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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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[X]----------
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996, or
[ ]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.________________
COMMISSION FILE NO.: 0-9409
MERCER INTERNATIONAL INC.
Exact name of Registrant as specified in its charterEXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER
WASHINGTON 91-6087550
State or other jurisdictionSTATE OR OTHER JURISDICTION IRS Employer Identification No.
of incorporationEMPLOYER IDENTIFICATION NO.
OF INCORPORATION OR ORGANIZATION
BRANDSCHENKE STR. 64, ZURICH, SWITZERLAND, 8002
Address of principal executive office Zip CodeONE RENTON PLACE, 555 S. RENTON VILLAGE PLACE, SUITE 700, RENTON, WA 98055
ADDRESS OF OFFICE
Registrant's telephone number including area code: 41(1) 201 7710(425) 687-4229
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
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SHARES OF BENEFICIAL INTEREST, $1.00 PAR VALUE
PREFERRED STOCK PURCHASE RIGHTS
(Title of Class)
---------------------------TITLE OF CLASS
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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 ofSECURITIES 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]/X/ No [ ]/ /
Indicate by check mark if disclosure of delinquent filers pursuant to
RuleItem 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]/X/
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes /X/ No / /
The aggregate market value of the Registrant's voting stock held by
non-affiliates of the Registrant as of March 21, 1997 was approximately
$143,444,927. TheJune 28, 2002, the last reported salebusiness day of
the Registrant's most recently completed second fiscal quarter, based on the
closing price of the common shares of beneficial
interestvoting stock on the NASDAQ Stock Market's National Market on March 21, 1997such date,
was $9.63 per share.approximately $133,287,192.
As of March 21, 1997,2003, the Registrant had 14,917,36916,874,899 common shares of
beneficial interest, $1.00 par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The Proxy Statement for the Annual Meeting of Shareholders to be held June
30, 1997 is incorporated by reference in Part III hereof. Certain exhibits in
Part IV of this Form 10-K are incorporated by reference from prior filings made
by the Registrant under the Securities Act of 1933, as amended, and the
Securities Exchange Act of 1934, as amended.
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SECURITIES AND EXCHANGE COMMISSION
FORM 10-K
TABLE OF CONTENTS
PAGE
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PART I
Item 1. BUSINESS..................................................................... 3BUSINESS.................................................... 4
The Company.................................................................. 3
Spun-off Operations.......................................................... 3
Products.....................................................................Company................................................. 4
The Pulp Industry........................................... 6
The Paper Industry.......................................... 9
Raw Materials............................................... 9
Our Products................................................ 11
Sales, Marketing and Distribution............................................ 4
Fibre........................................................................ 6Distribution........................... 13
Capital ExpendituresExpenditures........................................ 15
Government Financing........................................ 15
Rosenthal Conversion Project and Government Financing................................ 6Financing.................. 17
Stendal Pulp Mill Conversion Project................................................. 7
Environmental................................................................ 8Project and Financing..................... 18
Environmental............................................... 24
Human Resources.............................................................. 9
Acquisitions................................................................. 10Resources............................................. 25
Additional Information...................................... 26
Item 2. PROPERTIES................................................................... 10PROPERTIES.................................................. 26
Item 3. LEGAL PROCEEDINGS............................................................ 11PROCEEDINGS........................................... 28
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......................... 11HOLDERS......... 28
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS........................................................ 12MATTERS....................................... 29
Item 6. SELECTED FINANCIAL DATA...................................................... 13DATA..................................... 30
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION.................................................................. 13OPERATIONS................................. 32
Results of Operations........................................................ 14Operations....................................... 32
Overview.................................................. 32
Year Ended December 31, 19962002 Compared to the Year Ended
December 31, 1995.... 142001....................................... 34
Year Ended December 31, 19952001 Compared to the Year Ended
December 31, 1994.... 152000....................................... 36
Liquidity and Capital Resources.............................................. 17Resources............................. 37
Operating Activities...................................... 37
Investing Activities...................................... 37
Financing Activities...................................... 38
Sensitivity Analysis...................................... 39
Foreign Currency............................................................. 19
Cyclical Nature of Business; Competitive Position............................ 20
Inflation.................................................................... 20Currency............................................ 39
Critical Accounting Policies................................ 39
Cautionary Statement Regarding Forward-Looking
Information............................................... 41
Inflation................................................... 44
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK...................................................... 44
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................................. 20DATA................. 49
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE........................................ 20DISCLOSURE.................................. 49
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT........................... 21REGISTRANT.......... 50
Item 11. EXECUTIVE COMPENSATION....................................................... 21COMPENSATION...................................... 51
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT............... 21MANAGEMENT................................................ 54
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................... 21TRANSACTIONS.............. 55
Item 14. CONTROLS AND PROCEDURES..................................... 55
PART IV
Item 14.15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K............. 228-K....................................................... 56
Financial Statements......................................................... 24Statements........................................ 59
Supplementary Financial Information.......................................... 41
SIGNATURES................................................................... 42Information......................... 82
SIGNATURES.................................................. 83
2
FORWARD-LOOKING STATEMENTS
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, 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 under the sub-heading "Cautionary
Statement Regarding Forward-Looking Information" in "Management's Discussion and
Analysis of Financial Condition and Results of Operations". 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 documents we file from time to time with the
SEC, particularly our quarterly reports on Form 10-Q and current reports on
Form 8-K.
EXCHANGE RATES
As of January 1, 2002, we changed our reporting currency from the
U.S. dollar to the Euro, as a significant majority of our business transactions
are originally denominated in Euros. Accordingly, our financial statements for
the year ended December 31, 2002 included in this annual report are stated in
Euros and our financial statements and other financial information for prior
periods included in this annual report have been restated in Euros. We translate
non-euro denominated 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 following table sets out exchange rates, based on the noon buying rates
in New York City for cable transfers in foreign currencies as certified for
customs purposes by the Federal Reserve Bank of New York, referred to as the
"Noon Buying Rate", for the conversion of U.S. dollars to Euros in effect at the
end of the following periods, the average exchange rates during these periods
(based on daily Noon Buying Rates) and the range of high and low exchange rates
for these periods:
YEAR ENDED DECEMBER 31,
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2002 2001 2000 1999 1998(1)
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(E/U.S.$)
End of period....................................... 0.9536 1.1227 1.0646 0.9937 0.8521
High for period..................................... 1.1638 1.1945 1.2087 0.9984 0.9476
Low for period...................................... 0.9536 1.0487 0.9697 0.8422 0.8208
Average for period.................................. 1.0660 1.1219 1.0901 0.9430 0.9033
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(1) As the Euro was introduced as of January 1, 1999, the exchange rates for
1998 are based upon the conversion of U.S. dollars to Deutschmarks and
Deutschmarks to Euros. The Noon Buying Rate for the conversion of
U.S. dollars to Deutschmarks at December 31, 1998 was $1.00 = DM1.6665. The
average rate of exchange (based on daily Noon Buying Rates) for the
conversion of U.S. dollars to Deutschmarks during 1998 was $1.00 = DM1.7667.
The rate established by the European Union for the conversion of
Deutschmarks to Euros is E1.00 = DM1.95583.
On March 21, 2003, the Noon Buying Rate for the conversion of U.S. dollars
to Euros was E0.9483 per U.S. dollar.
3
PART I
ITEM 1. BUSINESS
THE COMPANYIn this document, please note the following:
- references to "we", "our", "us", the "Company" or "Mercer" mean Mercer
International Inc. and its subsidiaries, unless the context clearly
suggests otherwise;
- a "tonne" is one metric ton or 2,204.6 pounds;
- information is provided as of December 31, 2002, unless otherwise stated;
- all references to monetary amounts are to "Euros", the lawful currency
adopted by most members of the European Union, unless otherwise stated;
and
- "E" refers to Euros; and "DM" refers to Deutschmarks, the lawful currency
of Germany prior to the formal introduction of the Euro in 2002.
THE COMPANY
GENERAL
Mercer is a Massachusettsbusiness trust organized under the laws of the State of
Washington in 1968. Under Washington law, shareholders of a Massachusettsbusiness trust have
the same limited liability as shareholders of a corporation.
In this document: (i) unlessWe operate in the context otherwise requires, the
"Company" or "Mercer" refers to Mercer International Inc. and its subsidiaries;
and (ii) a "tonne" is one metric ton or 2,204.6 pounds.
Mercer is a pulp and paper company headquarteredbusiness. Our operations are located
primarily in Zurich, Switzerland,
with operations primarily locatedGermany and we currently employ approximately 736 people.
We operate a modern, efficient pulp mill, referred to as the "Rosenthal
mill", that produces softwood kraft pulp. It has an annual production capacity
of approximately 300,000 tonnes. The Rosenthal mill is the only producer of
market kraft pulp in Germany. The Company'sOur current pulp paper and
sales operations are conducted through
its indirectly wholly-owned subsidiaries,
Zellstoff-und Papierfabrik Rosenthal GmbH ("ZPR") and Dresden Paper AG ("DPAG").
The Company initially acquired its paper operations in 1993& Co. KG and its affiliates, or
"Rosenthal", which are our wholly-owned subsidiaries.
Our 63.6% owned project subsidiary, Zellstoff Stendal GmbH, or "Stendal", is
implementing a "greenfield" project, referred to as the "Stendal project", to
construct a new state-of-the-art softwood kraft pulp operations in 1994 from Bundesanstalt fur Vereinigungsbedingte Sonderaufgaben
("BVS")mill. The mill, referred to
as the "Stendal mill", will have an annual production capacity of approximately
552,000 tonnes and will be located near the German government agency responsible fortown of Stendal, Germany,
approximately 300 kilometers north of the privatization of
government owned companies.
The Company currently employs 873 people and its manufacturing plants
consist of fiveRosenthal mill.
We also operate two paper mills (thelocated at Heidenau and Fahrbrucke, Germany,
collectively referred to as the "Paper mills"), that produce specialty papers and
a pulp mill (the "Pulp
mill") withprinting and writing papers and have an aggregate annual production capacitiescapacity of
approximately 220,000
tonnes85,000 tonnes. Our paper operations are conducted through Dresden
Papier GmbH and 160,000 tonnes, respectively. The Paper mills produce three primary
classesits affiliates, or "Dresden", which are our wholly-owned
subsidiaries.
HISTORY AND DEVELOPMENT OF BUSINESS
We originally invested in various real estate assets with the intention of
paper products, being packaging, printing and specialty, and the Pulp
mill produces sulphite pulp.
Duringbecoming a real estate investment trust, but in 1985 changed our operational
direction to acquiring controlling interests in operating companies. We acquired
our current operations beginning in 1993.
Over the last threefive years, we have expended an aggregate of approximately
E399.6 million on capital investments at our pulp and a half years,paper mills, not including
the Company has focused upon
implementing operational changes and plant upgradesStendal project, to increase production capacity, improve efficiency, reduce
effluent discharges and emissions and modernize its manufacturing plants.
In aggregate, the Company has expended approximately $89.3 million onmills. Such capital
investments were financed in large part through government guaranteed term
financing and government grants of approximately E105.3 million. For more
information about these grants, see "Business--Government Financing".
4
In late 1999, we completed a major capital project which converted the
Rosenthal mill to the production of kraft pulp from sulphite pulp, increased its
annual production capacity from approximately 160,000 tonnes to approximately
300,000 tonnes and reduced emissions and energy costs. The aggregate cost of the
project was approximately E361.0 million.
We completed financing arrangements and commenced construction of the
Stendal mill in August 2002. The Stendal project is currently estimated to cost
approximately E1.0 billion and is scheduled to be producing saleable kraft pulp
in the third quarter of 2004. For more information about the Stendal project,
see "Business -- Stendal Pulp Mill Project and Financing".
Since 1998, we have also implemented a strategy to focus on our core
operations and rationalize assets that either were not part of our core
operations or did not provide the desired level of return. As a result, between
1998 and 2000, we took a charge of E17.9 million relating to our paper
operations and sold four paper mills that produced packaging, carton and
printing papers located at Greiz, Raschau, Trebsen and Hainsberg, Germany.
The sale of these paper mills was the Company'sresult of a strategic decision to
withdraw from commodity paper grades produced principally from waste paper where
we had little market share and, we believed, limited potential for long-term
profitability. We continue to operate and upgrade the Heidenau and Fahrbrucke
paper mills as they principally produce niche products and hold a significant
market share in their respective markets. In December 2001, we acquired Landqart
AG, or "Landqart", for approximately $2.7 million which operates a paper mill in
Graubunden, Switzerland that produces specialty paper. At the end of 2002, we
sold 20% of our interest in Landqart and reorganized our remaining interest into
an indirect 39% minority interest through a limited partnership.
ORGANIZATIONAL CHART
The following chart sets out our directly and indirectly owned principal
operating subsidiaries, all of which $27.9 million was financedare organized under the laws of Germany,
and their principal activities:
[GRAPHIC]
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(1) The Stendal mill is under construction.
(2) Managed and operated by Dresden.
5
CORPORATE STRATEGY
Our corporate strategy is to create shareholder value within the context of
an inclusive, stakeholder approach. We expect to pursue the expansion of our
asset and earnings base globally through non-refundable government grants.acquisitions and organic growth. We
seek to acquire interests in companies and assets in the pulp and paper industry
and related businesses where we can add value through focused management. We
pursue organic growth through high return capital expenditures at our operating
facilities to increase production, reduce costs and improve quality.
The markets for pulp and paper are highly competitive and sensitive to
cyclical changes in industry capacity, the economy, interest rates and
fluctuations in foreign currency exchange rates, all of which can have a
significant influence on the Company'sour selling prices and overall profitability. The Company
competesCustomers
in most markets in which we sell our products have a choice of suppliers. We
compete with European and international pulp and paper firms ranging from very
large integrated firms to smaller specialty firms. AreasMany of these firms are
larger than us and have greater financial resources, longer operating histories
and larger sales organizations. The primary areas of competition include price,
innovation, quality and service. The Company'sOur competitive position is influenced by the availability
and cost of itsour raw materials, energy and labour,labor, and itsour plant efficiencies and
productivity in relation to itsour competitors. The Company previously also operatedWe believe that the quality of our
assets and the location of the Rosenthal mill and the Stendal mill provide us
with a competitive advantage in terms of our products, transportation costs and
ability to service our customers.
