UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
DC 20549
FORM
10-K
(Mark
One)
[ü] ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
fiscal year ended December 31, 2008
or
[ ] TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
transition period from _________ to _____________
Commission
file number: 333-148201
Verso
Paper Corp.
(Exact
name of registrant as specified in its charter)
Delaware
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75-3217389
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(State or other
jurisdiction of incorporation or organization) |
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(I.R.S. Employer
Identification Number)
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6775
Lenox Center Court, Suite 400
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Memphis,
Tennessee 38115-4436
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(901)
369-4100
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(Address of principal
executive offices) (Zip Code)
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(Registrant’s
telephone number, including area code)
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Securities
registered pursuant to section 12(b) of the Act:
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Title
of each class |
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Name
of each exchange on which registered |
Common Stock, $.01
par value per share |
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New York Stock
Exchange |
Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes _____
No
ü
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes _____
No ü
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes ü
No _____
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§ 229.405) is not contained herein, and will not be contained,
to the best of registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ü
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. (Check
one):
Large
accelerated filer____
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Accelerated
filer____
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Non-accelerated
filer ü
(Do
not check if a smaller
reporting
company)
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Smaller
reporting
company____
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes ______ No ü
The
aggregate market value of the voting and non-voting common equity held by
non-affiliates, computed by reference to the price at which the common equity
was last sold on the last business day of the most recently completed second
fiscal quarter (June 30, 2008), was approximately $118,298,718.
As of
February 28, 2009, there were 52,046,647 shares of common stock
outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE:
The
information required by Part III is incorporated by reference from portions of
the definitive proxy statement to be filed within 120 days after December 31,
2008, pursuant to Regulation 14A under the Securities Exchange Act of 1934 in
connection with the 2009 annual meeting of stockholders.
Table
of Contents
PART
I
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Page
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Item
1.
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2
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Item
1A
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12
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Item
1B
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19
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Item
2.
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20
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Item
3.
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20
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Item 4. |
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20
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PART
II
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Item
5.
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21
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Item
6.
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22
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Item
7.
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24
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Item
7A.
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40
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Item
8.
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42
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Item
9.
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80
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Item
9A
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80
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Item
9A(T)
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80
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Item
9B
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81
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PART
III
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Item
10.
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81
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Item
11.
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81
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Item
12.
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81
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Item
13.
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81
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Item
14.
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Principal Accountant Fees and Services |
81
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PART
IV
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Item
15.
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82
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85
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Forward-Looking
Statements
In this
annual 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,” “predict,” “estimate,” “intend,” “could,”
“may,” “might” and similar expressions. Forward-looking statements
are based on currently available business, economic, financial and other
information and reflect management’s current knowledge, assumptions, beliefs,
estimates, expectations and views with respect to future developments and their
potential effects on Verso. Actual results could vary materially
depending on risks and uncertainties that may affect Verso and its
business. For a discussion of such risks and uncertainties, please
refer to “Risk Factors,” “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and other sections of this annual report
and to Verso’s other filings with the Securities and Exchange
Commission. Except as required by applicable law, we assume no
obligation to update any forward-looking statement made in this annual report to
reflect subsequent events or circumstances or actual outcomes.
Market
and Industry Information
Market
data and other statistical information used throughout this annual report are
based on independent industry publications, government publications, reports by
market research firms or other published independent sources. Some data are also
based on our good-faith estimates which are derived from our review of internal
surveys, as well as the independent sources listed above. Although we
believe these sources are reliable, we have not independently verified the
information. Industry prices for coated paper provided in this annual
report are, unless otherwise expressly noted, derived from Resource Information
Systems, Inc., or “RISI, Inc.” data. “North American” data included
in this annual report that has been derived from RISI, Inc. only includes data
from the United States and Canada. U.S. industry pricing data
included in this annual report has been derived from RISI, Inc. data; this data
represents pricing from the eastern United States only (as defined by RISI,
Inc.). Also, any reference to (i) grade No. 3, grade
No. 4 and grade No. 5 coated paper relates to 60 lb. basis weight, 50
lb. basis weight and 34 lb. basis weight, respectively, (ii) lightweight
coated groundwood paper refers to groundwood paper grades that are a 36 lb.
basis weight or less, and (iii) ultra-lightweight coated groundwood paper
refers to groundwood paper grades that are a 30 lb. basis weight or
less. The RISI, Inc. data included in this annual report has been
derived from the following RISI, Inc. publications: 2008 RISI World Graphic
Paper forecast and RISI, Paper Trader: A Monthly Monitor of the North American
Graphic Paper Market, January 2009.
PART
I
Unless
otherwise noted, the terms “Verso,” “Verso Paper,” “Company,” “we,” “us,” “our”
and “Successor” refer collectively to Verso Paper Corp., a Delaware corporation,
and its subsidiaries, and references to the “Division” or “Predecessor” refer to
the Coated and Supercalendered Papers Division of International Paper Company,
or “International Paper.”
Background
We began
operations on August 1, 2006, when we acquired the assets and certain
liabilities comprising the business of the Coated and Supercalendered Papers
Division of International Paper. We were formed by affiliates of
Apollo Management, L.P., or “Apollo,” for the purpose of consummating the
acquisition from International Paper, or the “Acquisition.” Verso
Paper Corp. went public on May 14, 2008, with an initial public offering, or
“IPO," of 14 million shares of common stock at a price of $12 per share which
generated $152.2 million in net proceeds.
Our
principal executive offices are located at 6775 Lenox Center Court, Suite 400,
Memphis, Tennessee 38115-4436. Our telephone number is
(901) 369-4100. Our web site address is www.versopaper.com. Information
on our web site is not considered part of this annual report.
Overview
We are a
leading North American supplier of coated papers to catalog and magazine
publishers. The coating process adds a smooth uniform layer in the
paper, which results in superior color and print definition. As a
result, 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
North America’s second largest producer 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. We also produce and sell market kraft pulp, which is used to
manufacture printing and writing paper grades and tissue products.
We operate
11 paper machines at four mills located in Maine, Michigan and
Minnesota. The mills have a combined annual production capacity of
1,693,000 tons of coated paper, 106,000 tons of supercalendered paper, 44,000
tons of ultra-lightweight specialty paper, and 878,000 tons of kraft
pulp.
Our net
sales (in millions) by product line in 2008 are illustrated below:
We sell
and market our products to approximately 100 customers which comprise
approximately 650 end-user accounts. We have long-standing
relationships with many leading magazine and catalog publishers, commercial
printers, specialty retail merchandisers and paper merchants. We
reach our end-users through several distribution channels, including direct
sales, commercial printers, paper merchants and brokers.
Industry
Based on
2008 sales, the size of the global coated paper industry is estimated to be
approximately $55 billion, or 53 million tons of coated paper shipments,
including approximately $12 billion, or 12 million tons of coated paper
shipments, in North America. Coated paper is used primarily in media
and marketing applications, including catalogs, magazines and commercial
printing applications, which include high-end advertising brochures, annual
reports and direct mail advertising. Demand is generally driven by
North American advertising and print media trends, which in turn have
historically been correlated with growth in Gross Domestic Product, or
“GDP.”
In North
America, coated papers are classified by brightness and fall into five grades,
labeled No. 1 to No. 5, with No. 1 having the highest brightness level and No. 5
having the lowest brightness level. Papers graded No. 1, No. 2 and
No. 3 are typically coated freesheet grades. No. 4 and No. 5 papers are
predominantly groundwood containing grades. Coated groundwood grades
are the preferred grades for catalogs and magazines, while coated freesheet is
more commonly used in commercial print applications.
Products
We
manufacture three main grades of paper: coated groundwood paper, coated
freesheet paper and supercalendered paper. These paper grades are
differentiated primarily by their respective brightness, weight, print quality,
bulk, opacity and strength. We also produce Northern Bleached
Hardwood Kraft, or “NBHK,” pulp. The following table sets forth our
principal products by 2008 tons sold and as a percentage of our 2008 net
sales:
Product
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Tons
Sold
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Net
Sales
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(tons
in thousands, dollars in millions)
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Kts
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%
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$
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%
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Coated
groundwood paper
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961 |
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49 |
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$ |
938 |
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53 |
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Coated
freesheet paper
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581 |
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30 |
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556 |
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31 |
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Supercalendered
paper
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105 |
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5 |
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81 |
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5 |
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Pulp
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255 |
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13 |
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147 |
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8 |
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Other
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51 |
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3 |
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45 |
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3 |
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Total
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1,953 |
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|
100 |
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$ |
1,767 |
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100 |
|
As a
result of our scale and technological capabilities, we are able to offer our
customers a broad product offering, from ultra-lightweight coated groundwood to
heavyweight coated freesheet and supercalendered papers. Our
customers have the opportunity to sole-source all of their coated paper needs
from us while optimizing their choice of paper products. As our
customers’ preferences change, they can switch paper grades to meet their
desired balance between cost and performance attributes while maintaining their
relationship with us.
We are
also one of the largest rotogravure lightweight coated paper manufacturers in
North America. Rotogravure printing is a technique for transferring
ink onto coated papers, which typically results in a sharper image with truer
colors and less ink trapping than in other printing processes but generally
requires a smaller and higher-quality paper. Additionally, we are the
only manufacturer in North America with the technological expertise to supply
both rotogravure coated groundwood and coated freesheet.
Coated groundwood
paper. Coated groundwood paper includes a fiber component
produced through a mechanical pulping process. The use of such fiber
results in a bulkier and more opaque paper that is better suited for
applications where lighter weights and/or higher stiffness are required, such as
catalogs and magazines. In addition to mechanical pulp, coated
groundwood paper typically includes a kraft pulp component to improve brightness
and print quality.
Coated freesheet
paper. Coated freesheet paper is made from bleached kraft
pulp, which is produced using a chemical process to break apart wood fibers and
dissolve impurities such as lignin. The use of kraft pulp results in
a bright, heavier-weight paper with excellent print qualities, which is
well-suited for high-end commercial applications and premium
magazines. Coated freesheet contains primarily kraft pulp, with less
than 10% mechanical pulp in its composition.
Supercalendered
paper. Supercalendered paper consists of groundwood fibers and
a very high filler content but does not receive a separate surface
coating. Instead, the paper is passed through a supercalendering
process in which alternating steel and filled rolls “iron” the paper, giving it
a gloss and smoothness that makes it resemble coated
paper. Supercalendered papers are primarily used for retail inserts,
due to their relatively low price point.
Pulp. We produce and sell NBHK
pulp. NBHK pulp is produced through the chemical kraft process using
hardwoods. Hardwoods typically have shorter length fibers than
softwoods and are used to smooth paper. Kraft describes pulp produced
using a chemical process, whereby wood chips are combined with chemicals and
steam to separate the wood fibers. The fibers are then washed and
pressure screened to remove the chemicals and lignin which originally held the
fibers together. Finally, the pulp is bleached to the necessary
whiteness and brightness. Kraft pulp is used in applications where
brighter and whiter paper is required.
Other products. We
also offer recycled paper to help meet specific customer
requirements. Additionally, we offer customized product solutions for
strategic accounts by producing paper grades with customer-specified weight,
brightness and pulp mix characteristics, providing customers with cost benefits
and/or brand differentiation. Finally, we have recently expanded our
offerings to include ultra-lightweight uncoated printing papers and
ultra-lightweight coated and uncoated flexible packaging papers.
Manufacturing
We operate
11 paper machines at four mills located in Maine, Michigan and
Minnesota. The mills have a combined annual production capacity of
1,693,000 tons of coated paper, 106,000 tons of supercalendered paper, 44,000
tons of ultra-lightweight specialty paper, and 878,000 tons of kraft
pulp. Of the pulp that we produce, we consume approximately 493,000
tons internally and sell the rest. Our facilities are strategically
located within close proximity to major publication printing
customers. The facilities also benefit from convenient and
cost-effective access to northern softwood fiber, which is required for the
production of lightweight and ultra-lightweight coated papers. All
mills and machines operate seven days a week on a twenty-four hours per day
basis.
The
following table sets forth the locations of our mills, the products they produce
and other key operating information:
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Paper
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Production
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Mill/Location
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Product/Paper
Grades
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Machines
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Capacity*
|
Jay
(Androscoggin), ME
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Lightweight
Coated Groundwood
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2
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366,100
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Lightweight
Coated Freesheet
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1
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246,600
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Pulp
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-
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404,600
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Bucksport,
ME
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Lightweight
and Ultra-Lightweight Coated
|
|
|
|
|
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Groundwood
and High Bulk Specialty
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Coated
Groundwood
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4
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466,900
|
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Ultra-Lightweight
Specialty
|
|
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44,000
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Quinnesec,
MI
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|
Coated
Freesheet
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|
1
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|
395,400
|
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Pulp
|
|
-
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|
473,400
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Sartell,
MN
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Lightweight
and Ultra-Lightweight Coated
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|
|
|
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Groundwood
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|
1
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217,700
|
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Supercalendered
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2
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105,600
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* We have
the capacity to produce 878,000 tons of kraft pulp, of which approximately
493,000 tons are to be consumed internally and the remainder is available
to be sold as market pulp. This data does not include our production
capacity
for other pulp grades, the entirety of which is consumed internally in
the
production process for our coated paper.
The basic
raw material of the papermaking process is wood pulp. The first stage
of papermaking involves converting wood logs to pulp through either a mechanical
or chemical process. Before logs can be processed into pulp, they are
passed through a debarking drum to remove the bark. Once separated,
the bark is burned as fuel in bark boilers. The wood logs are
composed of small cellulose fibers which are bound together by a glue-like
substance called lignin. The cellulose fibers are then separated from
each other through either a mechanical or a kraft pulping
process.
After the
pulping phase, the fiber furnish is run onto the forming fabric of the paper
machine. On the forming fabric, the fibers become interlaced, forming
a mat of paper, and much of the water is extracted. The paper web
then goes through a pressing and drying process to extract the remaining
water. After drying, the web receives a uniform layer of coating that
makes the paper smooth and provides uniform ink absorption. After
coating, the paper goes through a calendering process that provides a smooth
finish by ironing the sheet between multiple soft nips that consist of
alternating hard (steel) and soft (cotton or synthetic) rolls. At the
dry end, the paper is wound onto spools to form a machine reel and then rewound
and split into smaller rolls on a winder. Finally, the paper is
wrapped, labeled and shipped.
Catalog
and magazine publishers with longer print runs tend to purchase paper in roll
form for use in web printing, a process of printing from a reel of paper as
opposed to individual sheets of paper, in order to minimize costs. In
contrast, commercial printers typically buy large quantities of sheeted paper in
order to satisfy the short-run printing requirements of their
customers. We believe that sheeted paper is a less attractive product
as it requires additional processing, bigger inventory stocks, a larger sales
and marketing team and a different channel strategy. For this reason,
we have pursued a deliberate strategy of configuring our manufacturing
facilities to produce all web-based papers which are shipped in roll form and
have developed relationships with third-party converters to address any sheeted
paper needs of our key customers.
We utilize
a manufacturing excellence program, named R-GAP, to ensure timely and accurate
reporting, encourage faster operator involvement and provide an overall culture
of continuous process improvement. We use multi-variable testing,
lean manufacturing, center of excellence teams, source-of-loss initiatives and
best practice sharing to constantly improve our manufacturing processes and
products. Since 2001, three of our four facilities have participated
in OSHA’s Voluntary Protection Program which recognizes outstanding safety
programs and performance.
Raw
Materials and Suppliers
Our key
cost inputs in the papermaking process are wood fiber, market kraft pulp,
chemicals and energy.
Wood Fiber. We
source our wood fiber from a broad group of timberland and sawmill owners
located in our regions as well as from our 23,000-acre hybrid poplar fiber farm
located near Alexandria, Minnesota.
Kraft
Pulp. Overall, we have the capacity to produce 878,000 tons of
kraft pulp, consisting of 405,000 tons of pulp at the Androscoggin mill and
473,000 tons of pulp at the Quinnesec mill, of which a total of approximately
493,000 tons are consumed internally. We supplement our internal
production of kraft pulp with purchases from third parties. In 2008,
these purchases were approximately 166,000 tons of pulp. We purchase
the pulp requirements from a variety of suppliers and are not dependent on any
single supplier to satisfy our pulp needs.
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.
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 one of our
mills and include fuel oil, natural gas, coal and electricity. While
our internal energy production capacity and ability to switch between certain
energy sources mitigates the volatility of our overall energy expenditures, we
expect prices for energy to remain volatile for the foreseeable
future. We utilize derivative contracts as part of our risk
management strategy to manage our exposure to market fluctuations in energy
prices.
Sales,
Marketing and Distribution
We reach
our end-users through several sales channels. These include selling
directly to end-users, through brokers, merchants, and printers. We
sell and market products to approximately 100 customers, which comprise
approximately 650 end-user accounts.
Sales to
End-Users. In 2008, we sold approximately 42% of our paper
products directly to end-users, most of which are catalog and magazine
publishers. These customers are typically large, sophisticated buyers
who have the scale, resources and expertise to procure paper directly from
manufacturers. Customers for our pulp products are mostly other paper
manufacturers.
Sales to Brokers and
Merchants. Our largest indirect paper sales by volume are
through brokers and merchants who resell the paper to end-users. In
2008, our total sales to brokers and merchants represented 45% of our total
sales. Brokers typically act as an intermediary between paper
manufacturers and smaller end-users who do not have the scale or resources to
cost effectively procure paper directly from manufacturers. The
majority of the paper sold to brokers is resold to catalog
publishers. We work closely with brokers to achieve share targets in
the catalog, magazine and insert end-user segments through collaborative
selling.
Merchants
are similar to brokers in that they act as an intermediary between the
manufacturer and the end-user. However, merchants generally take physical
delivery of the product and keep inventory on hand. Merchants tend to
deal with smaller end-users that lack the scale to warrant direct delivery from
the manufacturer. Coated freesheet comprises the majority of our
sales to merchants. In most cases, because they are relatively small,
the ultimate end-users of paper sold through merchants are generally regional or
local catalog or magazine publishers.
Sales to
Printers. In 2008, our total sales to printers represented 9%
of our total sales. Nearly all of our sales were to the five largest
publication printers in the United States. Printers also effectively
act as an intermediary between manufacturers and end-users in that they directly
source paper for printing/converting and then resell it to their customers as a
finished product.
The
majority of our products are delivered directly from our manufacturing
facilities to the printer, regardless of the sales channel. In order
to serve the grade No. 3 coated freesheet segment, we maintain a network of
distribution centers located in the West, Midwest, South and Northeast close to
our customer base to provide quick delivery. The majority of our pulp
products are delivered to our customers’ paper mills.
Our sales
force is organized around our sales channels. We maintain an active
dialogue with all of our major customers and track product performance and
demand across grades. We have a team of sales representatives and
marketing professionals organized into three major sales groups that correspond
with our sales channels: direct sales support; support to brokers and merchants;
and printer support.
The
majority of our products are sold under contracts with our
customers. Contracted sales are more prevalent for coated groundwood
paper, as opposed to coated freesheet paper, which is more often sold without a
contract. 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.
Part of
our strategy is to continually reduce the cost to serve our customer base
through e-commerce initiatives which allow for simplified ordering, tracking and
invoicing. In 2008, orders totaling $474.3 million, or approximately
30% of our total paper sales, were placed through our online ordering
platforms. We are focused on further developing our technology
platform and e-commerce capabilities. To this end, we operate Nextier
Solutions, an Internet-based system that allows for collaborative production
planning, order placement and inventory management throughout the supply
chain. Participants use the system to maximize supply chain
efficiencies, improve communication and reduce operating costs and pay us
subscription and transaction fees for system usage.
Customers
We serve
the catalog, magazine, insert and commercial printing markets and have developed
long-standing relationships with the premier North American retailers and
catalog and magazine publishers. The length of our relationships with
our top ten customers averages more than 20 years and no single customer
accounted for more than 10% of our net sales in 2008. Our key
customers include leading magazine publishers such as Condé Nast Publications,
Inc., Hearst Corporation, National Geographic Society and Time Inc.; leading
catalog producers such as Avon Products, Inc. and Sears Holding Corporation;
leading commercial printers such as Quad/Graphics, Inc., and RR
Donnelley & Sons Company; and leading paper merchants and brokers, such
as A.T. Clayton & Co., Unisource Worldwide, Inc., the xpedx and Bulkley
Dunton business units of International Paper, and Clifford Paper,
Inc.
Our net
sales, excluding pulp sales, by end-user segment in 2008, are illustrated below
(dollars in millions):
Research
and Development
The
primary function of our research and development efforts is to work with
customers in developing and modifying products to accommodate their evolving
needs and to identify cost-saving opportunities within our
operations.
Examples
of our research and development efforts implemented over the past several years
include:
· high-bulk
offset and rotogravure coated groundwood;
· lightweight
grade No. 4 coated groundwood;
· ultra-lightweight
grade No. 5 coated groundwood; and
· rotogravure
coated freesheet.
Intellectual
Property
We have
several patents and patent applications in the United States and various foreign
countries. These patents and patent applications generally relate to
various paper manufacturing methods and equipment which may become commercially
viable in the future. We also have trademarks for our names, Verso®
and Verso Paper®, as well as for our products such as Influence®, Velocity®,
Liberty®, Advocate® and Trilogy®. In addition to the intellectual
property that we own, we license a significant portion of the intellectual
property used in our business on a perpetual, royalty-free, non-exclusive basis
from International Paper.
Competition
Our
business is highly competitive. A significant number of North
American competitors produce coated and supercalendered papers, and several
overseas manufacturers, principally from Europe, export to North
America. We compete based on a number of factors,
including:
· price;
· product
availability;
· product
quality;
· breadth of
product offerings;
· timeliness
of product delivery; and
· customer
service.
Foreign
competition in North America is also affected by the exchange rate of the U.S.
dollar relative to other currencies, especially the euro, market prices in North
America and other markets, worldwide supply and demand, and the cost of
ocean-going freight.
While our
product offering is broad in terms of grades produced (from supercalendered and
ultra-lightweight coated groundwood offerings to heavier-weight coated freesheet
products), we are focused on producing coated groundwood and coated freesheet in
roll form. This strategy is driven by our alignment with catalog and
magazine end-users which tend to purchase paper in roll form for use in long
runs of web printing in order to minimize costs. Our principal competitors
include NewPage Corporation, Abitibi Bowater Inc., UPM-Kymmene Corporation and
Sappi Limited, all of which have North American operations. UPM and
Sappi are headquartered overseas and also have overseas manufacturing
facilities.
Employees
As of
December 31, 2008, we had approximately 2,900 employees, of whom approximately
35% are unionized and 75% are hourly employees. Employees at two of
our four mills are represented by labor unions under a total of four collective
bargaining agreements. In 2007, we completed successful labor
negotiations for three agreements that were up for renewal during the
year. The new agreements will expire in 2011.
We have
not experienced any work stoppages during the past several years. We
believe that we have good relations with our employees.
Environmental
and Other Governmental Regulations
We are
subject to federal, state and local environmental, health and safety laws and
regulations, including the federal Water Pollution Control Act of 1972, or
“Clean Water Act,” the federal Clean Air Act, the federal Resource Conservation
and Recovery Act, the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, or “CERCLA,” the federal Occupational Health and Safety
Act, and analogous state and local laws. Our operations also are
subject to two regional regimes designed to address climate change, the Regional
Greenhouse Gas Initiative in the northeastern United States and the Midwestern
Greenhouse Gas Reduction Accord, and in the future we may be subject to
additional federal, state, local or supranational legislation related to climate
change. Among our activities subject to environmental regulation are
the emissions of air pollutants, discharges of wastewater and stormwater,
operation of dams, storage, treatment and disposal of materials and waste, and
remediation of soil, surface water and ground water
contamination. Many environmental laws and regulations provide for
substantial fines or penalties and criminal sanctions for any failure to
comply. In addition, failure to comply with these laws and
regulations could result in the interruption of our operations and, in some
cases, facility shutdowns.
Certain of
these environmental laws, such as CERCLA and analogous state laws, provide for
strict, and under certain circumstances, joint and several liability for
investigation and remediation of the release of hazardous substances into the
environment, including soil and groundwater. These laws may apply to
properties presently or formerly owned or operated by an entity or its
predecessors, as well as to conditions at properties at which wastes
attributable to an entity or its predecessors were disposed. Under
these environmental laws, a current or previous owner or operator of real
property, and parties that generate or transport hazardous substances that are
disposed of at real property, may be held liable for the cost to investigate or
clean up such real property and for related damages to natural
resources. We handle and dispose of wastes arising from our mill
operations, including disposal at on-site landfills. We are required
to maintain financial assurance for the expected cost of landfill closure and
post-closure care. We may be subject to liability, including
liability for investigation and cleanup costs, if contamination is discovered at
one of our paper mills or another location where we have disposed of, or
arranged for the disposal of, wastes. We could be subject to
potentially significant liabilities under, or fines or penalties for any failure
to comply with, any environmental rule or regulation.
Compliance
with environmental laws and regulations is a significant factor in our
business. We have made, and will continue to make, significant
expenditures to comply with these requirements. We incurred
environmental capital expenditures of $9.7 million in 2008 and $3.4 million in
2007, and we expect to incur additional environmental capital expenditures of
$1.9 million in 2009. We anticipate that environmental compliance
will continue to require increased capital expenditures and operating expenses
over time as environmental laws or regulations, or interpretations thereof,
change or the nature of our operations require us to make significant additional
capital expenditures.
Permits
are required for the operation of our mills and related
facilities. The permits are subject to renewal, modification and
revocation. We and others have the right to challenge our permit
conditions through administrative and legal appeals and review
processes. Governmental authorities have the power to enforce
compliance with the permits, and violators are subject to civil and criminal
penalties, including fines, injunctions or both. Other parties also
may have the right to pursue legal actions to enforce compliance with the
permits.
Available
Information
Our web
site is located at www.versopaper.com. We
make available free of charge through this web site our annual reports on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and
amendments to those reports filed with or furnished to the Securities and
Exchange Commission, or “SEC,” pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, as soon as reasonably practicable after they
are electronically filed with or furnished to the SEC.
Our
business is subject to various risks. Set forth below are certain of
the more important risks that we face and that could cause our actual results to
differ materially from our historical results. These risks are not
the only ones that we face. Our business also could be affected by
additional risks that are presently unknown to us or that we currently believe
are immaterial to our business.
We
have limited ability to pass through increases in our costs to our
customers. Increases in our costs or decreases in coated or
supercalendered paper prices could have a material adverse effect on our
business, financial condition and results of operations.
Our
earnings are sensitive to price changes in coated or supercalendered
paper. Fluctuations in paper prices (and coated paper prices in
particular) historically have had a direct effect on our net income (loss) and
EBITDA for several reasons:
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Market
prices for paper products are a function of supply and demand, factors
over which we have limited control. We therefore have limited
ability to control the pricing of our products. Market prices of
grade No. 3, 60 lb. basis weight paper, which is an industry benchmark for
coated freesheet paper pricing, have fluctuated since 2000 from a high of
$1,100 per ton to a low of $705 per ton. In addition, market prices
of grade No. 5, 34 lb. basis weight paper, which is an industry benchmark
for coated groundwood paper pricing, have fluctuated between a high of
$1,120 per ton to a low of $795 per ton over the same period.
Because market conditions determine the price of our paper products, the
price for our products could fall below our cash production
costs.
