATE
|
|
NUMBER
OF
SHARES
OR UNITS
THAT HAVE
NOT VESTED
(#)(b)
|
|
MARKET VALUE
OF SHARES
OR UNITS
THAT HAVE
NOT VESTED
($)(c)
|
|
Mr. Moore
|
|
200,000
|
|
0
|
|
0
|
|
$
|
14.25
|
|
03/14/10
|
|
200,655
|
|
$
|
56,183
|
|
|
|
50,000
|
|
0
|
|
0
|
|
$
|
14.42
|
|
06/15/11
|
|
|
|
|
|
|
|
200,000
|
|
0
|
|
0
|
|
$
|
15.38
|
|
02/12/12
|
|
|
|
|
|
|
|
300,000
|
|
0
|
|
0
|
|
$
|
13.53
|
|
02/20/13
|
|
|
|
|
|
|
|
180,000
|
|
0
|
|
0
|
|
$
|
18.78
|
|
07/22/14
|
|
|
|
|
|
|
|
200,000
|
|
0
|
|
0
|
|
$
|
16.37
|
|
02/23/15
|
|
|
|
|
|
|
|
200,000
|
|
0
|
|
0
|
|
$
|
13.05
|
|
03/02/16
|
|
|
|
|
|
|
|
0
|
|
240,000
|
|
0
|
|
$
|
12.75
|
|
02/26/17
|
|
|
|
|
|
|
|
0
|
|
300,000
|
|
0
|
|
$
|
8.94
|
|
02/27/18
|
|
|
|
|
|
|
|
1,330,000
|
|
540,000
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mr. Murphy
|
|
0
|
|
0
|
|
0
|
|
|
|
|
|
0
|
|
$
|
0
|
|
|
|
0
|
|
0
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mr. Klinger
|
|
150,000
|
|
0
|
|
0
|
|
$
|
13.10
|
|
05/11/16
|
|
147,489
|
|
$
|
41,297
|
|
|
|
0
|
|
180,000
|
|
0
|
|
$
|
12.75
|
|
02/26/17
|
|
|
|
|
|
|
|
0
|
|
225,000
|
|
0
|
|
$
|
8.94
|
|
02/27/18
|
|
|
|
|
|
|
|
150,000
|
|
405.,000
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mr. Hunt
|
|
60,000
|
|
0
|
|
0
|
|
$
|
14.25
|
|
03/14/10
|
|
24,619
|
|
$
|
6,893
|
|
|
|
15,000
|
|
0
|
|
0
|
|
$
|
14.42
|
|
06/15/11
|
|
|
|
|
|
|
|
12,000
|
|
0
|
|
0
|
|
$
|
17.03
|
|
05/10/12
|
|
|
|
|
|
|
|
12,000
|
|
0
|
|
0
|
|
$
|
14.38
|
|
05/08/13
|
|
|
|
|
|
|
|
12,000
|
|
0
|
|
0
|
|
$
|
18.78
|
|
07/22/14
|
|
|
|
|
|
|
|
13,000
|
|
0
|
|
0
|
|
$
|
16.37
|
|
02/23/15
|
|
|
|
|
|
|
|
19,500
|
|
0
|
|
0
|
|
$
|
13.05
|
|
03/02/16
|
|
|
|
|
|
|
|
0
|
|
24,000
|
|
0
|
|
$
|
12.75
|
|
02/26/17
|
|
|
|
|
|
|
|
0
|
|
39,000
|
|
0
|
|
$
|
8.94
|
|
02/27/18
|
|
|
|
|
|
|
|
143,500
|
|
63,000
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mr. Strickland
|
|
35,000
|
|
0
|
|
0
|
|
$
|
10.48
|
|
03/02/16
|
|
29,633
|
|
$
|
8,297
|
|
|
|
0
|
|
24,000
|
|
0
|
|
$
|
12.75
|
|
02/26/17
|
|
|
|
|
|
|
|
0
|
|
48,000
|
|
0
|
|
$
|
8.94
|
|
02/27/18
|
|
|
|
|
|
|
|
35,000
|
|
72,000
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mr. Hinrichs
|
|
10,000
|
|
0
|
|
0
|
|
$
|
14.25
|
|
03/14/10
|
|
0
|
|
$
|
0
|
|
|
|
15,000
|
|
0
|
|
0
|
|
$
|
14.42
|
|
06/15/11
|
|
|
|
|
|
|
|
50,000
|
|
0
|
|
0
|
|
$
|
14.98
|
|
01/18/12
|
|
|
|
|
|
|
|
20,000
|
|
0
|
|
0
|
|
$
|
17.03
|
|
05/10/12
|
|
|
|
|
|
|
|
50,000
|
|
0
|
|
0
|
|
$
|
13.53
|
|
02/20/13
|
|
|
|
|
|
|
|
30,000
|
|
0
|
|
0
|
|
$
|
18.78
|
|
07/22/14
|
|
|
|
|
|
|
|
32,500
|
|
0
|
|
0
|
|
$
|
16.37
|
|
02/23/15
|
|
|
|
|
|
|
|
32,500
|
|
0
|
|
0
|
|
$
|
13.05
|
|
03/02/16
|
|
|
|
|
|
|
|
0
|
|
16,000
|
|
0
|
|
$
|
12.75
|
|
02/26/17
|
|
|
|
|
|
|
|
0
|
|
10,000
|
|
0
|
|
$
|
8.94
|
|
02/27/18
|
|
|
|
|
|
|
|
240,000
|
|
26,000
|
|
0
|
|
|
|
|
|
|
|
|
|
(a)
Stock options granted prior
to November 1998 are fully vested and exercisable. Stock options granted
after November 1998 and prior to April 2001 vest and become
exercisable eight years after the date of grant, subject to acceleration based
upon the attainment of pre-established stock price targets. Stock options
granted between April 2001 and June 2004 vest and become exercisable
at the rate of 25% each year for four years, and stock options granted
subsequent to June 2004 vest and become exercisable on the third
anniversary of the award date.
(b)
This column includes RSUs
awarded under the LTIP and Company-matching RSUs awarded under the MIP.
(c)
Amounts shown under this
column represent the value of the Common Stock as of December 31, 2009
($0.28 per share) multiplied by the number of RSUs held by each of the NEOs.
112
Table
of Contents
Option Exercises and Stock Vested
Table
The following table summarizes
information regarding the exercise of options and the vesting of stock awards
during the fiscal year ended December 31, 2009.
|
|
OPTION AWARDS
|
|
STOCK AWARDS
|
|
NAME
|
|
NUMBER OF
SHARES
ACQUIRED
ON
EXERCISE
(#)
|
|
VALUE
REALIZED ON
EXERCISE
($)
|
|
NUMBER OF
SHARES
ACQUIRED
ON
VESTING
(#)
|
|
VALUE
REALIZED ON
VESTING
($)
|
|
Mr. Moore
|
|
0
|
|
0
|
|
0
|
|
$
|
0
|
|
Mr. Murphy
|
|
0
|
|
0
|
|
0
|
|
$
|
0
|
|
Mr. Klinger
|
|
0
|
|
0
|
|
127,500
|
|
$
|
12,750
|
|
Mr. Hunt
|
|
0
|
|
0
|
|
0
|
|
$
|
0
|
|
Mr. Strickland
|
|
0
|
|
0
|
|
30,000
|
|
$
|
17,400
|
|
Mr. Hinrichs
|
|
0
|
|
0
|
|
28,112
|
|
$
|
13,494
|
|
PAYMENTS
ON TERMINATION AND CHANGE IN CONTROL
Pension Benefits Table
We provide
retirement benefits to each of the NEOs (other than Messrs. Klinger,
Murphy and Strickland) under a tax-qualified defined benefit pension plan (the
Smurfit-Stone Container Corporation Pension Plan for Salaried Employees (the
Pension Plan, or the JSC Pension Plan or Universal Pension Plan, as defined
below)) and one of three non-qualified defined benefit pension plans (the
Jefferson Smurfit Corporation Supplemental Income Pension Plan II (SIPP II),
the Jefferson Smurfit Corporation Supplemental Income Pension Plan III/Stone
Top-Hat Plan/St. Laurent Paperboard Executive Supplemental Retirement Plan
(SIPP III), or the plan established pursuant to the Executive Retirement
Agreement with Mr. Klinger (the Klinger Retirement Agreement)). Benefits
provided under the Pension Plan are based on one of two sets of plan provisions
for service prior to January 1, 2007. Benefits for employees of the former
Jefferson Smurfit Corporation are determined under the Jefferson Smurfit
Corporation Pension Plan (the JSC Pension Plan). For service after December 31, 2006,
benefits are based on the provisions of the Universal Pension Plan. All benefit
accruals in the Pension Plan ceased as of December 31, 2008. The following
table discloses information regarding the present value of the current accrued
pension benefits of the NEOs computed as of December 31, 2009. There were
no payments made to the NEOs pursuant to these plans during the last fiscal
year. See Compensation Discussion and AnalysisPost-Termination Benefits for
additional information regarding our pension plans.
113
Table
of Contents
NAME
|
|
PLAN NAME(a)
|
|
NUMBER
OF
YEARS
CREDITED
SERVICE
(#)
|
|
PRESENT
VALUE OF
ACCUMULATED
BENEFIT
($)(b)
|
|
Mr. Moore
|
|
Tax-Qualified Pension
Plan
|
|
22
|
|
$
|
501,105
|
|
|
|
SIPP II
|
|
22
|
|
$
|
8,778,608
|
|
|
|
Total
|
|
|
|
$
|
9,279,713
|
|
|
|
|
|
|
|
|
|
Mr. Hinrichs
|
|
Tax-Qualified Pension
Plan
|
|
14
|
|
$
|
321,484
|
|
|
|
SIPP II
|
|
14
|
|
$
|
0
|
|
|
|
Total
|
|
|
|
$
|
321,484
|
|
|
|
|
|
|
|
|
|
Mr. Klinger
|
|
Executive Retirement
Agreement
|
|
2
|
|
$
|
558,969
|
|
|
|
Total
|
|
|
|
$
|
558,969
|
|
|
|
|
|
|
|
|
|
Mr. Hunt
|
|
Tax-Qualified Pension
Plan
|
|
18
|
|
$
|
281,230
|
|
|
|
SIPP III
|
|
18
|
|
$
|
249,637
|
|
|
|
Total
|
|
|
|
$
|
530,867
|
|
|
|
|
|
|
|
|
|
Mr. Strickland
|
|
N/A
|
|
N/A
|
|
$
|
0
|
|
|
|
Total
|
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
Mr. Murphy
|
|
N/A
|
|
N/A
|
|
$
|
0
|
|
|
|
Total
|
|
|
|
$
|
0
|
|
(a)
Tax-Qualified Pension Plan means the
Smurfit-Stone Container Corporation Pension Plan for Salaried Employees. All of
the other plans are non-qualified plans, and are described below.
