Unassociated Document
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 March 31, 2010
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
|
(Commission
File Number)
|
(IRS
Employer
|
or
Organization)
|
|
Identification
Number)
|
Verso
Paper Holdings LLC
(Exact
name of registrant as specified in its charter)
Delaware
|
333-163713
|
56-2597634
|
(State
of Incorporation
|
(Commission
File Number)
|
(IRS
Employer
|
or
Organization)
|
|
Identification
Number)
|
6775
Lenox Center Court, Suite 400
Memphis,
Tennessee 38115-4436
(Address,
including zip code, of principal executive offices)
(901)
369-4100
(Registrant’s
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 Web site, 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.
|
o Yes o
No
|
Verso
Paper Holdings LLC
|
o 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
April 30, 2010, Verso Paper Corp had 52,465,832
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.
References
to “Verso Paper” refer to Verso Paper Corp., a Delaware corporation, and its
subsidiaries. References to “Verso Finance One” refer to Verso Paper
Finance Holdings One LLC and its subsidiaries. Verso Finance One is a
direct, wholly-owned subsidiary of Verso Paper. References to “Verso
Finance” refer to Verso Paper Finance Holdings LLC, a Delaware limited liability
company, and its subsidiaries. Verso Finance is a direct, wholly-owned
subsidiary of Verso Finance One. References to “Verso Holdings” refer to
Verso Paper Holdings LLC, a Delaware limited liability company, and its
subsidiaries. Verso Holdings is a direct, wholly-owned subsidiary of Verso
Finance. Unless otherwise noted, references to “Company,” “we,” “us,” and
“our” refer to Verso Paper including Verso Holdings, a separate public-reporting
company. Other than Verso Paper’s common stock transactions and Verso
Finance’s debt obligation and related financing costs and interest expense, 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.
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6
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9
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27
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34
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36
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37
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37
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37
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37
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37
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37
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38
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39
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40
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VERSO
PAPER
|
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VERSO
HOLDINGS
|
|
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March
31,
|
|
|
December
31,
|
|
|
March
31,
|
|
|
December
31,
|
|
(In
thousands of U.S. dollars, except share and per share
amounts)
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
121,067 |
|
|
$ |
152,097 |
|
|
$ |
118,733 |
|
|
$ |
149,762 |
|
Accounts
receivable - net
|
|
|
105,276 |
|
|
|
104,263 |
|
|
|
105,355 |
|
|
|
104,289 |
|
Inventories
|
|
|
163,586 |
|
|
|
162,401 |
|
|
|
163,586 |
|
|
|
162,401 |
|
Prepaid
expenses and other assets
|
|
|
10,282 |
|
|
|
11,292 |
|
|
|
9,375 |
|
|
|
10,385 |
|
Total
Current Assets
|
|
|
400,211 |
|
|
|
430,053 |
|
|
|
397,049 |
|
|
|
426,837 |
|
Property,
plant, and equipment - net
|
|
|
1,000,881 |
|
|
|
1,022,622 |
|
|
|
1,000,881 |
|
|
|
1,022,622 |
|
Reforestation
|
|
|
13,371 |
|
|
|
13,357 |
|
|
|
13,371 |
|
|
|
13,357 |
|
Intangibles
and other assets - net
|
|
|
82,876 |
|
|
|
88,006 |
|
|
|
81,855 |
|
|
|
86,896 |
|
Goodwill
|
|
|
18,695 |
|
|
|
18,695 |
|
|
|
10,551 |
|
|
|
10,551 |
|
Total
Assets
|
|
$ |
1,516,034 |
|
|
$ |
1,572,733 |
|
|
$ |
1,503,707 |
|
|
$ |
1,560,263 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
100,914 |
|
|
$ |
103,253 |
|
|
$ |
98,657 |
|
|
$ |
100,995 |
|
Accrued
liabilities
|
|
|
88,274 |
|
|
|
116,225 |
|
|
|
87,464 |
|
|
|
115,425 |
|
Total
Current Liabilities
|
|
|
189,188 |
|
|
|
219,478 |
|
|
|
186,121 |
|
|
|
216,420 |
|
Long-term
debt
|
|
|
1,221,913 |
|
|
|
1,192,352 |
|
|
|
1,146,613 |
|
|
|
1,118,273 |
|
Other
liabilities
|
|
|
38,816 |
|
|
|
35,612 |
|
|
|
30,780 |
|
|
|
27,577 |
|
Total
Liabilities
|
|
|
1,449,917 |
|
|
|
1,447,442 |
|
|
|
1,363,514 |
|
|
|
1,362,270 |
|
Commitments
and contingencies (Note 11)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Equity:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
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Preferred
stock — par value $0.01 (20,000,000 shares authorized, no shares
issued) no shares issued)
|
|
|
- |
|
|
|
- |
|
|
|
n/a |
|
|
|
n/a |
|
Common
stock — par value $0.01 (250,000,000 shares authorized with 52,465,832
shares issued and outstanding on March 31, 2010, and 52,374,647 shares
issued and outstanding on December 31, 2009)
|
|
|
525 |
|
|
|
524 |
|
|
|
n/a |
|
|
|
n/a |
|
Paid-in-capital
|
|
|
212,739 |
|
|
|
212,381 |
|
|
|
317,382 |
|
|
|
317,023 |
|
Retained
deficit
|
|
|
(127,595 |
) |
|
|
(74,045 |
) |
|
|
(157,637 |
) |
|
|
(105,461 |
) |
Accumulated
other comprehensive loss
|
|
|
(19,552 |
) |
|
|
(13,569 |
) |
|
|
(19,552 |
) |
|
|
(13,569 |
) |
Total
Equity
|
|
|
66,117 |
|
|
|
125,291 |
|
|
|
140,193 |
|
|
|
197,993 |
|
Total
Liabilities and Equity
|
|
$ |
1,516,034 |
|
|
$ |
1,572,733 |
|
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$ |
1,503,707 |
|
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$ |
1,560,263 |
|
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|
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Included
in the balance sheet line items above are related-party balances as
follows:
|
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|
|
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Accounts
receivable
|
|
$ |
8,772 |
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$ |
7,785 |
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$ |
8,772 |
|
|
$ |
7,785 |
|
Accounts
payable
|
|
|
648 |
|
|
|
498 |
|
|
|
648 |
|
|
|
498 |
|
See notes
to unaudited condensed consolidated financial statements.
|
|
VERSO
PAPER
|
|
|
VERSO
HOLDINGS
|
|
|
|
Three
Months Ended
|
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
|
March
31,
|
|
(In
thousands of U.S. dollars, except per share data)
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Net
sales
|
|
$ |
363,646 |
|
|
$ |
287,074 |
|
|
$ |
363,646 |
|
|
$ |
287,074 |
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of products sold - (exclusive of depreciation, amortization, and
depletion)
|
|
|
336,746 |
|
|
|
268,940 |
|
|
|
336,746 |
|
|
|
268,940 |
|
Depreciation,
amortization, and depletion
|
|
|
32,142 |
|
|
|
34,323 |
|
|
|
32,142 |
|
|
|
34,323 |
|
Selling,
general, and administrative expenses
|
|
|
16,269 |
|
|
|
15,387 |
|
|
|
16,217 |
|
|
|
15,222 |
|
Restructuring
and other charges
|
|
|
- |
|
|
|
171 |
|
|
|
- |
|
|
|
171 |
|
Operating
loss
|
|
|
(21,511 |
) |
|
|
(31,747 |
) |
|
|
(21,459 |
) |
|
|
(31,582 |
) |
Interest
income
|
|
|
(39 |
) |
|
|
(58 |
) |
|
|
(39 |
) |
|
|
(58 |
) |
Interest
expense
|
|
|
32,322 |
|
|
|
27,085 |
|
|
|
31,001 |
|
|
|
24,716 |
|
Other
income, net
|
|
|
(244 |
) |
|
|
(113,317 |
) |
|
|
(245 |
) |
|
|
(113,317 |
) |
Net
income (loss)
|
|
$ |
(53,550 |
) |
|
$ |
54,543 |
|
|
$ |
(52,176 |
) |
|
$ |
57,077 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
(1.02 |
) |
|
$ |
1.05 |
|
|
|
|
|
|
|
|
|
Diluted
|
|
$ |
(1.02 |
) |
|
$ |
1.05 |
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
52,381,269 |
|
|
|
52,046,647 |
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
52,381,269 |
|
|
|
52,046,647 |
|
|
|
|
|
|
|
|
|
Included in the
financial statement line items above are related-party
transactions as follows (Notes 9 and
10):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
32,154 |
|
|
$ |
26,780 |
|
|
$ |
32,154 |
|
|
$ |
26,780 |
|
Purchases
included in cost of products sold
|
|
|
1,388 |
|
|
|
1,120 |
|
|
|
1,388 |
|
|
|
1,120 |
|
See notes
to unaudited condensed consolidated financial statements.
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'
EQUITY
FOR
THE PERIODS ENDED MARCH 31, 2010 AND 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
|
|
|
|
|
|
|
Common
|
|
|
Common
|
|
|
Paid-in-
|
|
|
Retained
|
|
|
Income
|
|
|
Total
|
|
(In
thousands)
|
|
Shares
|
|
|
Stock
|
|
|
Capital
|
|
|
Deficit
|
|
|
(Loss)
|
|
|
Equity
|
|
Beginning
Balance - January 1, 2009
|
|
|
52,046 |
|
|
$ |
520 |
|
|
$ |
211,752 |
|
|
$ |
(180,048 |
) |
|
$ |
(42,271 |
) |
|
$ |
(10,047 |
) |
Net
income
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
54,543 |
|
|
|
- |
|
|
|
54,543 |
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
unrealized losses on derivative financial instruments, net of
reclassification of $9.0 million of net losses included in net
income
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1,165 |
) |
|
|
(1,165 |
) |
Defined
benefit pension plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
actuarial loss
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
79 |
|
|
|
79 |
|
Prior
service cost amortization
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
218 |
|
|
|
218 |
|
Total
other comprehensive loss
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(868 |
) |
|
|
(868 |
) |
Comprehensive
income (loss)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
54,543 |
|
|
|
(868 |
) |
|
|
53,675 |
|
Equity
award expense
|
|
|
- |
|
|
|
- |
|
|
|
86 |
|
|
|
- |
|
|
|
- |
|
|
|
86 |
|
Ending
Balance - March 31, 2009
|
|
|
52,046 |
|
|
$ |
520 |
|
|
$ |
211,838 |
|
|
$ |
(125,505 |
) |
|
$ |
(43,139 |
) |
|
$ |
43,714 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
Balance - January 1, 2010
|
|
|
52,374 |
|
|
$ |
524 |
|
|
$ |
212,381 |
|
|
$ |
(74,045 |
) |
|
$ |
(13,569 |
) |
|
$ |
125,291 |
|
Net
loss
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(53,550 |
) |
|
|
- |
|
|
|
(53,550 |
) |
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
unrealized losses on derivative financial instruments, net of
reclassification of $0.8 million of net losses included in net
loss
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(6,451 |
) |
|
|
(6,451 |
) |
Defined
benefit pension plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
actuarial loss
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
22 |
|
|
|
22 |
|
Prior
service cost amortization
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
446 |
|
|
|
446 |
|
Total
other comprehensive loss
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(5,983 |
) |
|
|
(5,983 |
) |
Comprehensive
loss
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(53,550 |
) |
|
|
(5,983 |
) |
|
|
(59,533 |
) |
Common
stock issued for restricted stock
|
|
|
90 |
|
|
|
1 |
|
|
|
(1 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
Stock
option exercise
|
|
|
1 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Equity
award expense
|
|
|
- |
|
|
|
- |
|
|
|
359 |
|
|
|
- |
|
|
|
- |
|
|
|
359 |
|
Ending
Balance - March 31, 2010
|
|
|
52,465 |
|
|
$ |
525 |
|
|
$ |
212,739 |
|
|
$ |
(127,595 |
) |
|
$ |
(19,552 |
) |
|
$ |
66,117 |
|
See notes
to unaudited condensed consolidated financial statements.
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN MEMBER'S EQUITY
FOR
THE PERIODS ENDED MARCH 31, 2010 AND 2009
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
|
|
|
Total
|
|
|
|
Paid-in-
|
|
|
Retained
|
|
|
Income
|
|
|
Member's
|
|
(In
thousands of U.S. dollars)
|
|
Capital
|
|
|
Deficit
|
|
|
(Loss)
|
|
|
Equity
|
|
Beginning
Balance - January 1, 2009
|
|
$ |
301,110 |
|
|
$ |
(167,135 |
) |
|
$ |
(42,271 |
) |
|
$ |
91,704 |
|
Parent
company contributions
|
|
|
15,281 |
|
|
|
(3,569 |
) |
|
|
- |
|
|
|
11,712 |
|
Cash
distributions
|
|
|
- |
|
|
|
(239 |
) |
|
|
- |
|
|
|
(239 |
) |
Net
income
|
|
|
- |
|
|
|
57,077 |
|
|
|
- |
|
|
|
57,077 |
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
unrealized losses on derivative financial instruments, net
of reclassification of $9.0 million of net losses included in
net income
|
|
|
- |
|
|
|
- |
|
|
|
(1,165 |
) |
|
|
(1,165 |
) |
Defined
benefit pension plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
actuarial loss
|
|
|
- |
|
|
|
- |
|
|
|
79 |
|
|
|
79 |
|
Prior
service cost amortization
|
|
|
- |
|
|
|
- |
|
|
|
218 |
|
|
|
218 |
|
Total
other comprehensive loss
|
|
|
- |
|
|
|
- |
|
|
|
(868 |
) |
|
|
(868 |
) |
Comprehensive
income (loss)
|
|
|
- |
|
|
|
57,077 |
|
|
|
(868 |
) |
|
|
56,209 |
|
Equity
award expense
|
|
|
86 |
|
|
|
- |
|
|
|
- |
|
|
|
86 |
|
Ending
Balance - March 31, 2009
|
|
$ |
316,477 |
|
|
$ |
(113,866 |
) |
|
$ |
(43,139 |
) |
|
$ |
159,472 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
Balance - January 1, 2010
|
|
$ |
317,023 |
|
|
$ |
(105,461 |
) |
|
$ |
(13,569 |
) |
|
$ |
197,993 |
|
Net
loss
|
|
|
- |
|
|
|
(52,176 |
) |
|
|
- |
|
|
|
(52,176 |
) |
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
unrealized losses on derivative financial instruments, net
of reclassification of $0.8 million of net losses included in
net loss
|
|
|
- |
|
|
|
- |
|
|
|
(6,451 |
) |
|
|
(6,451 |
) |
Defined
benefit pension plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
actuarial loss
|
|
|
- |
|
|
|
- |
|
|
|
22 |
|
|
|
22 |
|
Prior
service cost amortization
|
|
|
- |
|
|
|
- |
|
|
|
446 |
|
|
|
446 |
|
Total
other comprehensive loss
|
|
|
- |
|
|
|
- |
|
|
|
(5,983 |
) |
|
|
(5,983 |
) |
Comprehensive
loss
|
|
|
- |
|
|
|
(52,176 |
) |
|
|
(5,983 |
) |
|
|
(58,159 |
) |
Equity
award expense
|
|
|
359 |
|
|
|
- |
|
|
|
- |
|
|
|
359 |
|
Ending
Balance - March 31, 2010
|
|
$ |
317,382 |
|
|
$ |
(157,637 |
) |
|
$ |
(19,552 |
) |
|
$ |
140,193 |
|
See notes
to unaudited condensed consolidated financial statements.
