10-Q 1 a50366361.htm VERSO PAPER CORP. 10-Q a50366361.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
 
(Mark One)
 
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2012
 
or
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from __________ to __________
 
Verso Paper Corp.
(Exact name of registrant as specified in its charter)

 
Delaware
 
001-34056
 
75-3217389
(State of Incorporation
or Organization)
 
(Commission File Number)
 
(IRS Employer
Identification Number)
 

 
Verso Paper Holdings LLC
(Exact name of registrant as specified in its charter)

 
Delaware
 
333-142283
 
56-2597634
(State of Incorporation
or Organization)
 
(Commission File Number)
 
(IRS Employer
Identification Number)
 
 
6775 Lenox Center Court, Suite 400
Memphis, Tennessee 38115-4436
(Address, including zip code, of principal executive offices)
 
(901) 369-4100
(Registrants’ telephone number, including area code)
 

 
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.
 
 
Verso Paper Corp.
þ Yes o No    
 
Verso Paper Holdings LLC
þ Yes o No    
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
 
Verso Paper Corp.
þ Yes o No    
 
Verso Paper Holdings LLC
þ Yes o No    
 
 
 

 
 
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:
 
Verso Paper Corp.
     
Large accelerated filer o
Accelerated filer o
Non-accelerated filer þ
Smaller reporting company o
 
  (Do not check if a smaller reporting company)
       
Verso Paper Holdings LLC
     
Large accelerated filer o
Accelerated filer o
Non-accelerated filer þ
Smaller reporting company o
   
  (Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  
 
 
Verso Paper Corp.
o Yes þ No    
 
Verso Paper Holdings LLC
o Yes þ No    
 
As of July 31, 2012, Verso Paper Corp. had 52,907,984 outstanding shares of common stock, par value $0.01 per share, and Verso Paper Holdings LLC had one outstanding limited liability company interest.
 
This Form 10-Q is a combined quarterly report being filed separately by two registrants: Verso Paper Corp. and Verso Paper Holdings LLC.
 
 
 

 

Entity Names and Organization

Within our organization, Verso Paper Corp. is the ultimate parent entity and the sole member of Verso Paper Finance Holdings One LLC, which is the sole member of Verso Paper Finance Holdings LLC, which is the sole member of Verso Paper Holdings LLC.  As used in this report, the term “Verso Paper” refers to Verso Paper Corp.; the term “Verso Finance” refers to Verso Paper Finance Holdings LLC; the term “Verso Holdings” refers to Verso Paper Holdings LLC; and the term for any such entity includes its direct and indirect subsidiaries when referring to the entity’s consolidated financial condition or results.  Unless otherwise noted, references to “Verso,” “we,” “us,” and “our” refer collectively to Verso Paper and Verso Holdings.  Other than Verso Paper’s common stock transactions, Verso Finance’s debt obligation and related financing costs and interest expense, Verso Holdings’ loan to Verso Finance, and the debt obligation of Verso Holdings’ consolidated variable interest entity to Verso Finance, the assets, liabilities, income, expenses and cash flows presented for all periods represent those of Verso Holdings in all material respects.  Unless otherwise noted, the information provided pertains to both Verso Paper and Verso Holdings.

Forward-Looking Statements
 
In this quarterly report, all statements that are not purely historical facts are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.  Forward-looking statements may be identified by the words “believe,” “expect,” “anticipate,” “project,” “plan,” “estimate,” “intend,” and similar expressions.  Forward-looking statements are based on currently available business, economic, financial, and other information and reflect management’s current beliefs, expectations, and views with respect to future developments and their potential effects on us.  Actual results could vary materially depending on risks and uncertainties that may affect us and our business.  For a discussion of such risks and uncertainties, please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other sections of this quarterly report and to Verso Paper’s and Verso Holdings’ other filings with the Securities and Exchange Commission.  We assume no obligation to update any forward-looking statement made in this quarterly report to reflect subsequent events or circumstances or actual outcomes.
 
 
2

 
 
TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
Page
     
Item 1.
Financial Statements
 
     
 
4
     
 
5
     
 
5
     
 
6
     
 
6
     
 
7
     
 
7
     
 
8
     
 
9
     
Item 2.
32
     
Item 3.
43
     
Item 4.
45
 
 
PART II. OTHER INFORMATION
     
Item 1.
46
     
Item 1A.
46
     
Item 2.
46
     
Item 3.
46
     
Item 4.
46
     
Item 5.
46
     
Item 6
47
   
49
   
50

 
3

 

PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS.
 
 
                         
   
VERSO PAPER
   
VERSO HOLDINGS
 
   
June 30,
   
December 31,
   
June 30,
   
December 31,
 
(Dollars in thousands, except per share amounts)
 
2012
   
2011
   
2012
   
2011
 
ASSETS
                       
Current assets:
                       
Cash and cash equivalents
  $ 21,154     $ 94,869     $ 21,080     $ 94,795  
Accounts receivable, net
    112,107       128,086       112,233       128,213  
Inventories
    170,185       166,876       170,185       166,876  
Prepaid expenses and other assets
    3,523       3,239       3,313       3,238  
Total current assets
    306,969       393,070       306,811       393,122  
Property, plant, and equipment, net
    897,624       934,699       897,624       934,699  
Reforestation
    12,932       13,671       12,932       13,671  
Intangibles and other assets, net
    96,231       80,035       119,537       102,950  
Total assets
  $ 1,313,756     $ 1,421,475     $ 1,336,904     $ 1,444,442  
                                 
LIABILITIES AND EQUITY
                               
Current liabilities:
                               