(b)
The assumptions used in computing the
actuarial present value of accumulated benefits of the NEOs presented in the
Pension Benefits Table are the same as those used in Note 15 to the
Consolidated Financial Statements. A discount rate of 5.88% was used for the December 31,
2009 calculation. The mortality table used to estimate the life expectancy of
the NEOs was the RP2000 Combined Mortality projected to 2015 on Scale AA with
no collar adjustments. For lump-sum payments, an interest rate of 2.75% was
used for the first five years, 5.75% for the next 15 years and 6.25% after
20 years, and the mortality table used was the 2010 combined static PPA
funding mortality, blended 50% male and 50% female, and projected to the
assumed payment date based on Scale AA. No pre-retirement decrements were taken
into account. The form of payment assumed a life annuity for Mr. Hinrichs,
Mr. Hunt and Mr. Moores tax qualified pension benefit, a five-year
payout for Mr. Klinger and a lump-sum payout for Mr. Moores SIPP II
benefit. The assumed normal retirement age used in these computations is 62,
the earliest age at which unreduced benefits are available to a plan
participant pursuant to the terms of the respective plans. Mr. Klingers
normal retirement age is assumed to be 62 under the Klinger Retirement
Agreement. Mr. Moore and Mr. Hinrichs
are the only NEOs currently eligible for early retirement under any of our
pension plans. Under the Tax-Qualified
Pension Plan and SIPP II, employees age 55 or older with at least five years of
service are eligible for early retirement.
Mr. Moore and Mr. Hinrichs would receive the benefit provided
under the JSC Pension Plan for service through December 31, 2006, reduced
by
5
/
12
% for each month by which the commencement of pension benefit payments
precedes his 62
nd
birthday, plus the benefit provided under the
Universal Pension Plan for service from January 1, 2007 through December 31,
2008 reduced by 0.5% for each month by which the commencement of pension
benefit payments precedes his 65th birthday. Mr. Moore would receive the
benefit under SIPP II
114
Table
of Contents
reduced by
5
/
12
% for each month by which the commencement of pension benefit payments
precedes his 62
nd
birthday. For service for the period after January 1,
2007, the benefit under SIPP II would be further reduced to the same extent the
benefit under the Tax-Qualified Pension Plan was reduced upon the change to the
Universal Pension Plan formula. Mr. Hinrichs
waived his claim to benefits under SIPP II when he entered into a Confidential
Non-Compete and Consulting Agreement with us in connection with his termination
of employment. See Pension Plans below
for a description of, and benefit formulas under, the Tax-Qualified Pension
Plan, the JSC Pension Plan and SIPP II. Mr. Murphy and Mr. Strickland
do not participate in any of our pension plans.
PENSION
PLANS
Subject to final approval of our Proposed Plan of Reorganization, it is
anticipated that the qualified pension plans described below will be assumed by
the Reorganized Smurfit-Stone. The
non-qualified plans will not be assumed, and claims for benefits under these
plans will be unsecured claims in the bankruptcy proceedings, with the
exception of the claims of Messrs. Moore and Klinger, that will be waived
in connection with the execution of their respective New Agreements (as defined
below in the section titled Employment Agreements and Post-Termination
Payments) in exchange for certain retirement benefits provided to them in
those New Agreements.
Tax-Qualified
Pension Plan
Salaried employees
hired before January 1, 2006 are eligible to participate in this plan. The
plan provisions that apply for benefit accruals before January 1, 2007 are
based on the company with which the employee originally became employed. For
accruals after December 31, 2006, the Universal Pension Plan provisions
apply. All benefit accruals ceased as of December 31, 2008. The normal
form of payment is a single life annuity with survivor options provided on an
actuarially equivalent basis.
Jefferson
Smurfit Corporation Pension Plan
Participants earn
service for the period of employment prior to January 1, 2007. The benefit
formula is 1.5% of final average earnings minus 1.2% of the primary insurance
amount, all multiplied by years of service. Earnings include total compensation
except for payments under annual incentive plans, and any long-term incentive
program or employment contract, up to the applicable tax-qualified plan
compensation limit ($230,000 in 2008). Final average earnings are the average
of the highest five consecutive years of earnings out of the last 10 years
prior to December 31, 2008. Participants vest in their benefits after
completing five years of service with us. The normal retirement age is age 65,
but participants who complete 25 years of service or are age 55 with five
years of service may elect to retire early. Benefits are reduced by 5% per year
from age 65 if the participant has less than 10 years of service at
termination and from age 62 if the participant has at least 10 years of
service.
Universal
Pension Plan
Participants earn
service for the period of employment with us for the period after December 31,
2006 and prior to January 1, 2009. The benefit formula is 0.9% of final
average earnings plus 0.4% of final average earnings in excess of covered
compensation, all multiplied by years of service up to 30 years (or
30 years less service earned prior to January 1, 2007 under the
predecessor plan). Earnings include total compensation except for payments
under the MIP, certain other annual incentive plans and any long-term incentive
program or employment agreement, up to the applicable tax-qualified plan
compensation limit ($230,000 in 2008). Final average earnings are the average
of the highest five consecutive years of earnings out of the last 10 years
prior to the earlier of termination or December 31, 2008. Participants
vest in their benefits after completing five years of service with us. The
normal retirement age is age 65, but participants who are age 55 with
10 years of service may elect to retire early. Benefits are reduced by 6%
per year from age 65.
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SIPP
II
SIPP II was
designed to provide a benefit to certain participants selected by the Jefferson
Smurfit Corporation Board of Directors.
We have not admitted new participants into this plan since 1998, and
only two of our currently active officers are participants, including Mr. Moore.
Mr. Hinrichs employment terminated May 18, 2009 and he waived his
claim to benefits under this plan when he entered into a Confidential
Non-Compete and Consulting Agreement with us. Participants earn service for the
period of employment with us. The benefit formula is 2.5% of final average
earnings multiplied by service limited to 20 years plus 1.0% of final
average earnings multiplied by service in excess of 20 years minus 1.2% of
the primary insurance amount multiplied by service and less the benefit earned
under the tax-qualified pension plan. The portion of the benefit earned for
service after December 31, 2006 (before the tax-qualified offset) is
adjusted by a fraction, the numerator of which is the portion of the Universal
tax-qualified benefit that would have been earned for service after December 31,
2006 if benefit accruals had not ceased under the Universal Plan and the
denominator of which is the tax-qualified benefit that would have been earned
for service after December 31, 2006 if the JSC Pension Plan provisions had
not been amended. Earnings are base pay plus amounts earned under the MIP.
Final average earnings are the average of the highest five consecutive years of
earnings out of the last 10 years prior to termination. Both of the
current participants in this plan are vested in their benefits. The normal
retirement age is age 65, but participants who are age 55 with five years of
service may elect to retire early. The benefit is reduced by 5% per year from
age 65 if the participant has less than 10 years of service at termination
and from age 62 if the participant has at least 10 years of service. For
the portion of the benefit earned for service after December 31, 2006, the
early commencement factors are applied to the respective benefits before the
fractional adjustment described above is made. The normal form of payment is a
single-life annuity. Participants were required to elect to receive their
benefits in the form of a lump-sum distribution or another optional form, which
is actuarially equivalent, by making a written election by December 31,
2008. Mr. Moore elected the
lump-sum distribution.
SIPP
III
SIPP III restores
benefits to participants whose compensation exceeds the applicable
tax-qualified plan compensation limits ($230,000 in 2008). The provisions of
SIPP III are the same as the relevant portion of the Pension Plan described
above, except earnings above the applicable tax-qualified plan compensation
limit are used. This SIPP III benefit is then offset by the Pension Plan
benefit. All benefit accruals ceased as of December 31, 2008.
Executive
Retirement Agreement with Mr. Klinger
The Klinger
Retirement Agreement was designed to provide a target benefit to Mr. Klinger.
Service is earned while he is employed by us. The benefit formula is 50% of
final average earnings, less $30,678 and benefits earned under any Company
sponsored retirement plans, excluding accruals attributable to salary deferrals
and matching employer contributions. Earnings include basic salary and annual
incentive bonuses, but exclude compensation under long-term incentive plans and
any other bonus or incentive compensation. Final average earnings are the
average of the highest four consecutive years of earnings out of the last
10 years prior to termination. Mr. Klinger is immediately vested in
his benefit. Prior to completing 15 years of service with us, the benefit
will be prorated by the ratio of service at termination to 15. Mr. Klinger
is entitled to a full retirement benefit after completion of 15 years of
service. Benefits commence on the first
day of the seventh month following termination, if he has completed at least
15 years of service, or on the later of age 62 or the first day of the
seventh month following termination if he has not completed 15 years of
service. The normal form of payment is a
single-life annuity. The value of the single-life annuity benefit is converted
and paid in five equal annual installments.
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Non-Qualified
Deferred Compensation Table
The following table
discloses contributions, earnings and balances under our non-qualified deferred
compensation plan for Mr. Moore as of December 31, 2009. This
non-qualified deferred compensation plan is no longer offered by us, and Mr. Moore
is the only NEO participating in the plan. He is no longer eligible to make
executive contributions to the plan, and we make no registrant contributions to
the plan. The only contributions made to this plan were employee contributions
of deferred bonus payments from 1991. Earnings in Mr. Moores account
accrue on the basis of a fixed rate of interest tied to Moodys Corporate Bond
Yield Index plus 2%. The earnings represent an unfunded liability of ours.
Subject to the impact of our bankruptcy filing, Mr. Moore will be entitled
to receive the payout under this plan only upon retirement or other termination
of employment with us.
NAME
|
|
REGISTRANT
CONTRIBUTIONS
IN LAST
FISCAL YEAR
($)
|
|
AGGREGATE
EARNINGS
IN LAST
FISCAL YEAR
($)(a)
|
|
AGGREGATE
WITHDRAWALS/
DISTRIBUTIONS
($)
|
|
AGGREGATE
BALANCE
AT
LAST
FISCAL
YEAR END
($)(a)
|
|
Mr. Moore
|
|
$
|
0
|
|
$
|
38,167
|
|
$
|
0
|
|
$
|
487,946
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
The amount shown in the column titled
Aggregate Earnings in Last Fiscal Year for Mr. Moore is included in the
Change in Pension Value & Non-Qualified Deferred Compensation Earnings
column of the Summary Compensation Table for 2009, and the portion of the
amount shown in the column titled Aggregate Balance at Last Fiscal Year End for
Mr. Moore attributable to aggregate earnings in 2007 and 2008 ($30,851 and
$34,774, respectively) was reported in that column of the Summary Compensation
Table for such years.
DIRECTOR
COMPENSATION
Each Independent Director is entitled to
receive an annual fee of $120,000 as compensation for serving on the
Board. Independent Directors also
receive a fee of $1,500 per Board and committee meeting attended, plus travel
expenses. The Chairman of the Audit
Committee receives an additional fee of $10,000 annually, and the Chairmen of
the Compensation Committee, the Nominating and Governance Committee and the
Strategy and Finance Committee receive an additional fee of $7,500
annually. Mr. OConnor, as Lead
Independent Director, also receives a fee of $20,000 annually for his service
in that capacity. We also maintains a
matching gift program for charitable donations of up to $7,500 per year made by
Independent Directors. Messrs. Moore and Klinger do not receive any
additional compensation by reason of their membership on, or attendance at
meetings of, the Board. In 2009, all
Director compensation was paid entirely in cash.
Compensation for
members of the Board has been established and is reviewed annually by the
Nominating and Governance Committee. The
Nominating and Governance Committee may not delegate its authority regarding
Director compensation. The Nominating
and Governance Committee considers the time spent on Board matters, which has
dramatically increased in recent years, as well as the need to attract and
retain high quality directors, as the key factors in determining such compensation.