|
|
VERSO
PAPER
|
|
|
VERSO
HOLDINGS
|
|
|
|
Three
Months Ended
|
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
|
March
31,
|
|
(In
thousands of U.S. dollars)
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Cash
Flows From Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
(53,550 |
) |
|
$ |
54,543 |
|
|
$ |
(52,176 |
) |
|
$ |
57,077 |
|
Adjustments
to reconcile net income (loss) to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation,
amortization, and depletion
|
|
|
32,142 |
|
|
|
34,323 |
|
|
|
32,142 |
|
|
|
34,323 |
|
Amortization
of debt issuance costs
|
|
|
1,354 |
|
|
|
1,502 |
|
|
|
1,264 |
|
|
|
1,353 |
|
Accretion
of discount on long-term debt
|
|
|
902 |
|
|
|
- |
|
|
|
902 |
|
|
|
- |
|
Gain
on early extinguishment of debt
|
|
|
(253 |
) |
|
|
(8,903 |
) |
|
|
(255 |
) |
|
|
(8,903 |
) |
(Gain)
loss on disposal of fixed assets
|
|
|
(59 |
) |
|
|
56 |
|
|
|
(59 |
) |
|
|
56 |
|
Equity
award expense
|
|
|
359 |
|
|
|
86 |
|
|
|
359 |
|
|
|
86 |
|
Change
in unrealized losses on derivatives, net
|
|
|
(6,451 |
) |
|
|
(1,165 |
) |
|
|
(6,451 |
) |
|
|
(1,165 |
) |
Other
– net
|
|
|
431 |
|
|
|
104 |
|
|
|
431 |
|
|
|
104 |
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(990 |
) |
|
|
(72,569 |
) |
|
|
(1,041 |
) |
|
|
(72,569 |
) |
Inventories
|
|
|
(1,184 |
) |
|
|
(33,143 |
) |
|
|
(1,184 |
) |
|
|
(33,143 |
) |
Prepaid
expenses and other assets
|
|
|
4,594 |
|
|
|
(2,676 |
) |
|
|
4,594 |
|
|
|
(2,676 |
) |
Accounts
payable
|
|
|
(2,338 |
) |
|
|
(29,006 |
) |
|
|
(2,338 |
) |
|
|
(28,932 |
) |
Accrued
liabilities
|
|
|
(24,080 |
) |
|
|
(30,229 |
) |
|
|
(25,310 |
) |
|
|
(32,449 |
) |
Net
cash used in operating activities
|
|
|
(49,123 |
) |
|
|
(87,077 |
) |
|
|
(49,122 |
) |
|
|
(86,838 |
) |
Cash
Flows From Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from sale of fixed assets
|
|
|
52 |
|
|
|
14 |
|
|
|
52 |
|
|
|
14 |
|
Capital
expenditures
|
|
|
(8,435 |
) |
|
|
(11,918 |
) |
|
|
(8,435 |
) |
|
|
(11,918 |
) |
Net
cash used in investing activities
|
|
|
(8,383 |
) |
|
|
(11,904 |
) |
|
|
(8,383 |
) |
|
|
(11,904 |
) |
Cash
Flows From Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from long-term debt
|
|
|
27,437 |
|
|
|
- |
|
|
|
27,437 |
|
|
|
- |
|
Debt
issuance costs
|
|
|
(961 |
) |
|
|
- |
|
|
|
(961 |
) |
|
|
- |
|
Repayments
of long-term debt
|
|
|
- |
|
|
|
(3,568 |
) |
|
|
- |
|
|
|
(3,568 |
) |
Cash
distributions
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(239 |
) |
Net
cash provided by (used in) financing activities
|
|
|
26,476 |
|
|
|
(3,568 |
) |
|
|
26,476 |
|
|
|
(3,807 |
) |
Change
in cash and cash equivalents
|
|
|
(31,030 |
) |
|
|
(102,549 |
) |
|
|
(31,029 |
) |
|
|
(102,549 |
) |
Cash
and cash equivalents at beginning of period
|
|
|
152,097 |
|
|
|
119,542 |
|
|
|
149,762 |
|
|
|
119,520 |
|
Cash
and cash equivalents at end of period
|
|
$ |
121,067 |
|
|
$ |
16,993 |
|
|
$ |
118,733 |
|
|
$ |
16,971 |
|
See notes
to unaudited condensed consolidated financial statements.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 2010,
AND DECEMBER 31, 2009, AND FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2010 AND
2009
1.
BACKGROUND AND BASIS OF PRESENTATION
The
accompanying consolidated financial statements for Verso Paper Corp., a Delaware
corporation, or “Verso Paper,” include the accounts of Verso Paper and its
subsidiaries, and the accompanying consolidated financial statements for Verso
Paper Holdings LLC, a Delaware limited liability company, or “Verso Holdings,”
include the accounts of Verso Holdings and its subsidiaries. Verso Paper
is the direct parent of Verso Paper Finance Holdings One LLC, or “Verso Finance
One,” and the indirect parent of Verso Paper Finance Holdings LLC, or “Verso
Finance,” and Verso Holdings. Unless otherwise noted, references to
“Company,” “we,” “us,” and “our” refer to Verso Paper including Verso Holdings,
a separate public-reporting company. Other than Verso Paper’s common stock
transactions and Verso Finance’s debt obligation and related financing costs and
interest expense, the assets, liabilities, income, expenses and cash flows
presented for all periods represent those of Verso Holdings. Unless
otherwise noted, the information provided pertains to both Verso Paper and Verso
Holdings.
The
Company began operations on August 1, 2006, when it acquired the assets and
certain liabilities comprising the business of the Coated and Supercalendered
Papers Division of International Paper Company, or “International
Paper.” The Company was formed by affiliates of Apollo Global
Management, LLC, or “Apollo,” for the purpose of consummating the acquisition
from International Paper, or the “Acquisition.” Verso Paper went
public on May 14, 2008, with an initial public offering, “IPO,” of 14 million
shares of common stock.
Verso
Paper is a holding company whose subsidiaries operate in the following three
segments: coated and supercalendered papers; hardwood market pulp; and other,
consisting of specialty papers. The Company’s core business platform is as
a producer of coated freesheet, coated groundwood, and uncoated supercalendered
papers. These products serve customers in the catalog, magazine, inserts,
and commercial print markets.
Included
in these financial statements are the unaudited condensed consolidated financial
statements of Verso Paper and Verso Holdings as of March 31, 2010, and for the
three-month periods ended March 31, 2010 and 2009. The December 31, 2009,
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. 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’ financial position, 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. All material
intercompany balances and transactions are eliminated. 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 Annual Reports on
Form 10-K for the year ended December 31, 2009.
2.
RECENT ACCOUNTING DEVELOPMENTS
ASC Topic 105, Generally
Accepted Accounting Principles. In 2009 the Financial Accounting
Standards Board, or “FASB”, issued an accounting pronouncement establishing the
FASB Accounting Standards
CodificationTM,
or “ASC,” as the single source of authoritative accounting principles recognized
by the FASB to be applied by nongovernmental entities in the preparation of
financial statements in conformity with generally accepted accounting
principles, or “GAAP.” Rules and interpretive releases of the
Securities and Exchange Commission, or “SEC,” under authority of federal
securities laws are also sources of authoritative guidance for SEC
registrants. All guidance contained in the ASC carries an equal level of
authority. All non-grandfathered, non-SEC accounting literature not
included in the ASC is superseded and deemed non-authoritative. The
Company’s adoption of the provisions of ASC Topic 105, Generally Accepted Accounting
Principles, for the quarterly period ended September 30, 2009, had no
impact on the Company’s financial condition, results of operations, or cash
flows.
ASC Topic 350, Intangibles –
Goodwill and Other. New authoritative accounting guidance (ASC
Topic 350-30-65) under ASC Topic 350, Intangibles – Goodwill and
Other, provides direction on factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of
a recognized intangible asset. The intent is to better match the useful
life of the recognized intangible asset to the period of the expected cash flows
used to measure its fair value. The Company’s adoption of the new guidance
under ASC Topic 350, effective January 1, 2009, did not have a material impact
on the Company’s consolidated financial statements.
ASC Topic 715, Compensation –
Retirement Benefits. New authoritative accounting guidance (ASC Topic
715-20-65) under ASC Topic 715, Compensation – Retirement
Benefits, requires more detailed disclosures about employers’ pension
plan assets. New disclosures will include more information on investment
strategies, major categories of plan assets, concentrations of risk within plan
assets and valuation techniques used to measure the fair value of plan
assets. The Company’s adoption of the new guidance under ASC Topic 715,
for the year ended December 31, 2009, had no impact on the Company’s financial
condition, results of operations, or cash flows.
ASC Topic 805, Business
Combinations. New authoritative
accounting guidance (ASC Topic 805-10-65) under ASC Topic 805, Business Combinations,
establish principles and requirements for how an acquirer recognizes and
measures identifiable assets acquired, liabilities assumed and noncontrolling
interests; recognizes and measures goodwill acquired in a business combination
or gain from a bargain purchase; and establishes disclosure requirements.
The Company adopted the new guidance under ASC Topic 805 effective January 1,
2009, and will apply these provisions to any future
acquisitions.
ASC Topic 810, Consolidation. New authoritative
accounting guidance (ASC Topic 810-10-65) under ASC Topic 810, Consolidation, establishes
accounting and reporting standards for the noncontrolling interest in a
subsidiary and for the deconsolidation of a subsidiary. The Company’s
adoption of the new guidance under ASC Topic 810, effective January 1, 2009, did
not have a material impact on the Company’s consolidated financial
statements.
ASC Topic 815, Derivatives and
Hedging. New authoritative accounting guidance (ASC Topic
815-10-65) under ASC Topic 815, Derivatives and Hedging,
changes the disclosure requirements for derivative instruments and hedging
activities. Entities are required to provide enhanced disclosures about
(a) how and why an entity uses derivative instruments, (b) how derivative
instruments and related hedged items are accounted for under ASC Topic 815, and
(c) how derivative instruments and related hedged items affect an entity’s
financial position, financial performance, and cash flows. Since this new
guidance under ASC Topic 815 only affects disclosure requirements, the Company’s
adoption of these requirements, effective January 1, 2009, had no impact on the
Company’s financial condition, results of operations, or cash
flows.
ASC Topic 820, Fair Value
Measurements and Disclosures. New authoritative accounting guidance
(ASC Topic 820-10-15) under ASC Topic 820, Fair Value Measurements and
Disclosures, delayed the effective date of ASC Topic 820-10 for all
nonfinancial assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring
basis, until 2009. ASC Topic 820 establishes a fair value hierarchy,
giving the highest priority to quoted prices in active markets and the lowest
priority to unobservable data and requires disclosures for assets and
liabilities measured at fair value based on their level in the hierarchy.
The Company’s adoption of the new guidance under ASC Topic 820, effective
January 1, 2009, did not have a material impact on the Company’s consolidated
financial statements.
Further
new authoritative accounting guidance (Accounting Standards Update, or “ASU”,
No. 2009-05) under ASC Topic 820, provides clarification that in circumstances
in which a quoted price in an active market for the identical liabilities is not
available, a reporting entity is required to measure fair value using one or
more of the techniques provided for in this update. The Company’s adoption
of the new guidance under ASC Topic 820, effective October 1, 2009, did not have
a material impact on the Company’s consolidated financial
statements.
Additionally,
new authoritative accounting guidance (ASU No. 2010-06) under ASC Topic 820
provides guidance relating to fair value measurement disclosures. Specifically,
companies will be required to separately disclose significant transfers into and
out of Level 1 and Level 2 measurements in the fair value hierarchy
and the reasons for those transfers. For Level 3 fair value measurements,
the new guidance requires a gross presentation of activities within the Level 3
roll forward. Additionally, the FASB clarified existing fair value
measurement disclosure requirements relating to the level of disaggregation,
inputs, and valuation techniques. This guidance is effective for interim or
annual reporting periods beginning after December 15, 2009, except for the
detailed Level 3 disclosures, which are effective for interim or annual
reporting periods beginning after December 15, 2010. Since this new guidance
only affects disclosure requirements, the Company’s adoption of the initial
requirements, for the quarterly period ended March 31, 2010, had no impact on
the Company’s financial condition, results of operations, or cash flows, and the
adoption of the remaining provisions is expected to have no impact on
the Company’s financial condition, results of operations, or cash
flows.
ASC Topic 825, Financial
Instruments. New authoritative accounting guidance (ASC Topic
825-10-65) under ASC Topic 825, Financial Instruments,
increases the frequency of fair value disclosures from an annual basis to a
quarterly basis. The guidance relates to fair value disclosures for any
financial instruments that are not currently reflected on the balance sheet at
fair value. Since this new guidance under ASC Topic 825 only affects
disclosure requirements, the Company’s adoption of these requirements, for the
quarterly period ended June 30, 2009, had no impact on the Company’s
consolidated financial statements.
ASC Topic 855, Subsequent
Events. New authoritative accounting guidance (ASU No. 2010-09)
under ASC Topic 855, Subsequent Events, removes
the requirement for SEC filers to disclose the date through which an entity has
evaluated subsequent events. This change removes potential conflicts with
current SEC guidance. ASU No. 2010-09 also clarifies the intended scope of
the reissuance disclosure provisions. ASU No. 2010-09 was effective upon
issuance and had no impact on the Company’s consolidated financial
statements.
