UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
DC 20549
  FORM
10-K
  (Mark
One)
  [ü]ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
 For the
fiscal year ended December 31, 2008
  or
  [    ]TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
 For the
transition period from _________ to _____________
 
 Commission
file number:  333-142283
  Verso
Paper Holdings LLC
 (Exact
name of registrant as specified in its charter)
  Delaware
              
              56-2597634(State or other
      jurisdiction of incorporation or organization)
              
              (I.R.S. Employer
      Identification Number)6775
      Lenox Center Court, Suite 400Memphis,
      Tennessee 38115-4436
              
              (901)
      369-4100(Address of principal
      executive offices) (Zip Code)
              
              (Registrant’s
      telephone number, including area
code)
 
 Securities
registered pursuant to Section 12(b) of the Act: None
  Securities
registered pursuant to Section 12(g) of the Act: None
  Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.  Yes    No
ü
  Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes 
No ü
  Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes ü  
No
  Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§ 229.405) is not contained herein, and will not be contained,
to the best of registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K. ü
  Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.  (Check
one):
 Large
      accelerated filer ____
                          
                          Accelerated
      filer ____
                          Non-accelerated
      filer ü
                            (Do
      not check if a smaller  reporting company)
                          Smaller
      reporting company
____
  Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act.  Yes ______   No  __ü__
  DOCUMENTS
INCORPORATED BY REFERENCE: None
 
 The
registrant meets the conditions set forth in General Instruction I(1)(a) and (b)
of Form 10-K and is therefore filing this Form 10-K with the reduced disclosure
format permitted by General Instruction I(2).
  
  Table
of Contents
  PART
      IPageItem
      1.
                  Business
                  3Item 1A.
                  Risk Factors
                  12Item 1B.
                  Unresolved Staff Comments
                  19Item
      2.
                  Properties
                  19Item
      3.
                  Legal Proceedings
                  19Item
      4.
                  Submission of Matters to a Vote of Security
      Holders
                  19PART
    IIItem
      5.
                  Market for Registrant’s Common Equity, Related Stockholder
      Matters, and Issuer Purchases
      of Equity Securities
                  20Item
      6.
                  Selected Financial Data
                  20Item
      7.
                  Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
                  22Item 7A.
                  Quantitative and Qualitative Disclosures About Market
      Risk
                  37Item
      8.
                  Financial Statements and Supplementary Data
                  40Item
      9.
                  Changes in and Disagreements with Accountants on Accounting
      and Financial Disclosure
                  77Item 9A.
                  Controls and Procedures
                  77Item 9A(T).
                  Controls and Procedures
                  77Item 9B.
                  Other Information
                  78PART
    IIIItem 10.
                  Directors, Executive Officers, and Corporate
      Governance
                  79Item 11.
                  Executive Compensation
                  79Item 12.
                  Security
      Ownership of Certain Beneficial Owners and Management and
      Related Stockholder
      Matters
                  79Item 13.
                  Certain Relationships and Related Transactions, and
      Director Independence
                  79Item 14.
                  Principal Accountant Fees and Services
                  79PART
    IVItem 15.
                  Exhibits and Financial Statement
    Schedules
                  80Signatures
                  
                  84
  
  Forward-Looking
Statements
  In this
annual report, all statements that are not purely historical facts are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Forward-looking statements may be identified by the words “believe,” “expect,”
“anticipate,” “project,” “plan,” “predict,” “estimate,” “intend,” “could,”
“may,” “might,” and similar expressions.  Forward-looking statements
are based on currently available business, economic, financial, and other
information and reflect management’s current knowledge, assumptions, beliefs,
estimates, expectations, and views with respect to future developments and their
potential effects on Verso.  Actual results could vary materially
depending on risks and uncertainties that may affect Verso and its
business.  For a discussion of such risks and uncertainties, please
refer to “Risk Factors,” “Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” and other sections of this annual report
and to Verso’s other filings with the Securities and Exchange
Commission.  Except as required by applicable law, we assume no
obligation to update any forward-looking statement made in this annual report to
reflect subsequent events or circumstances or actual outcomes.
  Market
and Industry Information
  Market
data and other statistical information used throughout this annual report are
based on independent industry publications, government publications, reports by
market research firms or other published independent sources. Some data are also
based on our good faith estimates which are derived from our review of internal
surveys, as well as the independent sources listed above.  Although we
believe these sources are reliable, we have not independently verified the
information.  Industry prices for coated paper provided in this annual
report are, unless otherwise expressly noted, derived from Resource Information
Systems, Inc., or “RISI, Inc.” data.  “North American” data included
in this annual report that has been derived from RISI, Inc. only includes data
from the United States and Canada.  U.S. industry pricing data
included in this annual report has been derived from RISI, Inc. data; this data
represents pricing from the eastern United States only (as defined by RISI,
Inc.).  Also, any reference to (i) grade No. 3, grade
No. 4, and grade No. 5 coated paper relates to 60 lb. basis weight, 50
lb. basis weight, and 34 lb. basis weight, respectively, (ii) lightweight
coated groundwood paper refers to groundwood paper grades that are a 36 lb.
basis weight or less, and (iii) ultra-lightweight coated groundwood paper
refers to groundwood paper grades that are a 30 lb. basis weight or
less.  The RISI, Inc. data included in this annual report has been
derived from the following RISI, Inc. publications: 2008 RISI World Graphic
Paper forecast and RISI, Paper Trader: A Monthly Monitor of the North American
Graphic Paper Market, January 2009.
  2
 
 PART
I
  Item
1.Business
  Unless
otherwise noted, the terms “Verso,” “Verso Paper,” “Company,” “we,” “us,” “our,”
and “Successor” refer collectively to Verso Paper Holdings LLC, a Delaware
limited liability company, and its subsidiaries, and references to the
“Division” or “Predecessor” refer to the Coated and Supercalendered Papers
Division of International Paper Company, or “International Paper”.
  Background
  We began
operations on August 1, 2006 when we acquired the assets and certain liabilities
comprising the business of the Coated and Supercalendered Papers Division of
International Paper.  We were formed by affiliates of Apollo
Management, L.P., or “Apollo,” for the purpose of consummating the acquisition
from International Paper, or the “Acquisition.”  Verso Paper Corp., of
which we are an indirect, wholly-owned subsidiary, went public on May 14, 2008,
with an initial public offering, or “IPO," of 14 million shares of common stock
at a price of $12 per share which generated $152.2 million in net
proceeds.
  Our
principal executive offices are located at 6775 Lenox Center Court, Suite 400,
Memphis, Tennessee 38115-4436.  Our telephone number is
(901) 369-4100.  Our web site address is www.versopaper.com.  Information
on our web site is not considered part of this annual report.
  Overview
  We are a
leading North American supplier of coated papers to catalog and magazine
publishers.  The coating process adds a smooth uniform layer in the
paper, which results in superior color and print definition.  As a
result, coated paper is used primarily in media and marketing applications,
including catalogs, magazines, and commercial printing applications, such as
high-end advertising brochures, annual reports, and direct mail
advertising.
  We are
North America’s second largest producer of coated groundwood paper, which is
used primarily for catalogs and magazines.  We are also a low cost
producer of coated freesheet paper, which is used primarily for annual reports,
brochures, and magazine covers.  In addition, we have a strategic
presence in supercalendered paper, which is primarily used for retail
inserts.  We also produce and sell market kraft pulp, which is used to
manufacture printing and writing paper grades and tissue products.
  We operate
11 paper machines at four mills located in Maine, Michigan, and
Minnesota.  The mills have a combined annual production capacity of
1,693,000 tons of coated paper, 106,000 tons of supercalendered paper, 44,000
tons of ultra-lightweight specialty paper, and 878,000 tons of kraft
pulp.
  3
  Our net
sales (in millions) by product line in 2008, are illustrated below:
  
   We sell
and market our products to approximately 100 customers which comprise
approximately 650 end-user accounts.  We have long-standing
relationships with many leading magazine and catalog publishers, commercial
printers, specialty retail merchandisers and paper merchants.  We
reach our end-users through several distribution channels, including direct
sales, commercial printers, paper merchants, and brokers.
 
 Industry
  Based on
2008 sales, the size of the global coated paper industry is estimated to be
approximately $55 billion, or 53 million tons of coated paper shipments,
including approximately $12 billion, or 12 million tons of coated paper
shipments, in North America.  Coated paper is used primarily in media
and marketing applications, including catalogs, magazines, and commercial
printing applications, which include high-end advertising brochures, annual
reports and direct mail advertising.  Demand is generally driven by
North American advertising and print media trends, which in turn have
historically been correlated with growth in Gross Domestic Product, or
“GDP.”
 
 In North
America, coated papers are classified by brightness and fall into five grades,
labeled No. 1 to No. 5, with No. 1 having the highest brightness level and No. 5
having the lowest brightness level.  Papers graded No. 1, No. 2, and
No. 3 are typically coated freesheet grades. No. 4 and No. 5 papers are
predominantly groundwood containing grades.  Coated groundwood grades
are the preferred grades for catalogs and magazines, while coated freesheet is
more commonly used in commercial print applications.
 
 Products
  We
manufacture three main grades of paper: coated groundwood paper, coated
freesheet paper, and supercalendered paper.  These paper grades are
differentiated primarily by their respective brightness, weight, print quality,
bulk, opacity, and strength.  We also produce Northern Bleached
Hardwood Kraft, or “NBHK,” pulp.  The following table sets forth our
principal products by 2008 tons sold and as a percentage of our 2008 net
sales:
  4
  Product
                                
                                Tons
      Sold
                                
                                
                                Net
      Sales(tons
      in thousands, dollars in millions)
                                
                                Kts
                                
                                
                                %
                                
                                
                                $
                                
                                
                                %Coated
      groundwood paper
                                
                                
                                961
                                
                                
                                
                                49
                                
                                
                                $
                                938
                                
                                
                                
                                53Coated
      freesheet paper
                                
                                
                                581
                                
                                
                                
                                30
                                
                                
                                
                                556
                                
                                
                                
                                31Supercalendered
      paper
                                
                                
                                105
                                
                                
                                
                                5
                                
                                
                                
                                81
                                
                                
                                
                                5Pulp
                                
                                
                                255
                                
                                
                                
                                13
                                
                                
                                
                                147
                                
                                
                                
                                8Other
                                
                                
                                51
                                
                                
                                
                                3
                                
                                
                                
                                45
                                
                                
                                
                                3Total
                                
                                
                                1,953
                                
                                
                                
                                100
                                
                                
                                $
                                1,767
                                
                                
                                
                                100
  As a
result of our scale and technological capabilities, we are able to offer our
customers a broad product offering, from ultra-lightweight coated groundwood to
heavyweight coated freesheet and supercalendered papers.  Our
customers have the opportunity to sole-source all of their coated paper needs
from us while optimizing their choice of paper products.  As our
customers’ preferences change, they can switch paper grades to meet their
desired balance between cost and performance attributes while maintaining their
relationship with us.
  We are
also one of the largest rotogravure lightweight coated paper manufacturers in
North America.  Rotogravure printing is a technique for transferring
ink onto coated papers, which typically results in a sharper image with truer
colors and less ink trapping than in other printing processes but generally
requires a smaller and higher-quality paper. Additionally, we are the only
manufacturer in North America with the technological expertise to supply both
rotogravure coated groundwood and coated freesheet.
  Coated groundwood
paper.  Coated groundwood paper includes a fiber component
produced through a mechanical pulping process.  The use of such fiber
results in a bulkier and more opaque paper that is better suited for
applications where lighter weights and/or higher stiffness are required, such as
catalogs and magazines.  In addition to mechanical pulp, coated
groundwood paper typically includes a kraft pulp component to improve brightness
and print quality.
  Coated freesheet
paper.Coated freesheet paper is made from bleached kraft
pulp, which is produced using a chemical process to break apart wood fibers and
dissolve impurities such as lignin.  The use of kraft pulp results in
a bright, heavier-weight paper with excellent print qualities, which is
well-suited for high-end commercial applications and premium
magazines.  Coated freesheet contains primarily kraft pulp, with less
than 10% mechanical pulp in its composition.
  Supercalendered
paper.Supercalendered paper consists of groundwood fibers and
a very high filler content but does not receive a separate surface
coating.  Instead, the paper is passed through a supercalendering
process in which alternating steel and filled rolls “iron” the paper, giving it
a gloss and smoothness that makes it resemble coated
paper.  Supercalendered papers are primarily used for retail inserts,
due to their relatively low price point.
  Pulp.Weproduce and sell NBHK
pulp.  NBHK pulp is produced through the chemical kraft process using
hardwoods.  Hardwoods typically have shorter length fibers than
softwoods and are used to smooth paper.  Kraft describes pulp produced
using a chemical process, whereby wood chips are combined with chemicals and
steam to separate the wood fibers.  The fibers are then washed and
pressure screened to remove the chemicals and lignin which originally held the
fibers together.  Finally, the pulp is bleached to the necessary
whiteness and brightness. Kraft pulp is used in applications where brighter and
whiter paper is required.
  5
  Over our
integrated mill system, the total volume of pulp purchased from third parties is
approximately balanced by the amount of pulp that we sell to the
market.  This feature substantially insulates our business from
exposure to fluctuations in the price of pulp.
  Other products.We
also offer recycled paper to help meet specific customer
requirements.  Additionally, we offer customized product solutions for
strategic accounts by producing paper grades with customer-specified weight,
brightness and pulp mix characteristics, providing customers with cost benefits
and/or brand differentiation.  Finally, we have recently expanded our
offerings to include ultra-lightweight uncoated printing papers and
ultra-lightweight coated and uncoated flexible packaging papers.
  Manufacturing
  We operate
11 paper machines at four mills located in Maine, Michigan, and
Minnesota.  The mills have a combined annual production capacity of
1,693,000 tons of coated paper, 106,000 tons of supercalendered paper, 44,000
tons of ultra-lightweight specialty paper, and 878,000 tons of kraft
pulp.  Of the pulp that we produce, we consume approximately 493,000
tons internally and sell the rest.  Our facilities are strategically
located within close proximity to major publication printing
customers.  The facilities also benefit from convenient and
cost-effective access to northern softwood fiber, which is required for the
production of lightweight and ultra-lightweight coated papers.  All
mills and machines operate seven days a week on a twenty-four hours per day
basis.
  The
following table sets forth the locations of our mills, the products they
produce, and other key operating information:
  Paper
                                    
                                    ProductionMill/Location
                                    
                                    Product/Paper
      Grades
                                    
                                    Machines
                                    
                                    Capacity*Jay
      (Androscoggin), ME
                                    
                                    Lightweight
      Coated Groundwood
                                    
                                    2
                                    
                                    366,100Lightweight
      Coated Freesheet
                                    
                                    1
                                    
                                    246,600Pulp
                                    
                                    -
                                    
                                    404,600Bucksport,
      ME
                                    
                                    Lightweight
      and Ultra-Lightweight CoatedGroundwood
      and High Bulk SpecialtyCoated
      Groundwood
                                    
                                    4
                                    
                                    466,900Ultra-Lightweight
      Specialty
                                    
                                    
                                    
                                    44,000Quinnesec,
      MI
                                    
                                    Coated
      Freesheet
                                    
                                    1
                                    
                                    395,400Pulp
                                    
                                    -
                                    
                                    473,400Sartell,
      MN
                                    
                                    Lightweight
      and Ultra-Lightweight CoatedGroundwood
                                    
                                    1
                                    
                                    217,700Supercalendered
                                    
                                    2
                                    
                                    105,600* We
      have the capacity to produce 878,000 tons of kraft pulp, of which
      approximately 493,000 tons are to be consumed internally and the remainder
      is available to be sold as market pulp.  This data does not
      include our production capacity for other pulp grades, the entirety of
      which is consumed internally in the production process for our coated
      paper.
  The basic
raw material of the papermaking process is wood pulp.  The first stage
of papermaking involves converting wood logs to pulp through either a mechanical
or chemical process.  Before logs can be processed into pulp, they are
passed through a debarking drum to remove the bark.  Once separated,
the bark is burned as fuel in bark boilers. The wood logs are composed of small
cellulose fibers which are bound together by a glue-like substance called
lignin.  The cellulose fibers are then separated from each other
through either a mechanical or a kraft pulping process.
  6
  After the
pulping phase, the fiber furnish is run onto the forming fabric of the paper
machine.  On the forming fabric, the fibers become interlaced, forming
a mat of paper, and much of the water is extracted.  The paper web
then goes through a pressing and drying process to extract the remaining
water.  After drying, the web receives a uniform layer of coating that
makes the paper smooth and provides uniform ink absorption.  After
coating, the paper goes through a calendering process that provides a smooth
finish by ironing the sheet between multiple soft nips that consist of
alternating hard (steel) and soft (cotton or synthetic) rolls.  At the
dry end, the paper is wound onto spools to form a machine reel and then rewound
and split into smaller rolls on a winder.  Finally, the paper is
wrapped, labeled, and shipped.
  Catalog
and magazine publishers with longer print runs tend to purchase paper in roll
form for use in web printing, a process of printing from a reel of paper as
opposed to individual sheets of paper, in order to minimize costs.  In
contrast, commercial printers typically buy large quantities of sheeted paper in
order to satisfy the short-run printing requirements of their
customers.  We believe that sheeted paper is a less attractive product
as it requires additional processing, bigger inventory stocks, a larger sales
and marketing team and a different channel strategy.  For this reason,
we have pursued a deliberate strategy of configuring our manufacturing
facilities to produce all web-based papers, which are shipped in roll form and
have developed relationships with third-party converters to address any sheeted
paper needs of our key customers.
  We utilize
a manufacturing excellence program, named R-GAP, to ensure timely and accurate
reporting, encourage faster operator involvement, and provide an overall culture
of continuous process improvement.  We use multi-variable testing,
lean manufacturing, center of excellence teams, source-of-loss initiatives, and
best practice sharing to constantly improve our manufacturing processes and
products.  Since 2001, three of our four facilities have participated
in OSHA’s Voluntary Protection Program which recognizes outstanding safety
programs and performance.
  Raw
Materials and Suppliers
  Our key
cost inputs in the papermaking process are wood fiber, market kraft pulp,
chemicals, and energy.
  Wood Fiber.We
source our wood fiber from a broad group of timberland and sawmill owners
located in our regions.
  Kraft
Pulp.Overall, we have the capacity to produce 878,000 tons of
kraft pulp, consisting of 405,000 tons of pulp at the Androscoggin mill and
473,000 tons of pulp at the Quinnesec mill, of which a total of approximately
493,000 tons are consumed internally.  We supplement our internal
production of kraft pulp with purchases from third parties.  In 2008,
these purchases were approximately 166,000 tons of pulp.  We purchase
the pulp requirements from a variety of suppliers and are not dependent on any
single supplier to satisfy our pulp needs.
  Chemicals.Chemicals
utilized in the manufacturing of coated papers include latex, starch, calcium
carbonate, and titanium dioxide.  We purchase these chemicals from a
variety of suppliers and are not dependent on any single supplier to satisfy our
chemical needs.
  Energy.We produce
a large portion of our energy requirements, historically producing approximately
50% of our energy needs for our coated paper mills from sources such as waste
wood and paper, hydroelectric facilities, chemicals from our pulping process,
our own steam recovery boilers, and internal energy cogeneration
facilities.  Our external energy purchases vary across each one of our
mills and include fuel oil, natural gas, coal, and electricity. While our
internal energy production capacity and ability to switch between certain energy
sources mitigates the volatility of our overall energy expenditures, we expect
prices for energy to remain volatile for the foreseeable future. We utilize
derivative contracts as part of our risk management strategy to manage our
exposure to market fluctuations in energy prices.
  7
  Sales,
Marketing, and Distribution
  We reach
our end-users through several sales channels.  These include selling
directly to end-users, through brokers, merchants, and printers.  We
sell and market products to approximately 100 customers, which comprise
approximately 650 end-user accounts.
  Sales to
End-Users.In 2008, we sold approximately 42% of our paper
products directly to end-users, most of which are catalog and magazine
publishers.  These customers are typically large, sophisticated buyers
who have the scale, resources, and expertise to procure paper directly from
manufacturers.  Customers for our pulp products are mostly other paper
manufacturers.
  Sales to Brokers and
Merchants.Our largest indirect paper sales by volume are
through brokers and merchants who resell the paper to end-users.  In
2008, our total sales to brokers and merchants represented 45% of our total
sales.  Brokers typically act as an intermediary between paper
manufacturers and smaller end-users who do not have the scale or resources to
cost effectively procure paper directly from manufacturers.  The
majority of the paper sold to brokers is resold to catalog
publishers.  We work closely with brokers to achieve share targets in
the catalog, magazine, and insert end-user segments through collaborative
selling.
  Merchants
are similar to brokers in that they act as an intermediary between the
manufacturer and the end-user. However, merchants generally take physical
delivery of the product and keep inventory on hand.  Merchants tend to
deal with smaller end-users that lack the scale to warrant direct delivery from
the manufacturer.  Coated freesheet comprises the majority of our
sales to merchants.  In most cases, because they are relatively small,
the ultimate end-users of paper sold through merchants are generally regional or
local catalog or magazine publishers.
  Sales to
Printers.In 2008, our total sales to printers represented 9%
of our total sales.  Nearly all of our sales were to the five largest
publication printers in the United States.  Printers also effectively
act as an intermediary between manufacturers and end-users in that they directly
source paper for printing/converting and then resell it to their customers as a
finished product.
  The
majority of our products are delivered directly from our manufacturing
facilities to the printer, regardless of the sales channel.  In order
to serve the grade No. 3 coated freesheet segment, we maintain a network of
distribution centers located in the West, Midwest, South, and Northeast close to
our customer base to provide quick delivery.  The majority of our pulp
products are delivered to our customers’ paper mills.
  Our sales
force is organized around our sales channels.  We maintain an active
dialogue with all of our major customers and track product performance and
demand across grades.  We have a team of sales representatives and
marketing professionals organized into three major sales groups that correspond
with our sales channels: direct sales support; support to brokers and merchants;
and printer support.
  The
majority of our products are sold under contracts with our
customers.  Contracted sales are more prevalent for coated groundwood
paper, as opposed to coated freesheet paper, which is more often sold without a
contract.  Our contracts generally specify the volumes to be sold to
the customer over the contract term, as well as the pricing parameters for those
sales.  Most of our contracts are negotiated on an annual basis, with
only a few having terms extending beyond one year.  Typically, our
contracts provide for quarterly price adjustments based on market price
movements.  The large portion of contracted sales allows us to plan
our production runs well in advance, optimizing production over our integrated
mill system and thereby reducing costs and increasing overall
efficiency.
  8
  Part of
our strategy is to continually reduce the cost to serve our customer base
through e-commerce initiatives which allow forsimplified
ordering, tracking, and invoicing.  In 2008, orders totaling $474.3
million, or approximately 30% of our total paper sales, were placed through our
online ordering platforms.  We are focused on further developing our
technology platform and e-commerce capabilities.  To this end, we
operate Nextier Solutions, an Internet-based system that allows for
collaborative production planning, order placement, and inventory management
throughout the supply chain.  Participants use the system to maximize
supply chain efficiencies, improve communication, and reduce operating costs,
and they pay us subscription and transaction fees for system usage.
  Customers
  We serve
the catalog, magazine, insert, and commercial printing markets and have
developed long-standing relationships with the premier North American retailers
and catalog and magazine publishers.  The length of our relationships
with our top ten customers averages more than 20 years and no single customer
accounted for more than 10% of our net sales in 2008.  Our key
customers include leading magazine publishers such as Condé Nast Publications,
Inc., Hearst Corporation, National Geographic Society, and Time Inc.; leading
catalog producers such as Avon Products, Inc. and Sears Holding Corporation;
leading commercial printers such as Quad/Graphics, Inc., and RR
Donnelley & Sons Company; and leading paper merchants and brokers, such
as A.T. Clayton & Co., Unisource Worldwide, Inc., the xpedx and Bulkley
Dunton business units of International Paper, and Clifford Paper,
Inc.
  Our net
sales, excluding pulp sales, by end-user segment in 2008, are illustrated below
(dollars in millions):
  
 Research
and Development
  The
primary function of our research and development efforts is to work with
customers in developing and modifying products to accommodate their evolving
needs and to identify cost-saving opportunities within our
operations.
  Examples
of our research and development efforts implemented over the past several years
include:
  9
  ·  high-bulk
offset and rotogravure coated groundwood;
  ·  lightweight
grade No. 4 coated groundwood;
  ·  ultra-lightweight
grade No. 5 coated groundwood; and
  ·  rotogravure
coated freesheet
  Intellectual
Property
  We have
several patents and patent applications in the United States and various foreign
countries.  These patents and patent applications generally relate to
various paper manufacturing methods and equipment which may become commercially
viable in the future.  We also have trademarks for our names, Verso®
and Verso Paper®, as well as for  our products such as Influence®,
Velocity®, Liberty®, Advocate,® and Trilogy®.  In addition to the
intellectual property that we own, we license a significant portion of the
intellectual property used in our business on a perpetual, royalty-free,
non-exclusive basis from International Paper.
 
 Competition
  Our
business is highly competitive.  A significant number of North
American competitors produce coated and supercalendered papers, and several
overseas manufacturers, principally from Europe, export to North
America.  We compete based on a number of factors,
including:
  ·  price;
  ·  product
availability;
  ·  product
quality;
  ·  breadth of
product offerings;
  ·  timeliness
of product delivery; and
  ·  customer
service.
  Foreign
competition in North America is also affected by the exchange rate of the U.S.
dollar relative to other currencies, especially the euro, market prices in North
America and other markets, worldwide supply and demand, and the cost of
ocean-going freight.
  While our
product offering is broad in terms of grades produced (from supercalendered and
ultra-lightweight coated groundwood offerings to heavier-weight coated freesheet
products), we are focused on producing coated groundwood and coated freesheet in
roll form.  This strategy is driven by our alignment with catalog and
magazine end-users which tend to purchase paper in roll form for use in long
runs of web printing in order to minimize costs. Our principal competitors
include NewPage Corporation, Abitibi Bowater Inc., UPM-Kymmene Corporation, and
Sappi Limited, all of which have North American operations.  UPM and
Sappi are headquartered overseas and also have overseas manufacturing
facilities.
  10
 
 Employees
  As of
December 31, 2008, we had approximately 2,900 employees, of whom approximately
35% are unionized and 75% are hourly employees.  Employees at two of
our four mills are represented by labor unions under a total of four collective
bargaining agreements.  In 2007, we completed successful labor
negotiations for three agreements that were up for renewal during the
year.  The new agreements will expire in 2011.
  We have
not experienced any work stoppages during the past several years.  We
believe that we have good relations with our employees.
  Environmental
and Other Governmental Regulations
  We are
subject to federal, state, and local environmental, health and safety laws and
regulations, including the federal Water Pollution Control Act of 1972, or
“Clean Water Act,” the federal Clean Air Act, the federal Resource Conservation
and Recovery Act, the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, or “CERCLA,” the federal Occupational Health and Safety
Act, and analogous state and local laws.  Our operations also are
subject to two regional regimes designed to address climate change, the Regional
Greenhouse Gas Initiative in the northeastern United States and the Midwestern
Greenhouse Gas Reduction Accord, and in the future we may be subject to
additional federal, state, local or supranational legislation related to climate
change.  Among our activities subject to environmental regulation are
the emissions of air pollutants, discharges of wastewater and stormwater,
operation of dams, storage, treatment and disposal of materials and waste, and
remediation of soil, surface water, and ground water
contamination.  Many environmental laws and regulations provide for
substantial fines or penalties and criminal sanctions for any failure to
comply.  In addition, failure to comply with these laws and
regulations could result in the interruption of our operations and, in some
cases, facility shutdowns.
  Certain of
these environmental laws, such as CERCLA and analogous state laws, provide for
strict, and under certain circumstances, joint and several liability for
investigation and remediation of the release of hazardous substances into the
environment, including soil and groundwater.  These laws may apply to
properties presently or formerly owned or operated by an entity or its
predecessors, as well as to conditions at properties at which wastes
attributable to an entity or its predecessors were disposed.  Under
these environmental laws, a current or previous owner or operator of real
property, and parties that generate or transport hazardous substances that are
disposed of at real property, may be held liable for the cost to investigate or
clean up such real property and for related damages to natural
resources.  We handle and dispose of wastes arising from our mill
operations, including disposal at on-site landfills. We are required to maintain
financial assurance for the expected cost of landfill closure and post-closure
care.  We may be subject to liability, including liability for
investigation and cleanup costs, if contamination is discovered at one of our
paper mills or another location where we have disposed of, or arranged for the
disposal of, wastes.  We could be subject to potentially significant
liabilities under, or fines or penalties for any failure to comply with, any
environmental rule or regulation.
  Compliance
with environmental laws and regulations is a significant factor in our
business.  We have made, and will continue to make, significant
expenditures to comply with these requirements.  We incurred
environmental capital expenditures of $9.7 million in 2008 and $3.4 million in
2007, and we expect to incur additional environmental capital expenditures of
$1.9 million in 2009.  We anticipate that environmental compliance
will continue to require increased capital expenditures and operating expenses
over time as environmental laws or regulations, or interpretations thereof,
change or the nature of our operations require us to make significant additional
capital expenditures.
  11
  Permits
are required for the operation of our mills and related
facilities.  The permits are subject to renewal, modification, and
revocation.  We and others have the right to challenge our permit
conditions through administrative and legal appeals and review
processes.  Governmental authorities have the power to enforce
compliance with the permits, and violators are subject to civil and criminal
penalties, including fines, injunctions or both.  Other parties also
may have the right to pursue legal actions to enforce compliance with the
permits.
  Available
Information
  Our web
site is located at www.versopaper.com.  We
make available free of charge through this web site our annual reports on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and
amendments to those reports filed with or furnished to the Securities and
Exchange Commission, or “SEC,” pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, as soon as reasonably practicable after they
are electronically filed with or furnished to the SEC.
 
 Item 1A.  Risk Factors
  Our
business is subject to various risks.  Set forth below are certain of
the more important risks that we face and that could cause our actual results to
differ materially from our historical results.  These risks are not
the only ones that we face.  Our business also could be affected by
additional risks that are presently unknown to us or that we currently believe
are immaterial to our business.
 
 We
have limited ability to pass through increases in our costs to our
customers.  Increases in our costs or decreases in coated or
supercalendered paper prices could have a material adverse effect on our
business, financial condition, and results of operations.
 
 Our
earnings are sensitive to price changes in coated or supercalendered
paper.  Fluctuations in paper prices (and coated paper prices in
particular) historically have had a direct effect on our net income (loss) and
EBITDA for several reasons:
 
 •
              Market
      prices for paper products are a function of supply and demand, factors
      over which we have limited control.  We therefore have limited
      ability to control the pricing of our products.  Market prices
      of grade No. 3, 60 lb. basis weight paper, which is an industry benchmark
      for coated freesheet paper pricing, have fluctuated since 2000 from a high
      of $1,100 per ton to a low of $705 per ton.  In addition, market
      prices of grade No. 5, 34 lb. basis weight paper, which is an industry
      benchmark for coated groundwood paper pricing, have fluctuated between a
      high of $1,120 per ton to a low of $795 per ton over the same
      period.  Because market conditions determine the price for our
      paper products, the price for our products could fall below our cash
      production costs.
 
 •
              Market
      prices for paper products typically are not directly affected by raw
      material costs or other costs of sales, and consequently we have limited
      ability to pass through increases in our costs to our customers absent
      increases in the market price.  In addition, a significant
      portion of our sales are pursuant to contracts that limit price
      increases.  Thus, even though our costs may increase, we may not
      have the ability to increase the prices for our products, or the prices
      for our products may decline.
 
