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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, 2003
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.)
14900 INTERURBAN AVENUE SOUTH, SUITE 282, SEATTLE, WA 98168
(Address of office)
(206) 674-4639
(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
--- ---
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). YES X NO
--- ---
The Registrant had 16,794,899 shares of beneficial interest outstanding as at
August 14, 2003.
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PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
MERCER INTERNATIONAL INC.
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2003
(Unaudited)
FORM 10-Q
QUARTERLY REPORT - PAGE 2
MERCER INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
As at June 30, 2003 and December 31, 2002
(Unaudited)
(Euros in thousands)
June 30, December 31,
2003 2002
---------- ------------
ASSETS
Current Assets
Cash and cash equivalents E 21,951 E 30,261
Cash restricted 13,234 9,459
Investments 333 307
Receivables 52,427 31,924
Inventories 20,514 16,375
Prepaid and other 6,339 7,891
---------- ----------
Total current assets 114,798 96,217
Long-Term Assets
Cash restricted 40,859 38,795
Properties 518,248 441,990
Investments 5,391 5,592
Equity method investment 7,159 7,019
Deferred income tax 10,054 10,137
---------- ----------
581,711 503,533
---------- ----------
E 696,509 E 599,750
========== ==========
LIABILITIES
Current Liabilities
Accounts payable and accrued expenses E 39,785 E 32,866
Construction in progress costs payable 62,339 24,885
Note payable 1,997 832
Note payable, construction in progress 45,000 15,000
Debt, current portion 21,852 16,306
---------- ----------
Total current liabilities 170,973 89,889
Long-Term Liabilities
Debt, construction in progress, less current portion 150,506 146,485
Debt, less current portion 193,186 205,393
Derivative financial instruments, construction
in progress 58,052 30,108
Other 2,497 2,906
---------- ----------
404,241 384,892
---------- ----------
Total liabilities 575,214 474,781
Minority interest - -
SHAREHOLDERS' EQUITY
Shares of beneficial interest 76,995 76,995
Accumulated other comprehensive income (loss) 1,560 (4,815)
Retained earnings 42,740 52,789
---------- ----------
121,295 124,969
---------- ----------
E 696,509 E 599,750
========== ==========
The accompanying notes are an integral part of these financial statements.
FORM 10-Q
QUARTERLY REPORT - PAGE 3
MERCER INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
For Six Months Ended June 30, 2003 and 2002
(Unaudited)
(Euros in thousands, except for earnings per share)
2003 2002
---------- ----------
Revenues
Sales of pulp and paper E 91,274 E 119,535
Transportation 2,022 2,753
Other 5,018 3,849
---------- ----------
98,314 126,137
Cost of sales
Pulp and paper 86,472 104,603
Transportation 1,863 2,478
---------- ----------
Gross profit 9,979 19,056
General, administrative and other (8,730) (14,396)
---------- ----------
Income from operations 1,249 4,660
Other income (expense)
Interest expense (4,651) (8,099)
Investment income (loss) 639 (667)
Gain on derivative contracts 14,601 14,881
Loss on derivative contracts, construction
in progress (27,944) -
Impairment of available-for-sale securities (5,511) -
Other 1,387 2,392
---------- ----------
Total other income (expense) (21,479) 8,507
---------- ----------
Income (loss) before income taxes and
minority interest (20,230) 13,167
Income tax (198) (11)
---------- ----------
Income (loss) before minority interest (20,428) 13,156
Minority interest 10,379 -
---------- ----------
Net income (loss) (10,049) 13,156
Retained earnings, beginning of period 52,789 59,111
---------- ----------
Retained earnings, end of period E 42,740 E 72,267
========== ==========
Income (loss) per share
Basic E (0.60) E 0.78
========== ==========
Diluted E (0.60) E 0.77
========== ==========
The accompanying notes are an integral part of these financial statements.
FORM 10-Q
QUARTERLY REPORT - PAGE 4
MERCER INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
For Three Months Ended June 30, 2003 and 2002
(Unaudited)
(Euros in thousands, except for earnings per share)
2003 2002
---------- ----------
Revenues
Sales of pulp and paper E 45,041 E 60,328
Transportation 980 1,337
Other 1,892 1,995
---------- ----------
47,913 63,660
Cost of sales
Pulp and paper 41,472 50,684
Transportation 797 1,436
---------- ----------
Gross profit 5,644 11,540
General, administrative and other (3,923) (7,766)
---------- ----------
Income from operations 1,721 3,774
Other income (expense)
Interest expense (2,188) (4,081)
Investment income (loss) 102 (28)
Gain on derivative contracts 12,805 18,948
Loss on derivative contracts, construction
in progress (17,582) -
Other (342) (57)
---------- ----------
Total other income (expense) (7,205) 14,782
---------- ----------
Income (loss) before income taxes and
minority interest (5,484) 18,556
Income tax (186) (11)
---------- ----------
Income (loss) before minority interest (5,670) 18,545
Minority interest 6,543 -
---------- ----------
Net income 873 18,545
Retained earnings, beginning of period 41,867 53,722
---------- ----------
Retained earnings, end of period E 42,740 E 72,267
========== ==========
Income per share
Basic E 0.05 E 1.10
========== ==========
Diluted E 0.05 E 1.08
========== ==========
The accompanying notes are an integral part of these financial statements.
FORM 10-Q
QUARTERLY REPORT - PAGE 5
MERCER INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For Six Months Ended June 30, 2003 and 2002
(Unaudited)
(Euros in thousands)
2003 2002
---------- ----------
Net income (loss) E (10,049) E 13,156
Other comprehensive income:
Foreign currency translation adjustments 1,125 3,513
Unrealized gain (loss) on securities
Unrealized holding loss arising during
the period (261) (1,289)
Adjustment for other than temporary decline
in value 5,511 -
---------- ----------
5,250 (1,289)
---------- ----------
Other comprehensive income 6,375 2,224
---------- ----------
Total comprehensive income (loss) E (3,674) E 15,380
========== ==========
The accompanying notes are an integral part of these financial statements.
FORM 10-Q
QUARTERLY REPORT - PAGE 6
MERCER INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For Three Months Ended June 30, 2003 and 2002
(Unaudited)
(Euros in thousands)
2003 2002
---------- ----------
Net income E 873 E 18,545
Other comprehensive income:
Foreign currency translation adjustments 1,016 2,186
Unrealized loss on securities (148) (2,148)
---------- ----------
Other comprehensive income 868 38
---------- ----------
Total comprehensive income E 1,741 E 18,583
========== ==========
The accompanying notes are an integral part of these financial statements.
