10-Q 1 doc1.txt ============================================================================= 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