UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
 
(Mark One)
 
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2012
 
or
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from __________ to __________
 
Verso Paper Corp.
(Exact name of registrant as specified in its charter)
 
Delaware
 
001-34056
 
75-3217389
(State of Incorporation
or Organization)
 
(Commission File Number)
 
(IRS Employer
Identification Number)
 
 
Verso Paper Holdings LLC
(Exact name of registrant as specified in its charter)  
 
Delaware
 
333-142283
 
56-2597634
(State of Incorporation
or Organization)
 
(Commission File Number)
 
(IRS Employer
Identification Number)
 
6775 Lenox Center Court, Suite 400
Memphis, Tennessee 38115-4436
(Address, including zip code, of principal executive offices)
 
(901) 369-4100
(Registrants’ telephone number, including area code )
 
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
  Verso Paper Corp.  þ Yes o No
  Verso Paper Holdings LLC  þ Yes o No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
  Verso Paper Corp.  þ Yes o No
  Verso Paper Holdings LLC  þ Yes o No
 
 
 
 
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
 
Verso Paper Corp.
Large accelerated filer o Accelerated filer o Non-accelerated filer  þ Smaller reporting company o
    (Do not check if a smaller reporting company)  
 
Verso Paper Holdings LLC
Large accelerated filer o Accelerated filer o Non-accelerated filer  þ Smaller reporting company o
    (Do not check if a smaller reporting company)  
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  
 
  Verso Paper Corp.  o Yes þ No
  Verso Paper Holdings LLC  o Yes þ No
                                                           
As of April 30, 2012, Verso Paper Corp. had 52,907,984 outstanding shares of common stock, par value $0.01 per share, and Verso Paper Holdings LLC had one outstanding limited liability company interest.
 
This Form 10-Q is a combined quarterly report being filed separately by two registrants: Verso Paper Corp. and Verso Paper Holdings LLC.

 
 
 
 
Entity Names and Organization

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

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

TABLE OF CONTENTS

PART I.
FINANCIAL INFORMATION
Page
     
Item 1.
Financial Statements
 
     
  4
     
  5
     
  5
     
  6
     
  6
     
  7
     
  8
     
Item 2.
29
     
Item 3.
39
     
Item 4.
41
     
PART II.
OTHER INFORMATION
 
     
Item 1. 42
     
Item 1A.
42
     
Item 2.
42
     
Item 3.
42
     
Item 4.
42
     
Item 5.
42
     
Item 6.
44
 
 
 
46
   
47

 
3
 

PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS.
 
 
                         
   
VERSO PAPER
   
VERSO HOLDINGS
 
   
March 31,
   
December 31,
   
March 31,
   
December 31,
 
(Dollars in thousands, except per share amounts)
 
2012
   
2011
   
2012
   
2011
 
ASSETS
                       
Current assets:
                       
Cash and cash equivalents
  $ 56,209     $ 94,869     $ 56,135     $ 94,795  
Accounts receivable, net
    119,423       128,086       119,549       128,213  
Inventories
    192,820       166,876       192,820       166,876  
Prepaid expenses and other assets
    6,681       3,239       6,681       3,238  
Total current assets
    375,133       393,070       375,185       393,122  
Property, plant, and equipment, net
    907,410       934,699       907,410       934,699  
Reforestation
    13,587       13,671       13,587       13,671  
Intangibles and other assets, net
    78,921       80,035       101,926       102,950  
Total assets
  $ 1,375,051     $ 1,421,475     $ 1,398,108     $ 1,444,442  
                                 
LIABILITIES AND EQUITY
                               
Current liabilities:
                               
Accounts payable
  $ 112,233     $ 109,683     $ 113,020     $ 110,589  
Accrued liabilities
    79,075       140,756       78,094       139,682  
Current maturities of long-term debt
    86,166       -       -       -  
Total current liabilities
    277,474       250,439       191,114       250,271  
Long-term debt
    1,259,014       1,262,459       1,282,319       1,201,077  
Other liabilities
    61,866       62,465       53,764       54,278  
Total liabilities
    1,598,354       1,575,363       1,527,197       1,505,626  
Commitments and contingencies (Note 12)
    -       -       -       -  
Equity:
                               
Preferred stock -- par value $0.01 (20,000,000 shares authorized,
                               
no shares issued)
    -       -       n/a       n/a  
Common stock -- par value $0.01 (250,000,000 shares authorized
                               
with 52,951,379 shares issued and 52,907,984 outstanding
                               
on March 31, 2012, and 52,630,965 shares issued and
                               
52,605,314 outstanding on December 31, 2011)
    530       526       n/a       n/a  
Treasury stock -- at cost (43,395 shares on March 31, 2012 and
                               
25,651 shares on December 31, 2011)
    (64 )     (53 )     n/a       n/a  
Paid-in-capital
    217,047       216,485       321,676       321,110  
Retained deficit
    (416,117 )     (342,188 )     (426,066 )     (353,636 )
Accumulated other comprehensive loss
    (24,699 )     (28,658 )     (24,699 )     (28,658 )
Total deficit
    (223,303 )     (153,888 )     (129,089 )     (61,184 )
Total liabilities and equity
  $ 1,375,051     $ 1,421,475     $ 1,398,108     $ 1,444,442  
                                 
Included in the balance sheet line items above are related-party
                               
balances as follows (Note 9):
                               
Accounts receivable
  $ 8,985     $ 9,890     $ 9,111     $ 10,016  
Intangibles and other assets, net
    -       -       23,305       23,305  
Accounts payable
    518       743       518       743  
Accrued liabilities
    -       -       126       126  
Long-term debt
    -       -       23,305       23,305  
 
See notes to unaudited condensed consolidated financial statements.
 
 
4
 
 
 
                         
   
VERSO PAPER
   
VERSO HOLDINGS
 
   
Three Months Ended
   
Three Months Ended
 
   
March 31,
   
March 31,
 
(Dollars in thousands, except per share amounts)
 
2012
   
2011
   
2012
   
2011
 
Net sales
  $ 375,295     $ 416,592     $ 375,295     $ 416,592  
Costs and expenses:
                               
Cost of products sold - (exclusive of depreciation, amortization,
                               
and depletion)
    337,280       352,528       337,280       352,528  
Depreciation, amortization, and depletion
    31,423       31,347       31,423       31,347  
Selling, general, and administrative expenses
    18,818       18,634       18,767       18,583  
Restructuring and other charges
    85       -       85       -  
Total operating expenses
    387,606       402,509       387,555       402,458  
Operating income (loss)
    (12,311 )     14,083       (12,260 )     14,134  
Interest income
    (2 )     (34 )     (380 )     (412 )
Interest expense
    32,119       32,389       30,917       31,344  
Other loss, net
    29,570       26,327       29,570       26,176  
Loss before income taxes
    (73,998 )     (44,599 )     (72,367 )     (42,974 )
Income tax benefit
    (69 )     (2 )     -       -  
Net loss
  $ (73,929 )   $ (44,597 )   $ (72,367 )   $ (42,974 )
                                 
Loss per common share
                               
Basic
  $ (1.40 )   $ (0.84 )                
Diluted
    (1.40 )     (0.84 )                
Weighted average common shares outstanding (in thousands)
                               
Basic
    52,686       53,114                  
Diluted
    52,686       53,114                  
Included in the financial statement line items above are related-party
                               
transactions as follows (Note 9):
                               
Net sales
  $ 31,636     $ 42,994     $ 31,636     $ 42,994  
Purchases included in cost of products sold
    1,354       1,813       1,354       1,813  
Interest income
    -       -       (379 )     (379 )
Interest expense
    -       -       379       379  
 
See notes to unaudited condensed consolidated financial statements.
 
 
 
                         
   
VERSO PAPER
   
VERSO HOLDINGS
 
   
Three Months Ended
   
Three Months Ended
 
   
March 31,
   
March 31,
 
(Dollars in thousands, except per share amounts)
 
2012
   
2011
   
2012
   
2011
 
Net Loss
  $ (73,929 )   $ (44,597 )   $ (72,367 )   $ (42,974 )
Other comprehensive income (loss):
                               
Derivative financial instruments:
                               
Effective portion of net unrealized losses
    (1,246 )     (158 )     (1,246 )     (158 )
Reclassification from accumulated other comprehensive loss to net loss
    4,640       1,271       4,640       1,271  
Defined benefit pension plan amortization of net loss and prior service cost
    565       392       565       392  
Other comprehensive income
    3,959       1,505       3,959       1,505  
Comprehensive loss
  $ (69,970 )   $ (43,092 )   $ (68,408 )   $ (41,469 )
 
See notes to unaudited condensed consolidated financial statements.
 
 
5
 
 
 
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
 
FOR THE PERIODS ENDED MARCH 31, 2012 AND 2011
 
                                                 
                                       
Accumulated
       
                                       
Other
   
Total
 
                                 
Total
   
Comprehensive
   
Stockholders'
 
   
Common
   
Common
   
Treasury
   
Treasury
   
Paid-in-
   
Retained
   
Income
   
Equity
 
(Dollars and shares in thousands)
 
Shares
   
Stock
   
Shares
   
Stock
   
Capital
   
Deficit
   
(Loss)
   
(Deficit)
 
Balance - December 31, 2010
    52,467     $ 525       -     $ -     $ 214,050     $ (205,127 )   $ (16,254 )   $ (6,806 )
Net loss
    -       -       -       -       -       (44,597 )     -       (44,597 )
Other comprehensive income
    -       -       -       -       -       -       1,505       1,505  
Common stock issued for restricted stock
    153       2       -       -       (2 )     -       -       -  
Stock option exercise
    5       -       -       -       15       -       -       15  
Equity award expense
    -       -       -       -       645       -       -       645  
Balance - March 31, 2011
    52,625     $ 527       -     $ -     $ 214,708     $ (249,724 )   $ (14,749 )   $ (49,238 )
                                                                 
Balance - December 31, 2011
    52,631     $ 526       (26 )   $ (53 )   $ 216,485     $ (342,188 )   $ (28,658 )   $ (153,888 )
Net loss
    -       -       -       -       -       (73,929 )     -       (73,929 )
Other comprehensive income
    -       -       -       -       -       -       3,959       3,959  
Common stock issued for restricted stock, net
    320       4       (17 )     (11 )     (4 )     -       -       (11 )
Equity award expense
    -       -       -       -       566       -       -       566  
Balance - March 31, 2012
    52,951     $ 530       (43 )   $ (64 )   $ 217,047     $ (416,117 )   $ (24,699 )   $ (223,303 )
 
See notes to unaudited condensed consolidated financial statements.
 
 
 
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN MEMBER'S EQUITY
 
FOR THE PERIODS ENDED MARCH 31, 2012 AND 2011
 
                         
               
Accumulated
       
               
Other
   
Total
 
               
Comprehensive
   
Member's
 
   
Paid-in-
   
Retained
   
Income
   
Equity
 
(Dollars in thousands)
 
Capital
   
Deficit
   
(Loss)
   
(Deficit)
 
Balance - December 31, 2010
  $ 318,690     $ (231,019 )   $ (16,254 )   $ 71,417  
Net loss
    -       (42,974 )     -       (42,974 )
Other comprehensive income
    -       -       1,505       1,505  
Equity award expense
    645       -       -       645  
Balance - March 31, 2011
  $ 319,335     $ (273,993 )   $ (14,749 )   $ 30,593  
                                 
Balance - December 31, 2011
  $ 321,110     $ (353,636 )   $ (28,658 )   $ (61,184 )
Cash distributions
    -       (63 )     -       (63 )
Net loss
    -       (72,367 )     -       (72,367 )
Other comprehensive income
    -       -       3,959       3,959  
Equity award expense
    566       -       -       566  
Balance - March 31, 2012
  $ 321,676     $ (426,066 )   $ (24,699 )   $ (129,089 )
 
See notes to unaudited condensed consolidated financial statements.
 
 
6
 
 
 
                         
   
VERSO PAPER
   
VERSO HOLDINGS
 
   
Three Months Ended
   
Three Months Ended
 
   
March 31,
   
March 31,
 
(Dollars in thousands)
 
2012
   
2011
   
2012
   
2011
 
Cash Flows From Operating Activities:
                       
Net loss   $ (73,929 )   $ (44,597 )   $ (72,367 )   $ (42,974 )
Adjustments to reconcile net loss to net cash used in operating activities:
                               
Depreciation, amortization, and depletion
    31,423       31,347       31,423       31,347  
Amortization of debt issuance costs
    1,323       1,468       1,233       1,378  
Accretion of discount on long-term debt
    976       1,053       976       1,053  
Loss on early extinguishment of debt
    29,971       26,092       29,971       26,092  
Loss (gain) on disposal of fixed assets
    (269 )     309       (269 )     309  
Equity award expense
    566       645       566       645  
Other - net
    4,529       (203 )     4,529       (203 )
Changes in assets and liabilities:
                               
Accounts receivable
    23,339       (30,000 )     23,339       (30,122 )
Inventories
    (25,944 )     (26,134 )     (25,944 )     (26,134 )
Prepaid expenses and other assets
    (262 )     (3,031 )     (262 )     (3,056 )
Accounts payable
    333       (1,709 )     215       (1,718 )
Accrued liabilities
    (62,587 )     (37,987 )     (63,889 )     (39,349 )
Net cash used in operating activities
    (70,531 )     (82,747 )     (70,479 )     (82,732 )
Cash Flows From Investing Activities:
                               
Proceeds from sale of fixed assets
    378       24       378       24  
Transfers (to) from restricted cash, net
    (292 )     3,818       (292 )     3,818  
Capital expenditures
    (16,990 )     (13,242 )     (16,990 )     (13,242 )
Net cash used in investing activities
    (16,904 )     (9,400 )     (16,904 )     (9,400 )
Cash Flows From Financing Activities:
                               
Proceeds from long-term debt
    341,191       394,618       341,191       394,618  
Debt issuance costs
    (6,950 )     (10,457 )     (6,950 )     (10,458 )
Repayments of long-term debt
    (285,455 )     (389,998 )     (285,455 )     (389,998 )
Cash distributions
    -       -       (63 )        
Acquisition of treasury stock
    (11 )     -       -       -  
Proceeds from issuance of common stock
    -       15       -       -  
Net cash provided by (used in) financing activities
    48,775       (5,822 )     48,723       (5,838 )
Change in cash and cash equivalents
    (38,660 )     (97,969 )     (38,660 )     (97,970 )
Cash and cash equivalents at beginning of period
    94,869       152,780       94,795       152,706  
Cash and cash equivalents at end of period
  $ 56,209     $ 54,811     $ 56,135     $ 54,736  
 
See notes to unaudited condensed consolidated financial statements.
 
 
7
 
 
VERSO PAPER CORP. AND VERSO PAPER HOLDINGS LLC
 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 2012, AND DECEMBER 31, 2011, AND FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2012 AND 2011
 
1.
BACKGROUND AND BASIS OF PRESENTATION

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

We operate in the following three market segments: coated papers; hardwood market pulp; and other, consisting of specialty papers.  Our core business platform is as a producer of coated freesheet, coated groundwood, and uncoated supercalendered papers.  These products are used in catalogs, magazines, retail inserts, and commercial print.

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

2.
RECENT ACCOUNTING DEVELOPMENTS

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

 
8
 
 
ASC Topic 820 , Fair Value Measurements and Disclosures.   ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs, provides   clarifying guidance on how to measure fair value and additional disclosure requirements. The update does not extend the use of fair value accounting, but does provide guidance on how it should be applied where it is already required or permitted under current GAAP.  ASU No. 2011-04 is effective for annual and interim periods beginning after December 15, 2011, which for us is January 1, 2012, and had no impact on our consolidated financial statements .

Other new accounting pronouncements issued but not effective until after March 31, 2012, are not expected to have a significant effect on our consolidated financial statements.
 
3.
SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION

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

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

   
VERSO PAPER
 
   
Three Months Ended
 
   
March 31,
 
(In thousands, except per share data)
 
2012
   
2011
 
Net loss available to common shareholders
  $ (73,929 )   $ (44,597 )
                 
Weighted average common stock outstanding
    52,300       52,740  
Weighted average restricted stock
    386       374  
Weighted average common shares outstanding - basic
    52,686       53,114  
Dilutive shares from stock options
    -       -  
Weighted average common shares outstanding - diluted
    52,686       53,114  
                 
Basic loss per share
  $ (1.40 )   $ (0.84 )
                 
Diluted loss per share
  $ (1.40 )   $ (0.84 )
 
In accordance with ASC Topic 260, Earnings Per Share , unvested restricted stock awards issued by Verso Paper contain nonforfeitable rights to dividends and qualify as participating securities.  No dividends have been declared or paid in 2012 or 2011.

 
9
 
 
For the three-month periods ended March 31, 2012 and 2011, respectively, 1,916,000 and 1,552,000 weighted average potentially dilutive shares from options with weighted average exercise prices per share of $3.68 and $3.56, respectively, were excluded from the diluted earnings per share calculation due to the antidilutive effect such shares would have on net loss per common share.

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

Inventories by major category include the following:
 
   
March 31,
   
December 31,
 
(Dollars in thousands)
 
2012
   
2011
 
Raw materials
  $ 33,421     $ 27,953  
Woodyard logs
    15,109       5,931  
Work-in-process
    23,489       19,120  
Finished goods
    92,982       87,585  
Replacement parts and other supplies
    27,819       26,287  
Inventories
  $ 192,820     $ 166,876  
 
Asset Retirement Obligations — In accordance with ASC Topic 410, Asset Retirement and Environmental Obligations , a liability and an asset are recorded equal to the present value of the estimated costs associated with the retirement of long-lived assets where a legal or contractual obligation exists.  The liability is accreted over time, and the asset is depreciated over its useful life.  Our asset retirement obligations under this standard relate to closure and post-closure costs for landfills.  Revisions to the liability could occur due to changes in the estimated costs or timing of closure or possible new federal or state regulations affecting the closure.

On March 31, 2012, we had $0.8 million of restricted cash included in Intangibles and other assets in the condensed consolidated balance   sheet related to an asset retirement obligation in the state of Michigan.  This cash deposit is required by the state and may only be used for the future closure of a landfill.
 
The following table presents an analysis related to our asset retirement obligations included in Other liabilities in the accompanying condensed consolidated balance sheets:
 
   
Three Months Ended March 31,
 
(Dollars in thousands)
 
2012
   
2011
 
Asset retirement obligations, January 1
  $ 11,233     $ 13,660  
Accretion expense
    201       195  
Settlement of existing liabilities
    (56 )     (55 )
Adjustment to existing liabilities
    419       -  
Asset retirement obligations, March 31
  $ 11,797     $ 13,800  

In addition to the above obligations, we may be required to remove certain materials from our facilities, or to remediate them in accordance with current regulations that govern the handling of certain hazardous or potentially hazardous materials.  At this time, any such obligations have an indeterminate settlement date, and we believe that adequate information does not exist to reasonably estimate any such potential obligations.  Accordingly, we will record a liability for such remediation when sufficient information becomes available to estimate the obligation.
 
 
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Property, Plant, and Equipment — Property, plant, and equipment is stated at cost, net of accumulated depreciation.  Interest is capitalized on projects meeting certain criteria and is included in the cost of the assets.  The capitalized interest is depreciated over the same useful lives as the related assets.  Expenditures for major repairs and improvements are capitalized, whereas normal repairs and maintenance are expensed as incurred.  For both the three-month periods ended March 31, 2012 and 2011, interest costs of 0.7 million were capitalized.

Depreciation is computed using the straight-line method over the assets’ estimated useful lives.  Depreciation expense was $31.1 million and $30.9 million for the three-month periods ended March 31, 2012 and 2011, respectively.
 