FORM 10-Q
QUARTERLY REPORT - PAGE 7
MERCER INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For Six Months Ended June 30, 2003 and 2002
(Unaudited)
(Euros in thousands)
2003 2002
---------- ----------
Cash Flows from Operating Activities:
Net income (loss) E (10,049) E 13,156
Adjustments to reconcile net income (loss)
to cash flows from operating activities
Unrealized loss on derivative financial
instruments, construction in progress 27,944 -
Depreciation and amortization 11,881 13,489
Impairment of securities 5,511 -
Minority interest (10,379) -
Loss from equity investee 546 -
Changes in current assets and liabilities
Investments 14 3,965
Inventories (4,139) (629)
Receivables (20,582) (2,639)
Accounts payable and accrued expenses 4,649 (16,797)
Other 1,579 374
---------- ----------
Net cash provided by operating activities 6,975 10,919
Cash Flows from Investing Activities:
Purchase of properties, net of investment
grants received (88,456) (5,223)
Sale of properties - 3,513
Other (30) (11)
---------- ----------
Net cash used in investing activities (88,486) (1,721)
Cash Flows from Financing Activities:
Cash restricted (5,839) 7,532
Increase in construction in progress costs payable 38,931 -
Increase in notes payable and debt 49,253 4,170
Decrease in notes payable and debt (9,266) (9,727)
---------- ----------
Net cash provided by financing activities 73,079 1,975
Effect of exchange rate changes on cash and
cash equivalents 122 (41)
---------- ----------
Net (decrease) increase in cash and cash equivalents (8,310) 11,132
Cash and cash equivalents, beginning of period 30,261 11,741
---------- ----------
Cash and cash equivalents, end of period E 21,951 E 22,873
========== ==========
The accompanying notes are an integral part of these financial statements.
FORM 10-Q
QUARTERLY REPORT - PAGE 8
MERCER INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR SIX MONTHS ENDED JUNE 30, 2003
(Unaudited)
Note 1. Basis of Presentation
The interim period consolidated financial statements contained herein include
the accounts of Mercer International Inc. and its wholly-owned and
majority-owned 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 accounting
principles generally accepted in the United States 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, 2002. 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. The results for the
periods presented herein may not be indicative of the results for the entire
year.
Note 2. Stock-Based Compensation
The Company has a stock-based employee compensation plan, which is described
more fully in our annual report on Form 10-K for the year ended December 31,
2002. The Company accounts for the plan under the recognition and measurement
principles of APB Opinion No. 25, "Accounting for Stock Issued to Employees,"
and related interpretations. No stock-based employee compensation cost is
reflected in net income, as all options granted under the plan had an exercise
price equal to or greater than the market value of the underlying common shares
on the date of grant. The following tables illustrate the effect on net income
(loss) and income (loss) per share if the Company had applied the fair value
recognition provisions of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," to stock-based employee compensation:
Six Months Ended June 30,
-----------------------------
2003 2002
---------- -----------
(Euros in thousands, except per share amounts)
Net (Loss) Income
As reported E (10,049) E 13,156
Deduct: Total stock-based employee
compensation expense determined
under fair value based methods for
all awards, net of any related
tax effects (8) (4)
---------- -----------
Pro forma E (10,057) E 13,152
========== ===========
Basic (Loss) Income Per Share
As reported E (0.60) E 0.78
========== ===========
Pro forma E (0.60) E 0.78
========== ===========
Diluted (Loss) Income Per Share
As reported E (0.60) E 0.77
========== ===========
Pro Forma E (0.60) E 0.77
========== ===========
FORM 10-Q
QUARTERLY REPORT - PAGE 9
Three Months Ended June 30,
-----------------------------
2003 2002
---------- -----------
(Euros in thousands, except per share amounts)
Net Income
As reported E 873 E 18,545
Deduct: Total stock-based employee
compensation expense determined
under fair value based methods for
all awards, net of any related tax
effects (6) (2)
--------- -----------
Pro forma E 867 E 18,543
========= ===========
Basic Income Per Share
As reported E 0.05 E 1.10
========= ===========
Pro forma E 0.05 E 1.10
========= ===========
Diluted Income Per Share
As reported E 0.05 E 1.08
========= ===========
Pro Forma E 0.05 E 1.08
========= ===========
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, 2003 and 2002, respectively. The weighted average number of
shares outstanding for the purposes of calculating diluted earnings per share
was 16,874,899 and 17,054,998 for the six months ended June 30, 2003 and 2002,
respectively, and 16,874,899 and 17,093,390 for the three months ended June 30,
2003 and 2002, respectively.
Note 4. Stendal Pulp Mill Project
In August 2002, the Company completed financing arrangements for the design,
development, financing, construction and operation of a "greenfield" project to
construct and operate a 552,000-tonne softwood kraft pulp mill to be located
near Stendal, Germany (the "Stendal Project"). The Stendal Project is being
implemented through an approximately 63.6% owned subsidiary of the Company. Two
minority shareholders own approximately 29.4% and 7%, respectively, of the
project company. Accordingly, the results of the subsidiary are consolidated
into the results of the Company. Mercer currently capitalizes the majority of
the expenses and all of the interest related to the Stendal Project as it is
classified as construction in progress. The construction costs of the Stendal
Project will commence to depreciate when the Stendal Project is completed and
commences its commercial production. Minority interests on the balance sheet
represent the share capital contribution from the minority shareholders,
adjusted for their proportionate share of income and loss.
FORM 10-Q
QUARTERLY REPORT - PAGE 10
Note 5. Landqart AG
The Company acquired all of the shares of Landqart AG ("Landqart"), which
operates a specialty paper mill in Graubunden, Switzerland, in December 2001.
The results of Landqart were consolidated into the results of the Company in
2002. The Company reorganized its interest in Landqart in December 2002 by
selling a 20% interest to a Swiss bank and exchanging the remaining 80% for an
indirect 39% minority interest through a limited partnership on a non-cash
basis. As of December 31, 2002, the Company's interest in Landqart is no longer
consolidated and is included in the Company's results on an equity basis within
other income (expense).
Note 6. New Accounting Standards
In April 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 149, Amendment of
Statement 133 on Derivative Instruments and Hedging Activities. SFAS 149 amends
and clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities under SFAS 133, Accounting for Derivative Instruments and
Hedging Activities. This Statement is effective for contracts entered into or
modified after June 30, 2003, and for hedging relationships designated after
June 30, 2003. In addition, all provisions of this Statement should be applied
prospectively. The Company does not anticipate that this Statement will have a
material impact on the Company's financial statements.
In May 2003, FASB issued SFAS 150, Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity. SFAS 150 establishes
standards for how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity. This Statement
is effective for financial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. This Statement did not have a material impact on
the Company's financial statements.
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective for all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired prior to
February 1, 2003, the provisions of FIN 46 must be applied for the first interim
or annual period beginning after June 15, 2003. The Company does not anticipate
that the adoption of FIN 46 will have a material impact on the results of
operations and financial condition of the Company.
Note 7. 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.