In determining the form and amount of director compensation, the Nominating and
Governance Committee periodically solicits analysis from Hewitt
Associates, LLP, the consultant retained by the Compensation Committee,
regarding the level and form of director compensation at companies of similar
size and complexity to us. No Executive
Officer has a role in determining or recommending Director compensation. The Board previously adopted a policy to
require Independent Directors to hold at least $100,000 worth of Common Stock
at all times, but has indefinitely suspended such policy due to our bankruptcy
filing.
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Director Compensation Table
The following
table discloses compensation paid for the fiscal year ended December 31,
2009 to the Independent Directors for serving as members of the Board. For information relating to compensation of Messrs. Moore
and Klinger, our Chairman and Chief Executive Officer and President and Chief
Operating Officer, respectively, see Executive Compensation.
NAME
|
|
FEES
EARNED OR
PAID IN CASH
($)
|
|
STOCK
AWARDS
($)(a)
|
|
OPTION
AWARDS
($)(b)
|
|
ALL
OTHER
COMPENSATION
($)(c)
|
|
TOTAL
($)
|
|
James
R. Boris
|
|
$
|
162,000
|
|
$
|
0
|
|
$
|
0
|
|
$
|
5,000
|
|
$
|
167,000
|
|
Connie
K. Duckworth
|
|
$
|
151,500
|
|
$
|
0
|
|
$
|
0
|
|
$
|
15,000
|
|
$
|
166,500
|
|
William
T. Lynch, Jr.
|
|
$
|
157,500
|
|
$
|
0
|
|
$
|
0
|
|
$
|
7,500
|
|
$
|
165,000
|
|
James
J. OConnor
|
|
$
|
185,000
|
|
$
|
0
|
|
$
|
0
|
|
$
|
7,500
|
|
$
|
192,500
|
|
Jerry
K. Pearlman(c)
|
|
$
|
164,500
|
|
$
|
0
|
|
$
|
0
|
|
$
|
7,500
|
|
$
|
219,926
|
|
Thomas A. Reynolds, III
|
|
$
|
148,500
|
|
$
|
0
|
|
$
|
0
|
|
$
|
2,500
|
|
$
|
151,000
|
|
William
D. Smithburg
|
|
$
|
157,500
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
157,500
|
|
(a)
No Stock Awards or Option Awards were
made to the directors in 2009. The
aggregate number of RSUs outstanding at fiscal year end for each of the
directors is 53,019 for Mr. Boris, 39,963 for Ms. Duckworth, 15,982
for Messrs. Lynch, OConnor, Pearlman and Reynolds and 49,017 for Mr. Smithburg;
and the aggregate number of stock options outstanding at fiscal year end for
each of the directors is 3,000 for Messrs. Boris, Lynch and Smithburg,
10,500 for Mr. OConnor, 12,000 for Messrs. Pearlman and Reynolds and
0 for Ms. Duckworth.
(b)
Amounts shown under ALL OTHER COMPENSATION
include the respective matching gift made by us to the charities designated by
each respective director under our matching gift program for charitable
donations by Independent Directors.
EMPLOYMENT AGREEMENTS AND POST-TERMINATION
PAYMENTS
The
Employment Agreements of Messrs. Moore, Klinger and Hinrichs
We have entered
into agreements (the Employment Agreements) with Messrs. Moore, Klinger
and Hinrichs. The Employment Agreements of Messrs. Moore and Klinger and
Mr. Klingers Executive Retirement Agreement are expected to be replaced by new
agreements (the New Agreements) upon our emergence from bankruptcy
proceedings. Accordingly, the following
discussion will describe both the Employment Agreements and the New Agreements. In connection with the termination of his
employment, Mr. Hinrichs entered into a Confidential Non-Compete and
Consulting Agreement. Mr. Hinrichs
waived all claims for any other payment under his Employment Agreement.
The
Employment Agreements
The Employment
Agreements require the executives to devote substantially all of their business
time to our operations through the term of each executives respective
Employment Agreement, unless sooner terminated by either party in accordance
with the provisions of such Employment Agreement. The Employment Agreements
provide that the executives shall be eligible to participate in any annual
performance bonus plans, long-term incentive plans, and/or equity-based
compensation plans established or maintained by us for our senior executive
officers, including the MIP and the LTIP.
The Employment
Agreements provide that if we terminate the executives employment without
cause or the executive terminates his employment with good reason, we will: (i) pay
the executive the full amount of base salary and annual bonus that we would
have paid under the Employment Agreement had the
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executives employment
continued to the end of the employment term; (ii) continue the executives
coverage under our medical, dental, life, disability, pension, profit-sharing
and other executive benefit plans through the end of the employment term; (iii) provide
the executive with certain perquisites until the end of the employment term,
provided that these Company-provided perquisites will be reduced to the extent
the executive receives comparable perquisites without cost during a period of
36 months for Mr. Moore and 24 months for Mr. Klinger
following each executives employment termination (the Post Termination
Period); (iv) continue to count the period through the end of the
employment term for purposes of determining the executives age and service
with us with respect to (A) eligibility, vesting and the amount of
benefits under our executive benefit plans, and (B) the vesting of any
outstanding stock options, restricted stock or other equity-based compensation
awards; and (v) provide outplacement services.
The Employment
Agreements also provide that if, within 24 months following a change of
control of the Company, we terminate the executives employment without cause
or the executive terminates his employment with good reason, we will: (i) pay
the executive a multiple (three times for Mr. Moore and two times for Mr. Klinger)
of the executives base salary, as in effect on the date of his termination; (ii) a
multiple (three times for Mr. Moore and two times for Mr. Klinger) of
the highest of (A) the average annual bonus paid for a prescribed period
immediately preceding the executives employment termination, (B) the
target bonus for the fiscal year in which such termination of employment
occurs, or (C) the actual bonus attained for the fiscal year in which such
termination occurs; (iii) continue the executives coverage under our
medical, dental, life, disability, and other executive benefit plans for the
Post Termination Period; (iv) pay the value of continued coverage during
the Post Termination Period under any pension, profit-sharing or other
retirement plan maintained by us; (v) continue to provide the executive
with certain perquisites, provided that these Company-provided perquisites will
be reduced to the extent the executive receives comparable perquisites without
cost during the Post Termination Period; (vi) immediately vest all stock
options, restricted stock and other equity-based awards; and (vii) pay for
certain outplacement services to the executive. We generally must make the
payments described above within 10 days of the executives employment
termination. Furthermore, the Employment Agreements provide that if the
payments and benefits described above would be excess parachute payments as
defined in Code Section 280G, with the effect that the executive is liable
for the payment of an excise tax, then we will pay the executive an additional
amount to gross up the executive for such excise tax.
In general, each
of the following transactions is considered a change in control under the
Employment Agreements: (a) a third partys acquisition of 20% or more of
the Common Stock; (b) an unapproved change in the majority of the Board; (c) completing
certain reorganization, merger or consolidation transactions or a sale of all
or substantially all of our assets; or (d) the complete liquidation or
dissolution of the Company.
The Employment
Agreements also prohibit the executives from: (i) disclosing our
confidential information, inventions or developments; (ii) diverting any
business opportunities or prospects from us; and (iii) during their
employment and for a period of up to two years following termination of their
employment, competing with any business conducted by us or any of our
affiliates, or soliciting any employees, customers or suppliers of ours within
the United States. The impact of our
bankruptcy filings on the Employment Agreements is not known at this time,
although our Proposed Plan of Reorganization contemplates that the Employment
Agreements of Messrs. Moore and Klinger will be terminated and replaced
with the New Agreements.
The New
Agreements
Mr. Moores
New Agreement (which is subject to confirmation of our Proposed Plan of
Reorganization) requires him to devote substantially all of his business time
to our operations through the nine-month anniversary of
our emergence from bankruptcy, at which
time he will retire from his employment with us,
unless
his retirement date is accelerated due to
his voluntary resignation for Good Reason or death, or due to our termination
of his employment without Cause (or his employment otherwise terminates
sooner in
accordance with the provisions of
the New
Agreement). He will continue in his
position as
Chief Executive Officer
until
his
retirement. During his employment, Mr. Moore
will receive a base salary and
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will be eligible to
participate in our annual incentive bonus plan and receive other benefits and
perquisites as are made available to the senior executives generally.
Upon his
retirement from the Company, Mr. Moore is eligible, pursuant to the terms
of his New Agreement, to receive, among other things: (i)
a retirement
benefit determined under the benefit formula contained
in the SIPP II pension plan; (ii) a
special incentive bonus payment of $3,500,000 in lieu of Mr. Moores
participation in our post-emergence Equity Incentive Plan (in which all other
senior executives except Mr. Moore will participate) that is designed to
provide market-based incentive compensation to Mr. Moore during his
employment preceding his retirement, which payment is subject to reduction by
the portion of his target level incentive bonus under the 2009 LTIP that is
based on our financial performance (and not any restructuring goals) and will
be earned in 2010; (iii) to the extent Mr. Moores retirement date is
accelerated to a date earlier than December 31, 2010, certain additional
amounts that represent the difference between one year of Mr. Moores
annual base salary and incentive bonus amounts and the base salary and
incentive bonus amounts already paid to him prior to his retirement date; and (iv) certain
other
benefits including continued health coverage until the earlier of the
three-year anniversary of his retirement date and the date on which he becomes
eligible for coverage through another employer, and secretarial support and
office space through the end of the second year after his retirement (which
will cease earlier if he becomes employed full time by another employer).
His New Agreement does not provide for any additional
benefits if his employment terminates prior to the nine-month anniversary of
our emergence from bankruptcy; however, he will remain eligible to receive
certain of the payments and benefits described above depending on the
circumstances of his termination of employment.
Additionally, payment of any benefits provided to Mr. Moore upon
his retirement is conditioned upon, among other things, his execution of a
valid release of claims and his compliance with post-employment obligations
under the New Agreement. If, at any
time, the payments and benefits described above would be excess parachute
payments, as defined in Section 280G of the Internal Revenue Code, with
the effect that Mr. Moore is liable for the payment of an excise tax, then
we will pay the executive an additional amount to gross up the executive for
such excise tax (provided that such payments to Mr. Moore will be reduced
to the extent necessary to avoid such excise tax if the aggregate of such
payments is less than 110% of the safe harbour amount, the maximum amount an
executive may receive without triggering an excise tax).
Because Mr. Moore
is not participating in our post-emergence Equity Incentive Plan, the New
Agreement provides that he is eligible to receive a cash incentive payment in
the event that we receive, prior to the cessation of his employment, an offer
to acquire us (or otherwise engage in a transaction) that results in a Change
in Control
prior to the fifteen-month anniversary
of our emergence from bankruptcy, provided that Mr. Moore has participated
in the efforts to attempt to sell us (or to engage in such other
transaction). The cash payment will be
equal to the monetary value of the equity-based compensation that that the
individual holding the positions of President and Chief Operating Officer (COO)
of the Company as of the Effective Date would receive if all of the
equity-based compensation that such President and COO received in accordance
with our Proposed Plan of Reorganization
were fully vested and
liquidated upon the acquisition of us, reduced by the amount of the $3,500,000
special incentive bonus payment described above paid to Mr. Moore.