Accounts payable
  $ 107,108     $ 109,683     $ 107,831     $ 110,589  
Accrued liabilities
    96,770       140,756       95,814       139,682  
Current maturities of long-term debt
    87,662       -       -       -  
Total current liabilities
    291,540       250,439       203,645       250,271  
Long-term debt
    1,203,483       1,262,459       1,226,788       1,201,077  
Other liabilities
    60,558       62,465       52,458       54,278  
Total liabilities
    1,555,581       1,575,363       1,482,891       1,505,626  
Commitments and contingencies (Note 12)
    -       -       -       -  
Equity:
                               
Preferred stock -- par value $0.01 (20,000,000 shares authorized,
                               
no shares issued)
    -       -       n/a       n/a  
Common stock -- par value $0.01 (250,000,000 shares authorized
                               
with 52,951,379 shares issued and 52,907,984 outstanding
                               
on June 30, 2012, and 52,630,965 shares issued and
                               
52,605,314 outstanding on December 31, 2011)
    530       526       n/a       n/a  
Treasury stock -- at cost (43,395 shares on June 30, 2012 and
                               
25,651 shares on December 31, 2011)
    (64 )     (53 )     n/a       n/a  
Paid-in-capital
    218,128       216,485       322,757       321,110  
Retained deficit
    (436,799 )     (342,188 )     (445,124 )     (353,636 )
Accumulated other comprehensive loss
    (23,620 )     (28,658 )     (23,620 )     (28,658 )
Total deficit
    (241,825 )     (153,888 )     (145,987 )     (61,184 )
Total liabilities and equity
  $ 1,313,756     $ 1,421,475     $ 1,336,904     $ 1,444,442  
                                 
See notes to unaudited condensed consolidated financial statements.
                               

 
4

 
 
VERSO PAPER CORP.
 
 
                           
     
Three Months Ended
   
Six Months Ended
 
     
June 30,
   
June 30,
 
(Dollars in thousands, except per share amounts)
 
2012
   
2011
   
2012
   
2011
 
Net sales
  $ 365,262     $ 398,779     $ 740,557     $ 815,371  
Costs and expenses:
                               
Cost of products sold - (exclusive of depreciation, amortization,
                               
       and depletion)     323,185       338,480       660,465       691,008  
Depreciation, amortization, and depletion
    31,777       31,645       63,200       62,992  
Selling, general, and administrative expenses
    19,930       21,667       38,748       40,301  
Restructuring and other charges
      (106 )     -       (21 )     -  
Total operating expenses
    374,786       391,792       762,392       794,301  
Operating income (loss)
    (9,524 )     6,987       (21,835 )     21,070  
Interest income
    (2 )     (33 )     (4 )     (67 )
Interest expense
    33,228       31,552       65,347       63,941  
Other (income) loss, net
    (22,077 )     (236 )     7,493       26,091  
Loss before income taxes
    (20,673 )     (24,296 )     (94,671 )     (68,895 )
Income tax expense (benefit)
    9       -       (60 )     (2 )
Net loss
  $ (20,682 )   $ (24,296 )   $ (94,611 )   $ (68,893 )
                                   
Loss per common share
                               
Basic
  $ (0.39 )   $ (0.46 )   $ (1.79 )   $ (1.31 )
Diluted
    (0.39 )     (0.46 )     (1.79 )     (1.31 )
Weighted average common shares outstanding (in thousands)
                               
Basic
    52,908       52,623       52,797       52,577  
Diluted
    52,908       52,623       52,797       52,577  
                                   
See notes to unaudited condensed consolidated financial statements.
                               
 
                         
VERSO PAPER CORP.
 
 
                         
   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
(Dollars in thousands)
 
2012
   
2011
   
2012
   
2011
 
Net Loss
  $ (20,682 )   $ (24,296 )   $ (94,611 )   $ (68,893 )
Other comprehensive income (loss):
                               
Derivative financial instruments:
                               
Effective portion of net unrealized losses
    -       (1,171 )     (1,365 )     (1,337 )
Reclassification from accumulated other comprehensive loss to net loss
    515       584       5,155       1,855  
Defined benefit pension plan amortization of net loss and prior service cost
    564       393       1,129       785  
Other
    -       (5 )     119       3  
Other comprehensive income (loss)
    1,079       (199 )     5,038       1,306  
Comprehensive loss
  $ (19,603 )   $ (24,495 )   $ (89,573 )   $ (67,587 )
                                 
See notes to unaudited condensed consolidated financial statements.
                               

 
5

 

VERSO PAPER HOLDINGS LLC
 
 
                           
     
Three Months Ended
   
Six Months Ended
 
     
June 30,
   
June 30,
 
(Dollars in thousands, except per share amounts)
 
2012
   
2011
   
2012
   
2011
 
Net sales
  $ 365,262     $ 398,779     $ 740,557     $ 815,371  
Costs and expenses:
                               
Cost of products sold - (exclusive of depreciation, amortization,
                               
      and depletion)     323,185       338,480       660,465       691,008  
Depreciation, amortization, and depletion
    31,777       31,645       63,200       62,992  
Selling, general, and administrative expenses
    19,930       21,667       38,697       40,250  
Restructuring and other charges
      (106 )     -       (21 )     -  
Total operating expenses
    374,786       391,792       762,341       794,250  
Operating income (loss)
    (9,524 )     6,987       (21,784 )     21,121  
Interest income
    (382 )     (412 )     (762 )     (824 )
Interest expense
    31,993       30,471       62,910       61,815  
Other (income) loss, net
    (22,077 )     (236 )     7,493       25,940  
Net loss
  $ (19,058 )   $ (22,836 )   $ (91,425 )   $ (65,810 )
                                   
See notes to unaudited condensed consolidated financial statements.
                               