FORM 10-Q
QUARTERLY REPORT - PAGE 11
Summarized financial information concerning the segments is shown in the
following table:
Pulp Paper Total
-------- --------- ---------
(Euros in thousands)
SIX MONTHS ENDED JUNE 30, 2003
Sales to external customers E 62,414 E 28,860 E 91,274
Intersegment net sales 1,545 - 1,545
Income from operations 1,171 1,303 2,474
Segment profit 10,552 2,804 13,356
Reconciliation of profit:
Total profit for reportable segments E 13,356
Elimination of intersegment profits 3,152
Loss on derivative financial instruments,
construction in progress financing (27,944)
Impairment of available-for-sale securities (5,511)
Unallocated amounts, other corporate expenses (3,283)
---------
Consolidated loss before income taxes and
minority interest E (20,230)
=========
The total assets for the Stendal pulp mill under
construction was E322,580 thousand and E223,386
thousand as at June 30, 2003 and December 31, 2002,
respectively.
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
Income from operations 5,574 1,330 6,904
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 and
minority interest E 13,167
=========
FORM 10-Q
QUARTERLY REPORT - PAGE 12
Pulp Paper Total
-------- --------- ---------
(Euros in thousands)
THREE MONTHS ENDED JUNE 30, 2003
Sales to external customers E 31,029 E 14,012 E 45,041
Intersegment net sales 675 - 675
Income (loss) from operations 2,609 (763) 1,846
Segment profit (loss) 12,691 (909) 11,782
Reconciliation of profit:
Total profit for reportable segments E 11,782
Elimination of intersegment profits 1,923
Loss on derivative financial instruments,
construction in progress financing (17,582)
Unallocated amounts, other corporate expenses (1,607)
---------
Consolidated loss before income taxes and
minority interest E (5,484)
=========
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
Income from operations 3,388 738 4,126
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 and
minority interest E 18,556
=========
Note 8. Reclassifications
Certain prior period amounts in the interim period consolidated financial
statements contained herein have been reclassified to conform to the current
period's presentation.
FORM 10-Q
QUARTERLY REPORT - PAGE 13
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. The following discussion and analysis of our
results of operations and financial condition for the six months and three
months ended June 30, 2003 should be read in conjunction with our consolidated
financial statements and related notes included in this quarterly report, as
well as our most recent annual report on Form 10-K for the fiscal year ended
December 31, 2002 filed with the Securities and Exchange Commission, or SEC.
Certain reclassifications have been made to the prior period financial
statements to conform with the current period presentation.
In this document: (i) unless the context otherwise requires, "we", "our", "us",
the "Company" or "Mercer" mean Mercer International Inc. and its subsidiaries;
(ii) information is provided as of June 30, 2003, unless otherwise stated; (iii)
all references to monetary amounts are to "Euros", the lawful currency adopted
by most members of the European Union, unless otherwise stated; (iv) "E" refers
to Euros; and (v) a "tonne" is one metric ton or 2,204.6 pounds.
RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 2003
Selected sales data for the six months ended June 30, 2003 and 2002 is as
follows:
Six Months Ended June 30,
-------------------------
2003 2002
-------- ----------
(unaudited)
(Euros in thousands)
REVENUES BY PRODUCT CLASS
Pulp(1) E 62,414 E 68,084
Papers
Specialty papers(2) 21,575 40,986
Printing papers 7,285 10,465
-------- ----------
Total papers 28,860 51,451
-------- ----------
Total(1) E 91,274 E 119,535
======== ==========
REVENUES BY GEOGRAPHIC AREA
Germany E 40,914 E 46,925
European Union(3) 38,062 40,170
Eastern Europe and Other 12,298 32,440
-------- ----------
Total(1) E 91,274 E 119,535
======== ==========
SALES VOLUME BY PRODUCT CLASS (tonnes)
Pulp(1) 148,179 149,798
Papers
Specialty papers(2) 21,675 31,870
Printing papers 9,334 12,207
-------- ---------
Total papers 31,009 44,077
-------- ---------
Total(1) 179,188 193,875
======== =========
- -----------
(1) Excluding intercompany sales volumes of 3,611 and 6,370 tonnes of pulp and
intercompany net sales revenues of approximately E1.5 million and E2.9
million in the six months ended June 30, 2003 and 2002, respectively.
(2) As of December 31, 2002, our interest in Landqart AG is no longer
consolidated and is included in our financial results on an equity basis.
Accordingly, sales from the Landqart specialty paper mill are not included
in our results for the six months ended June 30, 2003, but are included for
the six months ended June 30, 2002. The Landqart specialty paper mill sold
approximately 9,060 tonnes for approximately E20.6 million in the six
months ended June 30, 2002.
(3) Not including Germany.
FORM 10-Q
QUARTERLY REPORT - PAGE 14
In the six months ended June 30, 2003, total revenues decreased to E98.3 million
from E126.1 million in the six months ended June 30, 2002, primarily as the
current period does not include the revenues of the Landqart specialty paper
mill. We reorganized our interest therein in December 2002 and now account for
it under the equity method. In the current period, pulp and paper revenues
decreased to E91.3 million from E119.5 million in the comparative period in
2002, primarily as a result of the deconsolidation of Landqart.
Cost of pulp and paper sales in the six months ended June 30, 2003 decreased to
E86.5 million from E104.6 million in the six months ended June 30, 2002,
primarily as a result of the deconsolidation of Landqart.
Pulp sales in the current period were E62.4 million, compared to E68.1 million
in the comparative period of 2002. U.S. dollar denominated list pulp price
increases were more than offset by an 18.7% decline in the U.S. dollar against
the Euro for the current period versus the comparative period last year.
Average list prices for northern bleached softwood kraft ("NBSK") pulp in
Europe, which were approximately E477 ($470) per tonne in the second quarter of
2002, decreased to approximately E420 ($440) per tonne at the end of 2002,
before improving to approximately E441 ($480) per tonne in the first quarter of
2003 and approximately E484 ($550) per tonne in the second quarter of 2003. The
Company's pulp sales realizations were E421 per tonne on average in the current
period, compared to E455 per tonne in the first six months of 2002. Pulp sales
by volume decreased marginally to 148,179 tonnes in the current period from
149,798 tonnes in the comparative period of 2002.
Cost of sales and general, administrative and other expenses for the pulp
operations were E67.5 million for the six months ended June 30, 2003, compared
to E69.0 million for the six months ended June 30, 2002. On average, per tonne
fiber costs for pulp production increased by approximately 4.0% compared to the
six months ended June 30, 2002. Depreciation within the pulp segment was E10.9
million in the current period, compared to E10.8 million in the comparative
period of 2002.
The Company's pulp operations generated operating income of E1.2 million in the
six months ended June 30, 2003, compared to E5.6 million in the six months ended
June 30, 2002.
Results for the Company's paper segment during the current period reflect the
aforementioned exclusion of the results from the Landqart specialty paper mill,
which were included in the results for the six months ended June 30, 2002.