Mr. Moores
New Agreement also prohibits him from: (i) disclosing our confidential
information, inventions or developments; (ii) diverting any business
opportunities or prospects from us that are presented to him in his capacity as
an employee of ours; (iii) during his employment, competing with any
business conducted by us or any of its affiliates (or with any material new
line of business), within the United States, Canada, Mexico, or China or
soliciting any employees, customers or suppliers of ours or any of our affiliates;
(iv) for a period of two years following the termination of his
employment, competing with any business conducted by us or any of our
affiliates as of the termination of his employment (or with any material new
line of business in which we or our affiliates engage within the one-year
period following the termination of his employment); and (v) for a period
of two years following the termination of his employment, soliciting employees,
customers, or suppliers of ours or its affiliates to terminate their
relationships with our or its affiliates.
Mr. Klingers
New Agreement (which is subject to confirmation of our Proposed Plan of
Reorganization) requires him to devote substantially all of his business time
to our operations through the term of his
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employment
and is subject to automatic renewal for successive two-year terms unless sooner
terminated by either party in accordance with the provisions of the New
Agreement. His New Agreement also
provides that he shall be eligible to participate in any annual performance
bonus plans, long-term incentive plans, and/or equity-based compensation plans
established or maintained by us for its senior executive officers, including
the MIP and the Equity Incentive Plan, and provides that he will receive a
specified grant of the reorganized Companys common stock as set forth in our
Proposed Plan of Reorganization filed in its bankruptcy proceedings.
Pursuant
to Mr. Klingers New Agreement, no later than the earlier of the
nine-month anniversary of our emergence from its bankruptcy proceedings and
thirty days after we receive notice of the current Chief Executive Officers termination
of employment (the Promotion Date), we will consider Mr. Klinger for
employment as its Chief Executive Officer.
Any offer from us to Mr. Klinger to become Chief Executive Officer
will be subject to good faith negotiations between them prior to the Promotion
Date. If we do not offer Mr. Klinger
the position of Chief Executive Officer prior to the Promotion Date on mutually
acceptable terms, or if they cannot agree on a mutually acceptable form of an
employment agreement (or if we designate an executive chairperson of the board
but does not offer such position to Mr. Klinger), Mr. Klinger has the
right to voluntarily terminate his employment for good reason and receive the
severance benefits described below (but, at our option, would remain employed
for up to six months thereafter to transition his duties).
Mr. Klingers
New Agreement also provides that if we terminate the executives employment without
cause or the executive terminates his employment with good reason, we
will pay as severance, in a lump sum, a multiple of two times (which
multiple will increase to 2.99 times if he is Chief Executive Officer) the sum
of his base salary and the
higher of his (x) average annual incentive bonus for the three
fiscal years preceding the effective termination date of his employment; and (y) actual
annual incentive bonus paid with respect to the fiscal year immediately
preceding the effective termination date of his employment
, provided that
in the event that Mr. Klingers employment terminates prior to the
Promotion Date without cause or for good reason, then he is entitled to
receive
the greater of $5 million
and the foregoing severance pay. In
particular, Mr. Klinger will be eligible to resign for good reason and
receive the greater of $5 million and the foregoing severance pay in the event
he is not offered the position of Chief Executive Officer as described
above. In addition to the foregoing
severance pay, we also will: (i) continue
the executives coverage under its medical, dental, life, disability, pension,
profit-sharing and other executive benefit plans and perquisites for two (2) years
after the termination of his employment (which will increase to three (3) years
if he becomes Chief Executive Officer); (ii) pay him the supplemental
retirement benefit he would have received had he remained employed and retired
at such time as set forth in the New Agreement;
(iii) cause accelerated vesting of 33.3% of any unvested
equity-based awards if the termination of his employment or resignation for good
reason occurs within the first 12 months after our emergence from our
bankruptcy proceedings, and full accelerated vesting of such awards if such
termination occurs after the first 12 months following our emergence from our
bankruptcy proceedings (pursuant to the equity award agreements that are
provided as part of the New Agreement); and (iv) provide outplacement
services. Upon a Change in Control, Mr. Klinger
is entitled to full accelerated vesting of his Emergence Equity Awards but is
not entitled to receive any severance or other benefits solely due a Change in
Control. If, at any time, the payments
and benefits described above would be excess parachute payments as defined in
Section 280G of the Internal Revenue Code, with the effect that the
executive is liable for the payment of an excise tax, then we will pay the
executive an additional amount to gross up the executive for such excise tax
(provided that such payments to Mr. Klinger will be reduced to the extent
necessary to avoid such excise tax if the aggregate of such payments is less
than 110% of the safe harbour amount, the maximum amount an executive may
receive without triggering an excise tax).
Mr. Klingers
New Agreement also prohibits him from: (i) disclosing our confidential
information, inventions or developments; (ii) diverting any business
opportunities our its affiliates (or with any material new line of business),
within the United States, Canada, Mexico, or China, or soliciting any
employees, customers or suppliers of ours; (iv) for a period of two years
following the termination of his employment, competing with any business
conducted by us or any of our affiliates as of the termination of his
employment (or with any material new line of business in which we or our affiliates
engage within the one-year period following the termination of his employment);
and (v) for a period of two years following the termination of his
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employment,
soliciting employees, customers, or suppliers of ours or our affiliates to
terminate their relationships with us or our affiliates.
Mr. Klingers New
Agreement also provides that he and the Company will enter into an amended and
restated Executive Retirement Agreement that provides substantially the same
retirement benefits as are provided in the Klinger Retirement Agreement
described in the Executive Retirement Agreement with Mr. Klinger section
above.
The
Employment Security Agreements of Other Executives
Several other
executives (including Messrs. Strickland and Hunt) are parties to Employment
Security Agreements (collectively, the Severance Agreements) with us. The
Employment Security Agreements of certain executives (including Messrs.
Strickland and Hunt) are expected to be replaced by one of two forms of a new
agreement upon confirmation of our Proposed Plan of Reorganization. One form of the new agreement (the New
Employment Security Agreements) will replace the Severance Agreements of
certain executives (including Messrs. Strickland and Hunt) as described
below. The other form of the new
agreement (the New Severance Agreements) will replace the Severance
Agreements of those executives who will not receive New Employment Security
Agreements. The following discussion
will describe the Severance Agreements, the New Employment Security Agreements,
and the New Severance Agreements.
The Employment
Security Agreements
. The Severance Agreements provide for a lump
sum payment based on a specified multiple of salary and bonus plus the payment
of certain fringe benefits under certain circumstances within two years after a
change of control (as such term is defined in the Severance Agreements).
The New Employment
Security Agreements
. We will enter into the New Employment
Security Agreements with six Company executives (subject to confirmation of our
Proposed Plan of Reorganization). Each
such executives New Employment Security Agreement requires him to devote
substantially all of his business time to our operations through the term of
his employment and is subject to automatic renewal for successive two-year
terms unless sooner terminated by either party in accordance with the provisions
of the New Employment Security Agreement.
His New Employment Security Agreement also provides that he shall be
eligible to participate in any annual performance bonus plans, long-term
incentive plans, and/or equity-based compensation plans established or
maintained by us for our senior executive officers, including the MIP and the
Equity Incentive Plan, and provides that he will receive a specified grant of
the New Common Stock as set forth in our Proposed Plan of Reorganization filed
in our bankruptcy proceedings.
The New Employment
Security Agreement also provides that if we terminate the executives
employment without cause or the executive terminates his employment with
good reason, the Company will pay as severance, over a two-year period
following such termination, a multiple of two times the sum of his base salary
and the higher of the Executives (x) average annual incentive bonus for the
three fiscal years preceding the effective termination date of his employment;
and (y) actual annual incentive bonus paid with respect to the fiscal year
immediately preceding the effective termination date of his employment. In addition to the foregoing severance pay,
we also will: (i) continue the
executives coverage under its medical, dental, life, disability, pension,
profit-sharing and other executive benefit plans and perquisites for two (2)
years after the termination of his employment; and (ii) cause accelerated
vesting of 33.3% of any unvested equity-based awards if the termination of his employment
or resignation for good reason occurs within the first 12 months after our
emergence from our bankruptcy proceedings, and full accelerated vesting of such
awards if such termination occurs after the first 12 months following our
emergence from our bankruptcy proceedings pursuant to the equity award
agreements that are provided as part of the New Employment Security
Agreement). Upon a Change in Control,
each executive is entitled to full accelerated vesting of his Emergence Equity
Awards but is not entitled to receive any severance or other benefits solely
due to a Change in Control. If, at any
time, the payments and benefits described above would be excess parachute
payments as defined in Section 280G of the Internal Revenue Code, with the effect
that the executive is liable for the payment of an excise tax, then we will pay
the executive an additional amount to gross up the executive for such excise
tax (provided that such payments to the executive will be reduced to the extent
necessary to avoid such excise tax if the aggregate of such payments is less
than 110% of the safe harbour amount, the maximum amount an executive may
receive without triggering an excise tax).
The New Employment
Security Agreement also prohibits each executive from: (i) disclosing our
confidential information, inventions or developments; (ii) diverting any
business opportunities or prospects from the us; (iii) during his employment,
competing with any business conducted by us or any of our affiliates (or with
any material new line of business), within the United States, Canada, Mexico,
or China, or soliciting any employees, customers or suppliers of ours; (iv) for
a period of two years following the termination of his employment, competing
with any business conducted by us or any of our affiliates as of the
termination of his employment (or with any material new line of business in
which we or our affiliates engage within the one-year period following the
termination of his employment); and (v) for a period of two years following the
termination of his employment, soliciting employees, customers, or suppliers of
ours or our affiliates to terminate their relationships with us or our
affiliates.
The New Severance
Agreements
. The New Severance Agreements for certain of
those executives who will not be entering into the New Employment Security
Agreement (which are subject to confirmation of our Proposed Plan of
Reorganization) provide for a multiple of base salary and annual bonus payable
over a two-year period, plus the payment of certain fringe benefits, under
certain circumstances within two years after a change in control (as such
term is defined in the New Severance Agreements).
The New Severance
Agreements also contain certain restrictive covenants that prohibit the
executive from: (i) disclosing our confidential information, inventions or
developments; (ii) diverting any business opportunities or prospects from us;
(iii) during his employment, competing with any business conducted by us or any
of our affiliates (or with any material new line of business), within the
United States, Canada, Mexico, or China, or soliciting any employees, customers
or suppliers of ours; (iv) for a period of two years following the termination
of his employment, competing with any business conducted by us or any of our
affiliates as of the termination of his employment (or with any material new
line of business in which we or our affiliates engage within the one-year
period following the termination of his employment); and (v) for a period of
two years following the termination of the executives employment, soliciting
employees, customers, or suppliers of ours or our affiliates to terminate their
relationships with us or our affiliates.
