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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
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 NO.: 000-09409
MERCER INTERNATIONAL INC.
(Exact name of Registrant as specified in its charter)
WASHINGTON 91-6087550
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
SCHUTZENGASSE 32, ZURICH, SWITZERLAND, 8001
(Address of office)
41 (43) 344 7070
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
----- -----
The Registrant had 16,794,899 shares of beneficial interest outstanding as at
August 13, 2002.
================================================================================
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
MERCER INTERNATIONAL INC.
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2002
(UNAUDITED)
2
MERCER INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
AS AT JUNE 30, 2002 AND DECEMBER 31, 2001
(UNAUDITED)
(EUROS IN THOUSANDS)
JUNE 30, DECEMBER 31,
2002 2001
------------ ----------------
ASSETS
Current Assets
Cash and cash equivalents E 22,873 E 11,741
Investments 1,788 4,549
Receivables 51,622 47,892
Inventories 25,727 25,062
Prepaid and other 3,706 3,968
------------ ----------------
Total current assets 105,716 93,212
Long-Term Assets
Cash restricted 25,857 33,388
Properties 268,359 278,617
Investments 7,253 8,598
Notes receivable 5,298 5,475
Deferred income tax 10,197 10,303
------------ ----------------
316,964 336,381
------------ ----------------
E 422,680 E 429,593
============ ================
LIABILITIES
Current Liabilities
Accounts payable and accrued expenses E 36,365 E 51,916
Notes payable 8,502 7,392
Debt 19,193 18,360
------------ ----------------
Total current liabilities 64,060 77,668
Long-Term Liabilities
Debt 208,584 216,871
Other 3,043 3,441
------------ ----------------
211,627 220,312
------------ ----------------
Total liabilities 275,687 297,980
SHAREHOLDERS' EQUITY
Shares of beneficial interest 76,722 76,722
Retained earnings 72,267 59,111
Accumulated other comprehensive loss (1,996) (4,220)
------------ ----------------
146,993 131,613
------------ ----------------
E 422,680 E 429,593
============ ================
The accompanying notes are an integral part of these financial statements.
3
MERCER INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
FOR SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(UNAUDITED)
(EUROS IN THOUSANDS, EXCEPT FOR EARNINGS PER SHARE)
2002 2001
---------- ----------
Revenues
Sales E 119,535 E 112,404
Transportation 2,753 2,772
Other 5,574 5,575
---------- ----------
127,862 120,751
Expenses
Cost of pulp and paper 104,603 93,004
Transportation 2,478 2,031
General and administrative 14,396 9,452
Interest expense 8,099 8,366
(Gain) loss on foreign currency
derivative contracts (14,881) 2,846
---------- ----------
114,695 115,699
---------- ----------
Income before income taxes 13,167 5,052
Income taxes 11 29
---------- ----------
Net income 13,156 5,023
Retained earnings, beginning of period 59,111 61,934
---------- ----------
Retained earnings, end of period E 72,267 E 66,957
========== ==========
Earnings per share
Basic E 0.78 E 0.30
========== ==========
Diluted E 0.77 E 0.29
========== ==========
The accompanying notes are an integral part of these financial statements.
4
MERCER INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
FOR THREE MONTHS ENDED JUNE 30, 2002 AND 2001
(UNAUDITED)
(EUROS IN THOUSANDS, EXCEPT FOR EARNINGS PER SHARE)
2002 2001
---------- ----------
Revenues
Sales E 60,328 E 55,608
Transportation 1,337 1,477
Other 1,910 2,933
---------- ----------
63,575 60,018
Expenses
Cost of pulp and paper 50,684 48,580
Transportation 1,436 927
General and administrative 7,766 5,591
Interest expense 4,081 4,522
(Gain) loss on foreign currency
derivative contracts (18,948) 308
---------- ----------
45,019 59,928
---------- ----------
Income before income taxes 18,556 90
Income taxes 11 29
---------- ----------
Net income 18,545 61
Retained earnings, beginning of period 53,722 66,896
---------- ----------
Retained earnings, end of period E 72,267 E 66,957
========== ==========
Earnings per share
Basic E 1.10 E 0.00
========== ==========
Diluted E 1.08 E 0.00
========== ==========
The accompanying notes are an integral part of these financial statements.