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Market
prices for paper products typically are not directly affected by raw
material costs or other costs of sales, and consequently we have limited
ability to pass through increases in our costs to our customers absent
increases in the market price. In addition, a significant
portion of our sales are pursuant to contracts that limit price
increases. Thus, even though our costs may increase, we may not
have the ability to increase the prices for our products, or the prices
for our products may decline.
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The
manufacturing of coated paper is highly capital-intensive and a large
portion of our operating costs are fixed. Additionally, paper
machines are large, complex machines that operate more efficiently when
operated continuously. Consequently, both we and our
competitors typically continue to run our machines whenever marginal sales
exceed the marginal costs, adversely impacting prices at times of lower
demand.
|
Therefore,
our ability to achieve acceptable margins is principally dependent on (1)
managing our cost structure, (2) managing changes in raw materials prices, which
represent a large component of our operating costs and fluctuate based upon
factors beyond our control and (3) general conditions in the paper
market. If the prices of our products decline, or if our raw material
costs increase, it could have a material adverse effect on our business,
financial condition and results of operations.
The
paper industry is cyclical. Fluctuations in supply and demand for our
products could have a material adverse effect on our business, financial
condition and results of operations.
The paper
industry is a commodity market to a significant extent and is subject to
cyclical market pressures. North American demand for coated and supercalendered
paper products tends to decline during a weak U.S. economy. Accordingly, general
economic conditions and demand for magazines and catalogs may have a material
adverse impact on the demand for our products, which may result in a material
adverse effect on our business, financial condition and results of operations.
In addition, currency fluctuations can have a significant impact on the supply
of coated paper products in North America. If the U.S. dollar strengthens,
imports may increase, which would cause the supply of paper products available
in the North American market to increase. Foreign overcapacity also could result
in an increase in the supply of paper products available in the North American
market. An increased supply of paper available in North America could put
downward pressure on prices and/or cause us to lose sales to competitors, either
of which could have a material adverse effect on our business, financial
condition and results of operations.
Recent
global market and economic conditions have been unprecedented and challenging
with tighter credit conditions and recession in most major economies expected to
continue throughout 2009. Continued concerns about the systemic
impact of potential long-term and wide-spread recession, energy costs,
geopolitical issues, the availability and cost of credit, and the global housing
and mortgage markets have contributed to increased market volatility and
diminished expectations for the U.S. economy. These factors have led
to a decrease in spending by businesses and consumers alike, and a corresponding
decrease in demand for our products. (See “Management’s Discussion
and Analysis of Financial Condition and Results of Operations - Selected Factors
that Affect Our Operating Results”). Continued turbulence in the U.S. and
international markets and economies and prolonged declines in business consumer
spending may further adversely affect our business, financial condition and
results of operations.
We
have a limited operating history as a separate company. Accordingly,
our Predecessor's combined historical financial data may not be representative
of our results as a separate company.
We
operated as a division of International Paper prior to the
Acquisition. Therefore, we have a very limited operating history as a
separate company. Our business strategy as an independent entity may
not be successful on a long-term basis. Although International Paper,
after the completion of the Acquisition, generally no longer sells coated or
supercalendered paper, we cannot assure you that our customers will continue to
do business with us on the same terms as when we were a division of
International Paper or at all. We may not be able to grow our
business as planned and may not remain a profitable business. In
addition, the historical combined financial data included in this annual report
may not necessarily reflect what our results of operations, financial condition
and cash flows would have been had we been a separate independent entity
pursuing our own strategies during the periods presented. Our limited
operating history as a separate entity makes evaluating our business and our
future financial prospects difficult. As a result, our business,
financial condition and results of operations may differ materially from our
expectations based on the historical financial data contained in this annual
report.
Our cost
structure following the Acquisition is not comparable to the cost structure that
we experienced in prior periods. Our management has limited
experience managing our business as a separate company with a significant amount
of indebtedness. We cannot assure you that our cost structure in
future periods will be consistent with our current expectations or will permit
us to operate our business profitably.
The
markets in which we operate are highly competitive.
Our
business is highly competitive. Competition is based largely on
price. We compete with foreign producers, some of which are lower
cost producers than we are or are subsidized by governments. We also
face competition from numerous North American coated and supercalendered paper
manufacturers. Some of our competitors have advantages over us,
including lower raw material and labor costs and fewer environmental and
governmental regulations to comply with than we do. Furthermore, some
of our competitors have greater financial and other resources than we do or may
be better positioned than we are to compete for certain
opportunities.
Our
non-U.S. competitors may develop a competitive advantage over us and other U.S.
producers if the U.S. dollar strengthens in comparison to the home currency of
those competitors or ocean shipping rates decrease. If the U.S.
dollar strengthens, if shipping rates decrease or if overseas supply exceeds
demand, imports may increase, which would cause the supply of coated paper
products available in the North American market to increase. An
increased supply of coated paper could cause us to lower our prices or lose
sales to competitors, either of which could have a material adverse effect on
our business, financial condition and results of operations.
In
addition, the following factors will affect our ability to compete:
· product
availability;
· the
quality of our products;
· our
breadth of product offerings;
· our
ability to maintain plant efficiencies and high operating rates;
· manufacturing
costs per ton;
· customer
service and our ability to distribute our products on time; and
· the
availability and/or cost of wood fiber, market pulp, chemicals, energy and other
raw materials and labor.
If
we are unable to obtain energy or raw materials at favorable prices, or at all,
it could have a material adverse effect on our business, financial condition and
results of operations.
We
purchase wood fiber, market pulp, chemicals, energy and other raw materials from
third parties. We may experience shortages of energy supplies or raw
materials or be forced to seek alternative sources of supply. If we
are forced to seek alternative sources of supply, we may not be able to do so on
terms as favorable as our current terms or at all. In addition, the
prices for energy and many of our raw materials, especially petroleum-based
chemicals, have been volatile and have increased over the last
year. Prices are expected to remain volatile for the foreseeable
future. Chemical suppliers that use petroleum-based products in the
manufacture of their chemicals may, due to a supply shortage and cost increase,
ration the amount of chemicals available to us and/or we may not be able to
obtain the chemicals we need to operate our business at favorable prices, if at
all. In addition, certain specialty chemicals that we purchase are
available only from a small number of suppliers. If any of these
suppliers were to cease operations or cease doing business with us, we may be
unable to obtain such chemicals at favorable prices, if at all.
The supply
of energy or raw materials may be adversely affected by, among other things,
hurricanes and other natural disasters or an outbreak or escalation of
hostilities between the United States and any foreign power and, in particular,
events in the Middle East. For example, wood fiber is a commodity and
prices historically have been cyclical. The primary source for wood
fiber is timber. Environmental litigation and regulatory developments
have caused, and may cause in the future, significant reductions in the amount
of timber available for commercial harvest in Canada and the United
States. In addition, future domestic or foreign legislation,
litigation advanced by aboriginal groups, litigation concerning the use of
timberlands, the protection of endangered species, the promotion of forest
biodiversity, and the response to and prevention of wildfires and campaigns or
other measures by environmental activists also could affect timber
supplies. The availability of harvested timber may further be limited
by factors such as fire and fire prevention, insect infestation, disease, ice
and wind storms, droughts, floods and other natural and man-made
causes. Additionally, due to increased fuel costs, suppliers,
distributors and freight carriers have charged fuel surcharges, which have
increased our costs. Any significant shortage or significant increase
in our energy or raw material costs in circumstances where we cannot raise the
price of our products due to market conditions could have a material adverse
effect on our business, financial condition and results of
operations. Any disruption in the supply of energy or raw materials
also could affect our ability to meet customer demand in a timely manner and
could harm our reputation. Furthermore, we may be required to post
letters of credit or other financial assurance obligations with certain of our
energy and other suppliers, which could limit our financial
flexibility.
Currency fluctuations may adversely
affect our business, financial condition and results of
operations.
We compete
with producers in North America and abroad. Changes in the relative
strength or weakness of the U.S. dollar may affect international trade flows of
coated paper products. A stronger U.S. dollar may attract imports
from foreign producers, increase supply in the United States, and have a
downward effect on prices, while a weaker U.S. dollar may encourage U.S.
exports. Variations in the exchange rates between the U.S. dollar and
other currencies, particularly the Canadian dollar and the euro, may
significantly affect our competitive position, including by making it more
attractive for foreign producers to restart previously shut-down paper mills or
by increasing production capacity in North America or Europe.
We
are involved in continuous manufacturing processes with a high degree of fixed
costs. Any interruption in the operations of our manufacturing
facilities may affect our operating performance.
We seek to
run our paper machines on a nearly continuous basis for maximum
efficiency. Any downtime at any of our paper mills, including as a
result of or in connection with planned maintenance and capital expenditure
projects, results in unabsorbed fixed costs that negatively affect our results
of operations for the period in which we experience the downtime. Due
to the extreme operating conditions inherent in some of our manufacturing
processes, we may incur unplanned business interruptions from time to time and,
as a result, we may not generate sufficient cash flow to satisfy our operational
needs. In addition, many of the geographic areas where our production
is located and where we conduct our business may be affected by natural
disasters, including snow storms, forest fires and flooding. Such
natural disasters could cause our mills to stop running, which could have a
material adverse effect on our business, financial condition and results of
operations. Furthermore, during periods of weak demand for paper
products, we have in the past and may in the future experience market-related
downtime, which could have a material adverse effect on our financial condition
and results of operations.
Our
operations require substantial ongoing capital expenditures, and we may not have
adequate capital resources to fund all of our required capital
expenditures.
Our
business is capital intensive, and we incur capital expenditures on an ongoing
basis to maintain our equipment and comply with environmental laws, as well as
to enhance the efficiency of our operations. Our total capital
expenditures were $81 million in 2008, including $56 million for maintenance and
environmental capital expenditures. We expect to spend approximately
$50 million on capital expenditures during 2009, with approximately $35 million
for maintenance and environmental capital expenditures. We anticipate
that our available cash resources and cash generated from operations will be
sufficient to fund our operating needs and capital expenditures for at least the
next year. However, if we require additional funds to fund our
capital expenditures, we may not be able to obtain them on favorable terms, or
at all. If we cannot maintain or upgrade our facilities and equipment
as we require or as necessary to ensure environmental compliance, it could have
a material adverse effect on our business, financial condition and results of
operations.
We
depend on a small number of customers for a significant portion of our
business.
Our
largest customer, International Paper, accounted for approximately 8% of our net
sales in 2008. In 2008, our ten largest customers (including
International Paper) accounted for approximately 48% of our net sales, while our
ten largest end-users accounted for approximately 29% of our net
sales. The loss of, or reduction in orders from, any of these
customers or other customers could have a material adverse effect on our
business, financial condition and results of operations, as could significant
customer disputes regarding shipments, price, quality or other
matters.
We
may not realize certain productivity enhancements or improvements in
costs.
As part of
our business strategy, we intend to identify opportunities to improve
profitability by reducing costs and enhancing productivity. Any cost
savings or productivity enhancements that we realize from such efforts may
differ materially from our estimates. For example, we have several
productivity enhancement initiatives to reduce waste and increase the amount of
uptime on our paper machines. We cannot be assured that these
initiatives will be completed as anticipated or that the benefits we expect will
be achieved on a timely basis or at all.
Rising
postal costs could weaken demand for our paper products.
A
significant portion of paper is used in magazines, catalogs and other
promotional mailings. Many of these materials are distributed through
the mail. Future increases in the cost of postage could reduce the
frequency of mailings, reduce the number of pages in magazine and advertising
materials and/or cause catalog and magazine publishers to use alternate methods
to distribute their materials. Any of the foregoing could decrease
the demand for our products, which could have a material adverse effect on our
business, financial condition and results of operations.
Our
business may suffer if we do not retain our senior management.
We depend
on our senior management. The loss of services of members of our
senior management team could adversely affect our business until suitable
replacements can be found. There may be a limited number of persons
with the requisite skills to serve in these positions and we may be unable to
locate or employ qualified personnel on acceptable terms. In
addition, our future success requires us to continue to attract and retain
competent personnel.
A
large percentage of our employees are unionized. Wage increases or
work stoppages by our unionized employees may have a material adverse effect on
our business, financial condition and results of operations.
As of
December 31, 2008, approximately 35%, of our employees were represented by labor
unions under four collective bargaining agreements at two of our
mills. In 2007, we completed successful labor negotiations for three
agreements that were up for renewal during the year, and the new agreements
will expire in 2011. We may become subject to material cost increases
or additional work rules imposed by agreements with labor
unions. This could increase expenses in absolute terms and/or as a
percentage of net sales. In addition, although we believe we have
good relations with our employees, work stoppages or other labor disturbances
may occur in the future. Any of these factors could negatively affect
our business, financial condition and results of operations.
We
depend on third parties for certain transportation services.
We rely
primarily on third parties for transportation of our products to our customers
and transportation of our raw materials to us, in particular, by truck and
train. If any third-party transportation provider fails to deliver
our products in a timely manner, we may be unable to sell them at full
value. Similarly, if any transportation provider fails to deliver raw
materials to us in a timely manner, we may be unable to manufacture our products
on a timely basis. Shipments of products and raw materials may be
delayed due to weather conditions, strikes or other events. Any
failure of a third-party transportation provider to deliver raw materials or
products in a timely manner could harm our reputation, negatively impact our
customer relationships and have a material adverse effect on our business,
financial condition and results of operations. In addition, our
ability to deliver our products on a timely basis could be adversely affected by
the lack of adequate availability of transportation services, especially rail
capacity, whether because of work stoppages or
otherwise. Furthermore, increases in the cost of our transportation
services, including as a result of rising fuel costs, could have a material
adverse effect on our business, financial condition and results of
operations.
We
are subject to various environmental, health and safety laws and regulations
that could impose substantial costs or other liabilities upon us and may have a
material adverse effect on our business, financial condition and results of
operations.
We are
subject to a wide range of federal, state and local general and
industry-specific environmental, health and safety laws and regulations,
including those relating to air emissions, wastewater discharges, solid and
hazardous waste management and disposal and site
remediation. Compliance with these laws and regulations is a
significant factor in our business. We have made, and will continue
to make, significant expenditures to comply with these
requirements. In addition, we handle and dispose of wastes arising
from our mill operations and operate a number of on-site landfills to handle
that waste. We maintain financial assurance for the projected cost of
closure and post-closure care for these landfill operations. We could
be subject to potentially significant fines, penalties, criminal sanctions,
plant shutdowns or interruptions in operations for any failure to comply with
applicable environmental, health and safety laws and
regulations. Moreover, under certain environmental laws, a current or
previous owner or operator of real property, and parties that generate or
transport hazardous substances that are disposed of at real property, may be
held liable for the full cost to investigate or clean up such real property and
for related damages to natural resources. We may be subject to
liability, including liability for investigation and cleanup costs, if
contamination is discovered at one of our current or former paper mills, other
properties or other locations where we have disposed of, or arranged for the
disposal of, wastes. International Paper has agreed to indemnify us,
subject to certain limitations, for former properties and former off-site
shipments, as well as certain other environmental liabilities. There
can be no assurance that International Paper will perform under any of its
environmental indemnity obligations, and its failure to do so could have a
material adverse effect on our financial condition and results of
operations. We also could be subject to claims brought pursuant to
applicable laws, rules or regulations for property damage or personal injury
resulting from the environmental impact of our operations, including due to
human exposure to hazardous substances. Increasingly stringent or new
environmental requirements, more aggressive enforcement actions or policies, the
discovery of unknown conditions or the bringing of future claims may cause our
expenditures for environmental matters to increase, and we may incur material
costs associated with these matters.
Our
substantial indebtedness could adversely affect our financial
health.
We have a
significant amount of indebtedness. As of December 31, 2008, we had
total indebtedness of $1,357.7 million, including $92.1 million outstanding
under our revolving credit facility. The total amount of payments we
will need to make on our outstanding long-term indebtedness for each of the next
three fiscal years is equal to $116.0 million, $115.9 million and $115.7
million, respectively (assuming the current prevailing interest rates on our
outstanding floating rate indebtedness remain the same).
Our
substantial indebtedness could have important consequences for
us. For example, it could:
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increase
our vulnerability to general adverse economic and industry
conditions; |
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require
us to dedicate a substantial portion of our cash flow from operations to
payments on our indebtedness, thereby reducing the availability of our
cash flow to fund working capital, capital expenditures, research and
development efforts, and other general corporate
purposes;
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increase
our vulnerability to, and limit our flexibility in planning for or
reacting to, changes in our business and the industry in which we
operate;
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expose
us to the risk of increased interest rates as borrowings under our senior
secured credit facilities and our floating rate notes will be subject to
variable rates of interest;
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place
us at a competitive disadvantage compared to our competitors that have
less debt; and |
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limit
our ability to borrow additional funds. |
In
addition, the indentures governing our outstanding notes and our senior secured
credit facilities contain financial and other restrictive covenants that limit
our ability to engage in activities that may be in our long-term best
interests. Our failure to comply with those covenants could result in
an event of default which, if not cured or waived, could result in the
acceleration of all of our debts.
We and our
subsidiaries may be able to incur substantial additional indebtedness in the
future because the terms of the indentures governing our outstanding notes and
our senior secured credit facilities do not fully prohibit us or our
subsidiaries from doing so. If new indebtedness is added to our and
our subsidiaries’ current debt levels, the related risks that we and they now
face could intensify.
Lenders
under our revolving credit facility may not fund their commitments.
Lehman
Commercial Paper, Inc., or “Lehman," which filed for bankruptcy in October
2008 is one of the lenders under our revolving credit facility, with a
commitment of $15.8 million of the $200 million available under the
facility. On October 10, 2008, we requested funding in the amount of
$100 million under the revolving credit facility, and Lehman failed to fund
$7.9 million, the entire portion of its commitment with respect to that
borrowing request. Under the credit agreement governing our revolving
credit facility, if a lender's commitment is not honored, that portion of the
lender's commitment under the revolving credit facility will be unavailable to
the extent that the lender's commitment is not replaced by a new commitment from
an alternate lender.
Lenders
under our revolving credit facility are well-diversified, totaling 15 lenders at
December 31, 2008. We currently anticipate that these lenders, other than
Lehman, will participate in future requests for funding. However, there
can be no assurance that further deterioration in the credit markets and overall
economy will not affect the ability of our lenders to meet their funding
commitments. Additionally, our lenders have the ability to transfer
their commitments to other institutions, and the risk that committed funds may
not be available under distressed market conditions could be exacerbated to the
extent that consolidation of the commitments under our facilities or among its
lenders were to occur.
We
have received two notices from the New York Stock Exchange, or "NYSE," that we
did not meet its continued listing requirements. If we are unable to rectify
this non-compliance in accordance with NYSE rules, our common stock will be
delisted from trading on the NYSE, which could have a material adverse effect on
the liquidity and value of our common stock.
On
December 11, 2008, we received notification from the NYSE that we were not in
compliance with the NYSE's continued listing standard requiring that companies
maintain an average market capitalization of at least $75 million over any 30
consecutive trading-day period. Under the NYSE’s rules, we have 18
months, or until June 11, 2010, to correct this
deficiency. Notwithstanding the cure period for the $75 million
average market capitalization standard, if our average market capitalization
falls below $25 million (or $15 million through June 30, 2009, under temporary
rulemaking by the NYSE) over any 30 consecutive trading-day period, the NYSE
will automatically begin delisting proceedings with respect to our common
stock. There is no cure period if our average market capitalization
falls below this level. While we plan to address these deficiencies
within the required timeframe, there can be no assurance that we will be
successful in doing so or that the NYSE will not exercise its discretion and
begin delisting proceedings against us as a result of an abnormally low average
common stock price.
In
addition, on February 2, 2009, we received notification from the NYSE that we
were not in compliance with the NYSE's continued listing standard requiring that
the average closing price of our common stock be above $1.00 per share over a 30
consecutive trading-day period. Under the NYSE’s rules, we normally
would have six months, or until August 2, 2009, for our share price and average
share price to comply with the share price standard. However, on
February 26, 2009, the NYSE temporarily suspended the $1.00 requirement until
June 30, 2009, and allowed companies currently below the $1.00 minimum level
that do not regain compliance during the suspension period to recommence their
compliance period upon reinstitution of the share price standard and thereupon
to receive the remaining balance of their compliance period. If the
share price and average share price of our common stock do not regain compliance
with the $1.00 requirement during the suspension period, under the NYSE’s
temporary rulemaking we will have until on or about December 1, 2009, in which
to comply with the share price standard. Notwithstanding the cure
period for the share price standard, if our share price falls below the $1.00
threshold to the point where the NYSE considers the share price to be
"abnormally low," the NYSE has the discretion to begin delisting proceedings
immediately with respect to our common stock. While there is no
formal definition of "abnormally low" in the NYSE rules, the NYSE has the right
to make such a determination at any time. To the extent that our
share price remains significantly below $1.00 for an extended period of time,
the NYSE has broad discretion as to whether, and if so, when it would seek to
delist our common stock from trading on the NYSE.
If we are
unable to regain compliance with the NYSE’s continued listing standards within
the required time frames, our common stock will be delisted from the
NYSE. As a result, we likely would have our common stock quoted on
the Over-the-Counter Bulletin Board, or the “OTC BB,” in order to have our
common stock continue to be traded on a public market. Securities
that trade on the OTC BB generally have less liquidity and greater volatility
than securities that trade on the NYSE. Delisting from the NYSE also
may preclude us from using certain state securities law exemptions, which could
make it more difficult and expensive for us to raise capital in the future and
more difficult for us to provide compensation packages sufficient to attract and
retain top talent. In addition, because issuers whose securities
trade on the OTC BB are not subject to the corporate governance and other
standards imposed by the NYSE, our reputation may suffer, which could result in
a decrease in the trading price of our shares. The delisting of our
common stock from the NYSE, therefore, could significantly disrupt the ability
of investors to trade our common stock and could have a material adverse effect
on the value and liquidity of our common stock.
Not
applicable.
Our
corporate headquarters are located in Memphis, Tennessee. We own four
mills located in Maine, Michigan and Minnesota at which we operate 11 paper
machines. We also own five hydroelectric dams, of which four provide
hydroelectric power to our Androscoggin mill and the fifth services our Sartell
mill. In addition, we own 15 and lease five woodyards for the purpose
of storage and loading of forest products and lease a number of sales
offices.
Our
headquarters and material facilities as of December 31, 2008, are shown in the
following table:
Location
|
|
Use
|
|
Owned/Leased
|
Memphis,
TN
|
|
corporate
headquarters
|
|
leased
|
Jay
(Androscoggin), ME
|
|
paper
mill/kraft pulp mill
|
|
owned
|
Bucksport,
ME
|
|
paper
mill
|
|
owned
|
Quinnesec,
MI
|
|
paper
mill/kraft pulp mill
|
|
owned
|
Sartell,
MN
|
|
paper
mill
|
|
owned
|
West
Chester, OH
|
|
sales,
distribution and customer service
|
|
leased
|
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 condition
or results of operations.
On August
6, 2008, we filed a declaratory judgment suit in the United States District
Court for the Eastern District of Wisconsin against NewPage Corporation and
NewPage Wisconsin System Inc., in response to a patent infringement claim
asserted by NewPage regarding certain of our coated paper
products. The action sought a declaration that our coated paper
products do not infringe the NewPage patent and that the NewPage patent is
invalid. On January 29, 2009, the action was voluntarily dismissed
with prejudice pursuant to a settlement agreement between the
parties. As part of the settlement, NewPage granted us an
irrevocable, perpetual, non-exclusive, worldwide, royalty-free, and fully
paid-up right and license for any and all purposes under the NewPage patent and
any continuation, division, reissue or non-U.S. counterpart of the
patent.
Not
applicable.
PART
II
Market
Information
Our common
stock is traded on the New York Stock Exchange under the symbol
“VRS.” The following table sets forth the high and low sales prices
per share of our common stock, as reported by the New York Stock Exchange, for
the indicated periods:
|
|
NYSE
[US $]
|
|
2008
|
|
High
|
|
|
Low
|
|
Second
quarter (from May 15)
|
|
$ |
12.01 |
|
|
$ |
7.72 |
|
Third
quarter
|
|
$ |
8.42 |
|
|
$ |
2.16 |
|
Fourth
quarter
|
|
$ |
2.59 |
|
|
$ |
0.82 |
|
Holders
As of
February 20, 2009, there were two stockholders of record and an estimated 3,350
beneficial owners of our common stock.
Dividends
We paid no
dividends on our common stock prior to our IPO. Following our IPO in May 2008,
we paid cash dividends on our common stock in the amount of $0.03 per share for
the second and third quarters of 2008, which are declared and paid in the
following quarter. We have decided to suspend the payment of
dividends and will thus not be declaring a dividend for the fourth quarter of
2008. The past dividend payments are not indicative of our future dividend
policy, and there can be no assurance that we will declare or pay any cash
dividends in the future. Any future determination relating to our
dividend policy will be made at the discretion of our board of directors and
will depend on then existing conditions, including our financial condition,
results of operations, contractual restrictions, capital requirements, business
prospects and other factors that our board of directors may deem
relevant. Our ability to pay dividends on our common stock is limited
by the covenants of our senior secured credit facilities and the indentures
governing our outstanding notes, and may be further restricted by the terms of
any of our future debt or preferred securities. As of December 31,
2008, we were in compliance with these restrictive covenants.