Additionally,
new authoritative accounting guidance (ASC Topic 855-10) under ASC Topic 855
establishes general standards of accounting for and disclosure of events that
occur after the balance sheet date but before financial statements are issued or
available to be issued. ASC Topic 855 defines (1) the period after the
balance sheet date during which a reporting entity’s management should evaluate
events or transactions that may occur for potential recognition or disclosure in
the financial statements, (2) the circumstances under which an entity
should recognize events or transactions occurring after the balance sheet date
in its financial statements, and (3) the disclosures an entity should make
about events or transactions that occurred after the balance sheet date.
The Company’s adoption of the new guidance under ASC Topic 855, for the
quarterly period ended June 30, 2009, had no impact on the Company’s
consolidated financial statements.
Other new
accounting pronouncements issued but not effective until after March 31, 2010,
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 (loss) by the weighted
average number of common shares outstanding for each period. Diluted
earnings per share are calculated similarly, except that the dilutive effect of
the assumed exercise of potentially dilutive securities is included. 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 2010 or 2009. The following table provides a
reconciliation of basic and diluted earnings (loss) per common
share:
|
|
VERSO
PAPER
|
|
|
|
Three
Months Ended March 31,
|
|
(In
thousands, except per share data)
|
|
2010
|
|
|
2009
|
|
Net
income (loss) available to common shareholders
|
|
$ |
(53,550 |
) |
|
$ |
54,543 |
|
|
|
|
|
|
|
|
|
|
Weighted
average common stock outstanding
|
|
|
52,047 |
|
|
|
52,047 |
|
Weighted
average restricted stock
|
|
|
334 |
|
|
|
- |
|
Weighted
average common shares outstanding - basic
|
|
|
52,381 |
|
|
|
52,047 |
|
|
|
|
|
|
|
|
|
|
Dilutive
shares from stock options
|
|
|
- |
|
|
|
- |
|
Weighted
average common shares outstanding - diluted
|
|
|
52,381 |
|
|
|
52,047 |
|
|
|
|
|
|
|
|
|
|
Basic
earnings (loss) per share
|
|
$ |
(1.02 |
) |
|
$ |
1.05 |
|
|
|
|
|
|
|
|
|
|
Diluted
earnings (loss) per share
|
|
$ |
(1.02 |
) |
|
$ |
1.05 |
|
For the
three months ended March 31, 2010, 1,158,000 weighted average potentially
dilutive shares from options with a weighted average exercise price per share of
$3.40 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 March 31, 2009, 67,000 weighted average potentially
dilutive shares from options with a weighted average exercise price per share of
$1.12 were excluded from the diluted earnings per share calculation
because including such shares would have been
antidilutive.
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.
Inventories
by major category include the following:
|
|
March
31,
|
|
|
December 31,
|
|
(In
thousands of U.S. dollars)
|
|
2010
|
|
|
2009
|
|
Raw
materials
|
|
$ |
27,498 |
|
|
$ |
28,923 |
|
Woodyard
logs
|
|
|
8,268 |
|
|
|
4,463 |
|
Work-in-process
|
|
|
22,103 |
|
|
|
27,472 |
|
Finished
goods
|
|
|
79,662 |
|
|
|
75,379 |
|
Replacement
parts and other supplies
|
|
|
26,055 |
|
|
|
26,164 |
|
Inventories
|
|
$ |
163,586 |
|
|
$ |
162,401 |
|
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. The
Company’s 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 March
31, 2010, the Company had $0.8 million of restricted cash included in 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. The following table presents an analysis related to
the Company’s asset retirement obligations included in Other liabilities in the
accompanying balance sheets:
|
|
Three Months Ended March
31,
|
|
(In
thousands of U.S. dollars)
|
|
2010
|
|
|
2009
|
|
Asset
retirement obligations, January 1
|
|
$ |
13,300 |
|
|
$ |
14,028 |
|
Accretion
expense
|
|
|
204 |
|
|
|
202 |
|
Settlement
of existing liabilities
|
|
|
(155 |
) |
|
|
(61 |
) |
Adjustment
to existing liabilities
|
|
|
807 |
|
|
|
611 |
|
Asset
retirement obligations, March 31
|
|
$ |
14,156 |
|
|
$ |
14,780 |
|
In
addition to the above obligations, the Company may be required to remove certain
materials from its facilities, or to remediate 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 the Company believes that adequate
information does not exist to reasonably estimate any such potential
obligations. Accordingly, the Company 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 quarter ended March 31,
2010, interest costs capitalized were negligible compared to $0.2 million of
interest costs capitalized for the quarter ended March 31, 2009.
Depreciation
is computed using the straight-line method over the assets’ estimated useful
lives. Depreciation expense was $31.4 million and $31.5 million,
respectively, for the quarters ended March 31, 2010 and
2009.
4.
INTANGIBLES AND OTHER ASSETS
Intangibles
and other assets consist of the following:
|
|
VERSO
PAPER
|
|
|
VERSO
HOLDINGS
|
|
|
|
March
31,
|
|
|
December
31,
|
|
|
March
31,
|
|
|
December
31,
|
|
(In
thousands of U.S. dollars)
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Amortizable
intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer
relationships, net of accumulated amortization of $4.9 million at March
31, 2010, and $4.6 million at March 31, 2009
|
|
$ |
8,403 |
|
|
$ |
8,720 |
|
|
$ |
8,403 |
|
|
$ |
8,720 |
|
Patents,
net of accumulated amortization of $0.4 million at March 31, 2010, and
$0.4 million at March 31, 2009
|
|
|
727 |
|
|
|
755 |
|
|
|
727 |
|
|
|
755 |
|
Total
amortizable intangible assets
|
|
|
9,130 |
|
|
|
9,475 |
|
|
|
9,130 |
|
|
|
9,475 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortizable
intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
|
21,473 |
|
|
|
21,473 |
|
|
|
21,473 |
|
|
|
21,473 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing
costs, net of accumulated amortization of $15.6 million at March 31, 2010,
and $14.3 million at March 31, 2009, for Verso Paper Corp., and net of
accumulated amortization of $14.5 million at March 31, 2010, and $13.2
million at March 31, 2009, for Verso Paper Holdings LLC
|
|
|
28,837 |
|
|
|
29,229 |
|
|
|
27,816 |
|
|
|
28,119 |
|
Deferred
major repair
|
|
|
6,778 |
|
|
|
8,787 |
|
|
|
6,778 |
|
|
|
8,787 |
|
Deferred
software cost, net of accumulated amortization of $2.8 million at March
31, 2010, and $2.9 million at March 31, 2009
|
|
|
1,077 |
|
|
|
1,354 |
|
|
|
1,077 |
|
|
|
1,354 |
|
Replacement
parts, net
|
|
|
3,588 |
|
|
|
3,806 |
|
|
|
3,588 |
|
|
|
3,806 |
|
Other
|
|
|
11,993 |
|
|
|
13,882 |
|
|
|
11,993 |
|
|
|
13,882 |
|
Total
other assets
|
|
|
52,273 |
|
|
|
57,058 |
|
|
|
51,252 |
|
|
|
55,948 |
|
Intangibles
and other assets
|
|
$ |
82,876 |
|
|
$ |
88,006 |
|
|
$ |
81,855 |
|
|
$ |
86,896 |
|
Amounts
reflected in depreciation, amortization, and depletion expense related to
intangibles and other assets are as follows:
|
|
Three
Months Ended
|
|
|
|
March 31,
|
|
(In
thousands of U.S. dollars)
|
|
2010
|
|
|
2009
|
|
Intangible
amortization
|
|
$ |
345 |
|
|
$ |
354 |
|
Software
amortization
|
|
|
355 |
|
|
|
440 |
|
The
estimated future amortization expense for intangible assets over the next five
years is as follows:
(In
thousands of U.S. dollars)
|
|
|
|
Remainder
of 2010
|
|
$ |
949 |
|
2011
|
|
|
1,065 |
|
2012
|
|
|
915 |
|
2013
|
|
|
815 |
|
2014
|
|
|
715 |
|
5.
LONG-TERM DEBT
A summary
of long-term debt is as follows:
|
|
|
|
March
31, 2010
|
|
|
December
31, 2009
|
|
|
|
Original
|
|
Interest
|
|
|
|
|
|
Fair
|
|
|
|
|
|
Fair
|
|
(In
thousands of U.S. dollars)
|
|
Maturity
|
|
Rate
|
|
|
Balance
|
|
|
Value
|
|
|
Balance
|
|
|
Value
|
|
Verso
Paper Holdings LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Priority Revolving Credit Facility
|
|
8/1/2012
|
|
|
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
Senior Secured Notes
- fixed (1)
|
|
7/1/2014
|
|
|
11.50 |
% |
|
|
329,317 |
|
|
|
378,000 |
|
|
|
300,977 |
|
|
|
357,500 |
|
Second
Priority Senior Secured Notes - fixed
|
|
8/1/2014
|
|
|
9.13 |
% |
|
|
337,080 |
|
|
|
326,968 |
|
|
|
337,080 |
|
|
|
321,911 |
|
Second
Priority Senior Secured Notes - floating
|
|
8/1/2014
|
|
|
4.00 |
% |
|
|
180,216 |
|
|
|
153,634 |
|
|
|
180,216 |
|
|
|
142,371 |
|
Senior
Subordinated Notes
|
|
8/1/2016
|
|
|
11.38 |
% |
|
|
300,000 |
|
|
|
261,750 |
|
|
|
300,000 |
|
|
|
241,500 |
|
Total
Debt for Verso Paper Holdings LLC
|
|
|
|
|
|
|
|
|
1,146,613 |
|
|
|
1,120,352 |
|
|
|
1,118,273 |
|
|
|
1,063,282 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Verso
Paper Finance Holdings LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
Unsecured Term Loan
|
|
2/1/2013
|
|
|
6.57 |
% |
|
|
75,300 |
|
|
|
31,626 |
|
|
|
74,079 |
|
|
|
31,113 |
|
Total
Debt For Verso Paper Corp.
|
|
|
|
|
|
|
|
$ |
1,221,913 |
|
|
$ |
1,151,978 |
|
|
$ |
1,192,352 |
|
|
$ |
1,094,395 |
|
(1) Par
value of $350,000 at March 31, 2010, and $325,000 at December 31,
2009.
The
Company determines the fair value of its long-term debt based on market
information and a review of prices and terms available for similar
obligations.
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
|
|
|
VERSO HOLDINGS
|
|
|
|
Three
Months Ended
|
|
|
Three
Months Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
(In
thousands of U.S. dollars)
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Interest
expense
|
|
$ |
31,005 |
|
|
$ |
25,777 |
|
|
$ |
29,774 |
|
|
$ |
23,557 |
|
Cash
interest paid
|
|
|
55,874 |
|
|
|
39,064 |
|
|
|
55,874 |
|
|
|
39,064 |
|
Debt
issuance cost amortization (1)
|
|
|
1,354 |
|
|
|
1,502 |
|
|
|
1,264 |
|
|
|
1,353 |
|
(1)
Amortization of debt issuance cost is included in interest expense.
Verso
Finance has a senior unsecured term loan which matures on February 1,
2013. The term loan allows Verso Finance to pay interest either in cash or
in-kind, or “PIK,” through the accumulation of the outstanding principal
amount. Verso Finance elected to exercise the PIK option for $1.2 million
and $2.9 million of interest payments due in the first quarter of 2010 and 2009,
respectively.
On
January 15, 2010, Verso Holdings issued $25.0 million aggregate principal amount
of its 11.5% senior secured notes due July 1, 2014 under the same indenture that
it issued $325.0 million aggregate principal amount of the 11.5% senior secured
notes in June 2009. These $25 million of notes issued in January 2010 were
treated as a single series with and have the same terms as the $325 million of
notes issued under the indenture in June 2009. The notes are secured by
substantially all of the property and assets of Verso Holdings. The notes
are secured on a ratable and pari passu basis with Verso Holdings’ senior
secured revolving credit facility. The net proceeds of the notes issued in
January 2010 including premium and after deducting underwriting fees and
offering expenses, were $26.5 million.
In the
first quarter of 2009, the Company repurchased and retired $12.0 million of
Verso Holdings’ second priority senior secured floating-rate notes due August 1,
2014, and recognized a gain of $8.9 million, net of the write-off of unamortized
debt issuance costs. In addition, the Company recognized a loss of $0.2
million related to the de-designated portion of the swap hedging the interest
payments on the retired debt. These results were recognized in Other
income, net on the condensed consolidated statement of operations.
Pension
Plan
The
Company maintains a defined benefit pension plan that provides retirement
benefits to hourly employees hired prior to July 1, 2004, at the Androscoggin,
Bucksport, and Sartell mills. These employees generally are eligible to
participate in the plan upon completion of one year of service and attainment of
age 21. Employees hired on or after July 1, 2004, who are not eligible for
this pension plan, receive an additional company contribution to their savings
plan (see “Other Benefits” discussion below). The pension plan provides
defined benefits based on years of credited service times a specified flat
dollar benefit rate.
The
Company makes contributions that are sufficient to fully fund its actuarially
determined costs, generally equal to the minimum amounts required by the
Employee Retirement Income Security Act (ERISA). The Company made no
contributions in the first quarter of 2010 and made a contribution of $1.5
million in April 2010 attributable to the 2010 plan year. In the first
quarter of 2009, the Company made contributions of $0.2 million attributable to
the 2008 plan year. The Company expects to make additional contributions
of $3.4 million in 2010, with $0.5 million related to the 2009 plan year and
$2.9 million related to the 2010 plan year.
The
Company’s primary investment objective is to ensure, over the long-term life of
the pension plan, an adequate pool of sufficiently liquid assets to support the
benefit obligations. In meeting this objective, the pension plan seeks to
achieve a high level of investment return through long-term stock and bond
investment strategies, consistent with a prudent level of portfolio risk.
Any volatility in investment performance compared to investment objectives
should be explainable in terms of general economic and market conditions.
It is not contemplated at this time that any derivative instruments will be used
to achieve investment objectives. The expected return on plan assets
assumption for 2010 will be 7.50 percent. The expected long-term rate of
return on plan assets reflects the weighted-average expected long-term rates of
return for the broad categories of investments currently held in the plans
(adjusted for expected changes), based on historical rates of return for each
broad category, as well as factors that may constrain or enhance returns in the
broad categories in the future. The expected long-term rate of return on
plan assets is adjusted when there are fundamental changes in expected returns
in one or more broad asset categories and when the weighted-average mix of
assets in the plans changes significantly.