5
MERCER INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(UNAUDITED)
(EUROS IN THOUSANDS)
2002 2001
---------- ----------
Net income E 13,156 E 5,023
Other comprehensive income:
Foreign currency translation adjustments 3,513 233
Unrealized (loss) gain on securities (1,289) 988
---------- ----------
Other comprehensive income 2,224 1,221
---------- ----------
Total comprehensive income E 15,380 E 6,244
========== ==========
The accompanying notes are an integral part of these financial statements.
6
MERCER INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THREE MONTHS ENDED JUNE 30, 2002 AND 2001
(UNAUDITED)
(EUROS IN THOUSANDS)
2002 2001
---------- ----------
Net income E 18,545 E 61
Other comprehensive income:
Foreign currency translation adjustments 2,186 (608)
Unrealized (loss) gain on securities (2,148) 309
---------- ----------
Other comprehensive income (loss) 38 (299)
---------- ----------
Total comprehensive income (loss) E 18,583 E (238)
========== ==========
The accompanying notes are an integral part of these financial statements.
7
MERCER INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(UNAUDITED)
(EUROS IN THOUSANDS)
2002 2001
---------- ----------
Cash Flows from Operating Activities:
Net income E 13,156 E 5,023
Adjustments to reconcile net income
from operations to cash
Depreciation and amortization 13,489 11,593
Changes in current assets and liabilities
Investments 3,965 (910)
Inventories (629) 1,941
Receivables (2,639) 5,242
Accounts payable and accrued expenses (16,797) (2,692)
Other 374 (10)
---------- ----------
Net cash provided by operating
activities 10,919 20,187
Cash Flows from Investing Activities:
Purchases of fixed assets,
net of investment grants (1,710) (4,923)
Decrease in note receivable - 4,790
Other (11) 65
---------- ----------
Net cash used in investing
activities (1,721) (68)
Cash Flows from Financing Activities:
Cash restricted 7,532 1,530
Increase in indebtedness 4,170 -
Decrease in indebtedness (9,727) (23,685)
---------- ----------
Net cash provided by (used in)
financing activities 1,975 (22,155)
Effect of exchange rate changes on cash and
cash equivalents (41) (1,063)
---------- ----------
Net increase (decrease) in cash
and cash equivalents 11,132 (3,099)
Cash and cash equivalents,
beginning of period 11,741 19,691
---------- ----------
Cash and cash equivalents, end of period E 22,873 E 16,592
========== ==========
The accompanying notes are an integral part of these financial statements.
8
MERCER INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR SIX MONTHS ENDED JUNE 30, 2002
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The interim period consolidated financial statements contained herein include
the accounts of Mercer International Inc. and its subsidiaries (the "Company").
The interim period consolidated financial statements have been prepared by the
Company pursuant to the rules and regulations of the U.S. Securities and
Exchange Commission (the "SEC"). Certain information and footnote disclosure
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
SEC rules and regulations. The interim period consolidated financial statements
should be read together with the audited consolidated financial statements and
accompanying notes included in the Company's latest annual report on Form 10-K
for the fiscal year ended December 31, 2001. In the opinion of the Company, the
unaudited consolidated financial statements contained herein contain all
adjustments necessary to present a fair statement of the results of the interim
periods presented.
NOTE 2. REPORTING CURRENCY
Effective January 1, 2002, the Company changed its reporting currency from the
U.S. dollar to the Euro. The reason for this change is because a significant
majority of the Company's business transactions are originally denominated in
Euros. The Company's functional currency and reporting currency are now the
same. Prior years' financial statements had been reported in U.S. dollars, but
have been restated into Euros using the guidance of Statement of Financial
Accounting Standards No. 52, "Foreign Currency Translation" ("SFAS 52").
Therefore, the financial statements for prior years depict the same trends that
the previous financial statements presented in U.S. dollars show.
The Euro was initially implemented by the European Community on January 1, 1999.
By adopting the Euro as the Company's reporting currency, most of the cumulative
foreign currency translation losses were eliminated from the Company's balance
sheets and most of the foreign currency translation losses were eliminated from
the Company's statements of comprehensive income. Prior to the restatement, at
December 31, 2001, there was a cumulative foreign currency translation loss of
$64,016 (in thousands of U.S. dollars) included as part of shareholders' equity
in the balance sheet. In conjunction with the restatement, the majority of this
amount was eliminated. During the six months ended June 30, 2001, there was a
foreign currency translation loss of $13,004 (in thousands of U.S. dollars)
included as part of comprehensive income (loss). In conjunction with the
restatement, the majority of this amount was eliminated.