Equity
Compensation Plan Information
The table
below sets forth information regarding the number of shares of common stock to
be issued upon the exercise of the outstanding stock options granted under our
equity compensation plans and the shares of common stock remaining available for
future issuance under our equity compensation plans as of December 31,
2008.
|
|
|
|
|
|
|
|
Number
of securities
|
|
|
|
Number
of securities
|
|
|
|
|
|
remaining
available
|
|
|
|
to
be issued upon
|
|
|
|
|
|
for
future issuance
|
|
|
|
exercise
of
|
|
|
Weighted-average
|
|
|
under
equity
|
|
|
|
outstanding
options
|
|
|
exercise
price of
|
|
|
compensation
plans
|
|
Plan
Category
|
|
(in
thousands)
|
|
|
outstanding
options
|
|
|
(in
thousands)
|
|
Equity
compensation plans approved by security holders
|
|
|
15 |
|
|
$ |
1.43 |
|
|
|
4,235 |
|
Equity
compensation plans not approved by security holders
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Total
|
|
|
15 |
|
|
$ |
1.43 |
|
|
|
4,235 |
|
The
following table sets forth our selected financial data for the years and as of
the dates indicated. The selected statement of operations data for
the seven months ended July 31, 2006, and the years ended December 31, 2005 and
2004, and the selected balance sheet data as of December 31, 2005 and 2004, have
been derived from the audited combined financial statements of the Coated and
Supercalendered Papers Division of International Paper, or the
“Predecessor.” The selected statement of operations data for the
years ended December 31, 2008 and 2007, and the five months ended December 31,
2006, and the selected balance sheet data as of December 31, 2008, 2007 and
2006, have been derived from the audited consolidated (2008) and combined (2007
and 2006) financial statements of Verso Paper Corp., or the
“Successor.” The audited consolidated financial statements of the
Successor as of and for the year ended December 31, 2008, the audited combined
financial statements of the Successor as of and for the year ended December 31,
2007, the audited combined financial statements of the Successor for the five
months ended December 31, 2006, and the audited combined financial statements of
the Predecessor for the seven months ended July 31, 2006, are included elsewhere
in this annual report. Our selected financial data should be read in
conjunction with “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” and the financial statements and their related notes
included elsewhere in this annual report.
|
|
Successor
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
Successor
Combined
|
|
|
Predecessor
Combined
|
|
|
|
|
|
|
|
|
|
Five
|
|
|
Seven
|
|
|
|
|
|
|
|
|
|
Year
|
|
|
Year
|
|
|
Months
|
|
|
Months
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
Year
Ended
|
|
(dollars
and tons in millions
|
|
December
31,
|
|
|
December
31,
|
|
|
December
31,
|
|
|
July
31,
|
|
|
December
31,
|
|
except
per share data)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Statement
of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
1,766.8 |
|
|
$ |
1,628.8 |
|
|
$ |
706.8 |
|
|
$ |
904.4 |
|
|
$ |
1,603.8 |
|
|
$ |
1,463.3 |
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of products sold - (exclusive of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
depreciation,
amortization, and depletion)
|
|
|
1,463.2 |
|
|
|
1,403.0 |
|
|
|
589.3 |
|
|
|
771.6 |
|
|
|
1,338.2 |
|
|
|
1,272.5 |
|
Depreciation,
amortization, and depletion
|
|
|
134.5 |
|
|
|
123.2 |
|
|
|
48.3 |
|
|
|
72.7 |
|
|
|
129.4 |
|
|
|
130.5 |
|
Selling,
general, and administrative expenses
|
|
|
79.7 |
|
|
|
53.2 |
|
|
|
14.4 |
|
|
|
34.3 |
|
|
|
65.6 |
|
|
|
65.3 |
|
Restructuring
and other charges
|
|
|
27.4 |
|
|
|
19.4 |
|
|
|
10.1 |
|
|
|
(0.3 |
) |
|
|
10.4 |
|
|
|
0.6 |
|
Operating
income (loss)
|
|
|
62.0 |
|
|
|
30.0 |
|
|
|
44.7 |
|
|
|
26.1 |
|
|
|
60.2 |
|
|
|
(5.6 |
) |
Interest
income
|
|
|
(0.8 |
) |
|
|
(1.5 |
) |
|
|
(1.8 |
) |
|
|
- |
|
|
|
- |
|
|
|
(0.3 |
) |
Interest
expense
|
|
|
125.6 |
|
|
|
143.0 |
|
|
|
49.1 |
|
|
|
8.4 |
|
|
|
14.8 |
|
|
|
16.0 |
|
Income
(loss) before income taxes
|
|
|
(62.8 |
) |
|
|
(111.5 |
) |
|
|
(2.6 |
) |
|
|
17.7 |
|
|
|
45.4 |
|
|
|
(21.3 |
) |
Provision
(benefit) for income taxes
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
7.0 |
|
|
|
17.9 |
|
|
|
(8.2 |
) |
Net
income (loss)
|
|
$ |
(62.8 |
) |
|
$ |
(111.5 |
) |
|
$ |
(2.6 |
) |
|
$ |
10.7 |
|
|
$ |
27.5 |
|
|
$ |
(13.1 |
) |
Per
Share Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per share
|
|
$ |
(1.35 |
) |
|
$ |
(2.93 |
) |
|
$ |
(0.07 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding
-
basic and diluted
|
|
|
46,691,456 |
|
|
|
38,046,647 |
|
|
|
38,046,647 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement
of Cash Flows Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
provided by operating activities
|
|
$ |
54.1 |
|
|
$ |
15.0 |
|
|
$ |
128.2 |
|
|
$ |
39.3 |
|
|
$ |
116.8 |
|
|
$ |
123.7 |
|
Cash
used in investing activities
|
|
$ |
(81.3 |
) |
|
$ |
(69.1 |
) |
|
$ |
(1,402.0 |
) |
|
$ |
(27.6 |
) |
|
$ |
(53.0 |
) |
|
$ |
(111.5 |
) |
Cash
(used in) provided by financing activities
|
|
$ |
88.2 |
|
|
$ |
0.2 |
|
|
$ |
1,386.3 |
|
|
$ |
(11.6 |
) |
|
$ |
(63.8 |
) |
|
$ |
(12.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Financial and Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
(1)
|
|
$ |
196.5 |
|
|
$ |
153.2 |
|
|
$ |
93.0 |
|
|
$ |
98.8 |
|
|
$ |
189.6 |
|
|
$ |
124.9 |
|
Capital
expenditures
|
|
$ |
(81.4 |
) |
|
$ |
(70.9 |
) |
|
$ |
(27.8 |
) |
|
$ |
(27.7 |
) |
|
$ |
53.1 |
|
|
$ |
111.3 |
|
Total
tons sold
|
|
|
1,952.7 |
|
|
|
2,096.3 |
|
|
|
866.4 |
|
|
|
1,145.0 |
|
|
|
2,024.9 |
|
|
|
2,064.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working
capital (2)
|
|
$ |
151.9 |
|
|
$ |
87.2 |
|
|
$ |
153.8 |
|
|
|
|
|
|
$ |
87.8 |
|
|
$ |
58.6 |
|
Property,
plant and equipment, net
|
|
$ |
1,116.0 |
|
|
$ |
1,160.2 |
|
|
$ |
1,212.3 |
|
|
|
|
|
|
$ |
1,287.0 |
|
|
$ |
1,363.9 |
|
Total
assets
|
|
$ |
1,636.4 |
|
|
$ |
1,603.5 |
|
|
$ |
1,711.0 |
|
|
|
|
|
|
$ |
1,534.1 |
|
|
$ |
1,585.0 |
|
Total
debt
|
|
$ |
1,357.7 |
|
|
$ |
1,419.6 |
|
|
$ |
1,169.3 |
|
|
|
|
|
|
$ |
301.2 |
|
|
$ |
302.1 |
|
Equity
|
|
$ |
(10.0 |
) |
|
$ |
(75.1 |
) |
|
$ |
280.0 |
|
|
|
|
|
|
$ |
1,040.0 |
|
|
$ |
1,075.3 |
|
(1)
EBITDA consists of earnings before interest, taxes, depreciation, and
amortization. EBITDA is a measure commonly used in our industry and we present
EBITDA to enhance your understanding of our operating performance. We use EBITDA
as one criterion for evaluating our performance relative to that of our peers.
We believe that EBITDA is an operating performance measure, and not a liquidity
measure, that provides investors and analysts with a measure of operating
results unaffected by differences in capital structures, capital investment
cycles and ages of related assets among otherwise comparable companies. However,
EBITDA is not a measurement of financial performance under U.S. GAAP, and our
EBITDA may not be comparable to similarly titled measures of other companies.
You should not consider our EBITDA as an alternative to operating or net income,
determined in accordance with U.S. GAAP, as an indicator of our operating
performance, or as an alternative to cash flows from operating activities,
determined in accordance with U.S. GAAP, as an indicator of our cash flows or as
a measure of liquidity.
(2)
Working capital is defined as current assets net of current liabilities,
excluding the current portion of long-term debt and the Predecessor’s accounts
payable to International Paper.
The
following table reconciles net income (loss) to EBITDA for the periods
presented:
|
|
Successor
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
Successor
Combined
|
|
|
Predecessor
Combined
|
|
|
|
|
|
|
|
|
|
Five
|
|
|
Seven
|
|
|
|
|
|
|
|
|
|
Year
|
|
|
Year
|
|
|
Months
|
|
|
Months
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
Year
Ended
|
|
|
|
December
31,
|
|
|
December
31,
|
|
|
December
31,
|
|
|
July
31,
|
|
|
December
31,
|
|
(In
millions of U.S. dollars)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Reconciliation
of net income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to
EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
(62.8 |
) |
|
$ |
(111.5 |
) |
|
$ |
(2.6 |
) |
|
$ |
10.7 |
|
|
$ |
27.5 |
|
|
$ |
(13.1 |
) |
Interest
expense, net
|
|
|
124.8 |
|
|
|
141.5 |
|
|
|
47.3 |
|
|
|
8.4 |
|
|
|
14.8 |
|
|
|
15.7 |
|
Provision
(benefit) for income taxes
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
7.0 |
|
|
|
17.9 |
|
|
|
(8.2 |
) |
Depreciation, amortization,
and depletion
|
|
|
134.5 |
|
|
|
123.2 |
|
|
|
48.3 |
|
|
|
72.7 |
|
|
|
129.4 |
|
|
|
130.5 |
|
EBITDA
|
|
$ |
196.5 |
|
|
$ |
153.2 |
|
|
$ |
93.0 |
|
|
$ |
98.8 |
|
|
$ |
189.6 |
|
|
$ |
124.9 |
|
The
following discussion and analysis of our financial condition and results of
operations covers periods prior to the Acquisition. For comparison
purposes, the results of operations for the year ended December 31, 2006, are
presented on a combined basis, consisting of the results of the Predecessor for
the seven months ended July 31, 2006, and the results of the Successor for the
five months ended December 31, 2006. Accordingly, the discussion and
analysis of historical periods do not fully reflect the significant impact that
the Acquisition has had on our financial statements. In addition, the
statements in the discussion and analysis regarding the industry outlook and our
expectations regarding the performance of our business and the other
non-historical statements in the discussion and analysis are forward-looking
statements. These forward-looking statements are subject to numerous
risks and uncertainties, including, but not limited to, the risks and
uncertainties described in “Risk Factors.” Our actual results may
differ materially from those contained in or implied by any forward-looking
statements. The discussion and analysis should be read together with
“Risk Factors” and the financial statements and their related notes included
elsewhere in this annual report.
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 North America’s second largest producer 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. We also produce
and sell market kraft pulp, which is used to manufacture printing and
writing paper grades and tissue products.
Background
We began
operations on August 1, 2006, when we acquired the assets and certain
liabilities of the business of the Predecessor. We were formed by
affiliates of Apollo for the purpose of consummating the Acquisition from
International Paper. Verso Paper Corp. went public on May 14, 2008,
with an IPO of 14 million shares of common stock at a price of $12 per share
which generated $152.2 million in net proceeds.
Stand-Alone
Business
The
Predecessor’s financial statements for the periods presented represent the
Division’s combined financial statements. The preparation of this
information was based on certain assumptions and estimates, including
allocations of costs from International Paper. This financial
information may not, however, necessarily reflect the results of operations,
financial positions and cash flows that would have occurred if the Division had
been a separate, stand-alone entity during the periods presented or our future
results of operations, financial position and cash flows. For
example, the financial statements of the Predecessor in this annual report
include expenses for certain corporate services provided by International Paper
and allocated based on various methods, including direct consumption, percent of
capital employed, and number of employees. These historical charges
and allocations may not be representative of expenses that we will incur in
future reporting periods as we operate as a stand-alone entity.
Selected
Factors that Affect Our Operating Results
Net
Sales
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. Paper prices declined in late 2006 and early 2007, which we
believe was due to high customer and producer inventories and cautious
purchasing by customers in advance of a scheduled postal rate
increase. Beginning in mid-2007, prices began to rebound following
announcements by several of our North American competitors of permanent closures
of approximately 1 million tons of annual production capacity (approximately 9%
of North American coated paper capacity). These market
conditions continued into early 2008 with a series of announced price
increases by suppliers of coated paper. Meanwhile, customers were
rebuilding their paper inventories after a significant depletion in the second
half of 2007. In the second half of 2008, we saw a significant
weakening in demand as general economic conditions began to
worsen. This weakened demand, coupled with the inventory build, put
downward pressure on prices in late 2008 and into 2009, and has caused us, and
most coated paper producers, to curtail production to match supply with
demand.
We are
primarily focused on serving two end-user segments: catalogs and
magazines. In 2008, we believe we had a leading market share for the
catalog and magazine segments of coated papers. Coated paper demand
is primarily driven by advertising and print media usage. Advertising
spending and magazine and catalog circulation tend to correlate with changes in
the GDP of 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. Contracted sales are more prevalent for coated groundwood
paper, as opposed to coated freesheet paper, which is more often sold without a
contract. 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 which comprise approximately 650
end-user accounts. In 2008, no single customer accounted for more
than 10% of our total net sales.
Our
historical results include specialty papers that we manufacture for Thilmany,
LLC, or "Thilmany," on paper machine no. 5 at the Androscoggin
mill. Under a long-term supply agreement entered into in 2005 in
connection with International Paper’s sale of its Industrial Papers business to
Thilmany, these products are sold to Thilmany at a variable charge for the paper
purchased and a fixed charge for the availability of the machine. The
amounts included in our net sales for the specialty papers sold to Thilmany
totaled $42.4 million and $37.6 million in 2008 and 2007,
respectively.
Cost
of Products Sold
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.
After
giving effect to the Acquisition, our cost of products sold increased as a
result of the purchase accounting treatment of the Acquisition. Under
the rules of purchase accounting, we adjusted the value of our assets (including
the inventory we acquired) and liabilities at closing to their respective
estimated fair values. As a result of these adjustments to our asset
basis, following the closing of the Acquisition, our costs of goods sold
increased by such non-cash increase in our asset basis. However, this
increase did not have a cash impact and did not affect our cost of sales for any
inventory produced after the closing of the Acquisition.
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. In the near term, we expect the rate of inflation for
our total chemical costs to be lower than that experienced over the last two
years. However, we expect that imbalances in supply and demand will
drive higher prices for certain chemicals such as starch and sodium
chlorate.
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. As we have begun to utilize wood harvested from our
23,000-acre hybrid poplar fiber farm located near Alexandria, Minnesota, our
ongoing wood costs should be positively impacted.
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
derivative contracts as part of our risk management strategy to manage our
exposure to market fluctuations in energy prices.
Labor . Labor
costs include wages, salary and benefit expenses attributable to our mill
personnel. Mill employees at a non-managerial level are compensated
on an hourly basis. Management employees at our mills are compensated
on a salaried basis. Wages, salary and benefit expenses included in
cost of sales do not vary significantly over the short term. In
addition, we have not experienced significant labor shortages.
Maintenance. Maintenance
expense includes day-to-day maintenance, equipment repairs and larger
maintenance projects, such as paper machine shutdowns for periodic
maintenance. Day-to-day maintenance expenses have not varied
significantly from year-to-year. Larger maintenance projects and
equipment expenses can produce year-to-year fluctuations in our maintenance
expenses. In conjunction with our periodic maintenance shutdowns, we
have incidental incremental costs that are primarily comprised of unabsorbed
fixed costs from lower production volumes and other incremental costs for
purchased materials and energy that would otherwise be produced as part of the
normal operation of our mills.
Depreciation, Amortization, and
Depletion. Depreciation, amortization, and depletion expense
represents the periodic charge to earnings through which the cost of tangible
assets, intangible assets, and natural resources are recognized over the asset’s
life. Capital investments can increase our asset bases and produce
year-to-year fluctuations in expense. Depreciation was initially
lower after the Acquisition as a result of the lower asset bases assigned to
property, plant, and equipment, but has subsequently risen due to capital
investments.
Selling,
General, and Administrative Expenses
The
principal components of our selling, general, and administrative expenses are
wages, salaries and benefits for our office personnel at our headquarters and
our sales force, travel and entertainment expenses, advertising expenses,
expenses relating to certain information technology systems, and research and
development expenses. Also included are allocations of costs for corporate
functions historically provided to us by International Paper. For
further information about allocated costs, see “Corporate Allocations”
below. In addition, we previously paid an annual management fee to
Apollo under a management agreement pursuant to which Apollo provided us with
certain financial and strategic advisory services and consulting
services. Upon the consummation of the IPO, Apollo terminated the
annual fee arrangement under the management agreement.
Taxes
Prior to
the Acquisition, the Division was included in the consolidated income tax
returns of International Paper. In the Predecessor’s combined
financial statements included in this annual report, income taxes have been
presented based on an estimate of the income taxes that would have been
generated if the Division had operated as a separate
taxpayer. As a result, U.S. federal and state income tax expense is
reflected on the Division's income based on an allocated rate of 39.4% for
the seven months ended July 31, 2006. Income taxes have been provided
for all items included in the historical statement of operations included
herein, regardless of when such items were reported for tax purposes or when the
taxes were actually paid or refunded. As a result of the Acquisition,
there was a step-up in the tax basis of our assets, significantly reducing our
cash income tax payments. Accordingly, our historical income tax
expense may not necessarily reflect and may differ materially from what our cash
tax payments would have been or will be as a stand-alone entity.
Corporate
Allocations
The
Predecessor’s combined statement of operations includes allocations of costs for
certain corporate functions that historically were provided to us by
International Paper, including:
·
|
General corporate
expenses. This represents costs related to corporate functions such
as accounting, tax, treasury, payroll and benefits administration, certain
incentive compensation, risk management, legal, centralized transaction
processing and information management and technology. These
costs historically were allocated primarily based on general factors and
estimated use of services. These costs are included in selling,
general and administrative expenses in the Predecessor’s combined
statement of operations.
|
·
|
Employee benefits and
incentives. This represents fringe benefit costs and other
incentives, including group health and welfare benefits, U.S. pension
plans, U.S. post-retirement benefit plans and employee incentive
compensation plans. These costs historically were allocated on
an active headcount basis for health and welfare benefits (including U.S.
post-retirement plans), on the basis of salary for U.S. pension plans, and
on a specific identification basis for employee incentive compensation
plans. These costs are included in costs of products sold,
selling, general and administrative expenses, and restructuring charges in
the Predecessor’s combined statement of
operations.
|
·
|
Interest expense and debt
service costs. International Paper historically provided financing
to the Division through cash flows from its other operations and debt
incurred. The interest expense associated with incurred debt
that was allocated to the Division based on specifically-identified
borrowings is included in interest expense, net, in the Predecessor’s
combined statement of operations. Costs associated with the
debt are included in other expense in the Predecessor’s combined statement
of operations.
|
Expense
allocations from International Paper reflected in the Predecessor’s combined
statement of operations were as follows:
|
|
Seven
|
|
|
|
Months
Ended
|
|
|
|
July
31,
|
|
(In
thousands of U.S. dollars)
|
|
2006
|
|
|
|
|
|
General
corporate expenses
|
|
$ |
19.5 |
|
Employee
benefits and incentives
|
|
|
11.3 |
|
Interest
expense and debt service costs
|
|
|
8.4 |
|
Following
the consummation of the Acquisition, we no longer have allocations for costs of
certain corporate functions historically provided to the Division by
International Paper. We now receive such services from our internal
operations or third-party service providers. Accordingly, it is
unlikely that the expenses we will incur as a stand-alone company for these
services will reflect the allocated costs included in the Predecessor’s combined
financial statements.
Critical
Accounting Policies
Our
accounting policies are fundamental to understanding management’s discussion and
analysis of results of operations and financial condition. Our
consolidated and combined 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
policies 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: Statement of
Financial Accounting Standards, or “SFAS,” No. 5, Accounting for Contingencies;
SFAS No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets; SFAS No. 142,
Goodwill and Other Intangible
Assets; SFAS No. 87, Employers’ Accounting for
Pensions; and SFAS No. 158, Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans.
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 SFAS No. 142,
Goodwill and Other Intangible
Assets. 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, 2008, 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 and Postretirement 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 environ-mental 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.
Recent
Accounting Developments
Postretirement
Benefit Plan Assets. In December 2008, the Financial Accounting
Standards Board, or FASB, issued FASB Staff Position on Statement
132(R)-1, or FSP FAS 132(R)-1, Employers’ Disclosure about
Postretirement Benefit Plan Assets, which amends SFAS No. 132(R) to
require 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. FSP FAS 132(R)-1 is effective for fiscal years ending after
December 15, 2009. Since FSP FAS 132(R)-1 only addresses disclosure
requirements, the adoption of FSP FAS 132(R)-1 will have no impact on our
financial condition or results of operations.
Intangible
Assets. In April 2008,
the FASB issued FSP FAS 142-3, Determination of the Useful Life of
Intangible Assets, which provides guidance on the renewal or extension
assumptions used in the determination of the useful life of a recognized
intangible asset. The intent of FSP FAS 142-3 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. FSP FAS 142-3 is effective
for fiscal years and interim periods beginning after December 15,
2008. The adoption of FSP FAS 142-3 is not expected to have a
material impact on our financial condition or results of
operations.
Derivatives
and Hedging Activities. In March 2008, the FASB issued SFAS
No. 161, Disclosures about
Derivative Instruments and Hedging Activities. SFAS No. 161
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 SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, and its related interpretations, and
(c) how derivative instruments and related hedged items affect an entity’s
financial position, financial performance, and cash flows. SFAS No.
161 is effective for fiscal years and interim periods beginning after November
15, 2008. Since SFAS No. 161 only addresses disclosure requirements,
the adoption of SFAS No. 161 will have no impact on our financial condition or
results of operations.
Business
Combinations. In December 2007, the FASB issued SFAS No. 141
(revised 2007), Business
Combinations. SFAS No. 141-R establishes 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. SFAS No. 141-R is
effective for business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008. Early adoption is prohibited. We will
apply the provisions of SFAS No. 141-R to any future
acquisitions.
In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements – an amendment of ARB No.
51. SFAS No. 160 establishes accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. SFAS No. 160 is effective, on a
prospective basis, for fiscal years and interim periods beginning on or after
December 15, 2008. The presentation and disclosure requirements for
existing minority interests should be applied retrospectively for all periods
presented. Early adoption is prohibited. The adoption of
SFAS No. 160 is not expected to have a material impact on our financial
condition or results of operations.
Fair
Value Measurements. In September 2006, the FASB issued SFAS No. 157,
Fair Value
Measurements. SFAS No. 157 addresses how to measure fair
value (not what to measure at fair value) and applies, with limited exceptions,
to existing standards that require assets and liabilities to be measured at fair
value. SFAS No. 157 establishes a fair value hierarchy, giving
the highest priority to quoted prices in active markets and the lowest priority
to unobservable data, and requires new disclosures for assets and liabilities
measured at fair value based on their level in the hierarchy. SFAS
No. 157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007. However, FSP 157-2, Effective Date of FASB Statement No.
157, delayed the implementation of SFAS No. 157 for nonfinancial assets
and nonfinancial liabilities, except for items that are recognized or disclosed
at fair value in the financial statements on a recurring basis, to fiscal years
beginning after November 15, 2008. The adoption of the initial
provisions of SFAS No. 157 did not have, and the adoption of the remaining
provisions of SFAS No. 157 is not expected to have, a material impact on our
financial condition or results of operations.
Other new
accounting pronouncements issued but not effective until after December 31,
2008, are not expected to have a significant effect on our financial condition
or results of operations.
Financial
Overview
The United
States and global economies are experiencing a period of substantial economic
distress and uncertainty. These conditions have resulted in, among
other things, a significant weakening in the demand for coated
papers. This weakened demand coupled with increased inventories
accumulated earlier in 2008 put downward pressure on coated paper prices in the
fourth quarter of 2008. We, like most coated paper producers, have
moved to curtail production to match supply with demand. Accordingly,
we took almost 75,000 tons of downtime in the fourth quarter of 2008, and, as
previously announced, intend to take an additional 100,000 tons of downtime
during the first half of 2009. As 2009 progresses, we will continue
to monitor the market conditions and will take appropriate actions to balance
our supply of coated papers with the demand by our customers.
In the
fourth quarter of 2008, our net sales decreased 15.7% as our sales volume fell
26.7% compared to the fourth quarter of 2007. The decline in sales
volume was partially offset by a 15.1% increase in the average sales price per
ton compared to the same period last year. On a sequential quarter
basis, our average sale price dropped less than 1%, reflecting our efforts to
sustain our pricing in a difficult economic environment.
In the
fourth quarter of 2008, our gross margin dropped to 13.6% from 17.7% in the
fourth quarter of 2007. The compression in gross margin reflects
increased input prices for our key direct expenses compared to 2007 and $15.8
million of unabsorbed costs resulting from the downtime taken in the fourth
quarter of 2008.
Results
of Operations
The
following table sets forth certain consolidated and combined financial
information for the years ended December 31, 2008, 2007 and 2006. For
comparison purposes, we have presented the results of operations for 2006 on a
combined basis, consisting of the results of the Predecessor for the seven
months ended July 31, 2006, and the results of the Successor for the five months
ended December 31, 2006. We believe that this approach is beneficial
to the reader by providing an easier-to-read discussion of the results of
operations and provides the reader with information from which to analyze our
financial results that is consistent with the manner that management reviews and
analyzes results of operations.
U.S. GAAP
does not contemplate the combination of the financial results of the Predecessor
and the Successor as the combined information does not include any pro forma
assumptions or adjustments and, as a result, does not fully reflect the
significant impact of the Acquisition on our financial statements. In
particular, fair value adjustments to personal property and other property and
equipment due to the allocation of the purchase price to assets acquired and
liabilities assumed resulted in a lower depreciation expense for the
Successor. The pro forma impact of these adjustments on the
Predecessor’s results of operations for the seven months ended July 31, 2006,
would have been a reduction of $5.4 million in depreciation
expense. In addition, intangible assets recognized through the
allocation of the purchase price to assets acquired and liabilities assumed
resulted in incremental amortization expense for the Successor. The
pro forma impact on the Predecessor’s results of operations for the seven months
ended July 31, 2006, would have been $0.4 million of amortization expense,
resulting in a net pro forma reduction in depreciation and amortization expense
of $5.0 million for the twelve months ended December 31, 2006.
Cost of
sales in the following table and discussion includes the cost of products sold
and depreciation and amortization. The following table and
discussion should be read in conjunction with the information contained in our
consolidated and combined financial statements and the related notes included
elsewhere in this annual report. However, our historical results of
operations set forth below and elsewhere in this annual report may not
necessarily reflect what would have occurred if we had been a separate,
stand-alone entity during the periods presented or what will occur in the
future.
|
|
|
|
|
|
|
|
Combined
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Successor
|
|
|
Successor
and
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
Consolidated
|
|
|
Combined
|
|
|
Predecessor
|
|
|
Combined
|
|
|
Combined
|
|
|
|
|
|
|
|
|
|
|
|
|
Five
Months
|
|
|
Seven
Months
|
|
|
|
Year
Ended
|
|
|
Year
Ended
|
|
|
Year
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
|
December
31,
|
|
|
December
31,
|
|
|
December
31,
|
|
|
December
31,
|
|
|
July
31,
|
|
(In
thousands of U.S. dollars)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
1,766,813 |
|
|
$ |
1,628,753 |
|
|
|
1,611,250 |
|
|
$ |
706,833 |
|
|
$ |
904,417 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of products sold - exclusive of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
depreciation,
amortization, and depletion
|
|
|
1,463,169 |
|
|
|
1,403,013 |
|
|
|
1,360,859 |
|
|
|
589,283 |
|
|
|
771,576 |
|
Depreciation,
amortization, and depletion
|
|
|
134,458 |
|
|
|
123,217 |
|
|
|
121,004 |
|
|
|
48,330 |
|
|
|
72,674 |
|
Selling,
general, and administrative expenses
|
|
|
79,744 |
|
|
|
53,159 |
|
|
|
48,741 |
|
|
|
14,393 |
|
|
|
34,348 |
|
Restructuring
and other charges
|
|
|
27,416 |
|
|
|
19,395 |
|
|
|
9,804 |
|
|
|
10,126 |
|
|
|
(322 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
62,026 |
|
|
|
29,969 |
|
|
|
70,842 |
|
|
|
44,701 |
|
|
|
26,141 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
(770 |
) |
|
|
(1,544 |
) |
|
|
(1,821 |
) |
|
|
(1,798 |
) |
|
|
(23 |
) |
Interest
expense
|
|
|
125,622 |
|
|
|
142,976 |
|
|
|
57,550 |
|
|
|
49,136 |
|
|
|
8,414 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before income taxes
|
|
|
(62,826 |
) |
|
|
(111,463 |
) |
|
|
15,113 |
|
|
|
(2,637 |
) |
|
|
17,750 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
- |
|
|
|
- |
|
|
|
6,993 |
|
|
|
- |
|
|
|
6,993 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
(62,826 |
) |
|
$ |
(111,463 |
) |
|
$ |
8,120 |
|
|
$ |
(2,637 |
) |
|
$ |
10,757 |
|
2008
Successor Compared to 2007 Successor
Net Sales. Net
sales grew 8.5% to $1,766.8 million in 2008 from $1,628.8 million in
2007. The growth was the result of a 16.5% increase in the average
sales price per ton for all of our products in 2008. This increase
was partially offset by a 6.8% decrease in total sales volume, reflecting lower
coated paper demand in a difficult economic environment.