 •
              The
      manufacturing of coated paper is highly capital-intensive and a large
      portion of our operating costs are fixed. Additionally, paper machines are
      large, complex machines that operate more efficiently when operated
      continuously.  Consequently, both we and our competitors
      typically continue to run our machines whenever marginal sales exceed the
      marginal costs, adversely impacting prices at times of lower
      demand.
  12
 Therefore,
our ability to achieve acceptable margins is principally dependent on (1)
managing our cost structure, (2)  managing changes in raw materials
prices, which represent a large component of our operating costs and fluctuate
based upon factors beyond our control, and (3) general conditions in the paper
market.  If the prices of our products decline, or if our raw material
costs increase, it could have a material adverse effect on our business,
financial condition, and results of operations.
 
 The
paper industry is cyclical.  Fluctuations in supply and demand for our
products could have a material adverse effect on our business, financial
condition, and results of operations.
  The paper
industry is a commodity market to a significant extent and is subject to
cyclical market pressures.  North American demand for coated and
supercalendered paper products tends to decline during a weak U.S. economy.
Accordingly, general economic conditions and demand for magazines and catalogs
may have a material adverse impact on the demand for our products, which could
have a material adverse effect on our business, financial condition, and results
of operations.  In addition, currency fluctuations can have a
significant impact on the supply of coated paper products in North
America.  If the U.S. dollar strengthens, imports may increase, which
would cause the supply of paper products available in the North American market
to increase.  Foreign overcapacity also could result in an increase in
the supply of paper products available in the North American
market.  An increased supply of paper available in North America could
put downward pressure on prices and/or cause us to lose sales to competitors,
either of which could have a material adverse effect on our business, financial
condition, and results of operations.
  Recent
global market and economic conditions have been unprecedented and challenging
with tighter credit conditions and recession in most major economies expected to
continue throughout 2009.  Continued concerns about the systemic
impact of potential long-term and wide-spread recession, energy costs,
geopolitical issues, the availability and cost of credit, and the global housing
and mortgage markets have contributed to increased market volatility and
diminished expectations for the U.S. economy.  These factors have led
to a decrease in spending by businesses and consumers alike, and a corresponding
decrease in demand for our products.  (See “Management’s Discussion
and Analysis of Financial Condition and Results of Operations - Selected Factors
that Affect Our Operating Results”). Continued turbulence in the U.S. and
international markets and economies and prolonged declines in business consumer
spending may further adversely affect our business, financial condition, and
results of operations.
  We
have a limited operating history as a separate company.  Accordingly,
our Predecessor’s combined historical financial data may not be representative
of our results as a separate company.
  We
operated as a division of International Paper prior to the
Acquisition.  Therefore, we have a very limited operating history as a
separate company.  Our business strategy as an independent entity may
not be successful on a long-term basis.  Although International Paper,
after the completion of the Acquisition, generally no longer sells coated or
supercalendered paper, we cannot assure you that our customers will continue to
do business with us on the same terms as when we were a division of
International Paper or at all.  We may not be able to grow our
business as planned and may not remain a profitable business.  In
addition, the historical combined financial data included in this annual report
may not necessarily reflect what our results of operations, financial condition,
and cash flows would have been had we been a separate independent entity
pursuing our own strategies during the periods presented.  Our limited
operating history as a separate entity makes evaluating our business and our
future financial prospects difficult.  As a result, our business,
financial condition, and results of operations may differ materially from our
expectations based on the historical financial data contained in this annual
report.
  13
  Our cost
structure following the Acquisition is not comparable to the cost structure that
we experienced in prior periods.  Our management has limited
experience managing our business as a separate company with a significant amount
of indebtedness.  We cannot assure you that our cost structure in
future periods will be consistent with our current expectations or will permit
us to operate our business profitably.
  The
markets in which we operate are highly competitive.
  Our
business is highly competitive.  Competition is based largely on
price.  We compete with foreign producers, some of which are lower
cost producers than we are or are subsidized by governments.  We also
face competition from numerous North American coated and supercalendered paper
manufacturers.  Some of our competitors have advantages over us,
including lower raw material and labor costs and fewer environmental and
governmental regulations to comply with than we do.  Furthermore, some
of our competitors have greater financial and other resources than we do or may
be better positioned than we are to compete for certain
opportunities.
  Our
non-U.S. competitors may develop a competitive advantage over us and other U.S.
producers if the U.S. dollar strengthens in comparison to the home currency of
those competitors or ocean shipping rates decrease.  If the U.S.
dollar strengthens, if shipping rates decrease, or if overseas supply exceeds
demand, imports may increase, which would cause the supply of coated paper
products available in the North American market to increase.  An
increased supply of coated paper could cause us to lower our prices or lose
sales to competitors, either of which could have a material adverse effect on
our business, financial condition, and results of operations.
  In
addition, the following factors will affect our ability to compete:
  ·  product
availability;
  ·  the
quality of our products;
  ·  our
breadth of product offerings;
  ·  our
ability to maintain plant efficiencies and high operating rates;
  ·  manufacturing
costs per ton;
  ·  customer
service and our ability to distribute our products on time; and
  ·  the
availability and/or cost of wood fiber, market pulp, chemicals, energy, other
raw materials, and labor
  If
we are unable to obtain energy or raw materials at favorable prices, or at all,
it could have a material adverse effect on our business, financial condition,
and results of operations.
  We
purchase wood fiber, market pulp, chemicals, energy, and other raw materials
from third parties.  We may experience shortages of energy supplies or
raw materials or be forced to seek alternative sources of supply.  If
we are forced to seek alternative sources of supply, we may not be able to do so
on terms as favorable as our current terms or at all.  In addition,
the prices for energy and many of our raw materials, especially petroleum-based
chemicals, have been volatile and have increased over the last
year.  Prices are expected to remain volatile for the foreseeable
future.  Chemical suppliers that use petroleum-based products in the
manufacture of their chemicals may, due to a supply shortage and cost increase,
ration the amount of chemicals available to us and/or we may not be able to
obtain the chemicals we need to operate our business at favorable prices, if at
all.  In addition, certain specialty chemicals that we purchase are
available only from a small number of suppliers.  If any of these
suppliers were to cease operations or cease doing business with us, we may be
unable to obtain such chemicals at favorable prices, if at all.
  14
  The supply
of energy or raw materials may be adversely affected by, among other things,
hurricanes and other natural disasters or an outbreak or escalation of
hostilities between the United States and any foreign power and, in particular,
events in the Middle East.  For example, wood fiber is a commodity and
prices historically have been cyclical.  The primary source for wood
fiber is timber.  Environmental litigation and regulatory developments
have caused, and may cause in the future, significant reductions in the amount
of timber available for commercial harvest in Canada and the United
States.  In addition, future domestic or foreign legislation,
litigation advanced by aboriginal groups, litigation concerning the use of
timberlands, the protection of endangered species, the promotion of forest
biodiversity, and the response to and prevention of wildfires and campaigns or
other measures by environmental activists also could affect timber
supplies.  The availability of harvested timber may further be limited
by factors such as fire and fire prevention, insect infestation, disease, ice
and wind storms, droughts, floods, and other natural and man-made
causes.  Additionally, due to increased fuel costs, suppliers,
distributors, and freight carriers have charged fuel surcharges, which have
increased our costs.  Any significant shortage or significant increase
in our energy or raw material costs in circumstances where we cannot raise the
price of our products due to market conditions could have a material adverse
effect on our business, financial condition, and results of
operations.  Any disruption in the supply of energy or raw materials
also could affect our ability to meet customer demand in a timely manner and
could harm our reputation.  Furthermore, we may be required to post
letters of credit or other financial assurance obligations with certain of our
energy and other suppliers, which could limit our financial
flexibility.
  Currency fluctuations may adversely
affect our business, financial condition, and results of
operations.
  We compete
with producers in North America and abroad.  Changes in the relative
strength or weakness of the U.S. dollar may affect international trade flows of
coated paper products.  A stronger U.S. dollar may attract imports
from foreign producers, increase supply in the United States, and have a
downward effect on prices, while a weaker U.S. dollar may encourage U.S.
exports.  Variations in the exchange rates between the U.S. dollar and
other currencies, particularly the Canadian dollar and the euro, may
significantly affect our competitive position, including by making it more
attractive for foreign producers to restart previously shut-down paper mills or
by increasing production capacity in North America or Europe.
  We
are involved in continuous manufacturing processes with a high degree of fixed
costs.  Any interruption in the operations of our manufacturing
facilities may affect our operating performance.
  We seek to
run our paper machines on a nearly continuous basis for maximum
efficiency.  Any downtime at any of our paper mills, including as a
result of or in connection with planned maintenance and capital expenditure
projects, results in unabsorbed fixed costs that negatively affect our results
of operations for the period in which we experience the downtime.  Due
to the extreme operating conditions inherent in some of our manufacturing
processes, we may incur unplanned business interruptions from time to time and,
as a result, we may not generate sufficient cash flow to satisfy our operational
needs.  In addition, many of the geographic areas where our production
is located and where we conduct our business may be affected by natural
disasters, including snow storms, forest fires, and flooding.  Such
natural disasters could cause our mills to stop running, which could have a
material adverse effect on our business, financial condition, and results of
operations.  Furthermore, during periods of weak demand for paper
products, we have in the past and may in the future experience market-related
downtime, which could have a material adverse effect on our financial condition
and results of operations.
  15
  Our
operations require substantial ongoing capital expenditures, and we may not have
adequate capital resources to fund all of our required capital
expenditures.
  Our
business is capital intensive, and we incur capital expenditures on an ongoing
basis to maintain our equipment and comply with environmental laws, as well as
to enhance the efficiency of our operations.  Our total capital
expenditures were $80 million in 2008, including $56 million for maintenance and
environmental capital expenditures. We expect to spend approximately $50 million
on capital expenditures during 2009, with approximately $35 million for
maintenance and environmental capital expenditures.  We anticipate
that our available cash resources and cash generated from operations will be
sufficient to fund our operating needs and capital expenditures for at least the
next year.  However, if we require additional funds to fund our
capital expenditures, we may not be able to obtain them on favorable terms, or
at all.  If we cannot maintain or upgrade our facilities and equipment
as we require or as necessary to ensure environmental compliance, it could have
a material adverse effect on our business, financial condition, and results of
operations.
  We
depend on a small number of customers for a significant portion of our
business.
  Our
largest customer, International Paper, accounted for approximately 8% of our net
sales in 2008.  In 2008, our ten largest customers (including
International Paper) accounted for approximately 48% of our net sales, while our
ten largest end-users accounted for approximately 29% of our net
sales.  The loss of, or reduction in orders from, any of these
customers or other customers could have a material adverse effect on our
business, financial condition, and results of operations, as could significant
customer disputes regarding shipments, price, quality or other
matters.
  We
may not realize certain productivity enhancements or improvements in
costs.
  As part of
our business strategy, we intend to identify opportunities to improve
profitability by reducing costs and enhancing productivity.  Any cost
savings or productivity enhancements that we realize from such efforts may
differ materially from our estimates.  For example, we have several
productivity enhancement initiatives to reduce waste and increase the amount of
uptime on our paper machines.  We cannot be assured that these
initiatives will be completed as anticipated or that the benefits we expect will
be achieved on a timely basis or at all.
  Rising
postal costs could weaken demand for our paper products.
  A
significant portion of paper is used in magazines, catalogs, and other
promotional mailings.  Many of these materials are distributed through
the mail.  Future increases in the cost of postage could reduce the
frequency of mailings, reduce the number of pages in magazine and advertising
materials and/or cause catalog and magazine publishers to use alternate methods
to distribute their materials.  Any of the foregoing could decrease
the demand for our products, which could have a material adverse effect on our
business, financial condition, and results of operations.
  Our
business may suffer if we do not retain our senior management.
  We depend
on our senior management.  The loss of services of members of our
senior management team could adversely affect our business until suitable
replacements can be found.  There may be a limited number of persons
with the requisite skills to serve in these positions and we may be unable to
locate or employ qualified personnel on acceptable terms.  In
addition, our future success requires us to continue to attract and retain
competent personnel.
  A
large percentage of our employees are unionized.  Wage increases or
work stoppages by our unionized employees may have a material adverse effect on
our business, financial condition, and results of operations.
  16
  As of
December 31, 2008, approximately 35%, of our employees were represented by labor
unions under four collective bargaining agreements at two of our
mills.  In 2007, we completed successful labor negotiations for three
agreements that were up for renewal during the year, and the new agreements will
expire in 2011.  We may become subject to material cost increases or
additional work rules imposed by agreements with labor unions.  This
could increase expenses in absolute terms and/or as a percentage of net
sales.  In addition, although we believe we have good relations with
our employees, work stoppages or other labor disturbances may occur in the
future.  Any of these factors could negatively affect our business,
financial condition, and results of operations.
  We
depend on third parties for certain transportation services.
  We rely
primarily on third parties for transportation of our products to our customers
and transportation of our raw materials to us, in particular, by truck and
train.  If any third-party transportation provider fails to deliver
our products in a timely manner, we may be unable to sell them at full
value.  Similarly, if any transportation provider fails to deliver raw
materials to us in a timely manner, we may be unable to manufacture our products
on a timely basis.  Shipments of products and raw materials may be
delayed due to weather conditions, strikes or other events.  Any
failure of a third-party transportation provider to deliver raw materials or
products in a timely manner could harm our reputation, negatively impact our
customer relationships and have a material adverse effect on our business,
financial condition, and results of operations.  In addition, our
ability to deliver our products on a timely basis could be adversely affected by
the lack of adequate availability of transportation services, especially rail
capacity, whether because of work stoppages or
otherwise.  Furthermore, increases in the cost of our transportation
services, including as a result of rising fuel costs, could have a material
adverse effect on our business, financial condition, and results of
operations.
  We
are subject to various environmental, health and safety laws and regulations
that could impose substantial costs or other liabilities upon us and may have a
material adverse effect on our business, financial condition, and results of
operations.
  We are
subject to a wide range of federal, state, and local general and
industry-specific environmental, health and safety laws and regulations,
including those relating to air emissions, wastewater discharges, solid and
hazardous waste management and disposal and site
remediation.  Compliance with these laws and regulations is a
significant factor in our business.  We have made, and will continue
to make, significant expenditures to comply with these
requirements.  In addition, we handle and dispose of wastes arising
from our mill operations and operate a number of on-site landfills to handle
that waste.  We maintain financial assurance for the projected cost of
closure and post-closure care for these landfill operations.  We could
be subject to potentially significant fines, penalties, criminal sanctions,
plant shutdowns or interruptions in operations for any failure to comply with
applicable environmental, health and safety laws and
regulations.  Moreover, under certain environmental laws, a current or
previous owner or operator of real property, and parties that generate or
transport hazardous substances that are disposed of at real property, may be
held liable for the full cost to investigate or clean up such real property and
for related damages to natural resources.  We may be subject to
liability, including liability for investigation and cleanup costs, if
contamination is discovered at one of our current or former paper mills, other
properties or other locations where we have disposed of, or arranged for the
disposal of, wastes.  International Paper has agreed to indemnify us,
subject to certain limitations, for former properties and former off-site
shipments, as well as certain other environmental liabilities.  There
can be no assurance that International Paper will perform under any of its
environmental indemnity obligations, and its failure to do so could have a
material adverse effect on our financial condition and results of
operations.  We also could be subject to claims brought pursuant to
applicable laws, rules or regulations for property damage or personal injury
resulting from the environmental impact of our operations, including due to
human exposure to hazardous substances.  Increasingly stringent or new
environmental requirements, more aggressive enforcement actions or policies, the
discovery of unknown conditions or the bringing of future claims may cause our
expenditures for environmental matters to increase, and we may incur material
costs associated with these matters.
  17
  Our
substantial indebtedness could adversely affect our financial
health.
  We have a
significant amount of indebtedness.  As of December 31, 2008, we had
total indebtedness of $1,245.7 million, including $92.1 million outstanding
under our revolving credit facility.  The total amount of payments we
will need to make on our outstanding long-term indebtedness for each of the next
three fiscal years is equal to $104.7 million, $104.5 million, and $104.3
million, respectively (assuming the current prevailing interest rates on our
outstanding floating rate indebtedness remain the same).
 
 Our
substantial indebtedness could have important consequences for
us.  For example, it could:
 ·
                increase
      our vulnerability to general adverse economic and industry
      conditions;
  ·
              require
      us to dedicate a substantial portion of our cash flow from operations to
      payments on our indebtedness, thereby reducing the availability of our
      cash flow to fund working capital, capital expenditures, research and
      development efforts, and other general corporate
  purposes;
  ·
              increase
      our vulnerability to and limit our flexibility in planning for, or
      reacting to, changes in our business and the industry in which we
      operate;
  ·
              expose
      us to the risk of increased interest rates as borrowings under our senior
      secured credit facilities and our floating rate notes will be subject to
      variable rates of interest;
  ·
                place
      us at a competitive disadvantage compared to our competitors that have
      less debt; and
  ·
                    limit
      our ability to borrow additional
funds.
 In
addition, the indentures governing our outstanding notes and our senior secured
credit facilities contain financial and other restrictive covenants that limit
our ability to engage in activities that may be in our long-term best interests.
Our failure to comply with those covenants could result in an event of default
which, if not cured or waived, could result in the acceleration of all of our
debts.
  We and our
subsidiaries may be able to incur substantial additional indebtedness in the
future because the terms of the indentures governing our outstanding notes and
our senior secured credit facilities do not fully prohibit us or our
subsidiaries from doing so.  If new indebtedness is added to our and
our subsidiaries’ current debt levels, the related risks that we and they now
face could intensify.
 
 Lenders
under our revolving credit facility may not fund their commitments.
  Lehman
Commercial Paper, Inc., or “Lehman,” which filed for bankruptcy in October 2008
is one of the lenders under our revolving credit facility, with a commitment of
$15.8 million of the $200 million available under the facility.  On
October 10, 2008, we requested funding in the amount of $100 million under its
revolving credit facility and Lehman failed to fund $7.9 million, the entire
portion of its commitment with respect to that borrowing
request.  Under the credit agreement governing our revolving credit
facility, if a lender's commitment is not honored, that portion of the lender's
commitment under the revolving credit facility will be unavailable to the extent
that the lender's commitment is not replaced by a new commitment from an
alternate lender.
  18
  Lenders
under our revolving credit facility are well-diversified, totaling 15 lenders at
December 31, 2008. We currently anticipate that these lenders, other than
Lehman, will participate in future requests for funding. However, there can be
no assurance that further deterioration in the credit markets and overall
economy will not affect the ability of our lenders to meet their funding
commitments.  Additionally, our lenders have the ability to transfer
their commitments to other institutions, and the risk that committed funds may
not be available under distressed market conditions could be exacerbated to the
extent that consolidation of the commitments under our facilities or among its
lenders were to occur.
  Item
1B.  Unresolved Staff
Comments
  Not
applicable.
  Item
2.Properties
  Our
corporate headquarters are located in Memphis, Tennessee.  We own four
mills located in Maine, Michigan, and Minnesota at which we operate 11 paper
machines.  We also own five hydroelectric dams, of which four provide
hydroelectric power to our Androscoggin mill and the fifth services our Sartell
mill.  In addition, we own 14 and lease five woodyards for the purpose
of storage and loading of forest products and lease a number of sales
offices.
  Our
headquarters and material facilities as of December 31, 2008, are shown in the
following table:
  Location
                        
                        Use
                        
                        Owned/LeasedMemphis,
      TN
                        
                        corporate
      headquarters
                        
                        leasedJay
      (Androscoggin), ME
                        
                        paper
      mill/kraft pulp mill
                        
                        ownedBucksport,
      ME
                        
                        paper
      mill
                        
                        ownedQuinnesec,
      MI
                        
                        paper
      mill/kraft pulp mill
                        
                        ownedSartell,
      MN
                        
                        paper
      mill
                        
                        ownedWest
      Chester, OH
                        
                        sales,
      distribution and customer service
                        
                        leased
  Item
3.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 financial condition
or results of operations.
 
 On August
6, 2008, we filed a declaratory judgment suit in the United States District
Court for the Eastern District of Wisconsin against NewPage Corporation and
NewPage Wisconsin System Inc., in response to a patent infringement claim
asserted by NewPage regarding certain of our coated paper
products.  The action sought a declaration that our coated paper
products do not infringe the NewPage patent and that the NewPage patent is
invalid.  On January 29, 2009, the action was voluntarily dismissed
with prejudice pursuant to a settlement agreement between the
parties.  As part of the settlement, NewPage granted us an
irrevocable, perpetual, non-exclusive, worldwide, royalty-free, and fully
paid-up right and license for any and all purposes under the NewPage patent and
any continuation, division, reissue or non-U.S. counterpart of the
patent.
 
 Item
4.Submission
of Matters to a Vote of Security Holders
  Not
applicable.
  19
  PART
II
  Item
5.Market
for Registrants’ Common Equity, Related Stockholder Matters, and Issuer
Purchases of Equity Securities
  Not
applicable.
  Item
6.Selected
Financial Data
  The
following table sets forth our selected financial data for the years and as of
the dates indicated.  The selected statement of operations data for
the seven months ended July 31, 2006, and the years ended December 31, 2005 and
2004, and the selected balance sheet data as of December 31, 2005 and 2004, have
been derived from the audited combined financial statements of the Coated and
Supercalendered Papers Division of International Paper, or the
“Predecessor.”  The selected statement of operations data for the
years ended December 31, 2008 and 2007, and the five months ended December 31,
2006, and the selected balance sheet data as of December 31, 2008, 2007 and
2006, have been derived from the audited consolidated financial statements of
Verso Paper Holdings LLC, or the “Successor.”  The audited
consolidated financial statements of the Successor as of and for the years ended
December 31, 2008 and 2007, the audited consolidated financial statements of the
Successor for the five months ended December 31, 2006, and the audited combined
financial statements of the Predecessor for the seven months ended July 31,
2006, are included elsewhere in this annual report.  Our selected
financial data should be read in conjunction with “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” and the financial
statements and their related notes included elsewhere in this annual
report.
 
 20
  Successor
      Consolidated
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      Predecessor
      CombinedFive
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      SevenMonths
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      MonthsYear
      Ended
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      Ended
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      Ended
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      Year
      EndedDecember
      31,
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      December
      31,
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      July
      31,
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      December
      31,(Dollars
      and tons in millions)
                                                                                                                                                                                      
                                                                                                                                                                                      2008
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      2007
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      2006
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      2006
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      2005
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      2004Statement
      of Operations Data:Net
      sales
                                                                                                                                                                                      
                                                                                                                                                                                      $
                                                                                                                                                                                      1,766.8
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      $
                                                                                                                                                                                      1,628.8
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      $
                                                                                                                                                                                      706.8
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      $
                                                                                                                                                                                      904.4
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      $
                                                                                                                                                                                      1,603.8
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      $
                                                                                                                                                                                      1,463.3Costs
      and expenses:Cost
      of products sold - (exclusive of depreciationand
      amortization)
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      1,462.3
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      1,403.2
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      589.3
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      771.6
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      1,338.2
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      1,272.5Depreciation
      and amortization
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      134.4
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      123.1
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      48.3
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      72.7
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      129.4
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      130.5Selling,
      general, and administrative expenses
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      79.4
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      52.0
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      14.0
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      34.3
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      65.6
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      65.3Restructuring
      and other charges
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      27.4
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      19.4
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      10.1
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      (0.3
                                                                                                                                                                                      )
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      10.4
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      0.6Operating
      income (loss)
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      63.3
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      31.1
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      45.1
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      26.1
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      60.2
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      (5.6
                                                                                                                                                                                      )Interest
      income
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      (0.8
                                                                                                                                                                                      )
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      (1.5
                                                                                                                                                                                      )
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      (1.8
                                                                                                                                                                                      )
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      -
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      -
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      (0.3
                                                                                                                                                                                      )Interest
      expense
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      103.2
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      113.9
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      48.7
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      8.4
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      14.8
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      16.0Income
      (loss) before income taxes
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      (39.1
                                                                                                                                                                                      )
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      (81.3
                                                                                                                                                                                      )
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      (1.8
                                                                                                                                                                                      )
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      17.7
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      45.4
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      (21.3
                                                                                                                                                                                      )Provision
      (benefit) for income taxes
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      -
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      -
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      -
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      7.0
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      17.9
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      (8.2
                                                                                                                                                                                      )Net
      income (loss)
                                                                                                                                                                                      
                                                                                                                                                                                      $
                                                                                                                                                                                      (39.1
                                                                                                                                                                                      )
                                                                                                                                                                                      
                                                                                                                                                                                      $
                                                                                                                                                                                      (81.3
                                                                                                                                                                                      )
                                                                                                                                                                                      
                                                                                                                                                                                      $
                                                                                                                                                                                      (1.8
                                                                                                                                                                                      )
                                                                                                                                                                                      
                                                                                                                                                                                      $
                                                                                                                                                                                      10.7
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      $
                                                                                                                                                                                      27.5
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      $
                                                                                                                                                                                      (13.1
                                                                                                                                                                                      )Statement
      of Cash Flows Data:Cash
      provided by operating activities
                                                                                                                                                                                      
                                                                                                                                                                                      $
                                                                                                                                                                                      74.9
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      $
                                                                                                                                                                                      38.8
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      $
                                                                                                                                                                                      128.8
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      $
                                                                                                                                                                                      39.3
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      $
                                                                                                                                                                                      116.8
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      $
                                                                                                                                                                                      123.7Cash
      used in investing activities
                                                                                                                                                                                      
                                                                                                                                                                                      $
                                                                                                                                                                                      (80.3
                                                                                                                                                                                      )
                                                                                                                                                                                      
                                                                                                                                                                                      $
                                                                                                                                                                                      (67.8
                                                                                                                                                                                      )
                                                                                                                                                                                      
                                                                                                                                                                                      $
                                                                                                                                                                                      (1,391.8
                                                                                                                                                                                      )
                                                                                                                                                                                      
                                                                                                                                                                                      $
                                                                                                                                                                                      (27.6
                                                                                                                                                                                      )
                                                                                                                                                                                      
                                                                                                                                                                                      $
                                                                                                                                                                                      (53.0
                                                                                                                                                                                      )
                                                                                                                                                                                      
                                                                                                                                                                                      $
                                                                                                                                                                                      (111.5
                                                                                                                                                                                      )Cash
      (used in) provided by financing activities
                                                                                                                                                                                      
                                                                                                                                                                                      $
                                                                                                                                                                                      66.4
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      $
                                                                                                                                                                                      (24.9
                                                                                                                                                                                      )
                                                                                                                                                                                      
                                                                                                                                                                                      $
                                                                                                                                                                                      1,375.4
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      $
                                                                                                                                                                                      (11.6
                                                                                                                                                                                      )
                                                                                                                                                                                      
                                                                                                                                                                                      $
                                                                                                                                                                                      (63.8
                                                                                                                                                                                      )
                                                                                                                                                                                      
                                                                                                                                                                                      $
                                                                                                                                                                                      (12.2
                                                                                                                                                                                      )Other
      Financial and Operating Data:EBITDA
      (1)
                                                                                                                                                                                      
                                                                                                                                                                                      $
                                                                                                                                                                                      197.7
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      $
                                                                                                                                                                                      154.2
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      $
                                                                                                                                                                                      93.4
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      $
                                                                                                                                                                                      98.8
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      $
                                                                                                                                                                                      189.6
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      $
                                                                                                                                                                                      124.9Capital
      expenditures
                                                                                                                                                                                      
                                                                                                                                                                                      $
                                                                                                                                                                                      (80.4
                                                                                                                                                                                      )
                                                                                                                                                                                      
                                                                                                                                                                                      $
                                                                                                                                                                                      (69.6
                                                                                                                                                                                      )
                                                                                                                                                                                      
                                                                                                                                                                                      $
                                                                                                                                                                                      (27.5
                                                                                                                                                                                      )
                                                                                                                                                                                      
                                                                                                                                                                                      $
                                                                                                                                                                                      (27.7
                                                                                                                                                                                      )
                                                                                                                                                                                      
                                                                                                                                                                                      $
                                                                                                                                                                                      (53.1
                                                                                                                                                                                      )
                                                                                                                                                                                      
                                                                                                                                                                                      $
                                                                                                                                                                                      (111.3
                                                                                                                                                                                      )Total
      tons sold
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      1,952.7
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      2,096.3
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      866.4
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      1,145.0
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      2,024.9
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      2,064.6Balance
      Sheet Data:Working
      capital (2)
                                                                                                                                                                                      
                                                                                                                                                                                      $
                                                                                                                                                                                      156.3
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      $
                                                                                                                                                                                      95.6
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      $
                                                                                                                                                                                      154.0
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      $
                                                                                                                                                                                      87.8
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      $
                                                                                                                                                                                      58.6Property,
      plant, and equipment, net
                                                                                                                                                                                      
                                                                                                                                                                                      $
                                                                                                                                                                                      1,115.7
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      $
                                                                                                                                                                                      1,159.9
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      $
                                                                                                                                                                                      1,212.0
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      $
                                                                                                                                                                                      1,287.0
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      $
                                                                                                                                                                                      1,363.9Total
      assets
                                                                                                                                                                                      
                                                                                                                                                                                      $
                                                                                                                                                                                      1,614.1
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      $
                                                                                                                                                                                      1,577.0
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      $
                                                                                                                                                                                      1,692.4
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      $
                                                                                                                                                                                      1,534.1
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      $
                                                                                                                                                                                      1,585.0Total
      debt
                                                                                                                                                                                      
                                                                                                                                                                                      $
                                                                                                                                                                                      1,245.7
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      $
                                                                                                                                                                                      1,156.4
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      $
                                                                                                                                                                                      1,159.3
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      $
                                                                                                                                                                                      301.2
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      $
                                                                                                                                                                                      302.1Equity
                                                                                                                                                                                      
                                                                                                                                                                                      $
                                                                                                                                                                                      91.7
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      $
                                                                                                                                                                                      174.9
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      $
                                                                                                                                                                                      279.7
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      $
                                                                                                                                                                                      1,040.0
                                                                                                                                                                                      
                                                                                                                                                                                      
                                                                                                                                                                                      $
                                                                                                                                                                                      1,075.3(1)
      EBITDA consists of earnings before interest, taxes, depreciation, and
      amortization. EBITDA is a measure commonly used in our industry and we
      present EBITDA to enhance your understanding of our operating performance.
      We use EBITDA as one criterion for evaluating our performance relative to
      that of our peers. We believe that EBITDA is an operating performance
      measure, and not a liquidity measure, that provides investors and analysts
      with a measure of operating results unaffected by differences in capital
      structures, capital investment cycles and ages of related assets among
      otherwise comparable companies. However, EBITDA is not a measurement of
      financial performance under U.S. GAAP, and our EBITDA may not be
      comparable to similarly titled measures of other companies. You should not
      consider our EBITDA as an alternative to operating or net income,
      determined in accordance with U.S. GAAP, as an indicator of our operating
      performance, or as an alternative to cash flows from operating activities,
      determined in accordance with U.S. GAAP, as an indicator of our cash flows
      or as a measure of liquidity.(2)
      Working capital is defined as current assets net of current liabilities,
      excluding the current portion of long-term debt and the Predecessor's
      accounts payable to International
Paper.
  21
  The
following table reconciles net income (loss) to EBITDA for the periods
presented:
  Successor
      Consolidated
                                        
                                        
                                        Predecessor
      CombinedFive
                                        
                                        
                                        SevenMonths
                                        
                                        
                                        MonthsYear
      Ended
                                        
                                        
                                        Ended
                                        
                                        
                                        Ended
                                        
                                        
                                        Year
      EndedDecember
      31,
                                        
                                        
                                        December
      31,
                                        
                                        
                                        July
      31,
                                        
                                        
                                        December
      31,(In
      millions of U.S. dollars)
                                        
                                        2008
                                        
                                        
                                        2007
                                        
                                        
                                        2006
                                        
                                        
                                        2006
                                        
                                        
                                        2005
                                        
                                        
                                        2004Reconciliation
      of net income (loss) to EBITDA:Net
      income (loss)
                                        
                                        $
                                        (39.1
                                        )
                                        
                                        $
                                        (81.3
                                        )
                                        
                                        $
                                        (1.8
                                        )
                                        