For periods prior to 1999, when the Company's functional currency was the German
deutschmark, the financial statements were restated using a fixed rate of 0.5113
Euros to each deutschmark. As a result of using the fixed exchange rate, the
Company's consolidated financial statements for those periods may not be
comparable to the financial statements of companies from other countries
reporting in the Euro.
9
NOTE 3. EARNINGS PER SHARE
Basic earnings per share is computed by dividing income available to common
shareholders by the weighted average number of shares outstanding during a
period. Diluted earnings per share takes into consideration shares outstanding
(computed under basic earnings per share) and potentially dilutive shares. The
weighted average number of shares outstanding for the purposes of calculating
basic earnings per share was 16,874,899 for the six months and three months
ended June 30, 2002 and 2001, respectively. The weighted average number of
shares outstanding for the purposes of calculating diluted earnings per share
was 17,054,998 and 17,154,277 for the six months ended June 30, 2002 and 2001,
respectively, and 17,093,390 and 17,089,806 for the three months ended June 30,
2002 and 2001, respectively.
NOTE 4. BUSINESS SEGMENT INFORMATION
The Company operates in two reportable business segments: pulp and paper. The
segments are managed separately because each business requires different
production and marketing strategies.
Summarized financial information concerning the segments is shown in the
following table:
Pulp Paper Total
--------- --------- ---------
(Euros in thousands)
Six Months Ended June 30, 2002
- ------------------------------
Sales to external customers E 68,084 E 51,451 E 119,535
Intersegment net sales 2,925 - 2,925
Segment profit 13,039 3,376 16,415
Reconciliation of profit:
Total profit for reportable segments E 16,415
Elimination of intersegment profits 833
Unallocated amounts, other corporate expenses (4,081)
---------
Consolidated income before income taxes E 13,167
=========
Six Months Ended June 30, 2001
- ------------------------------
Sales to external customers E 80,449 E 31,955 E 112,404
Intersegment net sales 3,608 - 3,608
Segment profit 7,251 876 8,127
Reconciliation of profit:
Total profit for reportable segments E 8,127
Elimination of intersegment profits 671
Unallocated amounts, other corporate expenses (3,746)
---------
Consolidated income before income taxes E 5,052
=========
10
Pulp Paper Total
--------- --------- ---------
(Euros in thousands)
Three Months Ended June 30, 2002
- --------------------------------
Sales to external customers E 34,451 E 25,877 E 60,328
Intersegment net sales 1,524 - 1,524
Segment profit 18,906 596 19,502
Reconciliation of profit:
Total profit for reportable segments E 19,502
Elimination of intersegment profits 456
Unallocated amounts, other corporate expenses (1,402)
---------
Consolidated income before income taxes E 18,556
=========
Three Months Ended June 30, 2001
- --------------------------------
Sales to external customers E 40,763 E 14,845 E 55,608
Intersegment net sales 1,762 - 1,762
Segment profit 1,272 801 2,073
Reconciliation of profit:
Total profit for reportable segments 2,073
Elimination of intersegment profits 379
Unallocated amounts, other corporate expenses (2,362)
---------
Consolidated income before income taxes E 90
=========
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Mercer International Inc. is a pulp and paper company and its operations are
primarily located in Germany and Switzerland. The following discussion and
analysis of the results of operations and financial condition of the Company for
the six months and three months ended June 30, 2002 should be read in
conjunction with the consolidated financial statements and related notes
included in this quarterly report, as well as the Company's most recent annual
report on Form 10-K for the fiscal year ended December 31, 2001 filed with the
U.S. Securities and Exchange Commission. In this document: (i) unless the
context otherwise requires, the "Company" refers to Mercer International Inc.
and its subsidiaries; and (ii) a "tonne" is one metric ton or 2,204.6 pounds.
Effective January 1, 2002, the Company changed its reporting currency from the
U.S. dollar to the Euro, as a significant majority of the Company's business
transactions are originally denominated in Euros. As a result, the Company's
financial statements for prior periods included in this quarterly report have
been restated to Euros, but depict the same trends as previously shown. The
Company translates foreign assets and liabilities at the rate of exchange on the
balance sheet date. Revenues and expenses are translated at the average rate of
exchange prevailing during the period. The period end exchange rate for the
U.S. dollar to the Euro as at June 30, 2002 was Euro 1.0144. The period average
exchange rates for the U.S. dollar to the Euro for the six month and three month
periods ended June 30, 2002 were Euro 1.1143 and Euro 1.0884, respectively. See
Note 2 to the interim period consolidated financial statements included in this
quarterly report.