Net sales
for our coated and supercalendered papers segment were $1,575.0 million in 2008,
compared to $1,443.2 million in 2007, an increase of 9.1%. The
improvement reflects a 17.2% increase in average paper sales price which was
partially offset by a 6.9% decrease in paper sales volume compared to
2007.
Net sales
for our hardwood market pulp segment were relatively stable at $146.4 million in
2008, compared to $148.0 million in 2007. This result reflected a
9.3% decrease in pulp sales volume which was largely offset by a 9.1% increase
in average pulp sales price.
Net sales
for our other segment increased 20.7% to $45.4 million in 2008, from $37.6
million in 2007. This increase reflects an 11.4% increase
in average sales price combined with an 8.4% increase in sales volume compared
to 2007.
Cost of
sales. Cost of sales, including depreciation, amortization,
and depletion, was $1,597.7 million in 2008 compared to $1,526.2 million in
2007, an increase of 4.7% which was primarily driven by higher input
costs. Our gross margin, excluding depreciation, amortization, and
depletion, was 17.2% for 2008 compared to 13.9% for 2007, reflecting the
higher average sales price in 2008. Depreciation, amortization,
and depletion expense was $134.5 million in 2008 compared to $123.2 million
in 2007.
Selling, general, and administrative
expenses. Selling, general, and administrative expenses were
$79.7 million in 2008 compared to $53.2 million in 2007. Included in
selling, general, and administrative expenses for 2008 is a
one-time charge of $10.8 million due to the accelerated vesting of the Legacy
Class C Units of Verso Paper Management LP in connection with our
IPO.
Interest
expense. Interest expense was $125.6 million in 2008, compared
to $143.0 million in 2007. In May 2008, we repaid $152.1 million of
outstanding debt with a portion of the IPO proceeds. Included in 2008
interest expense is a $1.4 million prepayment penalty and $3.6 million from the
write-off of debt issuance costs related to the repaid debt. The net
decrease in interest expense was due to the reduction in aggregate indebtedness
and lower interest rates on floating rate debt compared to
2007. Interest expense for 2008 includes $117.1 million of cash
interest expense on our outstanding indebtedness and $8.5 million of non−cash
interest expense, including amortization of deferred debt issuance
costs.
Restructuring and other
charges. Restructuring and other charges were $27.4 million in
2008 compared to $19.4 million in 2007. Restructuring and other
charges are comprised of transition and other costs associated with the
Acquisition; including costs of a transition service agreement with
International Paper, technology migration costs, consulting and legal fees, and
other one-time costs related to becoming a stand-alone
business. Subsequent to the Acquisition, we entered into a management
agreement with Apollo relating to the provision of certain financial and
strategic advisory services and consulting services. Upon
consummation of the IPO, Apollo terminated the annual fee arrangement under the
management agreement for a one-time payment of $23.1 million, which is included
in the charges for 2008. The charges in 2007 included $5.6 million of
transition service agreement costs and $2.8 million of charges under the
management agreement. As of September 30, 2007, we substantially
discontinued the use of services under the transition service
agreement.
2007
Successor Compared to 2006 Combined Successor and Predecessor
Net Sales. Net
sales were $1,628.8 million in 2007 compared to $1,611.2 million in 2006, an
increase of 1.1%. The increase was the result of a 4.2% increase in
total sales volume in 2007, which was partially offset by a 3.0% decrease in
average sales price per ton for all of our products compared to
2006.
Net sales
for our coated and supercalendered papers segment were $1,443.2 million in 2007
compared to $1,425.2 million in 2006, an increase of 1.3%. The
increase was primarily due to a 6.1% increase in paper sales volume which was
partially offset by a 4.6% decrease in average paper sales price compared to the
prior year.
Net sales
for our hardwood market pulp segment were $148.0 million in 2007 compared to
$147.0 million in 2006, an increase of 0.7%. This growth resulted
from a 5.9% increase in average pulp sales price which was mostly offset by a
5.0% decrease in pulp sales volume due to an increase in our internal
consumption of pulp.
Net sales
for our other segment were $37.6 million in 2007 compared to $39.0 million in
2006, a decrease of 3.7%. This decrease reflects a 4.1% decline in
sales volume which was partially offset by a 0.5% increase in average sales
price compared to 2006.
Cost of
sales. Cost of sales, including depreciation, amortization,
and depletion, was $1,526.3 million in 2007 compared to $1,481.9 million in
2006, an increase of 3.0% which was primarily driven by higher sales
volume. Although the prices of certain commodities used in production
were higher in 2007, the operational efficiencies and improvements we
implemented, including through our R−GAP continuous cost improvement process,
more than offset the increased prices of raw materials. Our gross
margin, excluding depreciation, amortization, and depletion, was 13.9% for 2007
compared to 15.5% for 2006, reflecting the lower average sales prices in
2007. Depreciation, amortization, and depletion expense was
$123.2 million in 2007 compared to $121.0 million in 2006.
Selling, general, and administrative
expenses. Selling, general, and administrative expenses were
$53.1 million in 2007 compared to $48.7 million in 2006, an increase of
9.1%. For the periods following the closing of the Acquisition,
selling, general, and administrative expenses reflected the expenses we incurred
as a stand-alone business.
Interest expense. Interest
expense increased to $143.0 million in 2007 from $57.5 million in 2006 due to
the debt incurred as part of the Acquisition and the borrowing under the $250
million senior unsecured floating-rate term loan in January
2007. Interest expense in 2007 includes $137.0 million of cash
interest expense on our outstanding indebtedness and $6.0 million of non−cash
interest expense, including amortization of deferred debt issuance
costs.
Restructuring and other
charges. Restructuring and other charges were $19.4 million
for the year ended December 31, 2007, compared to $10.1 million for the five
months ended December 31, 2006. In conjunction with the Acquisition,
we entered into a transition service agreement with International Paper whereby
International Paper continued to provide certain services that were necessary
for us to run as a stand-alone business. The charges in 2007 included
$5.6 million of transition service agreement costs and $2.8 million of charges
under the management agreement with Apollo. The charges for the five
months ended December 31, 2006, included $6.1 million of transition service
agreement costs.
Income tax
expense. For the year ended December 31, 2007, and for the
five months ended December 31, 2006, we incurred no income taxes, compared to
our Predecessor’s income tax expense of $7.0 million for the seven months ended
July 31, 2006.
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, no assurance can be given that this will be the
case, and we may require additional debt or equity financing to meet our working
capital requirements. We expect to spend approximately $50 million on
capital expenditures during 2009, including approximately $35 million for
maintenance and environmental capital expenditures. Thereafter, our
annual maintenance and environmental capital expenditures are expected to
average approximately $40 million to $50 million per year for the next few
years.
In
addition, as a holding company, our investments in our operating subsidiaries,
including Verso Paper LLC, constitute substantially all of our operating
assets. Consequently, our subsidiaries conduct all of our
consolidated operations and own substantially all of our operating
assets. Our principal source of the cash we need to pay our debts is
the cash that our subsidiaries generate from their operations and their
borrowings. Our subsidiaries are not obligated
to make funds available to us. The terms of the senior secured credit
facilities and the indentures governing the outstanding notes of our
subsidiaries significantly restrict our subsidiaries from paying dividends and
otherwise transferring assets to us. Furthermore, our 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 us. Although the terms of the debt
agreements of our subsidiaries do not restrict our 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 our subsidiaries will permit
our subsidiaries to provide us
with sufficient dividends, distributions or loans to fund our obligations or pay
dividends to our stockholders.
Net cash flows from operating
activities. Net cash provided by operating activities was
$54.1 million in 2008 compared to $15.0 million of net cash provided in
2007. The increase in net cash provided by operating activities was
primarily due to improved performance, with a net loss of $62.8 million in 2008
compared to a net loss of $111.5 million in 2007. Operating
activities in 2006 generated net cash of approximately $167.5
million. The increase in 2006 was primarily driven by improved
operations and working capital improvements.
Net cash flows from investing
activities. In 2008 and 2007, we used $81.3 million and
$69.1 million, respectively, of net cash in investing activities, primarily
for investments in capital expenditures. In 2006, $1,429.6 million of
net cash was used, reflecting the $1.4 billion in cash paid for the
Acquisition.
Net cash flows from financing
activities. In 2008, financing activities provided $88.2
million of net cash which reflected $153.2 million in net proceeds from the
issuance of common stock of which $148.0 million was used to repay outstanding
principal on long-term debt. Also reflected in financing activities
for 2008 are a net increase of $89.0 million in borrowings under revolving
credit facilities, $3.1 million of dividends paid on common stock, and scheduled
principal payments of $2.8 million on the senior secured term
loan. In 2007 cash flows from financing activities provided $0.2
million of net cash as $242 million in net proceeds from the issuance of the
senior unsecured term loan were distributed to our equity holders, scheduled
principal payments of $2.8 million were made on the senior secured term loan,
and borrowings under revolving credit facilities increased $3.1
million. In 2006, net cash provided by financing activities was
$1,374.6 million, reflecting the net proceeds from the debt issuance and equity
contributions associated with the Acquisition.
Indebtedness. As
of December 31, 2008, our aggregate indebtedness was $1,357.7 million, and we
had $59.0 million available for borrowing under our revolving credit
facility.
In May
2008, we used the net proceeds from the IPO, together with available cash, to
repay $148.0 million of principal outstanding on long-term debt, $4.1 million of
principal outstanding on short-term debt, $0.7 million of accrued interest,
and a prepayment penalty of $1.4 million.
On August
1, 2006, Verso Paper Holdings LLC, or “Verso Holdings,” entered into senior
secured credit facilities consisting of:
·
|
a
$285 million term loan with a maturity of seven years, of which $253.6
million was outstanding as of December 31, 2008;
and
|
·
|
a
$200 million revolving credit facility with a maturity of six years, of
which $92.1 million was outstanding, $33.1 million in letters of
credit were issued, and $59.0 million was available for future borrowing
as of December 31, 2008.
|
The term
loan bears interest at a rate equal to LIBOR plus 1.75%, with the interest rate
being 3.3% at December 31, 2008. The revolving credit facility bears
interest at a rate equal to LIBOR plus 2.00%, with the weighted average interest
rate being 3.35% at December 31, 2008. 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 0.375% per annum (subject
to reduction in certain circumstances) and customary letter of credit and agency
fees. The senior secured credit facilities are 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. The senior secured credit facilities also are secured
by first priority pledges of all the equity interests owned by Verso Holdings in
its subsidiaries. The obligations under the senior secured credit
facilities are unconditionally guaranteed by Verso Paper Finance Holdings LLC,
or "Verso Finance," and, subject to certain exceptions, each of its direct
and indirect subsidiaries. The credit agreement for our senior
secured credit facilities contains various covenants which, among other things,
prohibit our subsidiaries from prepaying other indebtedness, require us to
maintain a maximum consolidated first lien leverage ratio, and restrict our
ability to incur indebtedness or liens, make investments or declare or pay any
dividends. As of December 31, 2008, we were in compliance with all
such covenants.
On August
1, 2006, Verso Holdings also issued debt securities consisting of:
·
|
$350
million aggregate principal amount of 9⅛% second priority senior secured
fixed rate notes due 2014;
|
·
|
$250
million aggregate principal amount of second priority senior secured
floating rate notes due 2014; and
|
·
|
$300
million aggregate principal amount of 11⅜% senior subordinated notes due
2016.
|
The
original principal amount of each issue of debt securities was outstanding at
December 31, 2008. The fixed rate notes and subordinated notes
pay interest semi-annually, and the floating rate notes pay interest
quarterly. The floating rate notes bear interest at a rate equal to
LIBOR plus 3.75% with the interest rate being 6.9% at December 31,
2008. The fixed rate and floating rate notes have the benefit
of a second priority security interest in the collateral securing our senior
secured credit facilities, while the subordinated notes are
unsecured.
The
indentures governing our notes contain various covenants which limit
our ability to, among other things, incur additional indebtedness; pay dividends
or make other distributions or 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. As of
December 31, 2008, we were in compliance with all such covenants.
On August
1, 2006, Verso Fiber Farm LLC, entered into senior secured credit facilities
consisting of a $10 million term loan and a $5 million revolving credit
facility, each with a maturity of four years. In May 2008, we used a
portion of the net proceeds from the IPO to repay the $10 million outstanding
principal of the term loan and the $4.1 million outstanding principal under
the revolving credit facility. As of December 31, 2008, no debt was
outstanding under the senior secured credit facilities.
On January
31, 2007, Verso Finance entered into a $250 million senior unsecured
floating-rate term loan facility with a maturity of six years. The
net proceeds from the term loan were distributed to the equity holders of Verso
Paper Management LP. In May 2008, we used a portion of the net
proceeds from the IPO to repay $138 million of the outstanding principal of the
term loan and to pay a related $1.4 million prepayment
penalty. As of December 31, 2008, $112.0 million was outstanding on
the term loan. 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
and added to the principal balance. The interest rate in effect on
December 31, 2008, was 10.0%. The
term loan allows Verso Finance to pay interest either in cash or in-kind through
the accumulation of the outstanding principal amount. On
December 10, 2008, Verso Finance elected to exercise the PIK option for the
interest payment pertaining to the 90-day interest period ending January 2,
2009.
The
Company may elect to retire its 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
Certain
covenants contained in the credit agreement governing Verso Holdings’ senior
secured credit facilities and the indentures governing Verso Holdings’
outstanding notes (a) require us to maintain a net first lien secured debt to
Adjusted EBITDA (as defined below) ratio that does not exceed 3.25 to 1.00 and
(b) restrict our ability to take certain actions, such as incurring additional
debt or making acquisitions, if we are unable to maintain an Adjusted EBITDA to
Fixed Charges (as defined below) ratio of at least 2.00 to 1.00, in each case
measured on a trailing four-quarter basis. Although we do not expect
to violate any of the provisions in the agreements governing our outstanding
indebtedness, these covenants can result in limiting our long-term growth
prospects by hindering our ability to incur future indebtedness or grow through
acquisitions.
Fixed
Charges, or cash interest expense, represents consolidated interest expense
excluding the amortization or write-off of deferred financing
costs. Adjusted EBITDA is EBITDA further adjusted to exclude unusual
items and other pro forma adjustments. We believe that the inclusion
of the supplemental adjustments applied in calculating Adjusted EBITDA are
appropriate to provide additional information to investors to demonstrate our
compliance with our financial covenants and assess our ability to incur
additional indebtedness in the future. However, Adjusted EBITDA is
not a measurement of financial performance under U.S. GAAP, and Adjusted EBITDA
may not be comparable to similarly titled measures of other
companies. You should not consider our Adjusted EBITDA as an
alternative to operating or net income, determined in accordance with U.S. GAAP,
as an indicator of our operating performance, or as an alternative to cash flows
from operating activities, determined in accordance with U.S. GAAP, as an
indicator of our cash flows or as a measure of liquidity.
For
comparison purposes, EBITDA and Adjusted EBITDA for 2006, are presented on a
combined basis, consisting of the results of the Predecessor for the seven
months ended July 31, 2006, and the results of the Successor for the five months
ended December 31, 2006. U.S. GAAP does not contemplate the
combination of the financial results of the Predecessor and the Successor, as
the combined information does not include any pro forma assumptions or
adjustments and, as a result, does not fully reflect the significant impact the
Acquisition has had on our financial statements.
The
following table reconciles cash flows from operating activities to EBITDA and
Adjusted EBITDA for the periods presented:
|
|
|
|
|
|
|
|
Combined
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Successor
|
|
|
Predecessor
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
Consolidated
|
|
|
Combined
|
|
|
&
Successor
|
|
|
Combined
|
|
|
Combined
|
|
|
|
|
|
|
|
|
|
|
|
|
Five
Months
|
|
|
Seven
Months
|
|
|
|
Year
Ended
|
|
|
Year
Ended
|
|
|
Year
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
|
December
31,
|
|
|
December
31,
|
|
|
December
31,
|
|
|
December
31,
|
|
|
July
31,
|
|
(in
millions of U.S. dollars)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flow from operating activities
|
|
$ |
54.1 |
|
|
$ |
15.0 |
|
|
$ |
167.5 |
|
|
$ |
128.2 |
|
|
$ |
39.3 |
|
Income
tax expense
|
|
|
- |
|
|
|
- |
|
|
|
7.0 |
|
|
|
- |
|
|
|
7.0 |
|
Amortization
of debt issuance costs
|
|
|
(9.9 |
) |
|
|
(6.7 |
) |
|
|
(2.3 |
) |
|
|
(2.3 |
) |
|
|
- |
|
Interest
income
|
|
|
(0.8 |
) |
|
|
(1.5 |
) |
|
|
(1.8 |
) |
|
|
(1.8 |
) |
|
|
- |
|
Interest
expense
|
|
|
125.6 |
|
|
|
143.0 |
|
|
|
57.6 |
|
|
|
49.2 |
|
|
|
8.4 |
|
Loss
on disposal of fixed assets
|
|
|
(0.7 |
) |
|
|
(1.0 |
) |
|
|
(1.4 |
) |
|
|
(0.1 |
) |
|
|
(1.3 |
) |
Other,
net
|
|
|
22.6 |
|
|
|
1.5 |
|
|
|
(0.7 |
) |
|
|
- |
|
|
|
(0.7 |
) |
Changes
in assets and liabilities, net
|
|
|
5.6 |
|
|
|
2.9 |
|
|
|
(34.1 |
) |
|
|
(80.2 |
) |
|
|
46.1 |
|
EBITDA
|
|
|
196.5 |
|
|
|
153.2 |
|
|
|
191.8 |
|
|
|
93.0 |
|
|
|
98.8 |
|
Restructuring,
severance and other (1)
|
|
|
27.4 |
|
|
|
19.4 |
|
|
|
9.8 |
|
|
|
10.1 |
|
|
|
(0.3 |
) |
Non-cash
compensation/benefits (2)
|
|
|
11.2 |
|
|
|
0.6 |
|
|
|
5.4 |
|
|
|
0.4 |
|
|
|
5.0 |
|
Other
items, net (3)
|
|
|
3.1 |
|
|
|
8.0 |
|
|
|
(0.1 |
) |
|
|
(8.2 |
) |
|
|
8.1 |
|
Inventory
fair value (4)
|
|
|
- |
|
|
|
- |
|
|
|
5.9 |
|
|
|
5.9 |
|
|
|
- |
|
Lease
not assumed (5)
|
|
|
- |
|
|
|
- |
|
|
|
5.8 |
|
|
|
- |
|
|
|
5.8 |
|
Change
in machine use, net (6)
|
|
|
- |
|
|
|
- |
|
|
|
2.8 |
|
|
|
- |
|
|
|
2.8 |
|
Adjusted
EBITDA
|
|
$ |
238.2 |
|
|
$ |
181.2 |
|
|
$ |
221.4 |
|
|
$ |
101.2 |
|
|
$ |
120.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
adjusted cash interest expense (7)
|
|
$ |
109.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
EBITDA to cash interest expense
|
|
|
2.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
first-lien secured debt/Adjusted EBITDA
|
|
|
0.95 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Restructuring
includes transition and other non-recurring costs associated with the
Acquisition as per our financial statements.
|
(2)
|
Represents
amortization of non-cash incentive compensation.
|
(3)
|
Represents
earnings adjustments for legal and consulting fees, and other
miscellaneous non-recurring items.
|
(4)
|
Represents
the fair value of inventory adjustment related to purchase
accounting.
|
(5)
|
Reflects
the elimination of the historical rent expense incurred on the Sartell
property lease that was not assumed by us in the
Acquisition.
|
(6)
|
Represents
the elimination or addition of expected earnings as a result of changes in
the use of two of our paper machines at the Jay mill
prior to the Acquisition.
|
(7)
|
As
adjusted cash interest expense reflects a decrease in cash interest
expense for the twelve months ended December 31, 2008 equal to $7.2
million as a result of the repayment of $138.0 million of the senior
unsecured term loan facility of our subsidiary, Verso Paper Finance
Holdings LLC, and the repayment of the outstanding $4.1 million under the
revolving credit facility and $10.0 million senior secured term loan of
our subsidiary, Verso Fiber Farm LLC, as if the repayment were consummated
on January 1, 2008. Cash interest expense represents gross interest
expense related to the debt, excluding amortization of debt issuance
costs.
|
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.
Effect
of Inflation
While
inflationary increases in certain input costs, such as for energy, wood fiber
and chemicals, have an impact on our operating results, changes in general
inflation have had minimal impact on our operating results in the last three
years. Sales prices and volumes are more strongly influenced by
supply and demand factors in specific markets and by exchange rate fluctuations
than by inflationary factors. We cannot assure you, however, that we
will not be affected by general inflation in the future.
Contractual
Obligations
The
following table reflects our contractual obligations and commercial commitments
as of December 31, 2008. Commercial commitments include lines of credit,
guarantees and other potential cash outflows resulting from a contingent event
that requires our performance pursuant to a funding commitment.
|
|
Payments
due by period
|
|
|
|
|
|
|
Less
than
|
|
|
|
|
|
|
|
|
More
than
|
|
(in
millions of U.S. dollars)
|
|
Total
|
|
|
1
year
|
|
|
1-3
years
|
|
|
3-5
years
|
|
|
5
years
|
|
Long-term
debt (1)
|
|
$ |
2,009.8 |
|
|
$ |
116.0 |
|
|
$ |
231.6 |
|
|
$ |
642.4 |
|
|
$ |
1,019.8 |
|
Operating
leases
|
|
|
14.8 |
|
|
|
5.6 |
|
|
|
5.3 |
|
|
|
1.9 |
|
|
|
2.0 |
|
Purchase
obligations (2)
|
|
|
931.5 |
|
|
|
149.9 |
|
|
|
187.2 |
|
|
|
187.4 |
|
|
|
407.0 |
|
Other
long-term liabilities (3)
|
|
|
33.8 |
|
|
|
1.1 |
|
|
|
2.0 |
|
|
|
2.7 |
|
|
|
28.0 |
|
Total
|
|
$ |
2,989.9 |
|
|
$ |
272.6 |
|
|
$ |
426.1 |
|
|
$ |
834.4 |
|
|
$ |
1,456.8 |
|
(1)
|
Long-term
debt includes principal payments, commitment fees and accrued interest
payable. A portion of interest expense is at a variable rate
and has been calculated using current LIBOR. Actual payments
could vary.
|
(2) |
Purchase obligations
include unconditional purchase obligations for power purchase agreements
(gas and electricity), machine clothing and
other commitments for advertising, raw materials or storeroom
inventory.
|
(3) |
Other
long-term liabilities reflected above represent the gross amount of asset
retirement
obligations.
|
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. Contracted sales are more prevalent for coated groundwood
paper, as opposed to coated freesheet paper, which is more often sold without a
contract. 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. In 2008, no single customer
accounted for more than 10% of our total net sales.
Interest
Rates
We issued
fixed- and floating-rate debt to finance the Acquisition in order to manage our
variability to cash flows from interest rates. Borrowings under our
senior secured credit facilities and our floating-rate notes accrue interest at
variable rates, and a 100 basis point increase in quoted interest rates on our
debt balances outstanding as of December 31, 2008, under our senior secured
credit facilities and our floating-rate notes would increase our annual interest
expense by $7.1 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
December 31, 2008, we had net unrealized losses of $26.9 million on open
commodity contracts with maturities of one to twelve 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 $4.4 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.
We entered
into a $250 million notional value receive-variable, pay-fixed interest rate
swap in connection with our outstanding floating rate notes that mature in
2014. We are hedging the cash flow exposure on our quarterly
variable-rate interest payments due to changes in the benchmark interest rate
(three-month LIBOR). As of December 31, 2008, the fair value of this
swap was an unrealized loss of $3.7 million. A 10% decrease in
interest rates would have a negative impact of approximately $0.5 million on the
fair value of this instrument.
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. In the near term, we expect the rate of inflation for
our total chemical costs to be lower than that experienced over the last two
years. However, we expect imbalances in supply and demand will drive
higher prices for certain chemicals such as starch and sodium
chlorate.
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. As we have begun to utilize wood harvested from our 23,000-acre
hybrid poplar fiber farm located near Alexandria, Minnesota, our ongoing wood
costs should be positively impacted.
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.
Verso
Paper Corp.
Consolidated
and Combined Financial Statements of Successor
For the
Years Ended December 31, 2008 and 2007, and
The Five
Months Ended December 31, 2006
and
Combined
Financial Statements of Predecessor
For the
Seven Months Ended July 31, 2006
Index to
Financial Statements
|
Page
|
Report
of Independent Registered Public Accounting Firm
|
43
|
Consolidated
and Combined Financial Statements |
|
Consolidated
and Combined Balance Sheets
|
44
|
Consolidated
and Combined Statements of Operations
|
45
|
Consolidated
and Combined Statements of Changes in Stockholders’ Equity
|
46
|
Consolidated
and Combined Statements of Cash Flows
|
47
|
Notes
to Consolidated and Combined Financial Statements of Verso Paper Corp.
(Successor)
|
48
|
Notes
to Combined Financial Statements of Coated and Supercalendered Papers
Division of International Paper Company (Predecessor)
|
74
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders of
Verso
Paper Corp.
Memphis,
Tennessee
We have
audited the accompanying consolidated and combined balance sheets of Verso Paper
Corp., a majority-owned subsidiary of Verso Paper Management LP, as of December
31, 2008 and 2007 (Successor Company balance sheets), and the related
consolidated and combined statements of operations, changes in
stockholders' equity, and cash flows for the years ended December 31, 2008 and
2007 and the five months ended December 31, 2006 (Successor Company
operations). We have also audited the accompanying combined statements of
operations and cash flows of the Coated & Supercalendered Papers Division of
International Paper Company (the “Predecessor”) for the seven months ended July
31, 2006 (Predecessor operations). These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion.
An audit also includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our
opinion, the Successor Company’s consolidated and combined financial statements
present fairly, in all material respects, the financial position of the Company
as of December 31, 2008 and 2007, and the results of its operations and its cash
flows for the years ended December 31, 2008 and 2007 and the five months ended
December 31, 2006, in conformity with accounting principles generally accepted
in the United States of America. Further, in our opinion, the
Predecessor combined financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of the
Predecessor for the seven months ended July 31, 2006, in conformity with
accounting principles generally accepted in the United States of
America.
As
discussed in Note 1 to the Successor Company consolidated and combined financial
statements, the Company adopted Statement of Financial Accounting Standards
(“SFAS”) No. 158, Employers’ Accounting for Defined Benefit Pension and Other
Postretirement Plans –an Amendment of FASB Statements No. 87, 88, 106, and 132(
R), as of December 31, 2006.