                                        $
                                        10.7
                                        
                                        
                                        $
                                        27.5
                                        
                                        
                                        $
                                        (13.1
                                        )Interest
      expense, net
                                        
                                        
                                        102.4
                                        
                                        
                                        
                                        112.4
                                        
                                        
                                        
                                        46.9
                                        
                                        
                                        
                                        8.4
                                        
                                        
                                        
                                        14.8
                                        
                                        
                                        
                                        15.7Provision
      (benefit) for income taxes
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        7.0
                                        
                                        
                                        
                                        17.9
                                        
                                        
                                        
                                        (8.2
                                        )Depreciation
      and amortization
                                        
                                        
                                        134.4
                                        
                                        
                                        
                                        123.1
                                        
                                        
                                        
                                        48.3
                                        
                                        
                                        
                                        72.7
                                        
                                        
                                        
                                        129.4
                                        
                                        
                                        
                                        130.5EBITDA
                                        
                                        $
                                        197.7
                                        
                                        
                                        $
                                        154.2
                                        
                                        
                                        $
                                        93.4
                                        
                                        
                                        $
                                        98.8
                                        
                                        
                                        $
                                        189.6
                                        
                                        
                                        $
                                        124.9
  Item
7.Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
  The
following discussion and analysis of our financial condition and results of
operations covers periods prior to the Acquisition.  For comparison
purposes, the results of operations for the year ended December 31, 2006, are
presented on a combined basis, consisting of the results of the Predecessor for
the seven months ended July 31, 2006, and the results of the Successor for the
five months ended December 31, 2006.  Accordingly, the discussion and
analysis of historical periods do not fully reflect the significant impact that
the Acquisition has had on our financial statements.  In addition, the
statements in the discussion and analysis regarding the industry outlook and our
expectations regarding the performance of our business and the other
non-historical statements in the discussion and analysis are forward-looking
statements.  These forward-looking statements are subject to numerous
risks and uncertainties, including, but not limited to, the risks and
uncertainties described in “Risk Factors.”  Our actual results may
differ materially from those contained in or implied by any forward-looking
statements.  The discussion and analysis should be read together with
“Risk Factors” and the financial statements and their related notes included
elsewhere in this annual report.
  Overview
  We are a
leading North American supplier of coated papers to catalog and magazine
publishers.  Coated paper is used primarily in media and marketing
applications, including catalogs, magazines, and commercial printing
applications, such as high-end advertising brochures, annual reports, and direct
mail advertising.  We are North America’s second largest producer of
coated groundwood paper which is used primarily for catalogs and
magazines.  We are also a low cost producer of coated freesheet paper
which is used primarily for annual reports, brochures, and magazine
covers.  In addition, we have a strategic presence in supercalendered
paper which is primarily used for retail inserts.  We also produce and
sell market kraft pulp which is used to manufacture printing and writing paper
grades and tissue products.
  Background
  We began
operations on August 1, 2006, when we acquired the assets and certain
liabilities of the business of the Predecessor.  We were formed by
affiliates of Apollo for the purpose of consummating the Acquisition from
International Paper.  Verso Paper Corp., of which we are an indirect,
wholly-owned subsidiary, went public on May 14, 2008, with an IPO of 14 million
shares of common stock at a price of $12 per share which generated $152.2
million in net proceeds.
  22
  Stand-Alone
Business
  The
Predecessor’s financial statements for the periods presented represent the
Division’s combined financial statements.  The preparation of this
information was based on certain assumptions and estimates, including
allocations of costs from International Paper.  This financial
information may not, however, necessarily reflect the results of operations,
financial positions, and cash flows that would have occurred if the Division had
been a separate, stand-alone entity during the periods presented or our future
results of operations, financial position, and cash flows.  For
example, the financial statements of the Predecessor in this annual report
include expenses for certain corporate services provided by International Paper
and allocated based on various methods, including direct consumption, percent of
capital employed, and number of employees.  These historical charges
and allocations may not be representative of expenses that we will incur in
future reporting periods as we operate as a stand-alone entity.
  Selected
Factors that Affect Our Operating Results
  Net
Sales
  Our sales,
which we report net of rebates, allowances, and discounts, are a function of the
number of tons of paper that we sell and the price at which we sell our
paper.  The coated paper industry is cyclical, which results in
changes in both volume and price.  Paper prices historically have been
a function of macro-economic factors which influence supply and
demand.  Price has historically been substantially more variable than
volume and can change significantly over relatively short time
periods.  Paper prices declined in late 2006 and early 2007, which we
believe was due to high customer and producer inventories and cautious
purchasing by customers in advance of a scheduled postal rate
increase.  Beginning in mid-2007, prices began to rebound following
announcements by several of our North American competitors of permanent closures
of approximately 1 million tons of annual production capacity (approximately 9%
of North American coated paper capacity).  These market conditions
continued into early 2008 with a series of announced price increases by
suppliers of coated paper. Meanwhile, customers were rebuilding their paper
inventories after a significant depletion in the second half of
2007.  In the second half of 2008, we saw a significant weakening in
demand as general economic conditions began to worsen.  This weakened
demand, coupled with the inventory build, put downward pressure on prices in
late 2008 and into 2009, and has caused us, and most coated paper producers, to
curtail production to match supply with demand.
 
 We are
primarily focused on serving two end-user segments: catalogs and
magazines.  In 2008, we believe we had a leading market share for the
catalog and magazine segments of coated papers.  Coated paper demand
is primarily driven by advertising and print media usage.  Advertising
spending and magazine and catalog circulation tend to correlated with changes in
the GDP of the United States – they rise with a strong economy and contract with
a weak economy.
  The
majority of our products are sold under contracts with our
customers.  Contracted sales are more prevalent for coated groundwood
paper, as opposed to coated freesheet paper, which is more often sold without a
contract.  Our contracts generally specify the volumes to be sold to
the customer over the contract term, as well as the pricing parameters for those
sales.  Most of our contracts are negotiated on an annual basis, with
only a few having terms extending beyond one year.  Typically, our
contracts provide for quarterly price adjustments based on market price
movements.  The large portion of contracted sales allows us to plan
our production runs well in advance, optimizing production over our integrated
mill system and thereby reducing costs and increasing overall
efficiency.
  23
  We reach
our end-users through several channels, including printers, brokers, paper
merchants, and direct sales to end-users.  We sell and market our
products to approximately 100 customers which comprise approximately 650
end-user accounts.  In 2008, no single customer accounted for more
than 10% of our total net sales.
  Our
historical results include specialty papers that we manufacture for Thilmany,
LLC, or “Thilmany,” on paper machine no. 5 at the Androscoggin
mill.  Under a long-term supply agreement entered into in 2005 in
connection with International Paper’s sale of its Industrial Papers business to
Thilmany, these products are sold to Thilmany at a variable charge for the paper
purchased and a fixed charge for the availability of the machine.  The
amounts included in our net sales for the specialty papers sold to Thilmany
totaled $42.4 million and $37.6 million in 2008 and 2007,
respectively.
 
 Cost
of Products Sold
  The
principal components of our cost of sales are chemicals, wood, energy, labor,
maintenance, and depreciation and amortization.  Costs for
commodities, including chemicals, wood, and energy, are the most variable
component of our cost of sales because their prices can fluctuate substantially,
sometimes within a relatively short period of time.  In addition, our
aggregate commodity purchases fluctuate based on the volume of paper that we
produce.
  After
giving effect to the Acquisition, our cost of products sold increased as a
result of the purchase accounting treatment of the Acquisition.  Under
the rules of purchase accounting, we adjusted the value of our assets (including
the inventory we acquired) and liabilities at closing to their respective
estimated fair values.  As a result of these adjustments to our asset
basis, following the closing of the Acquisition, our costs of goods sold
increased by such non-cash increase in our asset basis.  However, this
increase did not have a cash impact and did not affect our cost of sales for any
inventory produced after the closing of the Acquisition.
  Chemicals.Chemicals
utilized in the manufacturing of coated papers include latex, starch, calcium
carbonate, and titanium dioxide.  We purchase these chemicals from a
variety of suppliers and are not dependent on any single supplier to satisfy our
chemical needs.  In the near term, we expect the rate of inflation for
our total chemical costs to be lower than that experienced over the last two
years.  However, we expect that imbalances in supply and demand will
drive higher prices for certain chemicals such as starch and sodium
chlorate.
  Wood.Our costs to
purchase wood are affected directly by market costs of wood in our regional
markets and indirectly by the effect of higher fuel costs on logging and
transportation of timber to our facilities.  While we have in place
fiber supply agreements that ensure a substantial portion of our wood
requirements, purchases under these agreements are typically at market
rates.
 
 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.
  24
  Labor.Labor costs
include wages, salary, and benefit expenses attributable to our mill
personnel.  Mill employees at a non-managerial level are compensated
on an hourly basis.  Management employees at our mills are compensated
on a salaried basis.  Wages, salary, and benefit expenses included in
cost of sales do not vary significantly over the short term.  In
addition, we have not experienced significant labor shortages.
  Maintenance.Maintenance
expense includes day-to-day maintenance, equipment repairs, and larger
maintenance projects, such as paper machine shutdowns for periodic
maintenance.  Day-to-day maintenance expenses have not varied
significantly from year-to-year.  Larger maintenance projects and
equipment expenses can produce year-to-year fluctuations in our maintenance
expenses.  In conjunction with our periodic maintenance shutdowns, we
have incidental incremental costs that are primarily comprised of unabsorbed
fixed costs from lower production volumes and other incremental costs for
purchased materials and energy that would otherwise be produced as part of the
normal operation of our mills.
  Depreciation and
Amortization.Depreciation and amortization expense represents
the periodic charge to earnings through which the cost of tangible assets and
intangible assets are recognized over the asset’s life.  Capital
investments can increase our asset bases and produce year-to-year fluctuations
in expense.  Depreciation was initially lower after the Acquisition as
a result of the lower asset bases assigned to property, plant, and equipment,
but has subsequently risen due to capital investments.
  Selling,
General, and Administrative Expenses
  The
principal components of our selling, general, and administrative expenses are
wages, salaries, and benefits for our office personnel at our headquarters and
our sales force, travel and entertainment expenses, advertising expenses,
expenses relating to certain information technology systems, and research and
development expenses. Also included are allocations of costs for corporate
functions historically provided to us by International Paper.  For
further information about allocated costs, see “Corporate Allocations”
below.  In addition, we previously paid an annual management fee to
Apollo under a management agreement pursuant to which Apollo provided us with
certain financial and strategic advisory services and consulting
services.  Upon the consummation of the IPO, Apollo terminated the
annual fee arrangement under the management agreement.
  Taxes
  Prior to
the Acquisition, the Division was included in the consolidated income tax
returns of International Paper.  In the Predecessor’s combined
financial statements included in this annual report, income taxes have been
presented based on an estimate of the income taxes that would have been
generated if the Division had operated as a separate taxpayer.  As a
result, U.S. federal and state income tax expense is reflected on the Division’s
income based on an allocated rate of 39.4% for the seven months ended July 31,
2006.  Income taxes have been provided for all items included in the
historical statement of operations included herein, regardless of when such
items were reported for tax purposes or when the taxes were actually paid or
refunded.  As a result of the Acquisition, there was a step-up in the
tax basis of our assets, significantly reducing our cash income tax
payments.  Accordingly, our historical income tax expense may not
necessarily reflect and may differ materially from what our cash tax payments
would have been or will be as a stand-alone entity.
  Corporate
Allocations
  The
Predecessor’s combined statement of operations includes allocations of costs for
certain corporate functions that historically were provided to us by
International Paper, including:
  25
  ·
              General corporate
      expenses.This represents costs related to corporate
      functions such as accounting, tax, treasury, payroll and benefits
      administration, certain incentive compensation, risk management, legal,
      centralized transaction processing, and information management and
      technology.  These costs historically were allocated primarily
      based on general factors and estimated use of services.  These
      costs are included in selling, general, and administrative expenses in the
      Predecessor’s combined statement of
operations.
  ·
              Employee benefits and
      incentives.This represents fringe benefit costs and
      other incentives, including group health and welfare benefits, U.S.
      pension plans, U.S. post-retirement benefit plans, and employee incentive
      compensation plans. These costs historically were allocated on an active
      headcount basis for health and welfare benefits (including U.S.
      post-retirement plans), on the basis of salary for U.S. pension plans, and
      on a specific identification basis for employee incentive compensation
      plans.  These costs are included in costs of products sold,
      selling, general, and administrative expenses, and restructuring charges
      in the Predecessor’s combined statement of
  operations.
  ·
              Interest expense and debt
      service costs.International Paper historically provided
      financing to the Division through cash flows from its other operations and
      debt incurred.  The interest expense associated with incurred
      debt that was allocated to the Division based on specifically-identified
      borrowings is included in interest expense, net, in the Predecessor’s
      combined statement of operations.  Costs associated with the
      debt are included in other expense in the Predecessor’s combined statement
      of operations.
  Expense
allocations from International Paper reflected in the Predecessor’s combined
statement of operations were as follows:
  SevenMonths
      EndedJuly
      31,(In
      thousands of U.S. dollars)
                        
                        2006General
      corporate expenses
                        
                        $
                        19.5Employee
      benefits and incentives
                        
                        
                        11.3Interest
      expense and debt service costs
                        
                        
                        8.4
  Following
the consummation of the Acquisition, we no longer have allocations for costs of
certain corporate functions historically provided to the Division by
International Paper.  We now receive such services from our internal
operations or third-party service providers.  Accordingly, it is
unlikely that the expenses we will incur as a stand-alone company for these
services will reflect the allocated costs included in the Predecessor’s combined
financial statements.
  Critical
Accounting Policies
 
 Our
accounting policies are fundamental to understanding management’s discussion and
analysis of results of operations and financial condition.  Our
consolidated 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.
  26
 
 Management
believes the following critical accounting policies are both important to the
portrayal of our financial condition and results of operations and require
subjective or complex judgments.  These judgments about critical
accounting estimates are based on information available to us as of the date of
the financial statements.
 
 Accounting
policies whose application may have a significant effect on the reported results
of operations and financial position, and that can require judgments by
management that affect their application, include the following: Statement of
Financial Accounting Standards, or “SFAS,” No. 5, Accounting for Contingencies;
SFAS No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets; SFAS No. 142,
Goodwill and Other Intangible
Assets; SFAS No. 87, Employers’ Accounting for
Pensions; and SFAS No. 158, Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans.
 
 Impairment of long-lived assets and
goodwill.  Long-lived assets are reviewed for impairment upon
the occurrence of events or changes in circumstances that indicate that the
carrying value of the assets may not be recoverable, as measured by comparing
their net book value to the estimated undiscounted future cash flows generated
by their use.
 
 Goodwill
and other intangible assets are accounted for in accordance with SFAS No. 142,
Goodwill and Other Intangible
Assets.  Intangible assets primarily consist of trademarks,
customer-related intangible assets and patents obtained through business
acquisitions.  Impairment is the condition that exists when the
carrying amount of these assets exceed their implied fair value.  An
impairment evaluation of the carrying amount of goodwill and other intangible
assets with indefinite lives is conducted annually or more frequently if events
or changes in circumstances indicate that an asset might be
impaired.  We have identified the following trademarks as intangible
assets with an indefinite life: Influence®, Liberty,® and
Advocate®.  Goodwill is evaluated at the reporting unit level and has
been allocated to the “Coated” segment.  The valuation as of October
1, 2008, indicated no impairment of goodwill or trademarks assigned indefinite
lives.
 
 The
evaluation for impairment is performed by comparing the carrying amount of these
assets to their estimated fair value.  If impairment is indicated,
then an impairment charge is recorded to reduce the asset to its estimated fair
value.  The estimated fair value is generally determined on the basis
of discounted future cash flows.  Management believes the accounting
estimates associated with determining fair value as part of the impairment test
is a critical accounting estimate because estimates and assumptions are made
about our future performance and cash flows.  While management uses
the best information available to estimate future performance and cash flows,
future adjustments to management’s projections may be necessary if economic
conditions differ substantially from the assumptions used in making the
estimates.
  Pension and Postretirement Benefit
Obligations.We offer various pension plans to employees.  The
calculation of the obligations and related expenses under these plans requires
the use of actuarial valuation methods and assumptions, including the expected
long-term rate of return on plan assets, discount rates, projected future
compensation increases, health care cost trend rates, and mortality
rates.  Actuarial valuations and assumptions used in the determination
of future values of plan assets and liabilities are subject to management
judgment and may differ significantly if different assumptions are
used.
  Contingent
liabilities.A liability is contingent if the outcome or
amount is not presently known, but may become known in the future as a result of
the occurrence of some uncertain future event.  We estimate our
contingent liabilities based on management’s estimates about the probability of
outcomes and their ability to estimate the range of
exposure.  Accounting standards require that a liability be recorded
if management determines that it is probable that a loss has occurred and the
loss can be reasonably estimated.  In addition, it must be probable
that the loss will be confirmed by some future event.  As part of the
estimation process, management is required to make assumptions about matters
that are by their nature highly uncertain.
 
 27
  The
assessment of contingent liabilities, including legal contingencies, asset
retirement obligations, and environ-mental costs and obligations, involves the
use of critical estimates, assumptions, and judgments.  Management’s
estimates are based on their belief that future events will validate the current
assumptions regarding the ultimate outcome of these
exposures.  However, there can be no assurance that future events will
not differ from management’s assessments.
 
 Recent
Accounting Developments
 
 Postretirement Benefit Plan
Assets.In December 2008, the Financial Accounting Standards
Board, or FASB,  issued FASB Staff Position on Statement 132(R)-1, or
FSP FAS 132(R)-1, Employers’
Disclosure about Postretirement Benefit Plan Assets, which amends SFAS
No. 132(R) to require more detailed disclosures about employers’ pension plan
assets.  New disclosures will include more information on investment
strategies, major categories of plan assets, concentrations of risk within plan
assets and valuation techniques used to measure the fair value of plan
assets.  FSP FAS 132(R)-1 is effective for fiscal years ending after
December 15, 2009.  Since FSP FAS 132(R)-1 only addresses disclosure
requirements, the adoption of FSP FAS 132(R)-1 will have no impact on our
financial condition or results of operations.
 
 Intangible
Assets.  In April 2008, the FASB issued FSP FAS 142-3, Determination of the Useful Life of
Intangible Assets, which provides guidance on the renewal or extension
assumptions used in the determination of the useful life of a recognized
intangible asset.  The intent of FSP FAS 142-3 is to better match the
useful life of the recognized intangible asset to the period of the expected
cash flows used to measure its fair value.  FSP FAS 142-3 is effective
for fiscal years and interim periods beginning after December 15,
2008.  The adoption of FSP FAS 142-3 is not expected to have a
material impact on our financial condition or results of
operations.
 
 Derivatives and Hedging
Activities.In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities.  SFAS No. 161 changes the
disclosure requirements for derivative instruments and hedging
activities.  Entities are required to provide enhanced disclosures
about (a) how and why an entity uses derivative instruments, (b) how derivative
instruments and related hedged items are accounted for under SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, and its related interpretations, and
(c) how derivative instruments and related hedged items affect an entity’s
financial position, financial performance, and cash flows.  SFAS No.
161 is effective for fiscal years and interim periods beginning after November
15, 2008.  Since SFAS No. 161 only addresses disclosure requirements,
the adoption of SFAS No. 161 will have no impact on our financial condition or
results of operations.
 
 Business
Combinations.  In December 2007, the FASB issued SFAS No.
141 (revised 2007), Business
Combinations.  SFAS No. 141-R establishes principles and
requirements for how an acquirer recognizes and measures identifiable assets
acquired, liabilities assumed, and noncontrolling interests; recognizes and
measures goodwill acquired in a business combination or gain from a bargain
purchase; and establishes disclosure requirements.  SFAS No. 141-R is
effective for business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008.  Early adoption is prohibited. We will
apply the provisions of SFAS No. 141-R to any future
acquisitions.
  28
  In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements – an amendment of ARB No.
51.  SFAS No. 160 establishes accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary.  SFAS No. 160 is effective, on a
prospective basis, for fiscal years and interim periods beginning on or after
December 15, 2008.  The presentation and disclosure requirements for
existing minority interests should be applied retrospectively for all periods
presented.  Early adoption is prohibited.  The adoption of
SFAS No. 160 is not expected to have a material impact on our financial
condition or results of operations.
 
 Fair Value
Measurements.  In September 2006, the FASB issued SFAS
No. 157, Fair Value
Measurements.  SFAS No. 157 addresses how to measure fair
value (not what to measure at fair value) and applies, with limited exceptions,
to existing standards that require assets and liabilities to be measured at fair
value.  SFAS No. 157 establishes a fair value hierarchy, giving
the highest priority to quoted prices in active markets and the lowest priority
to unobservable data, and requires new disclosures for assets and liabilities
measured at fair value based on their level in the hierarchy.  SFAS
No. 157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007.  However, FSP 157-2, Effective Date of FASB Statement No.
157, delayed the implementation of SFAS No. 157 for nonfinancial assets
and nonfinancial liabilities, except for items that are recognized or disclosed
at fair value in the financial statements on a recurring basis, to fiscal years
beginning after November 15, 2008.  The adoption of the initial
provisions of SFAS No. 157 did not have, and the adoption of the remaining
provisions of SFAS No. 157 is not expected to have, a material impact on our
financial condition or results of operations.
  Other new
accounting pronouncements issued but not effective until after December 31,
2008, are not expected to have a significant effect on our financial condition
or results of operations.
  Financial
Overview
 
 The United
States and global economies are experiencing a period of substantial economic
distress and uncertainty.  These conditions have resulted in, among
other things, a significant weakening in the demand for coated
papers.  This weakened demand, coupled with increased inventories
accumulated earlier in 2008, put downward pressure on coated paper prices in the
fourth quarter of 2008.  We, like most coated paper producers, have
moved to curtail production to match supply with demand.  Accordingly,
we took almost 75,000 tons of downtime in the fourth quarter of 2008, and, as
previously announced, intend to take an additional 100,000 tons of downtime
during the first half of 2009.  As 2009 progresses, we will continue
to monitor the market conditions and will take appropriate actions to balance
our supply of coated papers with the demand by our customers.
 
 In the
fourth quarter of 2008, our net sales decreased 15.7% as our sales volume fell
26.7% compared to the fourth quarter of 2007.  The decline in sales
volume was partially offset by a 15.1% increase in the average sales price per
ton compared to the same period last year.  On a sequential quarter
basis, our average sales price dropped less than 1%, reflecting our efforts to
sustain our pricing in a difficult economic environment.
 
 In the
fourth quarter of 2008, our gross margin dropped to 13.7% from 17.6% in the
fourth quarter of 2007.  This compression in gross margin reflects
increased input prices for our key direct expenses compared to 2007 and $15.8
million of unabsorbed costs resulting from the downtime taken in the fourth
quarter of 2008.
 
 Results
of Operations
  The
following table sets forth certain consolidated and combined financial
information for the years ended December 31, 2008, 2007 and 2006.  For
comparison purposes, we have presented the results of operations for 2006, on a
combined basis, consisting of the results of the Predecessor for the seven
months ended July 31, 2006, and the results of the Successor for the five months
ended December 31, 2006.  We believe that this approach is beneficial
to the reader by providing an easier-to-read discussion of the results of
operations and provides the reader with information from which to analyze our
financial results that is consistent with the manner that management reviews and
analyzes results of operations.
  29
 U.S. GAAP
does not contemplate the combination of the financial results of the Predecessor
and the Successor, as the combined information does not include any pro forma
assumptions or adjustments and, as a result, does not fully reflect the
significant impact of the Acquisition on our financial statements.  In
particular, fair value adjustments to personal property and other property and
equipment due to the allocation of the purchase price to assets acquired and
liabilities assumed resulted in a lower depreciation expense for the
Successor.  The pro forma impact of these adjustments on the
Predecessor’s results of operations for the seven months ended July 31, 2006,
would have been a reduction of $5.4 million in depreciation
expense.  In addition, intangible assets recognized through the
allocation of the purchase price to assets acquired and liabilities assumed
resulted in incremental amortization expense for the Successor.  The
pro forma impact on the Predecessor’s results of operations for the seven months
ended July 31, 2006, would have been $0.4 million of amortization expense,
resulting in a net pro forma reduction in depreciation and amortization expense
of $5.0 million for the twelve months ended December 31, 2006.
 
 Cost of
sales in the following table and discussion includes the cost of products sold
and depreciation and  amortization.  The following table and
discussion should be read in conjunction with the information contained in our
consolidated and combined financial statements and the related notes included
elsewhere in this annual report.  However, our historical results of
operations set forth below and elsewhere in this annual report may not
necessarily reflect what would have occurred if we had been a separate,
stand-alone entity during the periods presented or what will occur in the
future.
  30
  CombinedSuccessor
                                      
                                      
                                      Successor
                                      
                                      
                                      Successor
      and
                                      
                                      
                                      Successor
                                      
                                      
                                      PredecessorConsolidated
                                      
                                      
                                      Consolidated
                                      
                                      
                                      Predecessor
                                      
                                      
                                      Consolidated
                                      
                                      
                                      CombinedFive
      Months
                                      
                                      
                                      Seven
      MonthsYear
      Ended
                                      
                                      
                                      Year
      Ended
                                      
                                      
                                      Year
      Ended
                                      
                                      
                                      Ended
                                      
                                      
                                      EndedDecember
      31,
                                      
                                      
                                      December
      31,
                                      
                                      
                                      December
      31,
                                      
                                      
                                      December
      31,
                                      
                                      
                                      July
      31,(In
      thousands of U.S. dollars)
                                      
                                      2008
                                      
                                      
                                      2007
                                      
                                      
                                      2006
                                      
                                      
                                      2006
                                      
                                      
                                      2006Net
      sales
                                      
                                      $
                                      1,766,813
                                      
                                      
                                      $
                                      1,628,753
                                      
                                      
                                      $
                                      1,611,250
                                      
                                      
                                      $
                                      706,833
                                      
                                      
                                      $
                                      904,417Costs
      and expenses:Cost
      of products sold - exclusive ofdepreciation
      and amortization
                                      
                                      
                                      1,462,333
                                      
                                      
                                      
                                      1,403,144
                                      
                                      
                                      
                                      1,360,859
                                      
                                      
                                      
                                      589,283
                                      
                                      
                                      
                                      771,576Depreciation
      and amortization
                                      
                                      
                                      134,344
                                      
                                      
                                      
                                      123,139
                                      
                                      
                                      
                                      120,991
                                      
                                      
                                      
                                      48,317
                                      
                                      
                                      
                                      72,674Selling,
      general, and administrative expenses
                                      
                                      
                                      79,441
                                      
                                      
                                      
                                      52,007
                                      
                                      
                                      
                                      48,344
                                      
                                      
                                      
                                      13,996
                                      
                                      
                                      
                                      34,348Restructuring
      and other charges
                                      
                                      
                                      27,416
                                      
                                      
                                      
                                      19,395
                                      
                                      
                                      
                                      9,804
                                      
                                      
                                      
                                      10,126
                                      
                                      
                                      
                                      (322
                                      )Operating
      income
                                      
                                      
                                      63,279
                                      
                                      
                                      
                                      31,068
                                      
                                      
                                      
                                      71,252
                                      
                                      
                                      
                                      45,111
                                      
                                      
                                      
                                      26,141Interest
      income
                                      
                                      
                                      (770
                                      )
                                      
                                      
                                      (1,544
                                      )
                                      
                                      
                                      (1,821
                                      )
                                      
                                      
                                      (1,798
                                      )
                                      
                                      
                                      (23
                                      )Interest
      expense
                                      
                                      
                                      103,200
                                      
                                      
                                      
                                      113,881
                                      
                                      
                                      
                                      57,155
                                      
                                      
                                      
                                      48,741
                                      
                                      
                                      
                                      8,414Income
      (loss) before income taxes
                                      
                                      
                                      (39,151
                                      )
                                      
                                      
                                      (81,269
                                      )
                                      
                                      
                                      15,918
                                      
                                      
                                      
                                      (1,832
                                      )
                                      
                                      
                                      17,750Income
      tax expense
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      6,993
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      6,993Net
      income (loss)
                                      
                                      $
                                      (39,151
                                      )
                                      
                                      $
                                      (81,269
                                      )
                                      
                                      $
                                      8,925
                                      
                                      
                                      $
                                      (1,832
                                      )
                                      
                                      $
                                      10,757
  2008
Successor Compared to 2007 Successor
  Net Sales.  Net
sales grew 8.5% to $1,766.8 million in 2008 from $1,628.8 million in
2007.  The growth was the result of a 16.5% increase in the average
sales price per ton for all of our products in 2008.  This increase
was partially offset by a 6.8% decrease in total sales volume, reflecting lower
coated paper demand in a difficult economic environment.
 
 Net sales
for our coated and supercalendered papers segment were $1,575.0 million in 2008,
compared to $1,443.2 million in 2007, an increase of 9.1%.  The
improvement reflects a 17.2% increase in average paper sales price which was
partially offset by a 6.9% decrease in paper sales volume compared to
2007.
 
 Net sales
for our hardwood market pulp segment were relatively stable at $146.4 million in
2008, compared to $148.0 million in 2007.  This result reflected a
9.3% decrease in pulp sales volume which was largely offset by a 9.1% increase
in average pulp sales price.
 
 Net sales
for our other segment increased 20.7% to $45.4 million in 2008, from $37.6
million in  2007.  This increase reflects an 11.4% increase
in average sales price combined with an 8.4% increase in sales volume compared
to 2007.
 
 Cost of
sales.  Cost of sales, including depreciation and amortization,
was $1,596.7 million in 2008 compared to $1,526.3 million in 2007, an increase
of 4.6% which was primarily driven by higher input costs.  Our gross
margin, excluding depreciation and amortization, was 17.2% for 2008 compared to
13.9% for 2007, reflecting the higher average sales price in
2008.  Depreciation and amortization expense was $134.4 million in
2008 compared to $123.1 million in 2007.
  31
 
 Selling, general, and administrative
expenses.  Selling, general, and administrative expenses were
$79.4 million in 2008 compared to $52.0 million in 2007.  Included in
selling, general, and administrative expenses for 2008 is a one-time charge of
$10.8 million due to the accelerated vesting of the Legacy Class C Units of
Verso Paper Management LP in connection with the IPO.
 
 Interest
expense.  Interest expense was $103.2 million in 2008 compared
to $113.9 million in 2007.  The net decrease in interest expense was
due to lower interest rates on floating rate debt compared to
2007.  Interest expense for 2008 includes $99.2 million of cash
interest expense on our outstanding indebtedness and $4.0 million of non-cash
interest expense, including amortization of deferred debt issuance
costs.
 
 Restructuring and other
charges.Restructuring and other charges were $27.4 million in
2008 compared to $19.4 million in 2007.  Restructuring and other
charges are comprised of transition and other costs associated with the
Acquisition, including costs of a transition service agreement with
International Paper, technology migration costs, consulting and legal fees, and
other one-time costs related to becoming a stand-alone
business.  Subsequent to the Acquisition, we entered into a management
agreement with Apollo relating to the provision of certain financial and
strategic advisory services and consulting services.  Upon
consummation of the IPO, Apollo terminated the annual fee arrangement under the
management agreement for a one-time payment of $23.1 million, which is included
in the charges for 2008.  The charges in 2007 included $5.6 million of
transition service agreement costs and $2.8 million of charges under the
management agreement.  As of September 30, 2007, we substantially
discontinued the use of services under the transition service
agreement.
  2007
Successor Compared to 2006 Combined Successor and Predecessor
  Net Sales.  Net
sales were $1,628.8 million in 2007 compared to $1,611.2 million in 2006, an
increase of 1.1%.  The increase was the result of a 4.2% increase in
total sales volume in 2007, which was partially offset by a 3.0% decrease in
average sales price per ton for all of our products compared to
2006.
 
 Net sales
for our coated and supercalendered papers segment were $1,443.2 million in 2007
compared to $1,425.2 million in 2006, an increase of 1.3%.  The
increase was primarily due to a 6.1% increase in paper sales volume which was
partially offset by a 4.6% decrease in average paper sales price compared to the
prior year.
 