RESULTS OF OPERATIONS - Six Months Ended June 30, 2002
- --------------------- ------------------------------
The following table sets forth selected sales data for the Company for the
periods indicated:
SIX MONTHS ENDED JUNE 30,
-------------------------------------
2002 2001
------------ ------------
(unaudited)
(Euros in thousands)
SALES BY PRODUCT CLASS
Specialty papers(1) E 40,986 E 19,599
Printing papers 10,465 12,356
Pulp 68,084 80,449
------------ ------------
Total(2) E 119,535 E 112,404
============ ============
SALES BY GEOGRAPHIC AREA
Germany E 46,925 E 53,021
European Union(3) 40,170 39,690
Eastern Europe and other 32,440 19,693
------------ ------------
Total(2) E 119,535 E 112,404
============ ============
SALES BY VOLUME (tonnes)
Specialty papers(1) 31,870 20,909
Printing papers 12,207 13,848
Pulp 149,798 142,082
------------ ------------
Total(2) 193,875 176,839
============ ============
- -------------------
(1) The Company acquired its specialty paper mill in Landqart, Switzerland
in December 2001. These amounts include the results from the Landqart
mill as of January 1, 2002.
(2) Excluding intercompany sales.
(3) Not including Germany.
12
In the six months ended June 30, 2002, revenues increased by approximately 5.9%
to Euro 127.9 million from Euro 120.8 million in the six months ended June 30,
2001, primarily as a result of increased sales of specialty papers resulting
from the acquisition of the paper mill in Landqart, Switzerland in December
2001. In the six months ended June 30, 2002, pulp and paper revenues increased
by approximately 6.3% from the comparable period of 2001, on a 15.4% decrease in
pulp sales and a 61.0% increase in paper sales.
Pulp sales in the six months ended June 30, 2002 decreased to Euro 68.1 million
from Euro 80.4 million in the comparable period of 2001, as global economic
weakness and high producer inventory levels lead to lower prices. List prices
for kraft pulp in Europe decreased from approximately Euro 755 (U.S. $710) per
tonne at the end of 2000 to approximately Euro 528 (U.S. $470) per tonne at the
end of 2001, approximately Euro 505 (U.S. $440) per tonne at the end of the
first quarter of 2002 and approximately Euro 477 (U.S. $470) per tonne at the
end of the second quarter of 2002.
Paper sales in the six months ended June 30, 2002 increased to Euro 51.5 million
from Euro 32.0 million in the comparable period of 2001. Sales of specialty
papers in the six months ended June 30, 2002 increased to Euro 41.0 million from
Euro 19.6 million in the six months ended June 30, 2001, as a result of the
acquisition of the Landqart mill. On average, prices realized by the Company in
the six months ended June 30, 2002 for specialty papers increased by
approximately 37.2% and for printing papers decreased by approximately 3.9%,
compared to the same period in 2001.
Expenses decreased to Euro 114.7 million in the six months ended June 30, 2002
from Euro 115.7 million in the comparable period of 2001. Operating expenses in
the current period increased from the comparable period of 2001, primarily as a
result of the inclusion of the results of the Landqart mill. On average, the
Company's unit fibre costs for pulp production in the six months ended June 30,
2002 decreased by approximately 7.5%, compared to the same period in 2001. As a
result of the acquisition of the Landqart mill, waste paper no longer represents
a significant portion of the fibre used at the Company's paper mills.
General and administrative expenses increased to Euro 14.4 million in the six
months ended June 30, 2002 from Euro 9.5 million in the six months ended June
30, 2001, primarily due to increased administrative expenses as a result of the
acquisition of the Landqart mill and an increase in professional fees, costs and
expenses. Interest expense in the six months ended June 30, 2002 decreased to
Euro 8.1 million from Euro 8.4 million in the comparable period of 2001,
primarily as a result of payments made on outstanding indebtedness during the
current period.
Total expenses in the current period decreased from the comparable period of
2001, due to a gain recognized on foreign currency derivative contracts during
the current period. The Company recorded a gain of Euro 14.9 million on its
foreign currency derivative contracts in the six months ended June 30, 2002.
See "Item 3. Quantitative and Qualitative Disclosures About Market Risk" for
information with respect to foreign currency derivatives.
For the six months ended June 30, 2002, net income increased to Euro 13.2
million, or Euro 0.78 per share on a basic basis or Euro 0.77 per share on a
diluted basis, in large part due to the gain recognized on foreign currency
derivative contracts in the current period, from Euro 5.0 million, or Euro 0.30
per share on a basic basis or Euro 0.29 per share on a diluted basis, in the
comparable period of 2001.