As
discussed in Note 1 to the Predecessor combined financial statements, the
accompanying Predecessor combined financial statements have been prepared from
the separate records maintained by the Predecessor and International Paper
Company and may not necessarily be indicative of the conditions that would have
existed or the results of operations if the Predecessor had been operated as an
unaffiliated company. Portions of certain expenses represent
allocations made from corporate-office items applicable to International Paper
Company as a whole.
/s/ Deloitte & Touche
LLP
Memphis,
Tennessee
March 2,
2009
VERSO
PAPER CORP.
|
|
|
|
CONSOLIDATED
AND COMBINED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December
31,
|
|
|
December
31,
|
|
(In
thousands of U.S. dollars)
|
|
2008
|
|
|
2007
|
|
ASSETS
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
119,542 |
|
|
$ |
58,533 |
|
Accounts
receivable - net
|
|
|
74,172 |
|
|
|
121,190 |
|
Accounts
receivable from related parties
|
|
|
8,312 |
|
|
|
12,318 |
|
Inventories
|
|
|
195,934 |
|
|
|
119,620 |
|
Prepaid
expenses and other assets
|
|
|
2,512 |
|
|
|
3,935 |
|
Total
Current Assets
|
|
|
400,472 |
|
|
|
315,596 |
|
Property,
plant and equipment - net
|
|
|
1,115,990 |
|
|
|
1,160,239 |
|
Reforestation
|
|
|
12,725 |
|
|
|
11,144 |
|
Intangibles
and other assets - net
|
|
|
88,513 |
|
|
|
97,785 |
|
Goodwill
|
|
|
18,695 |
|
|
|
18,695 |
|
Total
Assets
|
|
$ |
1,636,395 |
|
|
$ |
1,603,459 |
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
118,920 |
|
|
$ |
128,373 |
|
Accounts
payable to related parties
|
|
|
4,135 |
|
|
|
3,872 |
|
Accrued
liabilities
|
|
|
125,565 |
|
|
|
93,012 |
|
Short-term
borrowings
|
|
|
- |
|
|
|
3,125 |
|
Current
maturities of long-term debt
|
|
|
2,850 |
|
|
|
2,850 |
|
Total
Current Liabilities
|
|
|
251,470 |
|
|
|
231,232 |
|
Long-term
debt
|
|
|
1,354,821 |
|
|
|
1,413,588 |
|
Other
liabilities
|
|
|
40,151 |
|
|
|
33,740 |
|
Total
Liabilities
|
|
|
1,646,442 |
|
|
|
1,678,560 |
|
Commitments
and contingencies (Note 17)
|
|
|
- |
|
|
|
- |
|
Stockholders'
Equity (Deficit):
|
|
|
|
|
|
|
|
|
Preferred
stock -- par value $0.01 (20,000,000 shares authorized, no shares
issued)
|
|
|
- |
|
|
|
- |
|
Common
stock -- par value $0.01 (250,000,000 shares authorized with
52,046,647
|
|
|
|
|
|
|
|
|
shares
issued and outstanding on December 31, 2008; and 38,046,647 shares
issued
|
|
|
|
|
|
|
|
|
and
outstanding on December 31, 2007)
|
|
|
520 |
|
|
|
380 |
|
Paid-in-capital
|
|
|
211,752 |
|
|
|
48,489 |
|
Retained
deficit
|
|
|
(180,048 |
) |
|
|
(114,100 |
) |
Accumulated
other comprehensive income (loss)
|
|
|
(42,271 |
) |
|
|
(9,870 |
) |
Total
Stockholders' Deficit
|
|
|
(10,047 |
) |
|
|
(75,101 |
) |
Total
Liabilities and Stockholders' Equity
|
|
$ |
1,636,395 |
|
|
$ |
1,603,459 |
|
|
|
|
|
|
|
|
|
|
See
notes to consolidated and combined financial statements.
|
|
|
|
|
|
|
|
|
VERSO
PAPER CORP. (SUCCESSOR)
Notes
to Consolidated Financial Statements as of December 31, 2008, and for the Year
Ended
December
31, 2008, and to Combined Financial Statements as of December 31, 2007, and for
the Year Ended
December
31, 2007 and for the Period August 1, 2006 (Date of Acquisition) to December 31,
2006
1. SUMMARY
OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of
Business—The accompanying financial statements include the accounts of
Verso Paper Corp., a Delaware corporation, and its
subsidiaries. Unless otherwise noted, the terms “Verso,” “Verso
Paper,” “Company,” “we,” “us” and “our” refer collectively to Verso Paper Corp.
and its subsidiaries, and references to the “Division” or “Predecessor” refer to
the Coated and Supercalendered Papers Division of International Paper Company,
or “International Paper.”
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. The Company was formed by
affiliates of Apollo Management, L.P., or “Apollo,” for the purpose of
consummating the acquisition from International Paper, or the
“Acquisition.” Verso Paper Corp. went public on May 14, 2008 with an
initial public offering, or “IPO," of 14 million shares of common stock at
a price of $12 per share which generated $152.2 million in net proceeds.
Prior to
the consummation of the offering, the accompanying combined financial statements
include the accounts of Verso Paper One Corp., Verso Paper Two Corp., Verso
Paper Three Corp., Verso Paper Four Corp., and Verso Paper Five Corp., legal
entities under the common control of Verso Paper Management LP.
Verso
Paper Corp., indirect parent company of Verso Paper Finance Holdings LLC, or
"Verso Finance;" Verso Paper Holdings LLC, or "Verso Holdings;" and Verso Fiber
Farm LLC, a direct subsidiary of Verso Paper Management LP, is a holding
company whose subsidiaries operate in the following three segments: coated and
supercalendered papers; hardwood market pulp; and other, consisting of specialty
industrial paper. 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.
Basis of
Presentation—Included in this report are the financial statements of
Verso Paper Corp. as of December 31, 2008 and 2007, and for the twelve months
ended December 31, 2008 and 2007 and the five months ended December 31,
2006. The financial statements of the Predecessor for the seven
months ended July 31, 2006, follow the notes of the Successor. All material
intercompany balances and transactions are eliminated.
Use of
Estimates—The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting periods. Actual results
could differ from these estimates.
Revenue
Recognition—Sales are net of rebates, allowances and
discounts. Revenue is recognized when the customer takes title and
assumes the risks and rewards of ownership. Revenue is recorded at
the time of shipment for terms designated f.o.b. (free on board) shipping
point. For sales transactions designated f.o.b. destination, which
include export sales, revenue is recorded when the product is delivered to the
customer’s site and when title and risk of loss are transferred.
Shipping and
Handling Costs—Shipping and handling costs, such as freight to customer
destinations, are included in cost of products sold in the accompanying
statements of operations. These costs, when included in the sales
price charged for the Company’s products, are recognized in net
sales.
Planned
Maintenance Costs—Maintenance costs for major planned maintenance
shutdowns in excess of $0.5 million are deferred over the period in which the
maintenance shutdowns occur and expensed ratably over the period until the next
major planned shutdown, since the Company believes that operations benefit
throughout that period from the maintenance work performed. Other
maintenance costs are expensed as incurred.
Environmental
Costs and Obligations—Costs associated with environmental obligations,
such as remediation or closure costs, are accrued when such costs are probable
and reasonably estimable. Such accruals are adjusted as further
information develops or circumstances change. Costs of future
expenditures for environmental obligations are discounted to their present value
when the expected cash flows are reliably determinable.
Equity
Compensation—The Company accounts for equity awards in accordance with
SFAS No. 123 (Revised), Share-Based
Payment. SFAS No. 123(R) requires that all equity awards to
employees be expensed over the period of the award. The Company
applies the Black-Scholes method of valuation to determine share-based
compensation expense.
Income
Taxes—The Company accounts for income taxes using the liability method
pursuant to SFAS No. 109, Accounting for Income
Taxes. Under this method, the Company recognizes deferred tax
assets and liabilities for the expected tax consequences of temporary
differences between the tax bases of assets and liabilities and their reported
amounts using enacted tax rates in effect for the year the differences are
expected to reverse. The Company records a valuation allowance to
reduce the deferred tax assets to the amount that is more likely than not to be
realized.
Earnings Per
Share—The Company computes earnings per share by dividing net (loss)
income by the weighted average number of common shares outstanding for each
period. Diluted
earnings per share is calculated similarly, except that it includes the dilutive
effect of the assumed exercise of potentially diluted securities. At December
31, 2008, potentially dilutive securities included options for 15,200 shares.
These equity awards were excluded from the computation of diluted earnings per
share due to the antidilutive effect such shares would have on net loss per
common share.
Fair Value of
Financial Instruments—The carrying amounts for cash and cash equivalents,
restricted cash, accounts receivable, accounts payable and accrued liabilities,
and amounts receivable from or due to related parties approximates fair value
due to the short maturity of these instruments. 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. See also
Note 7 and Note 13 for additional information regarding the fair value of
financial instruments.
Cash and Cash
Equivalents—For cash and cash equivalents, the carrying amounts
approximate fair value due to the short-term nature of these
instruments. Cash and cash equivalents include highly liquid
investments with a maturity of three months or less at the date of
purchase.
Inventories and
Replacement Parts and Other Supplies—Inventory values include all costs
directly associated with manufacturing products: materials, labor, and
manufacturing overhead. These values are presented at the lower of
cost or market. Costs of raw materials, work-in-progress, and
finished goods are determined using the first-in, first-out
method. Replacement parts and other supplies are stated using the
average cost method and are reflected in Intangibles and other assets on the
balance sheet (see Note 3 and Note 5).
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. Interest cost of $1.4 million was capitalized in 2008 and
$1.2 million was capitalized 2007.
Depreciation
and amortization are computed using the straight-line method for all assets over
the assets’ estimated useful lives. Estimated useful lives are as
follows:
|
|
Years
|
Building
|
|
20 -
40
|
Machinery
and equipment
|
|
10 -
20
|
Furniture
and office equipment
|
|
3 -
10
|
Computer
hardware
|
|
3 -
6
|
Leasehold
improvements
|
|
Over
the terms of the lease
or
the useful life of the
improvements
|
Reforestation—At
December 31, 2008, the Company owned or leased approximately 23,000 acres of
hybrid poplar plantations. Timberlands are stated at cost, including
capitalized costs attributable to reforestation efforts (i.e., costs for site
preparation, planting stock, labor, herbicide, fertilizer, and any other costs
required to establish timber on land that was previously not
forested). From August 1, 2006 (date of Acquisition) through December
31, 2008, the Company has been primarily engaged in developing its hybrid poplar
fiber farm. Costs attributable to timberlands are charged against
income as trees are cut. The rate charged will be determined annually
based on the relationship of incurred costs to estimated current merchantable
volume.
Goodwill and
Intangible Assets—The Company accounts for goodwill and other intangible
assets in accordance with SFAS No. 142, Goodwill and Other Intangible
Assets. Intangible assets primarily consist of trademarks,
customer-related intangible assets and patents obtained through business
acquisitions. The useful lives of trademarks were determined to be
indefinite and, therefore, these assets are not
amortized. Customer-related intangible assets are amortized over
their estimated useful lives of approximately twenty-five
years. Patents are amortized over their remaining legal lives of ten
years.
The
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. Goodwill is evaluated at the reporting unit
level. Goodwill has been allocated to the “Coated”
segment.
The
evaluation for impairment is performed by comparing the carrying amount of these
assets to their estimated fair value. If the carrying amount exceeds
the reporting unit fair value, then the second step of the goodwill impairment
test is performed to determine the amount of the impairment loss.
Impairment of
Long-Lived Assets—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. Impaired assets are recorded at estimated fair value, determined
principally using discounted cash flows.
Allowance for
doubtful accounts—The Company maintains an allowance for doubtful
accounts for estimated losses resulting from the inability of customers to make
required payments. The Company manages credit risk related to its
trade accounts receivable by continually monitoring the creditworthiness of its
customers to whom credit is granted in the normal course of
business. Trade accounts receivable balances for sales to
unaffiliated customers were approximately $64.4 million at December 31, 2008,
compared to $104.6 million at December 31, 2007.
The
Company establishes its allowance for doubtful accounts based upon factors
surrounding the credit risks of specific customers, historical trends, and other
information. Based on this assessment, an allowance is maintained
that represents what is believed to be ultimately uncollectible from such
customers. The allowance for doubtful accounts was approximately $1.9
million at December 31, 2008, compared to $1.7 million at December 31,
2007. Bad debt expense was $1.0 million for the year ended December
31, 2008, and was negligible for the year ended December 31, 2007, and the
five-month period ended December 31, 2006.
Deferred
Financing Costs—The Company capitalizes costs incurred in connection with
borrowings or establishment of credit facilities. These costs are
amortized as an adjustment to interest expense over the life of the borrowing or
life of the credit facility using the effective interest method. In
the case of early debt principal repayments, the Company adjusts the value of
the corresponding deferred financing costs with a charge to interest expense,
and similarly adjusts the future amortization expense.
Asset Retirement
Obligations—In accordance with the provisions of SFAS No. 143, Accounting for Asset Retirement
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
December 31, 2008, the Company had approximately $0.8 million of restricted cash
related to an asset retirement obligation in the state of Michigan, which is
reflected in other assets on the accompanying balance sheet. 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 assets retirement obligations included in Other
liabilities on the accompanying balance sheet:
|
|
Year
Ended
|
|
|
Year
Ended
|
|
|
|
December
31,
|
|
|
December
31,
|
|
(In
thousands of U.S. dollars)
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Asset
retirement obligations, January 1
|
|
$ |
11,614 |
|
|
$ |
11,855 |
|
New
liabilities
|
|
|
1,091 |
|
|
|
310 |
|
Accretion
expense
|
|
|
599 |
|
|
|
583 |
|
Settlement
of existing liabilities
|
|
|
(1,306 |
) |
|
|
(1,063 |
) |
Adjustment
to existing liabilities
|
|
|
2,030 |
|
|
|
(71 |
) |
|
|
|
|
|
|
|
|
|
Asset
retirement obligations, December 31
|
|
$ |
14,028 |
|
|
$ |
11,614 |
|
Derivative
Financial Instruments—Derivative financial instruments are recognized as
assets or liabilities in the financial statements and measured at fair
value. The effective portion of the changes in the fair value of
derivative financial instruments that qualify and are designated as cash flow
hedges are recorded in other comprehensive income. Changes in the
fair value of derivative financial instruments that are entered into as economic
hedges are recognized in current earnings. The Company uses
derivative financial instruments to manage its exposure to energy prices and
interest rate risk.
Postretirement
Benefits—Pension plans cover substantially all of the Company’s
employees. The defined benefit plan is funded in conformity with the
funding requirements of applicable government regulations. Prior
service costs are amortized on a straight-line basis over the estimated
remaining service periods of employees. Certain employees are covered
by defined contribution plans. The Company’s contributions to these
plans are based on a percentage of employees’ compensation or employees’
contributions. These plans are funded on a current
basis.
The
Company adopted the provisions of SFAS No. 158, Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements
No. 87, 88, 106, and 132(R), as of December 31, 2006. The
measurement date is December 31.
2. RECENT
ACCOUNTING DEVELOPMENTS
Postretirement
Benefit Plan Assets—In December 2008, the Financial Accounting Standards
Board, or "FASB," issued FASB Staff Position on Statement 132(R)-1, or FSP FAS
132(R)-1, Employers’
Disclosure about Postretirement Benefit Plan Assets, which amends SFAS
No. 132(R) to require 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. FSP FAS 132(R)-1 is effective for fiscal years ending after
December 15, 2009. Since FSP FAS 132(R)-1 only addresses new
disclosure requirements, the adoption of FSP FAS 132(R)-1 will have no impact on
our financial condition or results of operations.
Intangible
Assets—In April
2008, the FASB issued FSP FAS 142-3, Determination of the Useful Life of
Intangible Assets, which provides guidance on the renewal or extension
assumptions used in the determination of the useful life of a recognized
intangible asset. The intent of FSP FAS 142-3 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. FSP FAS 142-3 is effective
for fiscal years and interim periods beginning after December 15,
2008. The adoption of FSP FAS 142-3 is not expected to have a
material impact on our financial condition or results of
operations.
Derivatives and
Hedging Activities—In March 2008, the FASB, issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities. SFAS No. 161 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 SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, and its related interpretations, and
(c) how derivative instruments and related hedged items affect an entity’s
financial position, financial performance, and cash flows. SFAS No. 161 is
effective for fiscal years and interim periods beginning after November 15,
2008. Since SFAS No. 161 only addresses disclosure requirements, the
adoption of SFAS No. 161 will have no impact on our financial condition or
results of operations.
Business
Combinations—In December 2007, the FASB issued SFAS No. 141 (revised
2007), Business
Combinations. SFAS No. 141-R establishes 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. SFAS No. 141-R is
effective for business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008. Early adoption is prohibited. The
Company will apply the provisions of SFAS No. 141-R to any future
acquisitions.
In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements – an amendment of ARB No.
51. SFAS No. 160 establishes accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. This standard is effective, on a
prospective basis, for fiscal years and interim periods beginning on or after
December 15, 2008. The presentation and disclosure requirements for
existing minority interests should be applied retrospectively for all periods
presented. Early adoption is prohibited. The adoption of
SFAS No. 160 is not expected to have a material impact on our financial
condition or results of operations.
Fair Value Option
for Financial Assets and Financial Liabilities—In February 2007, the FASB
issued SFAS No. 159, Fair
Value Option for Financial Assets and Financial Liabilities—including an
amendment of FASB Statement No. 115, which permits an entity to measure
certain financial assets and financial liabilities at fair value. The
Statement’s objective is to improve financial reporting by allowing entities to
mitigate volatility in reported earnings caused by the measurement of related
assets and liabilities using different attributes, without having to apply
complex hedge accounting provisions. The Statement was effective as
of the beginning of an entity’s fiscal year beginning after November 15,
2007. The adoption of SFAS No. 159 did not have a material impact on
our financial condition or results of operations.
Fair Value
Measurements—In September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements. SFAS No. 157 addresses how to measure fair
value (not what to measure at fair value) and, applies, with limited exceptions,
to existing standards that require assets and liabilities to be measured at fair
value. SFAS No. 157 establishes a fair value hierarchy, giving
the highest priority to quoted prices in active markets and the lowest priority
to unobservable data and requires new disclosures for assets and liabilities
measured at fair value based on their level in the hierarchy. SFAS
No. 157 was effective for financial statements issued for fiscal years
beginning after November 15, 2007. However, FSP 157-2, Effective Date of FASB Statement No.
157, delayed the implementation of SFAS No. 157 for nonfinancial assets
and nonfinancial liabilities, except for items that are recognized or disclosed
at fair value in the financial statements on a recurring basis, to fiscal years
beginning after November 15, 2008. The adoption of the initial
provisions of SFAS No. 157 did not have, and the adoption of the remaining
provisions of SFAS No. 157 is not expected to have, a material impact on our
financial condition or results of operations.
Defined
Benefit Pension and Other Postretirement Plans—In
September 2006, the FASB issued SFAS No. 158, Employers' Accounting for Defined Benefit Pension and
Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and
132(R), which requires the recognition of the overfunded or underfunded
status of a defined benefit postretirement plan as an asset or liability in
the balance sheet. SFAS No. 158 does not change measurement or
recognition requirements for periodic pension and postretirement costs.
SFAS No. 158 also provides that changes in the funded status of a defined
benefit postretirement plan should be recognized in the year such changes occur
through comprehensive income. As a result of adopting SFAS No. 158 as of
December 31, 2006, unrecognized prior service costs were recognized as a
component of accumulated other comprehensive income resulting in a reduction in
equity of $7.7
million.
Accounting
for Planned Major Maintenance Activities—In
September 2006, the FASB issued FSP AUG AIR-1, Accounting
for Planned Major Maintenance Activities. This FSP eliminates the
accrue-in-advance method of accounting for planned major maintenance activities
from the American Institute of Certified Public Accountants' Audit and
Accounting Guide, Audits of Airlines, or
the "Airline Guide." This method of accounting for planned major maintenance
activities was eliminated due to the FASB's belief that the resultant liability
does not meet the definition of a liability in FASB Concepts Statement No. 6,
Elements of Financial Statements.
As a result of the elimination of the accrue-in-advance method, the Airline
Guide, which provides guidance for all industries that conduct planned major
maintenance activities, permits the use of one of the following three remaining
methods: (1) direct expensing, (2) built-in overhaul, and (3) deferral.
This FSP was effective for fiscal years beginning after December 15, 2006,
with early adoption permitted as long as it was as of the beginning of the
entity's fiscal year. The Company adopted the FSP at its inception by
electing the deferral method.
Sales, Use and
Excise Taxes—In June 2006, the FASB ratified the consensuses reached by
the Emerging Issues Task Force in Issue No. 06-3, How Taxes Collected from Customers
and Remitted to Governmental Authorities Should be Presented in the Income
Statement (That is, Gross Versus Net Presentation). Issue
No. 06-3 requires disclosure of an entity’s accounting policy regarding the
presentation of taxes assessed by a governmental authority that are directly
imposed on a revenue-producing transaction between a seller and a customer,
including sales, use, value added and some excise taxes. We present
such taxes on a net basis (excluded from revenues and costs). The
adoption of Issue No. 06-3 in 2007 had no impact on our financial condition
or results of operations.
Accounting for
Uncertainty in Income Taxes—In June 2006, the FASB issued Interpretation
No. 48 (FIN48), Accounting for Uncertainty in Income
Taxes—an interpretation of FASB Statement
No. 109. FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in a company’s financial statements and
prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be
taken in a tax return. FIN 48 also provides guidance on
description, classification, interest and penalties, accounting in interim
periods, disclosure, and transition. FIN 48 was effective for
fiscal years beginning after December 15, 2006. The Company
applied the provisions of this interpretation beginning January 1,
2007. The adoption of FIN 48 did not have a material impact on our
financial condition or results of operations.
Other new
accounting pronouncements issued but not effective until after December 31,
2008, are not expected to have a significant effect on our financial condition
or results of operations.
3. INVENTORIES
Inventories
by major category as of December 31, 2008 and 2007, include the
following:
|
|
December
31,
|
|
|
December
31,
|
|
(In
thousands of U.S. dollars)
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Raw
materials
|
|
$ |
29,858 |
|
|
$ |
19,918 |
|
Woodyard
logs
|
|
|
7,970 |
|
|
|
3,209 |
|
Work-in-process
|
|
|
19,001 |
|
|
|
19,565 |
|
Finished
goods
|
|
|
113,050 |
|
|
|
48,167 |
|
Replacement
parts and other supplies
|
|
|
26,055 |
|
|
|
28,761 |
|
Inventories
|
|
$ |
195,934 |
|
|
$ |
119,620 |
|
4. PROPERTY,
PLANT, AND EQUIPMENT
Property,
plant and equipment as of December 31, 2008 and 2007, were as
follows:
|
|
December
31,
|
|
|
December
31,
|
|
(In
thousands of U.S. dollars)
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Land
and land improvements
|
|
$ |
30,141 |
|
|
$ |
28,017 |
|
Building
and leasehold improvements
|
|
|
174,959 |
|
|
|
172,189 |
|
Machinery
and equipment
|
|
|
1,172,334 |
|
|
|
1,096,429 |
|
Construction-in-progress
|
|
|
24,188 |
|
|
|
29,406 |
|
|
|
|
1,401,622 |
|
|
|
1,326,041 |
|
Less:
accumulated depreciation
|
|
|
(285,632 |
) |
|
|
(165,802 |
) |
Property,
plant, and equipment
|
|
$ |
1,115,990 |
|
|
$ |
1,160,239 |
|
Depreciation
expense was $126.4 million and $119.4 million for the years ended
December 31, 2008 and 2007, respectively, and was $48.0 million for the five
months ended December 31, 2006.
5. INTANGIBLES
AND OTHER ASSETS
Intangibles
and other assets as of December 31, 2008 and 2007, consist of the
following:
|
|
December
31,
|
|
|
December
31,
|
|
(In
thousands of U.S. dollars)
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Amortizable
intangible assets:
|
|
|
|
|
|
|
Customer
relationships - net of accumulated amortization of $3.3 million
and
|
|
|
|
|
$1.8
million, respectively
|
|
$ |
10,020 |
|
|
$ |
11,470 |
|
Patents
- net of accumulated amortization of $0.28 million and $0.16
million,
|
|
|
|
|
|
respectively
|
|
|
870 |
|
|
|
985 |
|
Total
amortizable intangible assets
|
|
|
10,890 |
|
|
|
12,455 |
|
|
|
|
|
|
|
|
|
|
Unamortizable
intangible assets:
|
|
|
|
|
|
|
|
|
Trademarks
|
|
|
21,473 |
|
|
|
21,473 |
|
|
|
|
|
|
|
|
|
|
Other
assets:
|
|
|
|
|
|
|
|
|
Financing
costs-net of accumulated amortization of $14.3 million and
|
|
|
|
|
|
$9.0 million,
respectively
|
|
|
33,465 |
|
|
|
43,410 |
|
Deferred
major repair
|
|
|
9,543 |
|
|
|
5,328 |
|
Deferred
software cost-net of accumulated amortization of $3.0
million
|
|
|
|
|
|
and
$1.3 million, respectively
|
|
|
2,746 |
|
|
|
3,765 |
|
Replacement
parts-net
|
|
|
5,625 |
|
|
|
4,932 |
|
Other
|
|
|
4,771 |
|
|
|
6,422 |
|
Total
other assets
|
|
|
56,150 |
|
|
|
63,857 |
|
|
|
|
|
|
|
|
|
|
Intangibles
and other assets
|
|
$ |
88,513 |
|
|
$ |
97,785 |
|
Approximately
$1.6 million, $1.7 million and $0.3 million of intangible amortization are
reflected in depreciation, amortization and depletion expense for the years
ended December 31, 2008 and 2007 and for the five months ended December 31,
2006, respectively.
Estimated
amortization expense of intangibles is expected to be $1.4 million, $1.3
million, $1.1 million, $0.9 million, and $0.8 million in 2009, 2010,
2011, 2012, and 2013, respectively.
Software
cost incurred as part of a major systems project was capitalized in 2007 and is
being amortized over its anticipated useful life of approximately three
years. Approximately $1.7 million and $1.3 million of software
amortization are reflected in depreciation, amortization and depletion expense
for the years ended December 31, 2008 and 2007, respectively.
6. ACCRUED
LIABILITIES
A summary
of accrued liabilities as of December 31, 2008 and 2007, is as
follows:
|
|
December
31,
|
|
|
December
31,
|
|
(In
thousands of U.S. dollars)
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Payroll
and employee benefit costs
|
|
$ |
48,024 |
|
|
$ |
35,799 |
|
Accrued
interest
|
|
|
33,702 |
|
|
|
36,727 |
|
Derivatives
|
|
|
26,878 |
|
|
|
1,428 |
|
Accrued
sales rebates
|
|
|
10,966 |
|
|
|
10,900 |
|
Accrued
taxes - other than income
|
|
|
1,777 |
|
|
|
2,573 |
|
Freight
and other
|
|
|
4,218 |
|
|
|
5,585 |
|
|
|
|
|
|
|
|
|
|
Accrued
liabilities
|
|
$ |
125,565 |
|
|
$ |
93,012 |
|
In 2008, a
separate category representing the fair value of short-term derivative
liabilities has been established and the accrued liability for workers’
compensation has been included in payroll and employee benefit
costs. As a result, payroll and employee benefit cost at December 31,
2007, increased by $2.3 million and a derivative liability of $1.4 million was
reclassified, resulting in a decrease of $3.7 million in freight and other
accrued liabilities from amounts previously reported.