 Net sales
for our hardwood market pulp segment were $148.0 million in 2007 compared to
$147.0 million in 2006, an increase of 0.7%.  This growth resulted
from a 5.9% increase in average pulp sales price which was mostly offset by a
5.0% decrease in pulp sales volume due to an increase in our internal
consumption of pulp.
 
 Net sales
for our other segment were $37.6 million in 2007 compared to $39.0 million in
2006, a decrease of 3.7%.  This decrease reflects a 4.1% decline in
sales volume which was partially offset by a 0.5% increase in average sales
price compared to 2006.
 
 Cost of
sales.  Cost of sales, including depreciation and amortization,
was $1,526.3 million in 2007 compared to $1,481.9 million in 2006, an increase
of 3.0% which was primarily driven by higher sales volume.  Although
the prices of certain commodities used in production were higher in 2007, the
operational efficiencies and improvements we implemented, including through our
R−GAP continuous cost improvement process, more than offset the increased prices
of raw materials.  Our gross margin, excluding depreciation and
amortization, was 13.9% for 2007 compared to 15.5% for 2006.  This
decline reflects the lower average sales prices in 2007.  Depreciation
and amortization expense was $123.1 million in 2007 compared to $121.0 million
in 2006.
 
 32
  Selling, general, and administrative
expenses.  Selling, general, and administrative expenses were
$52.0 million in 2007 compared to $48.3 million in 2006, an increase of
7.6%.  For the periods following the closing of the Acquisition,
selling, general, and administrative expenses reflected the expenses we incurred
as a stand-alone business.
 
 Interest
expense.  Interest expense increased to $113.9 million in 2007
from $57.1 million in 2006 due to the debt incurred as part of the
Acquisition.  Interest expense in 2007 includes $109.2 million of cash
interest expense on our outstanding indebtedness and $4.7 million of non-cash
interest expense, including amortization of deferred debt issuance
costs.
 
 Restructuring and other
charges.  Restructuring and other charges were $19.4 million
for the year ended December 31, 2007, compared to $10.1 million for the five
months ended December 31, 2006.  In conjunction with the Acquisition,
we entered into a transition service agreement with International Paper whereby
International Paper continued to provide certain services that were necessary
for us to run as a stand-alone business.  The charges in 2007 included
$5.6 million of transition service agreement costs and $2.8 million of charges
under the management agreement with Apollo.  The charges for the five
months ended December 31, 2006, included $6.1 million of transition service
agreement costs.
  Income tax
expense.  For the year ended December 31, 2007, and for the
five months ended December 31, 2006, we incurred no income taxes, compared to
our Predecessor’s income tax expense of $7.0 million for the seven months ended
July 31, 2006.
  Liquidity
and Capital Resources
  We rely
primarily upon cash flow from operations and borrowings under our revolving
credit facility to finance operations, capital expenditures, and fluctuations in
debt service requirements.  We believe that our ability to manage cash
flow and working capital levels, particularly inventory and accounts payable,
will allow us to meet our current and future obligations, pay scheduled
principal and interest payments, and provide funds for working capital, capital
expenditures and other needs of the business for at least the next twelve
months.  However, no assurance can be given that this will be the
case, and we may require additional debt or equity financing to meet our working
capital requirements.  We expect to spend approximately $50 million on
capital expenditures during 2009, including approximately $35 million for
maintenance and environmental capital expenditures.  Thereafter, our
annual maintenance and environmental capital expenditures are expected to
average approximately $40 million to $50 million per year for the next few
years.
 
 Net cash flows from operating
activities.  Net cash provided by operating activities was
$74.9 million in 2008 compared to $38.8 million of net cash provided in
2007.  The increase in net cash provided by operating activities was
primarily due to improved performance, with a net loss of $39.2 million in 2008
compared to a net loss of $81.3 million in 2007.  Operating activities
in 2006 generated net cash of approximately $168.1 million.  The
increase in 2006 was primarily driven by improved operations and working capital
improvements.
 
 Net cash flows from investing
activities.In 2008 and 2007, we used $80.3 million and $67.8
million, respectively, of net cash in investing activities, primarily for
investments in capital expenditures.  In 2006, $1,419.4 million of net
cash was used, reflecting the $1.4 billion in cash paid for the
Acquisition.
  33
  Net cash flows from financing
activities.In 2008, our financing activities provided $66.4
million of net cash, which reflected $92.1 million in borrowings under the
revolving credit facility, $2.8 million in scheduled principal payments made on
the senior secured term loan, and $22.8 million in distributions paid to Verso
Paper Finance Holdings LLC, or “Verso Finance,” our indirect parent company, to
fund interest and other obligations.  This compares to $24.9 million
of net cash used during 2007, which was comprised of $2.8 million in scheduled
principal payments on the senior secured term loan and $22.1 million in
distributions to Verso Finance.  In 2006, net cash provided by
financing activities was $1,363.8 million, reflecting the net proceeds from the
debt issuance and equity contributions associated with the
Acquisition.
  Indebtedness.As
of December 31, 2008, our aggregate indebtedness was $1,245.7 million, and we
had $59.0 million available for borrowing under our revolving credit
facility.
  On August
1, 2006, we entered into senior secured credit facilities consisting
of:
  ·
              a
      $285 million term loan with a maturity of seven years, of which $253.6
      million was outstanding as of December 31, 2008;
  and
  ·
              a
      $200 million revolving credit facility with a maturity of six years, of
      which $92.1 million was outstanding, $33.1 million in letters of
      credit were issued, and $59.0 million was available for future borrowing
      as of December 31, 2008.
  The term
loan bears interest at a rate equal to LIBOR plus 1.75%, with the interest rate
being 3.3% at December 31, 2008.  The revolving credit facility bears
interest at a rate equal to LIBOR plus 2.00%, with the weighted average interest
rate being 3.35% at December 31, 2008.  We are required to pay a
commitment fee to the lenders under the revolving credit facility in respect of
unutilized commitments at a rate equal to 0.375% per annum (subject to reduction
in certain circumstances) and customary letter of credit and agency
fees.  The senior secured credit facilities are secured by first
priority security interests in, and mortgages on, substantially all of our
tangible and intangible assets and those of each our direct and indirect
subsidiaries.  The senior secured credit facilities also are secured
by first priority pledges of all the equity interests owned by us in our
subsidiaries.  The obligations under the senior secured credit
facilities are unconditionally guaranteed by Verso Finance and, subject to
certain exceptions, each of its direct and indirect subsidiaries.  The
credit agreement for our senior secured credit facilities contains various
covenants which, among other things, prohibit our subsidiaries from prepaying
other indebtedness, require us to maintain a maximum consolidated first lien
leverage ratio, and restrict our ability to incur indebtedness or liens, make
investments, or declare or pay any dividends.  As of December 31,
2008, we were in compliance with all such covenants.
 
 On August
1, 2006, we also issued debt securities consisting of:
 
 ·
              $350
      million aggregate principal amount of 91⁄8% second priority senior secured
      fixed rate notes due 2014;
  ·
              $250
      million aggregate principal amount of second priority senior secured
      floating rate notes due 2014; and
  ·
              $300
      million aggregate principal amount of 113⁄8% senior subordinated notes due
      2016.
  The
original principal amount of each issue of debt securities was outstanding at
December 31, 2008.   The fixed rate notes and subordinated notes
pay interest semi-annually, and the floating rate notes pay interest
quarterly.  The floating rate notes bear interest at a rate equal to
LIBOR plus 3.75% with the interest rate being 6.9% at December 31,
2008.  The fixed rate and floating rate notes have the benefit of a
second priority security interest in the collateral securing our senior secured
credit facilities, while the subordinated notes are unsecured.  The
indentures governing our notes contain various covenants which  limit
our ability to, among other things, incur additional indebtedness; pay dividends
or make other distributions or repurchase or redeem our stock; make investments;
sell assets, including capital stock of restricted subsidiaries; enter into
agreements restricting our subsidiaries’ ability to pay dividends; consolidate,
merge, sell or otherwise dispose of all or substantially all of our assets;
enter into transactions with our affiliates; and incur liens.  As of
December 31, 2008, we were in compliance with all such covenants.
 
 34
  The
Company may elect to retire its outstanding debt in open market purchases,
privately negotiated transactions or otherwise.  These repurchases may
be funded through available cash from operations and borrowings from our credit
facilities.  Such repurchases are dependent on prevailing market
conditions, the Company’s liquidity requirements, contractual restrictions, and
other factors.
 
 Covenant
Compliance
 
 Certain
covenants contained in the credit agreement governing our senior secured credit
facilities and the indentures governing our outstanding notes (a) require us to
maintain a net first lien secured debt to Adjusted EBITDA (as defined below)
ratio that does not exceed 3.25 to 1.00 and (b) restrict our ability to take
certain actions, such as incurring additional debt or making acquisitions, if we
are unable to maintain an Adjusted EBITDA to Fixed Charges (as defined below)
ratio of at least 2.00 to 1.00, in each case measured on a trailing four-quarter
basis.  Although we do not expect to violate any of the provisions in
the agreements governing our outstanding indebtedness, these covenants can
result in limiting our long-term growth prospects by hindering our ability to
incur future indebtedness or grow through acquisitions.
 
 Fixed
Charges, or cash interest expense, represents consolidated interest expense
excluding the amortization or write-off of deferred financing
costs.  Adjusted EBITDA is EBITDA further adjusted to exclude unusual
items and other pro forma adjustments.  We believe that the inclusion
of the supplemental adjustments applied in calculating Adjusted EBITDA are
appropriate to provide additional information to investors to demonstrate our
compliance with our financial covenants and assess our ability to incur
additional indebtedness in the future.  However, Adjusted EBITDA is
not a measurement of financial performance under U.S. GAAP, and Adjusted EBITDA
may not be comparable to similarly titled measures of other
companies.  You should not consider our Adjusted EBITDA as an
alternative to operating or net income, determined in accordance with U.S. GAAP,
as an indicator of our operating performance, or as an alternative to cash flows
from operating activities, determined in accordance with U.S. GAAP, as an
indicator of our cash flows or as a measure of liquidity.
 
 For
comparison purposes, EBITDA and Adjusted EBITDA for 2006, are presented on a
combined basis, consisting of the results of the Predecessor for the seven
months ended July 31, 2006, and the results of the Successor for the five months
ended December 31, 2006.  U.S. GAAP does not contemplate the
combination of the financial results of the Predecessor and the Successor, as
the combined information does not include any pro forma assumptions or
adjustments and, as a result, does not fully reflect the significant impact of
the Acquisition on our financial statements.
  35
 
 The
following table reconciles cash flows from operating activities to EBITDA and
Adjusted EBITDA for the periods presented:
  CombinedSuccessor
                                                                                                    
                                                                                                    
                                                                                                    Successor
                                                                                                    
                                                                                                    
                                                                                                    Predecessor
                                                                                                    
                                                                                                    
                                                                                                    Successor
                                                                                                    
                                                                                                    
                                                                                                    PredecessorConsolidated
                                                                                                    
                                                                                                    
                                                                                                    Consolidated
                                                                                                    
                                                                                                    
                                                                                                    &
      Successor
                                                                                                    
                                                                                                    
                                                                                                    Consolidated
                                                                                                    
                                                                                                    
                                                                                                    CombinedFive
      Months
                                                                                                    
                                                                                                    
                                                                                                    Seven
      MonthsYear
      Ended
                                                                                                    
                                                                                                    
                                                                                                    Year
      Ended
                                                                                                    
                                                                                                    
                                                                                                    Year
      Ended
                                                                                                    
                                                                                                    
                                                                                                    Ended
                                                                                                    
                                                                                                    
                                                                                                    EndedDecember
      31,
                                                                                                    
                                                                                                    
                                                                                                    December
      31,
                                                                                                    
                                                                                                    
                                                                                                    December
      31,
                                                                                                    
                                                                                                    
                                                                                                    December
      31,
                                                                                                    
                                                                                                    
                                                                                                    July
      31,(in
      millions of U.S. dollars)
                                                                                                    
                                                                                                    2008
                                                                                                    
                                                                                                    
                                                                                                    2007
                                                                                                    
                                                                                                    
                                                                                                    2006
                                                                                                    
                                                                                                    
                                                                                                    2006
                                                                                                    
                                                                                                    
                                                                                                    2006Cash
      flow from operating activities
                                                                                                    
                                                                                                    $
                                                                                                    74.9
                                                                                                    
                                                                                                    
                                                                                                    $
                                                                                                    38.8
                                                                                                    
                                                                                                    
                                                                                                    $
                                                                                                    168.1
                                                                                                    
                                                                                                    
                                                                                                    $
                                                                                                    128.8
                                                                                                    
                                                                                                    
                                                                                                    $
                                                                                                    39.3Income
      tax expense
                                                                                                    
                                                                                                    
                                                                                                    -
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    -
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    7.0
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    -
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    7.0Amortization
      of debt issuance costs
                                                                                                    
                                                                                                    
                                                                                                    (5.4
                                                                                                    )
                                                                                                    
                                                                                                    
                                                                                                    (5.4
                                                                                                    )
                                                                                                    
                                                                                                    
                                                                                                    (2.3
                                                                                                    )
                                                                                                    
                                                                                                    
                                                                                                    (2.3
                                                                                                    )
                                                                                                    
                                                                                                    
                                                                                                    -Interest
      income
                                                                                                    
                                                                                                    
                                                                                                    (0.8
                                                                                                    )
                                                                                                    
                                                                                                    
                                                                                                    (1.5
                                                                                                    )
                                                                                                    
                                                                                                    
                                                                                                    (1.8
                                                                                                    )
                                                                                                    
                                                                                                    
                                                                                                    (1.8
                                                                                                    )
                                                                                                    
                                                                                                    
                                                                                                    -Interest
      expense
                                                                                                    
                                                                                                    
                                                                                                    103.2
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    113.9
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    57.1
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    48.7
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    8.4Loss
      on disposal of fixed assets
                                                                                                    
                                                                                                    
                                                                                                    (0.7
                                                                                                    )
                                                                                                    
                                                                                                    
                                                                                                    (1.0
                                                                                                    )
                                                                                                    
                                                                                                    
                                                                                                    (1.4
                                                                                                    )
                                                                                                    
                                                                                                    
                                                                                                    (0.1
                                                                                                    )
                                                                                                    
                                                                                                    
                                                                                                    (1.3
                                                                                                    )Other,
      net
                                                                                                    
                                                                                                    
                                                                                                    22.6
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    1.5
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    (0.7
                                                                                                    )
                                                                                                    
                                                                                                    
                                                                                                    -
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    (0.7
                                                                                                    )Changes
      in assets and liabilities, net
                                                                                                    
                                                                                                    
                                                                                                    3.9
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    7.9
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    (33.8
                                                                                                    )
                                                                                                    
                                                                                                    
                                                                                                    (79.9
                                                                                                    )
                                                                                                    
                                                                                                    
                                                                                                    46.1EBITDA
                                                                                                    
                                                                                                    
                                                                                                    197.7
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    154.2
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    192.2
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    93.4
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    98.8Restructuring,
      severance and other (1)
                                                                                                    
                                                                                                    
                                                                                                    27.4
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    19.4
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    9.8
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    10.1
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    (0.3
                                                                                                    )Non-cash
      compensation/benefits (2)
                                                                                                    
                                                                                                    
                                                                                                    11.2
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    0.6
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    5.4
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    0.4
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    5.0Other
      items, net (3)
                                                                                                    
                                                                                                    
                                                                                                    3.1
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    8.0
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    (0.1
                                                                                                    )
                                                                                                    
                                                                                                    
                                                                                                    (8.2
                                                                                                    )
                                                                                                    
                                                                                                    
                                                                                                    8.1Inventory
      fair value (4)
                                                                                                    
                                                                                                    
                                                                                                    -
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    -
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    5.9
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    5.9
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    -Lease
      not assumed (5)
                                                                                                    
                                                                                                    
                                                                                                    -
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    -
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    5.8
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    -
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    5.8Change
      in machine use, net (6)
                                                                                                    
                                                                                                    
                                                                                                    -
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    -
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    2.8
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    -
                                                                                                    
                                                                                                    
                                                                                                    
                                                                                                    2.8Adjusted
      EBITDA
                                                                                                    
                                                                                                    $
                                                                                                    239.4
                                                                                                    
                                                                                                    
                                                                                                    $
                                                                                                    182.2
                                                                                                    
                                                                                                    
                                                                                                    $
                                                                                                    221.8
                                                                                                    
                                                                                                    
                                                                                                    $
                                                                                                    101.6
                                                                                                    
                                                                                                    
                                                                                                    $
                                                                                                    120.2As
      adjusted cash interest expense (7)
                                                                                                    
                                                                                                    $
                                                                                                    99.2Adjusted
      EBITDA to cash interest expense
                                                                                                    
                                                                                                    
                                                                                                    2.4Net
      first-lien secured debt to Adjusted EBITDA
                                                                                                    
                                                                                                    
                                                                                                    0.95
  (1)
                                                                                      Restructuring
      includes transition and other non-recurring costs associated with the
      Acquisition as per our financial statements.(2)
                                                                                      Represents
      amortization of non-cash incentive compensation.(3)
                                                                                      Represents
      earnings adjustments for legal and consulting fees, and other
      miscellaneous non-recurring items.(4)
                                                                                      Represents
      the fair value of inventory adjustment related to purchase
      accounting.(5)
                                                                                      Reflects
      the elimination of the historical rent expense incurred on the Sartell
      property lease that was not assumed by us in the
    Acquisition.(6)
                                                                                      Represents
      the elimination or addition of expected earnings as a result of changes in
      the use of two of our paper machines at the Jay mill prior to the Acquisition.(7)
                                                                                      Cash
      interest expense represents gross interest expense related to the debt,
      excluding amortization of debt issuance
costs.
  36
  Seasonality
  We are
exposed to fluctuations in quarterly net sales volumes and expenses due to
seasonal factors.  These seasonal factors are common in the coated
paper industry.  Typically, the first two quarters are our slowest
quarters due to lower demand for coated paper during this period.  Our
third quarter is generally our strongest quarter, reflecting an increase in
printing related to end-of-year magazines, increased end-of-year direct
mailings, and holiday season catalogs.  Our working capital and
accounts receivable generally peak in the third quarter, while inventory
generally peaks in the second quarter in anticipation of the third quarter
season.  We expect our seasonality trends to continue for the
foreseeable future.
  Effect
of Inflation
  While
inflationary increases in certain input costs, such as for energy, wood fiber,
and chemicals, have an impact on our operating results, changes in general
inflation have had minimal impact on our operating results in the last three
years.  Sales prices and volumes are more strongly influenced by
supply and demand factors in specific markets and by exchange rate fluctuations
than by inflationary factors.  We cannot assure you, however, that we
will not be affected by general inflation in the future.
  Contractual
Obligations
  The
following table reflects our contractual obligations and commercial commitments
as of December 31, 2008. Commercial commitments include lines of credit,
guarantees, and other potential cash outflows resulting from a contingent event
that requires our performance pursuant to a funding commitment.
  Payments
      due by periodLess
      than
                        
                        
                        
                        
                        
                        
                        
                        
                        More
      than(in
      millions of U.S. dollars)
                        
                        Total
                        
                        
                        1
      year
                        
                        
                        1-3
      years
                        
                        
                        3-5
      years
                        
                        
                        5
      yearsLong-term
      debt (1)
                        
                        $
                        1,861.7
                        
                        
                        $
                        104.7
                        
                        
                        $
                        208.8
                        
                        
                        $
                        528.4
                        
                        
                        $
                        1,019.8Operating
      leases
                        
                        
                        10.6
                        
                        
                        
                        5.1
                        
                        
                        
                        4.3
                        
                        
                        
                        1.1
                        
                        
                        
                        0.1Purchase
      obligations (2)
                        
                        
                        931.5
                        
                        
                        
                        149.9
                        
                        
                        
                        187.2
                        
                        
                        
                        187.4
                        
                        
                        
                        407.0Other
      long-term liabilities (3)
                        
                        
                        33.8
                        
                        
                        
                        1.1
                        
                        
                        
                        2.0
                        
                        
                        
                        2.7
                        
                        
                        
                        28.0Total
                        
                        $
                        2,837.6
                        
                        
                        $
                        260.8
                        
                        
                        $
                        402.3
                        
                        
                        $
                        719.6
                        
                        
                        $
                        1,454.9
  (1)  
      Long-term debt includes principal payments, commitment fees and accrued
      interest payable.  A portion of interest expense is at a
      variable rate and has been calculated using current
      LIBOR.  Actual payments could vary.(2)  
      Purchase obligations include unconditional purchase obligations for power
      purchase agreements (gas and electricity), machine clothing and other
      commitments for advertising, raw materials or storeroom
      inventory.(3)  
      Other long-term liabilities reflected above represent the gross amount of
      asset retirement obligations.
  Item 7A.  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.
 
 37
  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 changes in the GDP of the United States -
they rise with a strong economy and contract with a weak economy.
 
 The
majority of our products are sold under contracts with our
customers.  Contracted sales are more prevalent for coated groundwood
paper, as opposed to coated freesheet paper, which is more often sold without a
contract.  Our contracts generally specify the volumes to be sold to
the customer over the contract term, as well as the pricing parameters for those
sales.  Most of our contracts are negotiated on an annual basis, with
only a few having terms extending beyond one year.  Typically, our
contracts provide for quarterly price adjustments based on market price
movements.  The large portion of contracted sales allows us to plan
our production runs well in advance, optimizing production over our integrated
mill system and thereby reducing costs and increasing overall
efficiency.
 
 We reach
our end-users through several channels, including printers, brokers, paper
merchants and direct sales to end-users.  We sell and market our
products to approximately 100 customers.  In 2008, no single customer
accounted for more than 10% of our total net sales.
 
 Interest
Rates
 
 We issued
fixed- and floating-rate debt to finance the Acquisition in order to manage our
variability to cash flows from interest rates.  Borrowings under our
senior secured credit facilities and our floating-rate notes accrue interest at
variable rates, and a 100 basis point increase in quoted interest rates on our
debt balances outstanding as of December 31, 2008, under our senior secured
credit facilities and our floating-rate notes would increase our annual interest
expense by $6.0 million.  While we may enter into agreements limiting
our exposure to higher interest rates, any such agreements may not offer
complete protection from this risk.
 
 Derivatives
 
 In the
normal course of business, we utilize derivatives contracts as part of our risk
management strategy to manage our exposure to market fluctuations in energy
prices and interest rates.  These instruments are subject to credit
and market risks in excess of the amount recorded on the balance sheet in
accordance with generally accepted accounting principles.  Controls
and monitoring procedures for these instruments have been established and are
routinely reevaluated.  We have an Energy Risk Management Policy which
was adopted by our board of directors and is monitored by an Energy Risk
Management Committee composed of our senior management.  In
addition, we have an Interest Rate Risk Committee which was formed to monitor
our Interest Rate Risk Management Policy.  Credit risk represents the
potential loss that may occur because a party to a transaction fails to perform
according to the terms of the contract.  The measure of credit
exposure is the replacement cost of contracts with a positive fair
value.  We manage credit risk by entering into financial instrument
transactions only through approved counterparties.  Market risk
represents the potential loss due to the decrease in the value of a financial
instrument caused primarily by changes in commodity prices or interest
rates.  We manage market risk by establishing and monitoring limits on
the types and degree of risk that may be undertaken.
 
 We do not
hedge the entire exposure of our operations from commodity price volatility for
a variety of reasons.  To the extent that we do not hedge against
commodity price volatility, our results of operations may be affected either
favorably or unfavorably by a shift in the future price curve.  As of
December 31, 2008, we had net unrealized losses of $26.9 million on open
commodity contracts with maturities of one to twelve months.  These
derivative instruments involve the exchange of net cash settlements, based on
changes in the price of the underlying commodity index compared to the fixed
price offering, at specified intervals without the exchange of any underlying
principal.  A 10% decrease in commodity prices would have a negative
impact of approximately $4.4 million on the fair value of such
instruments.  This quantification of exposure to market risk does not
take into account the offsetting impact of changes in prices on anticipated
future energy purchases.
  38
 
 We entered
into a $250 million notional value receive-variable, pay-fixed interest rate
swap in connection with our outstanding floating rate notes that mature in
2014.  We are hedging the cash flow exposure on its quarterly
variable-rate interest payments due to changes in the benchmark interest rate
(three-month LIBOR).  As of December 31, 2008, the fair value of
this swap was an unrealized loss of $3.7 million.   A 10%
decrease in interest rates would have a negative impact of approximately $0.5
million on the fair value of this instrument.
 
 Commodity
Prices
 
 We are
subject to changes in our cost of sales caused by movements underlying commodity
prices.  The principal components of our cost of sales are chemicals,
wood, energy, labor, maintenance, and depreciation and
amortization.  Costs for commodities, including chemicals, wood, and
energy, are the most variable component of our cost of sales because their
prices can fluctuate substantially, sometimes within a relatively short period
of time.  In addition, our aggregate commodity purchases fluctuate
based on the volume of paper that we produce.
 
 Chemicals.Chemicals
utilized in the manufacturing of coated papers include latex, starch, calcium
carbonate, and titanium dioxide.  We purchase these chemicals from a
variety of suppliers and are not dependent on any single supplier to satisfy our
chemical needs.  In the near term, we expect the rate of inflation for
our total chemical costs to be lower than that experienced over the last two
years.  However, we expect imbalances in supply and demand will drive
higher prices for certain chemicals such as starch and sodium
chlorate.
 
 Wood.Our costs to
purchase wood are affected directly by market costs of wood in our regional
markets and indirectly by the effect of higher fuel costs on logging and
transportation of timber to our facilities.  While we have in place
fiber supply agreements that ensure a substantial portion of our wood
requirements, purchases under these agreements are typically at market
rates.
  Energy.We produce a
large portion of our energy requirements, historically producing approximately
50% of our energy needs for our coated paper mills from sources such as waste
wood and paper, hydroelectric facilities, chemicals from our pulping process,
our own steam recovery boilers, and internal energy cogeneration
facilities.  Our external energy purchases vary across each of our
mills and include fuel oil, natural gas, coal, and electricity.  While
our internal energy production capacity mitigates the volatility of our overall
energy expenditures, we expect prices for energy to remain volatile for the
foreseeable future and our energy costs to increase in a high energy cost
environment.  As prices fluctuate, we have some ability to switch
between certain energy sources in order to minimize costs.  We utilize
derivatives contracts as part of our risk management strategy to manage our
exposure to market fluctuations in energy prices.
  Off-Balance
Sheet Arrangements
  None.
  39
  Item
8.Financial
Statements and Supplementary Data
  
 Verso
Paper Holdings LLC
 
 Consolidated
Financial Statements of Successor
 For
the Years Ended December 31, 2008 and 2007, and
 The
Five Months Ended December 31, 2006
 and
 Combined
Financial Statements of Predecessor
 For
the Seven Months Ended July 31, 2006
 
 Index
to Financial Statements
  Report of Independent
      Registered Public Accounting Firm
                41Consolidated and
      Combined Financial StatementsConsolidated Balance
      Sheets
                42Consolidated and
      Combined Statements of Operations
                43Consolidated
      Statements of Changes in Member’s Equity
                44Consolidated and
      Combined Statements of Cash Flows
                45Notes to Consolidated
      Financial Statements of Verso Paper Holdings LLC (Successor)
                46Notes
      to Combined Financial Statements of Coated and Supercalendered Papers
      Division ofInternational Paper
      Company (Predecessor)
                72
  40
  REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
  
  To the
Board of Directors and Members of
 Verso
Paper Holdings LLC
 Memphis,
Tennessee
  We have
audited the accompanying consolidated balance sheets of Verso Paper Holdings LLC
(the “Company”
or “Successor”), 
a wholly-owned subsidiary of Verso Paper Finance Holdings LLC, as of December
31, 2008 and 2007 (Successor Company balance sheets), and the related
consolidated statements of operations, changes in member's equity, and cash
flows for the years ended December 31, 2008 and 2007 and the five months ended
December 31, 2006 (Successor Company operations).  We have also audited the
accompanying combined statements of operations and cash flows of the Coated
& Supercalendered Papers Division of International Paper Company (the
“Predecessor”) for the seven months ended July 31, 2006 (Predecessor
operations).  These financial statements are the responsibility of the
Company's management.  Our responsibility is to express an opinion on these
financial statements based on our audits.
  We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement.  The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting.  Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting.  Accordingly, we express no such opinion. 
An audit also includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation.  We believe that
our audits provide a reasonable basis for our opinion.
  In our
opinion, the Successor Company’s consolidated financial statements present
fairly, in all material respects, the financial position of the Company as of
December 31, 2008 and 2007, and the results of its operations and its cash flows
for the years ended December 31, 2008 and 2007 and the five months ended
December 31, 2006, in conformity with accounting principles generally accepted
in the United States of America.  Further, in our opinion, the
Predecessor combined financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of the
Predecessor for the seven months ended July 31, 2006, in conformity with
accounting principles generally accepted in the United States of
America.
  As
discussed in Note 1 to the Successor Company consolidated financial statements,
the Company adopted Statement of Financial Accounting Standards (“SFAS”) No.
158, Employers’ Accounting for Defined Benefit
Pension and Other Postretirement Plans –an Amendment of FASB Statements No. 87,
88, 106, and 132( R), as of December 31, 2006.
  As
discussed in Note 1 to the Predecessor combined financial statements, the
accompanying Predecessor combined financial statements have been prepared from
the separate records maintained by the Predecessor and International Paper
Company and may not necessarily be indicative of the conditions that would have
existed or the results of operations if the Predecessor had been operated as an
unaffiliated company.  Portions of certain expenses represent
allocations made from corporate-office items applicable to International Paper
Company as a whole.
   /s/
Deloitte & Touche LLP
  
 Memphis,
Tennessee
 March 2,
2009
  41
  VERSO
      PAPER HOLDINGS LLCCONSOLIDATED
      BALANCE
SHEETS




December
      31,
                          
                          
                          December
      31,(In
      thousands of U.S. dollars)
                          
                          2008
                          
                          
                          2007ASSETSCurrent
      Assets:Cash
      and cash equivalents
                          
                          $
                          119,520
                          
                          
                          $
                          58,499Accounts
      receivable - net
                          
                          
                          74,733
                          
                          
                          
                          121,351Accounts
      receivable from related parties
                          
                          
                          8,312
                          
                          
                          
                          12,318Inventories
                          
                          
                          195,934
                          
                          
                          
                          119,620Prepaid
      expenses and other assets
                          
                          
                          2,512
                          
                          
                          
                          3,935Total
      Current Assets
                          
                          
                          401,011
                          
                          
                          
                          315,723Property,
      plant, and equipment - net
                          
                          
                          1,115,657
                          
                          
                          
                          1,159,918Intangibles
      and other assets - net
                          
                          
                          86,853
                          
                          
                          
                          90,843Goodwill
                          
                          
                          10,551
                          
                          
                          
                          10,551Total
      Assets
                          
                          $
                          1,614,072
                          
                          
                          $
                          1,577,035LIABILITIES
      AND MEMBER'S EQUITYCurrent
      Liabilities:Accounts
      payable
                          
                          $
                          117,906
                          
                          
                          $
                          128,149Accounts
      payable to related parties
                          
                          
                          4,135
                          
                          
                          
                          3,872Accrued
      liabilities
                          
                          
                          122,649
                          
                          
                          
                          88,127Current
      maturities of long-term debt
                          
                          
                          2,850
                          
                          
                          
                          2,850Total
      Current Liabilities
                          
                          
                          247,540
                          
                          
                          
                          222,998Long-term
      debt
                          
                          
                          1,242,821
                          
                          
                          
                          1,153,588Other
      liabilities
                          
                          
                          32,007
                          
                          
                          
                          25,596Total
      Liabilities
                          
                          
                          1,522,368
                          
                          
                          
                          1,402,182Commitments
      and contingencies (Note 16)
                          