13
RESULTS OF OPERATIONS - Three Months Ended June 30, 2002
- --------------------- --------------------------------
The following table sets forth selected sales data for the Company for the
periods indicated:
THREE MONTHS ENDED JUNE 30,
----------------------------------------
2002 2001
------------ -------------
(unaudited)
(Euros in thousands)
SALES BY PRODUCT CLASS
Specialty papers(1) E 20,549 E 8,973
Printing papers 5,328 5,872
Pulp 34,451 40,763
------------ -------------
Total(2) E 60,328 E 55,608
============ =============
SALES BY GEOGRAPHIC AREA
Germany E 22,556 E 24,466
European Union(3) 22,402 21,318
Eastern Europe and other 15,370 9,824
------------ -------------
Total(2) E 60,328 E 55,608
============ =============
SALES BY VOLUME (tonnes)
Specialty papers(1) 15,432 9,865
Printing papers 6,093 6,799
Pulp 76,300 80,340
------------ -------------
Total(2) 97,825 97,004
============ =============
- -------------------
(1) The Company acquired its specialty paper mill in Landqart, Switzerland
in December 2001. These amounts include the results from the Landqart
mill for the second quarter of 2002.
(2) Excluding intercompany sales.
(3) Not including Germany.
In the three months ended June 30, 2002, revenues increased by approximately
5.9% to Euro 63.6 million from Euro 60.0 million in the three months ended June
30, 2001, primarily as a result of increased sales of specialty papers resulting
from the acquisition of the paper mill in Landqart, Switzerland in December
2001. In the three months ended June 30, 2002, pulp and paper revenues
increased by approximately 8.5% from the comparable period of 2001, on a 15.5%
decrease in pulp sales and a 74.3% increase in paper sales.
Pulp sales in the three months ended June 30, 2002 decreased to Euro 34.5
million from Euro 40.8 million in the comparable period of 2001, as global
economic weakness and high producer inventory levels lead to lower prices. List
prices for kraft pulp in Europe decreased from approximately Euro 755 (U.S.
$710) per tonne at the end of 2000 to approximately Euro 528 (U.S. $470) per
tonne at the end of 2001, approximately Euro 505 (U.S. $440) per tonne at the
end of the first quarter of 2002 and approximately Euro 477 (U.S.$470) per tonne
at the end of the second quarter of 2002.
Paper sales in the three months ended June 30, 2002 increased to Euro 25.9
million from Euro 14.8 million in the comparable period of 2001. Sales of
specialty papers in the three months ended June 30, 2002 increased to Euro 20.5
million from Euro 9.0 million in the three months ended June 30, 2001, as a
result of the acquisition of the Landqart mill. On average, prices realized by
the Company in the three months ended June 30, 2002 for specialty papers
increased by approximately 46.4% and for printing papers increased by
approximately 1.3%, compared to the same period in 2001.
Expenses decreased to Euro 45.0 million in the three months ended June 30, 2002
from Euro 59.9 million in the comparable period of 2001. Operating expenses in
the current period increased from
14
the comparable period of 2001, primarily as a result of the inclusion of the
results of the Landqart mill. On average, the Company's unit fibre costs
for pulp production in the three months ended June 30, 2002 decreased by
approximately 7.1%, compared to the same period in 2001. As a result of the
acquisition of the Landqart mill, waste paper no longer represents a significant
portion of the fibre used at the Company's paper mills.
General and administrative expenses increased to Euro 7.8 million in the three
months ended June 30, 2002 from Euro 5.6 million in the three months ended June
30, 2001, primarily due to increased administrative expenses as a result of the
acquisition of the Landqart mill and an increase in professional fees, costs and
expenses. Interest expense in the three months ended June 30, 2002 decreased to
Euro 4.1 million from Euro 4.5 million in the comparable period of 2001,
primarily as a result of payments made on outstanding indebtedness during the
current period.
Total expenses in the current period decreased from the comparable period of
2001, due to a gain recognized on foreign currency derivative contracts during
the current period. The Company recorded a gain of Euro 18.9 million on its
foreign currency derivative contracts in the three months ended June 30, 2002.
See "Item 3. Quantitative and Qualitative Disclosures About Market Risk" for
information with respect to foreign currency derivatives.
For the three months ended June 30, 2002, net income increased to Euro 18.5
million, or Euro 1.10 per share on a basic basis or Euro 1.08 per share on a
diluted basis, in large part due to the gain recognized on foreign currency
derivative contracts in the current period, from Euro 0.1 million, or nil per
share on a basic and diluted basis, in the comparable period of 2001.