THE PULP INDUSTRY
GENERAL
Pulp is used in the financial services segment. On
December 28, 1995, the Company announced that it would spin-off its financial
services business to its shareholders and the same was completed in June 1996.
The corporate strategyproduction of the Company is to expand its asset and earnings
base both in Europe and internationally through the acquisition of interests in
companies and assets in the pulppaper, tissues and paper and related businesses.
SPUN-OFF OPERATIONS
Effective June 3, 1996, the Company completed the spin-off of its financial
services segment in a one for two stock dividend (the "Distribution") of
approximately 83% of its previously held 92% interest in Arbatax International
Inc., now called MFC Bancorp Ltd. ("Arbatax"). The Distribution was recorded as
a stock dividend from shareholders' equity at the carrying amount of the net
assets of the spun-off operations. As a result, the Company's total assets and
shareholders' equity were each reduced by approximately $50.7 million after the
Distribution. The operations of Arbatax have been classified separately within
the Company's financial statements and herein as "spun-off operations" and are
excluded from the amounts of revenues and expenses of the Company's continuing
operations. In addition, Arbatax's assets and liabilities are not consolidated
into the Company's continuing operations. Previously reported financial
statements for all periods and certain amounts in the Company's financial
statements have been restated to conform to this presentation.
3
4
The Distribution has permitted the Company to concentrate its management
and financial resources on its core business and pursue new opportunities in the
pulp and paper and related industries.
PRODUCTS
The Company manufactures and sells sulphite pulp and three primary classes
of paper products. The Company's products are produced from both virgin fibre,
being wood chips and pulpwood, and recycled fibre, being waste paper. The
Company's manufacturing plants are all located in Germany in the States of
Saxony and Thuringia. The Paper mills are located at Heidenau, Hainsberg,
Fahrbrucke, Trebsen and Greiz and have an aggregate annual production capacity
of approximately 220,000 tonnes. The Pulp mill is situated near the town of
Blankenstein and has an annual production capacity of approximately 160,000
tonnes. The following table sets out the Company's primary classes of paper
products and the mills at which they are produced:
PAPER PRODUCT CLASS MILL PRODUCT DESCRIPTION
- ------------------- ---- -------------------
Packaging Paper.......... Greiz and Trebsen Corrugated medium and testliner used in
the production of boxes and corrugated
shipping containers.
Specialty Paper.......... Heidenau and Fahrbrucke Greaseproof paper and coated and
uncoated wallpaper.
Printing Paper........... Hainsberg and Fahrbrucke Recycled and woodfree printing, writing
and copy paper.
Pulp is generally classified according to fibrefiber type, the process used and the
degree to which it is bleached. Kraft pulp is produced through a sulphate
chemical process in which lignin, the component of wood which binds individual
fibers, is dissolved in a chemical reaction. Chemically treated pulp allows the
wood's fiber to retain its length and flexibility, resulting in stronger paper
products. Kraft pulp can be bleached to increase its brightness. Kraft pulp is
noted for its strength, brightness and absorption properties and is used to
produce a variety of products, including lightweight publication grades of
paper, tissues and paper related products.
The sulphitemarket value of pulp depends in part on the raw materials, or fiber,
used in the production process. There are two primary species of wood used as
fiber: softwood and hardwood. Softwood species generally have long, flexible
fibers which add strength to paper, while fibers from hardwood species contain
shorter fibers which lend bulk and opacity. Northern bleached softwood kraft, or
"NBSK", pulp, which is kraft pulp manufactured using northern softwood species,
is a premium grade because of its relative strength. It generally obtains the
highest price relative to other kraft pulps. NBSK pulp is the Rosenthal mill's,
and will be the Stendal mill's, sole product.
Kraft pulp can be made in different grades, with varying technical
specifications, for different end uses. High quality kraft pulp is valued for
its reinforcing role in mechanical printing papers, while other grades of kraft
pulp are used to produce lower priced grades of paper, including tissues and
paper related products.
PULP MARKETS
Producers ranging from small independent manufacturers to large integrated
companies produce pulp worldwide. More than 100 million tonnes annually of
bleached pulp is converted into printing and writing papers, tissues,
cartonboards and other white grades of paper and paperboard around the world.
Approximately 55% of this pulp is produced for internal purposes by integrated
paper and paperboard manufacturers, and approximately 45% is produced for sale
on the open market, referred to as "market pulp". Although demand is cyclical
and has weakened during the recent global economic slowdown,
6
demand for bleached market pulp has been growing at approximately 3% annually
worldwide and approximately 2% annually in Europe.
Approximately 14 million tonnes of market pulp is consumed in Europe
annually, of which approximately 6.3 million tonnes is comprised of NBSK pulp.
Germany is the largest pulp market in Europe and consumes approximately five
million tonnes of market pulp annually. Approximately 35% of the market pulp
consumed in Germany is NBSK grade.
The markets for kraft pulp are cyclical in nature and demand for kraft pulp
is related to global and regional levels of economic activity. A measure of
demand for kraft pulp is the ratio obtained by dividing the worldwide
consumption of kraft pulp by the worldwide capacity for the production of kraft
pulp, or the "consumption/capacity ratio". An increase in this ratio generally
occurs when there is an increase in global and regional levels of economic
activity and low inventories of kraft pulp. An increase in this ratio generally
indicates greater demand as consumption increases, which generally results in
rising kraft pulp prices and a build-up of inventories by buyers and a reduction
by producers. As prices continue to rise, producers continue to run at higher
operating rates. However, an adverse change in global and regional levels of
economic activity generally negatively affects demand for kraft pulp, often
leading to a high level of inventory build-up by buyers. As demand falls, buyers
generally reduce their purchases and rely on inventories of kraft pulp and many
producers will run at lower operating rates by taking downtime to limit the
build-up of their own inventories.
The consumption/capacity ratio, excluding Indonesian and eastern European
pulp producers, was approximately 89% in 2001 and approximately 91% in 2002. We
expect the long lead time and significant capital investment required to bring
new pulp mills on stream to limit growth in industry capacity in the next few
years.
KRAFT PULP PRICING
Global economic conditions, changes in production capacity and inventory
levels are the primary factors affecting kraft pulp prices. Kraft pulp prices
are quoted in U.S. dollars. Historically, kraft pulp prices have been cyclical
in nature. NBSK pulp prices between 1990 and 2002 ranged on average from a low
of approximately $444 per tonne in 1993 to a high of approximately $875 per
tonne in 1995.
The 1995 price peak was followed by a steep decline as inventory levels for
North American and Scandinavian, or "Norscan", producers grew to over
2.5 million tonnes by early 1996. Between 1996 and 1999, pulp prices remained
relatively low due in part to the Asian financial crisis which began in late
1997.
Prices started to recover in 1999 due to a combination of factors including
a recovery in the Asian economy, the shutdown of unprofitable mills or older
mills in need of environmental upgrades and a decline in capacity expansion.
This contributed to tightening inventory levels among Norscan producers, which
fell to approximately 1.1 million tonnes in June 2000, resulting in prices
increasing to an average of approximately $710 per tonne in the fourth quarter
of 2000. However, the decline of the American and major European economies in
2001 caused a sharp reduction in paper demand. As a result, Norscan pulp
inventories rose to a high of approximately two million tonnes in early 2001 and
price levels eroded to an average of approximately $460 per tonne in late 2001.
Inventory levels ranged between approximately 1.3 million and 1.9 million tonnes
in 2002, and prices averaged approximately $463 per tonne in 2002. Lower
producer inventories in early 2003 resulted in producers increasing list prices
for kraft pulp in Europe to approximately $520 per tonne in March 2003.
7
THE MANUFACTURING PROCESS
The following diagram provides a simplified description of the Rosenthal
mill's manufacturing process:
[GRAPHIC]
In order to transform wood chips into kraft pulp, wood chips undergo a
multi-step process involving the following principal stages: chip screening,
digesting, pulp washing, and screening, bleaching and drying.
In the initial processing stage, wood chips are screened to remove oversized
chips and sawdust and are conveyed to a pressurized continuous digester where
they are heated and cooked with chemicals. This process softens and eventually
dissolves the phenolic material called lignin that binds the fibers to each
other in the wood.
Cooked pulp continuously flows out of the digester and is washed and
screened to remove most of the residual spent chemicals, called black liquor,
and partially cooked wood chips. The pulp then undergoes a series of bleaching
stages where the brightness of the pulp is gradually increased. Finally, the
bleached pulp is sent to the pulp machine where it is dried to achieve a dryness
level of more than 90%. The pulp is then ready to be baled for shipment to
customers.
A significant feature of kraft pulping technology is the recovery system,
whereby chemicals used in the cooking process are captured and extracted for
re-use, which reduces chemical costs and improves environmental performance.
During the cooking stage, dissolved organic wood materials and black liquor are
extracted from the digester. After undergoing an evaporation process, black
liquor is burned in a recovery boiler. The chemical compounds of the black
liquor are collected from the recovery boiler and are reconstituted into cooking
chemicals used in the digesting stage through additional processing in the
recausticizing plant.
8
The heat produced by the Pulp mill
is a chemical wood pulp manufactured by a magnesium bisulphite acid cooking
process. The majority of the production of the millrecovery boiler is used to make paper grade
pulp.generate high-pressure
steam. Additional steam is generated by a power boiler through the combustion of
biomass consisting of bark and other wood residues from sawmills, residue
generated by the effluent treatment system and natural gas. The dissolving sulphite pulpsteam produced
by the recovery and power boilers is used to power a turbogenerator to generate
electricity, as well as to provide heat for the digesting and pulp drying
processes.
THE PAPER INDUSTRY
Prices and profitability in the paper industry are driven primarily by
global supply and demand. Demand is strongly influenced by global and regional
levels of economic activity. Supply is determined by industry capacity and
operating rates. In general, the paper industry has experienced periods of
supply and demand imbalance. When demand increases, prices rise, which leads
producers to increase their capacity and operating rates. As supply increases in
response, price competition increases, driving prices lower.
Specialty papers that we produce are comprised of coated and uncoated
wallpaper, non-woven wallpaper base, pre-impregnated decor paper and greaseproof
paper.
Wallpaper can be coated with an agent to enhance its appearance and printing
capability. In addition, non-woven wallpaper contains a certain proportion of
synthetic fibers so that it does not expand when wet, paste can be applied to
the wall instead of the wallpaper and it can be easily torn from the wall, or
drystripped. Demand for wallpaper is related to activity in the construction and
refurbishing industries, which have been relatively strong due to low interest
rates in most industrialized countries. Non-woven wallpapers are the fastest
growing category of wallpaper. The non-woven wallpaper market is in a period of
capacity shortage and demand is primarily driven by quality rather than price.
Non-woven wallpaper is generally sold at a premium to woven wallpaper and we
expect premiums and higher margins to persist as long as capacity shortages
continue.
Decor papers are used in laminate flooring, interior panels, furniture and
other applications to provide a decorative surface. Decor papers can be
pre-impregnated with an agent to provide extra strength. Demand for decor paper
is related to activity in the construction and refurbishing industries. In
periods when prices increase, consumers often substitute less expensive
alternatives for more expensive wood-based material. Historically, markets for
pre-impregnated decor paper have grown faster than the decor paper market. The
main markets for decor paper are in Europe. In 2001, the market for decor paper
in Germany was approximately 154,000 tonnes. The pre-impregnated decor paper
market is in a period of capacity shortage and demand is primarily driven by
quality rather than price. Growth in the pre-impregnated decor market has been
steady in recent years.
Greaseproof paper is a consumer oriented product that can be used for, among
other things, baking and the packaging of food products such as fast foods.
Printing and writing papers include uncoated woodfree papers. Woodfree
papers generally contain less than 10% mechanical pulp. Uncoated woodfree papers
can be finished to enhance their surface and are often used to print less costly
products. The global demand for printing and writing paper increased by
approximately 2.5% from approximately 91.4 million tonnes in 2001 to
approximately 93.7 million tonnes in 2002, including approximately 28.5 million
tonnes in western Europe. The global demand for uncoated woodfree paper in 2002
was approximately 42.6 million tonnes.
RAW MATERIALS
The Rosenthal mill is situated in a specialtyregion which offers an ample and stable
supply of fiber. The fiber consumed by the Rosenthal mill consists of wood chips
produced by local sawmills and pulpwood, which are cyclical in both price and
supply. Wood chips are small pieces of wood used to make pulp and are a product
of either wood waste from sawmills or pulpwood processed, or chipped, especially
for this purpose. Pulpwood consists of lower quality logs not used in the
production of synthetic textile fibre such as viscose staple fibre
(rayon). A numberlumber. The costs of factors beyond economicwood chips and
9
pulpwood in Germany are primarily affected by the supply and demand for lumber.
In 2002, the Rosenthal mill consumed approximately 1.6 million cubic meters of
fiber. Approximately 69%, or approximately 1.1 million cubic meters, of such
consumption was in the form of sawmill wood chips. The balance of approximately
31%, or approximately 0.5 million cubic meters, was in the form of pulpwood.
Approximately 85 to 90% of the fiber consumed by the Rosenthal mill is spruce
and the remainder is pine.
The wood chips for the Rosenthal mill are sourced from approximately 60
sawmills located in the States of Bavaria and Thuringia within a 150 kilometer
radius of the Rosenthal mill. Within this radius, the Rosenthal mill is the
largest consumer of wood chips. Given its location and size, the Rosenthal mill
is the best economic outlet for the sale of wood chips in the area. We believe
the Rosenthal mill's fiber costs have historically been among the lowest for
European pulp producers. The Rosenthal mill's transportation division, which
operates approximately 51 trucks, handled approximately 61% of our wood chip
deliveries to the mill in 2002. While fiber costs and supply are subject to
cyclical changes largely in the sawmill industry, we expect that we will be able
to continue to obtain an impactadequate supply of fiber on reasonably satisfactory
terms for the Rosenthal mill due to its location and our long-term relationships
with suppliers. We have not historically experienced any fiber supply
interruptions at the Rosenthal mill.
Wood chips are normally sourced from sawmills under one year or quarterly
supply contracts with fixed volumes, which provide for price adjustments.
Pulpwood is partly sourced from the state forest agency in Thuringia on a
contract basis and partly from private holders, on the marketsame basis as wood chips.