Paper sales in the current period decreased to E28.9 million from E51.5 million
in the comparative period in 2002. Sales of specialty papers in the six months
ended June 30, 2003 decreased to E21.6 million from E41.0 million in the six
months ended June 30, 2002. Total paper sales volumes decreased to 31,009
tonnes in the six months ended June 30, 2003 from 44,077 tonnes in the six
months ended June 30, 2002. On average, prices for specialty papers realized in
the six months ended June 30, 2003 decreased by approximately 22.6% as our
product mix changed upon the deconsolidation of the Landqart mill, and for
printing papers decreased by approximately 9.0%, compared to the six months
ended June 30, 2002.
Cost of sales and general, administrative and other expenses for the paper
operations decreased to E28.1 million in the current period from E50.7 million
in the comparative period of 2002 as a result of lower paper sales. Paper
segment depreciation decreased to E1.0 million in the six months ended June 30,
2003 from E2.7 million in the prior period.
The Company's paper operations generated operating income of E1.3 million in
each of the six months ended June 30, 2003 and 2002.
FORM 10-Q
QUARTERLY REPORT - PAGE 15
Consolidated general and administrative expenses decreased to E8.7 million in
the six months ended June 30, 2003 from E14.4 million in the six months ended
June 30, 2002, primarily as a result of the exclusion of the results of the
Landqart mill and a decrease in professional fees in the current period.
For the six months ended June 30, 2003, the Company reported income from
operations of E1.2 million, compared to E4.7 million in the comparative period
of 2002. Interest expense (excluding capitalized interest of E7.2 million in
respect of the Stendal project) in the current period decreased to E4.7 million
from E8.1 million in the comparative period of 2002, primarily as a result of
lower borrowing costs and lower indebtedness for our operating units. During
the current period, the Company made principal repayments of E6.5 million in
respect of the indebtedness of the Rosenthal NBSK pulp mill.
Pursuant to the E828 million loan facility (the "Stendal Loan Facility") for the
Company's greenfield project (the "Stendal project") to construct an
approximately 552,000 tonne NBSK pulp mill near Stendal, Germany, the Company's
63.6% owned subsidiary, Zellstoff Stendal GmbH ("Stendal"), entered into
variable-to-fixed rate interest swaps (the "Stendal Interest Rate Swap
Agreements") for the full term of the facility to manage the risk exposure with
respect to an aggregate maximum amount of approximately E612.6 million of the
principal amount of the Stendal Loan Facility. Under these swaps, Stendal pays
a fixed rate and receives a floating rate with respect to interest payments
calculated on a notional amount. These swaps manage the exposure to variable
cash flow risk from the variable interest payments under the Stendal Loan
Facility. The swaps are marked to market at the end of each reporting period
and all unrealized gains and losses are recognized in earnings for such period.
A holding loss of E27.9 million before minority interests was recognized in
respect of these swaps for the six months ended June 30, 2003. We determine
market valuations based primarily upon values provided by our counterparties.
In addition, the Company's wholly-owned subsidiary that operates the Rosenthal
NBSK pulp mill, Zellstoff-und Papierfabrik Rosenthal GmbH & Co., KG
("Rosenthal"), has entered into currency swaps (the "Rosenthal Currency Swaps")
to manage its exposure with respect to an aggregate amount of approximately
E198.4 million of the principal long-term indebtedness of the Rosenthal mill
(the "Rosenthal Loan Facility"). Rosenthal has also entered into currency
forward contracts, forward interest rate and interest cap contracts in
connection with certain indebtedness relating to the Rosenthal mill. These
derivative instruments are also marked to market at the end of each reporting
period, and all gains and losses are recognized in earnings for such period.
In the six months ended June 30, 2003, the Company recognized a net gain of
E14.6 million from these derivative contracts.
Minority interest in the six months ended June 30, 2003 amounted to E10.4
million and represented the proportion of the loss of the Stendal project
allocated to the two minority shareholders of Stendal. There was no minority
interest in the six months ended June 30, 2002.
Our results for the six months ended June 30, 2003 include an adjustment of E5.5
million for the non-cash aggregate pre-tax earnings impact of
other-than-temporary impairment losses on certain of our available-for-sale
securities. This adjustment was recorded in other income (expense) in our
consolidated statement of operations. This adjustment did not affect our
shareholders' equity since all of our available-for-sale securities are marked
to market on a quarterly basis and unrealized gains or losses are reported
through the statement of comprehensive income in our financial statements and
recorded in other comprehensive income (loss) within shareholders' equity on our
balance sheet. Such unrealized gains or losses, the cost base and the current
marked to market value of our available-for-sale securities are further
described in the notes to our annual financial statements. These are legacy
investments and are unrelated to our pulp and paper operations. The majority of
FORM 10-Q
QUARTERLY REPORT - PAGE 16
this adjustment relates to an investment in a company operating in China. The
Company could not quantify the long-term effect of the SARS outbreak in China on
such investment and, accordingly, the Company wrote down such investment to its
fair value.
SFAS 115, Accounting for Certain Investments in Debt and Equity Securities, EITF
03-1, The Meaning of Other-Than-Temporary Impairment and its Application to
Certain Investments, and SEC Staff Accounting Bulletin 59, Accounting for
Noncurrent Marketable Equity Securities, provide guidance on determining when an
impairment is other-than-temporary, which requires judgment. In making this
judgment, we evaluate, among other factors, the duration and extent to which the
fair value of an investment is less than its cost; the financial health of and
business outlook for the investee, including factors such as industry and sector
performance, changes in technology, operational and financing cash flow, the
investee's financial position including its appraisal and net asset value,
market prices, its business plan and investment strategy; and our intent and
ability to hold the investment.
For the six months ended June 30, 2003, the Company reported a net loss of E10.0
million, or E0.60 per share on a basic and diluted basis, compared to a net
income of E13.2 million, or E0.78 per share on a basic basis or E0.77 per share
on a diluted basis, in the six months ended June 30, 2002.
As the Stendal project is currently under construction and because of its
overall size relative to the Company's other facilities, management uses
consolidated operating results excluding derivative items relating to the
Stendal project to measure the performance and results of the Company's
operating units. Management believes this measure provides meaningful
information on the performance of its operating facilities for a reporting
period. For the six months ended June 30, 2003, the Company reported a net loss
of E10.0 million or E0.60 per share on a diluted basis. If the Company had
excluded items relating to the Stendal project by adding the loss on derivative
financial instruments of E27.9 million to, and subtracting minority interest of
E10.4 million from, the reported net loss of E10.0 million, the Company would
have reported net income of E7.5 million or E0.45 per share on a diluted basis.
The Company generated operating earnings before interest, taxes, depreciation
and amortization ("Operating EBITDA") of E13.1 million in the current period,
compared to Operating EBITDA of E18.1 million in the comparative period of 2002.