LIQUIDITY AND CAPITAL RESOURCES
- ----------------------------------
The following table is a summary of selected financial information concerning
the Company for the periods indicated:
AS AT AS AT
JUNE 30, 2002 DECEMBER 31, 2001
------------- -----------------
(unaudited)
(Euros in thousands)
FINANCIAL POSITION
Working capital E 41,656 E 15,544
Property, plant and equipment (net) 268,359 278,617
Total assets 422,680 429,593
Long-term debt 208,584 216,871
Shareholders' equity 146,993 131,613
At June 30, 2002, the Company's cash and cash equivalents totalled Euro 22.9
million, a net increase of approximately Euro 11.1 million from Euro 11.7
million at December 31, 2001. At June 30, 2002, the Company had short-term
trading securities totalling Euro 1.8 million, compared to Euro 4.5 million at
December 31, 2001.
15
Operating Activities
- ---------------------
Operating activities provided cash of Euro 10.9 million in the six months ended
June 30, 2002, compared to Euro 20.2 million in the same period in 2001. An
increase in receivables used cash of Euro 2.6 million in the current period,
compared to a decrease in receivables providing cash of Euro 5.2 million in the
comparative period of 2001. A decrease in accounts payable and accrued expenses
used cash of Euro 16.8 million in the six months ended June 30, 2002, compared
to Euro 2.7 million in the six months ended June 30, 2001. Higher inventories
used cash of Euro 0.6 million in the six months ended June 30, 2002, compared to
lower inventories providing cash of Euro 1.9 million in the six months ended
June 30, 2001. A net decrease in investment securities provided cash of Euro
4.0 million in the six months ended June 30, 2002, compared to a net increase in
investment securities using cash of Euro 0.9 million in the comparative period
of 2001.
Investing Activities
- ---------------------
Investing activities in the six months ended June 30, 2002 used cash of Euro 1.7
million, which consisted primarily of net purchases of properties, compared to
using cash of Euro 0.1 million in the six months ended June 30, 2001.
The Company completed a major capital project to convert its Rosenthal pulp mill
from the production of sulphite pulp to kraft pulp, increase capacity and
improve operations (the "Conversion Project") in late 1999. The Conversion
Project was financed through a combination of borrowings under a project loan,
non-refundable governmental grants, governmental assistance and guarantees for
long-term project financing and an equity investment by the Company.
Financing Activities
- ---------------------
Financing activities provided cash of Euro 2.0 million in the six months ended
June 30, 2002 as a decrease in restricted cash related to the Conversion Project
provided cash of Euro 7.5 million in the current period. A net decrease in
indebtedness used cash of Euro 5.6 million in the current period, including the
repayment of Euro 6.2 million of indebtedness incurred in connection with the
Conversion Project. Financing activities used cash of Euro 22.2 million in the
six months ended June 30, 2001, primarily as a result of the reduction of
indebtedness during the period.
Effective January 2000, the Company agreed, subject to certain conditions, to
acquire an interest in a "greenfield" project to construct and operate a 550,000
tonne softwood kraft pulp mill to be located at Stendal, Germany (the "Stendal
Project"). In 2001, a shareholder removed itself from the Stendal Project
pursuant to a corporate reorganization and its pro rata share of the project was
redistributed among the remaining shareholders for a nominal amount. In
addition, in 2002 a shareholder agreed to transfer to the Company the pro rata
share of the project distributed to it as a result of the removal from the
Stendal Project of the former shareholder. Given the increase in the Company's
participation in the Stendal Project, pursuant to the terms of the subscription
agreement, the Company's participation in the Stendal Project will increase to
approximately 63%. The increase in ownership is subject to certain conditions,
including the entering into of a formal shareholders' agreement and the
completion of financing in connection with the project. The Stendal Project has
received the necessary permits for the construction of the Stendal mill as well
as German federal and state grants and subsidies. The Company has been notified
by the European Union that such German federal and state grants and subsidies
comply with the European Union guidelines applicable to
16
investments in the former East Germany. The Company is in the process of
concluding the financing requirements for the Stendal Project. Financing for
the Stendal Project will consist of a combination of third party debt financing,
for which the Company has received a financing commitment letter from a German
bank, as well as an equity contribution by the Company. Due to the timing and
the complexity of the Stendal Project, it is anticipated that a significant part
of the equity contribution to be made by the Company will be financed on an
interim basis. The Stendal Project is currently estimated to cost approximately
Euro 884.2 million and to be completed in 2004. See "Stendal Pulp Mill Project
Uncertainties".