The
following table summarizes the components of net periodic expense:
|
|
Three
Months Ended
|
|
|
|
March 31,
|
|
(In
thousands of U.S. dollars)
|
|
2010
|
|
|
2009
|
|
Components
of net periodic benefit cost:
|
|
|
|
|
|
|
Service
cost
|
|
$ |
1,527 |
|
|
$ |
1,592 |
|
Interest
cost
|
|
|
522 |
|
|
|
381 |
|
Expected
return on plan assets
|
|
|
(462 |
) |
|
|
(309 |
) |
Amortization
of prior service cost
|
|
|
446 |
|
|
|
218 |
|
Actuarial
loss
|
|
|
22 |
|
|
|
79 |
|
Net
periodic benefit cost
|
|
$ |
2,055 |
|
|
$ |
1,961 |
|
The
Company adopted ASC Topic 715-20-65, effective December 31, 2009, which requires
more detailed disclosures about employers’ pension plan assets, including
additional fair value disclosures about employers’ pension and postretirement
benefit plan assets consistent with the guidance contained in ASC Topic
820.
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).
The
following table sets forth by level, within the fair value hierarchy, the
pension plan’s assets at fair value as of March 31, 2010.
(In
thousands of U.S. dollars)
|
|
Total
|
|
|
Level 1
|
|
|
Level 2 (1)
|
|
|
Level 3
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate/Government
bond fund
|
|
$ |
10,771 |
|
|
$ |
- |
|
|
$ |
10,771 |
|
|
$ |
- |
|
Large
capital equity
|
|
|
6,241 |
|
|
|
- |
|
|
|
6,241 |
|
|
|
- |
|
International
equity
|
|
|
3,853 |
|
|
|
- |
|
|
|
3,853 |
|
|
|
- |
|
Small
capital equity
|
|
|
1,117 |
|
|
|
- |
|
|
|
1,117 |
|
|
|
- |
|
Fixed
income fund
|
|
|
1,011 |
|
|
|
- |
|
|
|
1,011 |
|
|
|
- |
|
Total
assets at fair value on March 31, 2010
|
|
$ |
22,993 |
|
|
$ |
- |
|
|
$ |
22,993 |
|
|
$ |
- |
|
(1) Based
on the net asset value of units held by the plan at quarter end.
Other
Benefits
The
Company sponsors a 401(k) plan to provide salaried and hourly employees an
opportunity to accumulate personal funds and to provide additional benefits for
retirement. Contributions may be made on a before-tax basis to the
plan. As determined by the provisions of the plan, the Company matches the
employees’ basic voluntary contributions; however, on April 3, 2009, in response
to the challenging economic conditions, the Company suspended its matching
contributions to the 401(k) plan for exempt and non-exempt salaried
employees. Effective January 2, 2010, the Company reinstated matching
contributions for exempt and non-exempt salaried employees in accordance with
the formula previously in effect (70% of the first 4% of the participant’s
compensation contributed to the plan, plus 60% of the next 4% of the
participant’s compensation contributed to the plan). Such contributions to
the plan totaled approximately $0.9 million for the first quarter of 2010
compared to $1.2 million in the first quarter of 2009.
7.
DERIVATIVE INSTRUMENTS AND HEDGES
In the
normal course of business, the Company utilizes derivatives contracts as part of
its risk management strategy to manage its exposure to market fluctuations in
energy prices and interest rates. These instruments are subject to credit
and market risks in excess of the amount recorded on the balance sheet in
accordance with generally accepted accounting principles. Controls and
monitoring procedures for these instruments have been established and are
routinely reevaluated. Credit risk represents the potential loss that may
occur because a party to a transaction fails to perform according to the terms
of the contract. The measure of credit exposure is the replacement cost of
contracts with a positive fair value. The Company manages credit risk by
entering into financial instrument transactions only through approved
counterparties. Market risk represents the potential loss due to the
decrease in the value of a financial instrument caused primarily by changes in
commodity prices. The Company manages market risk by establishing and
monitoring limits on the types and degree of risk that may be
undertaken.
Derivative
instruments are recorded on the balance sheet as other assets or other
liabilities measured at fair value. 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. Where
available, fair value is based on observable market prices or parameters or
derived from such prices or parameters. Where observable prices or inputs
are not available, valuation models may be applied. For a cash flow hedge
accounted for under ASC Topic 815, Derivatives and Hedging,
changes in the fair value of the derivative instrument, to the extent that it is
effective, are recorded in Accumulated other comprehensive income and
subsequently reclassified to earnings as the hedged transaction impacts net
income. Any ineffective portion of a cash flow hedge is recognized
currently in earnings. Cash flows from derivative contracts are reported
as operating activities on the consolidated statements of cash
flows.
The
Company enters into short-term, fixed-price energy swaps as hedges designed to
mitigate the risk of changes in commodity prices for future purchase
commitments. These fixed-price swaps involve the exchange of net cash
settlements, based on changes in the price of the underlying commodity index
compared to the fixed price offering, at specified intervals without the
exchange of any underlying principal. The Company has designated its
energy hedging relationships as cash flow hedges under ASC Topic 815 with net
gains or losses attributable to effective hedging recorded in Accumulated other
comprehensive income and any ineffectiveness recognized in Cost of products
sold. Amounts recorded in Accumulated other comprehensive income are
expected to be reclassified into cost of products sold in the period in which
the hedged cash flows affect earnings.
In
February 2008, the Company entered into a $250 million notional value
receive-variable, pay-fixed interest rate swap hedging the cash flow exposure of
the quarterly variable-rate interest payments due to changes in the benchmark
interest rate (three-month LIBOR) on its second priority senior secured
floating-rate notes. The swap matured in February 2010. During the
first quarter of 2009, the Company repurchased $12.0 million of the hedged notes
and de-designated the portion of the swap hedging the interest payments on this
portion of the debt. During the three months ended March 31, 2009, $0.2
million of losses were recognized in Other income, net on the condensed
consolidated statement of operations related to the de-designated portion of the
swap. By the end of 2009, the Company had repurchased $69.8 million of the
hedged notes and de-designated the interest-rate swap in full. During the
three months ended March 31, 2010, $0.3 million of losses were recognized in
Other income, net.
The
following table presents information about the volume and fair value amounts of
the Company’s derivative instruments.
|
|
March
31, 2010
|
|
December
31, 2009
|
|
|
|
|
|
|
|
Fair
Value Measurements
|
|
|
|
|
Fair
Value Measurements
|
|
Balance
|
|
|
Notional
|
|
|
Derivative
|
|
|
Derivative
|
|
Notional
|
|
|
Derivative
|
|
|
Derivative
|
|
Sheet
|
(dollars
in thousands)
|
|
Amount
|
|
|
Asset
|
|
|
Liability
|
|
|
Amount
|
|
|
Asset
|
|
|
Liability
|
|
Location
|
Derivatives
designated as hedging instruments
under FASB ASC 815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term,
fixed price energy swaps - MMBtu's
|
|
|
5,348,111 |
|
|
$ |
- |
|
|
$ |
8,281 |
|
|
|
5,430,707 |
|
|
$ |
560 |
|
|
$ |
2,132 |
|
Other assets/
Accrued liabilties
|
Derivatives
not designated as hedging instruments
under FASB ASC 815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate swaps, receive-variable, pay-fixed
|
|
$ |
- |
|
|
|
- |
|
|
|
- |
|
|
$ |
250,000 |
|
|
|
- |
|
|
|
1,573 |
|
Other
liabilities
|
The
following tables present information about the effect of the Company’s
derivative instruments on Accumulated other comprehensive income and the
condensed consolidated statements of operations.
|
|
Gain (Loss) Recognized
|
|
|
Gain (Loss) Reclassified
|
|
|
|
|
in Accumulated OCI
|
|
|
from Accumulated OCI
|
|
Location of
|
|
|
At
|
|
|
At
|
|
|
Three Months Ended
|
|
Gain (Loss)
|
|
|
March 31,
|
|
|
December 31,
|
|
|
March 31,
|
|
on Statements
|
(dollars in thousands)
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
of Operations
|
Derivatives
designated as hedging instruments under FASB ASC
815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term,
fixed price energy swaps (1)
|
|
$ |
(8,231 |
) |
|
$ |
(1,514 |
) |
|
$ |
(493 |
) |
|
$ |
(8,448 |
) |
Cost
of products sold
|
Interest
rate swaps, receive-variable, pay-fixed (1)
|
|
|
- |
|
|
|
(281 |
) |
|
|
(281 |
) |
|
|
(570 |
) |
Interest
expense
|
(1)
|
Net
losses at March 31, 2010 are expected to be reclassified from Accumulated
other comprehensive income into earningswithin
the next 12 months.
|
|
|
|
|
|
|
|
|
Gain (Loss) Recognized
|
|
|
|
|
Gain (Loss) Recognized
|
|
|
on Derivative
|
|
Location of
|
|
|
on Derivative
|
|
|
(Ineffective Portion)
|
|
Gain (Loss)
|
|
|
Three Months Ended March 31,
|
|
on Statements
|
(dollars in thousands)
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
of Operations
|
Derivatives
designated as hedging instruments
under FASB ASC 815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term,
fixed price energy swaps
|
|
$ |
(429 |
) |
|
$ |
(2,109 |
) |
|
$ |
(24 |
) |
|
$ |
(20 |
) |
Cost
of products sold
|
Derivatives not
designated as hedging instruments
under FASB ASC 815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate swaps, receive-variable, pay-fixed
|
|
|
- |
|
|
|
(195 |
) |
|
|
- |
|
|
|
- |
|
Interest
expense/
Other
income,
net
|
8.
FAIR VALUE OF FINANCIAL INSTRUMENTS
ASC Topic
820 defines fair value, establishes a framework for measuring fair value, and
expands disclosures about fair value measurements. On January 1, 2008, the
Company adopted ASC Topic 820 as it relates to financial assets and liabilities
and nonfinancial assets and liabilities that are recognized or disclosed at fair
value in the financial statements on a recurring basis, and adopted ASC Topic
820 as it relates to nonfinancial assets and liabilities that are not remeasured
at fair value on a recurring basis as of January 1, 2009. The adoption of
these provisions of ASC Topic 820 did not have a material impact on the
Company’s consolidated financial statements.
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.
Level 1 provides the most reliable measure of fair value, whereas Level 3
generally requires significant management judgment. The three levels are
defined as follows:
|
▪ Level
1:
|
Unadjusted
quoted prices in active markets for identical assets or liabilities at the
measurement date.
|
|
▪ Level
2:
|
Observable
inputs other than those included in Level 1. For example, quoted
prices for similar assets or liabilities in active markets or quoted
prices for identical assets or liabilities in inactive
markets.
|
|
▪ Level
3:
|
Unobservable
inputs reflecting management’s own assumption about the inputs used in
pricing the asset or liability at the measurement
date.
|
The
following table summarizes the balances of assets and liabilities measured at
fair value on a recurring basis:
(In
thousands of U.S. dollars)
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
At
March 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
compensation assets (1)
|
|
$ |
1,096 |
|
|
$ |
1,096 |
|
|
$ |
- |
|
|
$ |
- |
|
Regional
Greenhouse Gas Initiative carbon credits (1)
|
|
|
232 |
|
|
|
- |
|
|
|
232 |
|
|
|
- |
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity
swaps (1)
|
|
$ |
8,281 |
|
|
$ |
- |
|
|
$ |
8,281 |
|
|
$ |
- |
|
Deferred
compensation liabilities (1)
|
|
|
1,096 |
|
|
|
1,096 |
|
|
|
- |
|
|
|
- |
|
At
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
compensation assets (1)
|
|
$ |
643 |
|
|
$ |
643 |
|
|
$ |
- |
|
|
$ |
- |
|
Regional
Greenhouse Gas Initiative carbon credits (1)
|
|
|
248 |
|
|
|
- |
|
|
|
248 |
|
|
|
- |
|
Commodity
swaps (1)
|
|
|
560 |
|
|
|
- |
|
|
|
560 |
|
|
|
- |
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity
swaps (1)
|
|
$ |
2,132 |
|
|
$ |
- |
|
|
$ |
2,132 |
|
|
$ |
- |
|
Interest
rate swaps (2)
|
|
|
1,573 |
|
|
|
- |
|
|
|
1,573 |
|
|
|
- |
|
Deferred
compensation liabilities (1)
|
|
|
643 |
|
|
|
643 |
|
|
|
- |
|
|
|
- |
|
(1) Based
on observable market data.
(2) Based
on observable inputs for the liability (interest rates and yield curves
observable at specific intervals).
The Company did not record any impairment charges on long-lived assets and
no significant events requiring non-financial assets and liabilities to be
measured at fair value occurred (subsequent to initial recognition) during the
three months ended March 31, 2010 or 2009.
9.
RELATED PARTY TRANSACTIONS
The
Company had net sales to International Paper of $32.2 million for the first
quarter of 2010, compared to $26.8 million for the same period in 2009.
International Paper and its divisions and subsidiaries (including xpedx and
Central Lewmar LLC), is our largest customer and accounted for approximately 9%
of our net sales in the first quarter of 2010 and 2009. The Company had
purchases from International Paper, included in cost of products sold, of $1.4
million for the first quarter of 2010, compared to $1.1 million for the first
quarter of 2009.
Subsequent
to the Acquisition, the Company entered into a management consulting agreement
with Apollo relating to the provision of certain financial and strategic
advisory services and consulting services. Upon consummation of Verso
Paper’s IPO in 2008, Apollo terminated the annual fee arrangement under the
management agreement for its consulting and advisory services. The
management consulting agreement, however, remains in effect and will expire on
August 1, 2018.
Verso
Finance has a senior unsecured term loan which matures on February 1,
2013. The term loan allows Verso Finance to pay interest either in cash or
in-kind through the accumulation of the outstanding principal amount. Verso
Finance elected to exercise the PIK option for $1.2 million and $2.9 million of
interest payments due in the first quarter of 2010 and 2009, respectively.
Verso Finance has no independent operations; consequently, all cash flows used
to service its remaining debt obligation will need to be received via
distribution from Verso Holdings. Verso Holdings made no distributions to
Verso Finance in the first quarter of 2010 and made $0.2 million in
distributions to Verso Finance in the first quarter of 2009. Verso
Holdings has no obligation to make distributions to Verso Finance.
As of
March 31, 2010, Verso Holdings had $0.1 million in current receivables due from
Verso Paper. During the first quarter of 2009, Verso Paper pushed down the
assets, liabilities, and equity of Verso Fiber Farm LLC to Verso Holdings using
a carryover basis.
10.
RESTRUCTURING AND OTHER CHARGES
Restructuring
and other charges are comprised of transition and other non-recurring costs
associated with the Acquisition and carve out of our operations from those of
International Paper, including consulting and legal fees, and other one-time
costs related to us operating as a stand-alone business. There were no
restructuring charges in the first quarter of 2010 and $0.2 million of
restructuring charges in the first quarter of 2009.