4.
INTANGIBLES AND OTHER ASSETS
 
Intangibles and other assets consist of the following:

   
VERSO PAPER
   
VERSO HOLDINGS
 
   
March 31,
   
December 31,
   
March 31,
   
December 31,
 
(Dollars in thousands)
 
2012
   
2011
   
2012
   
2011
 
Amortizable intangible assets:
                       
Customer relationships, net of accumulated amortization of $6.9 million
                       
on March 31, 2012, and $6.7 million on December 31, 2011
  $ 6,420     $ 6,620     $ 6,420     $ 6,620  
Patents, net of accumulated amortization of $0.7 million on
                               
March 31, 2012, and $0.6 million on December 31, 2011
    497       526       497       526  
Total amortizable intangible assets
    6,917       7,146       6,917       7,146  
Unamortizable intangible assets:
                               
Trademarks
    21,473       21,473       21,473       21,473  
Other assets:
                               
Financing costs, net of accumulated amortization of $15.2 million on
                               
March 31, 2012, and $17.8 million on December 31, 2011, for
                               
Verso Paper, and net of accumulated amortization of $13.3 million
                               
on March 31, 2012, and $16.1 million on December 31, 2011,
                               
for Verso Holdings
    26,886       24,483       26,586       24,093  
Deferred major repair
    10,221       12,294       10,221       12,294  
Replacement parts, net
    3,972       4,257       3,972       4,257  
Loan to affiliate
    -       -       23,305       23,305  
Restricted cash
    3,852       3,560       3,852       3,560  
Other
    5,600       6,822       5,600       6,822  
Total other assets
    50,531       51,416       73,536       74,331  
Intangibles and other assets
  $ 78,921     $ 80,035     $ 101,926     $ 102,950  
Certain previously reported amounts have been reclassified to agree with current presentation.
 
Amortization expense of intangibles was $0.2 million and $0.3 million for the three-month periods ended March 31, 2012 and 2011, respectively.

The estimated future amortization expense for intangible assets over the next five years is as follows:
 
(Dollars in thousands)
     
2012
  $ 686  
2013
    815  
2014
    715  
2015
    615  
2016
    567  
 
 
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5.
LONG-TERM DEBT
 
A summary of long-term debt is as follows:
 
     
March 31, 2012
   
December 31, 2011
 
  Original  
Interest
       
Fair
         
Fair
 
(Dollars in thousands)
Maturity
 
Rate
 
Balance
   
Value
   
Balance
   
Value
 
Verso Paper Holdings LLC
                               
Revolving Credit Facility
8/1/2012
  -     $ -     $ -     $ -     $ -  
11.5% Senior Secured Notes (1)
7/1/2014
  11.50 %     42,826       46,928       302,820       316,260  
11.75% Senior Secured Notes (2)
1/15/2019
  11.75 %     341,203       348,019       -       -  
8.75% Second Priority Senior Secured Notes (3)
2/1/2019
  8.75 %     394,769       227,700       394,736       257,063  
Second Priority Senior Secured Floating Rate Notes
8/1/2014
  4.30 %     180,216       155,887       180,216       112,635  
11.38% Senior Subordinated Notes
8/1/2016
  11.38 %     300,000       178,500       300,000       122,550  
Chase NMTC Verso Investment Fund LLC
                                       
Loan from Verso Paper Finance Holdings LLC
12/29/2040
  6.50 %     23,305       23,305       23,305       23,305  
Total long-term debt for Verso Paper Holdings LLC
 
          1,282,319       980,339       1,201,077       831,813  
Verso Paper Finance Holdings LLC
                                       
Senior Unsecured Term Loan
2/1/2013
  6.95 %     86,166       47,391       84,687       46,578  
Loan from Verso Paper Holdings LLC
12/29/2040
  6.50 %     23,305       23,305       23,305       23,305  
Less current maturities of long-term debt
2/1/2013
  6.95 %     (86,166 )     (47,391 )     -       -  
Eliminate loans from affiliates
12/29/2040
  6.50 %     (46,610 )     (46,610 )     (46,610 )     (46,610 )
Total long-term debt for Verso Paper Corp.
          $ 1,259,014     $ 957,034     $ 1,262,459     $ 855,086  
(1) Par value of $44,427 on March 31, 2012, and $315,000 on December 31, 2011.
(2) Par value of $345,000 on March 31, 2012
(3) Par value of $396,000 on March 31, 2012 and December 31, 2011.
 
We determine the fair value of our long-term debt based on market information and a review of prices and terms available for similar obligations.

Amounts included in interest expense related to long-term debt and amounts of cash interest payments on long-term debt are as follows:
 
   
VERSO PAPER
   
VERSO HOLDINGS
 
   
Three Months Ended
   
Three Months Ended
 
   
March 31,
   
March 31,
 
(Dollars in thousands)
 
2012
   
2011
   
2012
   
2011
 
Interest expense
  $ 31,473     $ 31,647     $ 30,362     $ 30,693  
Cash interest paid
    61,893       55,556       62,272       55,812  
Debt issuance cost amortization (1)
    1,323       1,468       1,233       1,378  
(1) Amortization of debt issuance cost is included in interest expense.
 
Revolving Credit Facility.   Verso Holdings’ $200.0 million revolving credit facility had no amounts outstanding, $39.9 million in letters of credit issued, and $160.1 million available for future borrowing as of March 31, 2012.  The indebtedness under the revolving credit facility bears interest, payable quarterly, at a rate equal to LIBOR plus 3% or prime plus 2% per year.  Verso Holdings is required to pay a commitment fee to the lenders in respect of unutilized commitments under the revolving credit facility at a rate equal to 0.5% per year and customary letter of credit and agency fees.  The indebtedness under the revolving credit facility is guaranteed jointly and severally by Verso Finance and each of Verso Holdings’ subsidiaries, subject to certain exceptions, and the indebtedness and guarantees are senior secured obligations of Verso Holdings and the guarantors, respectively.  The indebtedness under the revolving credit facility and related guarantees are secured by first-priority security interests, subject to permitted liens, in substantially all of Verso Holdings’, Verso Finance’s, and the subsidiary guarantors’ tangible and intangible assets.  The revolving credit facility will mature on August 1, 2012.
 
 
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On May 4, 2012, Verso Holdings entered into new senior credit facilities consisting of a $150.0 million asset-based loan revolving credit facility, or “ABL Facility,” and a $50.0 million cash-flow revolving credit facility, or “Cash Flow Facility.”  The new senior credit facilities were used to repay the outstanding indebtedness under the existing $200.0 million revolving credit facility and will be used to provide ongoing working capital and for other general corporate purposes.  The indebtedness under the new senior credit facilities bears interest at a floating rate based on a margin over a base rate or eurocurrency rate.  As of May 4, 2012, the applicable margin for advances under the ABL Facility was 1.00% for base rate advances and 2.00% for LIBOR advances, and the applicable margin for advances under the Cash Flow Facility was 3.50% for base rate advances and 4.50% for LIBOR advances.  Verso Holdings is required to pay a commitment fee to the lenders in respect of the unused commitments under the ABL Facility at an annual rate initially equal to 0.50% and thereafter either 0.375% or 0.50%, based on daily average utilization, and under the Cash Flow Facility at an annual rate of 0.625%.  The indebtedness under the new senior credit facilities is guaranteed jointly and severally by Verso Finance and each of Verso Holdings’ subsidiaries, subject to certain exceptions, and the indebtedness and guarantees are senior secured obligations of Verso Holdings and the guarantors, respectively.  The indebtedness under the ABL Facility and related guarantees are secured by first-priority security interests, subject to permitted liens, in substantially all of Verso Holdings’, Verso Finance’s, and the subsidiary guarantors’ inventory and accounts receivable, or “ABL Priority Collateral,” and second-priority security interests, subject to permitted liens, in substantially all of their other assets, or “Notes Priority Collateral.”  The indebtedness under the Cash Flow Facility and related guarantees are secured, pari passu with the 11.75% senior secured notes due 2019 and related guarantees, by first-priority security interests in the Notes Priority Collateral and second-priority security interests in the ABL Priority Collateral.  The new senior credit facilities will mature on May 4, 2017, unless, on any of the dates that is 91 days prior to the earliest scheduled maturity of any of the existing second-lien notes, 11.38% senior subordinated notes, or senior unsecured term loan, an aggregate principal amount in excess of $100.0 million of indebtedness under such existing second-lien notes, subordinated notes or senior unsecured term loan, as applicable, is outstanding, in which case the new senior credit facilities will mature on such earlier date.  The new senior credit facilities replace the existing $200.0 million revolving credit facility and are being utilized in lieu of the previously announced commitments from lenders for a $100.0 million accounts receivable securitization facility and a new and/or extended $55.0 million first-priority revolving credit facility.

11.5% Senior Secured Notes due 2014 .  In June 2009 and January 2010, Verso Holdings issued a total of $350.0 million aggregate principal amount of 11.5% senior secured notes due 2014.  In March 2011, Verso Holdings repurchased and retired $35.0 million aggregate principal amount of the notes.  Verso Holdings recognized a loss of $3.6 million in the first quarter of 2011 on the repurchased debt, including the write-off of unamortized debt issuance costs and unamortized discount related to the notes.  On March 21, 2012, Verso Holdings repurchased and retired $270.6 million aggregate principal amount of the notes pursuant to a tender offer.  Verso Holdings recognized a loss of $30.0 million in the first quarter of 2012 on the repurchased debt, including the write-off of unamortized debt issuance costs and unamortized discount related to the notes.  On April 30, 2012, Verso Holdings redeemed the remaining outstanding $44.4 million aggregate principal amount of the notes.  Following such repurchase and redemption, there are no outstanding 11.5% senior secured notes due 2014.

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

The estimated net proceeds from the March 2012 issuance of the 11.75% senior secured notes, after deducting the discount, underwriting fees and offering expenses, were $332.7 million.  On March 21, 2012, Verso Holdings used $285.5 million of the net proceeds to repurchase and retire $270.6 million aggregate principal amount of its 11.5% senior secured notes due 2014.  On April 30, 2012, Verso Holdings paid $48.3 million from the remaining net proceeds and available cash to redeem the remaining outstanding $44.4 million aggregate principal amount of its 11.5% senior secured notes due 2014.

 
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8.75% Second Priority Senior Secured Notes due 2019 .  In January and February 2011, Verso Holdings issued a $360.0 million and $36.0 million, respectively, aggregate principal amount of 8.75% second priority senior secured notes due 2019.  The notes bear interest, payable semi-annually, at the rate of 8.75% per year.  The notes are guaranteed jointly and severally by each of Verso Holdings’ subsidiaries, subject to certain exceptions, and the notes and guarantees are senior secured obligations of Verso Holdings and the guarantors, respectively.  The notes and related guarantees are secured by second-priority security interests, subject to permitted liens, in substantially all of Verso Holdings’ and the guarantors’ tangible and intangible assets, excluding securities of Verso Holdings’ affiliates.  The notes will mature on February 1, 2019.

The net proceeds from the January 2011 issuance of the 8.75% second priority senior secured notes, after deducting the discount, underwriting fees and offering expenses, were $347.8 million.  In the first quarter of 2011, Verso Holdings used a total of $353.9 million of the net proceeds and available cash to repurchase or redeem and retire a total of $337.1 million aggregate principal amount of its 9.13% second priority senior secured notes due 2014.  Following such repurchases and redemption, there are no outstanding 9.13% second priority senior secured notes due 2014.  Verso Holdings recognized a total loss of $22.5 million in the first quarter of 2011 on the retired debt, including the write-off of unamortized debt issuance costs.

The net proceeds from the February 2011 issuance of the 8.75% second priority senior secured notes, including a premium and after deducting the underwriting fees and offering expenses, were $36.1 million.  In March 2011, Verso Holdings used these net proceeds to redeem and retire $35.0 million aggregate principal amount of its 11.5% senior secured notes due 2014.

Second Priority Senior Secured Floating Rate Notes due 2014 .  In August 2006, Verso Holdings issued $250.0 million aggregate principal amount of second priority senior secured floating rate notes due 2014.  As of March 31, 2012, Verso Holdings had repurchased and retired a total of $69.8 million aggregate principal amount of the notes.  The notes bear interest, payable quarterly, at a rate equal to LIBOR plus 3.75% per year.  As of March 31, 2012, the interest rate on the notes was 4.30% per year.  The notes are guaranteed jointly and severally by each of Verso Holdings’ subsidiaries, subject to certain exceptions, and the notes and guarantees are senior secured obligations of Verso Holdings and the guarantors, respectively.  The notes and related guarantees are secured by second-priority security interests, subject to permitted liens, in substantially all of Verso Holdings’ and the guarantors’ tangible and intangible assets, excluding securities of Verso Holdings’ affiliates.  The notes will mature on August 1, 2014.
 
On March 28, 2012, Verso Holdings commenced an exchange offer and consent solicitation for the outstanding $180.2 million aggregate principal amount of its second priority senior secured floating rate notes due 2014, or the “Second Lien Exchange Offer.”   On May 11, 2012, pursuant to the Second Lien Exchange Offer, Verso Holdings issued $166.9 million aggregate principal amount of 11.75% secured notes due 2019 and paid approximately $5.0 million in cash in exchange for $166.9 million aggregate principal amount of the second priority senior secured floating rate notes.  Following the exchange, $13.3 million aggregate principal amount of the second priority senior secured floating rate notes remain outstanding.
 
11.38% Senior Subordinated Notes due 2016 .  In August 2006, Verso Holdings issued $300.0 million aggregate principal amount of 11.38% senior subordinated notes due 2016.  The notes bear interest, payable semi-annually, at the rate of 11.38% per year.  The notes are guaranteed jointly and severally by each of Verso Holdings’ subsidiaries, subject to certain exceptions, and the notes and guarantees are unsecured senior subordinated obligations of Verso Holdings and the guarantors, respectively.  The notes will mature on August 1, 2016.
 
On April 25, 2012, Verso Holdings commenced an exchange offer and consent solicitation for up to $157.5 million aggregate principal amount of the outstanding $300.0 million aggregate principal amount of its 11.38% senior subordinated notes due 2016, or the “Subordinated Notes Exchange Offer.”  On May 11, 2012, pursuant to the Subordinated Notes Exchange Offer, Verso Holdings issued $104.7 million aggregate principal amount of 11.75% secured notes due 2019 and paid approximately $17.3 million in cash in exchange for $157.5 million aggregate principal amount of the 11.38% senior subordinated notes.  Following the exchange, $142.5 million aggregate principal amount of the 11.38% senior subordinated notes remain outstanding.
 
Loan from Verso Paper Finance Holdings LLC/ Verso Paper Holdings LLC .  In December 2010, Verso Quinnesec REP LLC, an indirect, wholly-owned subsidiary of Verso Holdings, entered into a financing transaction with Chase NMTC Verso Investment Fund, LLC, the “Investment Fund,” a consolidated variable interest entity (see Note 11 – New Market Tax Credit Entities).  Under this arrangement, Verso Holdings loaned $23.3 million to Verso Finance pursuant to a 6.5% loan due 2040, and Verso Finance, in turn, loaned the funds on similar terms to the Investment Fund.  The Investment Fund then contributed the loan proceeds to certain community development entities, which, in turn, loaned the funds on similar terms to Verso Quinnesec REP LLC as partial financing for the renewable energy project at our mill in Quinnesec, Michigan.

 
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Senior Unsecured Term Loan .  Verso Finance, the parent entity of Verso Holdings, had $86.2 million outstanding on its senior unsecured term loan as of March 31, 2012.  The loan allows Verso Finance to pay interest either in cash or in kind through the accumulation of the outstanding principal amount.  The loan bears interest, payable quarterly, at a rate equal to LIBOR plus 6.25% per year on interest paid in cash and LIBOR plus 7.00% per year for interest paid in kind, or “PIK,” and added to the principal balance.  As of March 31, 2012, the weighted-average interest rate on the loan was 6.95% per year. Verso Finance elected to exercise the PIK option for $1.5 million and $1.3 million of interest payments due in the first quarter of 2012 and 2011, respectively.  The loan will mature on February 1, 2013.   As of March 31, 2012, the loan is included in Current maturities of long-term debt on the accompanying condensed consolidated balance sheet.

As of March 31, 2012, we were in compliance with the covenants in our debt agreements.

6.
RETIREMENT PLANS

We maintain defined benefit pension plans that provide retirement benefits for hourly employees at the Androscoggin, Bucksport, and Sartell mills who were hired prior to July 1, 2004.  These employees generally are eligible to participate in the pension plan upon completion of one year of service and the attainment of age 21.  Hourly employees at Bucksport and Sartell who are classified as new hires, and who are not recalled, on or after May 1, 2011, are not eligible to participate in the pension plan, and other employees hired after June 30, 2004, who are not eligible to participate in the pension plans, receive an additional company contribution to their accounts under our 401(k) savings plan. The pension plans provide defined benefits based on years of credited service times a specified flat dollar benefit rate.

The following table summarizes the components of net periodic benefit cost for the three months ended March 31, 2012 and 2011:
 
   
Three Months Ended
 
   
March 31,
 
(Dollars in thousands)
 
2012
   
2011
 
Components of net periodic benefit cost:
           
Service cost
  $ 1,771     $ 1,674  
Interest cost
    719       631  
Expected return on plan assets
    (698 )     (645 )
Amortization of prior service cost
    196       294  
Amortization of actuarial loss
    369       98  
Net periodic benefit cost
  $ 2,357     $ 2,052  
 
We make contributions that are sufficient to fully fund our actuarially determined costs, generally equal to the minimum amounts required by the Employee Retirement Income Security Act (ERISA).  In the first quarter of 2012, we made contributions of $1.9 million and made an additional contribution of $2.1 million in April 2012. We expect to make additional contributions of approximately $7.4 million in 2012. We made contributions of $1.5 million in the first quarter of 2011.

ASC Topic 820 provides a common definition of fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.  The fair value framework requires the categorization of assets and liabilities into three levels based upon the assumptions used to value the assets or liabilities (see Note 8 – Fair Value of Financial Instruments for more detail).

 
15
 
 
The following table sets forth by level, within the fair value hierarchy, the pension plans’ assets at fair value as of March 31, 2012, and December 31, 2011.

(Dollars in thousands)
 
Total
   
Level 1
   
Level 2
   
Level 3
 
March 31, 2012
                       
Pooled funds (1) :
                       
Fixed income funds (2)
  $ 27,345     $ -     $ 27,345     $ -  
Domestic equity funds - large cap
    8,834       -       8,834       -  
Domestic equity funds - small cap
    1,683       -       1,683       -  
International equity funds
    1,683       -       1,683       -  
Money market funds
    1,262       -       1,262       -  
Other funds (3)
    1,262       -       1,262       -  
Total assets at fair value
  $ 42,069     $ -     $ 42,069     $ -  
December 31, 2011
                               
Pooled funds (1) :
                               
Fixed income funds (2)
  $ 25,274     $ -     $ 25,274     $ -  
Domestic equity funds - large cap
    8,165       -       8,165       -  
Domestic equity funds - small cap
    1,555       -       1,555       -  
International equity funds
    1,555       -       1,555       -  
Money market funds
    1,167       -       1,167       -  
Other funds (3)
    1,167       -       1,167       -  
Total assets at fair value
  $ 38,883     $ -     $ 38,883     $ -  
(1) 
Value is determined based on the net asset value of units held by the plan at period end.
(2)
This class consists of funds that invest primarily in corporate debt securities, U.S. federal government obligations, and mortgage- and asset-backed  securities.
(3)
This class consists of funds that invest primarily in domestic and international corporate debt securities, U.S. federal and other governmental debt securities, real estate investment trusts, and commodity-linked investments.

7.
DERIVATIVE INSTRUMENTS AND HEDGES

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.  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.  We manage market risk by establishing and monitoring limits on the types and degree of risk that may be undertaken.

Derivative instruments are recorded on the balance sheet as other assets or other liabilities measured at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters.  Where observable prices or inputs are not available, valuation models may be applied.  For a cash flow hedge accounted for under ASC Topic 815, changes in the fair value of the derivative instrument, to the extent that it is effective, are recorded in accumulated other comprehensive income and subsequently reclassified to earnings as the hedged transaction impacts net income.  Any ineffective portion of a cash flow hedge is recognized currently in earnings.  Cash flows from derivative contracts are reported as operating activities on the consolidated statements of cash flows.
 
 
16
 
 
We enter into fixed-price energy swaps as hedges designed to mitigate the risk of changes in commodity prices for forecasted 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.  Historically, we have designated our energy hedging relationships as cash flow hedges under ASC Topic 815 with net gains or losses attributable to effective hedging recorded in Accumulated other comprehensive income and any ineffectiveness recognized in Cost of products sold.
 