                          
                          -
                          
                          
                          
                          -Member's
      EquityPaid-in-capital
                          
                          
                          301,110
                          
                          
                          
                          289,911Retained
      deficit
                          
                          
                          (167,135
                          )
                          
                          
                          (105,188
                          )Accumulated
      other comprehensive loss
                          
                          
                          (42,271
                          )
                          
                          
                          (9,870
                          )Total
      Member's Equity
                          
                          
                          91,704
                          
                          
                          
                          174,853Total
      Liabilities and Member's Equity
                          
                          $
                          1,614,072
                          
                          
                          $
                          1,577,035See
      notes to consolidated financial statements.
  42
  VERSO
      PAPER HOLDINGS LLC (SUCCESSOR) ANDCOATED
      AND SUPERCALENDERED PAPERS DIVISION OF INTERNATIONAL PAPER
      COMPANY(PREDECESSOR)CONSOLIDATED
      AND COMBINED STATEMENTS OF
OPERATIONS
  PredecessorSuccessor
      Consolidated
                                      
                                      
                                      CombinedYear
                                      
                                      
                                      Year
                                      
                                      
                                      Five
      Months
                                      
                                      
                                      Seven
      MonthsEnded
                                      
                                      
                                      Ended
                                      
                                      
                                      Ended
                                      
                                      
                                      EndedDecember
      31,
                                      
                                      
                                      December
      31,
                                      
                                      
                                      December
      31,
                                      
                                      
                                      July
      31,(In
      thousands of U.S. dollars)
                                      
                                      2008
                                      
                                      
                                      2007
                                      
                                      
                                      2006
                                      
                                      
                                      2006Net
      sales
                                      
                                      $
                                      1,766,813
                                      
                                      
                                      $
                                      1,628,753
                                      
                                      
                                      $
                                      706,833
                                      
                                      
                                      $
                                      904,417Costs
      and expenses:Cost
      of products sold - (exclusive ofdepreciation
      and amortization)
                                      
                                      
                                      1,462,333
                                      
                                      
                                      
                                      1,403,144
                                      
                                      
                                      
                                      589,283
                                      
                                      
                                      
                                      771,576Depreciation
      and amortization
                                      
                                      
                                      134,344
                                      
                                      
                                      
                                      123,139
                                      
                                      
                                      
                                      48,317
                                      
                                      
                                      
                                      72,674Selling,
      general, and administrative expenses
                                      
                                      
                                      79,441
                                      
                                      
                                      
                                      52,007
                                      
                                      
                                      
                                      13,996
                                      
                                      
                                      
                                      34,348Restructuring
      and other charges
                                      
                                      
                                      27,416
                                      
                                      
                                      
                                      19,395
                                      
                                      
                                      
                                      10,126
                                      
                                      
                                      
                                      (322
                                      )Operating
      income
                                      
                                      
                                      63,279
                                      
                                      
                                      
                                      31,068
                                      
                                      
                                      
                                      45,111
                                      
                                      
                                      
                                      26,141Interest
      income
                                      
                                      
                                      (770
                                      )
                                      
                                      
                                      (1,544
                                      )
                                      
                                      
                                      (1,798
                                      )
                                      
                                      
                                      (23
                                      )Interest
      expense
                                      
                                      
                                      103,200
                                      
                                      
                                      
                                      113,881
                                      
                                      
                                      
                                      48,741
                                      
                                      
                                      
                                      8,414Income
      (loss) before income taxes
                                      
                                      
                                      (39,151
                                      )
                                      
                                      
                                      (81,269
                                      )
                                      
                                      
                                      (1,832
                                      )
                                      
                                      
                                      17,750Income
      tax expense
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      6,993Net
      income (loss)
                                      
                                      $
                                      (39,151
                                      )
                                      
                                      $
                                      (81,269
                                      )
                                      
                                      $
                                      (1,832
                                      )
                                      
                                      $
                                      10,757Included
      in the financial statement line itemsabove
      are related-party transactions as follows(Notes
      14 and 15):Net
      sales
                                      
                                      $
                                      165,799
                                      
                                      
                                      $
                                      191,358
                                      
                                      
                                      $
                                      71,541
                                      
                                      
                                      $
                                      83,797Purchases
      included in cost of products sold
                                      
                                      
                                      7,159
                                      
                                      
                                      
                                      11,722
                                      
                                      
                                      
                                      2,515
                                      
                                      
                                      
                                      119,471Selling,
      general, and administrative expenses
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      25,481Restructuring
      and other charges
                                      
                                      
                                      23,281
                                      
                                      
                                      
                                      8,399
                                      
                                      
                                      
                                      6,100
                                      
                                      
                                      
                                      -See
      notes to Successor's consolidated financial statements and Predecessor's
      combined financial statements.
  43
  VERSO
      PAPER HOLDINGS LLCCONSOLIDATED
      STATEMENTS OF CHANGES IN MEMBER'S EQUITYFOR
      THE PERIOD AUGUST 1, 2006 (DATE OF ACQUISITION) TO DECEMBER 31,
      2006AND
      FOR THE PERIODS ENDED DECEMBER 31, 2008 AND
2007
  AccumulatedOther
                                        
                                        
                                        TotalPaid-in-
                                        
                                        
                                        Retained
                                        
                                        
                                        Comprehensive
                                        
                                        
                                        Member's(In
      thousands of U.S. dollars)
                                        
                                        Capital
                                        
                                        
                                        Deficit
                                        
                                        
                                        Loss
                                        
                                        
                                        EquityDate
      of acquisition-August 1, 2006Capital
      contributions
                                        
                                        $
                                        288,889
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        288,889Net
      loss and comprehensive loss
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (1,832
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (1,832
                                        )Equity
      award expense
                                        
                                        
                                        397
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        397Adjustment
      to initially apply SFAS No. 158
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (7,741
                                        )
                                        
                                        
                                        (7,741
                                        )Balance
      - December 31, 2006
                                        
                                        
                                        289,286
                                        
                                        
                                        
                                        (1,832
                                        )
                                        
                                        
                                        (7,741
                                        )
                                        
                                        
                                        279,713Cash
      distributions
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (22,087
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (22,087
                                        )Net
      loss
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (81,269
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (81,269
                                        )Other
      comprehensive income (loss):Net
      unrealized losses on derivativefinancial
      instruments
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (2,095
                                        )
                                        
                                        
                                        (2,095
                                        )Defined
      benefit pension plan:Plan
      amendments
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (846
                                        )
                                        
                                        
                                        (846
                                        )Net
      actuarial gain
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        27
                                        
                                        
                                        
                                        27Prior
      service cost amortization
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        785
                                        
                                        
                                        
                                        785Total
      other comprehensive loss
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (2,129
                                        )
                                        
                                        
                                        (2,129
                                        )Comprehensive
      loss
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (81,269
                                        )
                                        
                                        
                                        (2,129
                                        )
                                        
                                        
                                        (83,398
                                        )Equity
      award expense
                                        
                                        
                                        625
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        625Balance
      - December 31, 2007
                                        
                                        
                                        289,911
                                        
                                        
                                        
                                        (105,188
                                        )
                                        
                                        
                                        (9,870
                                        )
                                        
                                        
                                        174,853Cash
      distributions
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (22,796
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (22,796
                                        )Net
      loss
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (39,151
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (39,151
                                        )Other
      comprehensive loss:Net
      unrealized losses on derivativefinancial
      instruments
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (27,571
                                        )
                                        
                                        
                                        (27,571
                                        )Defined
      benefit pension plan:Net
      actuarial loss
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (5,701
                                        )
                                        
                                        
                                        (5,701
                                        )Prior
      service cost amortization
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        871
                                        
                                        
                                        
                                        871Total
      other comprehensive loss
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (32,401
                                        )
                                        
                                        
                                        (32,401
                                        )Comprehensive
      loss
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (39,151
                                        )
                                        
                                        
                                        (32,401
                                        )
                                        
                                        
                                        (71,552
                                        )Equity
      award expense
                                        
                                        
                                        11,199
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        11,199Balance
      - December 31, 2008
                                        
                                        $
                                        301,110
                                        
                                        
                                        $
                                        (167,135
                                        )
                                        
                                        $
                                        (42,271
                                        )
                                        
                                        $
                                        91,704See
      notes to Successor's consolidated financial statements.
  44
  VERSO
      PAPER HOLDINGS LLC (SUCCESSOR) ANDCOATED
      AND SUPERCALENDERED PAPERS DIVISION OF INTERNATIONAL PAPER COMPANY
      (PREDECESSOR)CONSOLIDATED
      AND COMBINED STATEMENTS OF CASH
FLOWS




PredecessorSuccessor
      Consolidated
                                  
                                  
                                  CombinedYear
                                  
                                  
                                  Year
                                  
                                  
                                  Five
      Months
                                  
                                  
                                  Seven
      MonthsEnded
                                  
                                  
                                  Ended
                                  
                                  
                                  Ended
                                  
                                  
                                  EndedDecember
      31,
                                  
                                  
                                  December
      31,
                                  
                                  
                                  December
      31,
                                  
                                  
                                  July
      31,(In
      thousands of U.S. dollars)
                                  
                                  2008
                                  
                                  
                                  2007
                                  
                                  
                                  2006
                                  
                                  
                                  2006Cash
      Flows From Operating Activities:Net
      income (loss)
                                  
                                  $
                                  (39,151
                                  )
                                  
                                  $
                                  (81,269
                                  )
                                  
                                  $
                                  (1,832
                                  )
                                  
                                  $
                                  10,757Adjustments
      to reconcile net income (loss) tonet
      cash provided by operating activities:Depreciation
      and amortization
                                  
                                  
                                  134,344
                                  
                                  
                                  
                                  123,139
                                  
                                  
                                  
                                  48,317
                                  
                                  
                                  
                                  72,674Amortization
      of debt issuance costs
                                  
                                  
                                  5,427
                                  
                                  
                                  
                                  5,425
                                  
                                  
                                  
                                  2,264
                                  
                                  
                                  
                                  -Loss
      on disposal of fixed assets
                                  
                                  
                                  722
                                  
                                  
                                  
                                  942
                                  
                                  
                                  
                                  71
                                  
                                  
                                  
                                  1,262Equity
      award expense
                                  
                                  
                                  11,199
                                  
                                  
                                  
                                  625
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Increase
      in derivatives, net
                                  
                                  
                                  (27,571
                                  )
                                  
                                  
                                  (2,095
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Other - net
                                  
                                  
                                  (6,238
                                  )
                                  
                                  
                                  (34
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  686Changes
      in assets and liabilities:Accounts
      receivable
                                  
                                  
                                  50,625
                                  
                                  
                                  
                                  (11,963
                                  )
                                  
                                  
                                  (32,302
                                  )
                                  
                                  
                                  23,253Inventories
                                  
                                  
                                  (76,314
                                  )
                                  
                                  
                                  20,171
                                  
                                  
                                  
                                  5,438
                                  
                                  
                                  
                                  (55,256
                                  )Prepaid
      expenses and other assets
                                  
                                  
                                  (7,982
                                  )
                                  
                                  
                                  (8,201
                                  )
                                  
                                  
                                  (11,412
                                  )
                                  
                                  
                                  (6,396
                                  )Accounts payable
                                  
                                  
                                  (9,980
                                  )
                                  
                                  
                                  (14,355
                                  )
                                  
                                  
                                  64,736
                                  
                                  
                                  
                                  (8,690
                                  )Accrued liabilities
                                  
                                  
                                  39,842
                                  
                                  
                                  
                                  6,396
                                  
                                  
                                  
                                  53,505
                                  
                                  
                                  
                                  983Net
      cash provided by operating activities
                                  
                                  
                                  74,923
                                  
                                  
                                  
                                  38,781
                                  
                                  
                                  
                                  128,785
                                  
                                  
                                  
                                  39,273Cash
      Flows From Investing Activities:Proceeds from sale of fixed assets
                                  
                                  
                                  108
                                  
                                  
                                  
                                  1,789
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  32Cash paid for acquisition
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (1,364,221
                                  )
                                  
                                  
                                  -Capital
      expenditures
                                  
                                  
                                  (80,447
                                  )
                                  
                                  
                                  (69,582
                                  )
                                  
                                  
                                  (27,533
                                  )
                                  
                                  
                                  (27,655
                                  )Net
      cash used in investing activities
                                  
                                  
                                  (80,339
                                  )
                                  
                                  
                                  (67,793
                                  )
                                  
                                  
                                  (1,391,754
                                  )
                                  
                                  
                                  (27,623
                                  )Cash
      Flows From Financing Activities:Proceeds from long-term debt
                                  
                                  
                                  92,083
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  1,185,000
                                  
                                  
                                  
                                  -Repayments of long-term debt
                                  
                                  
                                  (2,850
                                  )
                                  
                                  
                                  (2,850
                                  )
                                  
                                  
                                  (25,713
                                  )
                                  
                                  
                                  (18,754
                                  )Equity
      distributions
                                  
                                  
                                  (22,796
                                  )
                                  
                                  
                                  (22,087
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Equity
      contributions
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  260,286
                                  
                                  
                                  
                                  7,105Debt
      issue costs
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (44,157
                                  )
                                  
                                  
                                  -Net
      cash provided by (used in) financing activities
                                  
                                  
                                  66,437
                                  
                                  
                                  
                                  (24,937
                                  )
                                  
                                  
                                  1,375,416
                                  
                                  
                                  
                                  (11,649
                                  )Change
      in cash and cash equivalents
                                  
                                  
                                  61,021
                                  
                                  
                                  
                                  (53,949
                                  )
                                  
                                  
                                  112,447
                                  
                                  
                                  
                                  1Cash
      and cash equivalents at beginning of period
                                  
                                  
                                  58,499
                                  
                                  
                                  
                                  112,448
                                  
                                  
                                  
                                  1
                                  
                                  
                                  
                                  46Cash
      and cash equivalents at end of period
                                  
                                  $
                                  119,520
                                  
                                  
                                  $
                                  58,499
                                  
                                  
                                  $
                                  112,448
                                  
                                  
                                  $
                                  47Supplemental
      Schedule of Non-Cash Financing Activities:Non-cash equity investment
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  29,000
                                  
                                  
                                  $
                                  -See
      notes to Successor's consolidated financial statements and Predecessor's
      combined financial
statements.
 45
  VERSO
PAPER HOLDINGS LLC (SUCCESSOR)
 
 Notes
to Consolidated Financial Statements as of December 31, 2008 and 2007, and for
the Years Ended
 December
31, 2008, and 2007 and for the Period August 1, 2006 (Date of Acquisition) to
December 31, 2006
  1.      SUMMARY
OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
 
 Nature of
Business—The accompanying financial statements include the accounts of
Verso Paper Holdings LLC, a Delaware limited liability company, and its
subsidiaries.  Unless otherwise noted, the terms “Verso,” “Verso
Paper,” “Company,” “we,” “us,” “our,” and “Successor”  refer
collectively to Verso Paper Holdings LLC and its subsidiaries, and references to
the “Division” or “Predecessor” refer to the Coated and Supercalendered Papers
Division of International Paper Company, or “International Paper”.
 
 The
Company began operations on August 1, 2006, when it acquired the assets and
certain liabilities comprising the business of the Coated and Supercalendered
Papers Division of International Paper.  The Company was formed by
affiliates of Apollo Management, L.P., or “Apollo,” for the purpose of
consummating the acquisition from International Paper, or the
“Acquisition.”  Verso Paper Corp., of which we are an indirect,
wholly-owned subsidiary, went public on May 14, 2008, with an initial public
offering, or “IPO," of 14 million shares of common stock at a price of $12
per share which generated $152.2 million in net proceeds.
  The
Company operates, through its subsidiaries, in the following three segments:
coated and supercalendered papers; hardwood market pulp; and other, consisting
of specialty industrial paper.  The Company’s core business platform
is as a producer of coated freesheet, coated groundwood, and uncoated
supercalendered papers.  These products serve customers in the
catalog, magazine, inserts, and commercial print markets.
 
 Basis of
Presentation—Included in this report are the financial statements of
Verso Paper Holdings LLC as of December 31, 2008 and 2007, and for the years
ended December 31, 2008 and 2007 and the five months ended December 31,
2006.  The notes to the financial statements of the Predecessor for
the seven months ended July 31, 2006, follow the notes of the
Successor.  All material intercompany balances and transactions are
eliminated.
 
 Use of
Estimates—The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting periods.  Actual results
could differ from these estimates.
 
 Revenue
Recognition—Sales are net of rebates, allowances, and
discounts.  Revenue is recognized when the customer takes title and
assumes the risks and rewards of ownership.  Revenue is recorded at
the time of shipment for terms designated f.o.b. (free on board) shipping
point.  For sales transactions designated f.o.b. destination, which
include export sales, revenue is recorded when the product is delivered to the
customer’s site and when title and risk of loss are transferred.
 
 Shipping and
Handling Costs—Shipping and handling costs, such as freight to customer
destinations, are included in cost of products sold in the accompanying
consolidated statements of operations.  These costs, when included in
the sales price charged for the Company’s products, are recognized in net
sales.
 
 46
  Planned
Maintenance Costs—Maintenance costs for major planned maintenance
shutdowns in excess of $0.5 million are deferred over the period in which the
maintenance shutdowns occur and expensed ratably over the period until the next
major planned shutdown, since the Company believes that operations benefit
throughout that period from the maintenance work performed.  Other
maintenance costs are expensed as incurred.
 
 Environmental
Costs and Obligations—Costs associated with environmental obligations,
such as remediation or closure costs, are accrued when such costs are probable
and reasonably estimable.  Such accruals are adjusted as further
information develops or circumstances change.  Costs of future
expenditures for environmental obligations are discounted to their present value
when the expected cash flows are reliably determinable.
  Equity
Compensation—The Company accounts for equity awards in accordance with
SFAS No. 123 (Revised), Share-Based
Payment.  SFAS No. 123(R) requires that all equity awards to
employees be expensed over the period of the award.  The Company
applies the Black-Scholes method of valuation to determine share-based
compensation expense.
  Income
Taxes—The Company is a limited liability corporation and is not subject
to federal income taxes.  The Company accounts for its state income
taxes in accordance with SFAS No. 109, Accounting for Income
Taxes.
  Fair Value of
Financial Instruments—The carrying amounts for cash and cash equivalents,
restricted cash, accounts receivable, accounts payable and accrued liabilities,
and amounts receivable from or due to related parties approximates fair value
due to the short maturity of these instruments.  The Company
determines the fair value of its long-term debt based on market information and
a review of prices and terms available for similar obligations. See also
Note 7 and Note 13 for additional information regarding the fair value of
financial instruments.
 
 Cash and Cash
Equivalents—For cash and cash equivalents, the carrying amounts
approximate fair value due to the short-term nature of these
instruments.  Cash and cash equivalents include highly liquid
investments with a maturity of three months or less at the date of
purchase.
 
 Inventories and
Replacement Parts and Other Supplies—Inventory values include all costs
directly associated with manufacturing products: materials, labor, and
manufacturing overhead.  These values are presented at the lower of
cost or market.  Costs of raw materials, work-in-progress, and
finished goods are determined using the first-in, first-out
method.  Replacement parts and other supplies are stated using the
average cost method and are reflected in Intangibles and other assets on the
balance sheet (see Note 3 and Note 5).
 
 Property, Plant,
and Equipment—Property, plant, and equipment is stated at cost, net of
accumulated depreciation. Interest is capitalized on projects meeting certain
criteria and is included in the cost of the assets.  The capitalized
interest is depreciated over the same useful lives as the related
assets.  Expenditures for major repairs and improvements are
capitalized, whereas normal repairs and maintenance are expensed as
incurred.  Interest cost of $1.4 million was capitalized in 2008 and
$1.2 million was capitalized in 2007.
  47
 
 Depreciation
and amortization are computed using the straight-line method for all assets over
the assets’ estimated useful lives.  Estimated useful lives are as
follows:
  YearsBuilding
                            
                            20 -
      40Machinery
      and equipment
                            
                            10 -
      20Furniture
      and office equipment
                            
                            3 -
      10Computer
      hardware
                            
                            3 -
      6Leasehold
      improvements
                            
                            Over
      the terms of the lease
                              or
      the useful life of the
                              improvements
  Goodwill and
Intangible Assets—The Company accounts for goodwill and other intangible
assets in accordance with SFAS No. 142, Goodwill and Other Intangible
Assets.  Intangible assets primarily consist of trademarks,
customer-related intangible assets, and patents obtained through business
acquisitions.  The useful lives of trademarks were determined to be
indefinite and, therefore, these assets are not
amortized.  Customer-related intangible assets are amortized over
their estimated useful lives of approximately twenty-five
years.  Patents are amortized over their remaining legal lives of ten
years.
 
 The
impairment evaluation of the carrying amount of goodwill and other intangible
assets with indefinite lives is conducted annually or more frequently if events
or changes in circumstances indicate that an asset might be
impaired.  Goodwill is evaluated at the reporting unit
level.  Goodwill has been allocated to the “Coated”
segment.
 The
evaluation for impairment is performed by comparing the carrying amount of these
assets to their estimated fair value.  If the carrying amount exceeds
the reporting unit fair value, then the second step of the goodwill impairment
test is performed to determine the amount of the impairment loss.
  Impairment of
Long-Lived Assets—Long-lived assets are reviewed for impairment upon the
occurrence of events or changes in circumstances that indicate that the carrying
value of the assets may not be recoverable, as measured by comparing their net
book value to the estimated undiscounted future cash flows generated by their
use.  Impaired assets are recorded at estimated fair value, determined
principally using discounted cash flows.
 
 Allowance for
doubtful accounts—The Company maintains an allowance for doubtful
accounts for estimated losses resulting from the inability of customers to make
required payments.  The Company manages credit risk related to its
trade accounts receivable by continually monitoring the creditworthiness of its
customers to whom credit is granted in the normal course of
business.  Trade accounts receivable balances for sales to
unaffiliated customers were approximately $64.4 million at December 31, 2008,
compared to $104.6 million at December 31, 2007.
 
 The
Company establishes its allowance for doubtful accounts based upon factors
surrounding the credit risks of specific customers, historical trends, and other
information.  Based on this assessment, an allowance is maintained
that represents what is believed to be ultimately uncollectible from such
customers.  The allowance for doubtful accounts was approximately $1.9
million at December 31, 2008, compared to $1.7 million at December 31,
2007.  Bad debt expense was $1.0 million for the year ended December
31, 2008, and was negligible for the year ended December 31, 2007, and the
five-month period ended December 31, 2006.
 
 48
 
 Deferred
Financing Costs—The Company capitalizes costs incurred in connection with
borrowings or establishment of credit facilities.  These costs are
amortized as an adjustment to interest expense over the life of the borrowing or
life of the credit facility using the effective interest method.  In
the case of early debt principal repayments, the Company adjusts the value of
the corresponding deferred financing costs with a charge to interest expense,
and similarly adjusts the future amortization expense.
  Asset Retirement
Obligations—In accordance with the provisions of SFAS No. 143, Accounting for Asset Retirement
Obligations, a liability and an asset are recorded equal to the present
value of the estimated costs associated with the retirement of long-lived assets
where a legal or contractual obligation exists.  The liability is
accreted over time, and the asset is depreciated over its useful
life.  The Company’s asset retirement obligations under this standard
relate to closure and post-closure costs for landfills.  Revisions to
the liability could occur due to changes in the estimated costs or timing of
closure, or possible new federal or state regulations affecting the
closure.
 
 On
December 31, 2008, the Company had approximately $0.8 million of restricted cash
related to an asset retirement obligation in the state of Michigan, which is
reflected in other assets on the consolidated balance sheet.  This
cash deposit is required by the state and may only be used for the future
closure of a landfill.  The following table presents an analysis
related to the company’s assets retirement obligations included in Other
liabilities on the accompanying consolidated balance sheet:
  Year
      Ended
                            
                            
                            Year
      EndedDecember
      31,
                            
                            
                            December
      31,(In
      thousands of U.S. dollars)
                            
                            2008
                            
                            
                            2007Asset
      retirement obligations, January 1
                            
                            $
                            11,614
                            
                            
                            $
                            11,855New
      liabilities
                            
                            
                            1,091
                            
                            
                            
                            310Accretion
      expense
                            
                            
                            599
                            
                            
                            
                            583Settlement
      of existing liabilities
                            
                            
                            (1,306
                            )
                            
                            
                            (1,063
                            )Adjustment
      to existing liabilities
                            
                            
                            2,030
                            
                            
                            
                            (71
                            )Asset
      retirement obligations, December 31
                            
                            $
                            14,028
                            
                            
                            $
                            11,614
 Derivative
Financial Instruments—Derivative financial instruments are recognized as
assets or liabilities in the financial statements and measured at fair
value.  The effective portion of the changes in the fair value of
derivative financial instruments that qualify and are designated as cash flow
hedges are recorded in other comprehensive income.  Changes in the
fair value of derivative financial instruments that are entered into as economic
hedges are recognized in current earnings.  The Company uses
derivative financial instruments to manage its exposure to energy prices and
interest rate risk.
  Postretirement
Benefits—Pension plans cover substantially all of the Company’s
employees.  The defined benefit plan is funded in conformity with the
funding requirements of applicable government regulations.  Prior
service costs are amortized on a straight-line basis over the estimated
remaining service periods of employees.  Certain employees are covered
by defined contribution plans.  The Company’s contributions to these
plans are based on a percentage of employees’ compensation or employees’
contributions.  These plans are funded on a current
basis.
  The
Company adopted the provisions of SFAS No. 158, Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements
No. 87, 88, 106, and 132(R), as of December 31, 2006.  The
measurement date is December 31.
  49
  2.      RECENT
ACCOUNTING DEVELOPMENTS
 
 Postretirement
Benefit Plan Assets—In December 2008, the Financial Accounting Standards
Board, or “FASB,” issued FASB Staff Position on Statement 132(R)-1, or FSP FAS
132(R)-1, Employers’
Disclosure about Postretirement Benefit Plan Assets, which amends SFAS
No. 132(R) to require more detailed disclosures about employers’ pension plan
assets.  New disclosures will include more information on investment
strategies, major categories of plan assets, concentrations of risk within plan
assets and valuation techniques used to measure the fair value of plan
assets.  FSP FAS 132(R)-1 is effective for fiscal years ending after
December 15, 2009.  Since FSP FAS 132(R)-1 only addresses new
disclosure requirements, the adoption of FSP FAS 132(R)-1 will have no impact on
our financial condition or results of operations.
 
 Intangible
Assets—In April
2008, the FASB issued FSP FAS 142-3, Determination of the Useful Life of
Intangible Assets, which provides guidance on the renewal or extension
assumptions used in the determination of the useful life of a recognized
intangible asset.  The intent of FSP FAS 142-3 is to better match the
useful life of the recognized intangible asset to the period of the expected
cash flows used to measure its fair value.  FSP FAS 142-3 is effective
for fiscal years and interim periods beginning after December 15,
2008.  The adoption of FSP FAS 142-3 is not expected to have a
material impact on our financial condition or results of
operations.
 
 Derivatives and
Hedging Activities—In March 2008, the FASB, issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities.  SFAS No. 161 changes the
disclosure requirements for derivative instruments and hedging
activities.  Entities are required to provide enhanced disclosures
about (a) how and why an entity uses derivative instruments, (b) how derivative
instruments and related hedged items are accounted for under SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, and its related interpretations, and
(c) how derivative instruments and related hedged items affect an entity’s
financial position, financial performance, and cash flows. SFAS No. 161 is
effective for fiscal years and interim periods beginning after November 15,
2008.  Since SFAS No. 161 only addresses disclosure requirements, the
adoption of SFAS No. 161 will have no impact on our financial condition or
results of operations.
 
 Business
Combinations—In December 2007, the FASB issued SFAS No. 141 (revised
2007), Business
Combinations.  SFAS No. 141-R establishes principles and
requirements for how an acquirer recognizes and measures identifiable assets
acquired, liabilities assumed and noncontrolling interests; recognizes and
measures goodwill acquired in a business combination or gain from a bargain
purchase; and establishes disclosure requirements.  SFAS No. 141-R is
effective for business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008.  Early adoption is prohibited.  The
Company will apply the provisions of SFAS No. 141-R to any future
acquisitions.
 
 In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements – an amendment of ARB No.
51.  SFAS No. 160 establishes accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary.  This standard is effective, on a
prospective basis, for fiscal years and interim periods beginning on or after
December 15, 2008.  The presentation and disclosure requirements for
existing minority interests should be applied retrospectively for all periods
presented.  Early adoption is prohibited.  The adoption of
SFAS No. 160 is not expected to have a material impact on our financial
condition or results of operations.
 
 Fair Value Option
for Financial Assets and Financial Liabilities—In February 2007, the FASB
issued SFAS No. 159, Fair
Value Option for Financial Assets and Financial Liabilities-including an
amendment of FASB Statement No. 115, which permits an entity to measure
certain financial assets and financial liabilities at fair value.  The
Statement’s objective is to improve financial reporting by allowing entities to
mitigate volatility in reported earnings caused by the measurement of related
assets and liabilities using different attributes, without having to apply
complex hedge accounting provisions.  The Statement was effective as
of the beginning of an entity’s fiscal year beginning after November 15,
2007.  The adoption of SFAS No. 159 did not have a material impact on
our financial condition or results of operations.
  50
  Fair Value
Measurements—In September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements.  SFAS No. 157 addresses how to measure fair
value (not what to measure at fair value) and, applies, with limited exceptions,
to existing standards that require assets and liabilities to be measured at fair
value.  SFAS No. 157 establishes a fair value hierarchy, giving
the highest priority to quoted prices in active markets and the lowest priority
to unobservable data and requires new disclosures for assets and liabilities
measured at fair value based on their level in the hierarchy.  SFAS
No. 157 was effective for financial statements issued for fiscal years
beginning after November 15, 2007.  However, FSP 157-2, Effective Date of FASB Statement No.
157, delayed the implementation of SFAS No. 157 for nonfinancial assets
and nonfinancial liabilities, except for items that are recognized or disclosed
at fair value in the financial statements on a recurring basis, to fiscal years
beginning after November 15, 2008.  The adoption of the initial
provisions of SFAS No. 157 did not have, and the adoption of the remaining
provisions of SFAS No. 157 is not expected to have, a material impact on our
financial condition or results of operations.
  Defined Benefit
Pension and Other Postretirement Plans—In September 2006, the FASB issued
SFAS No. 158, Employers’
Accounting for Defined Benefit Pension and Other Postretirement Plans-an
amendment of FASB Statements No. 87, 88, 106, and 132(R), which requires
the recognition of the overfunded or underfunded status of a defined benefit
postretirement plan as an asset or liability in the balance sheet. SFAS No. 158
does not change measurement or recognition requirements for periodic pension and
postretirement costs. SFAS No. 158 also provides that changes in the funded
status of a defined benefit postretirement plan should be recognized in the year
such changes occur through comprehensive income.  As a result of
adopting SFAS No. 158 as of December 31, 2006, unrecognized prior service costs
were recognized as a component of accumulated other comprehensive income
resulting in a reduction in equity of $7.7 million.
  Accounting for
Planned Major Maintenance Activities—In September 2006, the FASB issued
FSP AUG AIR-1, Accounting for
Planned Major Maintenance Activities. This FSP eliminates the
accrue-in-advance method of accounting for planned major maintenance activities
from the American Institute of Certified Public Accountants’ Audit and
Accounting Guide, Audits of
Airlines, orthe “Airline
Guide.”  This method of accounting for planned major maintenance
activities was eliminated due to the FASB's belief that the resultant liability
does not meet the definition of a liability in FASB Concepts Statement No. 6,
Elements of Financial
Statements.  As a result of the elimination of the
accrue-in-advance method, the Airline Guide, which provides guidance for all
industries that conduct planned major maintenance activities, permits the use of
one of the following three remaining methods: (1) direct expensing, (2) built-in
overhaul, and (3) deferral.  This FSP was effective for fiscal years
beginning after December 15, 2006, with early adoption permitted as long as it
was as of the beginning of the entity's fiscal year.  The Company
adopted the FSP at its inception by electing the deferral method.
 