7. LONG-TERM
DEBT
A summary
of long-term debt as of December 31, 2008 and 2007, is as follows:
|
|
|
|
|
|
December
31,
|
|
|
December
31,
|
|
(In
thousands of U.S. dollars)
|
Maturity
|
|
Rate
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Priority Revolving Credit Facility
|
8/1/2012
|
|
LIBOR
+ 2.00%
|
|
|
$ |
92,083 |
|
|
$ |
- |
|
First
Priority Term Loan B
|
8/1/2013
|
|
LIBOR
+ 1.75%
|
|
|
|
253,588 |
|
|
|
256,438 |
|
Second
Priority Senior Secured Notes - Fixed
|
8/1/2014
|
|
|
9.13 |
% |
|
|
350,000 |
|
|
|
350,000 |
|
Second
Priority Senior Secured Notes - Floating
|
8/1/2014
|
|
LIBOR
+ 3.75%
|
|
|
|
250,000 |
|
|
|
250,000 |
|
Senior
Subordinated Notes
|
8/1/2016
|
|
|
11.38 |
% |
|
|
300,000 |
|
|
|
300,000 |
|
Senior
Unsecured Term Loan
|
2/1/2013
|
|
LIBOR
+ 6.25%
|
|
|
|
112,000 |
|
|
|
250,000 |
|
Fiber
Farm Term Loan
|
8/1/2010
|
|
LIBOR
+ 3.00%
|
|
|
|
- |
|
|
|
10,000 |
|
|
|
|
|
|
|
|
|
1,357,671 |
|
|
|
1,416,438 |
|
Less
current maturities
|
|
|
|
|
|
|
|
(2,850 |
) |
|
|
(2,850 |
) |
Long-term
debt
|
|
|
|
|
|
|
$ |
1,354,821 |
|
|
$ |
1,413,588 |
|
One of the
Company’s subsidiaries, Verso Holdings, entered into senior secured credit
facilities on August 1, 2006, consisting of:
·
|
a
$285 million term loan with a maturity of seven years, of which $253.6
million was outstanding as of December 31, 2008;
and
|
·
|
a
$200 million revolving credit facility with a maturity of six years, of
which $92.1 million was outstanding, $33.1 million in letters of
credit were issued, and $59.0 million was available for future borrowing
as of December 31, 2008.
|
The term
loan bears interest at a rate equal to LIBOR plus 1.75%, with the interest rate
being 3.3% at December 31, 2008 and 6.6% at December 31, 2007. The
revolving credit facility bears interest at a rate equal to LIBOR plus 2.00%,
with the weighted average interest rate being 3.35% at December 31,
2008. 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 0.375% per annum (subject to reduction in certain
circumstances) and customary letter of credit and agency fees. The
senior secured credit facilities are 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. The senior secured credit facilities also are secured
by first priority pledges of all the equity interests owned by Verso Holdings in
its subsidiaries. The obligations under the senior secured credit
facilities are unconditionally guaranteed by Verso Paper Finance Holdings LLC
and, subject to certain exceptions, each of its direct and indirect
subsidiaries. The credit agreement for our senior secured credit
facilities contains various covenants which, among other things, prohibit our
subsidiaries from prepaying other indebtedness, require us to maintain a maximum
consolidated first lien leverage ratio, and restrict our ability to incur
indebtedness or liens, make investments or declare or pay any
dividends. As of December 31, 2008, we were in compliance with all
such covenants.
Verso
Holdings also issued debt securities on August 1, 2006, consisting
of:
·
|
$350
million aggregate principal amount of 9⅛% second priority senior secured
fixed rate notes due 2014;
|
·
|
$250
million aggregate principal amount of second priority senior secured
floating rate notes due 2014; and
|
·
|
$300
million aggregate principal amount of 11⅜% senior subordinated notes due
2016.
|
The
original principal amount of each issue of debt securities was outstanding at
December 31, 2008. The fixed rate notes and subordinated notes
pay interest semi-annually, and the floating rate notes pay interest
quarterly. The floating rate notes bear interest at a rate equal to
LIBOR plus 3.75%, with the interest rate being 6.9% at December 31, 2008
and 8.7% at December 31, 2007. The fixed rate and floating rate notes
have the benefit of a second priority security interest in the collateral
securing our senior secured credit facilities, while the subordinated notes are
unsecured. The indentures governing our notes contain various
covenants which limit our ability to, among other things, incur additional
indebtedness, pay dividends or make other distributions or 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. At December 31, 2008, we were in compliance with all
such covenants.
Another
subsidiary, Verso Finance, entered into a $250 million senior unsecured
floating-rate term loan facility on January 31, 2007. The term loan
matures in 2013. In May 2008, we used a portion of the net proceeds
from the IPO to repay $138 million of the outstanding principal of the term loan
and to pay a related $1.4 million prepayment penalty. As of
December 31, 2008, $112 million was outstanding on the term loan. 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 and added
to the principal balance. The interest rate in effect was 10.0% at December 31,
2008, and 9.5% at December 31, 2007. The term loan allows Verso
Finance to pay interest either in cash or in-kind through the accumulation of
the outstanding principal amount. On December 10, 2008, Verso Finance elected to
exercise the PIK option for the interest payment pertaining to the 90-day
interest period ending January 2, 2009.
Another
subsidiary, Verso Fiber Farm LLC, entered into senior secured credit facilities
on August 1, 2006, consisting of a $10 million term loan and a $5 million
revolving credit facility, each with a maturity of four years. In May
2008, we used a portion of the net proceeds from the IPO to repay the $10
million outstanding principal of the term loan and the $4.1 million
outstanding principal under the revolving credit facility. As of
December 31, 2008, no debt was outstanding under the senior secured credit
facilities.
The
payments required under the long-term debt listed above during the years
following December 31, 2008, are set forth below:
2009
|
|
$ |
2,850 |
|
2010
|
|
|
2,850 |
|
2011
|
|
|
2,850 |
|
2012
|
|
|
94,933 |
|
2013
|
|
|
354,188 |
|
Thereafter
|
|
|
900,000 |
|
Total
long-term debt
|
|
$ |
1,357,671 |
|
Interest
expense was $117.1 million and $120.7 million of interest was paid during the
year ended December 31, 2008. Interest expense was $137.0 million and
$132.2 million of interest was paid during the year ended December 31,
2007. Interest expense was $47.1 million and $15.0 million of
interest was paid during the five-month period ended December 31,
2006. In conjunction with the Acquisition, we assumed none of the
historical debt of the Predecessor.
Amortization
of debt issuance costs was $9.9 million for the year ended December 31, 2008,
and is included in interest expense in the consolidated statement of
operations. Amortization for 2008
includes the write-off of $3.6 million of debt issuance costs related to the
$148 million prepayment of long-term debt of Verso Finance and Verso Fiber Farm
LLC. Amortization of debt issuance costs was $6.7 million for the
year ended December 31, 2007, and was $2.3 million for the five-month period
ended December 31, 2006.
The fair
value of long-term debt was approximately $596 million at December 31, 2008,
compared to approximately $1.4 billion at December 31, 2007. 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. The fair value at December 31, 2008, of the $250 million
notional value interest rate swap hedging the cash flow exposure of quarterly
variable-rate interest payments on the Company’s outstanding floating rate notes
that mature in 2014 was an unrealized loss of $3.7 million.
8.
OTHER LIABILITIES
Other
liabilities as of December 31, 2008 and 2007, consist of the
following:
|
|
December
31,
|
|
|
December
31,
|
|
(In
thousands of U.S. dollars)
|
|
2008
|
|
|
2007
|
|
Asset
retirement obligations
|
|
$ |
14,028 |
|
|
$ |
11,614 |
|
Pension
benefit obligation
|
|
|
12,497 |
|
|
|
9,980 |
|
Deferred
income taxes
|
|
|
8,144 |
|
|
|
8,144 |
|
Derivatives
|
|
|
3,677 |
|
|
|
- |
|
Other,
primarily environmental obligations
|
|
|
1,805 |
|
|
|
4,002 |
|
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
$ |
40,151 |
|
|
$ |
33,740 |
|
9.
RETIREMENT PLANS
Defined
Benefit Plan
The
Company maintains a defined benefit pension plan that provides retirement
benefits to hourly employees in Jay, Bucksport and Sartell hired prior to July
1, 2004. These employees generally are eligible to participate in the
plan upon completion of one year of service and attainment of age
21. Employees hired after June 30, 2004, who are not eligible for
this pension plan receive an additional company contribution to their savings
plan (see “Other Plan”). The plan provides defined benefits based on
years of credited service times a specified flat dollar benefit
rate.
The
following table summarizes net periodic benefit cost for the years ended
December 31, 2008 and 2007:
|
|
Year
Ended
|
|
|
Year
Ended
|
|
|
|
December
31,
|
|
|
December
31,
|
|
(In
thousands of U.S. dollars)
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Components
of net periodic benefit cost:
|
|
|
|
|
|
|
Service
cost
|
|
$ |
5,976 |
|
|
$ |
5,278 |
|
Interest
cost
|
|
|
998 |
|
|
|
611 |
|
Expected
return on plan assets
|
|
|
(762 |
) |
|
|
(229 |
) |
Amortization
of prior service cost
|
|
|
871 |
|
|
|
785 |
|
|
|
|
|
|
|
|
|
|
Net
periodic benefit cost
|
|
$ |
7,083 |
|
|
$ |
6,445 |
|
The
following table provides detail on prior service cost and net actuarial gain
(loss) recognized in accumulated other comprehensive income at December 31, 2008
and 2007.
(In
thousands of U.S. dollars)
|
|
2008
|
|
|
2007
|
|
Amounts
recognized in accumulated other comprehensive income:
|
|
|
|
|
|
|
Prior
service cost
|
|
$ |
6,931 |
|
|
$ |
7,803 |
|
Net
actuarial (gain) loss
|
|
|
5,674 |
|
|
|
(27 |
) |
The
estimated net loss and prior service cost that will be amortized from
accumulated other comprehensive income into net periodic actuarial pension cost
during 2009 is $0.3 million and $0.9 million, respectively. We expect
no plan assets to be returned to the company in 2009.
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
contributions of $6.9 million in 2007, with $4.7 million attributable to the
2007 plan year and $2.2 attributable to the 2006 plan year. The
Company made contributions of $9.4 million in 2008, with $6.4 million
attributable to the 2008 plan year and $3.0 million attributable to the 2007
plan year. The Company made a contribution of $0.2 million in January
2009 attributable to the 2008 plan year. In 2009, the Company expects
to make an additional contribution of $1.0 million related to the 2008 plan year
and contributions of $5.8 million related to the 2009 plan year.
The
following table sets forth a reconciliation of the plan’s benefit obligation,
plan assets and funded status at December 31, 2008 and 2007:
|
|
Year
Ended
|
|
|
Year
Ended
|
|
|
|
December
31,
|
|
|
December
31,
|
|
(In
thousands of U.S. dollars)
|
|
2008
|
|
|
2007
|
|
Change
in Projected Benefit Obligation:
|
|
|
|
|
|
|
Benefit
obligation at beginning of period
|
|
$ |
16,708 |
|
|
$ |
10,351 |
|
Service
cost
|
|
|
5,976 |
|
|
|
5,278 |
|
Interest
cost
|
|
|
998 |
|
|
|
611 |
|
Plan
amendments
|
|
|
- |
|
|
|
846 |
|
Actuarial
(gain) loss
|
|
|
1,872 |
|
|
|
(341 |
) |
Benefits
paid
|
|
|
(101 |
) |
|
|
(37 |
) |
Benefit
obligation on December 31
|
|
$ |
25,453 |
|
|
$ |
16,708 |
|
|
|
|
|
|
|
|
|
|
Change
in Plan Assets:
|
|
|
|
|
|
|
|
|
Plan
assets at fair value, beginning of fiscal year
|
|
$ |
6,728 |
|
|
$ |
- |
|
Actual
net return on plan assets
|
|
|
(3,068 |
) |
|
|
(85 |
) |
Employer
contributions
|
|
|
9,397 |
|
|
|
6,850 |
|
Benefits
paid
|
|
|
(101 |
) |
|
|
(37 |
) |
Plan
assets at fair value, end of fiscal year
|
|
|
12,956 |
|
|
|
6,728 |
|
Unfunded
projected benefit obligation recognized on the
|
|
|
|
|
|
|
|
|
Consolidated
and Combined Balance Sheets as a long-term liability
|
|
$ |
(12,497 |
) |
|
$ |
(9,980 |
) |
The
accumulated benefit obligation at December 31, 2008 and 2007, is $25.5 million
and $16.7 million, respectively.
The
following table summarizes expected future pension benefit
payments:
(In
thousands of U.S. dollars)
|
|
|
|
2009
|
|
$ |
141 |
|
2010
|
|
|
287 |
|
2011
|
|
|
481 |
|
2012
|
|
|
713 |
|
2013
|
|
|
1,032 |
|
2014-2018
|
|
|
10,489 |
|
The
Company evaluates its actuarial assumptions annually as of December 31 (the
measurement date) and considers changes in these long-term factors based upon
market conditions and the requirements of SFAS No. 87, Employers’ Accounting for
Pensions. These assumptions are used to calculate benefit
obligations as of December 31 of the current year, and pension expense to be
recorded for the following year. The discount rate assumption
reflects the yield on a portfolio of high quality fixed-income instruments that
have a similar duration to the plan’s liabilities. The expected
long-term rate of return assumption reflects the average return expected on the
assets invested to provide for the plan’s liabilities.
The
actuarial assumptions used in the defined benefit pension plan were as
follows:
|
|
2008
|
|
|
2007
|
|
Weighted
average assumptions used to determine
|
|
|
|
|
|
|
benefit
obligations as of December 31 measurement date:
|
|
|
|
|
|
|
Discount
rate
|
|
|
6.00 |
% |
|
|
6.00 |
% |
Rate
of compensation increase
|
|
|
N/A |
|
|
|
N/A |
|
Weighted
average assumptions used to determine net
|
|
|
|
|
|
|
|
|
periodic
benefit cost for the fiscal year:
|
|
|
|
|
|
|
|
|
Discount
rate
|
|
|
6.00 |
% |
|
|
5.75 |
% |
Rate
of compensation increase
|
|
|
N/A |
|
|
|
N/A |
|
Expected
long-term return on plan assets
|
|
|
7.50 |
|
|
|
8.00 |
|
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 2009 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 provides the pension plan’s asset allocation on December 31,
2008:
|
|
Targeted
|
|
|
%
of Plan Assets on December 31
|
|
|
|
Allocation
|
|
|
2008
|
|
|
2007
|
|
Equity
Securities
|
|
|
|
|
|
|
|
|
|
Large
capital equity
|
|
|
26.4 |
% |
|
|
23.8 |
% |
|
|
25.5 |
% |
Small
capital equity
|
|
|
4.6 |
|
|
|
4.0 |
|
|
|
4.4 |
|
International
equity
|
|
|
17.0 |
|
|
|
15.1 |
|
|
|
17.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
Bond
fund
|
|
|
47.0 |
|
|
|
51.4 |
|
|
|
48.2 |
|
Fixed
income fund
|
|
|
5.0 |
|
|
|
5.6 |
|
|
|
4.9 |
|
Defined
Contribution Plan
The
Company sponsors a defined contribution plan to provide salaried and Quinnesec
hourly employees an opportunity to accumulate personal funds and to provide
additional benefits for retirement.
As
determined by the provisions of the plan, the Company contributes annually a
percentage of earnings. The percentage is based on age and years of
credited service for employees hired prior to July 1, 2004 and a fixed
percentage of earnings to employees hired after June 30,
2004. Expense under this plan was $6.9 million and $6.7 million for
the years ended December 31, 2008 and 2007, respectively, and was $2.3 million
for the five-month period ended December 31, 2006.
Other
Plan
The
Company sponsors a 401K 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. Such
contributions to the plans totaled approximately $8.4 million and $8.1 million
for the years ended December 31, 2008 and 2007, respectively, and $2.3 million
for the five months ended December 31, 2006.
10.
EQUITY AWARDS
Simultaneously
with the consummation of the IPO, the limited partnership agreement of Verso
Paper Corp.’s parent, Verso Paper Management LP, or the “Partnership,” was
amended to, among other things, change its equity structure from multiple
classes of units representing limited partner interests in the Partnership to a
single class of units representing such interests. The conversion
from the prior multiple-class unit structure, or the “Legacy Units,” to a new
single class of units in the Partnership was designed to correlate the equity
structure of the Partnership with the post-IPO equity structure of Verso Paper
Corp.
As part of
the amendment of the limited partnership agreement of the Partnership, the
Legacy Class C Units of the Partnership previously granted to certain members of
our management became vested immediately. Prior to the amendment, the
Legacy Class C Units were to vest only if certain performance targets were
met. As a result of the accelerated vesting of the Legacy Class C
Units, the Company recognized $10.8 million of additional equity compensation
expense.
Certain
members of the Company’s management have been granted Legacy Class B Units,
which vest over a five-year period at the rate of 20% per year on each
anniversary of the grant date. The Company’s directors have been
granted Legacy Class D Units, which were vested upon grant.
The fair
value of the restricted Legacy Class B Units granted to management and the
Legacy Class D Units granted to directors for the years ended December 31, 2008
and 2007, and for the five months ended December 31, 2006, was approximately
$0.1 million, $0.6 million and $1.4 million, respectively. A summary
of Legacy Class B Units activity for the year ended December 31, 2008, is
presented below:
|
|
Units
|
|
|
Weighted-
Average
Grant-
Date
Fair Value
|
|
Nonvested
at December 31, 2007
|
|
|
339,955 |
|
|
$ |
3.40 |
|
Vested
|
|
|
(84,343 |
) |
|
|
3.40 |
|
Nonvested
at December 31, 2008
|
|
|
255,612 |
|
|
$ |
3.40 |
|
Equity
award expense for the year ended December 31, 2008, was $11.2 million, which
includes the $10.8 million related to the vesting of the Legacy Class C
Units. Equity award expense was $0.6 million for the year ended
December 31, 2007 and was $0.4 million for the five months ended December 31,
2006. As of December 31, 2008, there was approximately $0.7 million
of unrecognized compensation cost related to unvested Legacy Class B Units. This
cost is expected to be recognized over a weighted-average period of
approximately 2.6 years.
The
Company estimates the fair value of management equity awards using the
Black-Scholes valuation model. Key input assumptions applied under
the Black-Scholes option pricing model for the Legacy Class B Units and the
Legacy Class D Units were as follows: expected term of five years
based on the vesting period, volatility rate of 36.65% based on industry
historical volatility rate, no expected dividends and average risk free rates of
3.0% in 2008, 4.2% to 4.7% in 2007.
Assumptions
applied under the Black-Scholes option pricing model for the Legacy Class C
Units were as follows: expected term of one year based on the lock-up
period following the IPO, volatility rate of 36.65% based on industry historical
volatility rate, expected dividend rate of 1%, and average risk free rate of
2.0%.
Additionally,
the 2008 Stock Incentive Award Plan, which authorized the issuance of up to
4,250,000 shares of common stock of Verso Paper Corp., allows stock awards to be
granted to non-employee directors upon approval by the board of
directors. During November 2008, the Company granted a director, upon
his election to the board, 15,200 options which were immediately vested with a
contractual life of 10 years and an exercise price of $1.43. The
Company used the Black-Scholes valuation model to estimate a grant date fair
value per option of $0.47 for this stock option award. Key input
assumptions applied under the Black-Scholes option pricing model were as
follows: expected term of five years, volatility rate of 31.82% based
on industry historical volatility rate, no expected dividends and an average
risk free rate of 2.58%.
11.
BUCKSPORT ENERGY ASSET INVESTMENT
The
Company, through its Verso Bucksport LLC subsidiary, 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 by the two parties and is located in Bucksport, Maine. Each
owner, Verso Bucksport LLC and Bucksport Energy LLC, owns its proportional share
of the assets. The Company accounts for this investment under the
proportional consolidation method. The plant supports the Bucksport
mill. The mill owns 28% of the steam and electricity produced by the
plant. The mill may purchase its remaining electrical needs from the plant at
market rates. The mill is obligated to purchase the remaining 72% of
the steam output 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 Bucksport mill has cash which is
restricted in its use and may be used only to fund the ongoing energy operations
of this investment. Approximately $0.2 million of restricted cash is
included in other assets on the balance sheet at December 31, 2008 and
2007. Balances included in the balance sheet at December 31, 2008 and
2007, related to this investment are as follows:
|
|
December
31,
|
|
|
December
31,
|
|
(In
thousands of U.S. dollars)
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Other
receivables
|
|
$ |
99 |
|
|
$ |
61 |
|
Other
current assets
|
|
|
158 |
|
|
|
256 |
|
Total
current assets
|
|
$ |
257 |
|
|
$ |
317 |
|
Property,
plant and equipment
|
|
$ |
10,699 |
|
|
$ |
10,301 |
|
Accumulated
depreciation
|
|
|
(1,385 |
) |
|
|
(807 |
) |
Net
property, plant and equipment
|
|
$ |
9,314 |
|
|
$ |
9,494 |
|
Current
liabilities
|
|
$ |
(84 |
) |
|
$ |
(84 |
) |
12.
DERIVATIVE INSTRUMENTS AND HEDGES
In the
normal course of business, the Company utilizes derivatives contracts as part of
its 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. 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 SFAS No. 133,
Accounting for Derivative
Instruments and Hedging Activities, 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 and combined 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. Effective November 1, 2007, the
Company designated its energy hedging relationships as cash flow hedges under
SFAS No. 133. For the period of time these hedge relationships were
not designated under SFAS No. 133, the swaps were measured at fair value with
gains or losses included in current earnings. Subsequent to
designation, net gains or losses attributable to effective hedging are recorded
in accumulated other comprehensive income, and the ineffective portion continues
to be recognized in cost of products sold. As of December 31, 2008,
certain commodity swaps hedging anticipated natural gas purchases for January
and February 2009 were de-designated due to modifications in management’s
expected usage. As of December 31, 2008, these swaps were measured at
fair value with unrealized losses of $1.0 million included in current
earnings.
In
addition to the hedges designated under SFAS No. 133, the Company has entered
into short-term energy swaps for the purpose of creating an economic hedge
designed to mitigate the risk of changes in commodity prices for future energy
purchase and sale commitments. Net realized gains of $1.8 million
from derivative contracts not designated as SFAS No. 133 hedges have been
recognized in cost of products sold in 2008.
Net
settlements on hedges increased cost of products sold by $3.9 million in 2008
compared to $2.8 million in 2007. On December 31, 2008, the balance
sheet impact of these swaps was a derivative liability of $26.9 million compared
to a derivative liability of $1.4 million on December 31,
2007. Unrealized losses representing the ineffective portion of these
hedges recognized in cost of products sold were negligible in
2008. Net unrealized gains of $0.7 million were recognized in cost of
products sold in 2007. Net losses of $29.7 million related to the
effective portion of SFAS No. 133 hedges were recorded in accumulated other
comprehensive income on December 31, 2008, and are expected to be reclassified
into cost of products sold in the period in which the hedged cash flows affect
earnings. Assuming no change in open hedge positions, the net losses
are expected to be reclassified into earnings through December
2009. Net losses related to the effective portion of SFAS No. 133
hedges recorded in accumulated other comprehensive income on December 31, 2007,
were $2.1 million.
In
February 2008, the Company entered into a $250 million notional value
receive-variable, pay-fixed interest rate swap in connection with the Company’s
outstanding floating rate notes that mature in 2014. The notes pay
interest quarterly based on a three-month LIBOR. The Company is
hedging the cash flow exposure on its quarterly variable-rate interest payments
due to changes in the benchmark interest rate (three-month LIBOR). On
December 31, 2008, the fair value of this swap was an unrealized loss of $3.7
million. Net losses of $3.9 million were recorded in accumulated
other comprehensive income on December 31, 2008, and are expected to be
reclassified into interest expense in the period in which the hedged cash flows
affect earnings. Net gains reclassified from other comprehensive
income decreased interest expense by $0.5 million in 2008. Net losses
of approximately $3.5 million are expected to be reclassified from accumulated
other comprehensive income into earnings within the next 12 months.
13.
FAIR VALUE OF FINANCIAL INSTRUMENTS
In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements,
which defines fair value, establishes a framework for measuring fair value, and
expands disclosures about fair value measurements. The Company
adopted SFAS No. 157 as it relates to financial assets and liabilities as of
January 1, 2008. The FASB deferred the effective date of SFAS No. 157
as it relates to fair value measurement for nonfinancial assets and liabilities
that are not remeasured at fair value on a recurring basis to years beginning
after November 15, 2008. The adoption of the initial provisions of
SFAS No. 157 did not have a material impact on the Company’s 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.
|
As of
December 31, 2008, the fair values of our financial assets and liabilities are
categorized as follows:
(In
thousands of U.S. dollars)
|
|
Total
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
compensation assets (a)
|
|
$ |
177 |
|
|
$ |
177 |
|
|
$ |
- |
|
|
$ |
- |
|
Regional
Greenhouse Gas Initiative carbon credits (a)
|
|
|
230 |
|
|
|
- |
|
|
|
230 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets at fair value on December 31, 2008
|
|
$ |
407 |
|
|
$ |
177 |
|
|
$ |
230 |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity
swaps (a)
|
|
$ |
26,878 |
|
|
$ |
- |
|
|
$ |
26,878 |
|
|
$ |
- |
|
Interest
rate swaps (b)
|
|
|
3,677 |
|
|
|
- |
|
|
|
3,677 |
|
|
|
- |
|
Deferred
compensation liabilities (a)
|
|
|
177 |
|
|
|
177 |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities at fair value on December 31, 2008
|
|
$ |
30,732 |
|
|
$ |
177 |
|
|
$ |
30,555 |
|
|
$ |
- |
|
(a)
Based on observable market data.
|
(b)
Based on observable inputs for the liability (interest rates and yield
curves observable at specific
intervals).
|
14.
RELATED PARTY TRANSACTIONS
In
conjunction with the Acquisition, the Company entered into a transition service
agreement with International Paper whereby International Paper agreed to
continue to provide certain services specified in the agreement that are
necessary for the Company to run as a stand-alone business. The
charges for the years ended December 31, 2008 and 2007, were $0.2 million and
$5.6 million, respectively. As of September 30, 2007, the Company
substantially discontinued the use of services under this
agreement.
The
Company had net sales to International Paper of approximately $165.8 million and
$191.4 million for the years ended December 31, 2008 and 2007, respectively, and
sales of $71.5 million for the five months ended December 31,
2006. The Company had purchases included in cost of products sold
from International Paper of approximately $7.2 million and $11.7 million for the
years ended December 31, 2008 and 2007, respectively, and purchases of $2.5
million for the five months ended December 31, 2006.