We organize the harvesting of pulpwood sourced from the state forest agency in
Thuringia after discussions with the agency regarding the quantities of pulpwood
that we require.
The Rosenthal mill's fiber requirements were historically procured
principally by SCA Holz, a large wood supply company. In 2002, SCA Holz procured
approximately 25% of the fiber for chemical pulp, including an emerging requirement, particularlythe Rosenthal mill. Our agreement with SCA
Holz expires in April 2003 and will not be renewed. We have organized our own
internal wood procurement department to handle and source the fiber requirements
for the Rosenthal mill. Four people are employed in the European market,department currently and
we expect to hire an additional four to five people. The department will
continue to procure fiber for pulp bleached without any chlorine compounds or without
the useRosenthal mill from many of chlorine gas.the same sources
and under similar terms as under our agreement with SCA Holz. We believe that
handling our own fiber procurement will reduce our operating costs over the
long-term due to the elimination of third party fees paid for sourcing fiber.
The PulpStendal mill haswill be situated in a region which offers an ample and
stable supply of fiber. The fiber consumed by the capabilityStendal mill will consist of
producing both
"totally chlorine free" ("TCF")wood chips and "elemental-chlorine free" ("ECF") pulp. TCF
pulppulpwood. When fully operational, the Stendal mill is bleachedexpected to
a high brightness using oxygenconsume approximately 2.8 to 3 million cubic meters of fiber annually. The core
wood supply region for the Stendal mill will include most of the northern part
of Germany within an approximately 240 kilometer radius of the mill. The wood
supply potential in this core region is not yet fully utilized and hydrogen peroxide as
bleaching agents, whereas ECF pulp is producedwe expect
that it should be able to supply 80% of all of the fiber needed by substituting chlorine dioxide
for chlorine gasthe mill. We
expect to obtain the balance primarily from southwestern and southern Germany.
The fiber base in the bleaching process. This substitution virtually
eliminates complex chloro-organic compounds fromplanned wood supply area for the Stendal mill effluent. Ethanol, a
by-productconsists of
pulp production, is also soldapproximately 80% pine and 20% spruce and fir. We expect approximately 25% of
the fiber consumed by the CompanyStendal mill to industrial
producersbe in the form of sawmill wood chips
and usedapproximately 75% in making paints, lacquers, filmsthe form of pulpwood. The Stendal mill will have
sufficient chipping capacity to fully operate using solely pulpwood, if
required. We expect to source wood chips from sawmills within an approximately
360 kilometer radius of the mill. We expect to source pulpwood partly from
private forest holders and printing colours.partly from state forest agencies in Thuringia,
Sachsen-Anhalt and Brandenburg. In 2002, Stendal, in part to demonstrate to its
senior lenders the availability of its required fiber, obtained non-binding
letters of intent from potential wood chip and pulplog suppliers to supply fiber
well in excess of its needs. In 2003 and 2004, Stendal expects to put into place
definitive supply arrangements similar to those of the Rosenthal mill. The
Company plansStendal mill is expected to convertbe the Pulplargest consumer of wood chips in Germany
and, together with the Rosenthal mill, fromprovide the production of sulphite pulp to
kraft (sulphate) pulp. See "Business -- Pulp Mill Conversion Project."
SALES, MARKETING AND DISTRIBUTION
The Company's sales and marketing operations focus primarily on western
European countries and are responsiblebest economic outlet for the
majoritysale of wood chips in eastern Germany.
10
Stendal is establishing its own wood procurement organization to handle the
paper sales.fiber requirements for the Stendal mill. This division would focus on three
principal activities, being wood procurement and sales, harvesting, and
transportation. The procurement and sales main activity will be to procure the
required wood chip and pulplog assortments for the mill's annual production. In
1996, the Company increased the amount of paper sales conductedconjunction with this activity, it may also procure higher quality sawlogs,
either through agents
to approximately 35% of total paper sales from approximately 30% in 1995 and 5%
in 1994,harvesting or through purchases that it can sell or trade with
others for wood chips in order to expand its salesoptimize the fiber mix. We expect these
activities to employ up to 17 people. The harvesting activities will focus on
acquiring up to approximately 800,000 cubic meters per annum of harvestable
timber, of which approximately 75% would be pulpwood and the balance would be
higher quality logs to be sold or traded to third parties for wood chips. We
expect that approximately half of this volume may be harvested directly by us
and the other half would be contracted out to third parties. When fully
operational, we expect to engage up to 60 people in markets outsidethis division.
Transportation activities would focus on managing, controlling and optimizing
shipping and flows of Germany. The
majority of the Company's paper products are sold to printers, wallpaper
manufacturers, corrugators and converters. Sales of sulphite pulp within Germany
are conducted primarily by the Company's own sales staff, while sales outside of
Germany are carried out primarily through agents. The Company's sulphite pulp is
sold principally to tissue and paper mills and rayon producers. Pulp and paper
sales are made on terms customarypulpwood to the industry. At December 31, 1996, there
were no material payment delinquencies. The Company's products are deliveredmill. When fully operational, we expect
that the transportation activities may employ up to market by truck, rail36 people.
When the Stendal mill commences production, we expect to be the largest
consumer of wood chips and ship.
4
5
The distribution ofpulplogs in Germany. We intend to coordinate and
integrate the Company's sales by volume, product class and
geographic area are set out in the following tablewood procurement activities for the periods indicated:
YEARS ENDED DECEMBER 31,
----------------------------------
1996 1995(1) 1994(1)(2)
-------- -------- --------
(tonnes)
SALES BY VOLUME
Packaging Papers......................................... 110,179 121,145 98,387
Specialty Papers......................................... 26,548 29,813 28,371
Printing Papers.......................................... 46,416 47,089 40,893
Pulp..................................................... 133,005 126,562 64,167
-------- -------- --------
Total(3)................................................. 316,148 324,609 231,818
======== ======== ========
(in thousands)
SALES BY PRODUCT CLASS
Packaging Papers......................................... $ 33,165 $ 66,776 $ 42,239
Specialty Papers......................................... 27,012 34,370 28,342
Printing Papers.......................................... 36,469 50,960 29,536
Pulp..................................................... 72,456 115,934 40,512
Other.................................................... 4,995 7,292 7,142
-------- -------- --------
Total.................................................... $174,097 $275,332 $147,771
======== ======== ========
SALES BY GEOGRAPHIC AREA
Germany.................................................. $101,351 $171,876 $104,170
European Union(4)........................................ 48,795 72,485 34,797
Other.................................................... 23,951 30,971 8,804
-------- -------- --------
Total.................................................... $174,097 $275,332 $147,771
======== ======== ========
- ---------------
(1) In 1995, the Company divested the corrugating box plant at HeidenauRosenthal mill and the Raschau paper mill.Stendal
mill to realize on a number of potential synergies between them. These plants had combined salesinclude
reduced overall personnel and administrative costs, greater purchasing power and
coordinated buying and trading activities. We also believe such coordination and
integration of $17.2 million or
22,123 tonnes of packaging papers in 1995fiber flows will allow us to optimize transportation costs, and
sales of $15.2 million or
24,540 tonnes of packaging papers in 1994.
(2)the species and fiber mix for both mills.
The Company acquired its pulp operations effective July 1, 1994.
(3) Excluding intercompany sales of 3,609, 3,545 and 1,774 tonnes of pulp in
1996, 1995 and 1994, respectively.
(4) Not including Germany.
The following charts illustrate the geographic distribution of the
Company's sales for the periods indicated:
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994(1)
% % %
----------------- ----------------- --------------------
Germany.................................................. 58.2 62.4 70.5
European Union(2)........................................ 28.0 26.3 23.5
Other.................................................... 13.8 11.3 6.0
- ---------------
(1) The Company acquired its pulp operations effective July 1, 1994.
(2) Not including Germany.
In 1996 and 1995, no single customer accounted for more than 10% of the
Company's pulp and paper sales. The Company's sales are not dependent upon a
single customer or upon a concentrated group of major customers. The loss of any
one customer would not have a material adverse effect on the Company.
5
6
FIBRE
The fibrefiber used by the Company's manufacturing plantsPaper mills consists of pulp and waste paper (recycled
paper), which are cyclical in both price and pulp used to producesupply. The cost of this fiber is
primarily affected by the supply and demand for paper products and wood chips and pulpwood used
to produce sulphite pulp. Approximately 80%In 2002,
approximately 76%, or approximately 45,184 tonnes, of the fibre usedfiber consumed by our
Paper mills was in the Company's
paper operations consistsform of market pulp and chemical additives. Market pulp
and chemical additives are available at market prices from various suppliers
throughout Europe. The balance of approximately 24%, or approximately 14,135
tonnes, of the fiber consumed by our Paper mills was in the form of waste paper.
Germany has extensive waste paper recycling and collection laws which result in
a readily available supply. The cost of lower grade waste paper is currently
relatively low in comparison to virgin pulp. We have not historically
experienced any fiber supply interruptions at our Paper mills.
OUR PRODUCTS
We manufacture and sell softwood kraft pulp fibre. The remaining 20%and two primary classes of paper
products. Our products are produced from both virgin fiber, being wood chips,
pulpwood and chemical woodfree pulp, and recycled fiber, being waste paper.
PULP
In early 2000, we completed the conversion of the fibreRosenthal mill to the
production of kraft pulp. The kraft pulp produced at the Rosenthal mill is made upa
long-fibred softwood pulp produced by a sulphate cooking process and
manufactured primarily from wood chips and pulpwood. A number of factors beyond
economic supply and demand have an impact on the market pulpsfor chemical pulp,
including requirements for pulp bleached without any chlorine compounds or
without the use of chlorine gas. The Rosenthal mill has the capability of
producing both "totally chlorine free" and chemical additives,"elemental chlorine free" pulp.
Totally chlorine free pulp is bleached to a high brightness using oxygen, ozone
and hydrogen peroxide as bleaching agents, whereas elemental chlorine free pulp
is produced by substituting chlorine dioxide for chlorine gas in the bleaching
process. This substitution virtually eliminates complex chloro-organic compounds
from mill effluent.
Kraft pulp is valued for its reinforcing role in mechanical printing papers
and is sought after by producers of paper for the publishing industry, primarily
for magazines and advertising materials. Kraft pulp produced for reinforcement
fibers is considered the highest grade of kraft pulp and generally obtains
11
the highest price. Through a focused technical and marketing effort, we have
changed the mix of the kraft pulp that we produce to substantially increase our
relative amount of reinforcement fibers from approximately 16% at the beginning
of 2000 to approximately 39% at the end of 2002.
We produce pulp for reinforcement fibers to the specifications of certain of
our customers. We believe that a number of our customers consider us their
supplier of choice.
The Rosenthal mill is located in the State of Thuringia and has an annual
production capacity of approximately 300,000 tonnes. For more information about
the facilities at the Rosenthal mill, see "Business -- Rosenthal Conversion
Project and Financing" and "Properties".
The kraft pulp that will be produced at the Stendal mill will be of a
slightly different grade than the kraft pulp produced at the Rosenthal mill as
the mix of softwood fiber used will be slightly different. The Stendal mill will
also have the capability of producing both totally chlorine free and elemental
chlorine free pulp. The Stendal mill, being constructed in the State of
Sachsen-Anhalt, is scheduled to begin producing saleable kraft pulp in the third
quarter of 2004, with an overall design capacity of approximately
552,000 tonnes per annum. For more information about the facilities at the
Stendal mill, see "Business -- Stendal Pulp Mill Project and Financing"
and "Properties".
PAPER
Our paper manufacturing strategy has focused on utilizing our existing
machines, with certain modifications, in combination with our skilled workforce,
to principally produce niche products. As a result, we have divested certain
paper mills which focused on packaging, carton and recycled printing and writing
papers, and shifted our production away from woodfree printing and writing
papers.
The following table sets out the primary classes of paper products that we
produce and the mills at which they are availableproduced:
PAPER PRODUCT CLASS MILL PRODUCT DESCRIPTION
- ------------------- ---- -------------------
Specialty Paper....... Heidenau Coated and uncoated wallpaper and non-woven wallpaper base
Fahrbrucke Greaseproof paper and pre-impregnated decor paper
Printing Paper........ Fahrbrucke Printing and writing paper
We sell our wallpaper and non-woven wallpaper base primarily to specialty
paper converters and printers. It is used primarily in new construction and in
the renovation industry in residential housing and commercial buildings. We sell
our pre-impregnated decor paper primarily to specialist converters serving
furniture and flooring producers. It is used primarily for furniture coverings.
We sell our greaseproof paper to paper converters supplying the food industry.
It is used primarily for wrapping and baking food. We sell our printing and
writing papers primarily to traders, converter suppliers and paper wholesalers.
We currently manufacture from two facilities located in Germany. For more
information about the facilities at market prices from suppliers
throughout Europe. In 1996, the Paper mills, consumed approximately 167,802see "Properties". In
addition to these two wholly-owned mills, we have an equity interest in the
Landqart mill in Switzerland, which also produces specialty papers.
12
SALES, MARKETING AND DISTRIBUTION
The distribution of our pulp and paper sales volume and revenues by product
class, and revenues by geographic area is set out in the following table for the
periods indicated:
YEAR ENDED DECEMBER 31,
--------------------------------------
2002 2001 2000
-------- -------- --------
(TONNES)
SALES VOLUME BY PRODUCT CLASS
Pulp(1).................................................. 293,607 285,654 239,552
Papers
Packaging Papers....................................... -- -- 29,111(2)
Specialty Papers....................................... 61,727(3) 40,437(3) 41,422
Printing Papers........................................ 23,195 26,815 53,552(4)
-------- -------- --------
Total Papers......................................... 84,922 67,252 124,085
-------- -------- --------
Total(1)................................................. 378,529 352,906 363,637
======== ======== ========
(IN THOUSANDS)
REVENUES BY PRODUCT CLASS
Pulp(1).................................................. E130,173 E146,245 E159,713
Papers
Packaging Papers....................................... -- -- 9,512(2)
Specialty Papers....................................... 79,358(3) 35,959(3) 35,964
Printing Papers........................................ 18,352 22,797 39,870(4)
-------- -------- --------
Total Papers......................................... 97,710 58,756 85,346
-------- -------- --------
Total(1)................................................. E227,883 E205,001 E245,059
======== ======== ========
(TONNES)
REVENUES BY GEOGRAPHIC AREA
Germany.................................................. E 88,809 E 94,486 E103,591
European Union(5)........................................ 77,658 71,954 83,444
Eastern Europe and Other................................. 61,416 38,561 58,024
-------- -------- --------
Total(1)................................................. E227,883 E205,001 E245,059
======== ======== ========
- ------------------------
(1) Excluding intercompany sales volumes of 10,768, 10,447 and 1,893 tonnes of
waste paper. Pricespulp and intercompany net sales revenues of approximately E4.9 million,
E5.8 million and E1.4 million in 2002, 2001 and 2000, respectively.