 Sales, Use and
Excise Taxes—In June 2006, the FASB ratified the consensuses reached by
the Emerging Issues Task Force in Issue No. 06-3, How Taxes Collected from Customers
and Remitted to Governmental Authorities Should be Presented in the Income
Statement (That is, Gross Versus Net Presentation).  Issue
No. 06-3 requires disclosure of an entity’s accounting policy regarding the
presentation of taxes assessed by a governmental authority that are directly
imposed on a revenue-producing transaction between a seller and a customer,
including sales, use, value added and some excise taxes.  We present
such taxes on a net basis (excluded from revenues and costs).  The
adoption of Issue No. 06-3 in 2007 had no impact on our financial condition
or results of operations.
  51
 
 Accounting for
Uncertainty in Income Taxes—In June 2006, the FASB issued Interpretation
No. 48 (FIN48), Accounting for Uncertainty in Income
Taxes-an interpretation of FASB Statement
No. 109.  FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in a company’s financial statements and
prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be
taken in a tax return.  FIN 48 also provides guidance on
description, classification, interest and penalties, accounting in interim
periods, disclosure, and transition.  FIN 48 was effective for
fiscal years beginning after December 15, 2006.  The Company
applied the provisions of this interpretation beginning January 1,
2007.  The adoption of FIN 48 did not have a material impact on our
financial condition or results of operations.
 
 Other new
accounting pronouncements issued but not effective until after December 31,
2008, are not expected to have a significant effect on our financial condition
or results of operations.
  3.      INVENTORIES
  Inventories
by major category as of December 31, 2008 and 2007, included the
following:
  December
      31,
                      
                      
                      December
      31,(In
      thousands of U.S. dollars)
                      
                      2008
                      
                      
                      2007Raw
      materials
                      
                      $
                      29,858
                      
                      
                      $
                      19,918Woodyard
      logs
                      
                      
                      7,970
                      
                      
                      
                      3,209Work-in-process
                      
                      
                      19,001
                      
                      
                      
                      19,565Finished
      goods
                      
                      
                      113,050
                      
                      
                      
                      48,167Replacement
      parts and other supplies
                      
                      
                      26,055
                      
                      
                      
                      28,761Inventories
                      
                      $
                      195,934
                      
                      
                      $
                      119,620
  4.      PROPERTY,
PLANT, AND EQUIPMENT
 
 Property,
plant, and equipment as of December 31, 2008 and 2007, were as
follows:
  December
      31,
                          
                          
                          December
      31,(In
      thousands of U.S. dollars)
                          
                          2008
                          
                          
                          2007Land
      and land improvements
                          
                          $
                          29,980
                          
                          
                          $
                          27,899Building
      and leasehold improvements
                          
                          
                          174,869
                          
                          
                          
                          172,099Machinery
      and equipment
                          
                          
                          1,172,178
                          
                          
                          
                          1,096,273Construction-in-progress
                          
                          
                          24,188
                          
                          
                          
                          29,4061,401,215
                          
                          
                          
                          1,325,677Less:
      accumulated depreciation
                          
                          
                          (285,558
                          )
                          
                          
                          (165,759
                          )Property,
      plant, and equipment
                          
                          $
                          1,115,657
                          
                          
                          $
                          1,159,918
  Depreciation
expense was $126.4 million and $119.4 million for the years ended December 31,
2008 and 2007, respectively, and was $48.0 million for the five months ended
December 31, 2006.
  52
  5.      INTANGIBLES
AND OTHER ASSETS
 
 Intangibles
and other assets as of December 31, 2008 and 2007, consisted of the
following:
  December
      31,
                                  
                                  
                                  December
      31,(In
      thousands of U.S. dollars)
                                  
                                  2008
                                  
                                  
                                  2007Amortizable
      intangible assets:Customer
      relationships - net of accumulated amortization of $3.3 million
      and$1.8
      million, respectively
                                  
                                  $
                                  10,020
                                  
                                  
                                  $
                                  11,470Patents
      - net of accumulated amortization of $0.28 million and $0.16
      million,respectively
                                  
                                  
                                  870
                                  
                                  
                                  
                                  985Total
      amortizable intangible assets
                                  
                                  
                                  10,890
                                  
                                  
                                  
                                  12,455Unamortizable
      intangible assets:Trademarks
                                  
                                  
                                  21,473
                                  
                                  
                                  
                                  21,473Other
      assets:Financing
      costs-net of accumulated amortization of $13.1 million and$7.7
      million, respectively
                                  
                                  
                                  31,040
                                  
                                  
                                  
                                  36,468Deferred
      major repair
                                  
                                  
                                  9,543
                                  
                                  
                                  
                                  5,328Deferred
      software cost-net of accumulated amortization of $3.0millionand
      $1.3 million, respectively
                                  
                                  
                                  2,746
                                  
                                  
                                  
                                  3,765Replacement
      parts-net
                                  
                                  
                                  5,625
                                  
                                  
                                  
                                  4,932Other
                                  
                                  
                                  5,536
                                  
                                  
                                  
                                  6,422Total
      other assets
                                  
                                  
                                  54,490
                                  
                                  
                                  
                                  56,915Intangibles
      and other assets
                                  
                                  $
                                  86,853
                                  
                                  
                                  $
                                  90,843
  Approximately
$1.6 million, $1.7 million, and $0.3 million of intangible amortization are
reflected in depreciation and amortization expense for the years ended December
31, 2008 and 2007 and for the five months ended December 31, 2006,
respectively.
 
 Estimated
amortization expense of intangibles is expected to be $1.4 million, $1.3
million, $1.1 million,  $0.9 million, and $0.8 million in 2009, 2010,
2011, 2012, and 2013 respectively.
 
 Software
cost incurred as part of a major systems project was capitalized in 2007 and is
being amortized over its anticipated useful life of approximately three
years.  Approximately $1.7 million and $1.3 million of software
amortization are reflected in depreciation and amortization expense for the
years ended December 31, 2008 and 2007, respectively.
  53
 
 6.      ACCRUED
LIABILITIES
 
 A summary
of accrued liabilities as of December 31, 2008 and 2007, is as
follows:
  December
      31,
                            
                            
                            December
      31,(In
      thousands of U.S. dollars)
                            
                            2008
                            
                            
                            2007Payroll
      and employee benefit costs
                            
                            $
                            48,005
                            
                            
                            $
                            35,780Accrued
      interest
                            
                            
                            30,805
                            
                            
                            
                            31,861Accrued
      sales rebates
                            
                            
                            10,966
                            
                            
                            
                            10,900Accrued
      taxes - other than income
                            
                            
                            1,777
                            
                            
                            
                            2,573Derivatives
                            
                            
                            26,878
                            
                            
                            
                            1,428Freight
      and other
                            
                            
                            4,218
                            
                            
                            
                            5,585Accrued
      liabilities
                            
                            $
                            122,649
                            
                            
                            $
                            88,127
 In 2008, a
separate category representing the fair value of short-term derivative
liabilities has been established and the accrued liability for workers’
compensation has been included in payroll and employee benefit
costs.  As a result, payroll and employee benefit cost at December 31,
2007, increased by $2.3 million and a derivative liability of $1.4 million was
reclassified, resulting in a decrease of $3.7 million in freight and other
accrued liabilities from amounts previously reported.
 
 7.      LONG-TERM
DEBT
 
 A summary
of long-term debt as of December 31, 2008 and 2007, is as follows:
  December
      31,
                                                          
                                                          
                                                          December
      31,(In
      thousands of U.S. dollars)
                                                          Maturity
                                                          
                                                          Rate
                                                          
                                                          
                                                          2008
                                                          
                                                          
                                                          2007First
      Priority Revolving Credit Facility
                                                          8/1/2012
                                                          
                                                          LIBOR
      + 2.00
                                                          %
                                                          
                                                          $
                                                          92,083
                                                          
                                                          
                                                          $
                                                          -First
      Priority Term Loan B
                                                          8/1/2013
                                                          
                                                          LIBOR
      + 1.75
                                                          %
                                                          
                                                          
                                                          253,588
                                                          
                                                          
                                                          
                                                          256,438Second
      Priority Senior Secured Notes - Fixed
                                                          8/1/2014
                                                          
                                                          
                                                          9.13
                                                          %
                                                          
                                                          
                                                          350,000
                                                          
                                                          
                                                          
                                                          350,000Second
      Priority Senior Secured Notes - Floating
                                                          8/1/2014
                                                          
                                                          LIBOR
      + 3.75
                                                          %
                                                          
                                                          
                                                          250,000
                                                          
                                                          
                                                          
                                                          250,000Senior
      Subordinated Notes
                                                          8/1/2016
                                                          
                                                          
                                                          11.38
                                                          %
                                                          
                                                          
                                                          300,000
                                                          
                                                          
                                                          
                                                          300,0001,245,671
                                                          
                                                          
                                                          
                                                          1,156,438Less
      current maturities
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          (2,850
                                                          )
                                                          
                                                          
                                                          (2,850
                                                          )Long-term
      debt
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
                                                          $
                                                          1,242,821
                                                          
                                                          
                                                          $
                                                          1,153,588
  The
Company entered into senior secured credit facilities on August 1, 2006,
consisting of:
  ·
              a
      $285 million term loan with a maturity of seven years, of which $253.6
      million was outstanding as of December 31, 2008;
  and
  ·
              a
      $200 million revolving credit facility with a maturity of six years, of
      which $92.1 million was outstanding, $33.1 million in letters of
      credit were issued, and $59.0 million was available for future borrowing
      as of December 31, 2008.
  54
  The term
loan bears interest at a rate equal to LIBOR plus 1.75%, with the interest rate
being 3.3% at December 31, 2008 and 6.6% at December 31, 2007.  The
revolving credit facility bears interest at a rate equal to LIBOR plus 2.00%,
with the weighted average interest rate being 3.35% at December 31,
2008.  The Company is required to pay a commitment fee to the lenders
under the revolving credit facility in respect of unutilized commitments at a
rate equal to 0.375% per annum (subject to reduction in certain circumstances)
and customary letter of credit and agency fees.  The senior secured
credit facilities are secured by first priority security interests in, and
mortgages on, substantially all of the Company’s tangible and intangible assets
and those of each of its direct and indirect subsidiaries.  The
senior secured credit facilities also are secured by first priority pledges of
all the equity interests owned by the Company in its
subsidiaries.  The obligations under the senior secured credit
facilities are unconditionally guaranteed by Verso Paper Finance Holdings LLC,
or “Verso Finance,” the Company's indirect parent company, and subject to
certain exceptions, each of its direct and indirect subsidiaries.  The
credit agreement for the senior secured credit facilities contains various
covenants which, among other things, prohibit the Company’s subsidiaries from
prepaying other indebtedness, require the Company to maintain a maximum
consolidated first lien leverage ratio, and restrict its ability to incur
indebtedness or liens, make investments or declare or pay any
dividends.  As of December 31, 2008, the Company was in compliance
with all such covenants.
 
 The
Company also issued debt securities on August 1, 2006, consisting
of:
 
 ·
              $350
      million aggregate principal amount of 91⁄8% second priority senior secured
      fixed rate notes due 2014;
  ·
              $250
      million aggregate principal amount of second priority senior secured
      floating rate notes due 2014; and
  ·
              $300
      million aggregate principal amount of 113⁄8% senior subordinated notes due
      2016.
  The
original principal amount of each issue of debt securities was outstanding at
December 31, 2008.   The fixed rate notes and subordinated notes
pay interest semi-annually, and the floating rate notes pay interest
quarterly.  The floating rate notes bear interest at a rate equal to
LIBOR plus 3.75%, with the interest rate being 6.9% at December 31, 2008,
and 8.7% at December 31, 2007.  The fixed rate and floating rate notes
have the benefit of a second priority security interest in the collateral
securing the Company’s senior secured credit facilities, while the subordinated
notes are unsecured.  The indentures governing the notes contain
various covenants which limit the Company’s ability to, among other things,
incur additional indebtedness, pay dividends or make other distributions or
repurchase or redeem its stock, make investments, sell assets (including capital
stock of restricted subsidiaries), enter into agreements restricting the
Company’s subsidiaries’ ability to pay dividends, consolidate, merge, sell or
otherwise dispose of all or substantially all of its assets, enter into
transactions with its affiliates, and incur liens.  At December 31,
2008, the Company was in compliance with all such covenants.
  55
 
 The
payments required under the long-term debt listed above during the years
following December 31, 2008, are set forth below:
  2009
                                              
                                              $
                                              2,8502010
                                              
                                              
                                              2,8502011
                                              
                                              
                                              2,8502012
                                              
                                              
                                              94,9332013
                                              
                                              
                                              242,188Thereafter
                                              
                                              
                                              900,000Total
      long-term debt
                                              
                                              $
                                              1,245,671
 Interest
expense was $99.2 million and $100.8 million of interest was paid during the
year ended December 31, 2008.  Interest expense was $109.2 million and
$109.1 million of interest was paid during the year ended December 31,
2007.  Interest expense was $46.7 million and $14.8 million of
interest was paid during the five-month period ended December 31,
2006.  In conjunction with the Acquisition, we assumed none of the
historical debt of the Predecessor.
 
 Amortization
of debt issuance costs was $5.4 million in each of the years ended December 31,
2008 and 2007, and is included in interest expense in the consolidated
statements of operations.  Amortization of debt issuance costs was
$2.3 million for the five-month period ended December 31, 2006.
 
 The fair
value of long-term debt was approximately $562 million at December 31, 2008,
compared to approximately $1.2 billion at December 31, 2007.  The
Company determines the fair value of its long-term debt based on market
information and a review of prices and terms available for similar
obligations.  The fair value at December 31, 2008, of the $250 million
notional value interest rate swap hedging the cash flow exposure of quarterly
variable-rate interest payments on the Company’s outstanding floating rate notes
that mature in 2014 was an unrealized loss of $3.7 million.
 
 8.      OTHER
LIABILITIES
 
 Other
liabilities as of December 31, 2008 and 2007, consisted of the
following:
  December
      31,
                            
                            
                            December
      31,(In
      thousands of U.S. dollars)
                            
                            2008
                            
                            
                            2007Asset
      retirement obligations
                            
                            $
                            14,028
                            
                            
                            $
                            11,614Pension
      benefit obligation
                            
                            
                            12,497
                            
                            
                            
                            9,980Derivatives
                            
                            
                            3,677
                            
                            
                            
                            -Other,
      primarily environmental obligations
                            
                            
                            1,805
                            
                            
                            
                            4,002Other
      liabilities
                            
                            $
                            32,007
                            
                            
                            $
                            25,596
  56
 
 9.      RETIREMENT
PLANS
 
 Defined
Benefit Plan
  The
Company maintains a defined benefit pension plan that provides retirement
benefits to hourly employees in Jay, Bucksport and Sartell hired prior to July
1, 2004.  These employees generally are eligible to participate in the
plan upon completion of one year of service and attainment of age
21.  Employees hired after June 30, 2004, who are not eligible for
this pension plan receive an additional company contribution to their savings
plan (see “Other Plan”).  The plan provides defined benefits based on
years of credited service times a specified flat dollar benefit
rate.
  The
following table summarizes net periodic benefit cost for the years ended
December 31, 2008 and 2007:
  Year
      Ended
                          
                          
                          Year
      EndedDecember
      31,
                          
                          
                          December
      31,(In
      thousands of U.S. dollars)
                          
                          2008
                          
                          
                          2007Components
      of net periodic benefit cost:Service
      cost
                          
                          $
                          5,976
                          
                          
                          $
                          5,278Interest
      cost
                          
                          
                          998
                          
                          
                          
                          611Expected
      return on plan assets
                          
                          
                          (762
                          )
                          
                          
                          (229
                          )Amortization
      of prior service cost
                          
                          
                          871
                          
                          
                          
                          785Net
      periodic benefit cost
                          
                          $
                          7,083
                          
                          
                          $
                          6,445
  The
following table provides detail on prior service cost and net actuarial gain
(loss) recognized in accumulated other comprehensive income at December 31, 2008
and 2007.
  (In
      thousands of U.S. dollars)
                        
                        2008
                        
                        
                        2007Amounts
      recognized in accumulated other comprehensive income:Prior
      service cost
                        
                        $
                        6,931
                        
                        
                        $
                        7,803Net
      actuarial (gain) loss
                        
                        
                        5,674
                        
                        
                        
                        (27
                        )
  The
estimated net loss and prior service cost that will be amortized from
accumulated other comprehensive income into net periodic actuarial pension cost
during 2009 is $0.3 million and $0.9 million, respectively.  We expect
no plan assets to be returned to the company in 2009.
  The
Company makes contributions that are sufficient to fully fund its actuarially
determined costs, generally equal to the minimum amounts required by the
Employee Retirement Income Security Act (ERISA).  The Company made
contributions of $6.9 million in 2007, with $4.7 million attributable to the
2007 plan year and $2.2 attributable to the 2006 plan year.  The
Company made contributions of $9.4 million in 2008, with $6.4 million
attributable to the 2008 plan year and $3.0 million attributable to the 2007
plan year.  The Company made a contribution of $0.2 million in January
2009 attributable to the 2008 plan year.  In 2009, the Company expects
to make an additional contribution of $1.0 million related to the 2008 plan year
and contributions of $5.8 million related to the 2009 plan year.
  57
  The
following table sets forth a reconciliation of the plan’s benefit obligation,
plan assets and funded status at December 31, 2008 and 2007:
  Year
      Ended
                          
                          
                          Year
      EndedDecember
      31,
                          
                          
                          December
      31,(In
      thousands of U.S. dollars)
                          
                          2008
                          
                          
                          2007Change
      in Projected Benefit Obligation:Benefit
      obligation at beginning of period
                          
                          $
                          16,708
                          
                          
                          $
                          10,351Service
      cost
                          
                          
                          5,976
                          
                          
                          
                          5,278Interest
      cost
                          
                          
                          998
                          
                          
                          
                          611Plan
      amendments
                          
                          
                          -
                          
                          
                          
                          846Actuarial
      (gain) loss
                          
                          
                          1,872
                          
                          
                          
                          (341
                          )Benefits
      paid
                          
                          
                          (101
                          )
                          
                          
                          (37
                          )Benefit
      obligation on December 31
                          
                          $
                          25,453
                          
                          
                          $
                          16,708Change
      in Plan Assets:Plan
      assets at fair value, beginning of fiscal year
                          
                          $
                          6,728
                          
                          
                          $
                          -Actual
      net return on plan assets
                          
                          
                          (3,068
                          )
                          
                          
                          (85
                          )Employer
      contributions
                          
                          
                          9,397
                          
                          
                          
                          6,850Benefits
      paid
                          
                          
                          (101
                          )
                          
                          
                          (37
                          )Plan
      assets at fair value, end of fiscal year
                          
                          
                          12,956
                          
                          
                          
                          6,728Unfunded
      projected benefit obligation recognized on theConsolidated
      Balance Sheets as a long-term liability
                          
                          $
                          (12,497
                          )
                          
                          $
                          (9,980
                          )
  The
accumulated benefit obligation at December 31, 2008 and 2007, is $25.5 million
and $16.7 million, respectively.
  The
following table summarizes expected future pension benefit
payments:
  (In
      thousands of U.S. dollars)2009
                                        
                                        $
                                        1412010
                                        
                                        
                                        2872011
                                        
                                        
                                        4812012
                                        
                                        
                                        7132013
                                        
                                        
                                        1,0322014-2018
                                        
                                        
                                        10,489
  The
Company evaluates its actuarial assumptions annually as of December 31 (the
measurement date) and considers changes in these long-term factors based upon
market conditions and the requirements of SFAS No. 87, Employers’ Accounting for
Pensions.  These assumptions are used to calculate benefit
obligations as of December 31 of the current year, and pension expense to be
recorded for the following year.  The discount rate assumption
reflects the yield on a portfolio of high quality fixed-income instruments that
have a similar duration to the plan’s liabilities.  The expected
long-term rate of return assumption reflects the average return expected on the
assets invested to provide for the plan’s liabilities.
  58
  The
actuarial assumptions used in the defined benefit pension plan were as
follows:
  2008
                          
                          
                          2007Weighted
      average assumptions used to determinebenefit
      obligations as of December 31 measurement date:Discount
      rate
                          
                          
                          6.00
                          %
                          
                          
                          6.00
                          %Rate
      of compensation increase
                          
                          
                          N/A
                          
                          
                          
                          N/AWeighted
      average assumptions used to determine netperiodic
      benefit cost for the fiscal year:Discount
      rate
                          
                          
                          6.00
                          %
                          
                          
                          5.75
                          %Rate
      of compensation increase
                          
                          
                          N/A
                          
                          
                          
                          N/AExpected
      long-term return on plan assets
                          
                          
                          7.50
                          
                          
                          
                          8.00
  The
Company’s primary investment objective is to ensure, over the long-term life of
the pension plan, an adequate pool of sufficiently liquid assets to support the
benefit obligations.  In meeting this objective, the pension plan
seeks to achieve a high level of investment return through long-term stock and
bond investment strategies, consistent with a prudent level of portfolio
risk.  Any volatility in investment performance compared to investment
objectives should be explainable in terms of general economic and market
conditions.  It is not contemplated at this time that any derivative
instruments will be used to achieve investment objectives.  The
expected return on plan assets assumption for 2009 will be 7.50
percent.  The expected long-term rate of return on plan assets
reflects the weighted-average expected long-term rates of return for the broad
categories of investments currently held in the plans (adjusted for expected
changes), based on historical rates of return for each broad category, as well
as factors that may constrain or enhance returns in the broad categories in the
future.  The expected long-term rate of return on plan assets is
adjusted when there are fundamental changes in expected returns in one or more
broad asset categories and when the weighted-average mix of assets in the plans
changes significantly.
  The
following table provides the pension plan’s asset allocation on December 31,
2008:
  Targeted
                      
                      
                      %
      of Plan Assets on December 31Allocation
                      
                      
                      2008
                      
                      
                      2007Equity
      Securities:Large
      capital equity
                      
                      
                      26.4
                      %
                      
                      
                      23.8
                      %
                      
                      
                      25.5
                      %Small
      capital equity
                      
                      
                      4.6
                      
                      
                      
                      4.0
                      
                      
                      
                      4.4International
      equity
                      
                      
                      17.0
                      
                      
                      
                      15.1
                      
                      
                      
                      17.0Other
      securities:Bond
      fund
                      
                      
                      47.0
                      
                      
                      
                      51.4
                      
                      
                      
                      48.2Fixed
      income fund
                      
                      
                      5.0
                      
                      
                      
                      5.6
                      
                      
                      
                      4.9
  Defined
Contribution Plan
  The
Company sponsors a defined contribution plan to provide salaried and Quinnesec
hourly employees an opportunity to accumulate personal funds and to provide
additional benefits for retirement.
  As
determined by the provisions of the plan, the Company contributes annually a
percentage of earnings.  The percentage is based on age and years of
credited service for employees hired prior to July 1, 2004 and a fixed
percentage of earnings to employees hired after June 30,
2004.  Expense under this plan was $6.9 million and $6.7 million for
the years ended December 31, 2008 and 2007, respectively, and was $2.3 million
for the five-month period ended December 31, 2006.
  59
  Other
Plan
  The
Company sponsors a 401K plan to provide salaried and hourly employees an
opportunity to accumulate personal funds and to provide additional benefits for
retirement.  Contributions may be made on a before-tax basis to the
plan.  As determined by the provisions of the plan, the Company
matches the employees’ basic voluntary contributions.  Such
contributions to the plans totaled approximately $8.4 million and $8.1 million
for the years ended December 31, 2008 and 2007, respectively, and $2.3 million
for the five months ended December 31, 2006.
  10.  EQUITY
AWARDS
  Simultaneously
with the consummation of the IPO, the limited partnership agreement of Verso
Paper Corp.’s parent, Verso Paper Management LP, or the “Partnership,” was
amended to, among other things, change its equity structure from multiple
classes of units representing limited partner interests in the Partnership to a
single class of units representing such interests.  The conversion
from the prior multiple-class unit structure, or  the “Legacy Units,”
to a new single class of units in the Partnership was designed to correlate the
equity structure of the Partnership with the post-IPO equity structure of Verso
Paper Corp.
 
 As part of
the amendment of the limited partnership agreement of the Partnership, the
Legacy Class C Units of the Partnership previously granted to certain members of
our management became vested immediately.  Prior to the amendment, the
Legacy Class C Units were to vest only if certain performance targets were
met.  As a result of the accelerated vesting of the Legacy Class C
Units, the Company recognized $10.8 million of additional equity compensation
expense.
 
 Certain
members of the Company’s management have been granted Legacy Class B Units,
which vest over a five-year period at the rate of 20% per year on each
anniversary of the grant date.  The Company’s directors have been
granted Legacy Class D Units, which were vested upon grant.
 
 The fair
value of the restricted Legacy Class B Units granted to management and the
Legacy Class D Units granted to directors for the years ended December 31, 2008
and 2007, and for the five months ended December 31, 2006, was approximately
$0.1 million, $0.6 million, and $1.4 million, respectively.  A summary
of Legacy Class B Units activity for the year ended December 31, 2008, is
presented below:
  Units
                            
                            
                            Weighted-Average
      Grant-Date
                              Fair
      ValueNonvested
      at December 21, 2007
                            
                            
                            339,955
                            
                            
                            $
                            3.40Vested
                            
                            
                            (84,343
                            )
                            
                            
                            3.40Nonvested
      at December 21, 2008
                            
                            
                            255,612
                            
                            
                            $
                            3.40
  60
  Equity
award expense for the year ended December 31, 2008, was $11.2 million, which
includes the $10.8 million related to the vesting of the Legacy Class C
Units.  Equity award expense was $0.6 million for the year ended
December 31, 2007, and was $0.4 million for the five months ended December 31,
2006.  As of December 31, 2008, there was approximately $0.7 million
of unrecognized compensation cost related to unvested Legacy Class B Units. This
cost is expected to be recognized over a weighted-average period of
approximately 2.6 years.
  The
Company estimates the fair value of management equity awards using the
Black-Scholes valuation model.  Key input assumptions applied under
the Black-Scholes option pricing model for the Legacy Class B Units and the
Legacy Class D Units were as follows:  expected term of five years
based on the vesting period, volatility rate of 36.65% based on industry
historical volatility rate, no expected dividends, and average risk free rates
of 3.0% in 2008 and 4.2% to 4.7% in 2007.
  Assumptions
applied under the Black-Scholes option pricing model for the Legacy Class C
Units were as follows:  expected term of one year based on the lock-up
period following the IPO, volatility rate of 36.65% based on industry historical
volatility rate, expected dividend rate of 1%, and average risk free rate of
2.0%.
  Additionally,
the 2008 Stock Incentive Award Plan, which authorized the issuance of up to
4,250,000 shares of common stock of Verso Paper Corp, allows stock awards to be
granted to non-employee directors upon approval by the board of
directors.  During November 2008, the Company granted a director, upon
his election to the board, 15,200 options which were immediately vested with a
contractual life of 10 years and an exercise price of $1.43.  The
Company used the Black-Scholes valuation model to estimate a grant date fair
value per option of $0.47 for this stock option award.  Key input
assumptions applied under the Black-Scholes option pricing model were as
follows:  expected term of five years, volatility rate of 31.82% based
on industry historical volatility rate, no expected dividends, and an average
risk free rate of 2.58%.
  11.  BUCKSPORT
ENERGY ASSET INVESTMENT
 
 The
Company, through its Verso Bucksport LLC subsidiary, has a joint ownership
interest with Bucksport Energy LLC, an unrelated third party, in a cogeneration
power plant producing steam and electricity.  The plant was built in
2000 by the two parties and is located in Bucksport, Maine.  Each
owner, Verso Bucksport LLC and Bucksport Energy LLC, owns its proportional
share of the assets.  The Company accounts for this investment under
the proportional consolidation method.  The plant supports the
Bucksport mill.  The mill owns 28% of the steam and electricity
produced by the plant. The mill may purchase its remaining electrical needs from
the plant at market rates.  The mill is obligated to purchase the
remaining 72% of the steam output at fuel cost plus a contractually fixed fee
per unit of steam.  Power generation and operating expenses are
divided on the same basis as ownership.  The Bucksport mill has cash
which is restricted in its use and may be used only to fund the ongoing energy
operations of this investment.  Approximately $0.2 million of
restricted cash is included in other assets in the balance sheet at December 31,
2008 and 2007.  Balances included in the balance sheet at December 31,
2008 and 2007, related to this investment are as follows:
  61
  December
      31,
                                          
                                          
                                          December
      31,(In
      thousands of U.S. dollars)
                                          
                                          2008
                                          
                                          
                                          2007Other
      receivables
                                          
                                          $
                                          99
                                          
                                          
                                          $
                                          61Other
      current assets
                                          
                                          
                                          158
                                          
                                          
                                          
                                          256Total
      current assets
                                          
                                          $
                                          257
                                          
                                          
                                          $
                                          317Property,
      plant and equipment
                                          
                                          $
                                          10,699
                                          
                                          
                                          $
                                          10,301Accumulated
      depreciation
                                          
                                          
                                          (1,385
                                          )
                                          
                                          
                                          (807
                                          )Net
      property, plant and equipment
                                          
                                          $
                                          9,314
                                          
                                          
                                          $
                                          9,494Current
      liabilities
                                          
                                          $
                                          (84
                                          )
                                          
                                          $
                                          (84
                                          )
  12. 
DERIVATIVE INSTRUMENTS AND HEDGES
 In the
normal course of business, the Company utilizes derivatives contracts as part of
its risk management strategy to manage our exposure to market fluctuations in
energy prices and interest rates.  These instruments are subject to
credit and market risks in excess of the amount recorded on the balance sheet in
accordance with generally accepted accounting principles.  Controls
and monitoring procedures for these instruments have been established and are
routinely reevaluated.  Credit risk represents the potential loss that
may occur because a party to a transaction fails to perform according to the
terms of the contract.  The measure of credit exposure is the
replacement cost of contracts with a positive fair value.  The Company
manages credit risk by entering into financial instrument transactions only
through approved counterparties.  Market risk represents the potential
loss due to the decrease in the value of a financial instrument caused primarily
by changes in commodity prices.  The Company manages market risk by
establishing and monitoring limits on the types and degree of risk that may be
undertaken.
 
 Derivative
instruments are recorded on the balance sheet as other assets or other
liabilities measured at fair value. Fair value is defined as the price that
would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement
date.  Where available, fair value is based on observable market
prices or parameters or derived from such prices or parameters.  Where
observable prices or inputs are not available, valuation models may be
applied.  For a cash flow hedge accounted for under SFAS No. 133,
“Accounting for Derivative Instruments and Hedging Activities,” changes in the
fair value of the derivative instrument, to the extent that it is effective, are
recorded in accumulated other comprehensive income and subsequently reclassified
to earnings as the hedged transaction impacts net income.  Any
ineffective portion of a cash flow hedge is recognized currently in
earnings.  Cash flows from derivative contracts are reported as
operating activities on the statements of cash flows.
 
 The
Company enters into short-term, fixed-price energy swaps as hedges designed to
mitigate the risk of changes in commodity prices for future purchase
commitments.  These fixed-price swaps involve the exchange of net cash
settlements, based on changes in the price of the underlying commodity index
compared to the fixed price offering, at specified intervals without the
exchange of any underlying principal.  Effective November 1, 2007, the
Company designated its energy hedging relationships as cash flow hedges under
SFAS No. 133.  For the period of time these hedge relationships were
not designated under SFAS No. 133, the swaps were measured at fair value with
gains or losses included in current earnings.  Subsequent to
designation, net gains or losses attributable to effective hedging are recorded
in accumulated other comprehensive income, and the ineffective portion continues
to be recognized in cost of products sold.  As of December 31, 2008,
certain commodity swaps hedging anticipated natural gas purchases for January
and February 2009 were de-designated due to modifications in management’s
expected usage.  As of December 31, 2008, these swaps were measured at
fair value with unrealized losses of $1.0 million included in current
earnings.
  62
  In
addition to the hedges designated under SFAS No. 133, the Company has entered
into short-term energy swaps for the purpose of creating an economic hedge
designed to mitigate the risk of changes in commodity prices for future energy
purchase and sale commitments.  Net realized gains of $1.8 million
from derivative contracts not designated as SFAS No. 133 hedges have been
recognized in cost of products sold in 2008.
 