Other than the agreement relating to the Stendal Project, the Company had no
material commitments to acquire assets or operating businesses as at June 30,
2002, although it is considering a number of initiatives relating to potential
acquisitions and joint ventures both in Europe and North America. The Company
anticipates that there will be acquisitions of businesses, the redeployment of
assets or commitments to projects in the future. To achieve its long-term goals
of expanding its asset and earnings base through mergers and acquisitions, the
Company will require substantial capital resources. The necessary resources
will be generated from cash flow from operations, issuances of securities and/or
borrowing against and/or the sale of assets.
Foreign Currency
- -----------------
Effective January 1, 2002, the Company changed its reporting currency from the
U.S. dollar to the Euro as a significant majority of the Company's business
transactions are originally denominated in Euros. By adopting the Euro, most
cumulative foreign currency translation losses of the Company were eliminated.
However, the Company holds certain assets and liabilities in U.S. dollars, Swiss
francs and, to a lesser extent, in Canadian dollars. Accordingly, the Company's
consolidated financial results are subject to foreign currency exchange rate
fluctuations.
The Company translates U.S. dollar, Swiss franc and Canadian dollar denominated
assets and liabilities into Euros at the rate of exchange on the balance sheet
date. Unrealized gains or losses from these translations are recorded as
shareholders' equity on the Company's balance sheet and do not affect the net
earnings of the Company.
The Company's cumulative foreign exchange translation gain increased from Euro
1.3 million at December 31, 2001 to Euro 4.8 million at June 30, 2002.
The average and period end exchange rates for the U.S. dollar to the Euro for
the periods indicated are as follows:
QUARTER ENDED QUARTER ENDED
JUNE 30, 2002 JUNE 30, 2001
---------------------------- ----------------------------
PERIOD END PERIOD AVERAGE PERIOD END PERIOD AVERAGE
---------- -------------- ---------- --------------
RATE OF EXCHANGE
Euro 1.0144 1.0884 1.1800 1.1452
Based upon the period average exchange rate in the six months ended June 30,
2002, the U.S. dollar decreased by approximately 0.7% in value against the Euro
since December 31, 2001.
17
Cyclical Nature of Business; Competitive Position
- ------------------------------------------------------
The pulp and paper business is cyclical in nature and markets for the Company's
principal products are characterized by periods of supply and demand imbalance,
which in turn affects product prices. The markets for pulp and paper are highly
competitive and sensitive to cyclical changes in industry capacity and in the
economy, both of which can have a significant influence on selling prices
and the earnings of the Company. Demand for pulp and paper products has
historically been determined by the level of economic growth and has been
closely tied to overall business activity. The competitive position of the
Company is influenced by the availability and quality of raw materials (fibre)
and its experience in relation to other producers with respect to inflation,
energy, transportation, labour costs and productivity.
Stendal Pulp Mill Project Uncertainties
- -------------------------------------------
The Company's participation in the Stendal Project is subject to certain
conditions, including the completion of financing. In addition, the Stendal
Project itself is subject to various risks and uncertainties customary to large
"greenfield" projects of this nature which may result in the Stendal Project not
proceeding as currently planned, or at all, including the availability and cost
of materials and labour, construction delays, cost overruns, weather conditions,
governmental regulations, availability of adequate financing, increases in
long-term interest rates and increases in taxes and other governmental fees.
The Stendal Project is also subject to extensive and complex regulations and
environmental compliance which may result in delays, in the project company
and/or its shareholders, including the Company, incurring substantial costs in
relation thereto or in the Stendal Project being amended or not proceeding at
all.
The implementation of the Stendal Project is currently expected to commence in
2002 and be completed in 2004. However, there can be no assurance that the
Stendal Project will proceed as currently planned, or at all.
Forward-Looking Statements
- ---------------------------
Statements in this report, to the extent they are not based on historical
events, constitute forward-looking statements. Forward-looking statements
include, without limitation, statements regarding the outlook for future
operations, forecasts of future costs and expenditures, the evaluation of market
conditions, the outcome of legal proceedings, the adequacy of reserves, or other
business plans. Investors are cautioned that forward-looking statements are
subject to an inherent risk that actual results may vary materially from those
described herein. Factors that may result in such variance, in addition to
those accompanying the forward-looking statements, include changes in interest
rates, commodity prices, and other economic conditions; actions by competitors;
changing weather conditions and other natural phenomena; actions by government
authorities; uncertainties associated with legal proceedings; technological
development; future decisions by management in response to changing conditions;
and misjudgments in the course of preparing forward-looking statements.