Operating EBITDA is defined as income (loss) from operations plus depreciation
and amortization. Operating EBITDA is calculated by adding depreciation and
amortization of E11.9 million and E13.5 million to income from operations of
E1.2 million and E4.7 million for each of the six months ended June 30, 2003 and
2002, respectively. Management uses Operating EBITDA as a benchmark measurement
of its own operating results, and as a benchmark relative to its competitors.
Management considers it to be a meaningful supplement to operating income as a
performance measure primarily because depreciation expense is not an actual cash
cost, and varies widely from company to company in a manner that management
considers largely independent of the underlying cost efficiency of their
operating facilities. In addition, the Company believes Operating EBITDA is
commonly used by securities analysts, investors and other interested parties to
evaluate the Company's financial performance. Operating EBITDA does not reflect
the impact of a number of items that affect the Company's net income (loss),
including financing costs and the effect of derivative instruments. Operating
EBITDA is not a measure of financial performance under accounting principles
generally accepted in the United States, and should not be considered as an
alternative to net income (loss) or income (loss) from operations as a measure
of performance, nor as an alternative to net cash from operating activities as a
measure of liquidity. Because all companies do not calculate Operating EBITDA
in the same manner, Operating EBITDA as calculated by the Company may differ
from Operating EBITDA as calculated by other companies.
FORM 10-Q
QUARTERLY REPORT - PAGE 17
The following table provides a reconciliation of Operating EBITDA to income from
operations for the periods indicated:
Six Months Ended June 30,
-------------------------
2003 2002
----------- ----------
(unaudited)
(Euros in thousands)
Income from operations, per income statement E 1,249 E 4,660
Add: Depreciation and amortization 11,881 13,489
----------- ----------
Operating EBITDA E 13,130 E 18,149
=========== ==========
RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 2003
Selected sales data for the three months ended June 30, 2003 and 2002 is as
follows:
Three Months Ended June 30,
---------------------------
2003 2002
---------- ----------
(unaudited)
(Euros in thousands)
REVENUES BY PRODUCT CLASS
Pulp(1) E 31,029 E 34,451
Papers
Specialty papers(2) 10,519 20,549
Printing papers 3,493 5,328
---------- ----------
Total papers 14,012 25,877
---------- ----------
Total(1) E 45,041 E 60,328
========== ==========
REVENUES BY GEOGRAPHIC AREA
Germany E 20,743 E 22,556
European Union(3) 17,246 22,402
Eastern Europe and Other 7,052 15,370
---------- ----------
Total(1) E 45,041 E 60,328
========== ==========
SALES VOLUME BY PRODUCT CLASS (tonnes)
Pulp(1) 69,700 76,300
Papers
Specialty papers(2) 10,539 15,432
Printing papers 4,763 6,093
---------- ----------
Total papers 15,302 21,525
---------- ----------
Total(1) 85,002 97,825
========== ==========
- --------
(1) Excluding intercompany sales volumes of 1,482 and 3,359 tonnes of pulp and
intercompany net sales revenues of approximately E0.6 million and E1.5
million in the three months ended June 30, 2003 and 2002, respectively.
(2) As of December 31, 2002, our interest in Landqart AG is no longer
consolidated and is included in our financial results on an equity basis.
Accordingly, sales from the Landqart specialty paper mill are not included
in our results for the three months ended June 30, 2003, but are included
for the three months ended June 30, 2002. The Landqart specialty paper mill
sold approximately 4,498 tonnes for approximately E10.6 million in the
three months ended June 30, 2002.
(3) Not including Germany.
In the three months ended June 30, 2003, total revenues decreased to E47.9
million from E63.7 million in the three months ended June 30, 2002, primarily as
the current period does not include the revenues of the Landqart specialty paper
mill. In the current period, pulp and paper revenues decreased to E45.0 million
from E60.3 million in the comparative period in 2002, primarily as a result of
the deconsolidation of Landqart.
FORM 10-Q
QUARTERLY REPORT - PAGE 18
Cost of pulp and paper sales in the three months ended June 30, 2003 decreased
to E41.5 million from E50.7 million in the three months ended June 30, 2002,
primarily as a result of the deconsolidation of Landqart.
Pulp sales in the current period were E31.0 million, compared to E31.4 million
in the first quarter of 2003 and E34.5 million in the comparative period of
2002. U.S. dollar denominated list pulp price increases were more than offset
by a 19.1% decline in the U.S. dollar against the Euro for the current period
versus the comparative period last year. Average list prices for NBSK pulp in
Europe, which were approximately E477 ($470) per tonne at the end of the second
quarter of 2002, decreased to approximately E420 ($440) per tonne at the end of
2002, before improving to approximately E484 ($550) per tonne in the current
period. The Company's pulp sales realizations were E445 per tonne on average in
the current period, compared to E400 per tonne in the three months ended March
31, 2003 and E452 per tonne in the second quarter of 2002. Pulp sales by volume
decreased to 69,700 tonnes in the current period from 78,479 tonnes in the first
quarter of 2003 and 76,300 tonnes in the comparative period of 2002, as a result
of lower demand.
Cost of sales and general, administrative and other expenses for the pulp
operations were E31.1 million for the three months ended June 30, 2003, compared
to E34.3 million in the three months ended June 30, 2002. On average, per tonne
fiber costs for pulp production decreased by approximately 3.8% compared to the
three months ended March 31, 2003, and increased by approximately 4.1% compared
to the three months ended June 30, 2002. Depreciation within the pulp segment
was E5.5 million in the current period, compared to E5.4 million in the
comparative period of 2002.
The Company's pulp operations generated operating income of E2.6 million in the
three months ended June 30, 2003, compared to an operating loss of E1.4 million
in the preceding three months and operating income of E3.4 million in the three
months ended June 30, 2002.
Results for the Company's paper segment during the current period exclude the
results from the Landqart specialty paper mill, which were included in the
results for the three months ended June 30, 2002. Paper sales in the current
period decreased to E14.0 million from E25.9 million in the comparative period
in 2002. Sales of specialty papers in the three months ended June 30, 2003
decreased to E10.5 million from E20.5 million in the three months ended June 30,
2002. Total paper sales volumes decreased to 15,302 tonnes in the three months
ended June 30, 2003 from 21,525 tonnes in the three months ended June 30, 2002.
On average, prices for specialty papers realized in the three months ended June
30, 2003 decreased by approximately 25.0% as our product mix changed upon the
deconsolidation of the Landqart mill, and for printing papers decreased by
approximately 16.1%, compared to the three months ended June 30, 2002.
Cost of sales and general, administrative and other expenses for the paper
operations decreased to E14.9 million in the current period from E25.4 million
in the comparative period of 2002 as a result of lower paper sales. Paper
segment depreciation decreased to E0.5 million in the three months ended June
30, 2003 from E1.3 million in the prior period.
The Company's paper operations generated an operating loss of E0.8 million in
the three months ended June 30, 2003, compared with operating income of E0.7
million in the comparative period of 2002.