 Net
settlements on hedges increased cost of products sold by $3.9 million in 2008
compared to $2.8 million in 2007.  On December 31, 2008, the balance
sheet impact of these swaps was a derivative liability of $26.9 million compared
to a derivative liability of $1.4 million on December 31,
2007.  Unrealized losses representing the ineffective portion of these
hedges recognized in cost of products sold were negligible in
2008.  Net unrealized gains of $0.7 million were recognized in cost of
products sold in 2007.  Net losses of $29.7 million related to the
effective portion of SFAS No. 133 hedges were recorded in accumulated other
comprehensive income on December 31, 2008, and are expected to be reclassified
into cost of products sold in the period in which the hedged cash flows affect
earnings.  Assuming no change in open hedge positions, the net losses
are expected to be reclassified into earnings through December
2009.  Net losses related to the effective portion of SFAS No. 133
hedges recorded in accumulated other comprehensive income on December 31, 2007,
were $2.1 million.
 
 In
February 2008, the Company entered into a $250 million notional value
receive-variable, pay-fixed interest rate swap in connection with the Company’s
outstanding floating rate notes that mature in 2014.  The notes pay
interest quarterly based on a three-month LIBOR.  The Company is
hedging the cash flow exposure on its quarterly variable-rate interest payments
due to changes in the benchmark interest rate (three-month LIBOR).  On
December 31, 2008, the fair value of this swap was an unrealized loss of $3.7
million.  Net losses of $3.9 million were recorded in accumulated
other comprehensive income on December 31, 2008, and are expected to be
reclassified into interest expense in the period in which the hedged cash flows
affect earnings.  Net gains reclassified from other comprehensive
income decreased interest expense by $0.5 million in 2008.  Net losses
of approximately $3.5 million are expected to be reclassified from accumulated
other comprehensive income into earnings within the next 12 months.
  13. 
FAIR VALUE OF FINANCIAL INSTRUMENTS
  In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements,
which defines fair value, establishes a framework for measuring fair value, and
expands disclosures about fair value measurements.  The Company
adopted SFAS No. 157 as it relates to financial assets and liabilities as of
January 1, 2008.  The FASB deferred the effective date of SFAS No. 157
as it relates to fair value measurement for nonfinancial assets and liabilities
that are not remeasured at fair value on a recurring basis to years beginning
after November 15, 2008.  The adoption of the initial provisions of
SFAS No. 157 did not have a material impact on the Company’s financial
statements.
 
 The fair
value framework requires the categorization of assets and liabilities into three
levels based upon the assumptions used to value the assets or
liabilities.  Level 1 provides the most reliable measure of fair
value, whereas Level 3 generally requires significant management
judgment.  The three levels are defined as follows:
 
 ▪  Level 1:  Unadjusted
quoted prices in active markets for identical assets or liabilities at the
measurement
 date.
 ▪  Level
2:  Observable inputs other than those included in Level 1.  For
example, quoted prices for similar
 assets or liabilities in active markets or quoted prices for identical assets or
liabilities in inactive
 markets.
 ▪  Level
3:  Unobservable inputs reflecting management’s own assumption about the
inputs used in pricing
 the
asset or liability at the measurement date.
 
 63
  As of
December 31, 2008, the fair values of our financial assets and liabilities are
categorized as follows:
  (In
      thousands of U.S. dollars)
                                                                      
                                                                      Total
                                                                      
                                                                      
                                                                      Level
      1
                                                                      
                                                                      
                                                                      Level
      2
                                                                      
                                                                      
                                                                      Level
      3ASSETSDeferred
      compensation assets (a)
                                                                      
                                                                      $
                                                                      177
                                                                      
                                                                      
                                                                      $
                                                                      177
                                                                      
                                                                      
                                                                      $
                                                                      -
                                                                      
                                                                      
                                                                      $
                                                                      -Regional
      Greenhouse Gas Initiative carbon credits (a)
                                                                      
                                                                      
                                                                      230
                                                                      
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      
                                                                      
                                                                      230
                                                                      
                                                                      
                                                                      
                                                                      -Total
      assets at fair value on December 31, 2008
                                                                      
                                                                      $
                                                                      407
                                                                      
                                                                      
                                                                      $
                                                                      177
                                                                      
                                                                      
                                                                      $
                                                                      230
                                                                      
                                                                      
                                                                      $
                                                                      -LIABILITIESCommodity
      swaps (a)
                                                                      
                                                                      $
                                                                      26,878
                                                                      
                                                                      
                                                                      $
                                                                      -
                                                                      
                                                                      
                                                                      $
                                                                      26,878
                                                                      
                                                                      
                                                                      $
                                                                      -Interest
      rate swaps (b)
                                                                      
                                                                      
                                                                      3,677
                                                                      
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      
                                                                      
                                                                      3,677
                                                                      
                                                                      
                                                                      
                                                                      -Deferred
      compensation liabilities (a)
                                                                      
                                                                      
                                                                      177
                                                                      
                                                                      
                                                                      
                                                                      177
                                                                      
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      
                                                                      
                                                                      -Total
      liabilities at fair value on December 31, 2008
                                                                      
                                                                      $
                                                                      30,732
                                                                      
                                                                      
                                                                      $
                                                                      177
                                                                      
                                                                      
                                                                      $
                                                                      30,555
                                                                      
                                                                      
                                                                      $
                                                                      -(a)
      Based on observable market data.(b)
      Based on observable inputs for the liability (interest rates and yield
      curves observable at specific
intervals).
  14. 
RELATED PARTY TRANSACTIONS
 
 In
conjunction with the Acquisition, the Company entered into a transition service
agreement with International Paper whereby International Paper agreed to
continue to provide certain services specified in the agreement that are
necessary for the Company to run as a stand-alone business.  The
charges for the years ended December 31, 2008 and 2007, were $0.2 million and
$5.6 million, respectively.  As of September 30, 2007, the Company
substantially discontinued the use of services under this
agreement.
  The
Company had net sales to International Paper of approximately $165.8 million and
$191.4 million for the years ended December 31, 2008 and 2007, respectively, and
sales of $71.5 million for the five months ended December 31,
2006.  The Company had purchases included in cost of products sold
from International Paper of approximately $7.2 million and $11.7 million for the
years ended December 31, 2008 and 2007, respectively, and purchases of $2.5
million for the five months ended December 31, 2006.
  Subsequent
to the Acquisition, the Company entered into a management agreement with Apollo
relating to the provision of certain financial and strategic advisory services
and consulting services.  Management fees to Apollo for these services
were $2.8 million for the year ended December 31, 2007.  Upon
consummation of the IPO, Apollo terminated the annual fee arrangement under the
management agreement for its consulting and advisory services, in exchange for a
one-time payment of $23.1 million corresponding to the present value of all
future annual fee payments pursuant to the terms of the management
agreement.  Although the annual fee arrangement was terminated in
connection with the IPO, the management agreement remains in effect and will
expire 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 the Company’s financial advisor or investment banker for any
merger, acquisition, disposition, financing or the like if the Company decides
that it needs to engage someone to fill such role.  In the event the
Company is not able to come to an agreement with Apollo in connection with such
role, at the closing of any merger, acquisition, disposition or financing or any
similar transaction, the Company has agreed to pay Apollo a fee equal to 1% of
the aggregate enterprise value (including the aggregate value
of  equity securities, warrants, rights, and options acquired or
retained; indebtedness acquired, assumed or refinanced; and any other
consideration or compensation paid in connection with such
transaction).  The Company agreed to indemnify Apollo and its
affiliates and their directors, officers and representatives for losses relating
to the services contemplated by the management agreement and the engagement of
affiliates of Apollo pursuant to, and the performance by them of the services
contemplated by, the management agreement.
 
 64
  On January
31, 2007, Verso Finance entered into a $250 million senior unsecured
floating-rate term loan facility with a maturity of six years.  The
net proceeds from the term loan were distributed to the equity holders of Verso
Paper Management LP.  In May 2008, a portion of the net proceeds from
the IPO were used to repay $138 million of the outstanding principal of the term
loan and to pay a related $1.4 million prepayment penalty.  As of
December 31, 2008, $112 million was outstanding on the term loan.  The
term loan allows Verso Finance to pay interest either in cash or in-kind through
the accumulation of the outstanding principal amount.  The term loan
bears interest at a rate equal to LIBOR plus 6.25% on interest payments made in
cash and LIBOR plus 7.00% for interest paid in-kind and added to the principal
balance.  The interest rate in effect on December 31, 2008, was
10.0%.  On December 10, 2008, Verso Finance elected to exercise the
PIK option for the interest payment pertaining to the 90-day interest period
ending January 2, 2009.  Verso Finance has no independent operations;
consequently, all cash flows used to service the remaining debt obligation will
need to be received via a distribution from the Company.  The Company
paid distributions to Verso Finance of $17.6 million in 2008 and $22.1 million
in 2007.  Additionally, in 2008 the Company paid $5.2 million of
expenses on behalf of Verso Paper Corp.The Company has no
obligation to make distributions to Verso Finance or Verso Paper
Corp.
 
 On
December 31, 2008, the Company had current receivables of $0.6 million due from
Verso Paper Corp. and its subsidiaries.
 
 15. 
RESTRUCTURING AND OTHER CHARGES
 
 Restructuring
and other charges are comprised of transition and other non-recurring costs
associated with the acquisition and carve out of our operations from those of
International Paper; including costs of a transition service agreement with
International Paper, technology migration costs, consulting and legal fees, and
other one-time costs related to us becoming a stand-alone
business.  The charges for the year ended December 31, 2008, were
$27.4 million, which included a one-time payment of $23.1 million to terminate
the annual fee arrangement under the management agreement with Apollo, and $0.2
million of transition service agreement costs.  The charges for the
year ended December 31, 2007, were $19.4 million, which included $5.6 million of
transition service agreement costs and  $2.8 million of charges under
the management agreement.  The charges for the five months ended
December 31, 2006, were $10.1 million which included $6.1 million of transition
service agreement costs.  As of September 30, 2007, the Company
substantially discontinued the use of services under this
agreement.
  16. 
COMMITMENTS AND CONTINGENCIES
 
 Operating
Leases—The Company has entered into operating lease agreements, which
expire at various dates through 2013, related to certain machinery and equipment
used in its manufacturing process.  Rental expense under operating
leases amounted to $6.1 million and $5.8 million for the years ended December
31, 2008 and 2007, respectively, and $2.2 million for the five months ended
December 31, 2006.
  65
  The
following, as of December 31, 2008, represents the future minimum rental
payments due under non-cancelable operating leases that have initial or
remaining lease terms in excess of one year:
  (In
      thousands of U.S. dollars)2009
                              
                              $
                              5,0852010
                              
                              
                              2,7262011
                              
                              
                              1,6022012
                              
                              
                              9322013
                              
                              
                              143Thereafter
                              
                              
                              73Total
                              
                              $
                              10,561
 Purchase
obligations—The
Company has entered into unconditional purchase obligations in the ordinary
course of business for the purchase of certain raw materials, energy, and
services.  At December 31, 2008, total unconditional purchase
obligations were $931.5 million, due as follows: 2009–$149.9 million; 2010–$93.7
million; 2011–$93.5 million; 2012–$93.9 million; 2013– $93.5; and
thereafter–$407.0 million.
 
 Employee
Severance Plan—Under the employee severance plan, each of our named
executive officers is eligible to receive a termination allowance in the event
of a termination of employment due to certain events, including the executive’s
job elimination, a facility closing, the executive’s disability, or the
executive’s inability to perform the requisite duties of his position despite
his reasonable efforts.
 
 The
termination allowance is a lump sum amount equal to a factor based on the number
of years or partial years of applicable service with the company, multiplied by
the amount of two weeks of base salary.  The termination allowance may
not be less than the amount of four weeks of base salary.  In addition
to the termination allowance under the Verso Paper Employee Severance Plan, it
is our practice to provide a pro rata amount of annual VIP bonus compensation
that would have otherwise been paid to the executive officer if employment had
continued through the end of the applicable calendar year.
 
 Contingencies—The
Company is involved in legal proceedings incidental to the conduct of its
business.  The Company does not believe that any liability that may
result from these proceedings will have a material adverse effect on our
financial statements.
 
 On August
6, 2008, the Company filed a declaratory judgment suit in the United States
District Court for the Eastern District of Wisconsin against NewPage Corporation
and NewPage Wisconsin System Inc., in response to a patent infringement claim
asserted by NewPage regarding certain of the Company’s coated paper
products.  The action sought a declaration that the Company’s coated
paper products do not infringe the NewPage patent and that the NewPage patent is
invalid.  On January 29, 2009, the action was voluntarily dismissed
with prejudice pursuant to a settlement agreement between the
parties.  As part of the settlement, NewPage granted the
Company an irrevocable, perpetual, non-exclusive, worldwide, royalty-free,
and fully paid-up right and license for any and all purposes under the NewPage
patent and any continuation, division, reissue or non-U.S. counterpart of the
patent.
 
 In
connection with the Acquisition, the Company assumed a twelve-year supply
agreement with Thilmany LLC, or “Thilmany,” for the specialty paper products
manufactured on paper machine No. 5 at the Androscoggin mill.  The
agreement requires Thilmany to pay the Company a variable charge for the paper
purchased and a fixed charge for the availability of the No. 5 paper
machine.  The Company is responsible for the No. 5 machine’s routine
maintenance, and Thilmany is responsible for any capital expenditures specific
to the machine.  Thilmany has the right to terminate the agreement if
certain events occur.
  66
  17.  INFORMATION
BY INDUSTRY SEGMENT
 
 The
Company operates in three operating segments: coated and supercalendered papers;
hardwood market pulp; and other, consisting of specialty industrial
paper.  The Company operates in one geographic segment, the United
States.  The Company’s core business platform is as a producer of
coated freesheet, coated groundwood, and uncoated supercalendered
papers.  These products serve customers in the catalog, magazine,
inserts, and commercial print markets.
 
 The
following table summarizes the industry segments for the periods ended December
31, 2008 and 2007, and the five months ended December 31, 2006:
  Year
                                  
                                  
                                  Year
                                  
                                  
                                  Five
      MonthsEnded
                                  
                                  
                                  Ended
                                  
                                  
                                  EndedDecember
      31,
                                  
                                  
                                  December
      31,
                                  
                                  
                                  December
      31,(In
      thousands of U.S. dollars)
                                  
                                  2008
                                  
                                  
                                  2007
                                  
                                  
                                  2006Net
      Sales:Coated
      and supercalendered
                                  
                                  $
                                  1,575,005
                                  
                                  
                                  $
                                  1,443,170
                                  
                                  
                                  $
                                  631,897Hardwood
      market pulp
                                  
                                  
                                  146,443
                                  
                                  
                                  
                                  148,007
                                  
                                  
                                  
                                  58,405Other
                                  
                                  
                                  45,365
                                  
                                  
                                  
                                  37,576
                                  
                                  
                                  
                                  16,531Total
                                  
                                  $
                                  1,766,813
                                  
                                  
                                  $
                                  1,628,753
                                  
                                  
                                  $
                                  706,833Operating
      Income (Loss):Coated
      and supercalendered
                                  
                                  $
                                  37,053
                                  
                                  
                                  $
                                  (1,496
                                  )
                                  
                                  $
                                  35,319Hardwood
      market pulp
                                  
                                  
                                  29,931
                                  
                                  
                                  
                                  35,808
                                  
                                  
                                  
                                  10,475Other
                                  
                                  
                                  (3,705
                                  )
                                  
                                  
                                  (3,244
                                  )
                                  
                                  
                                  (683
                                  )Total
                                  
                                  $
                                  63,279
                                  
                                  
                                  $
                                  31,068
                                  
                                  
                                  $
                                  45,111Depreciation
      and Amortization:Coated
      and supercalendered
                                  
                                  $
                                  112,928
                                  
                                  
                                  $
                                  102,161
                                  
                                  
                                  $
                                  39,894Hardwood
      market pulp
                                  
                                  
                                  18,385
                                  
                                  
                                  
                                  18,278
                                  
                                  
                                  
                                  7,527Other
                                  
                                  
                                  3,031
                                  
                                  
                                  
                                  2,700
                                  
                                  
                                  
                                  896Total
                                  
                                  $
                                  134,344
                                  
                                  
                                  $
                                  123,139
                                  
                                  
                                  $
                                  48,317Capital
      Spending:Coated
      and supercalendered
                                  
                                  $
                                  69,028
                                  
                                  
                                  $
                                  65,179
                                  
                                  
                                  $
                                  26,243Hardwood
      market pulp
                                  
                                  
                                  8,604
                                  
                                  
                                  
                                  2,649
                                  
                                  
                                  
                                  814Other
                                  
                                  
                                  2,815
                                  
                                  
                                  
                                  1,754
                                  
                                  
                                  
                                  476Total
                                  
                                  $
                                  80,447
                                  
                                  
                                  $
                                  69,582
                                  
                                  
                                  $
                                  27,533
  67
 
 18.  CONDENSED CONSOLIDATING
FINANCIAL INFORMATION
  Presented
on the following pages are the Company’s consolidating balance sheets,
statements of 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.  Prior to the Acquisition, the Predecessor operated as a
division of International Paper Company, and there were no separate legal
entities. The
consolidating financial statements have been prepared from the Company’s
financial information on the same basis of accounting as the consolidated
financial statements. Investments in the Company’s subsidiaries
are accounted for under the equity method.  Accordingly, the entries
necessary to consolidate Verso Paper Holdings LLC (referred to below as “Parent
Issuer”) and its subsidiaries other than Verso Paper Inc. that guaranteed the
obligations under the debt securities described in Note 7 (referred to below as
the “Guarantor Subsidiaries”) are reflected in the Intercompany Eliminations
column.
  Condensed
      Consolidating Balance Sheetas
      of December 31,
2008
  Parent
                                  
                                  
                                  Subsidiary
                                  
                                  
                                  Guarantor
                                  
                                  
                                  Intercompany(In
      thousands of U.S. dollars)
                                  
                                  Issuer
                                  
                                  
                                  Issuer
                                  
                                  
                                  Subsidiaries
                                  
                                  
                                  Eliminations
                                  
                                  
                                  ConsolidatedASSETSCurrent
      assets
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  401,011
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  401,011Property
      and equipment, net
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  1,115,657
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  1,115,657Intercompany
      receivable
                                  
                                  
                                  1,307,503
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (1,307,503
                                  )
                                  
                                  
                                  -Investment
      in subsidiaries
                                  
                                  
                                  60,663
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (60,663
                                  )
                                  
                                  
                                  -Non-current
      assets
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  97,404
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  97,404Total
      assets
                                  
                                  $
                                  1,368,166
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  1,614,072
                                  
                                  
                                  $
                                  (1,368,166
                                  )
                                  
                                  $
                                  1,614,072LIABILITIES
      AND MEMBER’S
      EQUITYCurrent
      liabilities
                                  
                                  $
                                  33,641
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  213,899
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  247,540Intercompany
      payable
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  1,307,503
                                  
                                  
                                  
                                  (1,307,503
                                  )
                                  
                                  
                                  -Long-term
      debt
                                  
                                  
                                  1,242,821
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  1,242,821Other
      long-term liabilities
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  32,007
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  32,007Member’s
      equity
                                  
                                  
                                  91,704
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  60,663
                                  
                                  
                                  
                                  (60,663
                                  )
                                  
                                  
                                  91,704Total
      liabilities and member’s
      equity
                                  
                                  $
                                  1,368,166
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  1,614,072
                                  
                                  
                                  $
                                  (1,368,166
                                  )
                                  
                                  $
                                  1,614,072
 68
  Condensed
      Consolidating Balance Sheetas
      of December 31,
2007
  Parent
                              
                              
                              Subsidiary
                              
                              
                              Guarantor
                              
                              
                              Intercompany(In
      thousands of U.S. dollars)
                              
                              Issuer
                              
                              
                              Issuer
                              
                              
                              Subsidiaries
                              
                              
                              Eliminations
                              
                              
                              ConsolidatedASSETSCurrent
      assets
                              
                              $
                              -
                              
                              
                              $
                              -
                              
                              
                              $
                              315,723
                              
                              
                              $
                              -
                              
                              
                              $
                              315,723Property
      and equipment, net
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              1,159,918
                              
                              
                              
                              -
                              
                              
                              
                              1,159,918Intercompany
      receivable
                              
                              
                              1,224,307
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (1,224,307
                              )
                              
                              
                              -Investment
      in subsidiaries
                              
                              
                              138,385
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              (138,385
                              )
                              
                              
                              -Non-current
      assets
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              101,394
                              
                              
                              
                              -
                              
                              
                              
                              101,394Total
      assets
                              
                              $
                              1,362,692
                              
                              
                              $
                              -
                              
                              
                              $
                              1,577,035
                              
                              
                              $
                              (1,362,692
                              )
                              
                              $
                              1,577,035LIABILITIES
      AND MEMBER’S
      EQUITYCurrent
      liabilities
                              
                              $
                              34,251
                              
                              
                              $
                              -
                              
                              
                              $
                              188,747
                              
                              
                              $
                              -
                              
                              
                              $
                              222,998Intercompany
      payable
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              1,224,307
                              
                              
                              
                              (1,224,307
                              )
                              
                              
                              -Long-term
      debt
                              
                              
                              1,153,588
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              1,153,588Other
      long-term liabilities
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              25,596
                              
                              
                              
                              -
                              
                              
                              
                              25,596Member’s
      equity
                              
                              
                              174,853
                              
                              
                              
                              -
                              
                              
                              
                              138,385
                              
                              
                              
                              (138,385
                              )
                              
                              
                              174,853Total
      liabilities and member’s
      equity
                              
                              $
                              1,362,692
                              
                              
                              $
                              -
                              
                              
                              $
                              1,577,035
                              
                              
                              $
                              (1,362,692
                              )
                              
                              $
                              1,577,035


Condensed
      Consolidating Statements of OperationsYear
      Ended December 31,
2008
  Parent
                                      
                                      
                                      Subsidiary
                                      
                                      
                                      Guarantor
                                      
                                      
                                      Intercompany(In
      thousands of U.S. dollars)
                                      
                                      Issuer
                                      
                                      
                                      Issuer
                                      
                                      
                                      Subsidiaries
                                      
                                      
                                      Eliminations
                                      
                                      
                                      ConsolidatedNet
      sales
                                      
                                      $
                                      -
                                      
                                      
                                      $
                                      -
                                      
                                      
                                      $
                                      1,766,813
                                      
                                      
                                      $
                                      -
                                      
                                      
                                      $
                                      1,766,813Cost
      of products sold (exclusiveof
      depreciation and amortization)
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      1,462,333
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      1,462,333Depreciation
      and amortization
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      134,344
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      134,344Selling,
      general, and administrative expenses
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      79,441
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      79,441Restructuring
      and other charges
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      27,416
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      27,416Interest
      and other income
                                      
                                      
                                      (122,315
                                      )
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (770
                                      )
                                      
                                      
                                      122,315
                                      
                                      
                                      
                                      (770
                                      )Interest
      expense
                                      
                                      
                                      105,007
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      103,200
                                      
                                      
                                      
                                      (105,007
                                      )
                                      
                                      
                                      103,200Equity
      in net loss of subsidiaries
                                      
                                      
                                      (39,151
                                      )
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      39,151
                                      
                                      
                                      
                                      -Net
      loss
                                      
                                      $
                                      (21,843
                                      )
                                      
                                      $
                                      -
                                      
                                      
                                      $
                                      (39,151
                                      )
                                      
                                      $
                                      21,843
                                      
                                      
                                      $
                                      (39,151
                                      )
   69
  Condensed
      Consolidating Statements of OperationsYear
      Ended December 31,
2007
  Parent
                                          
                                          
                                          Subsidiary
                                          
                                          
                                          Guarantor
                                          
                                          
                                          Intercompany(In
      thousands of U.S. dollars)
                                          
                                          Issuer
                                          
                                          
                                          Issuer
                                          
                                          
                                          Subsidiaries
                                          
                                          
                                          Eliminations
                                          
                                          
                                          ConsolidatedNet
      sales
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          1,628,753
                                          
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          1,628,753Cost
      of products sold (exclusive ofdepreciation
      and amortization)
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          1,403,144
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          1,403,144Depreciation
      and amortization
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          123,139
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          123,139Selling,
      general, and adminstrative expenses
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          52,007
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          52,007Restructuring
      and other charges
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          19,395
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          19,395Interest
      and other income
                                          
                                          
                                          (135,022
                                          )
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (1,544
                                          )
                                          
                                          
                                          135,022
                                          
                                          
                                          
                                          (1,544
                                          )Interest
      expense
                                          
                                          
                                          112,935
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          113,881
                                          
                                          
                                          
                                          (112,935
                                          )
                                          
                                          
                                          113,881Equity
      in net loss of subsidiaries
                                          
                                          
                                          (81,269
                                          )
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          81,269
                                          
                                          
                                          
                                          -Net
      loss
                                          
                                          $
                                          (59,182
                                          )
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          (81,269
                                          )
                                          
                                          $
                                          59,182
                                          
                                          
                                          $
                                          (81,269
                                          )
 Condensed
      Consolidating Statements of Cash FlowsYear
      Ended December 31,
2008
  Parent
                                  
                                  
                                  Subsidiary
                                  
                                  
                                  Guarantor
                                  
                                  
                                  Intercompany(In
      thousands of U.S. dollars)
                                  
                                  Issuer
                                  
                                  
                                  Issuer
                                  
                                  
                                  Subsidiaries
                                  
                                  
                                  Eliminations
                                  
                                  
                                  ConsolidatedNet
      cash provided by operating activities
                                  
                                  $
                                  17,308
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  57,615
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  74,923Cash
      flows from investing activities:Proceeds
      from sale of fixed assets
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  108
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  108Capital
      expenditures
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (80,447
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (80,447
                                  )Return
      of investment in subsidiaries
                                  
                                  
                                  5,488
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (5,488
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Net
      cash provided by (used in) investing activities
                                  
                                  
                                  5,488
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (85,827
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (80,339
                                  )Cash
      flows from financing activities:Equity
      distributions
                                  
                                  
                                  (22,796
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (22,796
                                  )Advances
      to subsidiaries
                                  
                                  
                                  (92,083
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  92,083
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Repayment
      of advances to subsidiaries
                                  
                                  
                                  2,850
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (2,850
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Proceeds
      from long-term debt
                                  
                                  
                                  92,083
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  92,083Payments
      on long-term debtunder
      credit agreement
                                  
                                  
                                  (2,850
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (2,850
                                  )Net
      cash provided by (used in) financing activities
                                  
                                  
                                  (22,796
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  89,233
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  66,437Change
      in cash and cash equivalents
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  61,021
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  61,021Cash
      and cash equivalents at beginning of period
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  58,499
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  58,499Cash
      and cash equivalents at end of period
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  119,520
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  119,520
   70
  Condensed
      Consolidating Statements of Cash FlowsYear
      Ended December 31,
2007
  Parent
                                    
                                    
                                    Subsidiary
                                    
                                    
                                    Guarantor
                                    
                                    
                                    Intercompany(In
      thousands of U.S. dollars)
                                    
                                    Issuer
                                    
                                    
                                    Issuer
                                    
                                    
                                    Subsidiaries
                                    
                                    
                                    Eliminations
                                    
                                    
                                    ConsolidatedNet
      cash provided by operating activities
                                    
                                    $
                                    22,087
                                    
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    16,694
                                    
                                    
                                    
                                    
                                    
                                    $
                                    38,781Cash
      flows from investing activities:Proceeds
      from sale of fixed assets
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    1,789
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    1,789Capital
      expenditures
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (69,582
                                    )
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (69,582
                                    )Net
      cash used in investing activities
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (67,793
                                    )
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (67,793
                                    )Cash
      flows from financing activities:Equity
      distributions
                                    
                                    
                                    (22,087
                                    )
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (22,087
                                    )Repayment
      of advances tosubsidiaries
                                    
                                    
                                    2,850
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (2,850
                                    )
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Payments
      on long-term debtunder
      credit agreement
                                    
                                    
                                    (2,850
                                    )
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (2,850
                                    )Net
      cash used in financing activities
                                    
                                    
                                    (22,087
                                    )
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (2,850
                                    )
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (24,937
                                    )Change
      in cash and cash equivalents
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (53,949
                                    )
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (53,949
                                    )Cash
      and cash equivalents at beginning of period
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    112,448
                                    
                                    
                                    
                                    -
                                    
                                    
                                    
                                    112,448Cash
      and cash equivalents at end of period
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    58,499
                                    
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    58,499
  19.  SUBSEQUENT
EVENT
 
 The
Company burns alternative fuel mixtures at its Androscoggin and Quinnesec mills
in order to produce renewable energy and help manage the Company’s exposure to
high energy costs.  The federal government has implemented a program
that provides incentive payments under certain circumstances for the use of
alternative fuels and alternative fuel mixtures in lieu of fossil-based
fuels.  In the fourth quarter of 2008, the Company filed applications
with the Internal Revenue Service for certification of its eligibility to
receive incentive payments for its use of black liquor in alternative fuel
mixtures in the recovery boilers at the Androscoggin and Quinnesec
mills.  In January and February 2009, the IRS certified that the
Company’s operations at the two mills qualified for the incentive
payments.  In February 2009, the Company received an incentive payment
of $29.7 million for operations at the Androscoggin mill in the fourth quarter
of 2008.  The Company’s claim for a similar incentive payment for
operations at the Quinnesec mill in the fourth quarter of 2008 is expected
during March 2009.  The federal regulations relating to the
alternative fuels mixture incentive program are complex, and further
clarification is needed by the Company prior to the recognition of any payment
received for financial reporting purposes.  The Company will continue
to evaluate its opportunities for burning alternative fuel mixtures to produce
energy at its mills.  Depending on the quantity of alternative fuel
mixtures burned, the federal incentive payments that may be received by the
Company could be material.  At the same time, there can be no
assurance that the federal incentive program for alternative fuel mixtures will
continue in effect, that its provisions will not be changed in a manner that
impacts the Company, that the Company’s operations will remain qualified to
receive the incentive payments, or that the Company’s claims for the incentive
payments will be approved and paid.
  71
  COATED
AND SUPERCALENDERED PAPERS DIVISION OF INTERNATIONAL PAPER COMPANY
(PREDECESSOR)
 
 Notes
to Combined Financial Statements for the Seven-Month Period Ended July 31,
2006
 
  1.      BASIS
OF PRESENTATION
 
 The
accompanying combined financial statements for the seven-month period ended July
31, 2006, have been prepared from the separate records maintained by the Coated
and Supercalendered Papers Division and International Paper Company (IPCO) and
include allocations of certain IPCO corporate costs and expenses.  In
accordance with SFAS No. 57, “Related Party Disclosures,” related party
transactions cannot be presumed to be carried out on an arm’s-length basis as
the requisite conditions of competitive, free-market dealing may not
exist.  These combined financial statements may not necessarily be
indicative of the results of operations that would have resulted had the
Division been operated as an unaffiliated company.
 
 The Coated
and Supercalendered Papers Division of International Paper Company (the
“Predecessor” or the “Division”) operated in three operating segments: coated
and supercalendered papers; hardwood market pulp; and other, consisting of
uncoated copy paper and specialty industrial paper.  The Division’s
core business platform is as a producer of coated freesheet, coated groundwood,
and uncoated supercalendered papers.  These products serve customers
in the catalog, magazine, inserts, and commercial print markets.  The
Division included mills and related woodyards in Bucksport and Jay, Maine;
Quinnesec, Michigan; and Sartell, Minnesota.  The Division also
included investments in two energy producing assets located at the Bucksport and
Jay, Maine, facilities.
  During the
periods presented, the Division was under the control of International Paper
Company.  The operating results and financial position of the Division
were impacted by the nature of this relationship (see Note 4).
 