 
                         
VERSO PAPER HOLDINGS LLC
 
 
                         
   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
(Dollars in thousands)
 
2012
   
2011
   
2012
   
2011
 
Net Loss
  $ (19,058 )   $ (22,836 )   $ (91,425 )   $ (65,810 )
Other comprehensive income (loss):
                               
Derivative financial instruments:
                               
Effective portion of net unrealized losses
    -       (1,171 )     (1,365 )     (1,337 )
Reclassification from accumulated other comprehensive loss to net loss
    515       584       5,155       1,855  
Defined benefit pension plan amortization of net loss and prior service cost
    564       393       1,129       785  
Other
    -       (5 )     119       3  
Other comprehensive income (loss)
    1,079       (199 )     5,038       1,306  
Comprehensive loss
  $ (17,979 )   $ (23,035 )   $ (86,387 )   $ (64,504 )
                                 
See notes to unaudited condensed consolidated financial statements.
                               

 
6

 

VERSO PAPER CORP.
 
 
FOR THE PERIODS ENDED JUNE 30, 2012 AND 2011
 
                                                 
                                       
Accumulated
       
                                       
Other
   
Total
 
                                 
Total
   
Comprehensive
   
Stockholders'
 
   
Common
   
Common
   
Treasury
   
Treasury
   
Paid-in-
   
Retained
   
Income
   
Equity
 
(Dollars and shares in thousands)
 
Shares
   
Stock
   
Shares
   
Stock
   
Capital
   
Deficit
   
(Loss)
   
(Deficit)
 
Balance - December 31, 2010
    52,467     $ 525       -     $ -     $ 214,050     $ (205,127 )   $ (16,254 )   $ (6,806 )
Net loss
    -       -       -       -       -       (68,893 )     -       (68,893 )
Other comprehensive income
    -       -       -       -       -       -       1,306       1,306  
Common stock issued for restricted stock
    158       2       -       -       (2 )     -       -       -  
Stock option exercise
    6       -       -       -       15       -       -       15  
Cancellation of restricted stock
    (10 )     -       -       -       -       -       -       -  
Equity award expense
    -       -       -       -       1,293       -       -       1,293  
Balance - June 30, 2011
    52,621     $ 527       -     $ -     $ 215,356     $ (274,020 )   $ (14,948 )   $ (73,085 )
                                                                 
Balance - December 31, 2011
    52,631     $ 526       (26 )   $ (53 )   $ 216,485     $ (342,188 )   $ (28,658 )   $ (153,888 )
Net loss
    -       -       -       -       -       (94,611 )     -       (94,611 )
Other comprehensive income
    -       -       -       -       -       -       5,038       5,038  
Common stock issued for restricted stock, net
    320       4       (17 )     (11 )     (4 )     -       -       (11 )
Equity award expense
    -       -       -       -       1,647       -       -       1,647  
Balance - June 30, 2012
    52,951     $ 530       (43 )   $ (64 )   $ 218,128     $ (436,799 )   $ (23,620 )   $ (241,825 )
                                                                 
See notes to unaudited condensed consolidated financial statements.
                                       


VERSO PAPER HOLDINGS LLC
 
 
FOR THE PERIODS ENDED JUNE 30, 2012 AND 2011
 
                         
               
Accumulated
       
               
Other
   
Total
 
               
Comprehensive
   
Member's
 
   
Paid-in-
   
Retained
   
Income
   
Equity
 
(Dollars in thousands)
 
Capital
   
Deficit
   
(Loss)
   
(Deficit)
 
Balance - December 31, 2010
  $ 318,690     $ (231,019 )   $ (16,254 )   $ 71,417  
Net loss
    -       (65,810 )     -       (65,810 )
Other comprehensive income
    -       -       1,306       1,306  
Equity award expense
    1,293       -       -       1,293  
Balance - June 30, 2011
  $ 319,983     $ (296,829 )   $ (14,948 )   $ 8,206  
                                 
Balance - December 31, 2011
  $ 321,110     $ (353,636 )   $ (28,658 )   $ (61,184 )
Cash distributions
    -       (63 )     -       (63 )
Net loss
    -       (91,425 )     -       (91,425 )
Other comprehensive income
    -       -       5,038       5,038  
Equity award expense
    1,647       -       -       1,647  
Balance - June 30, 2012
  $ 322,757     $ (445,124 )   $ (23,620 )   $ (145,987 )
                                 
See notes to unaudited condensed consolidated financial statements.
                               

 
7

 

 
                         
   
VERSO PAPER
   
VERSO HOLDINGS
 
   
Six Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
(Dollars in thousands)
 
2012
   
2011
   
2012
   
2011
 
Cash Flows From Operating Activities:
                       
Net loss
  $ (94,611 )   $ (68,893 )   $ (91,425 )   $ (65,810 )
Adjustments to reconcile net loss to net cash used in operating activities:
                               
Depreciation, amortization, and depletion
    63,200       62,992       63,200       62,992  
Amortization of debt issuance costs
    2,603       2,740       2,423       2,560  
Accretion of discount on long-term debt
    1,157       2,038       1,157       2,038  
Loss on early extinguishment of debt, net
    8,244       26,091       8,244       26,091  
Loss (gain) on disposal of fixed assets
    (728 )     215       (728 )     215  
Equity award expense
    1,647       1,293       1,647       1,293  
Other - net
    1,191       (439 )     1,191       (439 )
Changes in assets and liabilities:
                               