FORM 10-Q
QUARTERLY REPORT - PAGE 19
Consolidated general and administrative expenses decreased to E3.9 million in
the three months ended June 30, 2003 from E7.8 million in the three months ended
June 30, 2002, primarily as a result of the exclusion of the results of the
Landqart mill and a decrease in professional fees in the three months ended June
30, 2003.
For the three months ended June 30, 2003, the Company reported income from
operations of E1.7 million, compared to E3.8 million in the comparative period
of 2002. Interest expense (excluding capitalized interest of E4.0 million in
respect of the Stendal project) in the current period decreased to E2.2 million
from E4.1 million in the comparative period of 2002, primarily as a result of
lower borrowing costs and lower indebtedness for our operating units.
Pursuant to the Stendal Loan Facility, Stendal entered into the Stendal Interest
Rate Swap Agreements for the full term of the facility to manage the risk
exposure with respect to an aggregate maximum amount of approximately E612.6
million of the principal amount of the Stendal Loan Facility. The swaps are
marked to market at the end of each reporting period and all unrealized gains
and losses are recognized in earnings for such period. A holding loss of E17.6
million before minority interests was recognized in respect of these swaps for
the three months ended June 30, 2003. We determine market valuations based
primarily upon values provided by our counterparties.
In addition, Rosenthal has entered into the Rosenthal Currency Swaps to manage
its exposure with respect to an aggregate amount of approximately E198.4 million
of the principal long-term indebtedness under the Rosenthal Loan Facility.
Rosenthal has also entered into currency forward contracts, forward interest
rate and interest cap contracts in connection with certain indebtedness relating
to the Rosenthal mill. These derivative instruments are also marked to market
at the end of each reporting period, and all gains and losses are recognized in
earnings for such period. In the three months ended June 30, 2003, the Company
recognized a net gain of E12.8 million from these derivative contracts.
The results of Landqart did not have a material impact on the Company's results
for the three months ended June 30, 2003. Minority interest in the three months
ended June 30, 2003 amounted to E6.5 million and represented the proportion of
the loss of the Stendal project allocated to the two minority shareholders of
Stendal. There was no minority interest in the three months ended June 30,
2002.
For the three months ended June 30, 2003, the Company reported net income of
E0.9 million, or E0.05 per share on a basic and diluted basis, compared to a net
income of E18.5 million, or E1.10 per share on a basic basis or E1.08 per share
on a diluted basis, in the three months ended June 30, 2002.
As the Stendal project is currently under construction and because of its
overall size relative to the Company's other facilities, management uses
consolidated operating results excluding derivative items relating to the
Stendal project to measure the performance and results of the Company's
operating units. Management believes this measure provides meaningful
information on the performance of its operating facilities for a reporting
period. For the three months ended June 30, 2003, the Company reported net
income of E0.9 million or E0.05 per share on a diluted basis. If the Company had
excluded items relating to the Stendal project by adding the loss on derivative
financial instruments of E17.6 million to, and subtracting minority interest of
E6.5 million from, the reported net income of E0.9 million, the Company would
have reported net income of E11.9 million or E0.71 per share on a diluted basis.
FORM 10-Q
QUARTERLY REPORT - PAGE 20
The Company generated Operating EBITDA of E7.7 million in the current quarter,
compared to an Operating EBITDA of E5.5 million in the first quarter of 2003 and
Operating EBITDA of E10.5 million in the comparative quarter of 2002. Operating
EBITDA is calculated by adding depreciation and amortization of E6.0 million,
E5.9 million and E6.7 million to the income from operations of E1.7 million,
loss from operations of E0.5 million and income from operations of E3.8 million
for each of the three months ended June 30, 2003, March 31, 2003 and June 30,
2002, respectively. Management uses Operating EBITDA as a benchmark measurement
of its own operating results, and as a benchmark relative to its competitors.
Management considers it to be a meaningful supplement to operating income as a
performance measure primarily because depreciation expense is not an actual cash
cost, and varies widely from company to company in a manner that management
considers largely independent of the underlying cost efficiency of their
operating facilities. Because all companies do not calculate Operating EBITDA in
the same manner, Operating EBITDA as calculated by the Company may differ from
Operating EBITDA as calculated by other companies.
The following table provides a reconciliation of Operating EBITDA to income from
operations for the periods indicated:
Three Months Ended June 30,
---------------------------
2003 2002
---------- ----------
(unaudited)
(Euros in thousands)
Income from operations, per income statement E 1,721 E 3,774
Add: Depreciation and amortization 5,960 6,720
---------- ----------
Operating EBITDA E 7,681 E 10,494
========== ==========
Stendal Project Status
- ------------------------
We are implementing the Stendal project, which is a "greenfield" project to
construct a new state-of-the-art NBSK pulp mill. The mill will have an annual
production capacity of approximately 552,000 tonnes and will be located near the
town of Stendal in Germany. As at June 30, 2003, progress on the Stendal
project was substantially on schedule and there were no significant deviations
from the project budget. At June 30, 2003, the project was approximately 68%
completed and approximately 91% of the total engineering was finished. In
addition, approximately 65% of the civil works was completed. Progress was made
in a number of areas including the installation of the batch digesters and
towers for the bleach plant, commencement of the erection of the recovery boiler
and power boiler and assembly of large storage tanks. In addition, progress was
made in connection with the construction of the infrastructure of the mill site
including power, gas and road connections.
At the end of June 2003, Stendal employed 30 people, most of whom are part of
the management organization charged with supervising the implementation and
completion of the Stendal project.
During the second quarter, the Company filled many key positions, including for
the production and maintenance management and wood procurement and logistics
operations, and the recruitment process for operating personnel for the mill was
commenced.
FORM 10-Q
QUARTERLY REPORT - PAGE 21
LIQUIDITY AND CAPITAL RESOURCES
The following table is a summary of selected financial information for the
periods indicated:
As at as at
June 30, 2003 December 31, 2002
----------------- -----------------
(unaudited)
(Euros in thousands)
FINANCIAL POSITION
Working capital E (56,175) E 6,328
Properties 518,248 441,990
Total assets(1) 696,509 599,750
Long-term debt(2) 343,692 351,878
Shareholders' equity 121,295 124,969
- ---------
(1) Includes approximately E270.5 million and E186.9 million related to
properties construction in progress at the site of the Stendal mill as at
June 30, 2003 and December 31, 2002, respectively.
(2) Includes approximately E150.5 million and E146.5 million related to
construction in progress at the site of the Stendal mill as at June 30,
2003 and December 31, 2002, respectively.
At June 30, 2003, our cash and cash equivalents were E22.0 million, compared to
E30.3 million at the end of 2002. We also had E13.2 million of cash restricted
to pay construction in progress costs payable and E19.1 million of cash
restricted in a debt service account, both relating to the construction in
progress at the site of the Stendal mill. In addition, we had E21.8 million of
cash restricted in a debt service account relating to the Rosenthal mill.