(2) We sold our packaging paper mill in Trebsen effective June 2000 and no
longer produce packaging papers. Sales of approximately 29,111 tonnes for
fibreapproximately E9.5 million from the Trebsen mill are included in our results
for 2000.
(3) We acquired the specialty paper mill in Landqart effective December 2001 and
we reorganized our interest in Landqart at the end of 2002. Sales from the
Landqart mill are not included in our results for 2001, but are included for
2002. The Landqart mill sold approximately 18,613 tonnes for approximately
E43.2 million in 2001 and approximately 18,222 tonnes for approximately
E39.7 million in 2002. As of December 31, 2002, our interest in the Landqart
mill will no longer be consolidated and will be included in our financial
results on an equity basis.
(4) We sold our printing paper mill in Hainsberg effective November 2000. Sales
of approximately 24,964 tonnes for approximately E16.8 million from the
Hainsberg mill are included in our results for 2000.
(5) Not including Germany.
13
The following charts illustrate the geographic distribution of our revenues
for the periods indicated:
Year Ended Year Ended Year Ended
December 31, 2002 December 31, 2001 December 31, 2000
----------------- ----------------- -----------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
EUROPEAN(1) UNION 34.1%
Germany 39.0%
Eastern Europe and Other 26.9%
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
EUROPEAN(1) UNION 35.1%
Germany 46.1%
Eastern Europe and Other 18.8%
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
EUROPEAN(1) UNION 34.0%
Germany 42.3%
Eastern Europe and Other 23.7%
- ------------------------
(1) Not including Germany.
A large proportion of our kraft pulp sales in western Europe were
historically handled through a sales agency agreement with Oy Metsa Botnia Ab,
or "Metsa", a member of the M-Real Group of Finland which operates a number of
different paper mills. These sales comprised approximately 41%, 37% and 42% of
our total pulp sales in 2002, 2001 and 2000, respectively. Sales and marketing
in other countries were conducted by our own sales staff and through independent
agents. We chose not to renew our sales agency agreement with Metsa when it
expired in December 2002. As a result, the M-Real Group is not expected to be a
significant customer in the future. We have successfully placed with other
customers all of the volumes formerly sold to the M-Real Group. We are now
conducting all sales and marketing of our kraft pulp internally through our
sales staff and through independent agents. We believe that this allows us to
better coordinate our pulp sales and results in reduced sales and marketing
costs due to reduced third party fees in the distribution of our products. When
the Stendal mill is fully operational, we expect to sell substantially all of
its kraft pulp production in continental Europe.
14
The Rosenthal mill is the only market kraft pulp producer in Germany, which
is one of the leading import markets for kraft pulp in western Europe. We
therefore have a material competitive transportation cost advantage compared to
North American and Scandinavian pulp producers. Due to the Rosenthal mill's
central location, it delivers pulp to customers primarily by truck. Most trucks
that deliver goods into eastern Germany generally do not also haul goods out of
the region as eastern Germany is primarily an importer of goods. We are
therefore able to obtain relatively low in 1996 as a result
of weak paper markets and weakened pulp markets. Changes in market prices for
fibre in 1996 were generally reflected in the lower pricesfreight rates for the Company's
paper products.
The Company'sdelivery of our
products to many of our customers. Further, the Rosenthal mill's transportation
division handled approximately 7% of the Rosenthal mill's pulp operations are situateddeliveries in
a region which offers a
stable fibre supply. Its fibre requirements are met from wood chips produced by
local sawmills2002. Approximately 53% of our pulp sales in 2002 were to customers or
pulpwood. Wood chips are small pieces of wood used to make
pulp and are a product of either wood waste from sawmills or pulpwood processed
especially for this purpose. Pulpwood consists of lower quality logs not used in
the production of lumber. The wood chips are procured from approximately 60
sawmillsdestinations located in the States of Bavaria and Thuringia within a 150 kilometre500 kilometer radius of the PulpRosenthal mill. Within this radius,As a
result, we can generally supply our pulp customers faster than our competitors
because of the Pulpshort distances between the Rosenthal mill is by farand our customers. For
our customers in western Europe, we can, if requested, often supply them with
pulp within a day of it being ordered. This permits us to be a "just in time"
supplier to our customers. When operational, the largest
consumer of wood chips. Wood chips are normally procured from sawmills pursuant
to one year supply contracts, which provide for quarterly price adjustments.
Pulpwood is partly procured from the state forest agency in Thuringia on a
contract basis and partly from private holders. The Pulp mill's fibre
requirements are handled and procured primarily by PWA Holz, which is the
largest wood procurement company in Germany and handles a total volume of
approximately four million cubic metres per year. In 1996, the PulpStendal mill consumed approximately 656,109 cubic metres of fibre comprised of approximately
530,650 cubic metres of wood chips and 125,459 cubic metres of pulpwood.
The cost of fibre for pulpshould also have
similar advantages over Norscan producers in Europe decreased significantly
during 1996 due to low demand for pulp and a build-up in pulpwood supply. While
fibre costs remained relatively low in the last quarter of 1996, there can be no
assurance that they will not escalate in the future. During the early part of
1997, there were signs of upward price pressure for pulpwood in Europe. Overall,
in 1996, reduced fibre prices were reflected in significantly lower pulp prices.
While fibre costs are subject to cyclical changes based upon demand, the Company
expects that it will be ableits location.
Our pulp sales are on customary industry terms. At December 31, 2002, we had
no material payment delinquencies. In 2002 one customer accounted for
approximately 12%, in 2001 two customers accounted for approximately 22% and in
2000 one customer accounted for approximately 27% of our pulp sales. As our pulp
was delivered to obtain an adequate and stable supplya number of fibre on
satisfactory terms due to the favourable locationdifferent paper mills of the Pulp millM-Real Group and its
long-term relationship with suppliers.affiliates, pulp sales have not been dependent upon the activities of any single
paper operation.
Our paper sales operations focus primarily on Europe and are responsible for
the majority of our paper sales. Our paper sales conducted through agents were
approximately 27% of total paper sales in 2002, compared to approximately 30% in
2001 and 29% in 2000. We sell the majority of our paper products to paper
converters, printers and wallpaper manufacturers.
Our paper sales are also on customary industry terms. At December 31, 2002,
we had no material payment delinquencies. No single customer accounted for more
than 10% of our paper sales in 2002, 2001 or 2000. Our paper sales are not
dependent upon a single customer or upon a concentrated group of
major customers.
CAPITAL EXPENDITURES
AND GOVERNMENT FINANCING
In 1996, the Company2002, we continued with itsour capital investment programs designed to
increase production capacity, improve efficiency and profitability, reduce effluent discharges
and emissions at our manufacturing facilities. The improvements made at our
mills over the past five years have reduced operating costs and increase production capacity. Suchincreased the
competitive position of our facilities.
Our capital investments at the Rosenthal mill were approximately
E3.4 million, E7.4 million and E23.8 million in 2002, 2001 and 2000,
respectively, and we estimate them to be approximately E4.1 million for 2003. In
addition, in 2002 we commenced a strategic capital project to reconstruct the
landfill at the Rosenthal mill so that it will be useable for an additional
15 years. We estimate the total cost of this reconstruction to be approximately
E7.6 million, which Rosenthal is fully funding through a bank loan. Of this
amount, we incurred E5.0 million in 2002 and we will incur the remainder in
2003, which is when the reconstruction is expected to be completed. We estimate
this project to have an approximately three-year payback period and the project
requires no equity investment on our part.
Construction of the Stendal mill commenced in August 2002. Total capital
costs in respect of the project in 2002 were approximately E186.9 million. For
more information about the Stendal project, see "Business -- Stendal Pulp Mill
Project and Financing".
Our capital investments at our paper operations were approximately
E5.4 million, E2.7 million and E3.3 million in 2002, 2001 and 2000,
respectively. In 2003, we estimate capital investments to be approximately
E13.2 million relating primarily to quality and productivity upgrades of the
paper machines
15
at the Paper mills, replacement of a turbine at the Heidenau mill and the
completion of a wastewater treatment plant at the Fahrbrucke mill. Our capital
investments at our Paper mills in 2002 included the replacement of a gas turbine
and construction of the first stage of a wastewater treatment plant at the
Fahrbrucke mill, at a cost of approximately E0.9 million and E0.7 million,
respectively. We also adjusted the paper machine at the Fahrbrucke mill to
produce pre-impregnated decor paper at a cost of approximately E0.6 million. We
continue to review strategic initiatives designed to upgrade the product mix at
our Paper mills and enhance returns.
Over the last five years we have invested an aggregate of approximately
E399.6 million in gross capital improvements at our facilities, not including
the Stendal project. Our significant level of capital investment has largely
been facilitated by government financing and assistance initiatives in Germany.
Our capital investments to reduce effluent discharges have offset wastewater
fees that we would otherwise be required to pay. We estimate the aggregate
wastewater fees we saved over the last five fiscal years as a result of
environmental capital expenditures to be approximately E18.2 million. For more
information about our environmental capital expenditures, see
"Business -- Environmental".
GOVERNMENT FINANCING
GRANTS
Our capital investment programs are partially financed through non-refundablegovernment
grants made available by German federal and state governments and were used to offset certain wastewater fees.governments. Under legislation
adopted by the federal and certain state governments of Germany, non-refundablegovernment
grants are provided to qualifying businesses operating in eastern Germany to
finance capital investments. The grants are made to encourage investment and job
creation. Pursuant to the current terms of suchthese grants, federal and state
governments will provide funding ranging between 15% and 23%for up to 35% of the cost of qualified
investments. Additional non-refundableThe terms of such government grants equal to 5%also require that at least one
permanent job be created for each E500,000 of qualified investments, are availablecapital investment eligible for
such grants and that such jobs be maintained for a period of five years from the
federal government. Thesecompletion of the capital investment project. Such government grants are not
refundable or repayable by a recipient unless it fails to complete the proposed capital
investment or fails to create or maintain the requisite amount of jobs. In the
case of such failure, the government is entitled to revoke the grants and seek
repayment unless such failure resulted from material unforeseen market
developments beyond the control of the recipient, unlesswherein the proceedsgovernment may
refrain from reclaiming previous grants. Pursuant to such grants provided in
respect of our Rosenthal mill and being provided in respect of the Stendal
project, we have agreed to maintain stipulated job levels at each operation for
the specified five-year period. For more information, see "Business -- Human
Resources". We believe that we are used
for a non-specified purpose.in compliance with all of the terms and
conditions governing the government grants we have received.
Such grants are available generally to qualifying
businesses in Germany, and are unrelated to BVS or other amounts due to the
Company from BVS. These non-refundablegovernment grants are not recordedreported in theour income of
the Company, but instead reduce the
cost basis of the assets purchased bywith these grants.
The following table sets out the proceeds thereof.capital expenditures and government grants
recorded for the periods indicated:
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
TOTAL 2002 2001 2000 1999 1998
-------- -------- -------- -------- -------- --------
(IN THOUSANDS)
Capital expenditures, gross(1)... E399,606(2) E13,800 E10,097 E 27,028 E271,382 E77,299
======== ======= ======= ======== ======== =======
Government grants................ E105,329 E 1,176 E 2,450 E 55,355 E 31,847 E14,501
======== ======= ======= ======== ======== =======
- ------------------------
(1) Not including the Stendal project.
16
(2) The total cost of the conversion of the Rosenthal mill to produce kraft pulp
was approximately E361.0 million. We also received government grants
totaling approximately E101.7 million in connection with such capital
investments. For more information about the Rosenthal mill, see
"Business -- Rosenthal Conversion Project and Financing".
In addition, the Stendal project qualifies for approximately E274.5 million
of government grants. For more information about the Stendal project, see
"Business -- Stendal Pulp Mill Project and Financing".
The following table sets out for the periods indicated the effect of these
government grants on the recorded value of such assets in our consolidated
balance sheets:
AS AT DECEMBER 31,
-------------------
2002 2001
-------- --------
(IN THOUSANDS)
Properties, net (as shown on consolidated balance sheets)... E441,990 E278,617
Add back: government grants less amortization, deducted from
properties................................................ 85,358 91,073
-------- --------
Properties, gross amount including government grants less
amortization.............................................. E527,348 E369,690
======== ========
17
LOAN GUARANTEES
Loan guarantees are also available from German federal and state government agenciesgovernments for
up to 80% of the costborrowed amount for qualifying capital investments made in
certain parts of qualifying investments.Germany. These guarantees are provided by German federal and
state governments to assist any qualifying businesses with financing capital
investments. The guarantees permit suchqualifying businesses to obtain term loans
for such capital investments on terms and at interest rates that are more
favorable than available in the general market. In addition, subsidized interest
rate loans are available from public financial institutions in Germany, which
provide loans at below market interest rates. To date, the Company has not utilized any such
state government guarantees.
6
7
The capital investments made by the Companyrates for qualified investments.
These loan guarantees have permitted us to reduce effluent discharges
have been applied to offset wastewater fees that would otherwise be payable. At
December 31, 1996, the aggregate wastewater fees saved by the Company over the
last four years asobtain a resultsignificantly greater
amount of environmental capital expenditures were $10.3
million.
The following table sets out the Company's capital expenditures and
non-refundable grants recordedfinancing for the periods indicated:
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------------- ----------------
TOTAL 1996 1995 1994(1) 1993(2)
------- ------- ------- ------- ----------------
(in thousands)
Capital Expenditures................ $89,319(3) $23,865 $18,968 $25,145 $ 21,341
======= ======= ======= ======= ========
Non-refundable grants............... $27,952 $ 5,328 $ 7,291 $12,882 $ 2,451
======= ======= ======= ======= ========
- ---------------
(1) The Company acquired its pulp operations effective July 1, 1994.