 2.      SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
  Use of
Estimates—The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting periods.  Actual results
could differ from these estimates.
  Revenue
Recognition—Sales are reported net of rebates, allowances, and
discounts.  Revenue is recognized when the customer takes title and
assumes the risks and rewards of ownership.  Revenue is recorded at
the time of shipment for terms designated f.o.b. (free on board) shipping
point.  For sales transactions designated f.o.b. destination, which
include export sales, revenue is recorded when the product is delivered to the
customer’s site and when title and risk of loss are transferred.
  Shipping and
Handling Costs—Shipping and handling costs, such as freight to customer
destinations, are included in cost of products sold in the accompanying combined
statement of operations.  These costs, when included in the sales
price charged for the Division’s products, are recognized in net
sales.
  Annual
Maintenance Costs—Annual maintenance costs for major planned maintenance
shutdowns in excess of $1.0 million is expensed ratably over the year in
which the maintenance shutdowns occur as operations benefit throughout the year
from the maintenance work performed.  These costs, including
manufacturing variances and out-of-pocket costs that are directly related to the
shutdown, are fully expensed in the year of the shutdown with no amounts
remaining accrued at year-end.  Other maintenance costs are expensed
as incurred.
  72
 Affiliate
Transactions—All intradivision transactions have been eliminated (see
Note 4).
  Property, Plant,
and Equipment—Depreciation and amortization on Property, plant, and
equipment is computed using the units-of-production method for paper machines
and related equipment and the straight-line method for all other assets over the
assets’ estimated useful lives.  The useful life of machinery and
equipment is not expected to differ significantly between the
units-of-production method and the straight-line method.  Estimated
useful lives were as follows:
  YearsBuilding
                        
                        20 -
      40Machinery
      and equipment
                        
                        10 -
      20Furniture
      and office equipment
                        
                        3 -
      10Computer
      hardware
                        
                        3 -
      6Leasehold
      improvements
                        
                        Over
      the terms of the lease
                          or
      the useful life of the
                          improvements
  Expenditures
for major repairs and improvements are capitalized, whereas normal repairs and
maintenance are expensed as incurred.
  Asset Retirement
Obligations—In accordance with the provisions of SFAS No. 143,
“Accounting for Asset Retirement Obligations,” a liability and an asset are
recorded equal to the present value of the estimated costs associated with the
retirement of long-lived assets where a legal or contractual obligation
exists.  The liability is accreted over time, and the asset is
depreciated over its useful life.  The Division’s asset retirement
obligations under this standard related to closure costs for
landfills.
  Income
Taxes—The Division’s operating results were included in the income tax
returns of IPCO.  For the operating results included in the IPCO
income tax returns, a charge in lieu of income taxes was allocated by IPCO to
the Division, representing a portion of IPCO’s consolidated tax
provision.  This tax rate considers IPCO’s federal rate and the state
tax apportionment of the various states in which the Division
operated.  The rate may be different than that determined if the
Division were an incorporated entity computing its taxes on a separate return
basis.
  Environmental
Costs and Obligations—Costs associated with environmental obligations,
such as remediation or closure costs, are accrued when such costs are probable
and reasonably estimable.  Such accruals are adjusted as further
information develops or circumstances change.  Costs of future
expenditures for environmental obligations are discounted to their present value
when the expected cash flows are reliably determinable.
  3.      SUPPLEMENTAL
FINANCIAL STATEMENT INFORMATION
 Interest
payments for the seven months ended July 31, 2006, were $7.6
million.  Total interest expense was $8.4 million for the seven months
ended July 31, 2006.  In conjunction with the Acquisition, we assumed
none of the historical debt of the Predecessor.
  73
 4.      TRANSACTIONS
WITH IPCO AND AFFILIATES
  Certain
services are provided to the Division by IPCO, including corporate management,
legal, accounting and tax, treasury, payroll and benefits administration,
certain incentive compensation, risk management, information technology, and
centralized transaction processing.  These expenses are included in
Selling, general and administrative expenses and Cost of products sold in the
combined statement of operations.  Expenses for such corporate
services included in Selling, general, and administrative expenses totaled $19.0
million for the seven months ended July 31, 2006.  Expenses for such
corporate services in Cost of products sold totaled $6.2 million for the seven
months ended July 31, 2006.  These costs are allocated from IPCO to
the Division based on various methods, including direct consumption, percent of
capital employed, and number of employees.
 
 Substantially
all employees hired prior to July 2004 and retirees of the Division participate
in IPCO’s pension plans and are eligible to receive retirement
benefits.  IPCO allocates service cost to the Division based upon a
percent-of-pay for salaried employees and a calculated flat amount for hourly
employees.  During the seven-month period ended July 31, 2006, IPCO
allocated periodic pension costs to the Division of
$7.5 million.
  IPCO
provides certain retiree health care and life insurance benefits to a majority
of the Division’s salaried employees and certain of the Division’s hourly
employees.  IPCO allocates postretirement benefit costs to the
Division based upon a percent-of-pay for salaried employees and a calculated
flat amount for hourly employees.  During the seven-month period ended
July 31, 2006, IPCO allocated postretirement benefit costs to the Division of
$0.8 million.
  The
Division had net sales to IPCO of approximately $83.8 million for the seven
months ended July 31, 2006.  The Division had purchases from IPCO of
approximately $119.5 million for the seven months ended July 31,
2006.
 
 5.      INCOME
TAXES
  The
results of operations of the Division were included in the income tax returns of
IPCO.  In the accompanying combined financial statements, the Division
reflected U.S. federal and state income tax expense on its income based on an
allocated rate of 39.4% for the seven months ended July 31,
2006.  Income taxes have been provided for all items included in the
historical statement of operations included herein, regardless of when such
items were reported for tax purposes or when the taxes were actually paid or
refunded.
  6.      RESTRUCTURING
AND OTHER CHARGES
  In March
2005, IPCO announced the indefinite shutdown of the No.1 paper machine at the
Jay, Maine mill.  Effective December 2005, IPCO permanently
decommissioned the No. 1 paper machine and began conversion of it to a pulp
dryer.  Severance totaling $0.8 million was paid to employees in
January 2006.  This machine was a component of the pulp operating
segment.
  7.      COMMITMENTS
AND CONTINGENCIES
  Operating
Leases—The Division has entered into operating lease agreements, which
expire at various dates through 2013, related to certain machinery and equipment
used in its manufacturing process.
  The
building and land related to the Sartell mill No. 3 paper machine are
leased under a long-term operating lease. The lease was remeasured to fair value
upon IPCO’s acquisition of Champion International Corporation resulting in an
unfavorable fair value adjustment which is being amortized as rent expense over
the life of the lease.  Pursuant to the terms of the Acquisition,
International Paper will transfer the building to Verso Paper at no cost upon
expiration of the lease.
  74
  Pulp purchase
commitment—In December 2004, IPCO entered into a 10-year pulp purchase
agreement with the buyer of IPCO’s former Weldwood business.  This
take-or-pay agreement requires IPCO to purchase 170,000 tons of NBSK pulp at
market prices at the time of order and IPCO has allocated approximately 110,000
tons of the required purchases to the Division.  This purchased pulp
represents approximately one-third of the Division’s purchased pulp
needs.  This agreement is transferable with appropriate consent from
the seller.
  Wood Supply
Agreement—IPCO’s Forest Resources business supplies the Division’s mills
with their fiber needs at market prices.  The Division’s mills receive
fiber in various forms (chips, tree length, and custom cut) and species:
softwood (pine, spruce, and fir) and hardwood (aspen, maple, and
oak).  In December 2004, IPCO completed the sale of 1.1 million acres
of forestlands in Maine and New Hampshire.  As part of that sale, IPCO
also entered into a 50-year wood supply agreement.  The wood supply
agreement covers the Division’s Bucksport and Jay, Maine mills. Wood is
delivered at market prices in effect at the time of delivery to the
mills.  IPCO must purchase a base volume as defined in the agreement
and also has the ability to purchase additional wood fiber, defined as “option”
volume. The volumes, base and option, are computed as a percentage of the
estimated annual harvest.  Base volume per year is approximately
310,000 tons.  The agreement includes a limitation of damages section
under which IPCO’s maximum potential damages for a default are $15.00 per ton of
wood delivered in the first year.  This amount is approximately
$4.7 million.  The supply agreement is assignable by either party
with mutual consent.
  Androscoggin—PM 5
Agreement—In June 2005, IPCO sold its Industrial Papers
business.  As part of this transaction, IPCO and the Division entered
into a 12-year contract manufacturing arrangement with the buyer, Thilmany LLC.
(“Thilmany”), for production from the Jay, Maine mill’s No. 5 paper
machine.  IPCO deferred approximately $32.5 million of the sales
proceeds, to reflect the contract manufacturing agreement.  The
deferred proceeds are earned by IPCO as volume is produced in accordance with
the contract manufacturing agreement.  This agreement requires
Thilmany to pay the Division a variable charge for the paper purchased and a
fixed charge for the availability of the No. 5 paper
machine.  The deferred amount and related amortization are obligations
of IPCO and are not recorded on the Division’s financial
statements.  The Division is responsible for the No. 5 paper
machine’s routine maintenance capital, and Thilmany is responsible for any
capital expenditures specific to the No. 5 paper machine.  As
defined in the agreement, Thilmany has the right to terminate the agreement if
certain events occur, such as a failure to produce product for a 75-day
consecutive period.  Following a 30-day period after such a failure to
produce, IPCO would be subject to a penalty payment based on the prior 12-month
EBITDA from products produced on the machine multiplied by a
factor.  The factor at the beginning of the agreement is five and
decreases ratably over the life of the agreement.  Thilmany has not
notified IPCO or the Division of any failure to perform and no liability is
accrued.  The agreement is transferable with appropriate consent from
Thilmany.
 
 Litigation—In
March 2006, the Division received approximately $1.0 million from Androscoggin
Energy LLC (“AELLC”), as a result of the settlement of a billing
dispute.  AELLC was a supplier of energy to the Jay, Maine facility
that ceased operations in November 2004 and filed for Chapter 11
bankruptcy.
 
 8.      INFORMATION
BY INDUSTRY SEGMENT
  The
Division operated in three operating segments, coated and supercalendered
papers; hardwood market pulp; and other, consisting of uncoated copy paper and
specialty industrial paper.  The Division operated in one geographic
segment, the United States.  The Division’s core business platform was
as a producer of coated freesheet, coated groundwood, and uncoated
supercalendered papers.  These products serve customers in the
catalog, magazine, inserts, and commercial print markets.  For
management purposes, the operating performance of the Division was reported
based on earnings before interest and taxes, excluding the cumulative effect of
accounting changes:
 
 75
  Seven
      MonthsEndedJuly
      31,(In
      thousands of U.S. dollars)
                      
                      2006Net
      Sales:Coated
                      
                      $
                      793,308Pulp
                      
                      
                      88,634Other
                      
                      
                      22,475Total
                      
                      $
                      904,417Operating
      Income (Loss):Coated
                      
                      $
                      14,971Pulp
                      
                      
                      10,346Other
                      
                      
                      825Total
                      
                      $
                      26,142Depreciation
      and Amortization:Coated
                      
                      $
                      60,881Pulp
                      
                      
                      10,417Other
                      
                      
                      1,376Total
                      
                      $
                      72,674Capital
      Spending:Coated
                      
                      $
                      26,449Pulp
                      
                      
                      839Other
                      
                      
                      367Total
                      
                      $
                      27,655
   76
  Item
9.Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
  Not
applicable.
  Item 9A.  Controls and Procedures
  Not
applicable.
  Item 9A(T). Controls and Procedures
  Evaluation of Disclosure Controls and
Procedures
  We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in reports that we file and submit under
the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the SEC’s rules and forms and is
accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate to allow timely decisions
regarding required disclosure.
  There are
inherent limitations to the effectiveness of any disclosure controls and
procedures, including the possibility of human error or the circumvention or
overriding of the controls and procedures.  Accordingly, even
effective disclosure controls and procedures can provide only reasonable
assurance of achieving their objectives.
  Our
management, with the participation of our Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of the design and operation of
our disclosure controls and procedures as of December 31, 2008.  Based
upon the evaluation, and subject to the foregoing, our Chief Executive Officer
and Chief Financial Officer concluded that our disclosure controls and
procedures were effective to accomplish their objectives as of December 31,
2008.
  Management’s
Report on Internal Control Over Financial Reporting
 
 Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting.  Our internal control over financial
reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles.
 
 There are
inherent limitations to the effectiveness of any internal control over financial
reporting, including the possibility of human error or the circumvention or
overriding of the controls.  Accordingly, even an effective internal
control over financial reporting can provide only reasonable assurance of
achieving its objective.
 
 Our
management assessed the effectiveness of our internal control over financial
reporting as of December 31, 2008.
 In making
this assessment, management used the framework set forth in Internal Control–Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). Based upon the assessment, and subject to the foregoing, our
management concluded that our internal control over financial reporting was
effective to accomplish its objective as of December 31, 2008.
 
 This
annual report does not include an attestation report of our registered public
accounting firm regarding our internal control over financial
reporting.  Our management’s report was not subject to attestation by
our registered public accounting firm pursuant to temporary rules of the SEC
that permit us to provide only our management’s report in this annual
report.
  77
  Changes
in Internal Control Over Financial Reporting
  There was
no change in our internal control over financial reporting during the fourth
quarter of 2008 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
  Item 9B.  Other Information
  Not
applicable.
 
 78
  PART
III
  Item 10.  Directors, Executive Officers and Corporate
Governance
  The
information called for by this item is omitted under the reduced disclosure
format permitted by General Instruction I(2)(c) of Form 10-K.
  Item 11.  Executive Compensation
  The
information called for by this item is omitted under the reduced disclosure
format permitted by General Instruction I(2)(c) of Form 10-K.
  Item 12.  Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters
  The
information called for by this item is omitted under the reduced disclosure
format permitted by General Instruction I(2)(c) of Form 10-K.
  Item 13.  Certain Relationships and Related Transactions
and Director Independence
  The
information called for by this item is omitted under the reduced disclosure
format permitted by General Instruction I(2)(c) of Form 10-K.
  Item 14.  Principal Accountant Fees and
Services
  The
following table represents fees billed to us for professional services rendered
by Deloitte & Touche LLP for the years ended December 31, 2008 and 2007, and
the five months ended December 31, 2006:
  (In
      thousands of U.S. dollars)
                                  
                                  2008
                                  
                                  
                                  2007
                                  
                                  
                                  2006Audit
      fees
                                  
                                  $
                                  939
                                  
                                  
                                  $
                                  870
                                  
                                  
                                  $
                                  350Audit-related
      fees
                                  
                                  
                                  -
                                  
                                  
                                  
                                  110
                                  
                                  
                                  
                                  55Tax
      fees
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -All
      other
                                  
                                  
                                  395
                                  
                                  
                                  
                                  30
                                  
                                  
                                  
                                  -Total
                                  
                                  $
                                  1,334
                                  
                                  
                                  $
                                  1,010
                                  
                                  
                                  $
                                  405
  Audit
fees.  For the years ended December 31, 2008 and 2007, and for
the five months ended December 31, 2006, audit fees represents the aggregate
fees billed to us by Deloitte & Touche LLP for professional services
rendered for the audit of our financial statements and review of interim
financial statements.
 
 Audit-related
fees.  For the years ended December 31, 2008 and 2007, and for
the five months ended December 31, 2006, audit-related fees represent the
aggregate fees billed to us by Deloitte & Touche LLP for assurance and
related services that are reasonably related to the audit or review of our
financial statements, which in both periods includes fees for compliance
attestation and other procedures provided in conjunction with documents prepared
for our issuance of public debt.
 
 All other.For the
years ended December 31, 2008 and 2007, aggregate fees billed to us by Deloitte
& Touche LLP for professional services related to documentation of internal
controls.
 
 The audit
committee of our board of directors is responsible for pre-approval of all audit
and permitted non-audit services to be performed by Deloitte & Touche LLP,
as the registered public accounting firm that performs the audit of our
consolidated financial statements that are filed with the SEC.
  79
 
 Part
IV
  Item 15.  Exhibits and Financial Statement
Schedules
  Financial
Statements
  See the
Index to Financial Statements in “Financial Statements and Supplementary
Data.”
  Financial
Statement Schedules
  See
Schedule I – Valuation Accounts and the report thereon of Deloitte & Touche
LLP, Independent Registered Public Accounting Firm, starting on page S-1 of this
annual report.
  Exhibits
  The
following exhibits are included with this report:
  Exhibit
                                                                                                          Number
                                                                                                        
                                                                                                        Description of
      Exhibit2.1
                                                                                                        
                                                                                                        Agreement
      of Purchase and Sale dated as of June 4, 2006, among International Paper
      Company, Verso Paper Investments LP and Verso Paper LLC,(1)
      as amended by Amendment No. 1 to Agreement of Purchase and Sale,
      dated as of August 1, 2006, among International Paper Company, Verso
      Paper Investments LP and Verso Paper LLC,(2)
      and Amendment No. 2 to Agreement of Purchase and Sale, dated as of
      May 31, 2007, among International Paper Company, Verso Paper Investments
      LP and Verso Paper LLC.(2)3.1
                                                                                                        
                                                                                                        Certificate
      of Formation filed June 6, 2006, as amended by Certificate of Amendment
      filed June 13, 2006, Certificate of Amendment filed June 23, 2006, and
      Certificate of Amendment filed June 26, 2006, of Verso Paper Holdings
      LLC.(3)3.2
                                                                                                        
                                                                                                        Amended
      and Restated Limited Liability Company Agreement of Verso Paper Holdings
      LLC dated as of January 25, 2007.(3)4.1
                                                                                                        
                                                                                                        Indenture
      relating to the 91/8%
      Second Priority Senior Secured Fixed Rate Notes due 2014 and the Second
      Priority Senior Secured Floating Rate Notes due 2014, dated as of August
      1, 2006, among Verso Paper Holdings LLC, Verso Paper Inc., the Guarantors
      named therein, and Wilmington Trust Company, as Trustee.(1)4.2
                                                                                                        
                                                                                                        Indenture
      relating to the 113/8% Senior
      Subordinated Notes due 2016, dated as of August 1, 2006, among Verso Paper
      Holdings LLC, Verso Paper Inc., the Guarantors named therein, and
      Wilmington Trust Company, as Trustee.(1)4.3
                                                                                                        
                                                                                                        Collateral
      Agreement dated as of August 1, 2006, among Verso Paper Holdings LLC,
      Verso Paper Inc., the Subsidiaries named therein, and Wilmington Trust
      Company, as Collateral Agent.(1)4.4
                                                                                                        
                                                                                                        Intellectual
      Property Security Agreement dated as of August 1, 2006, made by Verso
      Paper Holdings LLC, Verso Paper Inc., Verso Paper LLC, Verso Androscoggin
      LLC, Verso Bucksport LLC, Verso Quinnesec LLC, Verso Sartell LLC, and
      Nextier Solutions Corporation in favor of Wilmington Trust Company, as
      Collateral Agent.(1)
   80
   4.5
                                                    
                                                    Intercreditor
      Agreement dated as August 1, 2006, among Credit Suisse, Cayman Islands
      Branch, as Intercreditor Agent, Wilmington Trust Company, as Trustee,
      Verso Paper Finance Holdings LLC, Verso Paper Holdings LLC, and the
      Subsidiaries named therein.(1)4.6
                                                    
                                                    Registration
      Rights Agreement dated as of August 1, 2006, among Verso Paper
      Holdings LLC, Verso Paper Inc., the Guarantors named therein, Credit
      Suisse Securities (USA) LLC, Lehman Brothers Inc., Citigroup Global
      Markets Inc., Banc of America Securities LLC, ABN AMRO Incorporated, and
      Fifth Third Securities Inc.(1)4.7
                                                    
                                                    Registration
      Rights Agreement dated as of August 1, 2006, among Verso Paper
      Holdings LLC, Verso Paper Inc., the Guarantors named therein, Credit
      Suisse Securities (USA) LLC, Lehman Brothers Inc., Citigroup Global
      Markets Inc., Banc of America Securities LLC, ABN AMRO Incorporated, and
      Fifth Third Securities Inc.(1)10.1
                                                    
                                                    Third
      Amended and Restated Limited Partnership Agreement of Verso Paper
      Management LP dated as of May 20, 2008 (form).(2)10.2
                                                    
                                                    Registration
      Rights Agreement among Verso Paper Investments LP and the individual
      limited partners of Verso Paper Management LP (form).(2)10.3
                                                    
                                                    Credit
      Agreement dated as of August 1, 2006, among Verso Paper Finance Holdings
      LLC, Verso Paper Holdings LLC, the Lenders party thereto, Credit Suisse,
      Cayman Islands Branch, as Administrative Agent, Lehman Brothers Inc., as
      Syndication Agent, and Citigroup Global Markets Inc. and Banc of America
      Securities LLC, as Documentation Agents.(1)10.4
                                                    
                                                    Guarantee
      and Collateral Agreement dated as of August 1, 2006, among Verso Paper
      Finance Holdings LLC, Verso Paper Holdings LLC, the Subsidiaries named
      therein, and Credit Suisse, Cayman Islands Branch, as Administrative
      Agent.(1)10.5
                                                    
                                                    Intellectual
      Property Security Agreement dated as of August 1, 2006, made by Verso
      Paper Finance Holdings LLC, Verso Paper Holdings LLC, Verso Paper Inc.,
      Verso Paper LLC, Verso Androscoggin LLC, Verso Bucksport LLC, Verso
      Quinnesec LLC, Verso Sartell LLC and NexTier Solutions Corporation in
      favor of Credit Suisse, Cayman Islands Branch, as Administrative
      Agent.(1)10.6
                                                    
                                                    Credit
      Agreement dated January 31, 2007, among Verso Paper Finance Holdings LLC,
      Verso Paper Finance Holdings Inc., the Lenders party thereto, Credit
      Suisse, as Administrative Agent, and Citigroup Global Markets Inc., as
      Syndication Agent..(2)10.7
                                                    
                                                    Management
      and Transaction Fee Agreement dated as of August 1, 2006, among Verso
      Paper LLC, Verso Paper Investments LP, Apollo Management V, L.P. and
      Apollo Management VI, L.P.(1)10.8
                                                    *
                                                    Verso
      Paper Corp. 2008 Incentive Award Plan (form),(2)
      as amended by the First Amendment to Verso Paper Corp. 2008 Incentive
      Award Plan.(4)10.9
                                                    *
                                                    Stock
      Option Grant Notice and Stock Option Agreement for Non-Employee Directors
      (form) pursuant to the Verso Paper Corp. 2008 Incentive Award Plan.(4)10.10
                                                    *
                                                    Verso
      Paper Corp. Senior Executive Incentive Bonus Plan (form).(2)10.11
                                                    *
                                                    2009
      Long-Term Cash Award Program for Executives effective as of January 1,
      2009, pursuant to the Verso Paper Corp. Senior Executive Bonus Plan.(5)
   81
    10.12
                                              *
                                              Employment
      Agreement dated as of November 16, 2006, between Mike Jackson and Verso
      Paper Holdings LLC,(1)
      as supplemented by the Letter Agreement dated as of November 16, 2006,
      between Mike Jackson and Verso Paper Holdings LLC,(1)
      and as amended by the First Amendment to Employment Agreement dated as of
      January 1, 2008, between Mike Jackson and Verso Paper Holdings LLC,(2)
      and the Second Amendment to Employment Agreement dated as of December 31,
      2008, between Mike Jackson and Verso Paper Holdings LLC.(5)10.13
                                              *
                                              Letter
      Agreement dated as of February 16, 2007, between Verso Paper
      Management LP and Mike Jackson.(1)10.14
                                              *
                                              Confidentiality
      and Non-Competition Agreement dated as of January 1, 2008, between
      Verso Paper Holdings LLC and Lyle J. Fellows,(2)
      as amended by the First Amendment to Confidentiality and Non-Competition
      Agreement dated as of December 31, 2008, between Verso Paper Holdings LLC
      and Lyle J. Fellows.(5)10.15
                                              *
                                              Confidentiality
      and Non-Competition Agreement dated as of January 1, 2008, between
      Verso Paper Holdings LLC and Michael A. Weinhold,(2)
      as amended by the First Amendment to Confidentiality and Non-Competition
      Agreement dated as of December 31, 2008, between Verso Paper Holdings LLC
      and Michael A. Weinhold.(5)10.16
                                              *
                                              Confidentiality
      and Non-Competition Agreement dated as of January 1, 2008, between
      Verso Paper Holdings LLC and Robert P. Mundy,(2)
      as amended by the First Amendment to Confidentiality and Non-Competition
      Agreement dated as of December 31, 2008, between Verso Paper Holdings LLC
      and Robert P. Mundy.(5)10.17
                                              *
                                              Confidentiality
      and Non-Competition Agreement dated as of January 1, 2008, between
      Verso Paper Holdings LLC and Peter H. Kesser,(2)
      as amended by the First Amendment to Confidentiality and Non-Competition
      Agreement dated as of December 31, 2008, between Verso Paper Holdings LLC
      and Peter H. Kesser.(5)10.18
                                              *
                                              Letter
      Agreement dated as of November 1, 2006, between Verso Paper Management LP
      and L.H. Puckett.(1)10.19
                                              *
                                              Indemnification
      Agreement between Verso Paper Corp. and its directors and executive
      officers (form).(2)21
                                              
                                              Subsidiaries
      of Verso Paper Holdings LLC(6)23
                                              
                                              Consent
      of Resource Information Systems, Inc.31.1
                                              
                                              Certification
      of Principal Executive Officer pursuant to Rule 13a-14(a) under Securities
      Exchange Act of 1934.31.2
                                              
                                              Certification
      of Principal Financial Officer pursuant to Rule 13a-14(a) under Securities
      Exchange Act of 1934.32.1
                                              
                                              Certification
      of Principal Executive Officer pursuant to Rule 13a-14(b) under Securities
      Exchange Act of 1934 and Section 1350 of Chapter 63 of Title 18 of United
      States Code.32.2
                                              
                                              Certification
      of Principal Financial Officer pursuant to Rule 13a-14(b) under Securities
      Exchange Act of 1934 and Section 1350 of Chapter 63 of Title 18 of the
      United States
Code.
   82
   (1)
                Incorporated
      by reference to our Registration Statement on Form S-4 (Registration No.
      333-142283), as amended.(2)
                Incorporated
      by reference to the Registration Statement on Form S-1 (Registration No.
      333-148201), as amended, of Verso Paper Corp.(3)
                Incorporated
      by reference to our Annual Report on Form 10-K for the year ended December
      31, 2007.(4)
                Incorporated
      by reference to the Annual Report on Form 10-K of Verso Paper Corp. for
      the year ended December 31, 2008.(5)
                Incorporated
      by reference to the Current Report on Form 8-K of Verso Paper Corp. filed
      on December 31, 2008.(6)
                This
      exhibit is omitted under the reduced disclosure format permitted by
      General Instruction I(2)(b) of Form 10-K.*
                An
      asterisk denotes a management contract or compensatory plan or
      arrangement.
   83
  SIGNATURES
 
 Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
  Date:  March
      30, 2009VERSO PAPER HOLDINGS
      LLC.By:
                  
                  /s/
      Michael A. JacksonMichael
      A. Jackson
                    President
      and Chief Executive
Officer
  By:
                
                /s/
      Robert P. MundyRobert
      P. Mundy
                  Senior
      Vice President and Chief Financial
Officer
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
  Signature
                                  Position
                                  Date/s/
      Michael A. Jackson
                                  
                                  
                                  March
      30, 2009Michael
      A. Jackson
                                  
                                  President,
      Chief Executive Officer and Director
                                    (Principal
      Executive Officer)/s/
      Robert P. Mundy
                                  
                                  
                                  March
      30, 2009Robert
      P. Mundy
                                  
                                  Senior
      Vice President and Chief Financial
                                    Officer
      (Principal Financial and Accounting Officer)/s/
      Michael E. Ducey
                                  
                                  
                                  March
      30, 2009Michael
      E. Ducey
                                  
                                  Director/s/
      Thomas Gutierrez
                                  
                                  
                                  March
      30, 2009Thomas
      Gutierrez
                                  
                                  Director/s/
      Scott M. KleinmanScott
      M. Kleinman
                                  
                                  Director
                                  March
      30, 2009/s/
      David W. OskinDavid
      W. Oskin
                                  
                                  Director
                                  March
      30, 2009/s/
      Eric L. PressEric
      L. Press
                                  
                                  Director
                                  March
      30, 2009/s/
      L.H. Puckett, Jr.L.H.
      Puckett, Jr.
                                  
                                  Director
                                  March
      30, 2009/s/
      David B. SamburDavid
      B. Sambur
                                  
                                  Director
                                  March
      30, 2009/s/
      Jordan C. Zaken
                                  
                                  
                                  March
      30, 2009Jordan
      C. Zaken
                                  
                                  Director
 
 84
  REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
  To the
Board of Directors and Members of
 Verso
Paper Holdings LLC
 Memphis,
Tennessee
  We have
audited the accompanying consolidated balance sheets of Verso Paper Holdings LLC
(the “Company” or “Successor”), a wholly-owned subsidiary of Verso Paper Finance
Holdings LLC,  as of December 31, 2008 and 2007 (Successor Company balance
sheets), and the related consolidated statements of operations, changes in
member's equity, and cash flows for the years ended December 31, 2008 and 2007
and the five months ended December 31, 2006 (Successor Company
Operations).  We have also audited the accompanying combined
statements of operations and cash flows for the seven months ended July 31, 2006
(Predecessor Operations), and have issued our report thereon dated March
2, 2009; such financial statements and report are included elsewhere in
this Form 10-K.  Our audits also included the financial statement schedule
of the Company listed in Item 15.  This financial statement schedule is the
responsibility of the Company's management.  Our responsibility is to
express an opinion based on our audits.  In our opinion, such financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, present fairly, in all material respects, the
information set forth therein.
   /s/
Deloitte & Touche LLP
   Memphis,
Tennessee
 March 2,
2009
  S-1
   Schedule I
– Valuation Accounts
 Verso
Paper Holdings LLC (Successor) and
 Coated and
Supercalendered Papers Division of International Paper Company
(Predecessor)
 For the
Seven Months Ended July 31, 2006 (Predecessor)
 and Five
Months Ended December 31, 2006 and Years Ended December 31, 2007 and 2008
(Successor)
  Balance
      at
                        
                        
                        Charged
      to
                        
                        
                        Charge-off
                        
                        
                        BalanceBeginning
                        
                        
                        Cost
      and
                        
                        
                        Against
                        
                        
                        at
      End of(in
      thousands of U.S. dollars)
                        
                        of
      Period
                        
                        
                        Expenses
                        
                        
                        Allowances
                        
                        
                        PeriodAllowance
      for uncollectible accounts included underthe
      balance sheet caption "Accounts receivable"(Predecessor):Seven
      Months Ended July 31, 2006
                        
                        $
                        7,302
                        
                        
                        $
                        856
                        
                        
                        $
                        (6,323
                        )
                        
                        $
                        1,835Allowance
      for uncollectible accounts included underthe
      balance sheet caption "Accounts receivable"(Successor):Five
      Months Ended December 31, 2006
                        
                        $
                        1,835
                        
                        
                        $
                        102
                        
                        
                        $
                        -
                        
                        
                        $
                        1,937Year
      Ended December 31, 2007
                        
                        $
                        1,937
                        
                        
                        $
                        (258
                        )
                        
                        $
                        (2
                        )
                        
                        $
                        1,677Year
      Ended December 31, 2008
                        
                        $
                        1,677
                        
                        
                        $
                        999
                        
                        
                        $
                        (783
                        )
                        
                        $
                        1,893
  S-2