11.
COMMITMENTS AND CONTINGENCIES
Bucksport Energy
LLC — The
Company has a joint ownership interest with Bucksport Energy LLC, an unrelated
third party, in a cogeneration power plant producing steam and
electricity. The plant was built in 2000 and is located at and supports
the Bucksport mill. Each co-owner owns an undivided proportional share of
the plant’s assets. The Company owns 28% of the steam and electricity
produced by the plant. The Company may purchase its remaining electrical
needs from the plant at market rates. The Company is obligated to purchase
the remaining 72% of the steam output from the plant at fuel cost plus a
contractually fixed fee per unit of steam. Power generation and operating
expenses are divided on the same basis as ownership. The Company has cash
which is restricted in its use and may be used only to fund the ongoing energy
operations of this investment. As of March 31, 2010, the Company had $0.2
million of restricted cash included in Other assets in the accompanying
condensed consolidated balance sheets.
Alternative Fuel
Tax Credit — Until
December 31, 2009, the United States government provided an excise tax credit
for companies that use alternative fuel mixtures in their businesses equal to
$0.50 per gallon of alternative fuel contained in the mixture. In January
and February 2009, the Internal Revenue Service certified that the Company’s
operations at its Androscoggin and Quinnesec mills qualified for the alternative
fuel mixture tax credit. During the first quarter of 2009, the Company
recognized $105.5 million of alternative fuel mixture tax credits for the period
from September 2008 through March 2009, including a receivable of $75.9 million
for claims pending as of March 31, 2009. These credits were recognized in
Other income, net on the condensed consolidated statement of operations, net of
$0.9 million of associated expenses. At December 31, 2009, $10.4 million
for claims pending was recognized in Accounts receivable – net on the condensed
consolidated balance sheets. The tax credit, as it relates to liquid fuels
derived from biomass, expired on December 31, 2009. Therefore, we did not
recognize any benefit from this tax credit in the first quarter of 2010 and no
receivables were outstanding as of March 31, 2010.
Thilmany, LLC
— In
connection with the Acquisition, the Company assumed a twelve-year supply
agreement with Thilmany, LLC, or “Thilmany,” for the specialty paper products
manufactured on paper machine no. 5 at the Androscoggin mill. The
agreement requires Thilmany to pay the Company a variable charge for the paper
purchased and a fixed charge for the availability of the no. 5 paper
machine. The Company is responsible for the machine’s routine maintenance
and Thilmany is responsible for any capital expenditures specific to the
machine. Thilmany has the right to terminate the agreement if certain
events occur.
In
October 2009, Thilmany (together with its parent company, Packaging Dynamics
Corporation) served the Company with a lawsuit filed in circuit court in
Outagamie County, Wisconsin. Thilmany alleged in the lawsuit that the
alternative fuel mixture tax credits that the Company received from the
operation of the Androscoggin mill had the effect of reducing the Company’s
costs associated with operating the Androscoggin mill and producing the pulp
that the Company uses to manufacture paper products for Thilmany on paper
machine no. 5 under the long-term supply agreement described above. Thilmany
sought unspecified damages for the Company’s alleged breach of contract for
failing to provide Thilmany with a prorated share of the purported cost savings
attributable to the tax credits and a declaration that Thilmany is entitled to a
prorated share of any such future costs savings attributable to the Company’s
use of alternative fuel mixtures at the Androscoggin mill. On March 29, 2010,
the Company entered into a settlement agreement with Thilmany and Packaging
Dynamics pursuant to which the lawsuit was dismissed.
The
Company is involved in legal proceedings incidental to the conduct of its
business. The Company does not believe that any liability that may result
from these proceedings will have a material adverse effect on its financial
statements.
12.
INFORMATION BY INDUSTRY SEGMENT
The
Company operates in three operating segments: coated and supercalendered papers;
hardwood market pulp; and other, consisting of specialty papers. The Company
operates in one geographic segment, the United States. The Company’s core
business platform is as a producer of coated freesheet, coated groundwood, and
uncoated supercalendered papers. These products serve customers in the catalog,
magazine, inserts, and commercial print markets.
The
following table summarizes the industry segment data for the three-month periods
ended March 31, 2010 and 2009:
|
|
VERSO PAPER
|
|
|
VERSO HOLDINGS
|
|
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
(In
thousands of U.S. dollars)
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Net
Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Coated
and supercalendered
|
|
$ |
302,778 |
|
|
$ |
255,977 |
|
|
$ |
302,778 |
|
|
$ |
255,977 |
|
Hardwood
market pulp
|
|
|
37,414 |
|
|
|
17,674 |
|
|
|
37,414 |
|
|
|
17,674 |
|
Other
|
|
|
23,454 |
|
|
|
13,423 |
|
|
|
23,454 |
|
|
|
13,423 |
|
Total
|
|
$ |
363,646 |
|
|
$ |
287,074 |
|
|
$ |
363,646 |
|
|
$ |
287,074 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Income (Loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Coated
and supercalendered
|
|
$ |
(25,670 |
) |
|
|
(20,552 |
) |
|
$ |
(25,618 |
) |
|
$ |
(20,387 |
) |
Hardwood
market pulp
|
|
|
7,632 |
|
|
|
(8,887 |
) |
|
|
7,632 |
|
|
|
(8,887 |
) |
Other
|
|
|
(3,473 |
) |
|
|
(2,308 |
) |
|
|
(3,473 |
) |
|
|
(2,308 |
) |
Total
|
|
$ |
(21,511 |
) |
|
$ |
(31,747 |
) |
|
$ |
(21,459 |
) |
|
$ |
(31,582 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation,
amortization, and depletion:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Coated
and supercalendered
|
|
$ |
25,808 |
|
|
$ |
28,902 |
|
|
$ |
25,808 |
|
|
$ |
28,902 |
|
Hardwood
market pulp
|
|
|
4,653 |
|
|
|
4,314 |
|
|
|
4,653 |
|
|
|
4,314 |
|
Other
|
|
|
1,681 |
|
|
|
1,107 |
|
|
|
1,681 |
|
|
|
1,107 |
|
Total
|
|
$ |
32,142 |
|
|
$ |
34,323 |
|
|
$ |
32,142 |
|
|
$ |
34,323 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
Spending:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Coated
and supercalendered
|
|
$ |
6,311 |
|
|
$ |
10,308 |
|
|
$ |
6,311 |
|
|
$ |
10,308 |
|
Hardwood
market pulp
|
|
|
1,673 |
|
|
|
1,341 |
|
|
|
1,673 |
|
|
|
1,341 |
|
Other
|
|
|
451 |
|
|
|
269 |
|
|
|
451 |
|
|
|
269 |
|
Total
|
|
$ |
8,435 |
|
|
$ |
11,918 |
|
|
$ |
8,435 |
|
|
$ |
11,918 |
|
13.
|
CONDENSED
CONSOLIDATING FINANCIAL INFORMATION
|
Presented
below are Verso Holdings’ consolidating balance sheets, statements of
operations, and statements of cash flows, as required by Rule 3-10 of
Regulation S-X of the Securities Exchange Act of 1934, as amended.
The consolidating financial statements have been prepared from Verso Holdings’
financial information on the same basis of accounting as the consolidated
financial statements. Investments in our subsidiaries are accounted for
under the equity method. Accordingly, the entries necessary to consolidate
Verso Holdings subsidiaries that guaranteed the obligations under the debt
securities described below are reflected in the Intercompany Eliminations
column.
Verso Holdings, the “Parent Issuer,” and its direct,
wholly-owned subsidiary, Verso Paper Inc., the “Subsidiary Issuer,” are the
issuers of 11½% senior secured fixed rate notes due 2014, 9⅛% second-priority
senior secured fixed rate notes due 2014, second-priority senior secured
floating rate notes due 2014, and 11⅜% senior subordinated notes due 2014
(collectively, the “Notes”). The Notes are jointly and severally
guaranteed on a full and unconditional basis by the Parent Issuer’s 100% owned
subsidiaries, excluding the Subsidiary Issuer and Bucksport Leasing LLC,
collectively, the “Guarantor Subsidiaries.” All subsidiaries other
than the Guarantor Subsidiaries are minor.
Verso
Paper Holdings LLC
Condensed
Consolidating Balance Sheet
March
31, 2010
|
|
Parent
|
|
|
Subsidiary
|
|
|
Guarantor
|
|
|
Intercompany
|
|
|
|
|
(In thousands of U.S. dollars)
|
|
Issuer
|
|
|
Issuer
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
397,049 |
|
|
$ |
- |
|
|
$ |
397,049 |
|
Property,
plant, and equipment, net
|
|
|
- |
|
|
|
- |
|
|
|
1,000,881 |
|
|
|
- |
|
|
|
1,000,881 |
|
Intercompany
receivable
|
|
|
1,196,685 |
|
|
|
- |
|
|
|
- |
|
|
|
(1,196,685 |
) |
|
|
- |
|
Investment
in subsidiaries
|
|
|
112,377 |
|
|
|
- |
|
|
|
- |
|
|
|
(112,377 |
) |
|
|
- |
|
Non-current
assets
|
|
|
- |
|
|
|
- |
|
|
|
105,777 |
|
|
|
- |
|
|
|
105,777 |
|
Total
assets
|
|
$ |
1,309,062 |
|
|
$ |
- |
|
|
$ |
1,503,707 |
|
|
$ |
(1,309,062 |
) |
|
$ |
1,503,707 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND MEMBER'S EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
$ |
22,256 |
|
|
$ |
- |
|
|
$ |
163,865 |
|
|
$ |
- |
|
|
$ |
186,121 |
|
Intercompany
payable
|
|
|
- |
|
|
|
- |
|
|
|
1,196,685 |
|
|
|
(1,196,685 |
) |
|
|
- |
|
Long-term
debt
|
|
|
1,146,613 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,146,613 |
|
Other
long-term liabilities
|
|
|
- |
|
|
|
- |
|
|
|
30,780 |
|
|
|
- |
|
|
|
30,780 |
|
Member's
equity
|
|
|
140,193 |
|
|
|
- |
|
|
|
112,377 |
|
|
|
(112,377 |
) |
|
|
140,193 |
|
Total
liabilities and member's equity
|
|
$ |
1,309,062 |
|
|
$ |
- |
|
|
$ |
1,503,707 |
|
|
$ |
(1,309,062 |
) |
|
$ |
1,503,707 |
|
Verso
Paper Holdings LLC
Condensed
Consolidating Balance Sheet
December
31, 2009
|
|
Parent
|
|
|
Subsidiary
|
|
|
Guarantor
|
|
|
Intercompany
|
|
|
|
|
(In thousands of U.S. dollars)
|
|
Issuer
|
|
|
Issuer
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
426,837 |
|
|
$ |
- |
|
|
$ |
426,837 |
|
Property,
plant, and equipment, net
|
|
|
- |
|
|
|
- |
|
|
|
1,022,622 |
|
|
|
- |
|
|
|
1,022,622 |
|
Intercompany
receivable
|
|
|
1,195,660 |
|
|
|
- |
|
|
|
- |
|
|
|
(1,195,660 |
) |
|
|
- |
|
Investment
in subsidiaries
|
|
|
169,874 |
|
|
|
- |
|
|
|
- |
|
|
|
(169,874 |
) |
|
|
- |
|
Non-current
assets
|
|
|
- |
|
|
|
- |
|
|
|
110,804 |
|
|
|
- |
|
|
|
110,804 |
|
Total
assets
|
|
$ |
1,365,534 |
|
|
$ |
- |
|
|
$ |
1,560,263 |
|
|
$ |
(1,365,534 |
) |
|
$ |
1,560,263 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND MEMBER'S EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
$ |
49,268 |
|
|
$ |
- |
|
|
$ |
167,152 |
|
|
$ |
- |
|
|
$ |
216,420 |
|
Intercompany
payable
|
|
|
- |
|
|
|
- |
|
|
|
1,195,660 |
|
|
|
(1,195,660 |
) |
|
|
- |
|
Long-term
debt
|
|
|
1,118,273 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,118,273 |
|
Other
long-term liabilities
|
|
|
- |
|
|
|
- |
|
|
|
27,577 |
|
|
|
- |
|
|
|
27,577 |
|
Member's
equity
|
|
|
197,993 |
|
|
|
- |
|
|
|
169,874 |
|
|
|
(169,874 |
) |
|
|
197,993 |
|
Total
liabilities and member's equity
|
|
$ |
1,365,534 |
|
|
$ |
- |
|
|
$ |
1,560,263 |
|
|
$ |
(1,365,534 |
) |
|
$ |
1,560,263 |
|
Verso
Paper Holdings LLC
Condensed
Consolidating Statements of Operations
Three
Months Ended March 31, 2010
|
|
Parent
|
|
|
Subsidiary
|
|
|
Guarantor
|
|
|
Intercompany
|
|
|
|
|
(In thousands of U.S. dollars)
|
|
Issuer
|
|
|
Issuer
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
Net
sales
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
363,646 |
|
|
$ |
- |
|
|
$ |
363,646 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of products sold (exclusive of depreciation, amortization, and
depletion)
|
|
|
- |
|
|
|
- |
|
|
|
336,746 |
|
|
|
- |
|
|
|
336,746 |
|
Depreciation,
amortization, and depletion
|
|
|
- |
|
|
|
- |
|
|
|
32,142 |
|
|
|
- |
|
|
|
32,142 |
|
Selling,
general, and administrative expenses
|
|
|
- |
|
|
|
- |
|
|
|
16,217 |
|
|
|
- |
|
|
|
16,217 |
|
Interest
income
|
|
|
(30,493 |
) |
|
|
- |
|
|
|
(39 |
) |
|
|
30,493 |
|
|
|
(39 |
) |
Interest
expense
|
|
|
30,493 |
|
|
|
- |
|
|
|
31,001 |
|
|
|
(30,493 |
) |
|
|
31,001 |
|
Other
income, net
|
|
|
(255 |
) |
|
|
- |
|
|
|
(245 |
) |
|
|
255 |
|
|
|
(245 |
) |
Equity
in net loss of subsidiaries
|
|
|
(52,176 |
) |
|
|
- |
|
|
|
- |
|
|
|
52,176 |
|
|
|
- |
|
Net
loss
|
|
$ |
(51,921 |
) |
|
$ |
- |
|
|
$ |
(52,176 |
) |
|
$ |
51,921 |
|
|
$ |
(52,176 |
) |
Verso
Paper Holdings LLC
Condensed
Consolidating Statements of Operations
Three
Months Ended March 31, 2009
|
|
Parent
|
|
|
Subsidiary
|
|
|
Guarantor
|
|
|
Intercompany
|
|
|
|
|
(In
thousands of U.S. dollars)
|
|
Issuer
|
|
|
Issuer
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
Net
sales
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
287,074 |
|
|
$ |
- |
|
|
$ |
287,074 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of products sold (exclusive of depreciation, amortization, and
depletion)
|
|
|
- |
|
|
|
- |
|
|
|
268,940 |
|
|
|
- |
|
|
|
268,940 |
|
Depreciation,
amortization, and depletion
|
|
|
- |
|
|
|
- |
|
|
|
34,323 |
|
|
|
- |
|
|
|
34,323 |
|
Selling,
general, and administrative expenses
|
|
|
- |
|
|
|
- |
|
|
|
15,222 |
|
|
|
- |
|
|
|
15,222 |
|
Restructuring
and other charges