(2) The Company acquired its paper operations effective July 1, 1993.
(3) To December 31, 1996, capital expenditures have offset $10.3 million in
wastewater fees.
In 1993, the Company initiated a four year capital investment program at an
anticipated cost of approximately $57.9 million to modernize and upgrade the
Paper mills. As at December 31, 1996, the Company had substantially completed
this capital investment program and spent in total approximately $58.8 million
thereon. Expenditures under this program in 1996 totalled approximately $9.7
million, of which $1.6 million was financed by non-refundable grants. The
principal investments at the Paper mills under this program consisted of: (i)
approximately $3.9 million for the installation of effluent treatment equipment
to improve environmental compliance; (ii) approximately $12.2 million for the
installation of power plants at two of the Paper mills; (iii) approximately $6.6
million to add a coating facility to the Heidenau mill; (iv) approximately $5.9
million to add a de-inking plant at the Hainsberg mill; and (v) approximately
$8.1 million to upgrade the paper machine at the Trebsen mill to increase its
annual production capacity by 25,000 tonnes. These investments are also expected
to improve the efficiencies of the Paper mills. As the capital investment
program has been substantially completed, the level of capital expenditures at
the Paper mills is expected to be lower in the next two years. The Company
anticipates that capital investments at its Paper mills will total approximately
$2.8 million in 1997.
In 1994, the Company initiated a capital investment program to reduce
effluent discharges and emissions and upgrade the Pulp mill. The program was
estimated to cost approximately $48.4 million and be completed by December 31,
1998. As at December 31, 1996, approximately $33.8 million had been expended on
this program. Expenditures under this program in 1996 totalled $13.6 million, of
which $3.7 million was funded by non-refundable grants. These investments
included the installation of new screens at the Pulp mill at an approximate cost
of $2.7 million which decreased losses of dissolved material and resulted in
reduced effluent discharges and cleaner pulp. In 1996, the Company also
increased the evaporation capacity of the Pulp mill to reduce effluent
discharges at an approximate cost of $1.5 million. The balance of this
investment program has been modified as a result of the Company's plansproject to convert the Pulp mill to produce kraft pulp.
PULP MILL CONVERSION PROJECT
The Company plans to convert the Pulp mill from the production of sulphite
pulp to kraft pulp. Kraft pulp is a fibrous material produced by chemically
reducing wood into its component parts using a sulphate cooking process and is
primarily used in the production of paper, tissues and paper related products.
This grade of pulp is noted for its strength, whiteness and absorption
properties and is the main type of pulp imported and sold in the European
market. Germany is one of the most significant pulp markets in Europe and the
Company is the only non-integrated pulp producer in the country. As a result,
most of the Company's kraft pulp production will be sold on the domestic German
market.
The conversion of the Pulp mill to produce kraft pulp is expected to
increase its annual production capacity from 160,000 tonnes to 280,000 tonnes,
substantially reduce effluent and sulphur dioxide emissions and reduce energy
costs.
7
8
The estimated cost for the conversion is approximately $325 million, which
will be financed through a combination of non-refundable governmental grants of
approximately $97.5 million, governmental assistance and guarantees for
long-term project financing and cash flow from operations.
The conversion will be subject to, among other things, the Company settling
all financing and governmental grants on satisfactory terms and obtaining all
necessary environmental and operating permits and approvals for the conversion.
The Company has conducted extensive studies and held extensive discussions with
the State Government of Thuringia in connection with the conversion project. To
date, the State Government of Thuringia has been supportive of the Company's
proposal and is assisting it in reducing the permitting period for a project of
this nature, from three years to approximately nine months. The Company is
finalizing its detailed reviews and anticipates making its formal application
for approval of the project in mid-1997. A final decision to proceed with the
conversion would be made upon receipt of all necessary permits and approvals
which are currently expected to be received at the end of 1997. The Company
estimates that its costs in respect of the project in 1997 will be approximately
$3.3 million. The actual conversion of the Pulp mill is expected to commence in
1998 and to be completed at or about the end of 1999. The majority of
expenditures on the project will occur in 1998 and 1999. The conversion of the
Pulp mill will result in it taking approximately three months downtime prior to
the switch over from sulphite to sulphate pulp production. The Finnish
engineering firm Jaakko Poyry has been appointed as the project engineer for the
conversion project. The fibre supply for the converted mill will primarily come
from the abundant source of long fibre spruce wood located in the region
surrounding the mill.
Although the Company's plan to convert the PulpRosenthal mill to the
production of kraft pulp, as well as the construction of the Stendal mill, at
substantially more favorable rates and upon substantially more favorable terms
than would otherwise have been available.
ROSENTHAL CONVERSION PROJECT AND FINANCING
In late 1999, we completed a major capital project to convert the Rosenthal
mill to the production of kraft pulp and increase its annual production capacity
to approximately 280,000 tonnes. Through subsequent minor capital investments
and efficiency improvements, the annual production capacity at the Rosenthal
mill has been increased to approximately 300,000 tonnes. The project has also
substantially reduced effluent and sulphur dioxide emissions and has reduced
energy costs, with natural gas consumption decreasing by approximately 46.9%
during the period from the beginning of 2000 to the end of 2002 as a result of
operating efficiencies.
The aggregate cost of the project, including project financing, capitalized
interest of approximately E14.1 million and related costs and an amount for
contingencies, was approximately E361.0 million. The project was financed
through a combination of a project loan supported by government guarantees,
government grants and an equity investment made by us.
The following summary of the material provisions of the project loan
agreement is not complete and these provisions, including definitions of certain
terms, are qualified by reference to the project loan agreement and the
applicable amendment agreements on file with the SEC.
In 1998, Rosenthal entered into a project loan agreement, as amended, having
a 15 year term with a German bank and other syndicated lenders in the aggregate
amount of E259.7 million (DM508.0 million), referred to as the "Rosenthal Loan
Facility", to finance the project. The Rosenthal Loan Facility is secured by
liens on all of the assets of Rosenthal and the German federal government and
the state government of Thuringia provided a guarantee for 80% of the facility.
We have agreed with the lenders under the Rosenthal Loan Facility that, so long
as Rosenthal has liability thereunder, to retain control over at least 51% of
the voting shares of Rosenthal.
The rate of interest under the Rosenthal Loan Facility, other than for
amounts drawn as special credits, is an amount equal to the three or six month
Euribor rates plus a margin of between 60 and 75 basis points. The amounts drawn
as special credits, under programs established by certain German public banks
for projects which enhance environmental performance, are part of the overall
Rosenthal Loan Facility and repayment structure. The rates of interest for the
special credits are set for the first 10 years at an annual amount equal to the
lenders' variable costs of such funds. The rates of interest will be adjusted
and reset after 10 years for the balance of the term. These special credits
permit qualifying borrowers to borrow money at favorable rates of interest.
As part of the Rosenthal Loan Facility, there is a credit line which allows
for derivative transactions, subject to certain controls, including certain
maximum notional and at-risk amounts, to manage risk. Rosenthal has entered into
derivative instruments with the lead bank under the Rosenthal Loan Facility to
manage its risk exposure with respect to certain amounts outstanding thereunder.
For more information
17
about these derivative instruments, see "Quantitative and Qualitative
Disclosures About Market Risk -- Derivative Instruments".
Repayment of the Rosenthal Loan Facility commenced on March 31, 2001. During
2002, we repaid E12.5 million of the principal amount of the Rosenthal Loan
Facility and at year end E204.9 million was outstanding. Of this amount, an
aggregate of E130.4 million was drawn by Rosenthal pursuant to special
credit programs.
In addition to the government guarantee, the state government of Thuringia
provided government grants of E73.6 million (DM144.0 million) in respect of the
project. The German federal government also provided, under existing programs,
government grants totaling E27.1 million (DM53.0 million) in respect of the
project. As of December 31, 2002, Rosenthal had received government grants
totaling approximately E101.7 million for the Rosenthal mill conversion.
The sulphite pulp production at the Rosenthal mill was shut-down in
July 1999 to implement the conversion to kraft pulp. The mill was successfully
started-up to produce kraft pulp in December 1999. The Rosenthal mill was
producing at approximately 89% of its original planned conversion capacity in
the first year and was producing at full capacity by the end of 2000.
STENDAL PULP MILL PROJECT AND FINANCING
THE PROJECT
Our 63.6% owned subsidiary, Stendal, is the project company formed to
develop, construct and operate the Stendal mill. The other shareholders of
Stendal are RWE Industrie-Losungen GmbH, or "RWE", as to a 29.4% interest and
AIG Altmark-Industrie AG, or "AIG", as to a 7.0% interest. RWE is a subsidiary
of the second largest utility company in Germany and is experienced in the
construction of pulp mills. AIG is a German real estate company which owns
1,050 acres of a 1,250 acre industrial park on which the Stendal mill will be
situated.
The Stendal mill is a "greenfield" softwood kraft pulp mill that is being
constructed at a total cost of approximately E1.0 billion near the town of
Stendal, in the German State of Sachsen-Anhalt. The mill will be a modern,
state-of-the-art single line mill with an anticipated annual production capacity
of approximately 552,000 tonnes. The overall mill design is based on proven or
existing processes and technologies. The process and mill operations will be
highly automated to ensure stable operation and pulp quality. The mill process
will be a modern but ordinary kraft pulping process that emphasizes
environmentally sound operational principles. The Stendal mill will use a batch
pulp cooking process. Batch cooking allows for different grades to be batch
produced for different end uses.
Construction of the Stendal mill commenced on August 26, 2002. The Stendal
mill will be located approximately 300 kilometers north of the Rosenthal mill.
As a result of the proximity of the Stendal mill to the Rosenthal mill and the
use of similar equipment at both mills, we believe we will be able to realize
operating synergies between the two operations, particularly in the areas of raw
material costs, production engineering, maintenance and marketing.
The Stendal mill will be situated on an approximately 200 acre site owned by
Stendal that is part of a larger 1,250 acre industrial park. The balance of the
industrial park is owned by AIG, which is seeking to develop the park. Although
no assurances can be provided that any development will occur and we are not
directly a party to these discussions, we are aware of third party proposals to
build manufacturing facilities on the balance of the industrial park that would
be complementary to our pulp operations. These include a sawmill and a
tissue mill.
When completed, the Stendal mill will be the largest market kraft pulp
facility in Germany, the only other being our Rosenthal mill. We anticipate that
the addition of production from the Stendal mill will allow us to expand our
customer base, as our two pulp mills will produce slightly different grades of
softwood kraft pulp.
18
When the Stendal mill is fully operational, we anticipate that we will have
an aggregate annual production capacity of approximately 852,000 tonnes of NBSK
pulp from our two mills.
The summaries of certain material provisions of agreements entered into in
connection with the Stendal project set forth herein are not complete and such
summaries, including definitions of certain terms, are qualified in their
entirety by reference to such agreements on file with the SEC.
CONTROL AND MANAGEMENT
We, Stendal and its other shareholders, RWE and AIG, entered into a
shareholders' agreement dated August 26, 2002 to govern our respective interests
in Stendal. The agreement contains terms and conditions customary for these
types of agreements, including restrictions on transfers of share capital and
shareholder loans other than to affiliates, rights of first refusal on share and
shareholder loan transfers, pre-emptive rights and piggyback rights on
dispositions of our interest. Pursuant to the shareholders' agreement, we are
entitled to transfer up to 12.5% of our interest in Stendal without the prior
consent of the other shareholders. The shareholders' agreement provides that
Stendal's managing directors may be appointed by holders of a simple majority of
its share capital. Further, shareholder decisions, other than those mandated by
law or for the provision of financial assistance to a shareholder, are
determined by a simple majority of Stendal's share capital. If a shareholder is
in default under the shareholders' agreement or commits certain acts of
insolvency or bankruptcy, it shall be considered to be a defaulting shareholder
and must offer to sell its share capital and shareholder loans to the remaining
shareholders on a pro rata basis, to a third party nominated by the other
shareholders or permit them to be redeemed by Stendal. Other than in
circumstances where a shareholder is considered to be a defaulting shareholder,
the shareholders' agreement does not provide for any mandatory or forced
purchases and sales of a shareholder's interest in Stendal.
In addition to integrating the wood procurement activities at the Rosenthal
and Stendal mills, we plan to coordinate other activities and operations between
the two mills to realize efficiencies and optimize the cost structure of each
mill. Such activities include establishing a unified sales organization to
conduct the sales and marketing of the pulp produced by both mills. Mercer
currently coordinates the pulp sales of the Rosenthal mill pursuant to a sales
agency agreement with Rosenthal whereby we receive a commission on overall
sales. We intend to establish a similar arrangement for the Stendal mill when it
is operational. Other activities that we intend to coordinate between the two
mills include purchases of supplies and stores, maintenance activities,
workforce and management training and transportation.
EPC CONTRACT
The Stendal mill is to be constructed under a E716.0 million fixed-price
turn-key engineering, procurement and construction, or "EPC", contract between
Stendal and RWE. RWE's obligations under the EPC contract are guaranteed by its
parent company.
The contract price for the completion of the project is fixed, taking into
account all risks associated with the project and is subject only to certain
changes that we cause or agree to, changes that arise due to changes in the law
and specified events of force majeure. Payments under the EPC contract are to be
made periodically against milestones as and when achieved by RWE.
Under the EPC contract, RWE is responsible for all planning, design,
engineering, procurement, construction and testing in connection with the
build-out and start-up of the mill. We are responsible for obtaining legal title
and possession of the site and providing the site and certain equipment,
materials and services, as well as personnel, raw materials and other items in
connection with the start-up of the mill. RWE is also primarily responsible for
obtaining construction and operating permits. We will construct approximately
E23.5 million of the site infrastructure and additional general site
infrastructure connections will be constructed by the local government. The
costs of such infrastructure construction are 90%
19
subsidized and co-financed by us, among others. Our co-financing obligations
amount to approximately E3.0 million and are funded out of the project
loan facility.