The tables set forth
below reflect the incremental cost to us of providing payments and benefits,
which are generally not available on a non-discriminatory basis, in connection
with a change of control of the Company or, with respect to Messrs. Moore
and Klinger, any termination, including involuntary termination without cause
and voluntary termination with good reason, death, and disability pursuant to
the terms of their respective Employment Agreements, as opposed to their
respective New Agreements. No amounts are payable to any of the NEOs in the event
that their employment is involuntarily terminated for cause. Messrs. Moore
and Klinger would be entitled to payment of MIP awards under their respective
Employment Agreements in the event they voluntarily terminate their employment
without good reason. The incremental cost to us for vesting stock options is
reported as zero since the exercise prices of the NEOs outstanding stock
options were greater than our stock price on December 31, 2009. The
computation of health and welfare benefits is based on the assumptions applied
under Financial Accounting Standards Board Statement of Financial Accounting
Standards No. 106,
Employers
Accounting for Postretirement Benefits Other Than Pensions
. The
amounts shown in the tables assume that such terminations occurred on December 31,
2009, and thus only include amounts earned through such time. The actual
amounts that would be paid out under each circumstance can only be determined
at the time of separation. The benefits set forth in the table below reflect
the benefits provided by the Employment Agreements and the Employment Security
Agreements, which are expected to be replaced with new employment agreements
and employment security agreements to become effective upon our emergence from
bankruptcy proceedings.
122
Table
of Contents
Mr. Moore
Type of
Payment
|
|
Involuntary
Termination
without
Cause
or
Voluntary
Termination
with Good
Reason
($)
|
|
Involuntary
Termination for Cause or
Voluntary
Termination of
Employment for
Other Than
Good Reason
($)
|
|
Retirement
($)
|
|
Death
($)
|
|
Disability
($)
|
|
Change
In
Control
Only
($)
|
|
Change
In
Control and
Termination
without
Cause
or with
Good
Reason
($)
|
|
Cash
Compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Severance
|
|
$
|
9,558,312
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
9,558,312
|
|
2009
Management Incentive Plan
|
|
$
|
2,079,104
|
|
$
|
1,383,750
|
|
$
|
0
|
|
$
|
2,079,104
|
|
$
|
2,079,104
|
|
$
|
0
|
|
$
|
2,079,104
|
|
Long-Term
Incentives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
Options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested
and Accelerated Awards
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
Restricted
Stock Units
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested
and Accelerated Awards
|
|
$
|
56,184
|
|
$
|
0
|
|
$
|
0
|
|
$
|
56,184
|
|
$
|
56,184
|
|
$
|
56,184
|
|
$
|
56,184
|
|
Retirement
Benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
Plan
|
|
$
|
2,864,000
|
|
$
|
0
|
|
$
|
8,778,608
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
2,864,000
|
|
Qualified
401(k) Plan
|
|
$
|
51,450
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
51,450
|
|
Deferred
Compensation Plan
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
Benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuation
of Health & Welfare Benefits
|
|
$
|
95,000
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
95,000
|
|
Life
Insurance and Death Benefit Payout
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
1,107,000
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
Disability
Payments
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
489,000
|
|
$
|
0
|
|
$
|
0
|
|
Perquisites
and Tax Payments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Perquisites
|
|
$
|
24,114
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
24,114
|
|
Outplacement
|
|
$
|
50,000
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
50,000
|
|
Excise
Tax & Gross-Up
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
6,775,646
|
|
Total
|
|
$
|
14,778,164
|
|
$
|
1,383,750
|
|
$
|
8,778,608
|
|
$
|
3,242,288
|
|
$
|
2,624,288
|
|
$
|
56,184
|
|
$
|
21,553,810
|
|
Mr. Klinger
Type of
Payment
|
|
Involuntary
Termination
without
Cause
or Voluntary
Termination
with Good
Reason
($)
|
|
Involuntary
Termination for
Cause or
Voluntary
Termination of
Employment for
Other Than
Good Reason
($)
|
|
Retirement
($)
|
|
Death
($)
|
|
Disability
($)
|
|
Change
In
Control
Only
($)
|
|
Change
In
Control and
Termination
without
Cause
or with
Good
Reason
($)
|
|
Cash
Compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Severance
|
|
$
|
4,576,246
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
4,576,246
|
|
2009
Management Incentive Plan
|
|
$
|
1,493,123
|
|
$
|
993,750
|
|
$
|
0
|
|
$
|
1,493,123
|
|
$
|
1,493,123
|
|
$
|
0
|
|
$
|
1,493,123
|
|
Long-Term
Incentives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
Options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested
and Accelerated Awards
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
Restricted
Stock Units
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested
and Accelerated Awards
|
|
$
|
41,296
|
|
$
|
0
|
|
$
|
0
|
|
$
|
41,296
|
|
$
|
41,296
|
|
$
|
41,296
|
|
$
|
41,296
|
|
Retirement
Benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
Plan
|
|
$
|
565,000
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
565,000
|
|
Qualified
401(k) Plan
|
|
$
|
34,300
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
34,300
|
|
Deferred
Compensation Plan
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
Benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuation
of Health & Welfare Benefits
|
|
$
|
39,000
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
39,000
|
|
Life
Insurance and Death Benefit Payout
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
Disability
Payments
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
605,000
|
|
$
|
0
|
|
$
|
0
|
|
Perquisites
and Tax Payments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Perquisites
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
Outplacement
|
|
$
|
50,000
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
50,000
|
|
Excise
Tax & Gross-Up
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
2,949,731
|
|
Total
|
|
$
|
6,798,965
|
|
$
|
993,750
|
|
$
|
0
|
|
$
|
1,534,419
|
|
$
|
2,139,419
|
|
$
|
41,296
|
|
$
|
9,748,696
|
|
123
Table
of Contents
Mr. Murphy
Type of
Payment
|
|
Involuntary
Termination
without
Cause
or Voluntary
Termination
with Good
Reason
($)
|
|
Involuntary
Termination for
Cause or
Voluntary
Termination of
Employment for
Other Than
Good Reason
($)
|
|
Retirement
($)
|
|
Death
($)
|
|
Disability
($)
|
|
Change
In
Control
Only
($)
|
|
Change
In
Control and
Termination
without
Cause
or with Good
Reason
($)
|
|
Cash
Compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Severance
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
2009
Management Incentive Plan
|
|
$
|
265,685
|
|
$
|
0
|
|
$
|
0
|
|
$
|
265,685
|
|
$
|
265,685
|
|
$
|
0
|
|
$
|
265,685
|
|
Long-Term
Incentives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
Options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested
and Accelerated Awards
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
Restricted
Stock Units
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested
and Accelerated Awards
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
Retirement
Benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
Plan
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
Qualified
401(k) Plan
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
Deferred
Compensation Plan
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
Benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuation
of Health & Welfare Benefits
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
Life
Insurance and Death Benefit Payout
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
Disability
Payments
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
323,000
|
|
$
|
0
|
|
$
|
0
|
|
Perquisites
and Tax Payments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Perquisites
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
Outplacement
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
Excise
Tax
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
Total
|
|
$
|
265,685
|
|
$
|
0
|
|
$
|
0
|
|
$
|
265,685
|
|
$
|
588,685
|
|
$
|
0
|
|
$
|
265,685
|
|
Mr. Hunt
Type of
Payment
|
|
Involuntary
Termination
without
Cause
or Voluntary
Termination
with Good
Reason
($)
|
|
Involuntary
Termination for
Cause or
Voluntary
Termination of
Employment for
Other Than
Good Reason
($)
|
|
Retirement
($)
|
|
Death
($)
|
|
Disability
($)
|
|
Change
In
Control
Only
($)
|
|
Change
In
Control and
Termination
without
Cause
or with Good
Reason
($)
|
|
Cash
Compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Severance
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
1,194,327
|
|
2009
Management Incentive Plan
|
|
$
|
613,777
|
|
$
|
0
|
|
$
|
0
|
|
$
|
613,777
|
|
$
|
613,777
|
|
$
|
0
|
|
$
|
613,777
|
|
Long-Term
Incentives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
Options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested
and Accelerated Awards
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
Restricted
Stock Units
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested
and Accelerated Awards
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
6,893
|
|
$
|
6,893
|
|
$
|
6,893
|
|
$
|
6,893
|
|
Retirement
Benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
Plan
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
Qualified
401(k) Plan
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
Deferred
Compensation Plan
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
Benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuation
of Health & Welfare Benefits
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
33,000
|
|
Life
Insurance and Death Benefit Payout
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
408,500
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
Disability
Payments
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
648,000
|
|
$
|
0
|
|
$
|
0
|
|
Perquisites
and Tax Payments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Perquisites
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
Outplacement
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
Forfeiture
by Executive (a)
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
(190,882
|
)
|
Total
|
|
$
|
613,777
|
|
$
|
0
|
|
$
|
0
|
|
$
|
1,029,170
|
|
$
|
1,268,670
|
|
$
|
6,893
|
|
$
|
1,657,115
|
|
124
Table
of Contents
Mr. Strickland
Type of
Payment
|
|
Involuntary
Termination
without
Cause
or Voluntary
Termination
with Good
Reason
($)
|
|
Involuntary
Termination for
Cause or
Voluntary
Termination of
Employment for
Other Than
Good Reason
($)
|
|
Retirement
($)
|
|
Death
($)
|
|
Disability
($)
|
|
Change
In
Control
Only
($)
|
|
Change
In
Control and
Termination
without
Cause
or with
Good
Reason
($)
|
|
Cash
Compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Severance
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
968,000
|
|
2009
Management Incentive Plan
|
|
$
|
536,397
|
|
$
|
0
|
|
$
|
0
|
|
$
|
536,397
|
|
$
|
536,397
|
|
$
|
0
|
|
$
|
536,397
|
|
Long-Term
Incentives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
Options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested
and Accelerated Awards
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
Restricted
Stock Units
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested
and Accelerated Awards
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
8,297
|
|
$
|
8,297
|
|
$
|
8,297
|
|
$
|
8,297
|
|
Retirement
Benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
Plan
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
Qualified
401(k) Plan
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
Deferred
Compensation Plan
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
Benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuation
of Health & Welfare Benefits
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
51,000
|
|
Life
Insurance and Death Benefit Payout
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
Disability
Payments
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
413,000
|
|
$
|
0
|
|
$
|
0
|
|
Perquisites
and Tax Payments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Perquisites
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
Outplacement
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
Forfeiture
by Executive (a)
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
(66,763
|
)
|
Total
|
|
$
|
536,397
|
|
$
|
0
|
|
$
|
0
|
|
$
|
544,694
|
|
$
|
957,694
|
|
$
|
8,297
|
|
$
|
1,496,931
|
|
(a)
Payments on
termination triggers an excise tax for which the executive is not entitled to
receive an excise tax and gross-up payment under the terms of his Employment
Security Agreement. It would be to the
executives advantage, on an after-tax basis, to forfeit the minimum amount
necessary to avoid triggering the excise tax, for which the executive would
have been personally responsible.
125
Table
of Contents
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Existing Equity Compensation Plan Information
The table below
shows information with respect to all of our equity compensation plans as of January 31,
2010. As of January 31, 2010, there were 22,717,770 shares of Common
Stock reserved for issuance under all of the stock- based incentive plans of
ours.
Plan Category
|
|
Number of
Securities to
be Issued
Upon
Exercise
of
Outstanding
Options,
Warrants and
Rights(a)
|
|
Weighted-Average
Exercise Price of
Outstanding
Options,
Warrants and
Rights
($ per share)
|
|
Number of Securities
Remaining Available for
Future Issuance Under Equity
Compensation Plans
(Excluding Securities Reflected
in Column at Left)(#)
|
|
Equity
compensation plans approved by security holders
|
|
10,473,408
|
|
13.12
|
|
10,353,239
|
|
Equity
compensation plans not approved by security holders
|
|
0
|
|
N/A
|
|
0
|
|
Total
|
|
10,473,408
|
|
13.12
|
|
10,353,239
|
|
(a)
Does not include 1,891,123 shares to
be issued upon conversion of RSUs that have been awarded under the LTIP, but
which have not yet vested.