Accounts receivable
    15,979       (28,004 )     15,979       (28,126 )
Inventories
    (8,086 )     (53,225 )     (8,086 )     (53,225 )
Prepaid expenses and other assets
    6,627       (423 )     6,627       (400 )
Accounts payable
    (4,092 )     2,534       (4,274 )     2,477  
Accrued liabilities
    (39,635 )     (7,074 )     (42,407 )     (9,806 )
Net cash used in operating activities
    (46,504 )     (60,155 )     (46,452 )     (60,140 )
Cash Flows From Investing Activities:
                               
Proceeds from sale of fixed assets
    1,452       182       1,452       182  
Transfers (to) from restricted cash, net
    (559 )     9,624       (559 )     9,624  
Capital expenditures
    (31,072 )     (40,006 )     (31,072 )     (40,006 )
Net cash used in investing activities
    (30,179 )     (30,200 )     (30,179 )     (30,200 )
Cash Flows From Financing Activities:
                               
Borrowings on revolving credit facilities
    90,000       -       90,000       -  
Payments on revolving credit facilities
    (50,000 )     -       (50,000 )     -  
Proceeds from long-term debt
    341,191       394,618       341,191       394,618  
Debt issuance costs
    (23,228 )     (10,667 )     (23,228 )     (10,667 )
Repayments of long-term debt
    (354,984 )     (389,998 )     (354,984 )     (389,998 )
Cash distributions
    -       -       (63 )        
Acquisition of treasury stock
    (11 )     -       -       -  
Proceeds from issuance of common stock
    -       15       -       -  
Net cash provided by (used in) financing activities
    2,968       (6,032 )     2,916       (6,047 )
Change in cash and cash equivalents
    (73,715 )     (96,387 )     (73,715 )     (96,387 )
Cash and cash equivalents at beginning of period
    94,869       152,780       94,795       152,706  
Cash and cash equivalents at end of period
  $ 21,154     $ 56,393     $ 21,080     $ 56,319  
                                 
See notes to unaudited condensed consolidated financial statements.
                               

 
8

 
 
1. 
BACKGROUND AND BASIS OF PRESENTATION

Within our organization, Verso Paper Corp. is the ultimate parent entity and the sole member of Verso Paper Finance Holdings One LLC, which is the sole member of Verso Paper Finance Holdings LLC, which is the sole member of Verso Paper Holdings LLC.  As used in this report, the term “Verso Paper” refers to Verso Paper Corp.; the term “Verso Finance” refers to Verso Paper Finance Holdings LLC; the term “Verso Holdings” refers to Verso Paper Holdings LLC; and the term for any such entity includes its direct and indirect subsidiaries when referring to the entity’s consolidated financial condition or results.  Unless otherwise noted, references to “Verso,” “we,” “us,” and “our” refer collectively to Verso Paper and Verso Holdings.  Other than Verso Paper’s common stock transactions, Verso Finance’s debt obligation and related financing costs and interest expense, Verso Holdings’ loan to Verso Finance, and the debt obligation of Verso Holdings’ consolidated variable interest entity to Verso Finance, the assets, liabilities, income, expenses and cash flows presented for all periods represent those of Verso Holdings in all material respects.  Unless otherwise noted, the information provided pertains to both Verso Paper and Verso Holdings.

We operate in the following three market segments: coated papers; hardwood market pulp; and other, consisting of specialty papers.  Our core business platform is as a producer of coated freesheet and coated groundwood papers.  Our products are used primarily in media and marketing applications, including catalogs, magazines, and commercial printing applications such as high-end advertising brochures, annual reports, and direct-mail advertising.

This report contains the unaudited condensed consolidated financial statements of Verso Paper and Verso Holdings as of June 30, 2012, and for the three-month and six-month periods ended June 30, 2012 and 2011. The December 31, 2011, condensed consolidated balance sheet data was derived from audited financial statements but does not include all disclosures required annually by accounting principles generally accepted in the United States of America, or “GAAP.”  In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments that are necessary for the fair presentation of Verso Paper’s and Verso Holdings’ respective financial conditions, results of operations, and cash flows for the interim periods presented.  Except as disclosed in the notes to the unaudited condensed consolidated financial statements, such adjustments are of a normal, recurring nature.  Variable interest entities for which Verso Paper or Verso Holdings is the primary beneficiary are consolidated.  Intercompany balances and transactions are eliminated in consolidation.  The results of operations and cash flows for the interim periods presented may not necessarily be indicative of full-year results.  It is suggested that these financial statements be read in conjunction with the audited consolidated financial statements and notes thereto of Verso Paper and Verso Holdings contained in their respective Annual Reports on Form 10-K for the year ended December 31, 2011.

2. 
RECENT ACCOUNTING DEVELOPMENTS

ASC Topic 220, Comprehensive Income.  Accounting Standards Update, or “ASU,” No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income, changes the existing guidance on the presentation of comprehensive income.  Entities will have the option of presenting the components of net income and other comprehensive income in either a single continuous statement of comprehensive income or in two separate but consecutive statements.  Entities no longer have the option of presenting the components of other comprehensive income within the statement of changes in stockholders’ equity.  ASU No. 2011-05 is effective on a retrospective basis for fiscal years, and interim periods within those years, beginning after December 15, 2011, which for us is the first quarter of 2012.  In December 2011, the Financial Accounting Standards Board, or “FASB,” issued ASU No. 2011-12, Comprehensive Income – Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05, which defers changes in ASU No. 2011-05 that related to the presentation of reclassification adjustments.  The adoption of the remaining guidance provided in ASU No. 2011-05 will result in a change to our current presentation of comprehensive income but will have no impact on our financial condition, results of operations, or cash flows.
 