Construction of the mill is scheduled to be completed in June 2004. Start-up
of the mill is to occur in July 2004, with production of saleable kraft pulp to
begin in the third quarter of 2004. Our acceptance of the mill and related works
is to occur by December 2004. Between July and December 2004, the mill will
undergo extensive testing and evaluation to determine whether mechanical
completion has occurred and whether certain performance requirements have been
met, referred to as the "Acceptance Test". The Acceptance Test requires that the
mill continuously produce pulp for a 72-hour period. If acceptance of the mill
has not occurred prior to December 2004, RWE has agreed to pay liquidated
damages equal to 0.4% of the contract price per week of delay, up to a maximum
of 12% of the contract price. If certain performance requirements are not met
within the terms of the agreement, subject to certain conditions, RWE has agreed
to pay liquidated damages totaling up to a maximum of 10% of the contract price.
The combined amounts that may become payable to us by RWE as a result of delays
in completion and failure to meet performance requirements are capped at 17% of
the contract price. Payment of such amounts will not relieve RWE of its
obligations to complete the project, attain minimum performance requirements or
cure deficiencies.
Following completion of testing, if the requisite minimum performance
requirements are met, we are required to provide RWE with an acceptance
certificate. Once we deliver the acceptance certificate to RWE, we assume
responsibility for the operation of the mill, subject to RWE's warranty
obligations. Furthermore, each department of the mill will be tested on a
stand-alone basis for compliance with its design specifications after the
Acceptance Test. Such testing is scheduled to be completed within the six-month
period after the Acceptance Test. Under the EPC contract, RWE warrants
conformity to specifications, compliance with permits and laws, suitability for
intended use, compliance with performance requirements and warrants against
defects in construction, in each case for a period of 18 months after
acceptance, subject to extension in certain circumstances. RWE is required under
the EPC contract to provide irrevocable bank guarantees in our favor, in agreed
upon amounts, as security for an initial advance payment and for any
deficiencies arising during the warranty period. In July 2006, RWE is required
to provide an additional guarantee in the same form, in respect of the same
matters, in an amount not less than 5% of the contract price which shall remain
in effect until January 1, 2009.
We have the right under the EPC contract to temporarily suspend construction
of the mill for a period of up to 150 days should we choose to do so, subject to
certain conditions. In addition, subject to certain conditions, we have the
right to terminate the EPC contract if, among other things, RWE becomes
insolvent, assigns or transfers its interest in the agreement in violation of
the provisions of the agreement or fails, without valid reason, to perform any
of its material obligations.
The EPC contract also contains reciprocal indemnities between us and RWE
pursuant to which we each agree to indemnify the other in respect of losses or
claims arising from negligent, illegal or other wrongful acts in connection with
the agreement or arising out of any violation of applicable laws or permits.
PROJECT FINANCING
In August 2002, referred to as the "Closing Date", we completed financing
arrangements for the Stendal project. Total investment costs in connection with
the project are approximately E1.0 billion, the majority of which is to be
provided under a senior project finance facility, referred to as the "Stendal
Loan Facility", arranged by Bayerische Hypo-und Vereinsbank AG, or "BHV",
pursuant to a project finance loan agreement, referred to as the "Project
Finance Loan Agreement", entered into between Stendal and BHV. We also
contributed financing to Stendal of approximately E63.5 million from cash on
hand and through bridge loans, referred to as the "Bridge Loans", from a
U.S. investment partnership and a bank.
20
As the site of the Stendal project is located in eastern Germany, it
qualifies for approximately E274.5 million of government grants, which are
applied to reduce the cost basis of the assets acquired with such grants. As of
December 31, 2002, we have applied for E38.0 million of such grants in
connection with the Stendal project, which we expect to receive in the second
half of 2003. In accordance with our accounting policies, these grants are not
recorded by us until they are received.
The Stendal Loan Facility is in the aggregate amount of E828.0 million and
is divided into tranches which cover, among other things, project construction
and development costs, financing and start-up costs and working capital, as well
as the financing of a debt service reserve account, approved cost overruns and a
revolving loan facility to cover any time lag for receipt of grant funding and
value-added tax in the amount of E160 million, referred to as "Tranche E". The
Stendal Loan Facility is available for disbursement from August 2002 until the
earlier of the issuance by us of a final acceptance certificate for the project
and December 2005, except that financing under the Stendal Loan Facility for
approved cost overruns will be available for up to one month prior to the
first repayment.
Pursuant to the Project Finance Loan Agreement, interest on the credit
facilities was to accrue at variable rates between Euribor plus 0.60% and
Euribor plus 1.55% per year. The Project Finance Loan Agreement provides for
facilities to allow us to manage our risk exposure to interest rate risk,
currency risk and pulp price risk by way of interest rate swaps, Euro and
U.S. dollar swaps and pulp hedging transactions, subject to certain controls,
including certain maximum notional and at-risk amounts. Pursuant to the terms of
the Project Finance Loan Agreement, in 2002 Stendal entered into interest rate
swap agreements in respect of borrowings under the Stendal Loan Facility to fix
most of the interest costs under the Stendal Loan Facility at a rate of 3.795%
per year until April 2004 and at a rate of 5.28% commencing May 2004 until final
payment in October 2017. For more information, see "Quantitative and Qualitative
Disclosures About Market Risk -- Derivative Instruments". In March 2003, as part
of its loan syndication, BHV exercised its right under the Stendal Loan Facility
to increase its up-front arrangement fee by 20 basis points and the rate of
interest under the facility by 30 basis points.
Stendal has agreed to initially reduce the aggregate advances outstanding
under the Stendal Loan Facility, other than in respect of Tranche E, to a
maximum of E599.0 million, from a maximum original amount of E638.0 million
(assuming no draws for approved cost overruns), on or before the first March 31
or September 30 following the fourth anniversary of the first advance under the
Stendal Loan Facility for project construction and development costs. The
tranches are generally repayable in installments and mature between the fifth
and 15th anniversary of the first advance under the Stendal Loan Facility for
project construction and development costs. Subject to various conditions,
including a minimum debt service coverage test, Stendal may make distributions,
in the form of interest and capital payments on shareholder debt or dividends on
equity invested, to its shareholders, including us.
The tranches under the Stendal Loan Facility for project construction and
development costs, financing costs, start-up costs and working capital will be
guaranteed by German federal and state governments in respect of 80% of the
principal amount of these tranches, but the tranche under the Stendal Loan
Facility for financing and start-up costs, working capital and certain of the
project construction and development costs benefiting from these guarantees will
be reduced semi-annually by 12.5% per year beginning on the first repayment date
following the fourth anniversary of the first advance under the Stendal Loan
Facility for each of these costs. Under the guarantees, the German federal and
state governments that provide the guarantees are responsible for the
performance of our payment obligations for the guaranteed amounts. Approximately
E101.0 million was drawn under the Stendal Loan Facility as of December 31,
2002.
The Stendal Loan Facility is secured by all of the assets of Stendal. In
addition, the Project Finance Loan Agreement provides for the establishment of
an equity reserve account into which excess start-up cash flows may be
deposited. The account will be used to secure claims and amounts owing to the
lenders in priority to the funding of the debt service reserve account under the
Stendal Loan Facility. The Project Finance Loan Agreement also provides that
revenues held by Stendal after certain payments may be paid to a
shareholders' account.
21
In connection with the Stendal Loan Facility, we entered into a
shareholders' undertaking agreement, referred to as the "Undertaking", dated
August 26, 2002 with RWE, AIG and BHV in order to finance the shareholders'
contribution to the Stendal project. Pursuant to the terms of the Undertaking,
on the Closing Date the shareholders of Stendal, on a pro rata basis, subscribed
for E15 million of share capital of Stendal and advanced to it E55 million in
subordinated loans. In addition, on a pro rata basis, the shareholders of
Stendal agreed to advance to it E30 million of stand-by equity to, among other
things, cover approved cost overruns, fund the equity reserve account and
partially fund the debt service reserve account under the Stendal Loan Facility.
On the Closing Date, we provided BHV with a cash deposit for our pro rata
portion of such equity reserve account. Our total funding commitment under the
Undertaking was E63.5 million, all of which was effected on August 2002.
Pursuant to the Undertaking, we have agreed, for as long as Stendal has any
liability under the Stendal Loan Facility to BHV, to retain control over at
least 51% of the voting shares of Stendal.
On the Closing Date, we entered into and completed funding under two bridge
financing loan agreements and used the net proceeds from such Bridge Loans to
fund, in part, our contribution to the Stendal project and commitment pursuant
to the Undertaking.
The Bridge Loans were negotiated at the same time and the agreements in
respect of the Bridge Loans were entered into upon substantially the same terms.
The Bridge Loans are in the principal amounts of E15.0 million and
E30.0 million. The Bridge Loan for E15.0 million matures in October 2003, but
can be extended for a further four months if agreed to by the lender. The lender
in connection with the Bridge Loan for E30.0 million has consented to the
extension of the maturity date of the loan to February 2004.
The Bridge Loans accrue interest at rates equal to Euribor plus 6.5% per
year until April 2003, Euribor plus 9.0% per year thereafter until October 2003
and Euribor plus 11.5% per year thereafter until February 2004, in each case
calculated semi-annually, not in advance, and payable upon maturity or default.
In addition, in the event that a Bridge Loan is not repaid upon maturity, the
loan accrues interest at the rate of Euribor plus 15% per year.
Each Bridge Loan is secured by assignment agreements, under which we and
certain of our subsidiaries assign our respective interests in intercompany
loans, and securities pledge agreements, under which we pledge our interest in
all of the share capital of certain of our wholly-owned subsidiaries.
Under European Union rules, the Commission of the European Communities (the
"Commission") was formally notified in March 2002 by Germany of plans to provide
support to the Stendal project through grants and guarantees. The Commission
considered these plans and, on June 19, 2002, decided not to raise any objection
against such support being provided by the German federal and state governments
in respect of the Stendal project. In its decision, the Commission was not
called upon to determine whether the governmental aid schemes, on which the
support is based, were acceptable, but was limited to a determination as to
whether a reduction of the pre-approved aid level for investment in the German
State of Sachsen-Anhalt under the previously approved schemes was required under
European Union law in the case of the Stendal project. In coming to its
decision, the Commission generally has a wide margin of discretion in its
assessment of facts and data. Under European Union law, member states,
competitors or trade associations directly affected by a decision of the
Commission may appeal such decision within a period of two months and
twenty-four days after publication of the Commission decision. Generally to be
successful, an appeal must show that the Commission failed to comply with
procedural requirements or committed a manifest error in assessing facts and
data in adopting its decision. On December 23, 2002, Kronoply and Kronotex, two
related manufacturers of, inter alia, OSB and MDF boards that do not compete
with the Stendal project by selling pulp or paper, filed an appeal with the
Court of First Instance of the European Communities (Luxemburg) against the
Commission decision of June 19, 2002. Although no assurance can be provided, we
believe that the complainants are unlikely to have standing under the applicable
rules to proceed with the appeal and that their appeal is without merit.
22
PROJECT DEVELOPMENT
Beginning in February 2002, approximately three months of pre-construction
activity was carried out in respect of the Stendal project. This was comprised
of, among other things, pre-engineering, planning and reviewing and sourcing
procurement requirements. Construction activity commenced on the Stendal project
upon the effectiveness of the EPC contract on the Closing Date.
As at December 31, 2002, progress on the Stendal project was substantially
on schedule and there were no significant deviations from the project budget. At
December 31, 2002, the project was approximately 22% completed and approximately
50% of the total engineering was finished. Progress was made in all areas
including with respect to setting the foundations for the recovery boiler
system, recausticizing system and evaporation system. In addition, progress was
made in connection with the construction of the infrastructure of the mill site
and contractors had been approved for the electrical power supply and
distribution system, natural gas supply system, railway infrastructure and roads
and harbor facilities. The public awareness and project acceptance by the local
community has been very positive and the project has received favourable supportgood cooperation
from Germanall governmental authorities. At December 31, 2002, no insurance claims had
been filed in respect of the project and regulatory bodiesthere had been no casualties or severe
injuries on the site.
At the end of 2002, Stendal employed 14 people, of whom 11 were part of the
management organization charged with supervising the implementation and
completion of the Stendal project. The members of the management team are
experienced in large capital projects, including those related to date,pulp mills,
and several are former senior members of Jaako Poyry Consulting. The management
team at Stendal is charged with ensuring the sameproject is effectively implemented
in accordance with the EPC contract and planned schedules and budgets. They meet
regularly with the main contractor and sub-contractors to, among other things,
coordinate site activities, review progress, review and approve engineering and
equipment specifications, and review any necessary work changes or permit
amendments. Payments are made to contractors against defined milestones set
forth in the EPC contract. Such milestone payments are due within 30 days of
receipt of an approved invoice by Stendal. As at December 31, 2002, Stendal had
approved invoices representing milestone payments equal to approximately 16% of
the total value of the EPC contract.
As at December 31, 2002, Stendal had applied for investment grants totaling
E38 million with respect to the project which are expected to be received in the
second half of 2003. In accordance with our accounting policies, these grants
are not recorded by us until they are received.
At the end of 2002, there were approximately 253 people working at the site.
This number is expected to increase to over 1,200 third party construction
workers in the latter part of 2003.
Our organization build-up and staff recruitment for the Stendal mill are on
schedule. We anticipate having approximately 230 employees at Stendal by the end
of 2003, to be at the required level for the commissioning of the mill and
start-up in mid-2004. We have developed a detailed manning and organizational
plan which we will start implementing in the second quarter of 2003. Hiring will
be coordinated through the Stendal management team and we will also use a
recruitment firm. We have hired a new human resources manager and co-managing
director (production) for the Stendal mill who will start in mid-2003. As part
of the hiring, we will be setting up training schedules for the bulk of the
mill's operating and maintenance staff. Such training will consist of both
fundamental classroom training, as well as on-job sessions at our Rosenthal mill
and courses and training sessions provided by equipment and other suppliers to
the project.
START-UP
Pursuant to the EPC contract, construction of the Stendal mill is scheduled
to be completed by June 26, 2004. Such completion means that the construction
and installation of all equipment and works are essentially finished and the
final checks are occurring so that continuous production from the mill can
23
commence. Upon such completion, the mill will be supervised by RWE, the EPC
contractor, using Stendal's personnel to operate the mill. The mill must then
pass the Acceptance Test prior to being accepted by Stendal. During the period
that RWE is commissioning the mill and supervising its operations in connection
with the Acceptance Test, the mill is expected to have a low capacity
utilization. Upon passing the Acceptance Test, the mill will be operated by
Stendal and we plan to ramp up production at the Stendal mill to approximately
76% of the rated capacity of the mill during the first year thereafter and in
excess of 90% of rated capacity in the following year.