|
|
|
- |
|
|
|
- |
|
|
|
171 |
|
|
|
- |
|
|
|
171 |
|
Interest
and dividend income
|
|
|
(24,318 |
) |
|
|
- |
|
|
|
(58 |
) |
|
|
24,318 |
|
|
|
(58 |
) |
Interest
expense
|
|
|
24,318 |
|
|
|
- |
|
|
|
24,716 |
|
|
|
(24,318 |
) |
|
|
24,716 |
|
Other
income, net
|
|
|
(8,903 |
) |
|
|
- |
|
|
|
(113,317 |
) |
|
|
8,903 |
|
|
|
(113,317 |
) |
Equity
in net income of subsidiaries
|
|
|
57,077 |
|
|
|
- |
|
|
|
- |
|
|
|
(57,077 |
) |
|
|
- |
|
Net
income
|
|
$ |
65,980 |
|
|
$ |
- |
|
|
$ |
57,077 |
|
|
$ |
(65,980 |
) |
|
$ |
57,077 |
|
Verso
Paper Holdings LLC
Condensed
Consolidating Statements of Cash Flows
Three
Months Ended March 31, 2010
|
|
Parent
|
|
|
Subsidiary
|
|
|
Guarantor
|
|
|
Intercompany
|
|
|
|
|
(In thousands of U.S. dollars)
|
|
Issuer
|
|
|
Issuer
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
Net
cash used in operating activities
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
(49,122 |
) |
|
$ |
- |
|
|
$ |
(49,122 |
) |
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from sale of fixed assets
|
|
|
- |
|
|
|
- |
|
|
|
52 |
|
|
|
- |
|
|
|
52 |
|
Capital
expenditures
|
|
|
- |
|
|
|
- |
|
|
|
(8,435 |
) |
|
|
- |
|
|
|
(8,435 |
) |
Net
cash used in investing activities
|
|
|
- |
|
|
|
- |
|
|
|
(8,383 |
) |
|
|
- |
|
|
|
(8,383 |
) |
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
issuance costs
|
|
|
(961 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(961 |
) |
Advances
to subsidiaries
|
|
|
(26,476 |
) |
|
|
- |
|
|
|
26,476 |
|
|
|
- |
|
|
|
- |
|
Proceeds
from long-term debt
|
|
|
27,437 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
27,437 |
|
Net
cash provided by financing activities
|
|
|
- |
|
|
|
- |
|
|
|
26,476 |
|
|
|
- |
|
|
|
26,476 |
|
Change
in cash and cash equivalents
|
|
|
- |
|
|
|
- |
|
|
|
(31,029 |
) |
|
|
- |
|
|
|
(31,029 |
) |
Cash
and cash equivalents at beginning of period
|
|
|
- |
|
|
|
- |
|
|
|
149,762 |
|
|
|
- |
|
|
|
149,762 |
|
Cash
and cash equivalents at end of period
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
118,733 |
|
|
$ |
- |
|
|
$ |
118,733 |
|
Verso
Paper Holdings LLC
Condensed
Consolidating Statements of Cash Flows
Three
Months Ended March 31, 2009
|
|
Parent
|
|
|
Subsidiary
|
|
|
Guarantor
|
|
|
Intercompany
|
|
|
|
|
(In
thousands of U.S. dollars)
|
|
Issuer
|
|
|
Issuer
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
Net
cash used in operating activities
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
(86,838 |
) |
|
$ |
- |
|
|
$ |
(86,838 |
) |
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from sale of fixed assets
|
|
|
- |
|
|
|
- |
|
|
|
14 |
|
|
|
- |
|
|
|
14 |
|
Capital
expenditures
|
|
|
- |
|
|
|
- |
|
|
|
(11,918 |
) |
|
|
- |
|
|
|
(11,918 |
) |
Investment
in subsidiaries
|
|
|
(9,145 |
) |
|
|
- |
|
|
|
9,145 |
|
|
|
- |
|
|
|
- |
|
Return
of investment in subsidiaries
|
|
|
239 |
|
|
|
- |
|
|
|
(239 |
) |
|
|
- |
|
|
|
- |
|
Net
cash used in investing activities
|
|
|
(8,906 |
) |
|
|
- |
|
|
|
(2,998 |
) |
|
|
- |
|
|
|
(11,904 |
) |
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
distributions
|
|
|
(239 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(239 |
) |
Repayment
of advances to subsidiaries
|
|
|
12,713 |
|
|
|
- |
|
|
|
(12,713 |
) |
|
|
- |
|
|
|
- |
|
Payments
on long-term debt
|
|
|
(3,568 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(3,568 |
) |
Net
cash provided by (used in) financing activities
|
|
|
8,906 |
|
|
|
- |
|
|
|
(12,713 |
) |
|
|
- |
|
|
|
(3,807 |
) |
Change
in cash and cash equivalents
|
|
|
- |
|
|
|
- |
|
|
|
(102,549 |
) |
|
|
- |
|
|
|
(102,549 |
) |
Cash
and cash equivalents at beginning of period
|
|
|
- |
|
|
|
- |
|
|
|
119,520 |
|
|
|
- |
|
|
|
119,520 |
|
Cash
and cash equivalents at end of period
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
16,971 |
|
|
$ |
- |
|
|
$ |
16,971 |
|
Overview
We are a
leading North American supplier of coated papers to catalog and magazine
publishers. Coated paper is 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. We are one of North America’s largest producers of
coated groundwood paper which is used primarily for catalogs and
magazines. We are also a low cost producer of coated freesheet paper which
is used primarily for annual reports, brochures, and magazine covers. In
addition, we have a strategic presence in supercalendered paper which is
primarily used for retail inserts, and specialty papers. We also produce
and sell market kraft pulp which is used to manufacture printing and writing
paper grades and tissue products.
Financial
Summary
Coated
paper shipments improved significantly in the first quarter of 2010 compared to
the first quarter of 2009 and fell only slightly compared to the seasonally
stronger fourth quarter of 2009. Year over year market conditions have
improved due to an improving economy, permanent and temporary capacity
reductions, and new product development initiatives. However, coated paper
prices for the first quarter of 2010 were below last year’s first quarter levels
as prices remained under pressure throughout 2009 due to weak demand resulting
from the global economic recession. Prices reached a trough during the
first quarter, and we have announced price increases for our core products of
$30 per ton effective April 1, 2010, and $40 to $60 per ton, effective June 1,
2010.
Our net
sales for the first quarter of 2010 increased $76.5 million, or 26.7%, as sales
volume increased 50.1% compared to last year’s first quarter. The average
sales price for all of our products fell 15.6% from the first quarter of 2009;
however, on a sequential quarter basis the average sales price decreased only
3.1% as our coated paper prices have begun to stabilize and the average sales
price for pulp has increased. Our gross margin was 7.4% for the first
quarter of 2010 compared to 6.3% in 2009. The compression in gross margin
for the first quarter of 2009 reflects $31.3 million of unabsorbed costs
resulting from almost 140,000 tons of downtime. Our gross margin remained
under pressure in the first quarter of 2010 due to continued low sales
prices.
In
response to market conditions, we continue to assess and implement, as
appropriate, various expense reduction initiatives. Our company-wide cost
reduction program produced approximately $9 million of savings during the first
quarter of 2010 compared to approximately $10 million in the first quarter of
2009. Management expects this program to yield an additional $40 million
in cost reductions over the next twelve months and continues to search for and
develop additional cost savings opportunities. Included in this program
are productivity improvements, material usage reductions, energy usage
reductions, labor cost savings, material and chemical substitution, and
workforce planning improvements.
Included
in our results for the first quarter of 2009 are $104.6 million in pre-tax net
benefits from alternative fuel mixture tax credits provided by the U.S.
government for our use of black liquor in alternative fuel mixtures. Since
the tax credit, as it relates to liquid fuels derived from biomass, expired on
December 31, 2009, we did not recognize any benefit from this tax credit in the
first quarter of 2010. Additionally, we recognized $8.7 million in pre-tax
net gains from the early retirement of debt at a discount in the first quarter
of 2009.
Results
of Operations
The
following table sets forth the historical results of operations of Verso Paper
and Verso Holdings for the periods indicated below. The following
discussion of our financial condition and results of operations should be read
in conjunction with our financial statements and notes thereto included
elsewhere in this Quarterly Report. All assets, liabilities, income,
expenses and cash flows presented for all periods represent those of Verso
Paper’s wholly-owned subsidiary, Verso Holdings, in all material respects,
except for Verso Paper’s common stock transactions and Verso Finance’s debt
obligation and related financing costs and interest expense. Unless
otherwise noted, the information provided pertains to both Verso Paper and Verso
Holdings.
|
|
VERSO PAPER
|
|
|
VERSO HOLDINGS
|
|
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
(In thousands of U.S. dollars)
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Net sales
|
|
$ |
363,646 |
|
|
$ |
287,074 |
|
|
$ |
363,646 |
|
|
$ |
287,074 |
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of products sold - exclusive of depreciation, amortization, and
depletion
|
|
|
336,746 |
|
|
|
268,940 |
|
|
|
336,746 |
|
|
|
268,940 |
|
Depreciation,
amortization, and depletion
|
|
|
32,142 |
|
|
|
34,323 |
|
|
|
32,142 |
|
|
|
34,323 |
|
Selling,
general, and administrative expenses
|
|
|
16,269 |
|
|
|
15,387 |
|
|
|
16,217 |
|
|
|
15,222 |
|
Restructuring
and other charges
|
|
|
- |
|
|
|
171 |
|
|
|
- |
|
|
|
171 |
|
Operating
loss
|
|
|
(21,511 |
) |
|
|
(31,747 |
) |
|
|
(21,459 |
) |
|
|
(31,582 |
) |
Interest
income
|
|
|
(39 |
) |
|
|
(58 |
) |
|
|
(39 |
) |
|
|
(58 |
) |
Interest
expense
|
|
|
32,322 |
|
|
|
27,085 |
|
|
|
31,001 |
|
|
|
24,716 |
|
Other
income, net
|
|
|
(244 |
) |
|
|
(113,317 |
) |
|
|
(245 |
) |
|
|
(113,317 |
) |
Net
income (loss)
|
|
$ |
(53,550 |
) |
|
$ |
54,543 |
|
|
$ |
(52,176 |
) |
|
$ |
57,077 |
|
First
Quarter of 2010 Compared to First Quarter of 2009
Net Sales. Net sales
for the first quarter of 2010 increased 26.7% to $363.6 million from $287.1
million for the first quarter of 2009, as total sales volume increased 50.1%,
reflecting improved economic conditions. This increase was partially
offset by a 15.6% decline in the average sales price per ton for all of our
products.
Net sales
for our coated and supercalendered papers segment increased 18.3% in the first
quarter of 2010 to $302.8 million from $256.0 million for the same period in
2009, as the positive impact of a 46.0% increase in paper sales volume was
partially offset by a 19.0% decrease in the average paper sales price per
ton. Average sales prices for coated papers decreased steadily throughout
2009 in response to weak demand. On a sequential quarter basis, average
sales prices for coated papers decreased 4.1%.
Net sales
for our market pulp segment increased 111.7% to $37.4 million in the first
quarter of 2010 from $17.7 million for the same period in 2009. This
increase was due to a 60.3% increase in sales volume combined with an increase
of 32.1% in average sales price per ton compared to the first quarter of
2009.
Net sales
for our other segment increased 74.7% to $23.4 million in the first quarter of
2010 from $13.4 million in the first quarter of 2009. The improvement in
2010 is due to a 94.6% increase in sales volume, reflecting the continued
development of new paper product offerings for our customers. Average
sales price per ton decreased 10.2% compared to the first quarter of
2009.
Cost of sales. Cost of
sales, including depreciation, amortization, and depletion, was $368.9 million
in the first quarter of 2010 compared to $303.3 million in 2009, primarily
reflecting the increase in sales volume. Our gross margin, excluding
depreciation, amortization, and depletion, was 7.4% for the first quarter of
2010 compared to 6.3% for the first quarter of 2009. The compression
in gross margin for the first quarter of 2009 reflects $31.3 million
of unabsorbed costs resulting from almost 140,000 tons of downtime. Our
gross margin remained under pressure in 2010 due to continued low sales
prices. Depreciation, amortization, and depletion expenses were $32.1
million in the first quarter of 2010 compared to $34.3 million in the first
quarter of 2009.
Selling, general, and
administrative. Verso Paper’s selling, general, and administrative
expenses were $16.2 million in the first quarter of 2010 compared to $15.4
million for the same period in 2009. Verso Holdings’ selling, general, and
administrative expenses were $16.2 million in the first quarter of 2010 compared
to $15.2 million for the same period in 2009.
Interest expense. Verso Paper’s
interest expense for the first quarter of 2010 was $32.3 million compared to
$27.1 million for the same period in 2009. Verso Holdings’ interest
expense for the first quarter of 2010 was $31.0 million compared to $24.7
million for the same period in 2009. The increase in interest expense was
primarily due to higher interest rates on outstanding debt in the first quarter
of 2010, which offset lower long-term indebtedness in the first quarter of 2010
as compared to the first quarter of 2009.
Other income. Other
income was $0.2 million for the first quarter of 2010, compared to $113.3
million for the first quarter of 2009. Included in the results for 2009
are $104.6 million in pre-tax net benefits from alternative fuel mixture tax
credits provided by the U.S. government for our use of black liquor in
alternative fuel mixtures. Since the tax credit, as it relates to liquid
fuels derived from biomass, expired on December 31, 2009, we did not recognize
any benefit from this tax credit in the first quarter of 2010. We also
recognized $8.7 million in pre-tax net gains from the early retirement of debt
at a discount in the first quarter of 2009.