One of the requirements that we must evaluate when determining whether a contract qualifies for hedge accounting treatment is whether or not the contract is deemed effective.  A contract is deemed effective if the change in the fair value of the derivative contract offsets, within a specified range, the change in the anticipated cash flows of the hedged transaction.  We must test the effectiveness at the inception of the hedging relationship and quarterly thereafter.  If the relationship fails this test at any time, we are required to discontinue hedge accounting treatment prospectively.  The requirements necessary to apply hedge accounting to these contracts are complex and must be documented at the inception as well as throughout the term of the contract.  If we fail to accurately document these requirements, the contact is not eligible for hedge accounting treatment and any changes in the fair value of the contract must be recognized in current earnings. The accompanying financial statements reflect the discontinuation of hedge accounting for certain contracts that failed to qualify for hedge accounting.  Additionally, effective April 1, 2012, management elected to de-designate the remaining energy swaps that had previously been designated as cash flow hedges and to discontinue hedge accounting prospectively.  As a result, all gains and losses from changes in the fair value of our derivative contracts subsequent to March 31, 2012, will be recognized immediately in Cost of products sold.  Prior to March 31, 2012, to the extent the hedge was effective, the change in fair value was deferred through Accumulated other comprehensive income.  The amount in Accumulated other comprehensive income at the time a contract is de-designated is reclassified into Cost of products sold when the contract settles, or sooner if management determines that the forecasted transaction is probable of not occurring.  Energy swaps continue to be utilized as economic hedges designed to mitigate the risk of changes in commodity prices for future energy purchase commitments.

The following table presents information about the volume and fair value amounts of our derivative instruments:

   
March 31, 2012
   
December 31, 2011
   
          Fair Value Measurements           Fair Value Measurements  
Balance
   
Notional
   
Derivative
   
Derivative
   
Notional
   
Derivative
   
Derivative
 
Sheet
(Dollars in thousands)
 
Amount
   
Asset
   
Liability
   
Amount
   
Asset
   
Liability
 
Location
Derivative contracts designated as
 
 
                                 
hedging instruments
                                     
Fixed price energy swaps - MMBtu's
    739,205     $ -     $ (1,406 )     2,988,107     $ -     $ (4,680 )
 Accrued liabilties
Derivative contracts not designated
                                                 
as hedging instruments
                                                 
Fixed price energy swaps - MMBtu's
    6,347,688     $ -     $ (12,304 )     4,891,187     $ -     $ (7,663 )
 Accrued liabilties
 
Counterparties to the energy swaps we enter into may require us to fund the margin associated with any loss position on the contracts.  We had restricted cash deposits totaling $1.1 million related to margin calls on our outstanding energy swaps as of March 31, 2012.
 
 
17
 
 
The following tables present information about the effect of our derivative instruments on Accumulated other comprehensive income and the consolidated statements of operations:
 
   
Loss Recognized
   
Loss Reclassified
   
 
 
   
in Accumulated OCI
   
from Accumulated OCI
   
Location of
 
               
Three Months Ended
   
Loss on
 
   
March 31,
   
December 31,
   
March 31,
   
Statements
 
(Dollars in thousands)
 
2012
   
2011
   
2012
   
2011
   
of Operations
 
Derivative contracts designated as
 
 
                         
hedging instruments
                             
Fixed price energy swaps (1)
  $ (1,551 )   $ (4,826 )   $ (283 )   $ (1,271 )     (2 )
Derivative contracts not designated
                                       
as hedging instruments
                                       
Fixed price energy swaps (1)
  $ -     $ -     $ (4,357 )   $ -       (2 )
(1)   Net losses at March 31, 2012, are expected to be reclassified from Accumulated other comprehensive income into earnings within the next 25 months.
(2)   Loss reclassified from Accumulated OCI to earnings is included in Cost of products sold.
 
 
               
Loss Recognized
       
   
Loss Recognized
   
on Derivative
   
Location of
 
   
on Derivative
   
(Ineffective Portion)
   
Loss on
 
   
Three Months Ended March 31,
   
Statements
 
(Dollars in thousands)
 
2012
   
2011
   
2012
   
2011
   
of Operations
 
Derivative contracts designated as
 
 
                         
hedging instruments
                             
Fixed price energy swaps
  $ (48 )   $ (346 )   $ (2 )   $ (4 )     (1 )
Derivative contracts not designated
                                       
as hedging instruments
                                       
Fixed price energy swaps
  $ (3,559 )   $ -     $ -     $ -       (1 )
(1)   Loss recognized in earnings is included in Cost of products sold.
 
8.
FAIR VALUE OF FINANCIAL INSTRUMENTS

We use fair value measurements for the initial recording of certain assets and liabilities, periodic remeasurement of certain assets and liabilities, and disclosures.  Fair value is generally defined as the exit price at which an asset or liability could be exchanged in a current transaction between willing, unrelated parties, other than in a forced or liquidation sale.
 
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.

 
18
 
 
The following table summarizes the balances of assets and liabilities measured at fair value on a recurring basis:
 
(Dollars in thousands)
 
Total
   
Level 1
   
Level 2
   
Level 3
 
March 31, 2012
                       
Assets:
                       
Deferred compensation assets
  $ 2,844     $ 2,844     $ -     $ -  
Liabilities:
                               
Commodity swaps
  $ 13,710     $ -     $ 13,710     $ -  
Deferred compensation liabilities
    2,844       2,844       -       -  
December 31, 2011
                               
Assets:
                               
Deferred compensation assets
  $ 2,672     $ 2,672     $ -     $ -  
Regional Greenhouse Gas Initiative carbon credits
    425       -       425       -  
Liabilities:
                               
Commodity swaps
  $ 12,343     $ -     $ 12,343     $ -  
Deferred compensation liabilities
    2,672       2,672       -       -  
Fair values are based on observable market data.
 
We did not record any impairment charges on long-lived assets and no significant events occurred requiring non-financial assets and liabilities to be measured at fair value (subsequent to initial recognition) during the three months ended March 31, 2012 or 2011.

9.
RELATED PARTY TRANSACTIONS

Sales to and Purchases from related parties —   We had net sales to xpedx, a business of International Paper, and its affiliated companies of approximately $31.6 million for the first quarter of 2012, compared to $43.0 million for the same period in 2011. We had purchases from related parties, primarily xpedx and its affiliated companies, of approximately $1.4 million and $1.8 million, included in cost of products sold for the first quarter of 2012 and 2011, respectively.

Accounts receivable from and payable to related parties —   We had accounts receivable from xpedx and its affiliated companies of approximately $9.0 million and $9.9 million as of March 31, 2012 and December 31, 2011, respectively.  We had accounts payable to related parties, primarily xpedx and its affiliated companies, of approximately $0.5 million and $0.7 million as of March 31, 2012 and December 31, 2011, respectively.

Management Agreement —   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, which will expire on 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 our financial advisor or investment banker for any merger, acquisition, disposition, financing or the like if we decide to engage someone to fill such role.  In the event that we are 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, we have 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).  We 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.
 
 
19
 
 
Distributions to Verso Finance — Verso Finance has a senior unsecured term loan which matures on February 1, 2013.  The loan allows Verso Finance to pay interest either in cash or in kind through the accumulation of the outstanding principal amount. Verso Finance elected to exercise the PIK option for $1.5 million and $1.3 million of interest payments due in the first quarter of 2012 and 2011, respectively.  Verso Finance has no independent operations; consequently, all cash flows used to service its remaining debt obligation will need to be received via distributions from Verso Holdings. Verso Holdings made negligible distributions to Vero Finance for the quarter ended March 31, 2012, and made no distributions for the same period in 2011. Verso Holdings has no obligation to make distributions to Verso Finance.

Verso Quinnesec Renewable Energy Project — On December 29, 2010, Verso Quinnesec REP LLC, an indirect, wholly-owned subsidiary of Verso Holdings, entered into a financing transaction with Chase NMTC Verso Investment Fund, LLC, the “Investment Fund,” a consolidated variable interest entity (see Note 11 – New Market Tax Credit Entities).  Under this arrangement, Verso Holdings loaned $23.3 million to Verso Finance pursuant to a 6.5% loan due December 29, 2040, and Verso Finance, in turn, loaned the funds on similar terms to the Investment Fund.  The Investment Fund then contributed the loan proceeds to certain community development entities, which, in turn, loaned the funds on similar terms to Verso Quinnesec REP LLC as partial financing for the renewable energy project at our mill in Quinnesec, Michigan.  As of both March 31, 2012, and December 31, 2011, Verso Holdings had a $23.3 million long-term receivable due from Verso Finance, representing these funds and accrued interest receivable of $0.1 million, while the Investment Fund had an outstanding loan of $23.3 million due to Verso Finance and accrued interest payable of $0.1 million.  In addition, for both the three months ended March 31, 2012 and 2011, Verso Holdings recognized interest income from Verso Finance of $0.4 million; and the Investment Fund recognized interest expense to Verso Finance of $0.4 million.

Verso Paper   — As of March 31, 2012, Verso Holdings had $0.8 million in current payables due to Verso Paper compared to $0.9 million for 2011.  Verso Holdings has made distributions to pay expenses on behalf of Verso Paper.  Distributions for the three months ended March 31, 2012 were negligible. No distributions were made for the three months ended March 31, 2011.
 
10.
RESTRUCTURING AND OTHER CHARGES
 
In 2011, we permanently shut down the No. 2 coated groundwood paper machine at our mill in Bucksport, Maine, and two supercalendered paper machines at our mill in Sartell, Minnesota, thereby reducing annual production capacity by 193,000 tons.  The following table details the cumulative charges incurred related to the shut-down through March 31, 2012:
 
(Dollars in thousands)
 
Total
Restructuring
Charges
   
Recognized and/or
paid as of March
31, 2012
   
Remaining Costs
to be Paid
 
Severance and benefit costs
  $ 15,146     $ 13,528     $ 1,618  
Accelerated depreciation of property, plant and equipment
    7,068       7,068       -  
Write-off of related spare parts and inventory
    2,080       2,080       -  
Other miscellaneous costs
    255       187       68  
Total restructuring costs
  $ 24,549     $ 22,863     $ 1,686  
 
 
20
 

The following details the changes in our associated shut-down liability during the quarter ended March 31, 2012, which is included in Accrued liabilities on our condensed consolidated balance sheets:
 
   
Three Months
 
   
Ended
 
(Dollars in thousands)
 
March 31, 2012
 
Balance of reserve at December 31, 2011
  $ 10,763  
Purchase obligations payments
    (22 )
Severance and benefit payments
    (9,055 )
Balance of reserve at March 31, 2012
  $ 1,686  

The following table details the charges incurred related to the shut-down as included in Restructuring and other charges on our condensed consolidated statements of operations for the quarter ended March 31, 2012:

   
Three Months
 
   
Ended
 
(Dollars in thousands)
 
March 31, 2012
 
Severance and benefit costs
  $ 142  
Write-off of related spare parts and inventory
    (198 )
Other miscellaneous costs
    141  
Total restructuring costs
  $ 85  

There were no restructuring and other charges for the quarter ended March 31, 2011.

11.
NEW MARKET TAX CREDIT ENTITIES
 
In 2010 we entered into a financing transaction with Chase Community Equity, LLC, or “Chase,” related to a $43 million renewable energy project at our mill in Quinnesec, Michigan in which Chase made a capital contribution and Verso Finance made a loan to Chase NMTC Verso Investment Fund, LLC, the “Investment Fund,” under a qualified New Markets Tax Credit, or “NMTC,” program.  The NMTC program was provided for in the Community Renewal Tax Relief Act of 2000, or the “Act,” and is intended to induce capital investment in qualified lower income communities.  The Act permits taxpayers to claim credits against their Federal income taxes for up to 39% of qualified investments in the equity of community development entities, or “CDEs.”  CDEs are privately managed investment institutions that are certified to make qualified low-income community investments, or “QLICIs.”

In connection with the financing, Verso Holdings loaned $23.3 million to Verso Finance pursuant to a 6.5% loan due 2040, and Verso Finance, in turn, loaned the funds on similar terms to the Investment Fund.  The Investment Fund then contributed the loan proceeds to certain CDEs, which, in turn, loaned the funds on similar terms to Verso Quinnesec REP LLC, our indirect, wholly-owned subsidiary.  The proceeds of the loans from the CDEs (including loans representing the capital contribution made by Chase, net of syndication fees) were used to partially fund the renewable energy project.

In 2010 Chase also contributed $9.0 million to the Investment Fund, and as such, Chase is entitled to substantially all of the benefits derived from the NMTCs.  This transaction includes a put/call provision whereby we may be obligated or entitled to repurchase Chase’s interest.  We believe that Chase will exercise the put option in December 2017 at the end of the recapture period.  The value attributed to the put/call is de minimis.  The NMTC is subject to 100% recapture for a period of seven years as provided in the Internal Revenue Code.  We are required to be in compliance with various regulations and contractual provisions that apply to the NMTC arrangement.  Non-compliance with applicable requirements could result in projected tax benefits not being realized and, therefore, require us to indemnify Chase for any loss or recapture of NMTCs related to the financing until such time as our obligation to deliver tax benefits is relieved.  We do not anticipate any credit recaptures will be required in connection with this arrangement.

 
21
 
 
We have determined that the financing arrangement is a variable interest entity, or “VIE.”  The ongoing activities of the VIE – collecting and remitting interest and fees and NMTC compliance – were all considered in the initial design and are not expected to significantly affect economic performance throughout the life of the VIE.  Management considered the contractual arrangements that obligate us to deliver tax benefits and provide various other guarantees to the structure; Chase’s lack of a material interest in the underling economics of the project; and the fact that we are obligated to absorb losses of the VIE.  We concluded that we are the primary beneficiary and consolidated the VIE in accordance with the accounting standard for consolidation.  Chase’s contribution, net of syndication fees, is included in Other liabilities in the accompanying condensed consolidated balance sheets.  Direct costs incurred in structuring the arrangement are deferred and will be recognized as expense over the term of the notes.  Incremental costs to maintain the structure during the compliance period are recognized as incurred.

The following table summarizes the impact of the VIE consolidated by Verso Holdings as of March 31, 2012 and December 31, 2011:
 
   
VERSO PAPER
   
VERSO HOLDINGS
 
   
March 31,
   
December 31,
   
March 31,
   
December 31,
 
(Dollars in thousands)
 
2012
   
2011
   
2012
   
2011
 
Current assets
  $ 64     $ 81     $ 64     $ 81  
Non-current assets
    85       85       23,390       23,390  
Total assets
  $ 149     $ 166     $ 23,454     $ 23,471  
Current liabilities
    62       79       189       205  
Long-term debt
    -       -       23,305       23,305  
Other non-current liabilities
    7,923       7,923       7,923       7,923  
Total liabilities
  $ 7,985     $ 8,002     $ 31,417     $ 31,433  
Amounts presented in the condensed consolidated balance sheets and the table above are adjusted for intercompany eliminations.
 
12.
COMMITMENTS AND CONTINGENCIES
 
Bucksport Energy LLC — We have a joint ownership interest with Bucksport Energy LLC, an unrelated third party, in a cogeneration power plant producing steam and electricity.  The plant was built in 2000 and is located at and supports our mill in Bucksport, Maine.  Each co-owner owns an undivided proportional share of the plant’s assets, and we account for this investment under the proportional consolidation method.  We own 28% of the steam and electricity produced by the plant.  We may purchase our remaining electrical needs from the plant at market rates.  We are obligated to purchase the remaining 72% of the steam output from the plant at fuel cost plus a contractually fixed fee per unit of steam.  Power generation and operating expenses are divided on the same basis as ownership.  As of March 31, 2012, we had $0.2 million of restricted cash which may be used only to fund the ongoing energy operations of this investment included in Intangibles and other assets in the accompanying condensed consolidated balance   sheets.

Thilmany, LLC — In connection with the Acquisition, we assumed a twelve-year supply agreement with Thilmany, LLC, or “Thilmany,” for the specialty paper products manufactured on paper machine no. 5 our  Androscoggin mill in Jay, Maine, which expires on June 1, 2017.  The agreement requires Thilmany to pay us a variable charge for the paper purchased and a fixed charge for the availability of the no. 5 paper machine.  We are responsible for the machine’s routine maintenance and Thilmany is responsible for any capital expenditures specific to the machine.  Thilmany has the right to terminate the agreement if certain events occur.

 
22
 
 
General Litigation   — We are involved in legal proceedings incidental to the conduct of our business.  We do not believe that any liability that may result from these proceedings will have a material adverse effect on our financial statements.
 
13.
INFORMATION BY INDUSTRY SEGMENT
 
Our reporting segments correspond to the following three market segments in which we operate: coated papers, including coated groundwood and coated freesheet; hardwood market pulp; and other, consisting of specialty papers.  We operate primarily in one geographic segment, North America.  Our products are used primarily in media and marketing applications, including magazines, catalogs and commercial printing applications such as high-end advertising brochures, annual reports and direct-mail advertising.

The following table summarizes the industry segment data for the three-month periods ended March 31, 2012 and 2011:

   
VERSO PAPER
   
VERSO HOLDINGS
 
   
Three Months Ended
   
Three Months Ended
 
   
March 31,
   
March 31,
 
(Dollars in thousands)
 
2012
   
2011
   
2012
   
2011
 
Net Sales:
                       
Coated papers
  $ 303,215     $ 351,690     $ 303,215     $ 351,690  
Hardwood market pulp
    32,870       35,737       32,870       35,737  
Other
    39,210       29,165       39,210       29,165  
Total
  $ 375,295     $ 416,592     $ 375,295     $ 416,592  
Operating Income (Loss):
                               
Coated papers
  $ (8,862 )     8,173     $ (8,811 )     8,224  
Hardwood market pulp
    961       9,264       961       9,264  
Other
    (4,410 )     (3,354 )     (4,410 )     (3,354 )
Total
  $ (12,311 )   $ 14,083     $ (12,260 )   $ 14,134  
Depreciation, Amortization, and Depletion:
                               
Coated papers
  $ 24,620     $ 25,116     $ 24,620     $ 25,116  
Hardwood market pulp
    4,273       4,283       4,273       4,283  
Other
    2,530       1,948       2,530       1,948  
Total
  $ 31,423     $ 31,347     $ 31,423     $ 31,347  
Capital Spending:
                               
Coated papers
  $ 15,450     $ 9,165     $ 15,450     $ 9,165  
Hardwood market pulp
    919       3,861       919       3,861  
Other
    621       216       621       216  
Total
  $ 16,990     $ 13,242     $ 16,990     $ 13,242  
 
 
23
 
 
14.
CONDENSED CONSOLIDATING FINANCIAL INFORMATION
 
Presented below are Verso Holdings’ consolidating balance sheets, statements of operations, statements of comprehensive income, and statements of cash flows, as required by Rule 3-10 of Regulation S-X of the Securities Exchange Act of 1934, as amended.  The consolidating financial statements have been prepared from Verso Holdings’ financial information on the same basis of accounting as the consolidated financial statements.  Investments in our subsidiaries are accounted for under the equity method.  Accordingly, the entries necessary to consolidate Verso Holdings’ subsidiaries that guaranteed the obligations under the debt securities described below are reflected in the Eliminations column.

Verso Holdings,  the “Parent Issuer,” and its direct, 100% owned subsidiary, Verso Paper Inc., the “Subsidiary Issuer,” are the issuers of 11.75% senior secured notes due 2019, 11.5% senior secured notes due 2014, 8.75% second priority senior secured notes due 2019, second priority senior secured floating rate notes due 2014, and 11.38% senior subordinated notes due 2016 (collectively, the “Notes”).  The Notes are jointly and severally guaranteed on a full and unconditional basis by the Parent Issuer’s 100% owned subsidiaries, excluding the Subsidiary Issuer, Bucksport Leasing LLC, and Verso Quinnesec REP LLC, collectively, the “Guarantor Subsidiaries.”  Chase NMTC Verso Investment Fund, LLC, a consolidated VIE of Verso Holdings, is a “Non-Guarantor Affiliate.”