PROJECT RISKS
The Stendal project is subject to receiving substantial
governmental financial assistance under existing programscustomary risks and receipt of complex
environmental and operating permits. There can be no assurance that current
governmental assistance programs will not be amendeduncertainties inherent
for large capital projects which could result in the futureconstruction of the Stendal
mill not occurring on schedule or that
financial assistance will be providedas budgeted. Delays or amendments to the Company on terms satisfactory to
it, if at all, or that all necessary environmental andStendal's
operating permits will be
received on satisfactory terms, if at all, or governmental grants could result in time to permitconstruction delays,
operational deficiencies or funding shortfalls. Further, the Company to
proceed withStendal mill could
experience operating difficulties or delays during the start-up period when
production is being ramped up. Also, the Stendal mill may not achieve our
planned production, quality or cost projections. See "Management's Discussion
and complete the project as currently planned.Analysis of Financial Condition and Results of Operations -- Cautionary
Statement Regarding Forward-Looking Information".
ENVIRONMENTAL
The Company'sOur operations are subject to a broadwide range of German federal, state and
local environmental laws and regulations, dealing primarily with water, air and
land pollution control. In recent years, the Company haswe have devoted significant financial
and management resources to complyingcomply with all applicable environmental laws and
regulations. The Company'sOur total capital expenditures on environmental projects, excluding
those incurred in connection with the conversion of the Rosenthal mill to the
production of kraft pulp, were approximately $13.7E6.2 million in 19962002 and are
expected to be approximately $6.0E3.2 million in 1997.
The Company's2003.
We believe we have obtained all required environmental permits,
authorizations and approvals for our operations. We believe our operations are
currently in substantial compliance with the requirements of all applicable
environmental legislationlaws and regulations and itsour respective operating permits.
In 1996, the Company completed the installation of a flue gas dust remover
at the Hainsberg paperThe Rosenthal mill and converted the Trebsen power plant to fire with
heating oil instead of coal, which reduced particulates in air emissions to
comply with prescribed levels effective on November 1, 1996 and January 1, 1997,
respectively. New wastewater treatment plants at the Greiz and Trebsen paper
mills were also completed in 1996 and are substantially in operation. The
municipality of Heidenau in co-operation with the Company is planning to build a
community wastewater treatment plant on land owned by the Company, which will
provide the Heidenau mill with the services of a new treatment facility.
The Pulp mill, which has a relatively modern biological wastewater treatment
and oxygen bleaching facility, willfacility. We have to gradually satisfy more
stringent state regulations with respect to both air emissions and effluent
discharges. In 1996, the Company installed new screens for the Pulp mill whichsignificantly reduced the losses of dissolved material and resulted in reduced effluent
discharges and cleaner pulp. Additional upgrades to the Pulp mill were also
being implemented to recover more dissolved substances from the process and to
decrease the effluent load. In 1995, the Company modified the recovery boiler at
the Pulp mill to reduce certain levels of particulates in air emissions to
prescribed levels which became effective on January 1, 1996. As well, the
Company has reduced itsour levels of AOX
(Adsorbable Organic Halogen) discharge to
0.6 kilograms per tonne,
8
9
in order to comply with new effluent discharge levels. A further reduction to
0.4 kilograms per tonne must be madeat the Rosenthal mill and we believe the
Rosenthal mill's AOX discharges are substantially below those currently mandated
by the German government. Effective January 1, 1998. In addition,2001, the Company must reduce itsRosenthal mill is
required to maintain levels of COD (Chemical Oxygen Demand) discharge at the
PulpRosenthal mill to 50below 25 kilograms per tonne by July 1, 1997.of pulp. The Company has andRosenthal mill is
currently in compliance with these levels of COD discharge. We will continue to
modify itsour wastewater and bleaching facilities at the PulpRosenthal mill, which have
been further enhanced as a result of the conversion of the mill to the
production of kraft pulp, to meet or exceed these prescribed regulations. Such modifications are also
expectedIn addition,
in 2002 we commenced a strategic capital project to improvereconstruct the operational efficiencylandfill at
the Rosenthal mill so that it will be useable for an additional 15 years. The
aggregate cost of the Pulp millproject is approximately E7.6 million and are part of
the Company's capital investment program for the mill.project is
scheduled to be completed in 2003.
Under German state environmental rules relating to effluent discharges,
industrial users are required to pay wastewater fees based upon the amount of
their effluent discharge. These rules also provide that an industrial user which
undertakes environmental capital expenditures and lowers certain effluent
discharges to prescribed levels may offset the amount of suchthese expenditures
against the wastewater fees that they would otherwise be payable.required to pay. As a
result, we estimate that the Company has offset the amountaggregate wastewater fees we saved in 2002 as a
result of environmental capital expenditures made at the
Pulp mill against wastewater fees for the period of 1993 to 1996, which totalledour manufacturing plants
were approximately $10.3E3.0 million. The Company expectsWe expect that its capital investment programs for
itsour manufacturing plants will fully offset the full amount of wastewater chargesfees that may be
payable in 1997for 2003 and 2004 and will ensure that itsour operations continue in
substantial compliance with prescribed standards.
The Company24
Environmental compliance is a priority for our operations. To ensure
compliance with environmental laws and regulations, we regularly monitor
emissions at our mills and periodically performsperform environmental audits of
operational sites and procedures both with Companyour internal personnel and outside
consultants. HUMAN RESOURCES
The Company currently employs a total of 873 employees, of which 487 are
engaged in paper operations, 381 in pulp operationsThese audits identify opportunities for improvement and the balanceallow us to
take proactive measures at the Company's head office.mills as considered appropriate.
In 1996,2002, an ammonia scrubber was installed to reduce levels of NOx emissions
from the Company reducedRosenthal mill's gas burner. The installation of the numberammonia scrubber
was made pursuant to a claim under a warranty provided by a supplier in
connection with the gas burner to reduce levels of employeesNOx emitted by 65 as part of its continuing operational changes. The Company expectsthis gas
burner. We believe we are in compliance with NOx emission standards applicable
to further
reduce employment levels to those permitted under the terms of acquisition,
which require the Company to employ 360 workers in its pulp operations in 1997
and 350 in 1998. Atgas burner.
We have until the end of 1996, there were no further contractual
obligations2005 to begin biologically treating the wastewater
at the Fahrbrucke mill. We are in the process of constructing a wastewater
treatment plant at the Fahrbrucke mill, the first stage of which was completed
in 2002 and brought into operation at the beginning of 2003. The cost of the
Companytreatment plant is expected to BVSbe approximately E2.0 million, of which
E0.9 million was incurred in 2002. The project is being funded by government
grants as to 28%, a bank loan as to 45% and the remainder from our funds, and we
expect construction of the plant to be completed in early 2005.
Future regulations or permits may place lower limits on allowable types of
emissions, including air, water, waste and hazardous materials, and may increase
the financial consequences of maintaining compliance with environmental laws and
regulations or conducting remediation. Our ongoing monitoring and policies have
enabled us to develop and implement effective measures to maintain prescribed employment levels at
itsemissions in
material compliance with environmental laws and regulations to date in a
cost-effective manner. However, there can be no assurances that this will be the
case in the future.
HUMAN RESOURCES
We currently employ or hold positions for approximately 736 people,
including:
- approximately 231 salaried and 273 hourly employees working in our pulp
operations, including our transportation subsidiary; and
- approximately 80 salaried and 136 hourly employees working in our paper
operations.
The termsPursuant to the government grants and financing arranged in connection with
the conversion of acquisition required BVSthe Rosenthal mill to reimburse the Company, subjectproduction of kraft pulp, we have
agreed with state government authorities in Germany to certain maximum limits, for all severance paymentsmaintain at least 504
jobs at our Rosenthal pulp operations until June 30, 2005. This includes the
employees of the Rosenthal mill's transportation operations which deliver raw
materials to the mill and costs
incurredpulp to reduceour customers.
When the Stendal mill is completed, Stendal and its subsidiaries are
expected to employ approximately 580 people. Pursuant to the government grants
and financing arranged in connection with the Stendal project, we have agreed
with German state authorities to maintain this number of employees in its pulpjobs until 2010.
Rosenthal and paper operations to
the aforesaid permitted levels. To date, the Company has been reimbursed
approximately $5.7 million for such expenses.
The majorityDresden are bound by collective agreements negotiated with
Industriegewerkschaft Bergbau-Chemie-Energie, or "IG-BCE", on behalf of the Company's employees are represented by the
Industriegewerkschaft Chemie-Papier-Keramik (the "ICPK"), a national union which
represents pulp and
paper workers in Germany. The Company was previouslyIn February 2003, we entered into a member of an employers' association, now called the Arbeitgeberverband
ostdeutsche Papierindustrie (the "AGOP"), which represents pulp and paper
producers in Germany and negotiates collectively on their behalf with the ICPK.
In April 1996, the AGOP reached an industry-wide collectivenew labor
agreement with IG-BCE for our pulp workers which, among other things, has a
one-year term and paperprovides for a 2% wage increase effective March 1, 2003 and
that the parties will negotiate in respect of a further wage increase for August
2003 depending upon the general economic conditions. The agreement has no fixed
term, but can be terminated by either party before February 28, 2004.
In 1998, the labor agreement with workers at our Paper mills was renewed
until the end of 1999, upon terms which provided for wage increases of 1.2% in
Germany with respect to wages (the "National Agreement")October 1998, 1.3% in July 1999 and 1.3% in December 1999. A new agreement was
reached in 1999 upon terms which provided for wage increases of
25
1.5% in July 2000 and January 2001. A further agreement was reached in May 2001
upon terms which provided for wage increases of 2.0% in each of July 2001 and
January 2002. In December 2002, a new agreement was reached for 2003 which
provided for a 4% wage increase retroactiveof 2.5%. A new agreement is expected to March 1, 1996be
negotiated in 2003.
We have a highly skilled and further
wage increaseseducated workforce. Over 90% of 3%, 3% and 2.5% on September 1, 1996, January 1, 1997 and
March 1, 1997, respectively.
In 1996, the Company gave notice to the AGOP that it was withdrawing from
the association and wished to negotiate independently with its workers with
respect to wages. In April 1996, the Company independently established a
separate wage agreement for its own workers, pursuant to which its employees
received a 4% wage increase retroactive to March 1, 1996. The Company is not
subject to the additional wage increases reached under the National Agreement,
but instead it has entered into separate labour negotiations with the Worker's
Council for each of its manufacturing plants. The Company has settled a labour
agreement for its pulp workers that expires at the end of June 1997 and is in
the process of negotiating agreements with its paper workers.
Although the Company cannot predict with any certainty the results of such
labour negotiations or provide any assurances, it expects that new labour
agreements will eventually be successfully concluded without material work
stoppages.
9
10
ACQUISITIONS
Effective April 1, 1995, the Company acquired the 30% minority interest and
related assets in itsour pulp and paper operations including shareholder loanshave post-secondary education or are trained
tradespersons. We consider the relationships with our employees to be good. We
have profit sharing plans, training programs and early retirement schemes for
the benefit of $6.4 million, held byour employees. Although no assurances can be provided, we have
not had any significant work stoppages at any of our paper operations and we
would therefore expect to enter into labor agreements with our paper workers
without any significant work stoppages at our Paper mills.
ADDITIONAL INFORMATION
We make available free of charge on or through our website at
www.mercerinternational.com annual reports on Form 10-K, quarterly reports on
Form 10-Q and current reports on Form 8-K, and all amendments to these reports,
as soon as reasonably practicable after we file these materials with the Shin Ho Group, a Korean industrialSEC.
The public may read and paper
manufacturer, in consideration of two million common shares incopy any material we file with the capitalSEC at the SEC's
Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. The public
may also obtain information on the operation of the CompanyPublic Reference Room by
calling the SEC at 1-800-SEC-0330. The SEC maintains an issue price of $21.00 per share. The total acquisition price
was $42 million, of which $22.4 million was allocated to ZPRinternet site at
www.sec.gov that contains reports, proxy and $19.6 million
to DPAG.
The Company acquired its 70% interest in its pulp operations from BVS,
effective July 1, 1994. Under the terms of acquisition: (i) the Company was
responsible for 70% of the total purchase price of $0.6 millioninformation statements, and a loan of
$12.9 million to ZPR; and (ii) the pulp operations were to receive a total of
$40.3 million in non-refundable privatization supplements from BVS, of which
$27.3 million and $6.7 million was received by December 31, 1995 and 1996,
respectively, and the further amounts of $3.2 million and $3.2 million due in
1997 and 1998 will be set off against the acquisition cost of the tax losses.
These supplements were recorded by the Company as revenue in 1994 at a
discounted value of $38.8 million. In addition, ZPR undertook to make
approximately $48.4 million in capital investments during the period ending
December 31, 1998 and to maintain certain annual employment levels through
December 31, 1998.
Pursuant to the terms of acquisition, BVS: (i) paid ZPR for the cost to
replace a boiler drum and to partially compensate it for downtime resulting from
the drum replacement; (ii) agreed to compensate ZPR for certain employee
termination costs; (iii) agreed to indemnify ZPR for 90% of remediation costs
for environmental liabilities of up to a maximum of $11.9 million; (iv) forgave
indebtedness of $47.4 million; and (v) agreed to reimburse ZPR for certain
interest, fees and charges relating to its bank credit facilities in 1994. ZPR
is restricted from making distributions to its owners prior to January 1, 1999,
however, the Company may expand or invest through ZPR.
In 1996, the Company acquired the net operating tax losses of its pulp
operations of approximately $97.0 million for the fixed amount of $6.3 million,
which will be deducted from the government supplements due from BVS to ZPR in
1997 and 1998. Under German tax laws the tax losses may be carried forward
indefinitely to offset future taxable income.
In 1994, the Company agreed to include the Trebsen paper mill in its
ongoing operations and BVS agreed to fund new investments at the mill of up to a
maximum of $11.4 million. This funding consisted of a subordinated loan in the
amount of $6.0 million with repayment beginning in 10 years, pre-financing of
certain non-refundable government grants and payment of $1.8 million. The
Company is permitted to sell the excess real estate located at the Trebsen mill
and apply the proceeds to repay the foregoing loan.