 
9

 

ASC Topic 820, Fair Value Measurements and Disclosures.  ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs, provides clarifying guidance on how to measure fair value and additional disclosure requirements.  The update does not extend the use of fair value accounting, but does provide guidance on how it should be applied where it is already required or permitted under current GAAP.  ASU No. 2011-04 is effective for annual and interim periods beginning after December 15, 2011, which for us is January 1, 2012, and had no impact on our consolidated financial statements.

Other new accounting pronouncements issued but not effective until after June 30, 2012, are not expected to have a significant effect on our consolidated financial statements.
 
3. 
SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION

Earnings Per Share Verso Paper computes earnings per share by dividing net income or net loss attributable to common stockholders by the weighted average number of common shares outstanding for the period.  Diluted earnings per share is computed by dividing net income or net loss by the weighted average number of shares outstanding, after giving effect to potentially dilutive common share equivalents outstanding during the period.  Potentially dilutive common share equivalents are not included in the computation of diluted earnings per share if they are anti-dilutive.

The following table provides a reconciliation of basic and diluted loss per common share of Verso Paper:

                         
   
VERSO PAPER
 
   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
(In thousands, except per share data)
 
2012
   
2011
   
2012
   
2011
 
Net loss available to common shareholders
  $ (20,682 )   $ (24,296 )   $ (94,611 )   $ (68,893 )
                                 
Weighted average common stock outstanding
    52,351       52,163       52,326       52,162  
Weighted average restricted stock
    557       460       471       415  
Weighted average common shares outstanding - basic
    52,908       52,623       52,797       52,577  
Dilutive shares from stock options
    -       -       -       -  
Weighted average common shares outstanding - diluted
    52,908       52,623       52,797       52,577  
                                 
Basic loss per share
  $ (0.39 )   $ (0.46 )   $ (1.79 )   $ (1.31 )
                                 
Diluted loss per share
  $ (0.39 )   $ (0.46 )   $ (1.79 )   $ (1.31 )
 
In accordance with ASC Topic 260, Earnings Per Share, unvested restricted stock awards issued by Verso Paper contain nonforfeitable rights to dividends and qualify as participating securities.  No dividends have been declared or paid in 2012 or 2011.
 
 
10

 

For the three months ended June 30, 2012, 2,626,619 weighted average potentially dilutive shares from stock options with a weighted average exercise price per share of $3.06 were excluded from the diluted earnings per share calculation due to the antidilutive effect such shares would have on net loss per common share.  For the six months ended June 30, 2012, 2,272,492 weighted average potentially dilutive shares from stock options with a weighted average exercise price per share of $3.32 were excluded from the diluted earnings per share calculation due to the antidilutive effect such shares would have on net loss per common share.  For the three months ended June 30, 2011, 1,793,611 weighted average potentially dilutive shares from stock options with a weighted average exercise price per share of $3.91 were excluded from the diluted earnings per share calculation due to the antidilutive effect such shares would have on net loss per common share.  For the six months ended June 30, 2011, 1,672,795 weighted average potentially dilutive shares from stock options with a weighted average exercise price per share of $3.75 were excluded from the diluted earnings per share calculation due to the antidilutive effect such shares would have on net loss per common share.

Inventories and Replacement Parts and Other Supplies Inventory values include all costs directly associated with manufacturing products: materials, labor, and manufacturing overhead.  These values are presented at the lower of cost or market.  Costs of raw materials, work-in-progress, and finished goods are determined using the first-in, first-out method.  Replacement parts and other supplies are stated using the average cost method and are reflected in Inventories and Intangibles and other assets on the accompanying condensed consolidated balance sheets (see also Note 4).

Inventories by major category include the following:
 
             
   
June 30,
   
December 31,
 
(Dollars in thousands)
 
2012
   
2011
 
Raw materials
  $ 32,450     $ 27,953  
Woodyard logs
    8,902       5,931  
Work-in-process
    15,334       19,120  
Finished goods
    85,078       87,585  
Replacement parts and other supplies
    28,421       26,287  
Inventories
  $ 170,185     $ 166,876  
                 
During the second quarter ended June 30, 2012, raw materials inventories with a carrying value of $0.7 million, work-in-process inventories with a carrying value of $1.0 million, and finished goods inventories with a carrying value of $3.1 million were reduced to their fair value of $0, due to fire loss, the value of which is expected to be recovered by insurance claims.

Asset Retirement Obligations In accordance with ASC Topic 410, Asset Retirement and Environmental Obligations, a liability and an asset are recorded equal to the present value of the estimated costs associated with the retirement of long-lived assets where a legal or contractual obligation exists.  The liability is accreted over time, and the asset is depreciated over its useful life.  Our asset retirement obligations under this standard relate to closure and post-closure costs for landfills.  Revisions to the liability could occur due to changes in the estimated costs or timing of closure or possible new federal or state regulations affecting the closure.

On June 30, 2012, we had $0.8 million of restricted cash included in Intangibles and other assets in the accompanying condensed consolidated balance sheet related to an asset retirement obligation in the state of Michigan.  This cash deposit is required by the state and may only be used for the future closure of a landfill.
 