PRINCIPAL STOCKHOLDERS
Security Ownership of Certain
Beneficial Owners
The table below sets
forth certain information regarding the beneficial ownership of Common Stock by
each person who is known to us to be the beneficial owner of more than 5% of
the Common Stock as of February 26, 2009. Except as noted below, the
stockholders named below have sole voting and investment power with respect to
all shares of Common Stock shown as being beneficially owned by them.
Name and Address of
Beneficial Owner
|
|
Amount and Nature of
Beneficial Ownership(a)
|
|
Percent of
Common
Stock
|
|
Fir Tree, Inc.
505 Fifth Avenue
23
rd
Floor
New York, NY 10017
|
|
13,800,000
|
|
5.37
|
%
|
(a)
The number of shares of Common Stock
beneficially owned and the percentages shown above were determined solely by a
review of a Schedule 13D/A filed with the SEC, which states that (i) of
the shares shown as beneficially owned by Fir Tree, Inc., such beneficial
owner had sole voting and dispositive power as to none of such shares, and
shared voting and dispositive power as to all of such shares.
126
Table
of Contents
Security Ownership of Management
The table below sets forth certain
information regarding the beneficial ownership of shares of Common Stock as of February 26,
2010 for (i) each Director, (ii) each of the NEOs and (iii) all
Directors and executive officers of the Company as a group.
|
|
SHARES OF COMMON STOCK
|
|
NAME
|
|
AMOUNT AND
NATURE OF
BENEFICIAL
OWNERSHIP(a)(b)
|
|
PERCENT OF
COMMON
STOCK(c)
|
|
Patrick
J. Moore
|
|
1,779,816
|
|
0.7
|
%
|
Steven
J. Klinger
|
|
474,235
|
|
0.2
|
%
|
John
R. Murphy
|
|
0
|
|
*
|
|
Craig
A. Hunt
|
|
192,052
|
|
*
|
|
Steven
C. Strickland
|
|
67,158
|
|
*
|
|
Charles
A. Hinrichs
|
|
266,000
|
|
0.1
|
%
|
James
R. Boris
|
|
74,148
|
|
*
|
|
Connie
K. Duckworth
|
|
27,404
|
|
*
|
|
William
T. Lynch Jr.
|
|
3,000
|
|
*
|
|
James
J. OConnor
|
|
10,500
|
|
*
|
|
Jerry
K. Pearlman
|
|
12,000
|
|
*
|
|
Thomas
A. Reynolds III
|
|
16,958
|
|
*
|
|
William
D. Smithburg
|
|
46,172
|
|
*
|
|
All
directors and executive officers as a group (21 Persons)
|
|
3,750,752
|
|
1.5
|
%
|
(a)
Shares shown as benefically owned include
the number of shares of Common Stock that Directors and executive officers have
the right to acquire within 60 days after January 31, 2010 pursuant
to exercisable options under the stock option plans maintained by the Company
(1,570,000 for Mr. Moore; 330,000 for Mr. Klinger; 0 for Mr. Murphy;
167,500 for Mr. Hunt; 59,000 for Mr. Strickland, 266,000 for Mr. Hinrichs;
3,000 for Messrs. Boris, Lynch and Smithburg; 10,500 for Mr. OConnor;
12,000 for Messrs. Pearlman and Reynolds; 0 for Ms. Duckworth; and
3,102,510 for all Directors and executive officers as a group); and RSUs held
by Directors and executive officers which, although fully vested, have no
voting rights until converted to Common Stock on the third anniversary of the
date awarded to them (103,267 for Mr. Moore; 62,437 for Mr. Klinger;
0 for Mr. Murphy; 18,085 for Mr. Hunt; 8,158 for Mr. Strickland;
0 for Mr. Hinrichs; 37,037 for Mr. Boris; 23,981 for Ms. Duckworth;
39,391 for Mr. Smithburg; and 375,312 for all Directors and executive
officers as a group).
(b)
Based upon a total of 256,811,073 shares
of Common Stock issued and outstanding as of February 26, 2010.
Percentages less than 0.1% are indicated by an asterisk.
ITEM 13.
CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
It is the responsibility
of the Companys Audit Committee to review and approve all material related
party transactions pursuant to its Charter. The Audit Committees current
practice with respect to the review and approval of related party transactions
is to apply standards consistent with the director independence standards of
Nasdaq and the disclosure requirements of the SEC for such transactions.
Board
of Directors
Each of the Directors
other than Mr. Moore and Mr. Klinger satisfies the definition of an
independent director set forth in the Companys Corporate Governance Guidelines
and Principles, and is referred to as an Independent Director. In reaching its determination that Mr. Smithburg
is an Independent Director, the Board considered the fact that Mr. Smithburg
is a member of the board of directors of Barry-Wehmiller Companies, Inc.,
which sold the Company equipment for $15 million, $28 million and
$15 million during
127
Table
of Contents
2009, 2008 and 2007,
respectively, and a member of the board of directors of Abbott Laboratories, to
which the Company sold products for $4 million in 2009 and $5 million in
2008. Such sales were made on an arms-length
basis, and Mr. Smithburg received no direct or indirect benefit from such
transactions merely as a result of his serving on such companies boards of
directors. In reaching its determination
that Mr. OConnor is an Independent Director, the Board considered the
fact that Mr. OConnor is a member of the board of directors of Armstrong
World Industries, Inc., to which the Company sold products for $3 million,
$4 million and $3 million in 2009, 2008 and 2007, respectively. Such sales were made on an arms-length basis,
and Mr. OConnor received no direct or indirect benefit from such
transactions merely as a result of his serving on such companys board of
directors. In reaching its determination
that Mr. Reynolds is an Independent Director, the Board considered the
fact that the fees paid to Mr. Reynolds law firm in 2009 were a minor
percentage of the firms revenues.
The Bylaws of the Company
provide that the Independent Directors shall hold regularly scheduled meetings
(Executive Sessions) where only Independent Directors are present, and shall
elect one director to act as the Lead Independent Director to preside at all
Executive Sessions. Mr. OConnor
currently serves as Lead Independent Director. The Board held 16 meetings in
2009, and the Independent Directors held Executive Sessions at five meetings.
The Board maintains four standing committees: an Audit Committee, a
Compensation Committee, a Nominating and Governance Committee and a Strategy
and Finance Committee.
ITEM 14.
PRINCIPAL
ACCOUNTANT FEES AND SERVICES
Ernst &
Young LLP, independent registered public accounting firm for the Company
since July 1982, has been appointed by the Audit Committee of the Companys
Board of Directors as the independent registered public accounting firm for the
Company for the fiscal year ending December 31, 2010.
The following table shows
fees for professional services rendered by Ernst & Young LLP for
2008 and 2009:
|
|
2008
|
|
2009
|
|
Audit
Fees
|
|
$
|
2,724,650
|
|
$
|
3,667,915
|
|
Audit-Related
Fees
|
|
353,410
|
|
291,250
|
|
Tax
Fees
|
|
247,467
|
|
2,382,423
|
|
All
Other Fees
|
|
0
|
|
0
|
|
Total
|
|
$
|
3,325,527
|
|
$
|
6,341,588
|
|
Audit fees include services
for the audit of the consolidated financial statements, attesting to the
effectiveness of the Companys internal control over financial reporting, the
review of the quarterly financial statements, filings of registration
statements with the SEC, comfort letters for underwriters, consultation
concerning financial accounting and reporting standards and international
statutory audits. Audit-related fees include audits of employee benefit plans,
attest services related to financial reporting that are not required by statute
or regulation and audits of disposed businesses. Tax fees include services for
federal, state and foreign tax compliance and tax research assistance.
All audit, tax and other
services to be performed by Ernst & Young LLP for us must be
pre-approved by the Audit Committee. The Audit Committee reviews the
description of the services and an estimate of the anticipated costs of
performing those services. Services not previously approved cannot commence
until such approval has been granted. Pre-approval is granted usually at
regularly scheduled meetings. If unanticipated items arise between meetings of
the Audit Committee, the Audit Committee has delegated approval authority to
the Chairman of the Audit Committee, in which case the Chairman communicates
such pre-approvals to the full Committee at its next meeting. During 2008 and
2009, all services performed by Ernst & Young LLP were
pre-approved by the Audit Committee in accordance with this policy. The Audit
Committee reviews all relationships with Ernst & Young LLP,
including the provision of non-audit services, which may relate to the
independent registered public accounting firms
128
Table
of Contents
independence. The Audit
Committee considered the effect of Ernst & Young LLPs non-audit
services in assessing the independence of such independent registered public
accounting firm and concluded that the provision of such services by Ernst &
Young LLP was compatible with the maintenance of that firms independence
in the conduct of its auditing functions.
The Audit Committee in
its discretion may select a different registered public accounting firm at any
time during the year if it determines that such a change would be in the best
interests of the Company and our stockholders.
129
Table of Contents
PART IV
ITEM 15.
EXHIBITS AND FINANCIAL
STATEMENT SCHEDULES
(a)
(1) and (2) The list of
Financial Statements and Financial Statement Schedules required by this item is
included in Item 8.
(3) Exhibits.
2.1(a)
Asset
Purchase Agreement, dated May 11, 2006, by and among Smurfit-Stone
Container Enterprises, Inc.(SSCE), Smurfit-Stone Container Canada Inc.
and Bluegrass Container Company, LLC (incorporated by reference to Exhibit 2.1
to Smurfit-Stone Container Corporations (SSCC) Current Report on Form 8-K
dated July 6, 2006 (File No. 0-23876)).
2.1(b)
Amendment
No. 1 to Asset Purchase Agreement, dated June 30, 2006, by and among
Smurfit-Stone Container Enterprises, Inc., Smurfit-Stone Container Canada
Inc. and Bluegrass Container Company, LLC (incorporated by reference to Exhibit 2.2
to SSCCs Current Report on Form 8-K dated July 6, 2006 (File No. 0-23876)).
2.2
Asset Purchase Agreement, dated August 8,
2007, by and among SSCE, Georgia-Pacific Brewton LLC and Georgia-Pacific LLC
(incorporated by reference to Exhibit 2.1 to SSCCs Current Report on Form 8-K
filed August 10, 2007 (File No. 0-23876)).
3.1
Restated Certificate of Incorporation of
SSCC (incorporated by reference to Exhibit 3(a) to SSCCs
Registration Statement on Form S-4 (File No. 333-65431)).
3.2(a)
Second
Amended and Restated Bylaws of Smurfit-Stone Container Corporation
(incorporated by reference to Exhibit 3.2 to SSCCs Annual Report on Form 10-K
for the fiscal year ended December 31, 2002 (File No. 0-23876)).
3.2(b)
Amendment
to Second Amended and Restated Bylaws of SSCC (incorporated by reference to Exhibit 3.1
to SSCCs Current Report on Form 8-K filed March 2, 2007 (File No. 0-23876)).
3.2(c)
Amendment
to Second Amended and Restated Bylaws of SSCC (incorporated by reference to Exhibit 3.1
to SSCCs Current Report on Form 8-K filed March 4, 2008 (File No. 0-23876)).