Seasonality
We are
exposed to fluctuations in quarterly net sales volumes and expenses due to
seasonal factors. These seasonal factors are common in the coated paper
industry. Typically, the first two quarters are our slowest quarters due
to lower demand for coated paper during this period. Our third quarter is
generally our strongest quarter, reflecting an increase in printing related to
end-of-year magazines, increased end-of-year direct mailings, and holiday season
catalogs. Our working capital and accounts receivable generally peak in
the third quarter, while inventory generally peaks in the second quarter in
anticipation of the third quarter season. We expect our seasonality trends
to continue for the foreseeable future.
Liquidity
and Capital Resources
We rely
primarily upon cash flow from operations and borrowings under our revolving
credit facility to finance operations, capital expenditures, and fluctuations in
debt service requirements. We believe that our ability to manage cash flow
and working capital levels, particularly inventory and accounts payable, will
allow us to meet our current and future obligations, pay scheduled principal and
interest payments, and provide funds for working capital, capital expenditures,
and other needs of the business for at least the next twelve months.
However, given the uncertainty of the current economic environment, no assurance
can be given that we will be able to generate sufficient cash flows from
operations or that future borrowings will be available under our revolving
credit facility in an amount sufficient to fund our liquidity needs. As of
March 31, 2010, $152.1 million was available for future borrowing under our
revolving credit facility. As we focus on managing our expenses and cash
flows, we continue to assess and implement, as appropriate, various earnings and
expense reduction initiatives. Management has developed a company-wide
cost reduction program which produced approximately $9 million of savings during
the first quarter of 2010 compared to approximately $10 million in the first
quarter of 2009. Management expects this program to yield an additional
$40 million in cost reductions over the next twelve months and continues to
search for and develop additional cost savings measures.
Net cash flows from operating
activities. Verso Paper’s net cash used in operating activities of
$49.1 million in the first quarter of 2010 was primarily attributable to net
losses of $53.6 million and to a lesser extent reflected changes in working
capital, which included a decline in accrued liabilities resulting from normal
fluctuations in accrued interest payable. Net cash used in operating
activities of $87.1 million in the first quarter of 2009, primarily resulted
from changes in working capital, which included declines in accounts payable and
accrued liabilities while inventories and accounts receivable increased.
The decline in accounts payable was related to the large amount of
market-related machine downtime taken in response to challenging market
conditions. The decline in accrued liabilities was due to normal
fluctuations in accrued interest payable. The increase in inventory value
was primarily due to the normal seasonal build of our wood and finished goods
inventories. Additionally, the increase in accounts receivable was
primarily due to accruals for alternative fuel mixture tax credits and was offset by the
resulting improvement in net income. The tax credit, as it relates to
liquid fuels derived from biomass, expired on December 31, 2009. Verso
Holdings’ net cash used in operating activities was $49.1 million for the first
quarter of 2010 compared to $86.8 million for the first quarter of 2009.
Verso Holdings’ operating cash flows are the same as those of Verso Paper in all
material respects.
Net cash flows from investing
activities. In the first quarter of 2010, Verso Paper used $8.4
million of net cash in investing activities due to investments in capital
expenditures, compared to $11.9 million of net cash used in investing activities
due to investments in capital expenditures in the first quarter of 2009.
Verso Holdings’ investing cash flows are the same as those of Verso
Paper.
Net cash flows from financing
activities. Verso Paper’s net cash provided by financing activities
was $26.5 million for the first quarter of 2010, reflecting $27.4 million in
proceeds from the issuance of $25.0 million in senior secured notes including
premium and net of underwriting fees and issuance costs. This compares to
net cash used in financing activities of $3.6 million in the first quarter of
2009, representing principal payments on long-term debt. Verso Holdings’
net cash provided by financing activities was $26.5 million for the first
quarter of 2010 compared to net cash used in financing activities of $3.8
million for the first quarter of 2009. Verso Holdings’ financing cash
flows are the same as those of Verso Paper in all material
respects.
Indebtedness. As of
March 31, 2010, Verso Paper’s aggregate indebtedness was $1,221.9 million, net
of $20.7 million of unamortized discounts. As of March 31, 2010, Verso
Holdings’ aggregate indebtedness was $1,146.6 million, net of $20.7 million of
unamortized discounts.
On March
31, 2010, Verso Holdings had a credit facility and outstanding debt securities
consisting of:
|
·
|
$200
million revolving credit facility maturing in 2012, under which no amounts
were outstanding, $32.1 million in letters of credit were issued, and
$152.1 million was available for future borrowing as of March 31,
2010. Our availability under our revolving credit facility has been
reduced by $15.8 million as a result of the bankruptcy filing of Lehman
Commercial Paper, Inc., “Lehman.” As a result of Lehman’s
inability to fulfill its obligation under the revolving credit facility,
we do not expect that Lehman will fund its pro rata share of any future
borrowing requests.
|
|
·
|
$350
million aggregate principal amount of 11½% senior secured fixed rate notes
due 2014;
|
|
·
|
$337
million aggregate principal amount of 9⅛% second priority senior secured
fixed rate notes due 2014;
|
|
·
|
$180
million aggregate principal amount of second priority senior secured
floating rate notes due 2014; and
|
|
·
|
$300
million aggregate principal amount of 11⅜% senior subordinated fixed rate
notes due 2016.
|
The
revolving credit facility bears interest at a rate equal to LIBOR plus 3.00%
and/or Prime plus 2.00%. Verso Holdings is required to pay a commitment
fee to the lenders under the revolving credit facility in respect of unutilized
commitments at a rate equal to 0.50% per annum and customary letter of credit
and agency fees. The revolving credit facility is secured by first
priority security interests in, and mortgages on, substantially all tangible and
intangible assets of Verso Holdings and each of its direct and indirect
subsidiaries. It is also secured by first priority pledges of all the
equity interests owned by Verso Holdings in its subsidiaries. The
obligations under the revolving credit facility are unconditionally guaranteed
by Verso Finance and, subject to certain exceptions, each of its direct and
indirect subsidiaries. On June 3, 2009, the credit agreement was amended
and restated to provide for the issuance of the senior secured notes due July 1,
2014 (see below). The amendment also, among other things, increased the
applicable margin for the interest rate on borrowings under the revolving credit
facility to 3.0% for Eurodollar loans and 2.0% for base rate loans and
eliminated the requirement to maintain a net first-lien secured debt to Adjusted
EBITDA ratio, providing us with additional business flexibility. The
revolving credit facility is secured on a ratable and pari passu basis with the
senior secured notes due 2014.
On
June 11, 2009, Verso Holdings issued $325.0 million aggregate principal
amount of 11.5% senior secured notes due July 1, 2014. These fixed-rate
notes pay interest semi-annually. The notes are secured by substantially
all of the property and assets of Verso Holdings and each of its direct and
indirect subsidiaries. The notes are secured on a ratable and pari passu basis with the
revolving credit facility. The net proceeds, after deducting the discount,
underwriting fees, and issuance costs, were $288.6 million, which funds were
used to repay in full $252.9 million outstanding on Verso Holdings’ first
priority term loan and to temporarily reduce the debt outstanding under the
revolving credit facility by $35.0 million. On January 15, 2010, Verso
Holdings issued an additional $25.0 million aggregate principal amount of the
11.5% senior secured notes under the same indenture. These notes were
treated as a single series with and have the same terms as the notes issued
under the indenture in June 2009. The net proceeds including premium,
after deducting underwriting fees and offering expenses, were $26.5
million. We intend to use the net proceeds for capital expenditures and
other general corporate purposes.
The
second priority senior secured fixed rate notes have a fixed interest rate of
9.125% and pay interest semiannually. The second priority senior secured
floating rate notes bear interest at a rate equal to LIBOR plus 3.75% and pay
interest quarterly. As of March 31, 2010, the interest rate was
4.00%. The senior subordinated notes have a fixed interest rate of 11.375%
and pay interest semi-annually. The second priority senior secured fixed
rate and floating rate notes have the benefit of a second priority security
interest in the collateral securing our senior secured credit facility, while
the subordinated notes are unsecured.
Additionally,
Verso Finance has $75.3 million aggregate principal amount outstanding on its
senior unsecured floating-rate term loan which matures in 2013. The term
loan allows Verso Finance to pay interest either in cash or in-kind through the
accumulation of the outstanding principal amount. The term loan bears
interest at a rate equal to LIBOR plus 6.25% on interest payments made in cash
and LIBOR plus 7.00% for interest paid in-kind, or “PIK,” and added to the
principal balance. The weighted-average interest rate in effect on March
31, 2010, on the term loan was 6.57%. Verso Finance elected to exercise
the PIK option for $1.2 million of interest payments due in the first quarter of
2010.
As a
holding company, Verso Paper’s investments in its operating subsidiaries,
including Verso Paper LLC, constitute substantially all of its operating assets.
Consequently, its subsidiaries conduct all of its consolidated operations and
own substantially all of its operating assets. Verso Paper’s principal source of
the cash it needs to pay its debts is the cash that its subsidiaries generate
from their operations and their borrowings. Verso Paper’s subsidiaries are not
obligated to make funds available to it. The terms of the senior secured credit
facilities and the indentures governing the outstanding notes of Verso Paper’s
subsidiaries significantly restrict its subsidiaries from paying dividends and
otherwise transferring assets to Verso Paper. Furthermore, Verso Paper’s
subsidiaries will be permitted under the terms of the senior secured credit
facilities and the indentures to incur additional indebtedness that may severely
restrict or prohibit the making of distributions, the payment of dividends or
the making of loans by such subsidiaries to Verso Paper. Although the
terms of the debt agreements of Verso Paper’s subsidiaries do not restrict its
operating subsidiaries from obtaining funds from their respective subsidiaries
to fund their operations and payments on indebtedness, there can be no assurance
that the agreements governing the current and future indebtedness of its
subsidiaries will permit its subsidiaries to provide Verso Paper with sufficient
dividends, distributions or loans to fund its obligations or pay dividends to
its stockholders.
We may
elect to retire our outstanding debt in open market purchases, privately
negotiated transactions, or otherwise. These repurchases may be funded
through available cash from operations and borrowings from our credit
facilities. Such repurchases are dependent on prevailing market
conditions, the Company’s liquidity requirements, contractual restrictions, and
other factors.
Covenant
Compliance
The
credit agreement and the indentures governing our notes contain affirmative
covenants as well as restrictive covenants which limit our ability to, among
other things, incur additional indebtedness; pay dividends or make other
distributions; repurchase or redeem our stock; make investments; sell assets,
including capital stock of restricted subsidiaries; enter into agreements
restricting our subsidiaries’ ability to pay dividends; consolidate, merge, sell
or otherwise dispose of all or substantially all of our assets; enter into
transactions with our affiliates; and incur liens. These covenants can
result in limiting our long-term growth prospects by hindering our ability to
incur future indebtedness or grow through acquisitions. As of March 31,
2010, we were in compliance with the covenants in our debt
agreements.
Critical
Accounting Policies
Our
accounting policies are fundamental to understanding management’s discussion and
analysis of financial condition and results of operations. Our
consolidated condensed financial statements are prepared in conformity with
accounting principles generally accepted in the United States of America and
follow general practices within the industry in which we operate. The
preparation of the financial statements requires management to make certain
judgments and assumptions in determining accounting estimates. Accounting
estimates are considered critical if the estimate requires management to make
assumptions about matters that were highly uncertain at the time the accounting
estimate was made, and different estimates reasonably could have been used in
the current period, or changes in the accounting estimate are reasonably likely
to occur from period to period, that would have a material impact on the
presentation of our financial condition, changes in financial condition or
results of operations.
Management
believes the following critical accounting policies are both important to the
portrayal of our financial condition and results of operations and require
subjective or complex judgments. These judgments about critical accounting
estimates are based on information available to us as of the date of the
financial statements.
Accounting
standards whose application may have a significant effect on the reported
results of operations and financial position, and that can require judgments by
management that affect their application, include the following: ASC Topic 450,
Contingencies, ASC
Topic 360, Property, Plant,
and Equipment, ASC Topic 350, Intangibles – Goodwill and
Other, and ASC Topic 715, Compensation – Retirement
Benefits.
Impairment of long-lived assets and
goodwill. Long-lived assets are reviewed for impairment upon the
occurrence of events or changes in circumstances that indicate that the carrying
value of the assets may not be recoverable, as measured by comparing their net
book value to the estimated undiscounted future cash flows generated by their
use.
Goodwill
and other intangible assets are accounted for in accordance with ASC Topic
350. Intangible assets primarily consist of trademarks, customer-related
intangible assets and patents obtained through business acquisitions.
Impairment is the condition that exists when the carrying amount of these assets
exceed their implied fair value. An impairment evaluation of the carrying
amount of goodwill and other intangible assets with indefinite lives is
conducted annually or more frequently if events or changes in circumstances
indicate that an asset might be impaired. The Company has identified the
following trademarks as intangible assets with an indefinite life: Influence®,
Liberty®, and Advocate®. Goodwill is evaluated at the reporting unit level
and has been allocated to the “Coated” segment. The valuation as of
October 1, 2009, indicated no impairment of goodwill or trademarks assigned
indefinite lives.
The
evaluation for impairment is performed by comparing the carrying amount of these
assets to their estimated fair value. If impairment is indicated, then an
impairment charge is recorded to reduce the asset to its estimated fair
value. The estimated fair value is generally determined on the basis of
discounted future cash flows. Management believes the accounting estimates
associated with determining fair value as part of the impairment test is a
critical accounting estimate because estimates and assumptions are made about
the Company’s future performance and cash flows. While management uses the
best information available to estimate future performance and cash flows, future
adjustments to management’s projections may be necessary if economic conditions
differ substantially from the assumptions used in making the
estimates.
Pension Benefit Obligations.
We offer various pension plans to employees. The calculation of the
obligations and related expenses under these plans requires the use of actuarial
valuation methods and assumptions, including the expected long-term rate of
return on plan assets, discount rates, projected future compensation increases,
health care cost trend rates, and mortality rates. Actuarial valuations
and assumptions used in the determination of future values of plan assets and
liabilities are subject to management judgment and may differ significantly if
different assumptions are used.
Contingent liabilities.
A liability is contingent if the outcome or amount is not presently
known, but may become known in the future as a result of the occurrence of some
uncertain future event. We estimate our contingent liabilities based on
management’s estimates about the probability of outcomes and their ability to
estimate the range of exposure. Accounting standards require that a
liability be recorded if management determines that it is probable that a loss
has occurred and the loss can be reasonably estimated. In addition, it
must be probable that the loss will be confirmed by some future event. As
part of the estimation process, management is required to make assumptions about
matters that are by their nature highly uncertain.