Subsequent
to the Acquisition, the Company entered into a management agreement with Apollo
relating to the provision of certain financial and strategic advisory services
and consulting services. Management fees to Apollo for these services
were $2.8 million for the year ended December 31, 2007. Upon
consummation of the IPO, Apollo terminated the annual fee arrangement under the
management agreement for its consulting and advisory services, in exchange for a
one-time payment of $23.1 million corresponding to the present value of all
future annual fee payments pursuant to the terms of the management
agreement. Although the annual fee arrangement was terminated in
connection with the IPO, the management agreement remains in effect and will
expire upon August 1, 2018. Under the management agreement, at
any time prior to the expiration of the agreement, Apollo has the right to act,
in return for additional fees to be mutually agreed by the parties to the
management agreement, as the Company's financial advisor or investment
banker for any merger, acquisition, disposition, financing or the like,
if the Company decides that it needs to engage someone to fill such a
role. In the event the Company is not able to come to an
agreement with Apollo in connection with such role, at the closing of any
merger, acquisition, disposition or financing or any similar transaction, the
Company has agreed to pay Apollo a fee equal to 1% of the aggregate enterprise
value (including the aggregate value of equity securities, warrants,
rights and options acquired or retained; indebtedness acquired, assumed or
refinanced; and any other consideration or compensation paid in connection with
such transaction). The Company agreed to indemnify Apollo and its
affiliates and their directors, officers and representatives for losses relating
to the services contemplated by the management agreement and the engagement of
affiliates of Apollo pursuant to, and the performance by them of the services
contemplated by, the management agreement.
On August
1, 2006, Verso Fiber Farm LLC, a wholly-owned subsidiary, entered into
senior secured credit facilities consisting of a $10 million term loan and a $5
million revolving credit facility, each with a maturity of four
years. In May 2008, the Company used a portion of the net proceeds
from the IPO to repay the $10 million outstanding principal of the term loan and
the $4.1 million outstanding principal under the revolving credit
facility. As of December 31, 2008, no debt was outstanding under the
senior secured credit facilities.
On January
31, 2007, Verso Finance, a wholly-owned subsidiary, entered into a $250
million senior unsecured floating-rate term loan facility with a maturity of six
years. The net proceeds from the term loan were distributed to the
equity holders of Verso Paper Management LP. In May 2008, the Company
used a portion of the net proceeds from the IPO to repay $138 million of the
outstanding principal of the term loan and to pay a related $1.4 million
prepayment penalty. As of December 31, 2008, $112 million was
outstanding on the term loan. 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 and added to the principal balance. The interest rate
in effect on December 31, 2008, was 10.0%. The term loan allows Verso
Finance to pay interest either in cash or in-kind through the accumulation of
the outstanding principal amount. On December 10, 2008, Verso Finance
elected to exercise the PIK option for the interest payment pertaining to the
90-day interest period ending January 2, 2009. Verso Finance has no
independent operations; consequently, all cash flows used to service the
remaining debt obligation will need to be received via a distribution from Verso
Holdings. Verso Holdings paid distributions to Verso Finance of $17.3
million in 2008 and $22.1 million in 2007. Verso Holdings has no
obligation to make distributions to Verso Finance.
15.
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 costs of a transition service agreement with
International Paper, technology migration costs, consulting and legal fees, and
other one-time costs related to becoming a stand-alone business. The
charges for the year ended December 31, 2008, were $27.4 million, which included
a one-time payment of $23.1 million to terminate the annual fee arrangement
under the management agreement with Apollo, and $0.2 million of transition
service agreement costs. The charges for the year ended December 31,
2007, were $19.4 million, which included $5.6 million of transition service
agreement costs and $2.8 million of charges under the management
agreement. The charges for the five months ended December 31, 2006,
were $10.1 million which included $6.1 million of transition service agreement
costs. As of September 30, 2007, the Company substantially
discontinued the use of services under this agreement.
16.
INCOME TAXES
The
following is a summary of the components of the provision (benefit) for income
taxes:
|
|
Year
Ended
|
|
|
Year
Ended
|
|
|
|
December
31,
|
|
|
December
31,
|
|
(In
thousands of U.S. dollars)
|
|
2008
|
|
|
2007
|
|
Current
tax provision (benefit):
|
|
|
|
|
|
|
U.S.
federal
|
|
$ |
- |
|
|
$ |
- |
|
U.S.
state and local
|
|
|
- |
|
|
|
- |
|
|
|
|
- |
|
|
|
- |
|
Deferred
tax provision (benefit):
|
|
|
|
|
|
|
|
|
U.S.
federal
|
|
|
(15,617 |
) |
|
|
(34,068 |
) |
U.S.
state and local
|
|
|
(2,970 |
) |
|
|
(6,428 |
) |
Total
Current Liabilities
|
|
|
(18,587 |
) |
|
|
(40,496 |
) |
Valuation
allowance
|
|
|
18,587 |
|
|
|
40,496 |
|
Income
tax provision
|
|
$ |
- |
|
|
$ |
- |
|
A
reconciliation of income tax expense using the statutory federal income tax rate
compared with actual income tax expense follows:
|
|
Year
Ended
|
|
|
Year
Ended
|
|
|
|
December
31,
|
|
|
December
31,
|
|
(In
thousands of U.S. dollars)
|
|
2008
|
|
|
2007
|
|
Ended
Tax at Statutory U.S. Rate of 34%
|
|
$ |
(21,361 |
) |
|
$ |
(37,897 |
) |
Increase
(decrease) resulting from:
|
|
|
|
|
|
|
|
|
Equity
award expense
|
|
|
3,808 |
|
|
|
- |
|
Disallowed
interest
|
|
|
730 |
|
|
|
1,479 |
|
Meals
and entertainment
|
|
|
171 |
|
|
|
152 |
|
Nondeductible
lobbying expenses
|
|
|
23 |
|
|
|
30 |
|
Other
|
|
|
2 |
|
|
|
(18 |
) |
Net
permanent differences
|
|
|
4,734 |
|
|
|
1,643 |
|
State
income taxes (benefit)
|
|
|
(1,960 |
) |
|
|
(4,242 |
) |
Valuation
allowance
|
|
|
18,587 |
|
|
|
40,496 |
|
Total
income tax provision
|
|
$ |
- |
|
|
$ |
- |
|
The
following is a summary of the significant components of our deferred tax
position:
|
|
December
31,
|
|
|
December
31,
|
|
(In
thousands of U.S. dollars)
|
|
2008
|
|
|
2007
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
Net
operating loss and credit carryforwards
|
|
$ |
156,872 |
|
|
$ |
95,986 |
|
Unrealized
hedge losses
|
|
|
9,182 |
|
|
|
794 |
|
Pension
|
|
|
4,780 |
|
|
|
2,949 |
|
Compensation
reserves
|
|
|
2,031 |
|
|
|
1,175 |
|
Inventory
reserves
|
|
|
2,045 |
|
|
|
- |
|
Inventory
capitalization
|
|
|
1,841 |
|
|
|
1,018 |
|
Payment-in-kind
interest
|
|
|
1,099 |
|
|
|
- |
|
Other
|
|
|
1,565 |
|
|
|
810 |
|
Gross
deferred tax assets
|
|
|
179,415 |
|
|
|
102,732 |
|
Less:
valuation allowance
|
|
|
(84,881 |
) |
|
|
(54,450 |
) |
Deferred
tax assets, net of allowance
|
|
$ |
94,534 |
|
|
$ |
48,282 |
|
|
|
|
|
|
|
|
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
|
Property,
plant, and equipment
|
|
$ |
(86,650 |
) |
|
$ |
(40,436 |
) |
Intangible
assets
|
|
|
(12,273 |
) |
|
|
(12,868 |
) |
Deferred
repair charges
|
|
|
(3,619 |
) |
|
|
(2,021 |
) |
Prepaid
expenses
|
|
|
(136 |
) |
|
|
(825 |
) |
Other
|
|
|
- |
|
|
|
(276 |
) |
Total
deferred tax liabilities
|
|
|
(102,678 |
) |
|
|
(56,426 |
) |
Net
deferred taxes
|
|
$ |
(8,144 |
) |
|
$ |
(8,144 |
) |
The
valuation allowance for deferred tax assets as of December 31, 2008 and
2007 was $84.9 million and $54.4 million, respectively. The change in
the valuation allowance of $30.5 million relates to the increase in net deferred
tax assets for federal income taxes and for some states, since it is more likely
than not that we will not recognize those benefits as defined in SFAS No.
109.
Income tax
benefits related to the pension prior service liability have been credited to
other comprehensive income. The benefits have been reduced by a valuation
allowance of $4.8 million. Income tax benefits related to hedging
activity have been credited to other comprehensive income, and the benefits have
been reduced by a valuation allowance of $11.3 million.
The Company adopted the
provisions of FIN 48 on January 1, 2007. The Company's policy is to record
interest paid with respect to income taxes as interest expense or interest
income, respectively, in the consolidated statements of
operations.
The
ultimate realization of deferred tax assets is dependent upon the generation of
future taxable income during the periods in which those temporary differences
become deductible. Based upon our current period loss and our lack of
historical earnings, management believes it is more likely than not that the
Company will not realize the benefits of those deductible
differences.
The
Company has federal net operating loss carryforwards totaling approximately
$413.3 million on December 31, 2008, which begin to expire in
2026.
The
Company has state net operating loss carryforwards totaling approximately $306.0
million on December 31, 2008, which begin to expire in 2011.
The Company is subject to
various federal, state, and local income tax audits for the tax years ended
December 31, 2006 through 2008. As of the current date there are no active
examinations.
17.
COMMITMENTS AND CONTINGENCIES
Operating
Leases—The Company has entered into operating lease agreements, which
expire at various dates through 2013, related to certain machinery and equipment
used in its manufacturing process. Rental expense under operating
leases amounted to $6.6 million and $6.1 million for the years ended December
31, 2008 and 2007, respectively, and $2.3 million for the five months ended
December 31, 2006.
The
following, as of December 31, 2008, represents the future minimum rental
payments due under non-cancelable operating leases that have initial or
remaining lease terms in excess of one year:
(In
thousands of U.S. dollars)
|
|
|
|
2009
|
|
$ |
5,555 |
|
2010
|
|
|
3,189 |
|
2011
|
|
|
2,052 |
|
2012
|
|
|
1,366 |
|
2013
|
|
|
576 |
|
Thereafter
|
|
|
2,039 |
|
|
|
|
|
|
Total
|
|
$ |
14,777 |
|
Purchase
obligations—The Company has entered into unconditional purchase
obligations in the ordinary course of business for the purchase of certain raw
materials, energy, and services. At December 31, 2008, total
unconditional purchase obligations were $931.5 million, due as follows:
2009–$149.9 million; 2010–$93.7 million; 2011–$93.5 million;
2012–$93.9 million; 2013– $93.5; and thereafter–$407.0
million.
Employee
Severance Plan—Under the employee severance plan, each of our named
executive officers is eligible to receive a termination allowance in the event
of a termination of employment due to certain events, including the executive’s
job elimination, a facility closing, the executive’s disability, or the
executive’s inability to perform the requisite duties of his position despite
his reasonable efforts.
The
termination allowance is a lump sum amount equal to a factor based on the number
of years or partial years of applicable service with the company, multiplied by
the amount of two weeks of base salary. The termination allowance may
not be less than the amount of four weeks of base salary. In addition
to the termination allowance under the Verso Paper Employee Severance Plan, it
is our practice to provide a pro rata amount of annual VIP bonus compensation
that would have otherwise been paid to the executive officer if employment had
continued through the end of the applicable calendar year.
Contingencies—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 our
financial statements.
On August
6, 2008, the Company filed a declaratory judgment suit in the United States
District Court for the Eastern District of Wisconsin against NewPage Corporation
and NewPage Wisconsin System Inc., in response to a patent infringement claim
asserted by NewPage regarding certain of the Company’s coated paper
products. The action sought a declaration that the Company’s coated
paper products do not infringe the NewPage patent and that the NewPage patent is
invalid. On January 29, 2009, the action was voluntarily dismissed
with prejudice pursuant to a settlement agreement between the
parties. As part of the settlement, NewPage granted the
Company an irrevocable, perpetual, non-exclusive, worldwide, royalty-free,
and fully paid-up right and license for any and all purposes under the NewPage
patent and any continuation, division, reissue or non-U.S. counterpart of the
patent.
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 No. 5 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.
18.
INFORMATION BY INDUSTRY SEGMENT
The
Company operates in three operating segments: coated and supercalendered papers;
hardwood market pulp; and other, consisting of specialty industrial
paper. 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 supercalendared
papers. These products serve customers in the catalog, magazine,
inserts, and commercial print markets.
The
following table summarizes the industry segments for the years ended December
31, 2008 and 2007 and the five months ended December 31, 2006:
|
|
Year
|
|
|
Year
|
|
|
Five
Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
|
December
31,
|
|
|
December
31,
|
|
|
December
31,
|
|
(In
thousands of U.S. dollars)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Net
Sales:
|
|
|
|
|
|
|
|
|
|
Coated
and supercalendered
|
|
$ |
1,575,005 |
|
|
$ |
1,443,170 |
|
|
$ |
631,897 |
|
Hardwood
market pulp
|
|
|
146,443 |
|
|
|
148,007 |
|
|
|
58,405 |
|
Other
|
|
|
45,365 |
|
|
|
37,576 |
|
|
|
16,531 |
|
Total
|
|
$ |
1,766,813 |
|
|
$ |
1,628,753 |
|
|
$ |
706,833 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Income (Loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Coated
and supercalendered
|
|
$ |
36,885 |
|
|
$ |
(1,504 |
) |
|
$ |
35,319 |
|
Hardwood
market pulp
|
|
|
29,931 |
|
|
|
35,808 |
|
|
|
10,475 |
|
Other
|
|
|
(4,790 |
) |
|
|
(4,335 |
) |
|
|
(1,093 |
) |
Total
|
|
$ |
62,026 |
|
|
$ |
29,969 |
|
|
$ |
44,701 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and Amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
Coated
and supercalendered
|
|
$ |
112,928 |
|
|
$ |
102,161 |
|
|
$ |
39,894 |
|
Hardwood
market pulp
|
|
|
18,385 |
|
|
|
18,278 |
|
|
|
7,527 |
|
Other
|
|
|
3,145 |
|
|
|
2,778 |
|
|
|
909 |
|
Total
|
|
$ |
134,458 |
|
|
$ |
123,217 |
|
|
$ |
48,330 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
Spending:
|
|
|
|
|
|
|
|
|
|
|
|
|
Coated
and supercalendered
|
|
$ |
69,029 |
|
|
$ |
65,179 |
|
|
$ |
26,243 |
|
Hardwood
market pulp
|
|
|
8,604 |
|
|
|
2,649 |
|
|
|
814 |
|
Other
|
|
|
3,753 |
|
|
|
3,036 |
|
|
|
733 |
|
Total
|
|
$ |
81,386 |
|
|
$ |
70,864 |
|
|
$ |
27,790 |
|
19.
QUARTERLY DATA
Our
quarterly financial data (unaudited) is as follows:
|
|
2008
|
|
(In
millions of U.S. dollars
|
|
YTD
|
|
|
Fourth
|
|
|
YTD
|
|
|
Third
|
|
|
YTD
|
|
|
Second
|
|
|
First
|
|
except
per share data)
|
|
31-Dec
|
|
|
Quarter
|
|
|
30-Sep
|
|
|
Quarter
|
|
|
30-Jun
|
|
|
Quarter
|
|
|
Quarter
|
|
Summary
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
1,766.8 |
|
|
$ |
375.9 |
|
|
$ |
1,390.9 |
|
|
$ |
485.4 |
|
|
$ |
905.5 |
|
|
$ |
451.6 |
|
|
$ |
453.9 |
|
Gross
margin (1) |
|
|
303.6 |
|
|
|
51.3 |
|
|
|
252.3 |
|
|
|
99.4 |
|
|
|
152.9 |
|
|
|
74.4 |
|
|
|
78.5 |
|
Cost
of products sold
|
|
|
1,597.7 |
|
|
|
358.4 |
|
|
|
1,239.3 |
|
|
|
419.8 |
|
|
|
819.5 |
|
|
|
411.9 |
|
|
|
407.6 |
|
Selling,
general and administrative expenses
|
|
|
79.7 |
|
|
|
20.9 |
|
|
|
58.8 |
|
|
|
18.3 |
|
|
|
40.5 |
|
|
|
26.3 |
|
|
|
14.2 |
|
Restructuring
and other charges
|
|
|
27.4 |
|
|
|
0.9 |
|
|
|
26.5 |
|
|
|
1.1 |
|
|
|
25.4 |
|
|
|
23.7 |
|
|
|
1.7 |
|
Interest
income
|
|
|
(0.8 |
) |
|
|
(0.3 |
) |
|
|
(0.5 |
) |
|
|
(0.2 |
) |
|
|
(0.3 |
) |
|
|
(0.1 |
) |
|
|
(0.2 |
) |
Interest
expense
|
|
|
125.6 |
|
|
|
29.6 |
|
|
|
96.0 |
|
|
|
27.8 |
|
|
|
68.2 |
|
|
|
34.5 |
|
|
|
33.7 |
|
Net
income (loss)
|
|
|
(62.8 |
) |
|
|
(33.6 |
) |
|
|
(29.2 |
) |
|
|
18.6 |
|
|
|
(47.8 |
) |
|
|
(44.7 |
) |
|
|
(3.1 |
) |
Share
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per share (2)
|
|
$ |
(1.35 |
) |
|
$ |
(0.64 |
) |
|
$ |
(0.65 |
) |
|
$ |
0.36 |
|
|
$ |
(1.16 |
) |
|
$ |
(1.00 |
) |
|
$ |
(0.08 |
) |
Weighted
average common shares outstanding
-
basic and diluted (thousands)
|
|
|
46,691 |
|
|
|
52,047 |
|
|
|
44,893 |
|
|
|
52,047 |
|
|
|
41,277 |
|
|
|
44,508 |
|
|
|
38,407 |
|
Dividends
declared per share
|
|
$ |
0.06 |
|
|
$ |
0.03 |
|
|
$ |
0.03 |
|
|
$ |
0.03 |
|
|
$ |
- |
|
|
$ |
- |
|
|
|
n/a |
|
Closing
price per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
$ |
10.80 |
|
|
$ |
2.24 |
|
|
$ |
10.80 |
|
|
$ |
7.84 |
|
|
$ |
10.80 |
|
|
$ |
10.80 |
|
|
|
n/a |
|
Low
|
|
|
0.93 |
|
|
|
0.93 |
|
|
|
2.46 |
|
|
|
2.46 |
|
|
|
8.00 |
|
|
|
8.00 |
|
|
|
n/a |
|
Period-end
|
|
|
1.03 |
|
|
|
1.03 |
|
|
|
2.64 |
|
|
|
2.64 |
|
|
|
8.46 |
|
|
|
8.46 |
|
|
|
n/a |
|
(1)
Gross margin represents net sales less cost of products sold, excluding
depreciation, amortization, and depletion. |
(2)
During preparation of the Company's consolidated financial statements for
the year ended December 31, 2008, management determined that there were
errors in its previously reported loss per common share and weighted
average common shares outstanding for the three-month and six-month
periods ended June 30, 2008, and for the nine months ended September 30,
2008, resulting from its inadvertant use of the number of common shares
outstanding at the end of the period in computing loss per share rather
than the actual weighted average common shares outstanding for these
periods. As a result, loss per share and weighted average
shares reported above have been restated from amounts previously reported
to correct these errors. The restatement has no other effects
to the Company's consolidated financial statements. The
restatement had the following
effects:
|
|
|
As
Previously
|
|
|
|
|
|
|
Reported
|
|
|
As
Restated
|
|
Three
months ended June 30, 2008
|
|
|
|
|
|
|
Loss
per common share
|
|
$ |
(0.86 |
) |
|
$ |
(1.00 |
) |
Weighted
average common shares outstanding (thousands)
|
|
|
52,047 |
|
|
|
44,508 |
|
|
|
|
|
|
|
|
|
|
Six
months ended June 30, 2008
|
|
|
|
|
|
|
|
|
Loss
per common share
|
|
$ |
(0.92 |
) |
|
$ |
(1.16 |
) |
Weighted
average common shares outstanding (thousands)
|
|
|
52,047 |
|
|
|
41,277 |
|
|
|
|
|
|
|
|
|
|
Nine
months ended September 30, 2008
|
|
|
|
|
|
|
|
|
Loss
per common share
|
|
$ |
(0.56 |
) |
|
$ |
(0.65 |
) |
Weighted
average common shares outstanding (thousands)
|
|
|
52,047 |
|
|
|
44,893 |
|
|
|
|
|
|
|
2007
|
|
|
|
YTD
|
|
|
Fourth
|
|
|
YTD
|
|
|
Third
|
|
|
YTD
|
|
|
Second
|
|
|
First
|
|
|
|
31-Dec
|
|
|
Quarter
|
|
|
30-Sep
|
|
|
Quarter
|
|
|
30-Jun
|
|
|
Quarter
|
|
|
Quarter
|
|
Summary
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
1,628.8 |
|
|
$ |
445.8 |
|
|
$ |
1,183.0 |
|
|
$ |
450.6 |
|
|
$ |
732.4 |
|
|
$ |
372.6 |
|
|
$ |
359.8 |
|
Gross
margin (1) |
|
|
225.8 |
|
|
|
78.7 |
|
|
|
147.1 |
|
|
|
63.9 |
|
|
|
83.2 |
|
|
|
39.7 |
|
|
|
43.5 |
|
Cost
of products sold
|
|
|
1,526.2 |
|
|
|
399.6 |
|
|
|
1,126.6 |
|
|
|
417.8 |
|
|
|
708.8 |
|
|
|
362.9 |
|
|
|
345.9 |
|
Selling,
general and administrative expenses
|
|
|
53.2 |
|
|
|
15.2 |
|
|
|
38.0 |
|
|
|
18.1 |
|
|
|
19.9 |
|
|
|
8.7 |
|
|
|
11.2 |
|
Restructuring
and other charges
|
|
|
19.4 |
|
|
|
2.9 |
|
|
|
16.5 |
|
|
|
4.2 |
|
|
|
12.3 |
|
|
|
7.0 |
|
|
|
5.3 |
|
Interest
income
|
|
|
(1.5 |
) |
|
|
(0.2 |
) |
|
|
(1.3 |
) |
|
|
(0.2 |
) |
|
|
(1.1 |
) |
|
|
(0.2 |
) |
|
|
(0.9 |
) |
Interest
expense
|
|
|
143.0 |
|
|
|
36.4 |
|
|
|
106.6 |
|
|
|
36.5 |
|
|
|
70.1 |
|
|
|
36.4 |
|
|
|
33.7 |
|
Net
income (loss)
|
|
|
(111.5 |
) |
|
|
(8.1 |
) |
|
|
(103.4 |
) |
|
|
(25.8 |
) |
|
|
(77.6 |
) |
|
|
(42.2 |
) |
|
|
(35.4 |
) |
Share
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per share
|
|
$ |
(2.93 |
) |
|
$ |
(0.21 |
) |
|
$ |
(2.72 |
) |
|
$ |
(0.68 |
) |
|
$ |
(2.04 |
) |
|
$ |
(1.11 |
) |
|
$ |
(0.93 |
) |
Weighted
average shares (thousands)
|
|
|
38,047 |
|
|
|
38,047 |
|
|
|
38,047 |
|
|
|
38,047 |
|
|
|
38,047 |
|
|
|
38,047 |
|
|
|
38,047 |
|
(1)
Gross margin represents net sales less cost of products sold, excluding
depreciation, amortization, and depletion.
20.
SUBSEQUENT EVENT
The
Company burns alternative fuel mixtures at its Androscoggin and Quinnesec mills
in order to produce renewable energy and help manage the Company’s exposure to
high energy costs. The federal government has implemented a program
that provides incentive payments under certain circumstances for the use of
alternative fuels and alternative fuel mixtures in lieu of fossil-based
fuels. In the fourth quarter of 2008, the Company filed applications
with the Internal Revenue Service for certification of its eligibility to
receive incentive payments for its use of black liquor in alternative fuel
mixtures in the recovery boilers at the Androscoggin and Quinnesec
mills. In January and February 2009, the IRS certified that the
Company’s operations at the two mills qualified for the incentive
payments. In February 2009, the Company received an incentive payment
of $29.7 million for operations at the Androscoggin mill in the fourth quarter
of 2008. The Company’s claim for a similar incentive payment for
operations at the Quinnesec mill in the fourth quarter of 2008 is
expected during March 2009. The federal regulations relating to the
alternative fuels mixture incentive program are complex, and further
clarification is needed by the Company prior to the recognition of any payment
received for financial reporting purposes.
The
Company will continue to evaluate its opportunities for burning alternative fuel
mixtures to produce energy at its mills. Depending on the quantity of
alternative fuel mixtures burned, the federal incentive payments that may be
received by the Company could be material. At the same time, there
can be no assurance that the federal incentive program for alternative fuel
mixtures will continue in effect, that its provisions will not be changed in a
manner that impacts the Company, that the Company’s operations will remain
qualified to receive the incentive payments, or that the Company’s claims for
the incentive payments will be approved and paid.
COATED
AND SUPERCALENDERED PAPERS DIVISION OF INTERNATIONAL PAPER COMPANY
(PREDECESSOR)
Notes
to Combined Financial Statements for the Seven-Month Period Ended July 31,
2006
1.
BASIS OF PRESENTATION
The
accompanying combined financial statements for the seven-month period ended
July 31,2006, have been prepared from the separate records maintained by the
Coated and Supercalendered Papers Division and International Paper Company
(IPCO) and include allocations of certain IPCO corporate costs and
expenses. In accordance with SFAS No. 57, Related Party Disclosures,
related party transactions cannot be presumed to be carried out on an
arm’s-length basis as the requisite conditions of competitive, free-market
dealing may not exist. These combined financial statements may not
necessarily be indicative of the results of operations that would have resulted
had the Division been operated as an unaffiliated company.
The Coated
and Supercalendered Papers Division of International Paper Company, the
“Predecessor” or the “Division,” operated in three operating segments: coated
and supercalendered papers; hardwood market pulp; and other, consisting of
uncoated copy paper and specialty industrial paper. The Division’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
Division included mills and related woodyards in Bucksport and Jay, Maine;
Quinnesec, Michigan; and Sartell, Minnesota. The Division also
included investments in two energy producing assets located at the Bucksport and
Jay, Maine, facilities.
During the
periods presented, the Division was under the control of International Paper
Company. The operating results and financial position of the Division
were impacted by the nature of this relationship (see Note 4).
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of
Estimates—The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting periods. Actual results
could differ from these estimates.
Revenue
Recognition—Sales are reported net of rebates, allowances and
discounts. Revenue is recognized when the customer takes title and
assumes the risks and rewards of ownership. Revenue is recorded at
the time of shipment for terms designated f.o.b. (free on board) shipping
point. For sales transactions designated f.o.b. destination, which
include export sales, revenue is recorded when the product is delivered to the
customer’s site and when title and risk of loss are transferred.
Shipping and
Handling Costs—Shipping and handling costs, such as freight to customer
destinations, are included in cost of products sold in the accompanying combined
statement of operations. These costs, when included in the sales
price charged for the Division’s products, are recognized in net
sales.
Annual
Maintenance Costs—Annual maintenance costs for major planned maintenance
shutdowns in excess of $1.0 million is expensed ratably over the year in
which the maintenance shutdowns occur as operations benefit throughout the year
from the maintenance work performed. These costs, including
manufacturing variances and out-of-pocket costs that are directly related to the
shutdown, are fully expensed in the year of the shutdown with no amounts
remaining accrued at year-end. Other maintenance costs are expensed
as incurred.