 
11

 

The following table presents an analysis related to our asset retirement obligations included in Other liabilities in the accompanying condensed consolidated balance sheets:
 
   
Six Months Ended June 30,
 
(Dollars in thousands)
 
2012
   
2011
 
Asset retirement obligations, January 1
  $ 11,233     $ 13,660  
Accretion expense
    406       417  
Settlement of existing liabilities
    (106 )     (104 )
Adjustment to existing liabilities
    419       (1,032 )
Asset retirement obligations, June 30
  $ 11,952     $ 12,941  
 
In addition to the above obligations, we may be required to remove certain materials from our facilities or to remediate them in accordance with current regulations that govern the handling of certain hazardous or potentially hazardous materials.  At this time, any such obligations have an indeterminate settlement date, and we believe that adequate information does not exist to reasonably estimate any such potential obligations.  Accordingly, we will record a liability for such remediation when sufficient information becomes available to estimate the obligation.
 
Property, Plant, and Equipment Property, plant, and equipment is stated at cost, net of accumulated depreciation.  Interest is capitalized on projects meeting certain criteria and is included in the cost of the assets.  The capitalized interest is depreciated over the same useful lives as the related assets.  Expenditures for major repairs and improvements are capitalized, whereas normal repairs and maintenance are expensed as incurred. For the three-month and six-month periods ended June 30, 2012, interest costs of $1.1 million and $1.8 million, respectively, were capitalized.  For the three-month and six-month periods ended June 30, 2011, interest costs of $0.7 million and $1.4 million, respectively, were capitalized.

Depreciation is computed using the straight-line method over the assets’ estimated useful lives.  Depreciation expense was $31.4 million and $62.5 million for the three-month and six-month periods ended June 30, 2012, respectively, compared to $31.2 million and $62.1 million for the three-month and six-month periods ended June 30, 2011, respectively.
 
 
12

 
 
4.    INTANGIBLES AND OTHER ASSETS

Intangibles and other assets consist of the following:

   
VERSO PAPER
   
VERSO HOLDINGS
 
   
June 30,
   
December 31,
   
June 30,
   
December 31,
 
(Dollars in thousands)
 
2012
   
2011
   
2012
   
2011
 
Amortizable intangible assets:
                       
Customer relationships, net of accumulated amortization of $7.1 million
                   
   on June 30, 2012, and $6.7 million on December 31, 2011
  $ 6,220     $ 6,620     $ 6,220     $ 6,620  
Patents, net of accumulated amortization of $0.7 million on
                               
    June 30, 2012, and $0.6 million on December 31, 2011
    469       526       469       526  
Total amortizable intangible assets
    6,689       7,146       6,689       7,146  
Unamortizable intangible assets:
                               
Trademarks
    21,473       21,473       21,473       21,473  
Other assets:
                               
Financing costs, net of accumulated amortization of $5.7 million on
                               
   June 30, 2012, and $17.8 million on December 31, 2011, for
                               
   Verso Paper, and net of accumulated amortization of $5.7 million
                               
   on June 30, 2012, and $16.1 million on December 31, 2011,
                               
   for Verso Holdings
    36,517       24,483       36,517       24,093  
Deferred major repair
    15,025       12,294       15,025       12,294  
Replacement parts, net
    3,717       4,257       3,717       4,257  
Loan to affiliate
    -       -       23,305       23,305  
Restricted cash
    4,120       3,560       4,120       3,560  
Other
    8,690       6,822       8,691       6,822  
Total other assets
    68,069       51,416       91,375       74,331  
Intangibles and other assets
  $ 96,231     $ 80,035     $ 119,537     $ 102,950  
Certain previously reported amounts have been reclassified to agree with current presentation.
                         
 
Amortization expense of intangibles was $0.3 million and $0.5 million for the three-month and six-month periods ended June 30, 2012, respectively, compared to $0.2 million and $0.5 million for the three-month and six-month periods ended June 30, 2011, respectively.

The estimated future amortization expense for intangible assets over the next five years is as follows:
 
(Dollars in thousands)
     
2012
  $ 457  
2013
    815  
2014
    715  
2015
    615  
2016
    567  

 
13

 

5.    DEBT

A summary of long-term debt is as follows:

     
June 30, 2012
   
December 31, 2011
 
 
Original
 
Interest
         
Fair
         
Fair
 
(Dollars in thousands)
Maturity
 
Rate
   
Balance
   
Value
   
Balance
   
Value
 
Verso Paper Holdings LLC
                               
Revolving Credit Facilities
5/4/2017
    2.25 %   $ 40,000     $ 40,000     $ -     $ -  
11.5% Senior Secured Notes (1)
7/1/2014
    11.50 %     -       -       302,820       316,260  
11.75% Senior Secured Notes (2)
1/15/2019
    11.75 %     341,298       355,350       -       -  
11.75% Secured Notes
1/15/2019
    11.75 %     271,573       209,111       -       -  
8.75% Second Priority Senior Secured Notes (3)
2/1/2019
    8.75 %     394,802       158,515       394,736       257,063  
Second Priority Senior Secured Floating Rate Notes
8/1/2014
    4.22 %     13,310       9,650       180,216       112,635  
11.38% Senior Subordinated Notes
8/1/2016
    11.38 %     142,500       71,606       300,000       122,550  
Chase NMTC Verso Investment Fund LLC
                                         
Loan from Verso Paper Finance Holdings LLC
12/29/2040
    6.50 %     23,305       23,305       23,305       23,305  
Total long-term debt for Verso Paper Holdings LLC
            1,226,788       867,537       1,201,077       831,813  
Verso Paper Finance Holdings LLC
                                         
Senior Unsecured Term Loan
2/1/2013
    6.88 %     87,662       84,156       84,687       46,578  
Loan from Verso Paper Holdings LLC
12/29/2040
    6.50 %     23,305       23,305       23,305       23,305  
Less current maturities of long-term debt
2/1/2013
    6.88 %     (87,662 )     (84,156 )     -       -  
Less loans from affiliates
12/29/2040
    6.50 %     (46,610 )     (46,610 )     (46,610 )     (46,610 )
Total long-term debt for Verso Paper Corp.
            $ 1,203,483     $ 844,232     $ 1,262,459     $ 855,086  
(1) Par value of $315,000 on December 31, 2011.
                                         
(2) Par value of $345,000 on June 30, 2012.
                                         
(3) Par value of $396,000 on June 30, 2012 and December 31, 2011.
                                       
 
We determine the fair value of our long-term debt based on market information and a review of prices and terms available for similar obligations.  Our debt is classified as Level 2 within the fair value hierarchy (see also Note 8).