4.1
Certificate for Smurfit-Stone Container
Corporations Common Stock (incorporated by reference to Exhibit 4.3 to
SSCCs Registration Statement on Form S-8 (File No. 33-57085)).
4.2
Form of Certificate of Designation
establishing the terms of Smurfit-Stone Container Corporations Series A
Preferred Stock (incorporated by reference to Exhibit 4.2 to SSCCs
Registration Statement on Form S-4 (File No. 333-43656)).
4.3
Certificate for Smurfit-Stone Container
Corporations Series A Preferred Stock (incorporated by reference to Exhibit 4.4
to SSCCs Registration Statement on Form S-4 (File No. 333-43656)).
4.4
Certificate of Designation of Series B
Junior Participating Preferred Stock (incorporated by reference to Exhibit 4.1
to SSCCs Quarterly Report on Form 10-Q for the quarter ended September 30,
2002 (File No. 0-23876)).
4.5
Rights Agreement dated as of September 9,
2002 by and between SSCC and Mellon Investor Services, as Rights Agent. The
Rights Agreement includes as Exhibit B the form of Rights
130
Table of Contents
Certificate and as
Exhibit C the form of Certificate of Designations (incorporated by
reference to Exhibit 4.1 to SSCCs Current Report on Form 8-K dated September 10,
2002 (File No. 0-23876)).
Indentures and other debt instruments
with respect to long-term debt that do not exceed 10% of the total assets of
SSCC and its subsidiaries on a consolidated basis are not filed herewith. The
Registrant agrees to furnish a copy of such documents to the Commission upon
request.
4.6(a)
Master
Indenture dated as of November 23, 2004 between SSCE Funding, LLC, as
Issuer, and Deutsche Bank Trust Company Americas, as Indenture Trustee
(incorporated by reference to Exhibit 4.1 to SSCE Current Report on Form 8-K
dated November 24, 2004 (File No. 0-23876)).
4.6(b)
Series 2004-1
Indenture Supplement to Master Indenture dated as of November 23, 2004
between SSCE Funding, LLC, as Issuer, and Deutsche Bank Trust Company Americas,
as Indenture Trustee (incorporated by reference to Exhibit 4.2 to SSCEs
Current Report on Form 8-K dated November 24, 2004 (File No. 0-23876)).
4.6(c)
Series 2004-2
Indenture Supplement to Master Indenture dated as of November 23, 2004
between SSCE Funding, LLC, as Issuer, and Deutsche Bank Trust Company Americas,
as Indenture Trustee (incorporated by reference to Exhibit 4.3 to SSCEs
Current Report on Form 8-K dated November 24, 2004 (File No. 0-23876)).
4.7(a)
Form of
8.000% Senior Notes due 2017 of Smurfit-Stone Container Enterprises, Inc.
(incorporated by reference to Exhibit 4.1 to SSCEs Registration Statement
on Form S-4, Registration Number 333-141630 (the SSCE Form S-4).
4.7(b)
Indenture
dated as of March 26, 2007, between Smurfit-Stone Container Enterprises, Inc.
and The Bank of New York Trust Company, N.A., as Trustee, relating to SSCEs
8.000% Senior Notes due 2017 (incorporated by reference to Exhibit 4.2 to
the SSCE Form S-4).
4.7(c)
Form of
8.25% Senior Notes due 2012 of Jefferson Smurfit Corporation (U.S.) (JSC(U.S.)).
(incorporated by reference to Exhibit 4.1 to JSCE, Inc.s (JSCE)
Registration Statement on Form S-4, Registration Number 333-101419 (the JSCE
Form S-4).
4.7(d)
Indenture
dated as of September 26, 2002, among JSC(U.S.), JSCE and the Bank of New
York, as Trustee, relating to JSC(U.S.)s 8.25% Senior Notes due 2012
(incorporated by reference to Exhibit 4.2 to JSCEs Quarterly Report on Form 10-Q
for the quarter ended September 20, 2002 (File No. 0-11951)).
10.1(a)
Credit
Agreement, dated November 1, 2004, by and among SSCC, as guarantor, SSCE
and Smurfit-Stone Container Canada Inc., as borrowers, JPMorgan Chase Bank, as
Senior Agent, Deposit Account Agent and Deposit Funded Facility Facing Agent,
Deutsche Bank Trust Company Americas, as Senior Agent, Administrative Agent,
Collateral Agent, Swingline Lender and Revolving Facility Facing Agent,
Deutsche Bank AG, as Canadian Administrative Agent and Revolving (Canadian)
Facility Facing Agent, and the other financial institutions party thereto, as
lenders (incorporated by reference to Exhibit 10.1 to SSCCs Current
Report on Form 8-K/A filed April 17, 2009 (File No. 0-23876)).
10.1(b)
Amendment
No. 1, dated as of September 30, 2005, to the Credit Agreement, dated
as of November 1, 2004, among SSCC, as Guarantor, SSCE and Smurfit-Stone
Container Canada Inc., as Borrowers, the Lenders party thereto, Deutsche Bank
Trust Company Americas, as Senior Agent, Administrative Agent, Collateral
Agent, Swingline Lender and Revolving Facility Facing Agent, Deutsche Bank AG,
as Canadian Administrative Agent and Revolving
131
Table of Contents
(Canadian)
Facility Facing Agent, and JPMorgan Chase Bank, N.A., as Senior Agent, Deposit
Account Agent and Deposit Funded Facility Facing Agent (incorporated by
reference to Exhibit 10.1 to SSCCs Current Report on Form 8-K dated October 5,
2005 (File No. 0-23876)).
10.1(c)
Incremental
Term Loan Assumption and Amendment No. 2, dated as of December 20,
2005, related to the Credit Agreement, dated as of November 1, 2004, as
amended by Amendment No. 1 dated as of September 30, 2005, among
SSCC, as Guarantor, SSCE and Smurfit-Stone Container Canada Inc., as Borrowers,
the Lenders party thereto, Deutsche Bank Trust Company Americas, as Senior
Agent, Administrative Agent, Collateral Agent, Swingline Lender and Revolving
Facility Facing Agent, Deutsche Bank AG, as Canadian Administrative Agent and
Revolving (Canadian) Facility Facing Agent, and JPMorgan Chase Bank, N.A., as
Senior Agent, Deposit Account Agent and Deposit Funded Facility Facing Agent
(incorporated by reference to Exhibit 10.1 to SSCCs Current Report on Form 8-K
dated December 20, 2005 (File No. 0-23876)).
10.1(d)
Amendment
No. 3 dated as of June 9, 2006, to the Credit Agreement dated as of November 1,
2004, as amended by Amendment No. 1 dated as of September 30, 2005,
and Incremental Term Loan Assumption Agreement and Amendment No. 2 dated
as of December 20, 2005, among Smurfit-Stone Container Corporation, as
Guarantor; Smurfit-Stone Container Enterprises, Inc. and Smurfit-Stone
Container Canada Inc., as Borrowers; the Lenders from time to time party
thereto; Deutsche Bank Trust Company Americas, as Senior Agent, Administrative
Agent, Collateral Agent, Swingline Lender and Revolving Facility Facing Agent;
Deutsche Bank AG, as Canadian Administrative Agent and Revolving (Canadian)
Facility Facing Agent; and JPMorgan Chase Bank, N.A., as Senior Agent, Deposit
Account Agent and Deposit Funded Facility Facing Agent (incorporated by
reference to Exhibit 10.1 to SSCCs Current Report on Form 8-K dated June 13,
2006 (File No. 0-23876)).
10.2
Sale Agreement dated as of November 23,
2004 by and between SSCE, as Seller, and Stone Receivables Corporation (SRC)
(incorporated by reference to Exhibit 10.1 to SSCEs Current Report on Form 8-K
dated November 24, 2004 (File No. 0-23876)).
10.3
Transfer and Servicing Agreement dated as
of November 23, 2004 by and among SRC, SSCE Funding, LLC and SSCE, as
Servicer (incorporated by reference to Exhibit 10.2 to SSCEs Current
Report on Form 8-K dated November 24, 2004 (File No. 0-23876)).
10.4
Variable Funding Note Purchase Agreement
dated as of November 23, 2004 by and among SSCE Funding, LLC, as issuer,
Barton Capital LLC, as conduit purchaser, certain financial institutions, as
committed purchasers, and Societe Generale, as agent for the purchasers
(incorporated by reference to Exhibit 10.3 to SSCEs Current Report on Form 8-K
dated November 24, 2004 (File No. 0-23876)).
10.5
Receivables Purchase Agreement, dated March 30,
2004, among MBI Limited/Limitee, in its capacity as General Partner of
Smurfit-MBI, an Ontario Limited Partnership and Computershare Trust Company of
Canada, in its capacity as Trustee of King Street Funding Trust and Scotia
Capital Inc. (incorporated by reference to Exhibit 10.2(a) to Stone
Containers Quarterly Report on Form 10-Q for the quarter ended March 31,
2004 (File No. 0-23876)).
10.6
Support Agreement, dated March 30,
2004, between Stone Container Corporation (Stone Container) and Computershare
Trust Company of Canada, in its capacity as Trustee of King Street Funding
Trust, by its Administrator, Scotia Capital Inc. (incorporated by reference to Exhibit 10.2(b) to
Stone Containers Quarterly Report on Form 10-Q for the quarter ended March 31,
2004 (File No. 0-23876)).
132
Table of Contents
10.7
Amended and Restated Guaranty dated as of
July 28, 2008, made by SSCE in favor of The CIT Group/Equipment Financing, Inc.,
as the initial lender and as Administrative Agent for the benefit of the
Lenders (incorporated by reference to Exhibit 10.1 to SSCEs Quarterly
Report on Form 10-Q for the quarter ended September 30, 2008 (File No. 1-3439)).
10.8
Continuing Guaranty, dated as of July 28,
2008, made by and between SSCE and Union Bank of California, N.A. (incorporated
by reference to Exhibit 10.2 to SSCEs Quarterly Report on Form 10-Q
for the quarter ended September 30, 2008 (File No. 1-3439)).
10.9(a)
Amended
and Restated Credit Agreement, dated as of February 25, 2009 among
Smurfit-Stone Container Corporation, as the parent and guarantor, Smurfit-Stone
Container Enterprises, Inc. and Smurfit-Stone Container Canada Inc., as
borrowers, JPMorgan Chase Bank, N.A., as administrative agent and collateral
agent, JPMorgan Chase Bank, N.A., Toronto Branch, as Canadian administrative
agent and Canadian collateral agent, and the other financial institutions party
thereto, as lenders (incorporated by reference to Exhibit 10.2 to SSCCs
Current Report on Form 8-K filed March 2, 2009 (File No. 0-23876)).
10.9(b)
First
Amendment to Amended and Restated Credit Agreement, dated as of February 27,
2009, by and among Smurfit-Stone Container Corporation, as the parent and
guarantor, Smurfit-Stone Container Enterprises, Inc. and Smurfit-Stone
Container Canada Inc., as borrowers, JPMorgan Chase Bank, N.A., as
administrative agent and collateral agent, JPMorgan Chase Bank, N.A., Toronto
Branch, as Canadian administrative agent and Canadian collateral agent, and the
other financial institutions party thereto, as lenders (incorporated by
reference to Exhibit 10.2 to SSCCs Current Report on Form 8-K/A
filed April 17, 2009, amending SSCCs Current Report on Form 8-K
filed March 2, 2009 (File No. 0-23876)).