Verso Paper Holdings LLC
 
Condensed Consolidating Balance Sheet
 
March 31, 2012
 
                                           
                     
Non-
   
Non-
             
   
Parent
   
Subsidiary
   
Guarantor
   
Guarantor
   
Guarantor
             
(Dollars in thousands)
 
Issuer
   
Issuer
   
Subsidiaries
   
Subsidiary
   
Affiliate
   
Eliminations
   
Consolidated
 
ASSETS
                                         
Cash and cash equivalents
  $ -     $ -     $ 56,078     $ -     $ 57     $ -     $ 56,135  
Accounts receivable, net
    -       -       104,873       14,676       -       -       119,549  
Inventories
    -       -       192,820       -       -       -       192,820  
Prepaid expenses and other assets
    -       -       6,674       -       7       -       6,681  
Current assets
    -       -       360,445       14,676       64       -       375,185  
Property, plant, and equipment, net
    -       -       892,503       15,195       -       (288 )     907,410  
Intercompany/affiliate receivable
    1,300,157       -       -       222       31,153       (1,331,532 )     -  
Investment in subsidiaries
    (154,865 )     -       11       -       -       154,854       -  
Other non-current assets (1)
    -       -       114,356       1,072       17       68       115,513  
Total assets
  $ 1,145,292     $ -     $ 1,367,315     $ 31,165     $ 31,234     $ (1,176,898 )   $ 1,398,108  
LIABILITIES AND MEMBER'S EQUITY
   
 
                                                 
Accounts payable
  $ -     $ -     $ 112,957     $ 8     $ 62     $ (7 )   $ 113,020  
Accrued liabilities
    15,367       -       62,600       -       127       -       78,094  
Current liabilities
    15,367       -       175,557       8       189       (7 )     191,114  
Intercompany/affiliate payable
    -       -       1,300,379       31,146       -       (1,331,525 )     -  
Long-term debt (2)
    1,259,014       -       -       -       23,305       -       1,282,319  
Other long-term liabilities
    -       -       45,841       -       7,923       -       53,764  
Member's (deficit) equity
    (129,089 )     -       (154,462 )     11       (183 )     154,634       (129,089 )
Total liabilities and equity
  $ 1,145,292     $ -     $ 1,367,315     $ 31,165     $ 31,234     $ (1,176,898 )   $ 1,398,108  
(1) Non-current assets of Guarantor Subsidiaries includes $23.3 million of a long-term note receivable from Verso Finance.
(2) Long-term debt of Non-Guarantor Affiliate is payable to Verso Finance.
 
 
24
 
 
Verso Paper Holdings LLC
 
Condensed Consolidating Balance Sheet
 
December 31, 2011
 
                                           
                     
Non-
   
Non-
             
   
Parent
   
Subsidiary
   
Guarantor
   
Guarantor
   
Guarantor
             
(Dollars in thousands)
 
Issuer
   
Issuer
   
Subsidiaries
   
Subsidiary
   
Affiliate
   
Eliminations
   
Consolidated
 
ASSETS
                                         
Cash and cash equivalents
  $ -     $ -     $ 94,722     $ -     $ 73     $ -     $ 94,795  
Accounts receivable, net
    -       -       128,213       -       -       -       128,213  
Inventories
    -       -       166,876       -       -       -       166,876  
Prepaid expenses and other assets
    -       -       3,230       -       8       -       3,238  
Current assets
    -       -       393,041       -       81       -       393,122  
Property, plant, and equipment, net
    -       -       904,901       30,086       -       (288 )     934,699  
Intercompany/affiliate receivable
    1,249,306       -       -       340       31,153       (1,280,799 )     -  
Investment in subsidiaries
    (84,459 )     -       356       -       -       84,103       -  
Other non-current assets (1)
    -       -       115,461       1,076       30       54       116,621  
Total assets
  $ 1,164,847     $ -     $ 1,413,759     $ 31,502     $ 31,264     $ (1,196,930 )   $ 1,444,442  
LIABILITIES AND MEMBER'S EQUITY
   
 
                                                 
Accounts payable
  $ -     $ -     $ 110,517     $ -     $ 79     $ (7 )   $ 110,589  
Accrued liabilities
    48,259       -       91,297       -       126       -       139,682  
Current liabilities
    48,259       -       201,814       -       205       (7 )     250,271  
Intercompany/affiliate payable
    -       -       1,249,646       31,146       -       (1,280,792 )     -  
Long-term debt (2)
    1,177,772       -       -       -       23,305       -       1,201,077  
Other long-term liabilities
    -       -       46,355       -       7,923       -       54,278  
Member's (deficit) equity
    (61,184 )     -       (84,056 )     356       (169 )     83,869       (61,184 )
Total liabilities and equity
  $ 1,164,847     $ -     $ 1,413,759     $ 31,502     $ 31,264     $ (1,196,930 )   $ 1,444,442  
(1) Other non-current assets of Guarantor Subsidiaries includes $23.3 million of a long-term note receivable from Verso Finance.
(2) Long-term debt of Non-Guarantor Affiliate is payable to Verso Finance.
 
 
Verso Paper Holdings LLC
 
Condensed Consolidating Statements of Operations
 
Three Months Ended March 31, 2012
 
                                           
                     
Non-
   
Non-
             
   
Parent
   
Subsidiary
   
Guarantor
   
Guarantor
   
Guarantor
             
(Dollars in thousands)
 
Issuer
   
Issuer
   
Subsidiaries
   
Subsidiary
   
Affiliate
   
Eliminations
   
Consolidated
 
Net sales
  $ -     $ -     $ 375,295     $ -     $ -     $ -     $ 375,295  
Cost of products sold (exclusive of
                                                       
  depreciation, amortization, and depletion)
    -       -       337,280       -       -       -       337,280  
Depreciation, amortization, and depletion
    -       -       31,064       359       14       (14 )     31,423  
Selling, general, and administrative expenses
    -       -       19,167       (408 )     8       -       18,767  
Restructuring and other charges
    -       -       85       -       -       -       85  
Interest income
    (31,188 )     -       (380 )     -       (387 )     31,575       (380 )
Interest expense
    31,188       -       30,531       394       379       (31,575 )     30,917  
Other loss, net
    29,971       -       (401 )     -       -       -       29,570  
Equity in net loss of subsidiaries
    (42,396 )     -       -       -       -       42,396       -  
Net loss
  $ (72,367 )   $ -     $ (42,051 )   $ (345 )   $ (14 )   $ 42,410     $ (72,367 )
 
 
25
 
 
Verso Paper Holdings LLC
 
Condensed Consolidating Statements of Comprehensive Income
 
Three Months Ended March 31, 2012
 
                                           
                     
Non-
   
Non-
             
   
Parent
   
Subsidiary
   
Guarantor
   
Guarantor
   
Guarantor
             
(Dollars in thousands)
 
Issuer
   
Issuer
   
Subsidiaries
   
Subsidiary
   
Affiliate
   
Eliminations
   
Consolidated
 
Net Loss
  $ (72,367 )   $ -     $ (42,051 )   $ (345 )   $ (14 )   $ 42,410     $ (72,367 )
Other comprehensive income (loss):
                                                       
Derivative financial instruments:
                                                       
  Effective portion of net unrealized losses
    -       -       (1,246 )     -       -       -       (1,246 )
  Reclassification from accumulated other
                                                       
    comprehensive loss to net loss
    -       -       4,640       -       -       -       4,640  
Defined benefit pension plan amortization of
                                                       
  net loss and prior service cost
    -       -       565       -       -       -       565  
Other comprehensive income
    -       -       3,959       -       -       -       3,959  
Comprehensive loss
  $ (72,367 )   $ -     $ (38,092 )   $ (345 )   $ (14 )   $ 42,410     $ (68,408 )
 
 
Verso Paper Holdings LLC
 
Condensed Consolidating Statements of Operations
 
Three Months Ended March 31, 2011
 
                                           
                     
Non-
   
Non-
             
   
Parent
   
Subsidiary
   
Guarantor
   
Guarantor
   
Guarantor
             
(Dollars in thousands)
 
Issuer
   
Issuer
   
Subsidiaries
   
Subsidiary
   
Affiliate
   
Eliminations
   
Consolidated
 
Net sales
  $ -     $ -     $ 416,592     $ -     $ -     $ -     $ 416,592  
Cost of products sold (exclusive of
                                                       
  depreciation, amortization, and depletion)
    -       -       352,528       -       -       -       352,528  
Depreciation, amortization, and depletion
    -       -       31,341       6       14       (14 )     31,347  
Selling, general, and administrative expenses
    -       -       18,506       (24 )     101       -       18,583  
Interest income
    (31,781 )     -       (396 )     (16 )     (387 )     32,168       (412 )
Interest expense
    31,781       -       30,958       394       379       (32,168 )     31,344  
Other loss, net
    26,092       -       84       -       -       -       26,176  
Equity in net loss of subsidiaries
    (16,882 )     -       -       -       -       16,882       -  
Net loss
  $ (42,974 )   $ -     $ (16,429 )   $ (360 )   $ (107 )   $ 16,896     $ (42,974 )
 
 
Verso Paper Holdings LLC
 
Condensed Consolidating Statements of Comprehensive Income
 
Three Months Ended March 31, 2011
 
                                           
                     
Non-
   
Non-
             
   
Parent
   
Subsidiary
   
Guarantor
   
Guarantor
   
Guarantor
             
(Dollars in thousands)
 
Issuer
   
Issuer
   
Subsidiaries
   
Subsidiary
   
Affiliate
   
Eliminations
   
Consolidated
 
Net Loss
  $ (42,974 )   $ -     $ (16,429 )   $ (360 )   $ (107 )   $ 16,896     $ (42,974 )
Other comprehensive income (loss):
                                                       
Derivative financial instruments:
                                                       
  Effective portion of net unrealized losses
    -       -       (158 )     -       -       -       (158 )
  Reclassification from accumulated other
                                                       
    comprehensive loss to net loss
    -       -       1,271       -       -       -       1,271  
Defined benefit pension plan amortization of
                                                       
  net loss and prior service cost
    -       -       392       -       -       -       392  
Other comprehensive income
    -       -       1,505       -       -       -       1,505  
Comprehensive loss
  $ (42,974 )   $ -     $ (14,924 )   $ (360 )   $ (107 )   $ 16,896     $ (41,469 )
 
 
26
 
 
Verso Paper Holdings LLC
 
Condensed Consolidating Statements of Cash Flows
 
Three Months Ended March 31, 2012
 
                                           
                     
Non-
   
Non-
             
   
Parent
   
Subsidiary
   
Guarantor
   
Guarantor
   
Guarantor
             
(Dollars in thousands)
 
Issuer
   
Issuer
   
Subsidiaries
   
Subsidiary
   
Affiliate
   
Eliminations
   
Consolidated
 
Net cash used in operating activities
  $ -     $ -     $ (70,611 )   $ 148     $ (16 )   $ -     $ (70,479 )
Cash flows from investing activities:
                                                       
Proceeds from sale of fixed assets
    -       -       378       -       -       -       378  
Transfers to (from) restricted cash
    -       -       (288 )     (4 )     -       -       (292 )
Return of investment in subsidiaries
    63       -       (63 )     -       -       -          
Capital expenditures
    -       -       (16,846 )     (144 )     -       -       (16,990 )
Net cash used in investing activities
    63       -       (16,819 )     (148 )     -       -       (16,904 )
Cash flows from financing activities:
                                                       
Proceeds from long-term debt
    341,191       -       -       -       -       -       341,191  
Repayments of long-term debt
    (285,455 )     -       -       -       -       -       (285,455 )
Debt issuance costs
    (8,626 )     -       1,676       -       -       -       (6,950 )
Cash distributions
    (63 )     -       -       -       -       -       (63 )
Repayment of advances to subsidiaries
    285,455       -       (285,455 )     -       -       -       -  
Advances to subsidiaries
    (332,565 )     -       332,565       -       -       -       -  
Net cash (used in) provided by financing activities
    (63 )     -       48,786       -       -       -       48,723  
Change in cash and cash equivalents
    -       -       (38,644 )     -       (16 )     -       (38,660 )
Cash and cash equivalents at beginning of period
    -       -       94,722       -       73       -       94,795  
Cash and cash equivalents at end of period
  $ -     $ -     $ 56,078     $ -     $ 57     $ -     $ 56,135  
 
 
Verso Paper Holdings LLC
 
Condensed Consolidating Statements of Cash Flows
 
Three Months Ended March 31, 2011
 
                                           
                     
Non-
   
Non-
             
   
Parent
   
Subsidiary
   
Guarantor
   
Guarantor
   
Guarantor
             
(Dollars in thousands)
 
Issuer
   
Issuer
   
Subsidiaries
   
Subsidiary
   
Affiliate
   
Eliminations
   
Consolidated
 
Net cash used in operating activities
  $ -     $ -     $ (81,520 )   $ (1,224 )   $ 12     $ -     $ (82,732 )
Cash flows from investing activities:
                                                       
Proceeds from sale of fixed assets
    -       -       24       -       -       -       24  
Transfers to (from) restricted cash
    -       -       (307 )     4,125       -       -       3,818  
Capital expenditures
    -       -       (10,573 )     (2,669 )     -       -       (13,242 )
Net cash used in investing activities
    -       -       (10,856 )     1,456       -       -       (9,400 )
Cash flows from financing activities:
                                                       
Proceeds from long-term debt
    394,618       -       -       -       -       -       394,618  
Repayments of long-term debt
    (389,998 )     -       -       -       -       -       (389,998 )
Debt issuance costs
    (10,378 )     -       152       (232 )     -       -       (10,458 )
Repayment of advances to subsidiaries
    389,998       -       (389,998 )     -       -       -       -  
Advances to subsidiaries
    (384,240 )     -       384,240       -       -       -       -  
Net cash used in financing activities
    -       -       (5,606 )     (232 )     -       -       (5,838 )
Change in cash and cash equivalents
    -       -       (97,982 )     -       12       -       (97,970 )
Cash and cash equivalents at beginning of period
    -       -       152,702       -       4       -       152,706  
Cash and cash equivalents at end of period
  $ -     $ -     $ 54,720     $ -     $ 16     $ -     $ 54,736  
 
 
27
 
 
15.
SUBSEQUENT EVENTS
 
On March 7, 2012, Verso Holdings commenced a tender offer to repurchase the outstanding $315.0 million aggregate principal amount of its 11.5% senior secured notes due 2014.  On March 21, 2012, Verso Holdings repurchased and retired $270.6 million aggregate principal amount of the notes.  On April 30, 2012, Verso Holdings redeemed the remaining outstanding $44.4 million aggregate principal amount of the notes.  Following the redemption, there are no outstanding 11.5% senior secured notes due 2014.
 
On March 21, 2012, Verso Holdings issued $345.0 million aggregate principal amount of 11.75% senior secured notes due 2019.  The estimated net proceeds from the issuance of the notes, after deducting the discount, underwriting fees and offering expenses, were $332.7 million.  Verso Holdings used the net proceeds to fund the repurchase and redemption of the outstanding $315.0 million aggregate principal amount of its 11.5% senior secured notes due 2014.
 
On March 28, 2012, Verso Holdings commenced an exchange offer and consent solicitation for the outstanding $180.2 million aggregate principal amount of its second priority senior secured floating rate notes due 2014, or the “Second Lien Exchange Offer.”   On May 11, 2012, pursuant to the Second Lien Exchange Offer, Verso Holdings issued $166.9 million aggregate principal amount of 11.75% secured notes due 2019 and paid approximately $5.0 million in cash in exchange for $166.9 million aggregate principal amount of the second priority senior secured floating rate notes.  Following the exchange, $13.3 million aggregate principal amount of the second priority senior secured floating rate notes remain outstanding.
 
The 11.75% secured notes due 2019 bear interest, payable semi-annually, at the rate of 11.75% per year.  The notes are guaranteed jointly and severally by each of Verso Holdings’ subsidiaries, subject to certain exceptions, and the notes and guarantees are senior secured obligations of Verso Holdings and the guarantors, respectively.  The notes and related guarantees are secured by security interests, subject to permitted liens, in substantially all of Verso Holdings’ and the guarantors’ tangible and intangible assets.  The security interests securing the notes rank junior to those securing the obligations under the ABL Facility, the Cash Flow Facility, and the 11.75% senior secured notes due 2019 and senior to those securing the second priority senior secured floating rate notes due 2014 and the 8.75% second priority senior secured notes due 2019.  The notes will mature on January 15, 2019.
 
On April 25, 2012, Verso Holdings commenced an exchange offer and consent solicitation for up to $157.5 million aggregate principal amount of the outstanding $300.0 million aggregate principal amount of its 11.38% senior subordinated notes due 2016, or the “Subordinated Notes Exchange Offer.”  On May 11, 2012, pursuant to the Subordinated Notes Exchange Offer, Verso Holdings issued $104.7 million aggregate principal amount of 11.75% secured notes due 2019 and paid approximately $17.3 million in cash in exchange for $157.5 million aggregate principal amount of the 11.38% senior subordinated notes.  Following the exchange, $142.5 million aggregate principal amount of the 11.38% senior subordinated notes remain outstanding.
 
On May 4, 2012, Verso Holdings entered into new senior credit facilities, consisting of a $150.0 million asset-based loan revolving credit facility and a $50.0 million cash-flow revolving credit facility.  The new senior credit facilities were used to repay the outstanding indebtedness under the existing $200.0 million revolving credit facility and will be used to provide ongoing working capital and for other general corporate purposes.
 
 
28
 

ITEM 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Overview

We are a leading North American supplier of coated papers to catalog and magazine publishers.  Coated paper is used primarily in media and marketing applications, including catalogs, magazines, and commercial printing applications such as high-end advertising brochures, annual reports, and direct mail advertising.  We are one of North America’s largest producers of coated groundwood paper which is used primarily for catalogs and magazines.  We are also a low cost producer of coated freesheet paper which is used primarily for annual reports, brochures, and magazine covers.  We also produce and sell market kraft pulp which is used to manufacture printing and writing paper grades and tissue products.

Financial Summary

Our net sales for the first quarter of 2012 decreased $41.3 million, or 9.9%, reflecting an 8.2% decrease in sales volume and a 1.9% decrease in the average sales price for all of our products.  Typically the first quarter is a seasonally slow quarter due to lower demand for coated paper.  However, prior year results were positively impacted by unusually high sales volume for coated papers in March of 2011.  The decline in sales volume for the first quarter of 2012 was also impacted by the permanent shutdown of three paper machines in the fourth quarter of 2011.  The lower average sales price for all of our products reflects a decline in the price of pulp while coated paper prices remained flat compared to the first quarter of 2011.  We announced a price increase of $60 per ton on coated groundwood and $30 per ton on coated freesheet, effective, May 1, 2012.  Additionally, three pulp price increases, each for $30 per metric ton, have been announced since March 1.
 
We continue to focus on our capital structure, refinancing our existing senior secured notes due 2014 with new senior secured notes due 2019.  On May 4, 2012, Verso Holdings entered into new senior credit facilities, consisting of a $150.0 million asset-backed revolving credit facility, or “ABL Facility,” and a $50.0 million cash-flow credit facility, or “Cash Flow Facility.”  These facilities replaced our existing $200.0 million revolving credit facility.  We also initiated exchange offers for our second priority senior secured floating rate notes due 2014 and for a portion of our senior subordinated notes due 2016, both of which will extend our maturity dates to 2019.
 
Our capital expenditures increased to $17.0 million in the first quarter of 2012 compared to $9.4 million, net of funds transferred from restricted cash, in the same period last year, reflecting our ongoing investment in our renewable energy strategy, including the Bucksport renewable energy project which continues to be on schedule.

Results of Operations

The following table sets forth the historical results of operations of Verso Paper and Verso Holdings for the periods indicated below.  The following discussion of our financial condition and results of operations should be read in conjunction with our financial statements and notes thereto included elsewhere in this Quarterly Report.  All assets, liabilities, income, expenses and cash flows presented for all periods represent those of Verso Paper’s wholly-owned subsidiary, Verso Holdings, in all material respects, except for Verso Paper’s common stock transactions and Verso Finance’s debt obligation and related financing costs and interest expense.  Unless otherwise noted, the information provided pertains to both Verso Paper and Verso Holdings.