Amounts included in interest expense related to long-term debt and amounts of cash interest payments on long-term debt are as follows:

   
VERSO PAPER
 
   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
(Dollars in thousands)
 
2012
   
2011
   
2012
   
2011
 
Interest expense
  $ 33,050     $ 30,946     $ 64,523     $ 62,593  
Cash interest paid
    7,864       2,294       69,757       57,850  
Debt issuance cost amortization(1)
    1,280       1,272       2,603       2,740  
   
VERSO HOLDINGS
 
   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
(Dollars in thousands)
    2012       2011       2012       2011  
Interest expense
  $ 31,904     $ 29,954     $ 62,266     $ 60,647  
Cash interest paid
    8,242       2,673       70,514       58,485  
Debt issuance cost amortization(1)
    1,190       1,182       2,423       2,560  
(1) Amortization of debt issuance cost is included in interest expense.
                               

 
14

 
 
Revolving Credit Facilities.  On May 4, 2012, Verso Holdings entered into new revolving credit facilities consisting of a $150.0 million asset-based loan facility, or “ABL Facility,” and a $50.0 million cash-flow facility, or “Cash Flow Facility.”  The revolving credit facilities were used to repay the outstanding indebtedness under the existing $200.0 million revolving credit facility and will be used to provide ongoing working capital and for other general corporate purposes.  In connection with the revolving credit facilities, debt issuance costs of approximately $9.8 million were deferred and will be amortized over the life of the credit facilities.  The indebtedness under the revolving credit facilities bears interest at a floating rate based on a margin over a base rate or eurocurrency rate.  As of June 30, 2012, the weighted-average interest rate on outstanding advances was 2.25%.  Verso Holdings is required to pay commitment fees to the lenders in respect of unutilized commitments under the revolving credit facilities and other customary fees.  The indebtedness under the ABL Facility and related guarantees are secured by first-priority security interests, subject to permitted liens, in substantially all of Verso Holdings’, Verso Finance’s, and the subsidiary guarantors’ inventory and accounts receivable, or “ABL Priority Collateral,” and second-priority security interests, subject to permitted liens, in substantially all of their other assets, or “Notes Priority Collateral.”  The indebtedness under the Cash Flow Facility and related guarantees are secured, pari passu with the 11.75% senior secured notes due 2019 and related guarantees, by first-priority security interests in the Notes Priority Collateral and second-priority security interests in the ABL Priority Collateral.  The revolving credit facilities will mature on May 4, 2017, unless, on any of the dates that is 91 days prior to the earliest scheduled maturity of any of the second priority senior secured floating rate notes due 2014, the 11.38% senior subordinated notes, or the senior unsecured term loan, an aggregate principal amount in excess of $100.0 million of indebtedness under such existing second-lien notes, subordinated notes or senior unsecured term loan, as applicable, is outstanding, in which case the revolving credit facilities will mature on such earlier date.  The ABL Facility had $40.0 million outstanding, $42.3 million in letters of credit issued, and $67.7 million available for future borrowing as of June 30, 2012.  The Cash Flow Facility had no outstanding balance, no letters of credit issued, and $50.0 million available for future borrowing as of June 30, 2012.

11.5% Senior Secured Notes due 2014.  For the three months ended June 30, 2012, Verso Holdings redeemed $44.4 million aggregate principal amount of its 11.5% senior secured notes due 2014 and recognized losses of $4.6 million on the early retirement of the notes, including the write-off of unamortized debt issuance costs and unamortized discount related to the notes.  For the six months ended June 30, 2012 Verso Holdings repurchased and retired $270.6 million and redeemed $44.4 million aggregate principal amount of its 11.5% senior secured notes due 2014 and recognized losses of $34.5 million on the early retirement of the notes, including the write-off of unamortized debt issuance costs and unamortized discount related to the notes.  Following these transactions, there are no outstanding 11.5% senior secured notes due 2014.

11.75% Senior Secured Notes due 2019. On March 21, 2012, Verso Holdings issued $345.0 million aggregate principal amount of 11.75% senior secured notes due 2019.  The notes bear interest, payable semi-annually, at the rate of 11.75% per year.  The notes are guaranteed jointly and severally by each of Verso Holdings’ subsidiaries, subject to certain exceptions, and the notes and guarantees are senior secured obligations of Verso Holdings and the guarantors, respectively.  The indebtedness under the notes and related guarantees are secured, pari passu with the Cash Flow Facility and related guarantees, by first-priority security interests in the Notes Priority Collateral and second-priority security interests in the ABL Priority Collateral.  The notes will mature on January 15, 2019.

Verso Holdings used $332.0 million of net proceeds from the notes issuance, after deducting the discount, underwriting fees and offering expenses, along with $0.6 million of available cash, to repurchase and retire $270.6 million and to redeem $44.4 million aggregate principal amount of its 11.5% senior secured notes due 2014.  Debt issuance costs of approximately $9.6 million were deferred and will be amortized over the life of the notes.
 