Short-term trading securities were E0.3 million at both June 30, 2003 and
December 31, 2002. We had a working capital deficit of E56.2 million (including
Stendal construction costs payable of E62.3 million and bridge financing and
related expenses of E54.9 million) at June 30, 2003, compared to working capital
of E6.3 million at December 31, 2002. However, the Stendal Loan Facility
provides the necessary resources for the continued construction of the Stendal
project.
We expect to continue to generate sufficient cash flow from operations to pay
our interest and debt service expenses and meet the working and maintenance
capital requirements for our operations. We currently do not have any revolving
credit facilities. From time to time, we have entered into project specific
credit facilities to finance capital projects and expect to continue to do so,
subject to availability.
In connection with our obligation to repay or refinance two bridge loans in the
principal amounts of E15 million and E30 million which mature in October 2003
and April 2004, respectively, and fees and accrued interest thereon, incurred in
connection with the Stendal project, we intend to issue new debt, equity or
convertible securities in 2003 (the "Financing"). As at June 30, 2003, the
aggregate principal amount, fees and accrued interest relating to the repayment
of the bridge loans was E54.9 million, subject to reduction in limited
exceptions for capital raising activities using the services of affiliates of
the bridge lenders. The bridge loan in the principal amount of E15 million may
be extended to April 2004 with the consent of the lender. We intend to seek
such consent if the Financing is not completed prior to the maturity of such
bridge loan. There can be no assurance that such consent will be obtained or
that the Financing will be completed. We may also pursue asset sales to raise
capital to repay the bridge loan. If we do not obtain the consent of the
lender, complete the Financing or raise sufficient capital through asset sales
to repay the bridge loan, this could have a materially adverse effect on our
results of operations and financial condition.
FORM 10-Q
QUARTERLY REPORT - PAGE 22
Operating Activities
- ---------------------
Operating activities in the six months ended June 30, 2003 provided cash of E7.0
million, compared to E10.9 million in the six months ended June 30, 2002. Net
changes in trading securities provided nominal cash in the six months ended June
30, 2003, compared to E4.0 million in the six months ended June 30, 2002.
Receivables in the current period and in the six months ended June 30, 2002 used
cash of E20.6 million and E2.6 million, respectively. An increase in inventories
used cash of E4.1 million in the current period, compared to E0.6 million in the
comparable period of 2002. An increase in accounts payable and accrued expenses
provided cash of E4.6 million in the six months ended June 30, 2003, compared to
a decrease in the same using cash of E16.8 million in the six months ended June
30, 2002.
Investing Activities
- ---------------------
Investing activities in the six months ended June 30, 2003 used cash of E88.5
million, primarily as a result of the acquisition of properties, net of
investment grants received, of which E84.0 million was attributable to the
Stendal project. The sale of properties provided cash of E3.5 million in the
six months ended June 30, 2002.
We have applied for investment grants from the federal and state governments of
Germany and have claims of E50.9 million outstanding as of June 30, 2003. We
received E28.8 million with respect to the Stendal project in the six months
ended June 30, 2003, which reduced the acquisition costs relating to the Stendal
project. We expect to receive the full amount of our currently outstanding
claims in the second half of 2003. In accordance with our accounting policies,
we do not record these grants until they are received.
Our Paper mills have or will have to replace certain equipment that was damaged
as a result of flooding in parts of Germany and other eastern European countries
during the third quarter of 2002. The aggregate equipment costs are estimated to
be approximately E3.3 million, of which approximately E0.7 million was incurred
in the six months ended June 30, 2003. We have applied for German government
grants and for assistance under special credit programs instituted by the German
government for flooding victims in connection with these costs. As at June 30,
2003, we had received approximately E2.4 million of such grants, of which E1.7
million was recognized as income in the current period and the balance has been
deferred. Although we have received approval for the full amount of the grants
and assistance applied for, there can be no assurance that we will receive any
unpaid amounts of such grants and assistance.
Financing Activities
- ---------------------
Financing activities provided cash of E73.1 million in the six months ended June
30, 2003. An increase in construction costs payable relating to the Stendal
project provided cash of E38.9 million and an increase in indebtedness,
primarily in connection with the Stendal project, provided cash of E49.3 million
in the six months ended June 30, 2003. An increase in restricted cash used cash
of E5.8 million in the current period. We made principal repayments of E6.5
million in connection with the Rosenthal Loan Facility in the six months ended
June 30, 2003. Financing activities provided cash of E2.0 million in the six
months ended June 30, 2002, primarily as a result of a decrease in restricted
cash and an increase in indebtedness during the period.
FORM 10-Q
QUARTERLY REPORT - PAGE 23
Other than the agreements entered into by Stendal relating to the Stendal
project, we had no material commitments to acquire assets or operating
businesses at June 30, 2003. We anticipate that there will be acquisitions of
businesses or commitments to projects in the future. To achieve our long-term
goals of expanding our asset and earnings base through the acquisition of
interests in companies and assets in the pulp and paper and related businesses,
and organically through high return capital expenditures at our operating
facilities, we will require substantial capital resources. The required
necessary resources for such long-term goals will be generated from cash flow
from operations, cash on hand, borrowing against our assets, the sale of debt
and/or equity securities and/or asset sales.
FOREIGN CURRENCY
We hold certain assets and liabilities in U.S. dollars, Swiss francs and, to a
lesser extent, in Canadian dollars. Accordingly, our consolidated financial
results are subject to foreign currency exchange rate fluctuations.
We translate foreign 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 balance sheet and do
not affect our net earnings.
In the six months ended June 30, 2003, we reported a net E1.1 million foreign
exchange translation gain and, as a result, the cumulative foreign exchange
translation gain increased to E4.6 million at June 30, 2003 from E3.5 million at
December 31, 2002.
Based upon the average exchange rate for the six months ended June 30, 2003, the
U.S. dollar decreased by approximately 18.7% in value against the Euro compared
to the same period in 2002.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with generally accepted
accounting principles requires our management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and 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.
Our management routinely makes judgments and estimates about the effects of
matters that are inherently uncertain. As the number of variables and
assumptions affecting the probable future resolution of the uncertainties
increase, these judgments become even more subjective and complex. We have
identified certain accounting policies that are the most important to the
portrayal of our financial condition and results of operations.
For information about our critical accounting policies, see our annual report on
Form 10-K for the year ended December 31, 2002.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
The statements in this report that are not based on historical facts are called
"forward-looking statements" within the meaning of the United States Private
Securities Litigation Reform Act of 1995. These statements appear in a number of
different places in this report and can be identified by words such as
"estimates", "projects", "expects", "intends", "believes", "plans", or their
negatives or other comparable words. Also look for discussions of strategy that
involve risks and uncertainties. Forward-looking statements include statements
regarding the outlook for our future operations,
FORM 10-Q
QUARTERLY REPORT - PAGE 24
forecasts of future costs and expenditures, the evaluation of market conditions,
the outcome of legal proceedings, the adequacy of reserves, or other business
plans. You are cautioned that any such forward-looking statements are not
guarantees and may involve risks and uncertainties. Our actual results may
differ materially from those in the forward-looking statements due to risks
facing us or due to actual facts differing from the assumptions underlying our
estimates. Some of these risks and assumptions include those set forth in
reports and other documents we have filed with or furnished to the SEC,
including in our annual report on Form 10-K for the year ended December 31, 2002
and current report on Form 8-K furnished on May 12, 2003. We advise you that
these cautionary remarks expressly qualify in their entirety all forward-looking
statements attributable to us or persons acting on our behalf. Unless required
by law, we do not assume any obligation to update forward-looking statements
based on unanticipated events or changed expectations. However, you should
carefully review the reports and other documents we file from time to time with
the SEC.