Affiliate
Transactions—All intradivision transactions have been eliminated (see
Note 4).
Property, Plant
and Equipment—Depreciation and amortization on Property, plant and
equipment is computed using the units-of-production method for paper machines
and related equipment and the straight-line method for all other assets over the
assets’ estimated useful lives. The useful life of machinery and
equipment is not expected to differ significantly between the
units-of-production method and the straight-line method. Estimated
useful lives were as follows:
|
Years
|
Building
|
20 -
40
|
Machinery
and equipment
|
10 -
20
|
Furniture
and office equipment
|
3 -
10
|
Computer
hardware
|
3 -
6
|
Leasehold
improvements
|
Over
the terms of the lease or the useful life of the
improvements
|
Expenditures
for major repairs and improvements are capitalized, whereas normal repairs and
maintenance are expensed as incurred.
Asset Retirement
Obligations—In accordance with the provisions of SFAS No. 143, Accounting for Asset Retirement
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 Division’s asset retirement obligations under this standard
related to closure costs for landfills.
Income
Taxes—The Division’s operating results were included in the income tax
returns of IPCO. For the operating results included in the IPCO
income tax returns, a charge in lieu of income taxes was allocated by IPCO to
the Division, representing a portion of IPCO’s consolidated tax
provision. This tax rate considers IPCO’s federal rate and the state
tax apportionment of the various states in which the Division
operated. The rate may be different than that determined if the
Division were an incorporated entity computing its taxes on a separate return
basis.
Environmental
Costs and Obligations—Costs associated with environmental obligations,
such as remediation or closure costs, are accrued when such costs are probable
and reasonably estimable. Such accruals are adjusted as further
information develops or circumstances change. Costs of future
expenditures for environmental obligations are discounted to their present value
when the expected cash flows are reliably determinable.
3.
SUPPLEMENTAL
FINANCIAL STATEMENT INFORMATION
Interest
payments for the seven months ended July 31, 2006, were $7.6
million. Total interest expense was $8.4 million for the seven months
ended July 31, 2006. In conjunction with the Acquisition, we assumed
none of the historical debt of the Predecessor.
4.
TRANSACTIONS WITH IPCO AND AFFILIATES
Certain
services are provided to the Division by IPCO, including corporate management,
legal, accounting and tax, treasury, payroll and benefits administration,
certain incentive compensation, risk management, information technology and
centralized transaction processing. These expenses are included in
Selling, general and administrative expenses and Cost of products sold in the
combined statement of operations. Expenses for such corporate
services included in Selling, general and administrative expenses totaled $19.0
million for the seven months ended July 31, 2006. Expenses for such
corporate services in Cost of products sold totaled $6.2 million for the seven
months ended July 31, 2006. These costs are allocated from IPCO to
the Division based on various methods, including direct consumption, percent of
capital employed, and number of employees.
Substantially,
all employees hired prior to July 2004, and retirees of the Division,
participate in IPCO’s pension plans and are eligible to receive retirement
benefits. IPCO allocates service cost to the Division based upon a
percent-of-pay for salaried employees and a calculated flat amount for hourly
employees. During the seven-month period ended July 31, 2006, IPCO
allocated periodic pension costs to the Division of
$7.5 million.
IPCO
provides certain retiree health care and life insurance benefits to a majority
of the Division’s salaried employees and certain of the Division’s hourly
employees. IPCO allocates postretirement benefit costs to the
Division based upon a percent-of-pay for salaried employees and a calculated
flat amount for hourly employees. During the seven-month period ended
July 31, 2006, IPCO allocated postretirement benefit costs to the Division of
$0.8 million.
The
Division had net sales to IPCO of approximately $83.8 million for the seven
months ended July 31, 2006. The Division had purchases from IPCO of
approximately $119.5 million for the seven months ended July 31,
2006.
5.
INCOME TAXES
The
results of operations of the Division were included in the income tax returns of
IPCO. In the accompanying combined financial statements, the Division
reflected U.S. federal and state income tax expense on its income based on
an allocated rate of 39.4% for the seven months ended July 31,
2006. Income taxes have been provided for all items included in the
historical statement of operations included herein, regardless of when such
items were reported for tax purposes or when the taxes were actually paid or
refunded.
6.
RESTRUCTURING AND OTHER CHARGES
In March
2005, IPCO announced the indefinite shutdown of the No.1 paper machine at the
Jay, Maine mill. Effective December 2005, IPCO permanently
decommissioned the No. 1 paper machine and began conversion of it to a pulp
dryer. Severance totaling $0.8 million was paid to employees in
January 2006. This machine was a component of the pulp operating
segment.
7.
COMMITMENTS AND CONTINGENCIES
Operating
Leases—The Division has entered into operating lease agreements, which
expire at various dates through 2013, related to certain machinery and equipment
used in its manufacturing process.
The
building and land related to the Sartell mill No. 3 paper machine are
leased under a long-term operating lease. The lease was remeasured to fair value
upon IPCO’s acquisition of Champion International Corporation resulting in an
unfavorable fair value adjustment which is being amortized as rent expense over
the life of the lease. Pursuant to the terms of the Acquisition,
International Paper will transfer the building to Verso Paper at no cost upon
expiration of the lease.
Pulp purchase
commitment—In December 2004, IPCO entered into a 10-year pulp purchase
agreement with the buyer of IPCO’s former Weldwood business. This
take-or-pay agreement requires IPCO to purchase 170,000 tons of NBSK pulp at
market prices at the time of order and IPCO has allocated approximately 110,000
tons of the required purchases to the Division. This purchased pulp
represents approximately one-third of the Division’s purchased pulp
needs. This agreement is transferable with appropriate consent from
the seller.
Wood Supply
Agreement—IPCO’s Forest Resources business supplies the Division’s mills
with their fiber needs at market prices. The Division’s mills receive
fiber in various forms (chips, tree length, and custom cut) and species:
softwood (pine, spruce, and fir) and hardwood (aspen, maple, and
oak). In December 2004, IPCO completed the sale of 1.1 million acres
of forestlands in Maine and New Hampshire. As part of that sale, IPCO
also entered into a 50-year wood supply agreement. The wood supply
agreement covers the Division’s Bucksport and Jay, Maine mills. Wood
is delivered at market prices in effect at the time of delivery to the
mills. IPCO must purchase a base volume as defined in the agreement
and also has the ability to purchase additional wood fiber, defined as “option”
volume. The volumes, base and option, are computed as a percentage of
the estimated annual harvest. Base volume per year is approximately
310,000 tons. The agreement includes a limitation of damages section
under which IPCO’s maximum potential damages for a default are $15.00 per ton of
wood delivered in the first year. This amount is approximately
$4.7 million. The supply agreement is assignable by either party
with mutual consent.
Androscoggin—PM 5
Agreement—In June 2005, IPCO sold its Industrial Papers
business. As part of this transaction, IPCO and the Division entered
into a 12-year contract manufacturing arrangement with the buyer, Thilmany LLC.
(“Thilmany”), for production from the Jay, Maine mill’s No. 5 paper
machine. IPCO deferred approximately $32.5 million of the sales
proceeds, to reflect the contract manufacturing agreement. The
deferred proceeds are earned by IPCO as volume is produced in accordance with
the contract manufacturing agreement. This agreement requires
Thilmany to pay the Division a variable charge for the paper purchased and a
fixed charge for the availability of the No. 5 paper
machine. The deferred amount and related amortization are obligations
of IPCO and are not recorded on the Division’s financial
statements. The Division is responsible for the No. 5 paper
machine’s routine maintenance capital, and Thilmany is responsible for any
capital expenditures specific to the No. 5 paper machine. As
defined in the agreement, Thilmany has the right to terminate the agreement if
certain events occur, such as a failure to produce product for a 75-day
consecutive period. Following a 30-day period after such a failure to
produce, IPCO would be subject to a penalty payment based on the prior 12-month
EBITDA from products produced on the machine multiplied by a
factor. The factor at the beginning of the agreement is five and
decreases ratably over the life of the agreement. Thilmany has not
notified IPCO or the Division of any failure to perform and no liability is
accrued. The agreement is transferable with appropriate consent from
Thilmany.
Litigation—In
March 2006, the Division received approximately $1.0 million from Androscoggin
Energy LLC, or “AELLC,” as a result of the settlement of a billing
dispute. AELLC was a supplier of energy to the Jay, Maine facility
that ceased operations in November 2004 and filed for Chapter 11
bankruptcy.
8.
INFORMATION BY INDUSTRY SEGMENT
The
Division operated in three operating segments, coated and supercalendered
papers; hardwood market pulp; and other, consisting of uncoated copy paper and
specialty industrial paper. The Division operated in one geographic
segment, the United States. The Division’s core business platform was
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. For
management purposes, the operating performance of the Division was reported
based on earnings before interest and taxes, excluding the cumulative effect of
accounting changes:
|
|
Seven
Months
|
|
|
|
Ended
|
|
|
|
July
31,
|
|
(In
thousands of U.S. dollars)
|
|
2006
|
|
|
|
|
|
Net
Sales:
|
|
|
|
Coated
|
|
$ |
793,308 |
|
Pulp
|
|
|
88,634 |
|
Other
|
|
|
22,475 |
|
Total
|
|
$ |
904,417 |
|
|
|
|
|
|
Operating
Income:
|
|
|
|
|
Coated
|
|
$ |
14,971 |
|
Pulp
|
|
|
10,346 |
|
Other
|
|
|
825 |
|
Total
|
|
$ |
26,142 |
|
|
|
|
|
|
Depreciation
and Amortization:
|
|
|
|
|
Coated
|
|
$ |
60,881 |
|
Pulp
|
|
|
10,417 |
|
Other
|
|
|
1,376 |
|
Total
|
|
$ |
72,674 |
|
|
|
|
|
|
Capital
Spending:
|
|
|
|
|
Coated
|
|
$ |
26,449 |
|
Pulp
|
|
|
839 |
|
Other
|
|
|
367 |
|
Total
|
|
$ |
27,655 |
|
Not
applicable.
Not
applicable.
Evaluation
of Disclosure Controls and Procedures
We
maintain disclosure controls and procedures that are designed to ensure 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. Accordingly, even
effective disclosure controls and procedures can provide only 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 December 31, 2008. Based
upon the evaluation, and subject to the foregoing, our Chief Executive Officer
and Chief Financial Officer concluded that our disclosure controls and
procedures were effective to accomplish their objectives as of December 31,
2008.
Management’s
Report on Internal Control Over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting. Our internal control over financial
reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles.
There are
inherent limitations to the effectiveness of any internal control over financial
reporting, including the possibility of human error or the circumvention or
overriding of the controls. Accordingly, even an effective internal
control over financial reporting can provide only reasonable assurance of
achieving its objective.
Our
management assessed the effectiveness of our internal control over financial
reporting as of December 31, 2008. In making this assessment, management
used the framework set forth in Internal Control – Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). Based upon the assessment, and subject to the foregoing, our
management concluded that our internal control over financial reporting was
effective to accomplish its objective as of December 31, 2008.
This
annual report does not include an attestation report of our registered public
accounting firm regarding our internal control over financial
reporting. Our management’s report was not subject to attestation by
our registered public accounting firm pursuant to temporary rules of the SEC
that permit us to provide only our management’s report in this annual
report.
Changes
in Internal Control Over Financial Reporting
There was
no change in our internal control over financial reporting during the fourth
quarter of 2008 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
On March
3, 2009, we made annual incentive performance payments for 2008 to the
participants in our Verso Incentive Plan, or “VIP.” All of the VIP participants
received incentive payments in amounts equal to approximately 55% of the maximum
levels of their incentive opportunities under the VIP, subject to adjustment by
their supervisors.
The
compensation committee of the board of directors, which administers the VIP,
determined that our performance in 2008 in a very difficult and challenging
business environment merited a nonrecurring upward adjustment in the incentive
payments from a base level of 36% of the maximum incentive opportunity level.
These achievements included, among others, (1) the best overall safety
performance in our history, which puts us in the first quartile for safety
performance by all U.S. manufacturers; (2) marked improvements in our operating
and financial performance as measured by EBITDA, gross margin and working
capital; (3) surpassing our aggressive cost-savings goal for R-GAP, our
manufacturing excellence program; (4) the completion of two major planned mill
outages on time, under budget and without any injuries; (5) the development of
new specialty paper product offerings for our customers; and (6) the execution
and completion of our initial public offering.
The
incremental adjustments in the 2008 incentive payments to our “named executive
officers,” as defined in the rules of the Securities and Exchange Commission,
were as follows:
|
|
|
|
Adjustment
to 2008
|
|
Name
|
|
Positions
|
|
Incentive
Payment
|
|
Michael
A. Jackson
|
|
President
and Chief Executive Officer
|
|
$ |
184,440 |
|
Lyle
J. Fellows
|
|
Senior
Vice President of Manufacturing
|
|
|
97,626 |
|
Michael
A. Weinhold
|
|
Senior
Vice President of Sales and Marketing
|
|
|
84,747 |
|
Robert
P. Mundy
|
|
Senior
Vice President and Chief Financial Officer
|
|
|
83,157 |
|
Peter
H. Kesser
|
|
Vice
President, General Counsel and Secretary
|
|
|
65,000 |
|
The 2008
incentive payments to our executive officers, including those named above, were
paid under the VIP as to the initial component and under our Senior Executive
Bonus Plan as to the additional component. The 2008 incentive payments to all
other VIP participants were paid entirely under the VIP.
Part
III
The
information required by this item is incorporated by reference from the
definitive proxy statement to be filed within 120 days after
December 31, 2008, pursuant to Regulation 14A under the Securities
Exchange Act of 1934 in connection with our 2009 annual meeting of
stockholders.
The
information required by this item is incorporated by reference from the
definitive proxy statement to be filed within 120 days after
December 31, 2008, pursuant to Regulation 14A under the Securities
Exchange Act of 1934 in connection with our 2009 annual meeting of
stockholders.
The
information required by this item is incorporated by reference from the
definitive proxy statement to be filed within 120 days after
December 31, 2008, pursuant to Regulation 14A under the Securities
Exchange Act of 1934 in connection with our 2009 annual meeting of
stockholders.
The
information required by this item is incorporated by reference from the
definitive proxy statement to be filed within 120 days after
December 31, 2008, pursuant to Regulation 14A under the Securities
Exchange Act of 1934 in connection with our 2009 annual meeting of
stockholders.
The
information required by this item is incorporated by reference from the
definitive proxy statement to be filed within 120 days after
December 31, 2008, pursuant to Regulation 14A under the Securities
Exchange Act of 1934 in connection with our 2009 annual meeting of
stockholders.
Part
IV
Financial
Statements
See the
Index to Financial Statements in “Financial Statements and Supplementary
Data.”
Financial
Statement Schedules
See
Schedule I – Valuation Accounts and the report thereon of Deloitte & Touche
LLP, Independent Registered Public Accounting Firm, on page S-1 of this annual
report.
Exhibits
The
following exhibits are included with this report:
Exhibit
|
|
|
Number
|
|
Description of Exhibit
|
2.1
|
|
Agreement
of Purchase and Sale dated as of June 4, 2006, among International Paper
Company, Verso Paper Investments LP and Verso Paper LLC,(1)
as amended by Amendment No. 1 to Agreement of Purchase and Sale,
dated as of August 1, 2006, among International Paper Company, Verso
Paper Investments LP and Verso Paper LLC,(2)
and Amendment No. 2 to Agreement of Purchase and Sale, dated as of
May 31, 2007, among International Paper Company, Verso Paper Investments
LP and Verso Paper LLC.(2)
|
3.1
|
|
Amended
and Restated Certificate of Incorporation of Verso Paper Corp.
(form).(2)
|
3.2
|
|
Amended
and Restated Bylaws of Verso Paper Corp. (form).(2)
|
4.1
|
|
Specimen
common stock certificate of Verso Paper Corp.(2)
|
10.1
|
|
Third
Amended and Restated Limited Partnership Agreement of Verso Paper
Management LP dated as of May 20, 2008 (form).(2)
|
10.2
|
|
Registration
Rights Agreement among Verso Paper Investments LP and the individual
limited partners of Verso Paper Management LP (form).(2)
|
10.3
|
|
Credit
Agreement dated as of August 1, 2006, among Verso Paper Finance Holdings
LLC, Verso Paper Holdings LLC, the Lenders party thereto, Credit Suisse,
Cayman Islands Branch, as Administrative Agent, Lehman Brothers Inc., as
Syndication Agent, and Citigroup Global Markets Inc. and Banc of America
Securities LLC, as Documentation Agents.(1)
|
10.4
|
|
Guarantee
and Collateral Agreement dated as of August 1, 2006, among Verso Paper
Finance Holdings LLC, Verso Paper Holdings LLC, the Subsidiaries named
therein, and Credit Suisse, Cayman Islands Branch, as Administrative
Agent.(1)
|
10.5
|
|
Intellectual
Property Security Agreement dated as of August 1, 2006, made by Verso
Paper Finance Holdings LLC, Verso Paper Holdings LLC, Verso Paper Inc.,
Verso Paper LLC, Verso Androscoggin LLC, Verso Bucksport LLC, Verso
Quinnesec LLC, Verso Sartell LLC and NexTier Solutions Corporation in
favor of Credit Suisse, Cayman Islands Branch, as Administrative
Agent.(1)
|
10.6
|
|
Indenture
relating to the 9 1/8%
Second Priority Senior Secured Fixed Rate Notes due 2014 and the Second
Priority Senior Secured Floating Rate Notes due 2014, dated as of August
1, 2006, among Verso Paper Holdings LLC, Verso Paper Inc., the Guarantors
named therein, and Wilmington Trust Company, as Trustee.
(1)
|
10.7
|
|
Indenture
relating to the 11 3/8%
Senior Subordinated Notes due 2016, dated as of August 1, 2006, among
Verso Paper Holdings LLC, Verso Paper Inc., the Guarantors named therein,
and Wilmington Trust Company, as Trustee.(1)
|
10.8
|
|
Collateral
Agreement dated as of August 1, 2006, among Verso Paper Holdings LLC,
Verso Paper Inc., the Subsidiaries named therein, and Wilmington Trust
Company, as Collateral Agent.(1)
|
10.9
|
|
Intellectual
Property Security Agreement dated as of August 1, 2006, made by Verso
Paper Holdings LLC, Verso Paper Inc., Verso Paper LLC, Verso Androscoggin
LLC, Verso Bucksport LLC, Verso Quinnesec LLC, Verso Sartell LLC, and
Nextier Solutions Corporation in favor of Wilmington Trust Company, as
Collateral Agent.(1)
|
10.10
|
|
Intercreditor
Agreement dated as August 1, 2006, among Credit Suisse, Cayman Islands
Branch, as Intercreditor Agent, Wilmington Trust Company, as Trustee,
Verso Paper Finance Holdings LLC, Verso Paper Holdings LLC, and the
Subsidiaries named therein.(1)
|
10.11
|
|
Credit
Agreement dated January 31, 2007, among Verso Paper Finance Holdings LLC,
Verso Paper Finance Holdings Inc., the Lenders party thereto, Credit
Suisse, as Administrative Agent, and Citigroup Global Markets Inc., as
Syndication Agent..(2)
|
10.12
|
|
Management
and Transaction Fee Agreement dated as of August 1, 2006, among Verso
Paper LLC, Verso Paper Investments LP, Apollo Management V, L.P. and
Apollo Management VI, L.P.(1)
|
10.13
|
*
|
Verso
Paper Corp. 2008 Incentive Award Plan (form),(2)
as amended by the First Amendment to Verso Paper Corp. 2008 Incentive
Award Plan.
|
10.14
|
*
|
Stock
Option Grant Notice and Stock Option Agreement for Non-Employee Directors
(form) pursuant to the Verso Paper Corp. 2008 Incentive Award
Plan.
|
10.15
|
*
|
Verso
Paper Corp. Senior Executive Incentive Bonus Plan (form).(2)
|
10.16
|
*
|
2009
Long-Term Cash Award Program for Executives effective as of January 1,
2009, pursuant to the Verso Paper Corp. Senior Executive Bonus Plan.(3)
|
10.17
|
*
|
Employment
Agreement dated as of November 16, 2006, between Mike Jackson and Verso
Paper Holdings LLC,(1)
as supplemented by the Letter Agreement dated as of November 16, 2006,
between Verso Paper Holdings LLC and Mike Jackson,(1)
and as amended by the First Amendment to Employment Agreement dated as of
January 1, 2008, between Mike Jackson and Verso Paper Holdings LLC,(2)
and the Second Amendment to Employment Agreement dated as of December 31,
2008, between Mike Jackson and Verso Paper Holdings LLC.(3)
|
10.18
|
*
|
Letter
Agreement dated as of February 16, 2007, between Verso Paper
Management LP and Mike Jackson.(1)
|
10.19
|
*
|
Confidentiality
and Non-Competition Agreement dated as of January 1, 2008, between
Verso Paper Holdings LLC and Lyle J. Fellows,(2)
as amended by the First Amendment to Confidentiality and Non-Competition
Agreement dated as of December 31, 2008, between Verso Paper Holdings LLC
and Lyle J. Fellows.(3)
|
10.20
|
*
|
Confidentiality
and Non-Competition Agreement dated as of January 1, 2008, between
Verso Paper Holdings LLC and Michael A. Weinhold,(2)
as amended by the First Amendment to Confidentiality and Non-Competition
Agreement dated as of December 31, 2008, between Verso Paper Holdings LLC
and Michael A. Weinhold.(3)
|
10.21
|
*
|
Confidentiality
and Non-Competition Agreement dated as of January 1, 2008, between
Verso Paper Holdings LLC and Robert P. Mundy,(2)
as amended by the First Amendment to Confidentiality and Non-Competition
Agreement dated as of December 31, 2008, between Verso Paper Holdings LLC
and Robert P. Mundy.(3)
|
10.22
|
*
|
Confidentiality
and Non-Competition Agreement dated as of January 1, 2008, between
Verso Paper Holdings LLC and Peter H. Kesser,(2)
as amended by the First Amendment to Confidentiality and Non-Competition
Agreement dated as of December 31, 2008, between Verso Paper Holdings LLC
and Peter H. Kesser.(3)
|
10.23
|
*
|
Letter
Agreement dated as of November 1, 2006, between Verso Paper Management LP
and L.H. Puckett.(1)
|
10.24
|
*
|
Indemnification
Agreement between Verso Paper Corp. and its directors and executive
officers (form).(2)
|
21
|
|
Subsidiaries
of Verso Paper Corp.(2)
|
23.1
|
|
Consent
of Deloitte & Touche LLP, Independent Registered Public Accounting
Firm.
|
23.2
|
|
Consent
of Resource Information Systems, Inc.
|
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 the
United States Code.
|
|
|
|
|
|
|
|
|
(1) |
Incorporated
by reference to the Registration Statement of Verso Paper Holdings LLC on
Form S-4 (Registration No. 333-142283), as amended. |
(2) |
Incorporated
by reference to our Registration Statement on Form S-1 (Registration No.
333-148201), as amended. |
(3) |
Incorporated
by reference to our Current Report on Form 8-K filed on December 31,
2008. |
* |
An
asterisk denotes a management contract or compensatory plan or
arrangement. |
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
Date: March
5, 2009
|
|
|
|
|
|
|
VERSO PAPER
CORP.
|
|
|
|
|
|
By:
|
|
|
|
|
|
|
Michael
A. Jackson
President
and Chief Executive Officer
|
|
|
|
|
|
|
|
By:
|
|
|
|
|
|
|
Robert
P. Mundy
Senior
Vice President and Chief Financial
Officer
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Signature
|
Position
|
Date
|
/s/
Michael A. Jackson
|
|
|
March
5, 2009
|
Michael
A. Jackson
|
|
President,
Chief Executive Officer and Director
(Principal
Executive Officer)
|
/s/
Robert P. Mundy
|
|
|
March
5, 2009
|
Robert
P. Mundy
|
|
Senior
Vice President and Chief Financial
Officer
(Principal Financial and Accounting Officer)
|
/s/
Michael E. Ducey
|
|
|
March
5, 2009
|
Michael
E. Ducey
|
|
Director
|
|
|
|
/s/
Thomas Gutierrez
|
|
|
March
5, 2009
|
Thomas
Gutierrez
|
|
Director
|
|
|
|
/s/
Scott M. Kleinman
|
|
|
|
Scott
M. Kleinman
|
|
Director
|
March
5, 2009
|
|
|
|
|
|
|
|
|
David
W. Oskin
|
|
Director
|
March
5, 2009
|
|
|
|
|
/s/
Eric L. Press.
|
|
|
|
Eric
L. Press
|
|
Director
|
March
5, 2009
|
|
|
|
|
/s/
L.H. Puckett, Jr.
|
|
|
|
L.H.
Puckett, Jr.
|
|
Director
|
March
5, 2009
|
|
|
|
|
/s/
David B. Sambur
|
|
|
|
David
B. Sambur
|
|
Director
|
March
5, 2009
|
|
|
|
|
/s/
Jordan C. Zaken
|
|
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March
5, 2009
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Jordan
C. Zaken
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Director
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REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders of
Verso
Paper Corp.
Memphis,
Tennessee
We have
audited the consolidated and combined balance sheets of Verso Paper Corp. (the
“Company”), a majority-owned subsidiary of Verso Paper Management LP, as of
December 31, 2008 and 2007 (Successor Company balance sheets), and the related
consolidated and combined statements of operations, changes in stockholders’
equity, and cash flows for the years ended December 31, 2008 and 2007 and the
five months ended December 31, 2006 (Successor Company
Operations). We have also audited the accompanying combined
statements of operations and cash flows for the seven months ended July 31, 2006
(Predecessor Operations), and have issued our report thereon dated March 2,
2009; such financial statements and report are included elsewhere in this Form
10-K. Our audits also included the financial statement schedule of the
Company listed in Item 15. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to
express an opinion based on our audits. In our opinion, such financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, present fairly, in all material respects, the
information set forth therein.
/s/
Deloitte & Touche LLP
Memphis,
Tennessee
March 2,
2009
Schedule I
– Valuation Accounts
Verso
Paper Corp. (Successor) and
Coated and
Supercalendered Papers Division of International Paper Company
(Predecessor)
For the
Seven Months Ended July 31, 2006 (Predecessor)
and Five
Months Ended December 31, 2006 and Years Ended December 31, 2007 and 2008
(Successor)
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Balance
at
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Charged
to
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Charge-off
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Balance
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Beginning
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Cost
and
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Against
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at
End of
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(in
thousands of U.S. dollars)
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of
Period
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Expenses
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Allowances
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Period
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Allowance
for uncollectible accounts included under
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the
balance sheet caption "Accounts receivable"
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(Predecessor):
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Seven
Months Ended July 31, 2006
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$ |
7,302 |
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$ |
856 |
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$ |
(6,323 |
) |
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$ |
1,835 |
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Allowance
for uncollectible accounts included under
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the
balance sheet caption "Accounts receivable"
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(Successor):
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Five
Months Ended December 31, 2006
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$ |
1,835 |
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$ |
102 |
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$ |
- |
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$ |
1,937 |
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Year
Ended December 31, 2007
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$ |
1,937 |
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$ |
(258 |
) |
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$ |
(2 |
) |
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$ |
1,677 |
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Year
Ended December 31, 2008
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$ |
1,677 |
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$ |
999 |
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$ |
(783 |
) |
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$ |
1,893 |
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S-1