 
15

 

11.75% Secured Notes due 2019. On May 11, 2012, Verso Holdings issued $271.6 million aggregate principal amount of 11.75% secured notes due 2019.  The notes bear interest, payable semi-annually, at the rate of 11.75% per year.  The notes are guaranteed jointly and severally by each of Verso Holdings’ subsidiaries, subject to certain exceptions, and the notes and guarantees are senior secured obligations of Verso Holdings and the guarantors, respectively.  The notes and related guarantees are secured by security interests, subject to permitted liens, in substantially all of Verso Holdings’ and the guarantors’ tangible and intangible assets.  The security interests securing the notes rank junior to those securing the obligations under the ABL Facility, the Cash Flow Facility, and the 11.75% senior secured notes due 2019 and rank senior to those securing the second priority senior secured floating rate notes due 2014 and the 8.75% second priority senior secured notes due 2019.  The notes will mature on January 15, 2019.

Verso Holdings issued the notes pursuant to two separate exchange offers whereby it (a) issued $166.9 million aggregate principal amount of the notes and paid $5.0 million in cash in exchange for $166.9 million aggregate principal amount of its second priority senior secured floating rate notes due 2014 and (b) issued $104.7 million aggregate principal amount of the notes and paid $17.3 million in cash in exchange for $157.5 million aggregate principal amount of its 11.38% senior subordinated notes due 2016.  Verso Holdings recognized a total gain of $26.3 million, net of the write-off of unamortized debt issuance costs, from the exchanges.  Following the exchanges, $13.3 million aggregate principal amount of the second priority senior secured floating rate notes and $142.5 million aggregate principal amount of the 11.38% senior subordinated notes remain outstanding.  Debt issuance costs of approximately $5.4 million were deferred and will be amortized over the life of the notes.

Senior Unsecured Term Loan.  Verso Finance, the parent entity of Verso Holdings, had $87.7 million outstanding on its senior unsecured term loan as of June 30, 2012.  The loan allows Verso Finance to pay interest either in cash or in kind through the accumulation of the outstanding principal amount.  The loan bears interest, payable quarterly, at a rate equal to LIBOR plus 6.25% per year on interest paid in cash and LIBOR plus 7.00% per year for interest paid in kind, or “PIK,” and added to the principal balance.  As of June 30, 2012, the weighted-average interest rate on the loan was 6.88% per year. Verso Finance elected to exercise the PIK option for $3.0 million and $2.7 million of interest payments due in the first six months of 2012 and 2011, respectively.  The loan will mature on February 1, 2013.   As of June 30, 2012, the loan is included in Current maturities of long-term debt on the accompanying condensed consolidated balance sheet.

As of June 30, 2012, we were in compliance with the covenants in our debt agreements.

6. 
RETIREMENT PLANS

We maintain defined benefit pension plans that provide retirement benefits for hourly employees at the Androscoggin, Bucksport, and Sartell mills who were hired prior to July 1, 2004.  After June 30, 2004, certain employees who are not eligible to participate in the pension plans receive an additional company contribution to their accounts under our 401(k) savings plan. The pension plans provide defined benefits based on years of credited service times a specified flat dollar benefit rate.
 
 
16

 
 
The following table summarizes the components of net periodic benefit cost for the three-month and six-month periods ended June 30, 2012 and 2011:

   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
(Dollars in thousands)
 
2012
   
2011
   
2012
   
2011
 
Components of net periodic benefit cost:
                       
Service cost
  $ 1,770     $ 1,673     $ 3,541     $ 3,347  
Interest cost
    719       630       1,438       1,261  
Expected return on plan assets
    (698 )     (644 )     (1,396 )     (1,289 )
Amortization of prior service cost
    196       294       392       588  
Amortization of actuarial loss
    369       99       738       197  
Net periodic benefit cost
  $ 2,356     $ 2,052     $ 4,713     $ 4,104  
 
We make contributions that are sufficient to fully fund our actuarially determined costs, generally equal to the minimum amounts required by the Employee Retirement Income Security Act, or “ERISA.”  For the three months and six months ended June 30, 2012, we made contributions of $2.1 million and $4.0 million, respectively, to the pension plans.  For the three months and six months ended June 30, 2011, we made contributions of $1.8 million and $3.3 million, respectively, to the pension plans.  We made an additional contribution of $1.8 million in July 2012 to the pension plans.  We expect to make additional contributions of approximately $5.3 million in 2012.  New legislation, titled Moving Ahead for Progress in the 21st Century, has the effect of spreading the expected funding requirements over a longer period of time.  This relief will have an impact on the calculation of our remaining funding contributions in 2012.  Management expects to reduce the estimated 2012 minimum funding requirement by approximately $1.0 million.  This estimate may change when then applicable discount rates are published by the IRS.

ASC Topic 820 provides a common definition of fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.  The fair value framework requires the categorization of assets and liabilities into three levels based upon the assumptions used to value the assets or liabilities (see Note 8 – Fair Value of Financial Instruments for more detail).
 
 
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The following table sets forth by level, within the fair value hierarchy, the pension plans’ assets at fair value as of June 30, 2012, and December 31, 2011.

(Dollars in thousands)
 
Total
   
Level 1
   
Level 2
   
Level 3
 
June 30, 2012
                       
Fixed income funds
  $ 29,322     $ -     $ 29,322     $ -  
Domestic equity funds - large cap
    9,191       -       9,191       -  
Domestic equity funds - small cap
    1,751       -       1,751