 
29
 
 
   
VERSO PAPER
   
VERSO HOLDINGS
 
   
Three Months Ended
   
Three Months Ended
 
   
March 31,
   
March 31,
 
(Dollars in thousands)
 
2012
   
2011
   
2012
   
2011
 
Net sales
  $ 375,295     $ 416,592     $ 375,295     $ 416,592  
Costs and expenses:
                               
Cost of products sold - exclusive of
                               
depreciation, amortization, and depletion
    337,280       352,528       337,280       352,528  
Depreciation, amortization, and depletion
    31,423       31,347       31,423       31,347  
Selling, general, and administrative expenses
    18,818       18,634       18,767       18,583  
Restructuring and other charges
    85       -       85       -  
Total operating expenses
    387,606       402,509       387,555       402,458  
Operating income (loss)
    (12,311 )     14,083       (12,260 )     14,134  
Interest income
    (2 )     (34 )     (380 )     (412 )
Interest expense
    32,119       32,389       30,917       31,344  
Other loss, net
    29,570       26,327       29,570       26,176  
Loss before income taxes
    (73,998 )     (44,599 )     (72,367 )     (42,974 )
Income tax benefit
    (69 )     (2 )     -       -  
Net loss
  $ (73,929 )   $ (44,597 )   $ (72,367 )   $ (42,974 )
 
First Quarter of 2012 Compared to First Quarter of 2011

Net Sales .  Net sales for the first quarter of 2012 decreased 9.9%, to $375.3 million from $416.6 million in the first quarter of 2011, as total sales volume decreased 8.2%.  The decline in total sales volume reflects the unusually high sales volume for coated papers in March of 2011 and the permanent shutdown of three paper machines in the fourth quarter of 2011.  The average sales price for all of our products decreased 1.9%, reflecting a decline in the price of pulp.
 
Net sales for our coated papers segment decreased 13.8% in the first quarter of 2012 to $303.2 million from $351.7 million for the same period in 2011, due to a 13.8% decrease in paper sales volume while the average paper sales price per ton remained flat.
 
Net sales for our market pulp segment decreased 8.0% to $32.9 million in the first quarter of 2012 from $35.7 million for the same period in 2011.  This decline reflects a 14.8% decrease in the average sales price per ton, which was partially offset by an increase of 8.0% in sales volume compared to the first quarter of 2011.
 
Net sales for our other segment increased 34.4% to $39.2 million in the first quarter of 2012 from $29.2 million in the first quarter of 2011.  The improvement in 2012 was due to a 33.6% increase in sales volume, reflecting the continued development of new paper product offerings for our customers.  The average sales price per ton was up slightly.
 
Cost of sales.   Cost of sales, including depreciation, amortization, and depletion, was $368.7 million in the first quarter of 2012 compared to $383.9 million in 2011.  Our gross margin, excluding depreciation, amortization, and depletion, was 10.1% for the first quarter of 2012 compared to 15.4% for the first quarter of 2011.  Depreciation, amortization, and depletion expenses were $31.4 million in both the first quarter of 2012 and 2011.
 
Selling, general, and administrative .  Selling, general, and administrative expenses were $18.8 million in the first quarter of 2012 compared to $18.6 million for the same period in 2011.

Interest expense.   Verso Paper’s interest expense for the first quarter of 2012 was $32.1 million compared to $32.4 million for the same period in 2011.  Verso Holdings’ interest expense for the first quarter of 2012 was $30.9 million compared to $31.3 million for the same period in 2011.
 
 
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Other loss, net .  Other loss, net for Verso Paper was $29.6 million in the first quarter of 2012 compared to $26.3 million in the first quarter of 2011.  Other loss, net for Verso Holdings was $29.6 million in the first quarter of 2012 compared to $26.2 million in the first quarter of 2011.  Included in the results for the first quarter of 2012 and 2011, respectively, were losses of $30.0 million and $26.1 million related to the early retirement of debt in connection with debt refinancing.
 
Reconciliation of Cash Flows from Operating Activities to Adjusted EBITDA
 
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.  Adjusted EBITDA is EBITDA further adjusted to exclude unusual items and other pro forma adjustments permitted in calculating covenant compliance under the indentures governing our notes.  Adjusted EBITDA is modified to align the mark-to-market impact of derivative contracts used to economically hedge a portion of future natural gas purchases with the period in which the contracts settle.  We believe that Adjusted EBITDA is an important measure that supplements discussions and analysis of our results of operations.  We believe that it is useful to investors to provide disclosures of our results of operations on the same basis as that used by management.  Management relies upon Adjusted EBITDA as a primary measure to review and assess operating performance of its business and its management team.  Adjusted EBITDA is also used to determine compliance with our financial covenants.  We believe that the inclusion of the supplemental adjustments applied in calculating Adjusted EBITDA are reasonable and appropriate to provide additional information to investors.

Because EBITDA and Adjusted EBITDA are not measurements determined in accordance with U.S. GAAP and are susceptible to varying calculations, EBITDA and Adjusted EBITDA, as presented, may not be comparable to other similarly titled measures presented by other companies.  You should consider our EBITDA and Adjusted EBITDA in addition to, and not as a substitute for, or superior to, our operating or net income or cash flows from operating activities, determined in accordance with U.S. GAAP.

 
31
 

   
Verso Paper
   
Three
     
Three
 
Twelve
   
Months
 
Year
 
Months
 
Months
   
Ended
 
Ended
 
Ended
 
Ended
   
March 31,
 
December 31,
 
March 31,
 
March 31,
(Dollars in millions)
 
2011
 
2011
 
2012
 
2012
Cash flows from operating activities
  $ (82.7 )   $ 14.5     $ (70.5 )   $ 26.7  
Income tax expense
    -       0.2       (0.1 )     0.1  
Amortization of debt issuance costs
    (1.5 )     (5.4 )     (1.3 )     (5.2 )
Accretion of discount on long-term debt
    (1.0 )     (4.1 )     (1.0 )     (4.1 )
Loss on early extinguishment of debt, net
    (26.1 )     (26.1 )     (30.0 )     (30.0 )
Goodwill impairment
    -       (18.7 )     -       (18.7 )
Equity award expense
    (0.6 )     (2.4 )     (0.6 )     (2.4 )
Interest income
    -       (0.1 )     -       (0.1 )
Interest expense
    32.4       126.6       32.1       126.3  
Other, net
    (0.1 )     (1.3 )     (4.3 )     (5.5 )
Changes in assets and liabilities, net
    98.8       31.7       65.2       (1.9 )
EBITDA
    19.2       114.9       (10.5 )     85.2  
Loss on early extinguishment of debt, net (1)
    26.1       26.1       30.0       30.0  
Goodwill impairment (2)
    -       18.7       -       18.7  
Restructuring and other charges (3)
    -       24.5       0.1       24.6  
Hedge losses (4)
    -       7.5       4.7       12.2  
Equity award expense (5)
    0.6       2.4       0.6       2.4  
Other items, net (6)
    1.1       8.4       0.4       7.7  
Adjusted EBITDA before pro forma effects of profitability program
    47.0       202.5       25.3       180.8  
(1)
Represents net losses related to debt refinancing.
(2)
Represents impairment of goodwill allocated to the coated paper segment.
(3)
Represents costs associated with the shut-down of three paper machines.
(4)
Represents unrealized losses on energy-related derivative contracts.
(5)
Represents amortization of non-cash incentive compensation.
(6)
Represents earnings adjustments for product development costs and other miscellaneous non-recurring items.
 
Seasonality

We are exposed to fluctuations in quarterly net sales volumes and expenses due to seasonal factors.  These seasonal factors are common in the coated paper industry.  Typically, the first two quarters are our slowest quarters due to lower demand for coated paper during this period.  Our third quarter is generally our strongest quarter, reflecting an increase in printing related to end-of-year magazines, increased end-of-year direct mailings, and holiday season catalogs.  Our working capital and accounts receivable generally peak in the third quarter, while inventory generally peaks in the second quarter in anticipation of the third quarter season.  We expect our seasonality trends to continue for the foreseeable future.

Liquidity and Capital Resources

We rely primarily upon cash flow from operations and borrowings under our revolving credit facility to finance operations, capital expenditures, and fluctuations in debt service requirements.  As of March 31, 2012, $160.1 million was available for future borrowing under our revolving credit facility.  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 we will be able to generate sufficient cash flows from operations or that future borrowings will be available under our revolving credit facility in an amount sufficient to fund our liquidity needs.  As we focus on managing our expenses and cash flows, we continue to assess and implement, as appropriate, various earnings and expense reduction initiatives.  Management has developed a company-wide cost reduction program and expects this program to yield an additional $58 million in cost reductions and continues to search for and develop additional cost savings measures.

 
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Verso Paper’s and Verso Holdings’ cash flows from operating, investing and financing activities, as reflected in the Unaudited Condensed Consolidated Statements of Cash Flows are summarized in the following table.
 
   
VERSO PAPER
   
VERSO HOLDINGS
 
   
Three Months Ended
   
Three Months Ended
 
   
March 31,
   
March 31,
 
(Dollars in thousands)
 
2012
   
2011
   
2012
   
2011
 
Net cash provided by (used in):
                       
Operating activities
  $ (70,531 )   $ (82,747 )   $ (70,479 )   $ (82,732 )
Investing activities
    (16,904 )     (9,400 )     (16,904 )     (9,400 )
Financing activities
    48,775       (5,822 )     48,723       (5,838 )
Net change in cash and cash equivalents
  $ (38,660 )   $ (97,969 )   $ (38,660 )   $ (97,970 )

Operating activities.   In the first quarter of 2012, Verso Paper’s net cash used in operating activities of $70.5 million reflects a net loss of $73.9 million adjusted for non-cash depreciation, amortization, depletion and accretion and non-cash losses on early extinguishment of debt of $63.7 million and an increase in working capital of $67.8 million, primarily due to a decrease in accrued liabilities resulting from normal fluctuations in accrued interest payable.  In the first quarter of 2011, Verso Paper’s net cash used in operating activities of $82.7 million reflects a net loss of $44.6 million adjusted for non-cash depreciation, amortization, depletion and accretion and non-cash losses on the early extinguishment of debt of $60.0 million and an increase in working capital of $102.7 million, which included increases in inventory and accounts receivable and a decrease in accrued liabilities.  The increases in inventory and accounts receivable reflect the improved demand for our products and the decrease in accrued liabilities is the result of normal fluctuations in accrued interest payable.  Verso Holdings’ operating cash flows are the same as those of Verso Paper in all material respects.

Investing activities.   In the first quarter of 2012, Verso Paper’s net cash used in investing activities of $16.9 million reflects capital expenditures.  This compares to $9.4 million of net cash used in investing activities in the first quarter of 2011, reflecting $13.2 million in capital expenditures net of funds transferred from cash restricted for use on a renewable energy project at our mill in Quinnesec, Michigan.  Verso Holdings’ investing cash flows are the same as those of Verso Paper.
 
Financing activities.   In the first quarter of 2012, Verso Paper’s net cash provided by financing activities was $48.8 million, reflecting $334.2 million in cash received from the issuance of $345.0 million aggregate principal amount of 11.75% senior secured notes due 2019 after discount, underwriting fees and issuance costs, net of cash payments of $285.5 million to repurchase $270.6 million of our 11.5% senior secured notes due 2014 and pay related fees and charges.  In April 2012, Verso Holdings redeemed the remaining outstanding $44.4 million aggregate principal amounts of the 11.5% senior secured notes due 2014.  In the first quarter of 2011, Verso Paper’s net cash used in financing activities was $5.8 million, reflecting cash payments of $390.0 million to repurchase $337.1 million of our 9.13% second priority senior secured notes and $35.0 million of our 11.5% first priority senior secured notes and pay related fees and charges, net of $384.2 million in cash received from the issuance of $396.0 million aggregate principal amount of 8.75% second priority senior secured notes net of discount, underwriting fees and issuance costs.  Verso Holdings’ financing cash flows are the same as those of Verso Paper in all material respects.
 
 
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Revolving Credit Facility.   Verso Holdings’ $200.0 million revolving credit facility had no amounts outstanding, $39.9 million in letters of credit issued, and $160.1 million available for future borrowing as of March 31, 2012.  The indebtedness under the revolving credit facility bears interest, payable quarterly, at a rate equal to LIBOR plus 3% or prime plus 2% per year.  Verso Holdings is required to pay a commitment fee to the lenders in respect of unutilized commitments under the revolving credit facility at a rate equal to 0.5% per year and customary letter of credit and agency fees.  The indebtedness under the revolving credit facility is guaranteed jointly and severally by Verso Finance and each of Verso Holdings’ subsidiaries, subject to certain exceptions, and the indebtedness and guarantees are senior secured obligations of Verso Holdings and the guarantors, respectively.  The indebtedness under the revolving credit facility and related guarantees are secured by first-priority security interests, subject to permitted liens, in substantially all of Verso Holdings’, Verso Finance’s, and the subsidiary guarantors’ tangible and intangible assets.  The revolving credit facility will mature on August 1, 2012.

On May 4, 2012, Verso Holdings entered into new senior credit facilities consisting of a $150.0 million ABL Facility and a $50.0 million Cash Flow Facility.  The new senior credit facilities were used to repay the outstanding indebtedness under the existing $200.0 million revolving credit facility and will be used to provide ongoing working capital and for other general corporate purposes.  The indebtedness under the new senior credit facilities bears interest at a floating rate based on a margin over a base rate or eurocurrency rate.  As of May 4, 2012, the applicable margin for advances under the ABL Facility was 1.00% for base rate advances and 2.00% for LIBOR advances, and the applicable margin for advances under the Cash Flow Facility was 3.50% for base rate advances and 4.50% for LIBOR advances.  Verso Holdings is required to pay a commitment fee to the lenders in respect of the unused commitments under the ABL Facility at an annual rate initially equal to 0.50% and thereafter either 0.375% or 0.50%, based on daily average utilization, and under the Cash Flow Facility at an annual rate of 0.625%.  The indebtedness under the new senior credit facilities is guaranteed jointly and severally by Verso Finance and each of Verso Holdings’ subsidiaries, subject to certain exceptions, and the indebtedness and guarantees are senior secured obligations of Verso Holdings and the guarantors, respectively.  The indebtedness under the ABL Facility and related guarantees are secured by first-priority security interests, subject to permitted liens, in substantially all of Verso Holdings’, Verso Finance’s, and the subsidiary guarantors’ inventory and accounts receivable, or “ABL Priority Collateral,” and second-priority security interests, subject to permitted liens, in substantially all of their other assets, or “Notes Priority Collateral.”  The indebtedness under the Cash Flow Facility and related guarantees are secured, pari passu with the 11.75% senior secured notes due 2019 and related guarantees, by first-priority security interests in the Notes Priority Collateral and second-priority security interests in the ABL Priority Collateral.  The new senior credit facilities will mature on May 4, 2017, unless, on any of the dates that is 91 days prior to the earliest scheduled maturity of any of the existing second-lien notes, 11.38% senior subordinated notes, or senior unsecured term loan, an aggregate principal amount in excess of $100.0 million of indebtedness under such existing second-lien notes, subordinated notes or senior unsecured term loan, as applicable, is outstanding, in which case the new senior credit facilities will mature on such earlier date.  The new senior credit facilities replaces the existing $200.0 million revolving credit facility and is being utilized in lieu of the previously announced commitments from lenders for a $100.0 million accounts receivable securitization facility and a new and/or extended $55.0 million first-priority revolving credit facility.
 
11.5% Senior Secured Notes due 2014 .  In June 2009 and January 2010, Verso Holdings issued a total of $350.0 million aggregate principal amount of 11.5% senior secured notes due 2014.  In March 2011, Verso Holdings repurchased and retired $35.0 million aggregate principal amount of the notes.  On March 21, 2012, Verso Holdings repurchased and retired $270.6 million aggregate principal amount of the notes pursuant to a tender offer.  On April 30, 2012, Verso Holdings redeemed the remaining outstanding $44.4 million aggregate principal amount of the notes.  Following such repurchase and redemption, there are no outstanding 11.5% senior secured notes due 2014.

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

 
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The estimated net proceeds from the March 2012 issuance of the 11.75% senior secured notes, after deducting the discount, underwriting fees and offering expenses, were $332.7 million.  On March 21, 2012, Verso Holdings used $285.5 million of the net proceeds to repurchase and retire $270.6 million aggregate principal amount of its 11.5% senior secured notes due 2014.  On April 30, 2012, Verso Holdings paid $48.3 million from the remaining net proceeds and available cash to redeem the remaining outstanding $44.4 million aggregate principal amount of its 11.5% senior secured notes due 2014.

8.75% Second Priority Senior Secured Notes due 2019 .  In January and February 2011, Verso Holdings issued $360.0 million and $36.0 million, respectively, aggregate principal amount of 8.75% second priority senior secured notes due 2019.  The notes bear interest, payable semi-annually, at the rate of 8.75% per year.  The notes are guaranteed jointly and severally by each of Verso Holdings’ subsidiaries, subject to certain exceptions, and the notes and guarantees are senior secured obligations of Verso Holdings and the guarantors, respectively.  The notes and related guarantees are secured by second-priority security interests, subject to permitted liens, in substantially all of Verso Holdings’ and the guarantors’ tangible and intangible assets, excluding securities of Verso Holdings’ affiliates.  The notes will mature on February 1, 2019.

The net proceeds from the January 2011 issuance of the 8.75% second priority senior secured notes, after deducting the discount, underwriting fees and offering expenses, were $347.8 million.  In the first quarter of 2011, Verso Holdings used a total of $353.9 million of the net proceeds and available cash to repurchase or redeem and retire a total of $337.1 million aggregate principal amount of its 9.13% second priority senior secured notes due 2014.  Following such repurchases and redemption, there are no outstanding 9.13% second priority senior secured notes due 2014.

The net proceeds from the February 2011 issuance of the 8.75% second priority senior secured notes, including a premium and after deducting the underwriting fees and offering expenses, were $36.1 million.  In March 2011, Verso Holdings used these net proceeds to redeem and retire $35.0 million aggregate principal amount of its 11.5% senior secured notes due 2014.

Second Priority Senior Secured Floating Rate Notes due 2014 .  In August 2006, Verso Holdings issued $250.0 million aggregate principal amount of second priority senior secured floating rate notes due 2014.  As of March 31, 2012, Verso Holdings had repurchased and retired a total of $69.8 million aggregate principal amount of the notes.  The notes bear interest, payable quarterly, at a rate equal to LIBOR plus 3.75% per year.  As of March 31, 2012, the interest rate on the notes was 4.30% per year.  The notes are guaranteed jointly and severally by each of Verso Holdings’ subsidiaries, subject to certain exceptions, and the notes and guarantees are senior secured obligations of Verso Holdings and the guarantors, respectively.  The notes and related guarantees are secured by second-priority security interests, subject to permitted liens, in substantially all of Verso Holdings’ and the guarantors’ tangible and intangible assets, excluding securities of Verso Holdings’ affiliates.  The notes will mature on August 1, 2014.
 
On March 28, 2012, Verso Holdings commenced an exchange offer and consent solicitation for the outstanding $180.2 million aggregate principal amount of its second priority senior secured floating rate notes due 2014, or the “Second Lien Exchange Offer.”   On May 11, 2012, pursuant to the Second Lien Exchange Offer, Verso Holdings issued $166.9 million aggregate principal amount of 11.75% secured notes due 2019 and paid approximately $5.0 million in cash in exchange for $166.9 million aggregate principal amount of the second priority senior secured floating rate notes.  Following the exchange, $13.3 million aggregate principal amount of the second priority senior secured floating rate notes remain outstanding.
 
The 11.75% secured notes due 2019 bear interest, payable semi-annually, at the rate of 11.75% per year.  The notes are guaranteed jointly and severally by each of Verso Holdings’ subsidiaries, subject to certain exceptions, and the notes and guarantees are senior secured obligations of Verso Holdings and the guarantors, respectively.  The notes and related guarantees are secured by security interests, subject to permitted liens, in substantially all of Verso Holdings’ and the guarantors’ tangible and intangible assets.  The security interests securing the notes rank junior to those securing the obligations under the ABL Facility, the Cash Flow Facility, and the 11.75% senior secured notes due 2019 and senior to those securing the second priority senior secured floating rate notes due 2014 and the 8.75% second priority senior secured notes due 2019.  The notes will mature on January 15, 2019.
 
11.38% Senior Subordinated Notes due 2016 .  In August 2006, Verso Holdings issued $300.0 million aggregate principal amount of 11.38% senior subordinated notes due 2016.  The notes bear interest, payable semi-annually, at the rate of 11.38% per year.  The notes are guaranteed jointly and severally by each of Verso Holdings’ subsidiaries, subject to certain exceptions, and the notes and guarantees are unsecured senior subordinated obligations of Verso Holdings and the guarantors, respectively.  The notes will mature on August 1, 2016.
 