18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
The Company is exposed to market risks from changes in interest rates, foreign
currency exchange rates and equity prices which may affect its results of
operations and financial condition. The Company manages these risks through
internal risk management policies. As a result of the change in the Company's
reporting currency from the U.S. dollar to the Euro, the Company is no longer
sensitive to foreign currency exchange rate fluctuations in connection with cash
restricted. The Company also uses derivative instruments in regard to its
exposure to interest rate, currency and pulp price risks. The derivative
instruments are not designated as hedging instruments and the purpose of the
derivative activity is speculative in nature, as management uses such tools
either to augment the Company's potential gains or to reduce the Company's
potential losses, depending on management's perception of future economic events
and developments. If any of the variety of instruments and strategies the
Company utilizes are not effective, the Company may incur losses. Many of the
Company's strategies are based on historical trading patterns and correlations.
However, these strategies may not be fully effective in all market environments
or against all types of risks. Unexpected market developments may affect the
Company's risk management strategies during this time, and unanticipated
developments could impact the Company's risk management strategies in the
future.
In December 2000, the Company entered into U.S. dollar/Euro foreign currency
forward rate swaps to manage its risk exposure with respect to in aggregate
approximately Euro 223.3 million of the principal amount of its long-term
indebtedness. The notional amount outstanding at June 30, 2002 was Euro 211.1
million and there was a fair value gain of Euro 16.0 million on these contracts
as at June 30, 2002. These foreign currency forward rate swaps were
subsequently settled and realized in July 2002 at a gain of Euro 13.9 million,
which was accrued for in the current period. A currency gain of Euro 0.2
million was recognized when loan repayments were made under the currency swap
contracts during the current period.
As a consequence of the settlement of these foreign currency forward rate swaps,
interest on these swaps will be paid from April 1, 2002 to September 29, 2002 at
the six-month Euribor plus bank margin rate and 4.5% fixed rate including bank
margin, as applicable, in accordance with the terms of the original underlying
loans.
Subsequently in July 2002, the Company renewed these previously settled foreign
currency forward rate swaps in terms of both the currency and interest
components. The interest component of the swaps is required under the terms of
the facility agreement related to the Company's long-term indebtedness, and
becomes effective for the period starting September 30, 2002. For the
outstanding principal amounts of Euro 74.5 million and Euro 130.4 million under
the facility agreement, all repayment instalments from September 30, 2002
until September 30, 2013 and September 30, 2008, respectively, were swapped
into U.S. dollar amounts at a rate of Euro 1.0050. The interest rates
were swapped into the six-month U.S. dollar/Libor plus bank margin rate and
three-month U.S. dollar/Libor rate, respectively, with a cap on both of these
floating interest rates of 6.8% until September 28, 2007.
During the second quarter of 2001, the Company entered into two U.S. dollar/Euro
forward contracts in the aggregate amount of approximately Euro 22.4 million,
which matured in the second quarter of 2002 and a net gain of Euro 0.2 million
was recognized in the current period.
19
During the second quarter of 2002, two U.S.$10 million forward contracts were
sold and bought, effectively cancelling out each other, and a holding gain of
Euro 0.6 million was recognized. These contracts are to mature in the third or
fourth quarter of 2002.
As at June 30, 2002, no derivative contract had been executed with respect to
pulp prices.
Any change in the fair value of derivative instruments is included in the
determination of earnings.
In July 2002, the Company sold a U.S. dollar/Euro forward contract in the amount
of U.S.$20 million. The contract is to mature in March 2003.
Reference is made to the Company's annual report on Form 10-K for the year ended
December 31, 2001 for additional information concerning market risk.
20
PART II. OTHER INFORMATION
-----------------
ITEM 1. LEGAL PROCEEDINGS
The Company is subject to routine litigation incidental to its business. The
Company does not believe that the outcome of such litigation will have a
material adverse effect on its business or financial condition.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
99.1 Certificate of Chief Executive Officer
99.2 Certificate of Chief Financial Officer
(b) REPORTS ON FORM 8-K
None.
21
SIGNATURES
Pursuant to the requirements 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.
MERCER INTERNATIONAL INC.
By: /s/ R. Ian Rigg
-----------------------
R. Ian Rigg
Vice President and
Chief Financial Officer
Date: August 13, 2002
22