10.10(a)*
Jefferson
Smurfit Corporation Amended and Restated 1992 Stock Option Plan, dated as of May 1,
1997 (incorporated by reference to Exhibit 10.10 to SSCCs Annual Report
on Form 10-K for the fiscal year ended December 31, 1997 (File No. 0-23876)).
10.10(b)*
Amendment
of the Jefferson Smurfit Corporation Amended and Restated 1992 Stock Option
Plan (incorporated by reference to Exhibit 10.3 to SSCCs Quarterly Report
on Form 10-Q for the quarter ended September 30, 1999 (File No. 0-23876)).
10.11*
Jefferson
Smurfit Corporation Deferred Compensation Plan as amended (incorporated by
reference to Exhibit 10.7 to SSCCs Annual Report on Form 10-K for
the fiscal year ended December 31, 1996 (File No. 0-23876)).
10.12(a)*
Jefferson
Smurfit Corporation Management Incentive Plan (incorporated by reference to Exhibit 10.10
to SSCCs Annual Report on Form 10-K for the fiscal year ended December 31,
1995 (File No. 0-23876)).
10.12(b)*
Smurfit-Stone
Container Corporation 2009 Management Incentive Plan (incorporated by reference
to Exhibit 10.1 to SSCCs Current Report on Form 8-K dated May 4,
2009 (File No. 0-23876)).
10.13(a)*
Stone
Container Corporation 1995 Long-Term Incentive Plan (incorporated by reference
to Exhibit A to Stone Containers Proxy Statement dated as of April 7,
1995 (File No. 0-23876)).
10.13(b)*
Amendment
of the 1995 Long-Term Incentive Plan of Stone Container Corporation
(incorporated by reference to Exhibit 10.2 to Stone Containers Quarterly
Report on Form 10-Q for the quarter ended September 30, 1999 (File No. 0-23876)).
133
Table of Contents
10.14(a)*
Smurfit-Stone
Container Corporation 1998 Long-Term Incentive Plan (incorporated by reference
to Exhibit 10.14 to SSCCs Annual Report on Form 10-K for the fiscal
year ended December 31, 1998 (File No. 0-23876)).
10.14(b)*
First
Amendment of the Smurfit-Stone Container Corporation 1998 Long-Term Incentive
Plan (incorporated by reference to Exhibit 10.2 to SSCCs Quarterly Report
on Form 10-Q for the quarter ended September 30, 1999 (File No. 0-23876)).
10.14(c)*
Second
Amendment of the Smurfit-Stone Container Corporation 1998 Long-Term Incentive
Plan (incorporated by reference to Exhibit 10.1 to SSCCs Quarterly Report
on Form 10-Q for the quarter ended June 30, 2001 (File No. 0-23876)).
10.14(d)*
Third
Amendment of the Smurfit-Stone Container Corporation 1998 Long-Term Incentive
Plan (incorporated by reference to Exhibit 10.1 to SSCCs Quarterly Report
on Form 10-Q for the quarter ended September 30, 2001 (File No. 0-23876)).
10.15(a)*
Smurfit-Stone
Container Corporation 2004 Long-Term Incentive Plan (incorporated by reference
to Appendix I to SSCCs Proxy Statement dated April 5, 2004 (File No. 0-23876)).
10.15(b)*
First
Amendment of the Smurfit-Stone Container Corporation 2004 Long-Term Incentive
Plan (incorporated by reference to Exhibit 10.1 to SSCCs Quarterly Report
on Form 10-Q for the quarter ended June 30, 2004 (File No. 0-23876)).
10.16*
Jefferson
Smurfit Corporation Supplemental Income Pension Plan II (incorporated by
reference to Exhibit 10.1 to SSCCs Quarterly Report on Form 10-Q for
the quarter ended September 30, 2006 (File No. 0-23876)).
10.17*
Form of
Employment Security Agreements (incorporated by reference to Exhibit 10(h) to
SSCCs Registration Statement on Form S-4 (File No. 333-65431)).
10.18(a)*
Employment
Agreement for Patrick J. Moore (incorporated by reference to Exhibit 10.28
to SSCCs Annual Report on Form 10-K for the fiscal year ended December 31,
1999 (File No. 0-23876)).
10.18(b)*
First
Amendment of Employment Agreement of Patrick J. Moore (incorporated by
reference to Exhibit 10.2 to SSCCs Quarterly Report on Form 10-Q for
the quarter ended September 30, 2002 (File No. 0-23876)).
10.18(c)*
Second
Amendment of Employment Agreement of Patrick J. Moore effective as of July 25,
2006, between SSCC and Patrick J. Moore (incorporated by reference to Exhibit 10.1
to SSCCs Quarterly Report on Form 10-Q for the quarter ended June 30,
2006 (File No. 0-23876)).
10.18(d)*
Third
Amendment to Employment Agreement of Patrick J. Moore entered into December 31,
2008 (incorporated by reference to Exhibit 10.1 to SSCCs Current Report
on Form 8-K filed December 31, 2008 (File No. 0-23876)).
10.19(a)*
Restricted
Stock Unit Agreement dated as of January 4, 2002 by and between SSCC and
Patrick J. Moore (incorporated by reference to Exhibit 10.3 to SSCCs
Quarterly Report on Form 10-Q for the quarter ended September 30,
2002 (File No. 0-23876)).
10.19(b)*
Amendment,
dated June 1, 2004, of Restricted Stock Unit Agreement dated as of January 4,
2002 by and between SSCC and Patrick J. Moore (incorporated by reference to Exhibit 10.2
to SSCCs Quarterly Report on Form 10-Q for the quarter ended June 30,
2004 (File No. 0-23876)).
134
Table of Contents
10.19(c)*
Amendment
No. 2, dated December 31, 2004, of Restricted Stock Unit Agreement
dated as of January 4, 2002 by and between SSCC and Patrick J. Moore
(incorporated by reference to Exhibit 10.20(c) to SSCCs Annual
Report on Form 10-K for the fiscal year ended December 31, 2004 (File
No. 0-23876)).
10.20(a)*
Offer
Letter dated as of May 11, 2006 between the Company and Steven J. Klinger
(incorporated by reference to Exhibit 10.1 to SSCCs Current Report on Form 8-K
dated May 12, 2006 (File No. 0-23876)).
10.20(b)*
Employment
Agreement dated as of May 11, 2006 between the Company and Steven J.
Klinger (incorporated by reference to Exhibit 10.2 to SSCCs Current
Report on Form 8-K dated May 12, 2006 (File No. 0-23876)).
10.20(c)*
First
Amendment of Employment Agreement of Steven J. Klinger, incorporated by
reference to Exhibit 10.1 to SSCCs Quarterly Report on Form 10-Q for
the quarter ended June 30, 2008 (File No. 0-23876)).
10.20(d)*
Amendment
to Employment Agreement of Steven J. Klinger, entered into December 31,
2008 (incorporated by reference to Exhibit 10.3 to SSCCs Current Report
on Form 8-K filed December 31, 2008 (File No. 0-23876)).
10.20(e)*
Executive
Retirement Agreement, dated as of October 2, 2006, between SSCC and Steven
J. Klinger (incorporated by reference to Exhibit 10.1 to SSCCs Current
Report on Form 8-K dated October 5, 2006 (File No. 0-23876)).
10.20(f)*
Amendment
to Executive Retirement Agreement of Steven J. Klinger, entered into December 31,
2008 (incorporated by reference to Exhibit 10.4 to SSCCs Current Report
on Form 8-K filed December 31, 2008 (File No. 0-23876)).
10.21*
Employment
Security Agreement, dated November 4, 2008, between SSCC and Craig A. Hunt
(incorporated by reference to Exhibit 10.3 to SSCCs Quarterly Report on Form 10-Q
for the quarter ended September 30, 2008 (File No. 0-23876)).
10.22*
Employment
Security Agreement, dated November 16, 2006, between SSCC and Steven C.
Strickland (incorporated by reference to Exhibit 10.23 to SSCCs Annual
Report on Form 10-K for the fiscal year ended December 31, 2008 (File
No. 0-23876)).
10.23*
Offer
Letter dated as of May 7, 2009 between the Company and John R. Murphy
(incorporated by reference to Exhibit 10.1 to SSCCs Current Report on Form 8-K
dated May 21, 2009 (File No. 0-23876)).
10.24*
Smurfit-Stone
Container Corporation Executive Deferred Compensation Plan (incorporated by
reference to Exhibit 10.25 to SSCCs Annual Report on Form 10-K for
the fiscal year ended December 31, 2004 (File No. 0-23876)).
21.1
Subsidiaries of Smurfit-Stone Container
Corporation.
23.1
Consent of Independent Registered Public
Accounting Firm.
24.1
Powers of Attorney.
31.1
Certification Pursuant to Rules 13a-14
and 15d-14 under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
135
Table of Contents
31.2
Certification Pursuant to Rules 13a-14
and 15d-14 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.
(b)
Exhibits filed with this annual report are included
under Item (a) (3).
(c)
None.
* Indicates a management contract or compensation plan
or arrangement.
136
Table
of Contents
SIGNATURES
Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
DATE
|
March 2, 2010
|
|
SMURFIT-STONE CONTAINER
CORPORATION
|
|
|
(Registrant)
|
|
By
|
/s/ Paul K.
Kaufmann
|
|
|
Paul K. Kaufmann
|
|
|
Senior Vice
President and Corporate Controller
|
Pursuant to the requirements of the
Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant in the capacities and on the
dates indicated.
SIGNATURE
|
|
TITLE
|
|
DATE
|
|
|
|
|
|
/s/ Patrick J.
Moore
|
|
Chairman and
Chief Executive Officer and Director
|
|
March 2,
2010
|
Patrick J. Moore
|
|
(Principal
Executive Officer)
|
|
|
|
|
|
|
|
/s/ Paul K.
Kaufmann
|
|
Senior Vice
President and Corporate Controller
|
|
March 2,
2010
|
Paul K. Kaufmann
|
|
(Principal Financial
and Accounting Officer)
|
|
|
|
|
|
|
|
*
|
|
|
|
|
James R. Boris
|
|
Director
|
|
|
|
|
|
|
|
*
|
|
|
|
|
Connie K. Duckworth
|
|
Director
|
|
|
|
|
|
|
|
*
|
|
|
|
|
Steven J.
Klinger
|
|
Director
|
|
|
|
|
|
|
|
*
|
|
|
|
|
William T.
Lynch, Jr.
|
|
Director
|
|
|
|
|
|
|
|
*
|
|
|
|
|
James J.
OConnor
|
|
Director
|
|
|
|
|
|
|
|
*
|
|
|
|
|
Jerry K.
Pearlman
|
|
Director
|
|
|
|
|
|
|
|
*
|
|
|
|
|
Thomas A.
Reynolds, III
|
|
Director
|
|
|
|
|
|
|
|
*
|
|
|
|
|
William D.
Smithburg
|
|
Director
|
|
|
|
|
|
|
|
*By /s/ Craig A.
Hunt
|
|
Pursuant to
Powers of Attorney filed
|
|
March 2,
2010
|
Craig A. Hunt
|
|
as part of
Form 10-K.
|
|
|
137
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