On April 25, 2012, Verso Holdings commenced an exchange offer and consent solicitation for up to $157.5 million aggregate principal amount of the outstanding $300.0 million aggregate principal amount of its 11.38% senior subordinated notes due 2016, or the “Subordinated Notes Exchange Offer.”  On May 11, 2012, pursuant to the Subordinated Notes Exchange Offer, Verso Holdings issued $104.7 million aggregate principal amount of 11.75% secured notes due 2019 and paid approximately $17.3 million in cash in exchange for $157.5 million aggregate principal amount of the 11.38% senior subordinated notes.  Following the exchange, $142.5 million aggregate principal amount of the 11.38% senior subordinated notes remain outstanding.
 
 
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Loan from Verso Paper Finance Holdings LLC/ Verso Paper Holdings LLC .  In December 2010, Verso Quinnesec REP LLC, an indirect, wholly-owned subsidiary of Verso Holdings, entered into a financing transaction with Chase NMTC Verso Investment Fund, LLC, the “Investment Fund,” a consolidated variable interest entity (see Note 11 – New Market Tax Credit Entities).  Under this arrangement, Verso Holdings loaned $23.3 million to Verso Finance pursuant to a 6.5% loan due 2040, and Verso Finance, in turn, loaned the funds on similar terms to the Investment Fund.  The Investment Fund then contributed the loan proceeds to certain community development entities, which, in turn, loaned the funds on similar terms to Verso Quinnesec REP LLC as partial financing for the renewable energy project at our mill in Quinnesec, Michigan.

Senior Unsecured Term Loan .  Verso Finance, the parent entity of Verso Holdings, had $86.2 million outstanding on its senior unsecured term loan as of March 31, 2012.  The loan allows Verso Finance to pay interest either in cash or in kind through the accumulation of the outstanding principal amount.  The loan bears interest, payable quarterly, at a rate equal to LIBOR plus 6.25% per year on interest paid in cash and LIBOR plus 7.00% per year for interest paid in kind, or “PIK,” and added to the principal balance.  As of March 31, 2012, the weighted-average interest rate on the loan was 6.95% per year. Verso Finance elected to exercise the PIK option for $1.5 million and $1.3 million of interest payments due in the first quarter of 2012 and 2011, respectively.  The loan will mature on February 1, 2013.  As of March 31, 2012, the loan is included in Current maturities of long-term debt on the accompanying condensed consolidated balance sheet.

Covenant Compliance

The credit agreement and the indentures governing our notes contain affirmative covenants as well as restrictive covenants which limit our ability to, among other things, incur additional indebtedness; pay dividends or make other distributions; repurchase or redeem our stock; make investments; sell assets, including capital stock of restricted subsidiaries; enter into agreements restricting our subsidiaries’ ability to pay dividends; consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; enter into transactions with our affiliates; and incur liens.  These covenants can result in limiting our long-term growth prospects by hindering our ability to incur future indebtedness or grow through acquisitions.  As of March 31, 2012, we were in compliance with the covenants in our debt agreements.

Critical Accounting Policies

Our accounting policies are fundamental to understanding management’s discussion and analysis of financial condition and results of operations.  Our consolidated condensed financial statements are prepared in conformity with accounting principles generally accepted in the United States of America and follow general practices within the industry in which we operate.  The preparation of the financial statements requires management to make certain judgments and assumptions in determining accounting estimates.  Accounting estimates are considered critical if the estimate requires management to make assumptions about matters that were highly uncertain at the time the accounting estimate was made, and different estimates reasonably could have been used in the current period, or changes in the accounting estimate are reasonably likely to occur from period to period, that would have a material impact on the presentation of our financial condition, changes in financial condition or results of operations.

Management believes the following critical accounting policies are both important to the portrayal of our financial condition and results of operations and require subjective or complex judgments.  These judgments about critical accounting estimates are based on information available to us as of the date of the financial statements.  

 
36
 
 
Accounting standards whose application may have a significant effect on the reported results of operations and financial position, and that can require judgments by management that affect their application, include the following: ASC Topic 450, Contingencies , ASC Topic 360, Property, Plant, and Equipment , ASC Topic 350, Intangibles – Goodwill and Other , and ASC Topic 715, Compensation – Retirement Benefits.

Impairment of long-lived assets and goodwill .  Long-lived assets are reviewed for impairment upon the occurrence of events or changes in circumstances that indicate that the carrying value of the assets may not be recoverable, as measured by comparing their net book value to the estimated undiscounted future cash flows generated by their use.

Goodwill and other intangible assets are accounted for in accordance with ASC Topic 350.  Intangible assets primarily consist of trademarks, customer-related intangible assets and patents obtained through business acquisitions.  We have identified the following trademarks as intangible assets with an indefinite life: Influence®, Liberty®, and Advocate®.  We assess goodwill and indefinite-lived intangible assets at least annually for impairment or more frequently if events occur or circumstances change between annual tests that would more likely than not reduce the fair value of the reporting unit below its carrying amount.  Goodwill is evaluated at the reporting unit level and has been allocated to the “Coated” segment.

During 2011, based on a combination of factors, including the difficult market conditions which resulted in a decline in customer demand and excess capacity in the coated paper markets and high raw material, energy and distribution costs which have challenged the profitability of our products, we concluded that sufficient indicators existed to require us to perform an interim goodwill impairment analysis.  Upon finalizing our analysis during the fourth quarter of 2011, Verso Paper recognized a goodwill impairment charge of $18.7 million and Verso Holdings recognized a goodwill impairment charge of $10.5 million.  We had no goodwill remaining as of December 31, 2011.

Management believes that the accounting estimates associated with determining fair value as part of the impairment analysis are critical accounting estimates because estimates and assumptions are made about our future performance and cash flows.  The estimated fair value is generally determined on the basis of discounted future cash flows.  We also consider a market-based approach and a combination of both.  While management uses the best information available to estimate future performance and cash flows, future adjustments to management’s projections may be necessary if economic conditions differ substantially from the assumptions used in making the estimates.
 
Pension benefit obligations. We offer various pension plans to employees.  The calculation of the obligations and related expenses under these plans requires the use of actuarial valuation methods and assumptions, including the expected long-term rate of return on plan assets, discount rates, projected future compensation increases, health care cost trend rates, and mortality rates.  Actuarial valuations and assumptions used in the determination of future values of plan assets and liabilities are subject to management judgment and may differ significantly if different assumptions are used.
 
Contingent liabilities.   A liability is contingent if the outcome or amount is not presently known, but may become known in the future as a result of the occurrence of some uncertain future event.  We estimate our contingent liabilities based on management’s estimates about the probability of outcomes and their ability to estimate the range of exposure.  Accounting standards require that a liability be recorded if management determines that it is probable that a loss has occurred and the loss can be reasonably estimated.  In addition, it must be probable that the loss will be confirmed by some future event.  As part of the estimation process, management is required to make assumptions about matters that are by their nature highly uncertain.

 
37
 
 
The assessment of contingent liabilities, including legal contingencies, asset retirement obligations, and environmental costs and obligations, involves the use of critical estimates, assumptions, and judgments.  Management’s estimates are based on their belief that future events will validate the current assumptions regarding the ultimate outcome of these exposures.  However, there can be no assurance that future events will not differ from management’s assessments.
 

 
 
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ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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 gross domestic product, or “GDP,” in the United States - they rise with a strong economy and contract with a weak economy.

Many of our customers provide us with forecasts of their paper needs, which allows us to plan our production runs in advance, optimizing production over our integrated mill system and thereby reducing costs and increasing overall efficiency.  Generally, our sales agreements do not extend beyond the calendar year.  Typically, our sales agreements provide for quarterly price adjustments based on market price movements.

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 125 customers.

Interest Rates

We have issued fixed- and floating-rate debt in order to manage our variability to cash flows from interest rates.  Borrowings under the revolving credit facility, the second priority senior secured floating rate notes, and Verso Finance’s senior unsecured term loan accrue interest at variable rates; however, there were no amounts outstanding under the revolving credit facility as of March 31, 2012.  A 100 basis point increase in quoted interest rates on Verso Paper’s outstanding floating-rate debt as of March 31, 2012, would increase annual interest expense by $2.7 million (of which $0.9 million is attributable to Verso Finance’s senior unsecured term loan on which we have elected to pay interest in kind).  A 100 basis point increase in quoted interest rates on Verso Holdings’ outstanding floating-rate notes as of March 31, 2012, would increase annual interest expense by $1.8 million.  While we may enter into agreements limiting our exposure to higher interest rates, any such agreements may not offer complete protection from this risk.

Derivatives

In the normal course of business, we utilize derivatives contracts as part of our risk management strategy to manage our exposure to market fluctuations in energy prices and interest rates.  These instruments are subject to credit and market risks in excess of the amount recorded on the balance sheet in accordance with generally accepted accounting principles.  Controls and monitoring procedures for these instruments have been established and are routinely reevaluated.  We have an Energy Risk Management Policy which was adopted by our board of directors and is monitored by an Energy Risk Management Committee composed of our senior management.  In addition, we have an Interest Rate Risk Committee which was formed to monitor our Interest Rate Risk Management Policy.  Credit risk represents the potential loss that may occur because a party to a transaction fails to perform according to the terms of the contract.  The measure of credit exposure is the replacement cost of contracts with a positive fair value.  We manage credit risk by entering into financial instrument transactions only through approved counterparties.  Market risk represents the potential loss due to the decrease in the value of a financial instrument caused primarily by changes in commodity prices or interest rates.  We manage market risk by establishing and monitoring limits on the types and degree of risk that may be undertaken.

 
39
 
 
We do not hedge the entire exposure of our operations from commodity price volatility for a variety of reasons.  To the extent that we do not hedge against commodity price volatility, our results of operations may be affected either favorably or unfavorably by a shift in the future price curve.  As of March 31, 2012, we had net unrealized losses of $13.7 million on open commodity contracts with maturities of one to twenty-five months.  These derivative instruments involve the exchange of net cash settlements, based on changes in the price of the underlying commodity index compared to the fixed price offering, at specified intervals without the exchange of any underlying principal.  A 10% decrease in commodity prices would have a negative impact of approximately $2.0 million on the fair value of such instruments.  This quantification of exposure to market risk does not take into account the offsetting impact of changes in prices on anticipated future energy purchases.

Commodity Prices

We are subject to changes in our cost of sales caused by movements underlying commodity prices.  The principal components of our cost of sales are chemicals, wood, energy, labor, maintenance, and depreciation, amortization, and depletion.  Costs for commodities, including chemicals, wood, and energy, are the most variable component of our cost of sales because their prices can fluctuate substantially, sometimes within a relatively short period of time.  In addition, our aggregate commodity purchases fluctuate based on the volume of paper that we produce.

Chemicals.   Chemicals utilized in the manufacturing of coated papers include latex, starch, calcium carbonate, and titanium dioxide.  We purchase these chemicals from a variety of suppliers and are not dependent on any single supplier to satisfy our chemical needs.  We expect imbalances in supply and demand to periodically create volatility in prices for certain chemicals.

Wood.   Our costs to purchase wood are affected directly by market costs of wood in our regional markets and indirectly by the effect of higher fuel costs on logging and transportation of timber to our facilities.  While we have in place fiber supply agreements that ensure a substantial portion of our wood requirements, purchases under these agreements are typically at market rates.

Energy.   We produce a large portion of our energy requirements, historically producing approximately 50% of our energy needs for our coated paper mills from sources such as waste wood and paper, hydroelectric facilities, chemicals from our pulping process, our own steam recovery boilers, and internal energy cogeneration facilities.  Our external energy purchases vary across each of our mills and include fuel oil, natural gas, coal, and electricity.  While our internal energy production capacity mitigates the volatility of our overall energy expenditures, we expect prices for energy to remain volatile for the foreseeable future and our energy costs to increase in a high energy cost environment.  As prices fluctuate, we have some ability to switch between certain energy sources in order to minimize costs.  We utilize derivative contracts as part of our risk management strategy to manage our exposure to market fluctuations in energy prices.

 
40
 
 
Off-Balance Sheet Arrangements
 
None.

ITEM 4.   CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures
 
We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in reports that we file and submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

There are inherent limitations to the effectiveness of any disclosure controls and procedures, including the possibility of human error or the circumvention or overriding of the controls and procedures, and even effective disclosure controls and procedures can provide only reasonable assurance of achieving their objectives.  Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of Verso Paper’s disclosure controls and procedures as of March 31, 2012.  Based upon this evaluation, and subject to the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of March 31, 2012.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of Verso Holdings’ disclosure controls and procedures as of March 31, 2012.  Based upon this evaluation, and subject to the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of March 31, 2012.

Changes in Internal Control Over Financial Reporting
 
There was no change in our internal control over financial reporting during the fiscal quarter ended March 31, 2012, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 
41
 
 
PART II.  OTHER INFORMATION

ITEM 1.   LEGAL PROCEEDINGS

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 consolidated financial statements.

ITEM 1A.   RISK FACTORS

For a detailed discussion of risk factors affecting us, see “Part I – Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2011.

ITEM 2.   UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Stock Repurchases under 2008 Incentive Award Plan

Participants in our 2008 Incentive Award Plan, or the “Plan,” may elect to surrender to us restricted shares of our common stock issued to them pursuant to awards granted under the Plan to satisfy the applicable federal, state, local and foreign tax withholding obligations that arise upon the vesting of their shares of restricted stock under the Plan.  Shares of restricted stock surrendered to us to meet tax withholding obligations are deemed to be repurchased pursuant to the Plan.  We repurchased shares of restricted stock to meet participants’ tax withholding obligations during the first three months of 2012 as follows:
 
   
Total Number
       
   
of Shares
   
Average Price
 
Period
 
Purchased
   
Paid per Share
 
January 1 - January 31, 2012
    1,533     $ 0.99  
February 1 - February 29, 2012
    -       -  
March 1 - March 31, 2012
    6,838       1.44  
Total for the three months ended March 31, 2012
    8,371     $ 1.36  

ITEM 3.   DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4.   MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5.   OTHER INFORMATION

On May 10, 2012, our board of directors adopted and implemented the 2012 Executive Long-Term Incentive Program, or “Program.”  The purposes of the Program are to retain our highly qualified executives, to provide an incentive for their continued superior work, and to motivate them toward even higher achievement and business results.  The principal features of the Program are as follows:

●
The participants in the Program are the seven executives who report directly to our President and Chief Executive Officer.

 
42
 
 
●
Each participant in the Program is eligible to receive a long-term cash bonus award, or “LTIP Award,” equal to the base salary paid or payable to the participant in 2012 and 2013.

●
A participant’s LTIP Award will vest as follows: (a) 50% of the LTIP Award, or “2012 Tranche,” will vest on December 31, 2012, if the participant is employed by us or one of our subsidiaries continuously from January 1, 2012, through December 31, 2012; and (b) 50% of the LTIP Award, or “2013 Tranche,” will vest on December 31, 2013, if the participant is employed by us or one of our subsidiaries continuously from January 1, 2013, through December 31, 2013.

●
The vested portions of a participant’s LTIP Award will be eligible for payment as follows: (a) 70% of the 2012 Tranche will be paid in January 2013; and (b) 30% of the 2012 Tranche and 100% of the 2013 Tranche will be paid in January 2014.

On May 10, 2012, our board of directors also authorized us to amend and restate the Confidentiality and Non-Competition Agreement, or “Prior Agreement,” to which we are a party with each of our executives other than our President and Chief Executive Officer.  In the Prior Agreement, each executive agreed to abide by certain confidentiality, non-competition and other obligations, and we agreed to provide the executive with certain benefits and payments after his employment with us ends, in order to protect our valuable competitive information and business relationships to which the executive is allowed access in the performance of his employment duties for us.  In the Amended and Restated Confidentiality and Non-Competition Agreement, the parties have agree to modify the Prior Agreement in the following principal ways:

●
The primary post-employment payment by us to the executive would increase from 100% of the executive’s annual base salary to an amount equal to between 145% and 180% of the executive’s annual base salary, depending on the executive, and would be payable to the executive regardless of whether or when the executive obtains new employment.

●
The executive would enter into a comprehensive waiver and release of claims agreement with us following the termination of the executive’s employment.

 
43
 

ITEM 6.   EXHIBITS

The following exhibits are included with this report:
 
Exhibit
 
Number
Description
   
3.1
Amended and Restated Certificate of Incorporation of Verso Paper Corp. (1)
   
3.2
Amended and Restated Bylaws of Verso Paper Corp. (2)
   
3.3
Certificate of Formation, as amended, of Verso Paper Holdings LLC. (3)
   
3.4
Amended and Restated Limited Liability Company Agreement of Verso Paper Holdings LLC. (3)
   
10.1
2012 Executive Long-Term Incentive Program.
   
10.2
Amended and Restated Confidentiality and Non-Competition Agreement between Verso Paper Corp. and each of its executives (form).
   
12
Computation of Ratio of Earnings to Fixed Charges.
   
31.1
Certification of Principal Executive Officer of Verso Paper Corp. pursuant to Rule 13a-14(a) under Securities Exchange Act of 1934.
   
31.2
Certification of Principal Financial Officer of Verso Paper Corp. pursuant to Rule 13a-14(a) under Securities Exchange Act of 1934.
   
31.3
Certification of Principal Executive Officer of Verso Paper Holdings LLC pursuant to Rule 13a-14(a) under Securities Exchange Act of 1934.
   
31.4
Certification of Principal Financial Officer of Verso Paper Holdings LLC pursuant to Rule 13a-14(a) under Securities Exchange Act of 1934.
   
32.1
Certification of Principal Executive Officer of Verso Paper Corp. 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.
   
32.2
Certification of Principal Financial Officer of Verso Paper Corp. 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.
   
32.3
Certification of Principal Executive Officer of Verso Paper Holdings LLC 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.
   
32.4
Certification of Principal Financial Officer of Verso Paper Holdings LLC 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.
 
 
44
 
 
(1)
Incorporated by reference to Amendment No. 5 to Verso Paper Corp.’s Registration Statement on Form S-1 (Registration Statement No. 333-148201), filed with the Securities and Exchange Commission (the "SEC") on May 8, 2008.
   
(2)
Incorporated by reference to Amendment No. 3 to Verso Paper Corp.’s Registration Statement on Form S-1 (Registration Statement No. 333-148201), filed with the SEC on April 28, 2008.
   
(3)
Incorporated by reference to Verso Paper Holding LLC’s Annual Report on Form 10-K for the year ended December 31, 2007, filed with the SEC on March 12, 2008.

 
 
 
45
 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, each registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
Date:  May 14, 2012
   
 
VERSO PAPER CORP.
     
     
 
By:
/s/ Michael A. Jackson
   
Michael A. Jackson
   
President and Chief Executive Officer
     
     
 
By:
/s/ Robert P. Mundy
   
Robert P. Mundy
   
Senior Vice President and Chief Financial Officer

 
 
Date:  May 14, 2012
   
 
VERSO PAPER HOLDINGS LLC
     
     
 
By:
/s/ Michael A. Jackson
   
Michael A. Jackson
   
President and Chief Executive Officer
     
     
  By:
/s/ Robert P. Mundy
    Robert P. Mundy
   
Senior Vice President and Chief Financial Officer
 
 
46
 
 
EXHIBIT INDEX
 
The following exhibits are included with this report:
 
3.1
Amended and Restated Certificate of Incorporation of Verso Paper Corp. (1)
   
3.2
Amended and Restated Bylaws of Verso Paper Corp. (2)
   
3.3
Certificate of Formation, as amended, of Verso Paper Holdings LLC. (3)
   
3.4
Amended and Restated Limited Liability Company Agreement of Verso Paper Holdings LLC. (3)
   
10.1
2012 Executive Long-Term Incentive Program.
   
10.2
Amended and Restated Confidentiality and Non-Competition Agreement between Verso Paper Corp. and each of its executives (form).
   
12
Computation of Ratio of Earnings to Fixed Charges.
   
31.1
Certification of Principal Executive Officer of Verso Paper Corp. pursuant to Rule 13a-14(a) under Securities Exchange Act of 1934.
   
31.2
Certification of Principal Financial Officer of Verso Paper Corp. pursuant to Rule 13a-14(a) under Securities Exchange Act of 1934.
   