CYCLICAL NATURE OF BUSINESS; COMPETITIVE POSITION
The pulp and paper business is cyclical in nature and markets for our 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
global economy, all of which can have a significant influence on selling prices
and our earnings. 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. During the past three years, pulp prices have fallen
significantly. Our competitive position is influenced by the availability and
quality of raw materials and our experience in relation to other producers with
respect to inflation, energy, transportation, labor costs, productivity and
currency exchange rates. There can be no assurance that we will continue to be
competitive in the future, as a result of new technological advancements or
otherwise.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
We are exposed to market risks from changes in interest rates, foreign currency
exchange rates and equity prices which may affect our results of operations and
financial condition and, consequently, our fair value. We manage these risks
through internal risk management policies as well as the use of derivative
instruments. We use derivative instruments to reduce or limit our exposure to
interest rate and currency risks. We may in the future use derivative
instruments to reduce or limit our exposure to fluctuations in pulp prices. We
also use derivative instruments either to augment our potential gains or to
reduce our potential losses, depending on our management's perception of future
economic events and developments. These types of derivative instruments are
generally highly speculative in nature. They are also very volatile as they are
highly leveraged given that margin requirements are relatively low in proportion
to notional amounts.
Many of our strategies, including the use of derivative instruments and the
types of derivative instruments selected by us, are based on historical trading
patterns and correlations and our management's expectations of future events.
However, these strategies may not be fully effective in all market environments
or against all types of risks. Unexpected market developments may affect our
risk management strategies during this time, and unanticipated developments
could impact our risk management strategies in the future. If any of the variety
of instruments and strategies we utilize are not effective, we may incur losses.
FORM 10-Q
QUARTERLY REPORT - PAGE 25
Rosenthal has entered into the Rosenthal Currency Swaps in connection with our
long-term indebtedness relating to the conversion of the Rosenthal mill to the
production of kraft pulp. These derivatives have been contracted by Rosenthal
using a dedicated credit line within the Rosenthal Loan Facility and assigned
for this purpose, and are subject to prescribed controls, including certain
maximum amounts for notional and at-risk amounts. As NBSK pulp prices are quoted
in U.S. dollars and the majority of our business transactions are denominated in
Euros, Rosenthal has entered into the Rosenthal Currency Swaps to reduce the
effects of exchange rate fluctuations between the U.S. dollar and the Euro on
notional amounts under the Rosenthal Loan Facility. Under the Rosenthal Currency
Swaps, Rosenthal effectively pays the principal and interest in U.S. dollars and
at U.S. dollar borrowing rates. In the six months ended June 30, 2003,
Rosenthal entered into an additional Rosenthal Currency Swap for the notional
amount of E124.2 million maturing on September 30, 2008.
In addition, Rosenthal has entered into interest rate contracts to either fix or
limit the interest rates in connection with certain of its indebtedness, and
various currency forwards to reduce or limit its exposure to currency risks and
to augment its potential gains or to reduce its potential losses.
Stendal has entered into the Stendal Interest Rate Swap Agreements in connection
with its long-term indebtedness relating to the Stendal project to fix the
interest rate under the Stendal Loan Facility at the then low level, relative to
its historical trend and projected variable interest rate. Under the Stendal
Interest Rate Swap Agreements, Stendal pays a fixed rate and receives a floating
rate with interest payments being calculated on a notional amount. The interest
rates payable under the Stendal Loan Facility were swapped at the fixed rates
based on the Eur-Euribor rate for the repayment periods of the tranches under
the Stendal Loan Facility. Stendal effectively converted the Stendal Loan
Facility from a variable interest rate loan into a fixed interest rate loan,
thereby reducing interest rate uncertainty.
For more information concerning market risk and our derivative instruments, see
the Company's annual report on Form 10-K for the year ended December 31, 2002.
ITEM 4. DISCLOSURE CONTROLS AND PROCEDURES
Within 90 days prior to the date of this report, we carried out an evaluation,
under the supervision and with the participation of our principal executive
officer and principal financial officer, of the effectiveness of the design and
operation of our disclosure controls and procedures. Based on this evaluation,
our principal executive officer and principal financial officer concluded that
our disclosure controls and procedures are effective in timely alerting them to
material information required to be included in our periodic reports filed with
the SEC. It should be noted that the design of any system of controls is based
in part upon certain assumptions about the likelihood of certain events, and
there can be no assurance that any design will succeed in achieving its stated
goals under all future conditions, regardless of how remote. In addition, we
reviewed our internal controls, and there have been no significant changes in
our internal controls or in other factors that could significantly affect those
controls subsequent to the date of their last evaluation.
FORM 10-Q
QUARTERLY REPORT - PAGE 26
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
31.1 Section 302 Certification of Chief Executive Officer
31.2 Section 302 Certification of Chief Financial Officer
32.1* Section 906 Certification of Chief Executive Officer
32.2* Section 906 Certification of Chief Financial Officer
-----------
*In accordance with Release 33-8212 of the Commission, these
Certifications: (i) are "furnished" to the Commission and are not "filed"
for the purposes of liability under the Securities Exchange Act of 1934, as
amended; and (ii) are not to be subject to automatic incorporation by
reference into any of the Company's registration statements filed under the
Securities Act of 1933, as amended for the purposes of liability thereunder
or any offering memorandum, unless the Company specifically incorporates
them by reference therein.
(b) Reports on Form 8-K
The Company filed the following reports on Form 8-K with respect to the
indicated items during the second quarter of 2003:
Form 8-K dated May 5, 2003
Item 7. Exhibits
Item 9. Regulation FD Disclosure
Form 8-K dated May 9, 2003
Item 7. Exhibits
Form 8-K dated May 12, 2003
Item 9. Regulation FD Disclosure
Form 8-K dated May 13, 2003
Item 4. Changes in Registrant's Certifying Accountant
Item 7. Exhibits
Form 8-K dated June 18, 2003
Item 5. Other Events and Regulation FD Disclosure
Item 7. Exhibits
FORM 10-Q
QUARTERLY REPORT - PAGE 27
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
Secretary and Chief Financial Officer
Date: August 14, 2003
FORM 10-Q
QUARTERLY REPORT - PAGE 28