The
assessment of contingent liabilities, including legal contingencies, asset
retirement obligations, and environmental costs and obligations, involves the
use of critical estimates, assumptions, and judgments. Management’s
estimates are based on their belief that future events will validate the current
assumptions regarding the ultimate outcome of these exposures. However,
there can be no assurance that future events will not differ from management’s
assessments.
We are
exposed to market risk from fluctuations in our paper prices, interest rates,
energy prices, and commodity prices for our inputs.
Paper
Prices
Our
sales, which we report net of rebates, allowances, and discounts, are a function
of the number of tons of paper that we sell and the price at which we sell our
paper. The coated paper industry is cyclical, which results in changes in
both volume and price. Paper prices historically have been a function of
macro-economic factors, which influence supply and demand. Price has
historically been substantially more variable than volume and can change
significantly over relatively short time periods.
We are
primarily focused on serving two end-user segments: catalogs and
magazines. Coated paper demand is primarily driven by advertising and
print media usage. Advertising spending and magazine and catalog
circulation tend to correlate with GDP in the United States - they rise with a
strong economy and contract with a weak economy.
The
majority of our products are sold under contracts with our customers; however,
coated freesheet paper is sold without a contract more often then coated
groundwood paper. Our contracts generally specify the volumes to be sold
to the customer over the contract term, as well as the pricing parameters for
those sales. Most of our contracts are negotiated on an annual basis, with
only a few having terms extending beyond one year. Typically, our
contracts provide for quarterly price adjustments based on market price
movements. The large portion of contracted sales allows us to plan our
production runs well in advance, optimizing production over our integrated mill
system and thereby reducing costs and increasing overall
efficiency.
We reach
our end-users through several channels, including printers, brokers, paper
merchants, and direct sales to end-users. We sell and market our products
to approximately 100 customers. During the first quarter of 2010, no
single customer accounted for more than 10% of our total net
sales.
Interest
Rates
We have
issued fixed- and floating-rate debt in order to manage our variability to cash
flows from interest rates. Borrowings under the revolving credit facility,
the floating rate notes, and Verso Finance’s senior unsecured term loan accrue
interest at variable rates; however, there were no amounts outstanding under the
revolving credit facility as of March 31, 2010. A 100 basis point increase
in quoted interest rates on Verso Paper’s outstanding floating-rate debt as of
March 31, 2010, would increase annual interest expense by $2.6 million (of which
$0.8 million is attributable to Verso Finance’s senior unsecured term loan on
which we have elected to pay interest in kind). A 100 basis point increase
in quoted interest rates on Verso Holdings’ outstanding floating-rate notes as
of March 31, 2010, would increase annual interest expense by $1.8 million.
While we may enter into agreements limiting our exposure to higher interest
rates, any such agreements may not offer complete protection from this
risk.
Derivatives
In the
normal course of business, we utilize derivatives contracts as part of our risk
management strategy to manage our exposure to market fluctuations in energy
prices and interest rates. These instruments are subject to credit and
market risks in excess of the amount recorded on the balance sheet in accordance
with generally accepted accounting principles. Controls and monitoring
procedures for these instruments have been established and are routinely
reevaluated. We have an Energy Risk Management Policy which was adopted by
our board of directors and is monitored by an Energy Risk Management
Committee composed of our senior management. In addition, we have an
Interest Rate Risk Committee which was formed to monitor our Interest Rate Risk
Management Policy. Credit risk represents the potential loss that may
occur because a party to a transaction fails to perform according to the terms
of the contract. The measure of credit exposure is the replacement cost of
contracts with a positive fair value. We manage credit risk by entering
into financial instrument transactions only through approved
counterparties. Market risk represents the potential loss due to the
decrease in the value of a financial instrument caused primarily by changes in
commodity prices or interest rates. We manage market risk by establishing
and monitoring limits on the types and degree of risk that may be
undertaken.
We do not
hedge the entire exposure of our operations from commodity price volatility for
a variety of reasons. To the extent that we do not hedge against commodity
price volatility, our results of operations may be affected either favorably or
unfavorably by a shift in the future price curve. As of March 31, 2010, we
had net unrealized losses of $8.3 million on open commodity contracts with
maturities of one to 12 months. These derivative instruments involve the
exchange of net cash settlements, based on changes in the price of the
underlying commodity index compared to the fixed price offering, at specified
intervals without the exchange of any underlying principal. A 10% decrease
in commodity prices would have a negative impact of approximately $2.3 million
on the fair value of such instruments. This quantification of exposure to
market risk does not take into account the offsetting impact of changes in
prices on anticipated future energy purchases.
Commodity
Prices
We are
subject to changes in our cost of sales caused by movements underlying commodity
prices. The principal components of our cost of sales are chemicals, wood,
energy, labor, maintenance, and depreciation, amortization, and depletion.
Costs for commodities, including chemicals, wood, and energy, are the most
variable component of our cost of sales because their prices can fluctuate
substantially, sometimes within a relatively short period of time. In
addition, our aggregate commodity purchases fluctuate based on the volume of
paper that we produce.
Chemicals. Chemicals utilized in
the manufacturing of coated papers include latex, starch, calcium carbonate, and
titanium dioxide. We purchase these chemicals from a variety of suppliers
and are not dependent on any single supplier to satisfy our chemical
needs. We expect imbalances in supply and demand to periodically create
volatility in prices for certain chemicals.
Wood. Our costs to purchase
wood are affected directly by market costs of wood in our regional markets and
indirectly by the effect of higher fuel costs on logging and transportation of
timber to our facilities. While we have in place fiber supply agreements
that ensure a substantial portion of our wood requirements, purchases under
these agreements are typically at market rates.
Energy. We produce a large
portion of our energy requirements, historically producing approximately 50% of
our energy needs for our coated paper mills from sources such as waste wood and
paper, hydroelectric facilities, chemicals from our pulping process, our own
steam recovery boilers, and internal energy cogeneration facilities. Our
external energy purchases vary across each of our mills and include fuel oil,
natural gas, coal, and electricity. While our internal energy production
capacity mitigates the volatility of our overall energy expenditures, we expect
prices for energy to remain volatile for the foreseeable future and our energy
costs to increase in a high energy cost environment. As prices fluctuate,
we have some ability to switch between certain energy sources in order to
minimize costs. We utilize derivatives contracts as part of our risk
management strategy to manage our exposure to market fluctuations in energy
prices.
Off-Balance
Sheet Arrangements
None.
Evaluation
of Disclosure Controls and Procedures
We
maintain disclosure controls and procedures that are designed to provide
reasonable assurance that information required to be disclosed in reports that
we file and submit under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the
SEC’s rules and forms and is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding required
disclosure.
There are
inherent limitations to the effectiveness of any disclosure controls and
procedures, including the possibility of human error or the circumvention or
overriding of the controls and procedures, and even effective disclosure
controls and procedures can provide only reasonable assurance of achieving their
objectives. Our disclosure
controls and procedures are designed to provide reasonable assurance of
achieving their objectives.
Our
management, with the participation of our Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of the design and operation of
our disclosure controls and procedures as of March 31, 2010. Based upon
this evaluation, and subject to the foregoing, our Chief Executive Officer and
Chief Financial Officer concluded that our disclosure controls and procedures
were effective at the reasonable assurance level as of March 31,
2010.
Changes
in Internal Control Over Financial Reporting
There was
no change in our internal control over financial reporting during the fiscal
quarter ended March 31, 2010, that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.
In
October 2009, Thilmany, LLC (together with its parent company, Packaging
Dynamics Corporation) served us with a lawsuit filed in circuit court in
Outagamie County, Wisconsin. Thilmany alleged in the lawsuit that the
alternative fuel mixture tax credits that we received from the operation of the
Androscoggin mill had the effect of reducing our costs associated with operating
the Androscoggin mill and producing the pulp that we use to manufacture paper
products for Thilmany on paper machine no. 5 under a long-term supply agreement.
Thilmany sought unspecified damages for our alleged breach of contract for
failing to provide Thilmany with a prorated share of the purported cost savings
attributable to the tax credits and a declaration that Thilmany is entitled to a
prorated share of any such future costs savings attributable to our use of
alternative fuel mixtures at the Androscoggin mill. On March 29, 2010, we
entered into a settlement agreement with Thilmany and Packaging Dynamics
pursuant to which the lawsuit was dismissed.
We are
involved in legal proceedings incidental to the conduct of our business.
We do not believe that any liability that may result from these proceedings will
have a material adverse effect on our financial statements.
For a
detailed discussion of risk factors affecting us, see “Part I – Item 1A. Risk
Factors” in our Annual Report on Form 10-K for the year ended December
31, 2009.
Not
applicable.
Not
applicable.
Not
applicable.
The
following exhibits are included with this report:
Exhibit
Number
|
|
Description
|
|
|
|
3.1
|
|
Amended and Restated
Certificate of Incorporation of Verso Paper Corp. (1)
|
|
|
|
3.2
|
|
Amended and Restated
Bylaws of Verso Paper Corp. (1)
|
|
|
|
3.3
|
|
Certificate of
Formation of Verso Paper Holdings LLC, filed June 6, 2006, as amended by
Certificates of Amendment filed June 13, 2006, June 23, 2006 and June 26
2006. (2)
|
|
|
|
3.4
|
|
Amended and Restated
Limited Liability Company Agreement of Verso Paper Holdings LLC dated as
of January 25, 2007. (2)
|
|
|
|
4.1 |
|
First
Supplemental Indenture, dated as of January 15, 2010, among Verso Paper
Holdings LLC, Verso Paper Inc., the guarantors named therein, and
Wilmington Trust FSB, as trustee. (3) |
|
|
|
4.2 |
|
Registration
Rights Agreement, dated as of January 15, 2010, among Verso Paper Holdings
LLC, Verso Paper Inc., the guarantors named therein, and Credit Suisse
Securities (USA) LLC, as initial purchaser. (3) |
|
|
|
12
|
|
Computation
of Ratio of Earnings to Fixed Charges for Verso Paper Holdings
LLC.
|
|
|
|
31.1
|
|
Certification
of Principal Executive Officer pursuant to Rule 13a-14(a) under Securities
Exchange Act of 1934.
|
|
|
|
31.2
|
|
Certification
of Principal Financial Officer pursuant to Rule 13a-14(a) under Securities
Exchange Act of 1934.
|
|
|
|
32.1
|
|
Certification
of Principal Executive Officer pursuant to Rule 13a-14(b) under Securities
Exchange Act of 1934 and Section 1350 of Chapter 63 of Title 18 of United
States Code.
|
|
|
|
32.2
|
|
Certification
of Principal Financial Officer pursuant to Rule 13a-14(b) under Securities
Exchange Act of 1934 and Section 1350 of Chapter 63 of Title 18 of United
States
Code.
|
(1)
|
Incorporated
by reference to our Verso Paper Corp.’s Registration Statement on Form S-1
filed with the Securities and Exchange Commission on December 20, 2007, as
amended (Registration Statement No.
333-148201).
|
(2)
|
Incorporated
by reference to Verso Paper Holding LLC’s Annual Report on Form 10-K for
the year ended December 31, 2007, filed with the Securities and Exchange
Commission on March 12, 2008.
|
|
Incorporated
by reference to the Current Report on Form 8-K of Verso Paper
Corp. and Verso Paper Holdings LLC filed with the Securities and Exchange
Commission on January 15, 2010.
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, each registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
Date: May
6, 2010
|
|
|
VERSO
PAPER CORP.
|
|
|
|
By:
|
|
|
|
Michael
A. Jackson
President
and Chief Executive
Officer
|
|
By:
|
|
|
|
Robert
P. Mundy
Senior
Vice President and Chief Financial
Officer
|
Date: May
6, 2010
|
|
|
VERSO
PAPER HOLDINGS LLC
|
|
|
|
|
By:
|
|
|
|
Michael
A. Jackson
President
and Chief Executive
Officer
|
|
By:
|
|
|
|
Robert
P. Mundy
Senior
Vice President and Chief Financial
Officer
|
The
following exhibits are included with this report:
3.1
|
Amended and Restated
Certificate of Incorporation of Verso Paper Corp. (1)
|
|
|
3.2
|
Amended and Restated
Bylaws of Verso Paper Corp. (1)
|
|
|
3.3
|
Certificate of
Formation of Verso Paper Holdings LLC, filed June 6, 2006, as amended by
Certificates of Amendment filed June 13, 2006, June 23, 2006 and June 26
2006. (2)
|
|
|
3.4
|
Amended and Restated
Limited Liability Company Agreement of Verso Paper Holdings LLC dated as
of January 25, 2007. (2)
|
|
|
4.1 |
First Supplemental
Indenture, dated as of January 15, 2010, among Verso Paper Holdings LLC,
Verso Paper Inc., the guarantors named therein, and Wilmington Trust FSB,
as trustee. (3) |
|
|
4.2 |
Registration
Rights Agreement, dated as of January 15, 2010, among Verso Paper Holdings
LLC, Verso Paper Inc., the guarantors named therein, and Credit Suisse
Securities (USA) LLC, as initial purchaser. (3) |
|
|
12
|
Computation
of Ratio of Earnings to Fixed Charges for Verso Paper Holdings
LLC.
|
|
|
31.1
|
Certification
of Principal Executive Officer pursuant to Rule 13a-14(a) under Securities
Exchange Act of 1934.
|
|
|
31.2
|
Certification
of Principal Financial Officer pursuant to Rule 13a-14(a) under Securities
Exchange Act of 1934.
|
|
|
32.1
|
Certification
of Principal Executive Officer pursuant to Rule 13a-14(b) under Securities
Exchange Act of 1934 and Section 1350 of Chapter 63 of Title 18 of United
States Code.
|
|
|
32.2
|
Certification
of Principal Financial Officer pursuant to Rule 13a-14(b) under Securities
Exchange Act of 1934 and Section 1350 of Chapter 63 of Title 18 of United
States
Code.
|
(1)
|
Incorporated
by reference to Verso Paper Corp.’s Registration Statement on Form S-1
filed with the Securities and Exchange Commission on December 20, 2007, as
amended (Registration Statement No.
333-148201).
|
(2)
|
Incorporated
by reference to Verso Paper Holding LLC’s Annual Report on Form 10-K for
the year ended December 31, 2007, filed with the Securities and Exchange
Commission on March 12, 2008.
|
|
Incorporated
by reference to the Current Report on Form 8-K of Verso Paper
Corp. and Verso Paper Holdings LLC filed with the Securities and Exchange
Commission on January 15, 2010.
|