31.3
Certification of Principal Executive Officer of Verso Paper Holdings LLC pursuant to Rule 13a-14(a) under Securities Exchange Act of 1934.
   
31.4
Certification of Principal Financial Officer of Verso Paper Holdings LLC pursuant to Rule 13a-14(a) under Securities Exchange Act of 1934.
   
32.1
Certification of Principal Executive Officer of Verso Paper Corp. 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.
   
32.2
Certification of Principal Financial Officer of Verso Paper Corp. 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.
   
32.3
Certification of Principal Executive Officer of Verso Paper Holdings LLC 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.
   
32.4
Certification of Principal Financial Officer of Verso Paper Holdings LLC 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.
 
 
47
 
 
(1)
Incorporated by reference to Amendment No. 5 to Verso Paper Corp.’s Registration Statement on Form S-1 (Registration Statement No. 333-148201), filed with the Securities and Exchange Commission (the "SEC") on May 8, 2008.
   
(2)
Incorporated by reference to Amendment No. 3 to Verso Paper Corp.’s Registration Statement on Form S-1 (Registration Statement No. 333-148201), filed with the SEC on April 28, 2008.
   
(3)
Incorporated by reference to Verso Paper Holding LLC’s Annual Report on Form 10-K for the year ended December 31, 2007, filed with the SEC on March 12, 2008.
 
 
48
Exhibit 10.1
 
VERSO PAPER CORP.
 
2012 EXECUTIVE LONG-TERM INCENTIVE PROGRAM
 

This 2012 Executive Long-Term Incentive Program (this “ Program ”) of Verso Paper Corp., a Delaware corporation (the “ Company ”), was adopted by the Board of Directors of the Company (the “ Board ”) on May 10, 2012.
 
1.    Purpose .  The purposes of this Program are to retain the Company’s highly qualified executives, to provide an incentive for their continued superior work, and to motivate them toward even higher achievement and business results.  This Program is a stand-alone bonus arrangement and is not entered into under the Company’s Senior Executive Bonus Plan, Amended and Restated 2008 Incentive Award Plan, or any other incentive compensation plan, program or arrangement of the Company.
 
2.    Participants .  The following persons are executives of the Company who have been selected by the Compensation Committee of the Board to participate in this Program: Lyle J. Fellows, Robert P. Mundy, Michael A. Weinhold, Peter H. Kesser, Kenneth D. Sawyer, Benjamin Hinchman, IV, and Joseph C. Duffy (individually a “ Participant ” and collectively the “ Participants ”).
 
3.    LTIP Period .  The “ LTIP Period ” shall be the period beginning on January 1, 2012, and ending on December 31, 2013.
 
4.    LTIP Award .  On the terms and subject to the conditions of this Program, each Participant shall be eligible to receive a long-term cash bonus award (an “ LTIP Award ”) equal to the amount of the base salary paid or payable to the Participant during the LTIP Period.  If a Participant becomes entitled to receive payment of any unvested portion of the Participant’s LTIP Award upon the termination of the Participant’s employment pursuant to Section 8, the Participant’s LTIP Award shall be calculated based on the following assumptions: (a) the Participant was employed by the Company or a subsidiary thereof continuously during the entire LTIP Period; (b) if the effective date of the Participant’s termination of employment occurs before the date in 2013 when the Company determines the base salary increases for its executives, the Participant’s base salary was increased as of the effective date of such base salary increases to 103% of the Participant’s base salary in effect immediately prior to his termination of employment; and (c) the Participant was paid his base salary for the entire LTIP Period.
 
5.    Vesting .  Subject to Section 8, (a) 50% of a Participant’s LTIP Award (the “ 2012 Tranche ”) shall vest on December 31, 2012, if the Participant is employed by the Company or a subsidiary thereof continuously from January 1, 2012, through December 31, 2012, and (b) 50% of a Participant’s LTIP Award (the “ 2013 Tranche ”) shall vest on December 31, 2013, if the Participant is employed by the Company or a subsidiary thereof continuously from January 1, 2013, through December 31, 2013.
 
6.    Payment .  Subject to Section 8, the vested portions of a Participant’s LTIP Award shall be eligible for payment as follows: (a) 70% of the 2012 Tranche shall be paid in cash in a lump sum in January 2013; and (b) 30% of the 2012 Tranche and 100% of the 2013 Tranche shall be paid in cash in a lump sum in January 2014.
 
7.    Change in Control .  Unless otherwise provided by the Board, in the event of a Change in Control (as defined in the Amended and Restated 2008 Incentive Award Plan), the Company shall require that this Program be assumed by the surviving entity in the Change in Control, or a parent or subsidiary thereof, and the LTIP Awards shall continue to be eligible to become vested and payable in accordance with the terms and conditions of this Program, subject to such equitable adjustments, if any, as the Board may determine are appropriate.
 
 
 
 
 
8.    Termination of Employment .  If a Participant’s employment with the Company or any subsidiary thereof terminates for any reason at any time during the LTIP Period, the Participant shall not be entitled to receive payment of any portion of his LTIP Award following the effective date of such termination; provided, however, that subject to Section 13, if a Participant’s employment with the Company or any subsidiary thereof terminates at any time during the LTIP Period by reason of the Participant’s death, Disability (as defined below), termination of employment by the Company or any subsidiary thereof without Cause (as defined below), or resignation by the Participant from his employment with the Company or any subsidiary thereof for Good Reason (as defined below), then (a) any vested but unpaid portion of the Participant’s LTIP Award shall be paid to the Participant (or his estate) in cash in a lump sum in accordance with the schedule set forth in Section 6, and (b) any unvested portion of the Participant’s LTIP Award shall vest immediately and shall be paid to the Participant (or his estate) in cash in a lump sum within 45 days after the effective date of such termination.  If a Participant’s employment with the Company or any subsidiary thereof terminates for any reason other than for Cause at any time after December 31, 2013, the Participant nonetheless shall be entitled to receive payment of any portion of his LTIP Award that was vested but unpaid as of the effective date of such termination.  As used herein, the following capitalized terms shall have the meanings provided below:
 
Disability :  A Disability shall have occurred when a Participant has been unable to perform his duties for a period of at least one hundred eighty (180) consecutive days because of a physical or mental incapacity which is expected to result in death or to last for a continuous period of not less than twelve (12) months as determined by a medical doctor mutually agreed upon by the Company and the Participant.
 
Cause :  The Company or a subsidiary thereof shall have Cause to terminate a Participant’s employment upon (a) the Participant’s commission of a felony crime or a crime of moral turpitude, (b) the Participant’s willful commission of a material act of dishonesty involving the Company or any of its affiliates, (c) the Participant’s material breach of his obligations under any agreement entered into between the Participant and the Company or any of its affiliates, (d) the Participant’s willful and repeated failure to perform his material duties, (e) the Participant’s material breach of the Company’s policies or procedures, or (f) any other willful misconduct by the Participant which causes material harm to the Company or any of its affiliates or their business reputations, including harm due to any adverse publicity; provided, however, that none of the events described in the foregoing clauses (c), (d), (e) or (f) shall constitute Cause unless the Company has notified the Participant in writing describing the events that constitute Cause, and then only if the Participant fails to cure such events within thirty (30) days after receipt of such written notice; and provided further, that in the event that any such event is not curable, no notice period shall be required.  No act or omission to act shall be “willful” if conducted in good faith or with a reasonable belief that such act or omission was in the best interests of the Company.
 
Good Reason :  The Participant shall have Good Reason to resign from his employment with the Company or any subsidiary thereof in the event that any of the following actions is taken by the Company or such subsidiary without the Participant’s consent: (a) a reduction in the Participant’s annual base salary or target bonus opportunity; (b) a reduction or adverse change in the Participant’s title, duties, responsibilities or reporting relationship; (c) a material breach by the Company of this Agreement; or (d) a material breach by the Company or any applicable affiliate thereof of its obligations under any material   agreement entered into between the Participant and the Company or such affiliate; provided, however, that none of the events described in the foregoing clauses (a), (b), (c) or (d) shall constitute Good Reason unless the Participant has notified the Company in writing describing the events that constitute Good Reason, and then only if the Company fails to cure such events within thirty (30) days after the Company’s receipt of such written notice.
 
 
2
 
 
9.    Taxes .  All amounts payable hereunder shall be subject to applicable federal, state and local tax withholding.
 
10.         Choice of Law .  This Program and the rights and obligations of the Company and the Participants hereunder shall be governed by, construed under, and interpreted in accordance with the laws of the State of Delaware without regard to conflict-of-law provisions or principles thereof.
 
11.         Amendment .  Except as may be limited by applicable law, this Program may be amended at any time and from time to time by the Board (including amendments with retroactive effect); provided, however, that no amendment of this Program shall adversely affect the rights and benefits of a Participant hereunder without the prior written consent of the Participant.
 
12.         Severability .  In the event that any provision of this Program is held by a court of competent jurisdiction to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision of this Program.
 
13.          Section 409A .  To the extent applicable, this Program shall be interpreted in accordance with Section 409A of the Internal Revenue Code of 1986, as amended, and the Department of Treasury regulations and other interpretive guidance issued thereunder, including, without limitation, any such regulations and guidance that may be issued after the adoption of this Program (collectively, “ Section 409A ”).  Notwithstanding any provision of this Program to the contrary, in the event that following the adoption of this Program the Company determines that any LTIP Award may be subject to Section 409A, the Company may adopt amendments to this Program (including amendments with retroactive effect),  adopt policies and procedures (including policies and procedures with retroactive effect), or take other actions that the Company determines are necessary or appropriate to (a) exempt the LTIP Award from Section 409A of the Code and/or preserve the intended tax treatment of the benefits provided with respect to the LTIP Award or (b) comply with the requirements of Section 409A and thereby avoid the application of any penalty tax under Section 409A.  No provision of this Program shall be interpreted or construed to transfer any liability for failure to comply with the requirements of Section 409A from any Participant or any other individual to the Company or any of its affiliates, employees or agents.
 
*  *  *  *  *
 
I hereby certify that this Program was duly authorized, approved and adopted by the Board of Directors of the Company on May 10, 2012.
 
Date:  May 10, 2012
 
   
 
  /s/ Peter H. Kesser
 
Peter H. Kesser
 
Secretary
 
 
3
Exhibit 10.2
 
AMENDED AND RESTATED
CONFIDENTIALITY AND NON-COMPETITION AGREEMENT


This Amended and Restated Confidentiality and Non-Competition Agreement (this “ Agreement ”) is entered into as of May __, 2012 (the “ Effective Date ”), by and between Verso Paper Corp., a Delaware corporation (“ Verso ”), and __________ (“ Employee ”).

Introduction .  Verso or one of its affiliates and Employee are parties to a Confidentiality and Non-Competition Agreement dated as of __________ (the “ Prior Agreement ”).  In the Prior Agreement, Employee agreed to certain obligations, and Verso agreed to provide Employee with certain benefits and payments (even after the employment relationship ends), to protect the valuable competitive information and business relationships of Verso to which Employee is allowed access in the performance of his employment duties for Verso.  The parties now desire to amend and restate the Prior Agreement in its entirety as set forth in this Agreement.  In connection therewith, Verso is willing to continue to employ Employee in a senior executive position, and Employee is willing to accept such continued employment, upon the terms and conditions set forth in this Agreement.  Based on the foregoing, and for certain good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, Verso and Employee hereby agree as follows:

1.             Definitions.   As used in this Agreement, the terms:

(a)           “ Protected Information ” shall mean all information, documents or materials, owned, developed or possessed by Verso or any employee while in the employ of Verso, whether in tangible or intangible form, that (i) Verso takes reasonable measures to maintain in secrecy, and (ii) pertains in any manner to Verso’s business, including but not limited to Research and Development (as defined below); customers or prospective customers, targeted national accounts, or strategies or data for identifying and satisfying their needs; present or prospective business relationships; present, short term, or long term strategic plans; acquisition candidates; plans for corporate restructuring; products under consideration or development; cost, margin or profit information; data from which any of the foregoing types of information could be derived; human resources (including compensation information and internal evaluations of the performance, capability and potential of Verso employees); business methods, data bases and computer programs.  The fact that individual elements of the information that constitutes Protected Information may be generally known does not prevent an integrated compilation of information, whether or not reduced to writing, from being Protected Information if that integrated whole is not generally known.

(b)           “ Research and Development ” shall include, but not be limited to, all (i) short-term and long-term basic, applied and developmental research and technical assistance and specialized research support of customers or active prospects, targeted national accounts, of Verso operating divisions; (ii) information relating to manufacturing and converting processes, methods, techniques and equipment and the improvements and innovations relating to same; quality control procedures and equipment; identification, selection, generation and propagation of tree species having improved characteristics; forest resource management; innovation and improvement to manufacturing and converting processes such as shipping, pulping bleaching chemical recovery papermaking, coating and calendaring processes and in equipment for use in such processes; reduction and remediation of environmental discharges; minimization or elimination of solid and liquid waste; use and optimization of raw materials in manufacturing processes; recycling and manufacture paper products; recycling of other paper or pulp products; energy conservation; computer software and application of computer controls to manufacturing and quality control operations and to inventory control; radio frequency identification and its use in paper and packaging products; and product process improvement development or evaluation; and (iii) information about methods, techniques, products equipment, and processes that Verso has learned do not work or do not provide beneficial results (“negative know-how”) as well as those that do work or provide beneficial results.

 
 
 
 
 (c)           “ Unauthorized ” shall mean (i) in contravention of Verso’s policies or procedures; (ii) otherwise inconsistent with Verso’s measures to protect its interests in the Protected Information; (iii) in contravention of any lawful instruction or directive, either written or oral, of any Verso employee empowered to issue such instruction or directive; (iv) in contravention of any duty existing under law or contract; or (v) to the detriment of Verso.

2.           Confidentiality.

(a)           Employee acknowledges and agrees that by reason of Employee’s employment with Verso, Employee has been and will be entrusted with Protected Information and may develop Protected Information, that such information is valuable and useful to Verso, that it would also be valuable and useful to competitors and others who do not know it and that such information constitutes confidential and proprietary trade secrets of Verso.  While an employee or consultant of Verso, or at any time thereafter, regardless of the reasons for leaving Verso, Employee agrees not to use or disclose, directly or indirectly, any Protected Information in an Unauthorized manner or for any Unauthorized purpose unless such information shall have become generally known in the relevant industry or independently developed with no assistance from Employee.  Further, promptly upon termination, for any reason, of Employee’s employment with Verso or upon the request of Verso, Employee agrees to deliver to Verso all property and materials and copies thereof within Employee’s possession or control that belong to Verso or that contain Protected Information and to permanently delete upon Verso’s request all Protected Information from any computers or other electronic storage media Employee owns or uses.

(b)           While an employee of Verso and after termination of Employee’s employment with Verso for any reason, Employee agrees not to take any actions that would constitute or facilitate the Unauthorized use or disclosure of Protected Information, including transmitting or posting such Protected Information on the internet, anonymously or otherwise.  Employee further agrees to take all reasonable measures to prevent the Unauthorized use and disclosure of Protected Information and to prevent Unauthorized persons or entities from obtaining or using Protected Information.

(c)           If Employee becomes legally compelled (by deposition, interrogatory, request for documents, subpoena, investigation, demand, order or similar process) to disclose any Protected Information, then before any such disclosure may be made, Employee shall immediately notify Verso thereof and, at Verso’s expense, shall consult with Verso on the advisability of taking steps to resist or narrow such request and cooperate with Verso in any attempt to obtain a protective order or other appropriate remedy or assurance that the Protected Information will be afforded confidential treatment.  If such protective order or other appropriate remedy is not obtained, Employee shall furnish only that portion of the Protected Information that it is advised by legal counsel is legally required to be furnished.

3.           Non-Competition.

(a)           Employee acknowledges and agrees that the business of Verso and its customers is worldwide in scope, Verso’s competitors and customers are located throughout the world, and Verso’s strategic planning and Research and Development activities have application throughout the world and are for the benefit of customers and Verso’s business throughout the world, and therefore, the restrictions on Employee’s competition after employment as described below apply to anywhere in the world in which Verso or its subsidiaries are doing business.  Employee acknowledges that any such competition within that geographical scope will irreparably injure Verso.  Employee acknowledges and agrees that, for that reason, the prohibitions on competition described below are reasonably tailored to protect Verso.

 
2
 
 
(b)           While an employee or consultant of Verso, Employee agrees not to compete in any manner, either directly or indirectly and whether for compensation or otherwise, with Verso or to assist any other person or entity to compete with Verso in the business of coated and supercalendared paper products or the operation of coated and supercalendared paper mills anywhere in the world.

(c)           After the termination of Employee’s employment with Verso for any reason, Employee agrees that for a period of 12 months (the “ Non-Compete Period ”) following such termination Employee will not compete with Verso anywhere in the world in which Verso or its subsidiaries are doing business by:

(i)           producing, developing, selling or marketing, or assisting others to produce, develop, sell or market in the business of coated and supercalendared paper products or the operation of coated and supercalendared paper mills;

(ii)           engaging in any sales, marketing, Research and Development or managerial duties (including, without limitation, financial, human resources, strategic planning, or operation duties) for, whether as an employee, consultant, or otherwise, any entity that produces, develops, sells or markets in the business of coated and supercalendared paper products or the operation of coated and supercalendared paper mills;

(iii)           owning, managing, operating, controlling or consulting for any entity that produces, develops, sells or markets in the business of coated and supercalendared paper products or the operation of coated and supercalendared paper mills; provided, however, that this Section 3(c)(iii) shall not prohibit Employee from being a passive owner of not more than 2% of the outstanding stock of any class of a corporation that is publicly traded, so long as Employee has no active participation in the business of such corporation; or

(iv)           soliciting the business of any actual or active prospective customers, or targeted national accounts of Verso for any product, process or service that is competitive with the products, processes, or services of Verso, namely any products, processes or services of the business of coated and supercalendared paper products or the operation of coated and supercalendared paper mills, whether existing or contemplated for the future, on which Employee has worked, or concerning which Employee has in any manner acquired knowledge or Protected Information about, during the 24 months preceding termination of Employee’s employment.

It shall not be a violation of this provision for Employee to accept employment with a non-competitive division or business unit of a multi-divisional company some of whose divisions or business units are competitors of Verso, so long as Employee does not engage in, oversee, provide input or information regarding, or participate in any manner in the activities described in this paragraph as they relate to the division or business unit that is a competitor of Verso.  Employee shall not assist others in engaging in activities that Employee is not permitted to take.

4.             Non-Solicitation/Non-Hire.   During the term of Employee’s employment at Verso and for a period of 12 months following the termination of such employment for any reason, Employee agrees that Employee will not, either on Employee’s own behalf or on behalf of any other person or entity, directly or indirectly, hire, solicit, retain or encourage to leave the employ of Verso (or assist any other person or entity in hiring, soliciting, retaining or encouraging) any person who is then or was within 6 months of the date of such hiring an employee of Verso.

 
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5.             Tolling Period of Restrictions.   Employee agrees that the periods of non-competition and non-solicitation/non-hire set forth in Sections 3 and 4, respectively, shall be extended by the period of violation if Employee is found to be in violation of those provisions.

6.             Verso’s Obligations upon Employee’s Termination of Employment.   Upon the termination of Employee’s employment with Verso by either party and for any reason, in consideration of Employee’s compliance with all his obligations under this Agreement (including, without limitation, his obligations under Sections 2, 3(c) and 4) and provided that Employee complies with all such obligations, subject to Employee’s execution and non-revocation of a waiver and release of claims agreement in Verso’s customary form (a “ Release ”), and subject to Section 9, Verso shall provide the following payments and benefits to Employee (or his estate if he is deceased) or on Employee’s behalf, as applicable, within 45 days after the effective date of the termination of Employee’s employment (the “ Termination Date ”) or as otherwise contemplated herein:

(a)           any base salary payable to Employee through the Termination Date that has not been paid as of the Termination Date, in accordance with Verso’s payroll policy and procedures;

(b)           any accrued vacation pay owed to Employee as of the Termination Date, in accordance with Verso’s vacation policy and procedures in effect immediately prior to the Termination Date;

(c)           reimbursement of any reasonable travel and other business expenses incurred by Employee in the performance of his duties to Verso through the Termination Date, in accordance with Verso’s expense reimbursement policy and procedures;

(d)           any amount arising from Employee’s participation in, and any benefit under, Verso’s employee benefit plans, programs, policies and arrangements in effect immediately prior to the Termination Date, in accordance with such employee benefit plans, programs, policies and arrangements and the procedures thereunder;

(e)           any incentive award payable to Employee under Verso’s annual performance-based incentive plan for any year completed on or prior to the Termination Date that has not been paid to Employee as of the Termination Date, payable when the incentive awards under such plan are paid to the other senior executives of Verso;

(f)           a prorated incentive award under Verso’s annual performance-based incentive plan for any year in which the Termination Date is prior to December 31, determined on a daily basis with respect to the period of employment during such year, based solely on the actual level of achievement of Verso’s performance objectives for such year, and payable when the incentive awards under such plan are paid to the other senior executives of Verso;

(g)           an amount equal to 145-180% of Employee’s annual base salary in effect immediately prior to the Termination Date, payable in 12 equal, consecutive, monthly installments commencing within 45 days after the Termination Date;

(h)           continued coverage of Employee and any eligible dependents under all Verso health and welfare plans in which Employee and such dependents participated immediately prior to the Termination Date, for a period of two years commencing immediately after the later of (i) the last day of the calendar month in which the Termination Date occurs or (ii) the last day of any period for which Verso has provided Employee with a subsidy for continued coverage pursuant to its severance policy (provided that such subsidy period may not exceed six months in duration), in either case to the extent that the continued coverage is permitted thereunder, subject to Employee’s payment of the active-employee component of the cost of the continued coverage in effect immediately prior to the Termination Date, and subject to early termination of the continued coverage upon Employee’s re-employment with comparable available benefits;

 
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(i)           reimbursement of any amount paid by Employee to (i) convert to an individual policy the basic life insurance on Employee’s life provided by Verso with the coverage amount in effect immediately prior to the Termination Date and (ii) continue such individual life insurance policy in effect for two years after the Termination Date, subject in each case to Employee providing Verso with reasonable documentation of the payment of such costs;

(j)           an amount equal to the sum of any and all federal, state and local income taxes imposed on Employee resulting from the benefits described in Sections 6(h) and 6(i), as determined by Verso in its reasonable discretion; and

(k)           a contribution to Employee’s account under Verso’s deferred compensation plan in an amount equal to the contributions that Verso would have made on Employee’s behalf under all Verso retirement plans in which Employee participated immediately prior to the Termination Date (including, without limitation, Verso’s retirement savings plan, deferred compensation plan, executive retirement program, and supplemental salary retirement program) if Employee had remained actively employed with Verso for two years after the Termination Date (the “ Lost Retirement Benefits ”).  Verso, in its reasonable discretion, shall determine the amount of the Lost Retirement Benefits based on (i) Employee’s annual base salary and other eligible compensation (within the meaning of the retirement plans) in effect immediately prior to the Termination Date and (ii) the assumption that Employee would have deferred portions of his base salary and other eligible compensation during the two-year period in amounts that would have produced the maximum possible matching contributions by Verso under the retirement plans.  Verso shall contribute the Lost Retirement Benefits to Employee’s account under the deferred compensation plan within 90 days after the Termination Date, except in the event that the determination of any portion of the Lost Retirement Benefits is dependent on the occurrence of an event occurring after the Termination Date, in which case Verso shall make the contribution of such portion of the Lost Retirement Benefits within 45 days after such event occurs.

7.             Duty to Show Agreement to Prospective Employer.   During Employee’s employment with Verso and for 12 months after the Termination Date, Employee shall, prior to accepting other employment, provide a copy of this Agreement to any recruiter who assists Employee in locating employment other than with Verso and to any prospective employer with which Employee discusses potential employment.

8.             Representations, Warranties and Acknowledgements.   In addition to the representations, warranties and obligations set forth throughout this Agreement, Employee acknowledges that (a) Protected Information is commercially and competitively valuable to Verso and critical to its success; (b) the Unauthorized use or disclosure of Protected Information or the violation of the covenants set forth in Sections 2, 3, or 4 would cause irreparable harm to Verso; (c) by this Agreement, Verso is taking reasonable steps to protect its legitimate interests in its Protected Information; (d) Employee has developed, or will develop, legally unique relationships with customers of Verso; and (e) nothing herein shall prohibit Verso from pursuing any remedies, whether in law or equity, available to Verso for breach or threatened breach of this Agreement.  Employee further acknowledges and agrees that, as a senior executive of Verso, Employee performs unique and valuable services to Verso of an intellectual character and that Employee’s services will be difficult for Verso to replace.  Employee further acknowledges and agrees that Verso is providing Employee with significant consideration in this Agreement for entering into the Agreement and that Verso’s remedies for any breach of this Agreement are in addition to and not in place of any other remedies Verso may have at law or equity or under any other agreements.

 
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9.           Section 409A.

(a)            General .  The parties hereto acknowledge and agree that, to the extent applicable, this Agreement shall be interpreted in accordance with, and incorporate the terms and conditions required by, Section 409A of the Internal Revenue Code of 1986, as amended (the “ Code ”), and the Department of Treasury Regulations and other interpretive guidance issued thereunder, including, without limitation, any such regulations or other guidance that may be issued after the date hereof (collectively, “ Section 409A ”).  Notwithstanding any provision of this Agreement to the contrary, in the event that Verso determines that any amounts payable hereunder will be immediately taxable to Employee under Section 409A, Verso and Employee shall cooperate in good faith to (i) adopt such amendments to this Agreement and appropriate policies and procedures, including amendments and policies with retroactive effect, that they mutually determine to be necessary or appropriate to preserve the intended tax treatment of the benefits provided by this Agreement, to preserve the economic benefits of this Agreement, and to avoid less favorable accounting or tax consequences for Verso and/or (ii) take such other actions as are mutually determined to be necessary or appropriate to exempt any amounts payable hereunder from Section 409A or to comply with the requirements of Section 409A and thereby avoid the application of penalty taxes thereunder.  No provision of this Agreement shall be interpreted or construed to transfer any liability for failure to comply with the requirements of Section 409A from Employee or any other individual to Verso or any of its affiliates, employees or agents.

(b)            Separation from Service under 409A .  Notwithstanding any provision to the contrary in this Agreement: (i) no amount shall be payable pursuant to Section 6 unless the termination of Employee’s employment constitutes a “separation from service” within the meaning of Section 1.409A-1(h) of the Department of Treasury Regulations; (ii) if Employee is deemed at the time of his separation from service to be a “specified employee” for purposes of Section 409A(a)(2)(B)(i) of the Code, to the extent that delayed commencement of any portion of the termination benefits to which Employee is entitled under this Agreement (after taking into account all exclusions applicable to such termination benefits under Section 409A), including, without limitation, any portion of the additional compensation awarded pursuant to Section 6, is required in order to avoid a prohibited distribution under Section 409A(a)(2)(B)(i) of the Code, such portion of Employee’s termination benefits shall not be provided to Employee prior to the earlier of (A) the expiration of the six-month period measured from the date of Employee’s “separation from service” with Verso (as such term is defined in the Department of Treasury Regulations issued under Section 409A) or (B) the date of Employee’s death, provided that upon the earlier of such dates, all payments deferred pursuant to this Section 9(b)(ii) shall be paid in a lump sum to Employee, and any remaining payments due under this Agreement shall be paid as otherwise provided herein; (iii) the determination of whether Employee is a “specified employee” for purposes of Section 409A(a)(2)(B)(i) of the Code as of the time of his separation from service shall be made by Verso in accordance with Section 409A (including, without limitation, Section 1.409A-1(i) of the Department of Treasury Regulations and any successor provision thereto); (iv) for purposes of Section 409A, Employee’s right to receive installment payments pursuant to Section 6 shall be treated as a right to receive a series of separate and distinct payments; and (v) to the extent that any reimbursement of expenses or in-kind benefits constitutes “deferred compensation” under Section 409A, such reimbursement or benefit shall be provided no later than December 31 of the year following the year in which the expense was incurred.  The amount of expenses reimbursed in one year shall not affect the amount eligible for reimbursement in any subsequent year.  The amount of any in-kind benefits provided in one year shall not affect the amount of in-kind benefits provided in any other year.

 
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(c)            Release .  Notwithstanding any provision to the contrary in this Agreement, to the extent that any payments of “nonqualified deferred compensation” within the meaning of Section 409A due under this Agreement as a result of Employee’s termination of employment are subject to Employee’s execution and delivery of a Release, (i) Verso shall deliver the Release to Employee within 10 business days following the Termination Date, and Verso’s failure to deliver a Release prior to the expiration of such 10-business-day period shall constitute a waiver of any requirement to execute a Release; (ii) if Employee fails to execute the Release on or prior to the Release Expiration Date (as defined below) or timely revokes his acceptance of the Release thereafter, Employee shall not be entitled to any payments or benefits otherwise conditioned on the Release; and (iii) if the Termination Date and the Release Expiration Date fall in two separate taxable years, any payments required to be made to Employee that are conditioned on the Release and are treated as nonqualified deferred compensation for purposes of Section 409A shall be made in the later taxable year.  For purposes of this Section 9(c), the term “Release Expiration Date” shall mean the date that is 21 days following the date upon which Verso timely delivers the Release to Employee, or, in the event that Employee’s termination of employment is “in connection with an exit incentive or other employment termination program” (as such phrase is defined in the Age Discrimination in Employment Act of 1967), the date that is 45 days following such delivery date.  To the extent that any payments of nonqualified deferred compensation within the meaning of Section 409A due under this Agreement as a result of Employee’s termination of employment are delayed pursuant to this Section 9(c), such amounts shall be paid in a lump sum on the first payroll date following the date that Employee executes and does not revoke the Release (and the applicable revocation period has expired) or, in the case of any payments subject to Section 9(c)(iii), on the first payroll date to occur in the subsequent taxable year, if later.

10.             Section 280G.

(a)           If it is determined (as hereafter provided) that any payment or distribution by Verso to or for the benefit of Employee, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise pursuant to or by reason of any other agreement, policy, plan, program or arrangement, including without limitation any stock option, stock appreciation right or similar right, or the lapse or termination of any restriction on or the vesting or exercisability of any of the foregoing (a “ Payment ”) would be subject to the excise tax imposed by Section 4999 of the Code (or any successor provision thereto) by reason of being contingent on a change in ownership or effective control of Verso or of a substantial portion of the assets of Verso, within the meaning of Section 280G of the Code (or any successor provision thereto) or to any similar tax imposed by state or local law, or any interest or penalties with respect to such excise tax (such tax or taxes, together with any such interest or penalties, are hereafter collectively referred to as the “ Excise Tax ”), then, in the event that the after-tax value of all Payments to Employee (such after-tax value to reflect the reduction for the Excise Tax and all federal, state and local income, employment and other taxes on such Payments) would, in the aggregate, be less than the after-tax value to Employee (reflecting a reduction for all such taxes in a like manner) of the Safe Harbor Amount (as defined below), (i) the cash portions of the Payments payable to Employee under this Agreement shall be reduced, in the reverse order in which they are due to be paid commencing with the latest such payment, until the Parachute Value (as defined below) of all Payments paid to Employee, in the aggregate, equals the Safe Harbor Amount, and (ii) if the reduction of the cash portions of the Payments, payable under this Agreement, to zero would not be sufficient to reduce the Parachute Value of all Payments to the Safe Harbor Amount, then any cash portions of the Payments payable to Employee under any other agreements, policies, plans, programs or arrangements shall be reduced, in the reverse order in which they are due to be paid commencing with the latest such payment, until the Parachute Value of all Payments paid to Employee, in the aggregate, equals the Safe Harbor Amount, and (iii) if the reduction of all cash portions of the Payments, payable pursuant to this Agreement or otherwise, to zero would not be sufficient to reduce the Parachute Value of all Payments to the Safe Harbor Amount, then non-cash portions of the Payments shall be reduced, in the reverse order in which they are due to be paid commencing with the latest such payment, until the Parachute Value of all Payments paid to Employee, in the aggregate, equals the Safe Harbor Amount.  All calculations under this section shall be determined by a national accounting firm selected by Verso (which may include Verso’s outside auditors) and shall be provided to Verso and Employee within 15 days prior to the date on which any Payment is payable to Employee.  Verso shall pay all costs to obtain and provide such calculations to Employee and Verso.

 
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(b)           For purposes of this Section 10, (i) the term “ Parachute Value ” of a Payment shall mean the present value as of the date of the change in ownership or effective control, within the meaning of Section 280G of the Code, of the portion of such Payment that constitutes a “parachute payment” under Section 280G(b)(2) of the Code, as determined for purposes of determining whether and to what extent the Excise Tax will apply to such Payment; and (ii) the term “ Safe Harbor Amount ” shall mean 2.99 times Employee’s “base amount” within the meaning of Section 280G(b)(3) of the Code.

11.           General.

(a)           Employee acknowledges and agrees that the parties have attempted to limit Employee’s right to compete only to the extent necessary to protect Verso from unfair competition and protect the legitimate interests of Verso.  If any provision or clause of this Agreement or portion thereof shall be held by any court of competent jurisdiction to be illegal, void or unenforceable in such jurisdiction, the remainder of such provisions shall not thereby be affected and shall be given full effect, without regard to the invalid portion.  It is the intention of the parties and Employee agrees, that if any court construes any provision or clause of this Agreement or any portion thereof to be illegal, void or unenforceable because of the duration of such provision or the area or matter covered thereby, such court shall reduce the duration, area or matter of such provision and in its reduced form, such provision shall then be enforceable and shall be enforced.

(b)           Employee acknowledges that neither this Agreement nor any provision hereof can be modified, abrogated or waived except in a written document signed by the President and Chief Executive Officer of Verso, or in the event of the absence of such executive or the vacancy of such position, such other officer as Verso’s board of directors shall designate in writing.

(c)           This Agreement shall be governed by, construed under, and enforced in accordance with the laws of the State of Delaware without regard to the conflict-of-law provisions or principles thereof.  Employee hereby consents to the jurisdiction of and agrees that any claim arising out of or relating to this Agreement may be brought in the courts of the State of Delaware.

(d)           This Agreement and any rights thereunder may be assigned by Verso and, if so assigned, shall operate to protect the Protected Information and relationships of Verso as well as such information and relationships of the assignee.

(e)           If any party to this Agreement breaches any of the terms of this Agreement, the breaching party shall pay to the non-breaching party all of the non-breaching party’s costs and expenses, including, without limitation, attorneys’ and experts’ fees, incurred in enforcing the provisions of this Agreement as to which a breach is found.

(f)           Employee agrees that Verso’s determination not to enforce this or similar agreements as to specific violations shall not operate as a waiver or release of Employee’s obligations under this Agreement.

 
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(g)           Employee understands that Employee owes fiduciary and common law duties to Verso in addition to the covenants set forth above prohibiting the misuse or disclosure of trade secrets or confidential information and the unlawful interference with Verso’s business and customer relationships.

(h)           Employee acknowledges and agrees that Verso has advised Employee that Employee may consult with an independent attorney before signing this Agreement.

(i)           This Agreement sets forth the entire agreement of the parties, and fully supersedes any and all prior agreements or understandings between the parties (including, without limitation, the Prior Agreement, which shall be of no further force and effect following the Effective Date) pertaining to the subject matter hereof.


IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered effective as of the Effective Date.

 
 
VERSO PAPER CORP.
     
     
  By:  
    David J. Paterson
    President and Chief Executive Officer
     
     
     
     
   
 
[Employee]
 
[Title]
 
 
9
 
Exhibit 12
 
VERSO PAPER HOLDINGS LLC
 
RATIO OF EARNINGS TO FIXED CHARGES
 
(Unaudited)
 
   
Three Months Ended
 
   
March 31,
 
(Dollars in thousands)
 
2012
   
2011
 
Earnings (Loss):
           
Net loss
  $ (72,367 )   $ (42,974 )
Amortization of capitalized interest
    90       50  
Capitalized interest
    (678 )     (727 )
Fixed charges (below)
    32,225       32,712  
Net loss adjusted for fixed charges
  $ (40,730 )   $ (10,939 )
                 
Fixed charges:
               
Interest expense
  $ 30,917     $ 31,344  
Capitalized interest
    678       727  
Portion of rent expense representative of interest
    630       641  
Total fixed charges
  $ 32,225     $ 32,712  
Ratio of earnings to fixed charges
    -       -  
Coverage deficiency
  $ 72,955     $ 43,651  
EXHIBIT 31.1
 
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO RULE 13a-14(a) UNDER SECURITIES EXCHANGE ACT OF 1934
 
I, Michael A. Jackson, certify that:
 
1.
I have reviewed this quarterly report of Verso Paper Corp.;
 
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
 
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
 
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
 
  
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
  
(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
 
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
 
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 14, 2012
 
   
   
 
/s/ Michael A. Jackson
 
Michael A. Jackson
 
President and Chief Executive Officer
EXHIBIT 31.2

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO RULE 13a-14(a) UNDER SECURITIES EXCHANGE ACT OF 1934
 
I, Robert P. Mundy, certify that:
 
1.
I have reviewed this quarterly report of Verso Paper Corp.;
 
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
 
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
 
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
 
 
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
 
(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
 
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
 
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 14, 2012
 
   
   
 
/s/ Robert P. Mundy
 
   Robert P. Mundy
  Senior Vice President and Chief Financial Officer
EXHIBIT 31.3

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO RULE 13a-14(a) UNDER SECURITIES EXCHANGE ACT OF 1934
 
I, Michael A. Jackson, certify that:
 
1.
I have reviewed this quarterly report of Verso Paper Holdings LLC;
 
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
 
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
 
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
 
  
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
  
(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
 
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
 
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 14, 2012
 
   
   
 
/s/ Michael A. Jackson
 
Michael A. Jackson
 
President and Chief Executive Officer
EXHIBIT 31.4

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO RULE 13a-14(a) UNDER SECURITIES EXCHANGE ACT OF 1934
 
I, Robert P. Mundy, certify that:
 
1.
I have reviewed this quarterly report of Verso Paper Holdings LLC;
 
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
 
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
 
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
 
 
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
 
(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
 
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
 
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 14, 2012
 
   
   
 
/s/ Robert P. Mundy
 
   Robert P. Mundy
 
Senior Vice President and Chief Financial Officer
EXHIBIT 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

In connection with the quarterly report of Verso Paper Corp. (the “Company”) for the quarterly period ended March 31, 2012 (the “Report”), I, Michael A. Jackson, certify that:
 
 
(1)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
     
  (2) 
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
May 14, 2012
 

 
 
/s/ Michael A. Jackson
 
Michael A. Jackson
 
President and Chief Executive Officer
EXHIBIT 32.2

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO RULE 13a-14(b) UNDER SECURITIES EXCHANGE ACT OF 1934 AND
SECTION 1350 OF CHAPTER 63 OF TITLE 18 OF UNITED STATES CODE

In connection with the quarterly report of Verso Paper Corp. (the “Company”) for the quarterly period ended March 31, 2012 (the “Report”), I, Robert P. Mundy, certify that:
 
 
(1)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
     
 
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
May 14, 2012

 
 
 
/s/ Robert P. Mundy
 
Robert P. Mundy
 
Senior Vice President and Chief Financial Officer
EXHIBIT 32.3

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

In connection with the quarterly report of Verso Paper Holdings LLC (the “Company”) for the quarterly period ended March 31, 2012 (the “Report”), I, Michael A. Jackson, certify that:
 
 
(1)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
     
  (2) 
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
May 14, 2012
 

 
 
/s/ Michael A. Jackson
 
Michael A. Jackson
 
President and Chief Executive Officer
EXHIBIT 32.4

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO RULE 13a-14(b) UNDER SECURITIES EXCHANGE ACT OF 1934 AND
SECTION 1350 OF CHAPTER 63 OF TITLE 18 OF UNITED STATES CODE

In connection with the quarterly report of Verso Paper Holdings LLC (the “Company”) for the quarterly period ended March 31, 2012 (the “Report”), I, Robert P. Mundy, certify that:
 
 
(1)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
     
  (2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
May 14, 2012
 
 

 
/s/ Robert P. Mundy
 
Robert P. Mundy
 
Senior Vice President and Chief Financial Officer