The Company acquired its paper operations from BVS effective July 1, 1993.
Under the terms of acquisition: (i) the Company was responsible for 70% of the
total purchase price of $0.6 million for the shares of DPAG and related
receivables and a loan of $11.5 million to DPAG; (ii) DPAG undertook to make
approximately $57.9 million in capital investments during the period ending
December 31, 1996; and (iii) DPAG agreed to maintain certain average annual
employment levels and was restricted from making any distributions to its owners
until December 31, 1996. At December 31, 1996, DPAG had expended a total of
$58.8 million on capital investments and its obligations with respect to
maintaining certain employment levels and restrictions on distributions to its
owners had expired.
In connection with the acquisition, BVS: (i) forgave $45.4 million of
indebtedness owed by DPAG, which was contributed to the capital of DPAG; (ii)
paid $39.2 million in non-refundable privatization supplements to DPAG; (iii)
paid $6.9 million to compensate for losses and closure costs at certain
previously operated mills; and (iv) provided an indemnity for 90% of the
remediation costs for environmental liabilities at the Paper mills, up to a
maximum of $7.2 million.other
information regarding us.
ITEM 2. PROPERTIES
The Company's corporate headWe lease an office is located in Zurich, SwitzerlandRenton, Washington and it also maintains offices in Germany and Hong Kong. All of these offices are
leased, except for those in Germany which are owned.
10
11
The Company'sGermany. We own the Paper
mills and the PulpRosenthal mill are located in Germany inand the States of Saxony and Thuringia. All of the mills areunderlying property. The Stendal mill will
be situated on property owned by the Company.Stendal, our 63.6% owned subsidiary.
The Heidenau paperRosenthal mill serves as headquarters for the Company's pulp and
paper operations. It produces specialty papers and has an annual production
capacity of 35,000 tonnes. In October 1995, the Company closed the corrugating
box plant at this location. The Fahrbrucke mill produces both specialty and
printing papers and the Hainsberg mill produces printing papers and each has an
annual production capacity of 30,000 tonnes. The de-inking plant at the
Hainsberg mill improves paper brightness and general product quality and allows
for the increased usage of lower priced waste paper. Both mills use virgin and
recycled fibre in producing various grades of printing papers.
The Greiz and the Trebsen mills produce packaging papers and have an annual
production capacity of 50,000 and 75,000 tonnes, respectively. The fibre supply
for these mills is almost entirely from waste paper. In November 1995, the
Company leased the Raschau paper mill, with an option to purchase, to third
parties. All of the Paper mills operate their own power plants to produce
electricity. A new power plant was completed at the Trebsen mill in 1996.
The Pulp mill has an annual production capacity of 160,000 tonnes and is situated on a 220 acre site in close proximity to the Saale River andnear the town of
Blankenstein in the State of Thuringia.Thuringia, approximately 300 kilometers south of
the Stendal mill. The PulpSaale river flows through the site of the mill. In late
1999, we completed a major capital project which converted the Rosenthal mill to
the production of kraft pulp. It is a single line mill with an annual production
capacity of approximately 300,000 tonnes of kraft pulp. The mill is
self-sufficient in steam and electrical power. Some excess electrical power
which is constantly generated is sold to the regional power grid. The facilities
at the mill include:
- an approximately 723,000 square feet fiber storage area;
- barking and chipping facilities for pulpwood;
- a fiber line, which includes a Kamyer continuous digester and bleaching
facilities;
- a pulp machine, which includes a dryer and a cutter;
- an approximately 63,000 square foot finished goods storage area;
- a chemical recovery system, which includes a recovery boiler, evaporation
plant and recausticizing plant;
- a fresh water plant;
- a wastewater treatment plant; and
- a power station with a turbine capable of producing 45 megawatts of
electric power from steam produced by the recovery boiler and a
power boiler.
The Stendal mill will be situated on a 200 acre site near the town of
Stendal in the State of Sachsen-Anhalt, approximately 300 kilometers north of
the Rosenthal mill and 130 kilometers from the city of Berlin. The mill will be
adjacent to the Elbe river and have access to harbor facilities for water
transportation. Construction of the Stendal mill commenced in 2002 and is
scheduled to be completed by
26
the end of 2004. The mill will be a single line mill with an annual production
capacity of approximately 552,000 tonnes of kraft pulp. The Stendal mill will be
self-sufficient in steam and electrical power. Some excess electrical power
which is constantly being generated will be sold to the regional power grid. The
facilities at the mill will include:
- an approximately 920,000 square feet fiber storage area;
- barking and chipping facilities for pulpwood;
- a fiber line, which includes eight Superbatch digester and bleaching
facilities;
- a pulp machine, which includes a dryer and a cutter;
- an approximately 108,000 square foot finished goods storage area;
- a recovery line, which includes a recovery boiler, evaporation plant,
recausticizing plant and lime kiln;
- a fresh water plant;
- a wastewater treatment plant; and
- a power station with a turbine capable of producing approximately
100 megawatts of electric power from steam produced by the recovery boiler
and a power boiler.
The Heidenau mill is situated on a 26 acre site in the town of Heidenau in
the State of Saxony at the Elbe river, approximately 120 kilometers east of the
Fahrbrucke mill and 12 kilometers south of the city of Dresden. The mill was
constructed in 1956 and has been continually upgraded. The mill has an annual
production capacity of approximately 45,000 tonnes of specialty papers. The
facilities at the mill include:
- an approximately 34,200 square feet fiber storage area;
- an approximately 57,600 square foot paper machine building, which houses a
Pama paper machine with a 339 centimeter trim width, processing speed of
300 meters per minute and including, among other things, a stock
preparation unit, approach system, press section and dryer section;
- a fresh water plant, which consists of 15 wells;
- a wastewater treatment plant; and
- a power plant, which includes a gas turbine capable of producing
approximately 4,200 kilowatts of electric power, a waste heat boiler
capable of producing 17 tonnes per hour of steam generated power and an
auxiliary boiler capable of producing five tonnes per hour of steam
generated power.
The Fahrbrucke mill is situated on a 27 acre site near the town of
Fahrbrucke in the State of Saxony, in the western part of the Erzebirge
mountains at the Zwickauer Mulde river. The mill is approximately
100 kilometers east of the Rosenthal mill and approximately 120 kilometers west
of the Heidenau mill. The mill was constructed between 19731972 and 19771973 and has
been upgradedcontinually upgraded. The mill has an annual production capacity for
approximately 40,000 tonnes of printing and writing papers and specialty papers.
The mill uses virgin fiber in several stages. Itsproducing various grades of printing and writing
papers and specialty papers. The facilities includeat the mill include:
- an approximately 69,300 square feet fiber storage area;
- an approximately 60,300 square foot paper machine building, which houses a
complete wood fibreVoith paper machine with a 276 centimeter trim width, processing line with an oxygen bleaching plant,speed of
540 meters per minute and including, among other things, a pulper unit,
paper chemical recovery systems,preparation unit, refiner system, stock blending system,
approach system, press section and dryer section;
- a fresh water plant;
27
- a power plant, which consists of, among other things, a biologicalwaste heat boiler
which can produce 22 tonnes per hour of steam generated power and a heavy
duty boiler which can produce 3.2 tonnes per hour of steam generated
power, as well as a cogeneration plant with a gas turbine which can
produce approximately 4,280 kilowatts of electric power; and
- a wastewater treatment facilityplant is currently being constructed, the first
stage of which was completed at the end of 2002 and a
waste disposal site.brought on line at the
beginning of 2003.
The following table sets out, by primary product class, theour production
capacity and actual production of the Company for the periods indicated:
PRODUCTION
-------------------------------
YEARS--------------------------------------
ANNUAL YEAR ENDED DECEMBER 31,
ANNUAL PRODUCTION ---------------------------------------------------------------------
PRODUCT CLASS CAPACITY(1) 1996 1995 19942002 2001 2000
- ------------- ----------------- ------- ------- -------
(tonnes)----------- -------- -------- --------
(TONNES)
Pulp........................................... 300,000(2) 304,854 290,046 251,743
Papers
Packaging Papers........................... 120,000(2) 110,304 138,591 98,387Papers............................. -- -- -- 28,762(3)
Specialty Papers........................... 40,000 26,179 34,069 28,371Papers............................. 75,500(4) 62,172(4) 40,275 41,881
Printing Papers............................ 60,000 45,568 50,245 40,893
Pulp....................................... 160,000 134,950 139,409 67,810(3)Papers.............................. 30,000 23,195 26,852 53,601(5)
------- ------- ------- -------
Total................................. 380,000 317,001 362,314 235,461Total Papers............................... 105,500 85,367 67,127 124,244
------- ------- ------- -------
Total.......................................... 405,500(2) 390,221 357,173 375,987
======= ======= ======= =======
- ---------------------------------------
(1) Capacity is stated upon the rated capacity of the plants for the year ended
December 31, 2002, which is based upon production for 365 days a year.
Actual production is generally based upon 353 days per year for the
Rosenthal mill and 340 days per year.year for the Paper mills.
(2) In 1995,Upon completion, the Company divestedStendal mill will increase our annual production
capacity by approximately 552,000 tonnes to approximately 852,000 tonnes,
for a total annual production capacity from our pulp and paper operations of
approximately 937,000 tonnes.
(3) We sold our packaging paper mill located in Trebsen effective June 2000.
This amount includes approximately 28,762 tonnes from the corrugating box plantTrebsen mill.
(4) As we reorganized our interest in Landqart at Heidenau and the Raschau paperend of 2002, we no longer
have a direct interest in the Landqart mill. These plantsThe Landqart mill had a combinedan annual
production capacity of 20,000 tonnes.
(3)approximately 20,500 tonnes, which is included in the
calculation of our annual production capacity for specialty papers. The
Company acquiredLandqart mill produced approximately 20,422 tonnes in 2002.
(5) We sold our printing paper mill located in Hainsberg effective
November 2000. This amount includes production of approximately
25,463 tonnes from the pulp operations effective July 1, 1994.
The Company ownsHainsberg mill.
We own a substantial amount of real estate adjacent to itsthe Paper mills,
which is in excess to itsof our production requirements and may be divested.
ITEM 3. LEGAL PROCEEDINGS
The Company isWe are subject to routine litigation incidental to itsour business. The Company doesWe do not
believe that the outcome of such litigation will have a material adverse effect
on itsour business or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
11Not applicable.
28
12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market Information. The Company'sMARKET INFORMATION. Our shares of beneficial interest tradeare quoted for
trading on the NASDAQ Stock Market's National Market under the symbol "MERCS" and on EASDAQNASDAQ
Europe under the symbol "MERC". The following table sets forth the quarterly high and low
closingsale prices of our shares on the NASDAQ National Market for each quarter in the
two yearstwo-year period ended December 31, 1995 and 1996,2002, and for the period endingended
March 21, 1997.2003:
FISCAL QUARTER ENDED HIGH LOW
- -------------------- ------ -------------- --------
19952001
March 31............................................................. $15.63 $12.0031.................................................... $9.00 $6.75
June 30.............................................................. $22.00 $13.0030..................................................... 7.91 6.70
September 30......................................................... $27.75 $19.6330................................................ 9.05 6.25
December 31.......................................................... $25.75 $19.00
199631................................................. 7.51 5.40
2002
March 31............................................................. $24.00 $18.5031.................................................... 7.90 6.05
June 30.............................................................. $23.63 $13.13(1)30..................................................... 8.50 6.40
September 30......................................................... $15.38 $10.7530................................................ 7.75 5.16
December 31.......................................................... $13.63 $ 9.00
199731................................................. 5.78 4.75
2003
Period endingended March 21............................................... $12.63 $ 8.6321....................................... 5.88 4.37
- ---------------
(1) Stock dividend paid.
(b) Shareholder Information.SHAREHOLDER INFORMATION. As ofat March 21, 1997,2003, there were approximately
927549 holders of record of the Company'sour shares and a total of 14,917,36916,874,899 shares were
outstanding.
(c) Dividend Information. Effective June 3, 1996,DIVIDEND INFORMATION. The declaration and payment of dividends is at
the Company spun-off its
financial services segment in a one for two stock dividenddiscretion of 6,697,716
sharesour board of Arbatax. The Company did not pay any cash dividends on its shares
of beneficial interest in 1996. In 1997, the Company resolved that subject
to, among other things, the availability of earnings and its anticipated
cash requirements, to pay regular dividends on its shares of beneficial
interest. The first dividend will be $0.03 per share to be paid on May 9,
1997 to shareholders of record as of April 30, 1997. The actual timing,
payment and amount of future dividends paid by the Company will be
determined by thetrustees. Our board of trustees has not declared
or paid any dividends on our shares in the past two years and does not
anticipate declaring or paying dividends in the foreseeable future.
(d) EQUITY COMPENSATION PLANS. For information about our equity
compensation plans, see "Security Ownership of the Company from timeCertain Beneficial Owners and
Management".
(e) PRIVATE PLACEMENT. In October 2002, we sold 200,000 of our shares to time based
upon, among other things, the cash flow, resultsan
accredited investor for gross proceeds of operations and
financial condition$900,000 by way of the Company, the need for funds to finance ongoing
operations and such other business considerations as the board of trustees
of the Company considers relevant.
(d) Recent Sales of Unregistered Securities. In December 1996, the Company
issued 2,461 shares of beneficial interest upon the conversion of $24,000
of Series 1 convertible bonds initially issued in 1992. These securities
were issuedprivate placement
in reliance on the exemption from the registration under Section
3(a)(9)provisions of the Securities
Act of 1933, as amended (the "Act"), andprovided under Section 4(2) of the rules promulgated under the Act, as transactions not involving a public
offering.
12act.
29
13
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial information for the
Company for each of
theour last five yearsfiscal years. Effective January 1, 2002, we changed our reporting
currency from the U.S. dollar to the Euro. The following selected financial
information for periods prior to the year ended December 31, 1996. The Company's
previous interest in the operating results and net assets of "spun-off
operations" are classified separately and excluded from the Company's revenues,
expenses and other amounts presented for continuing operations. The following
financial information2002 has been
restated in Euros and reclassified to conform to thiswith the current year's
presentation.
The following selected financial data is qualified in its entirety by, and
should be read in conjunction with, the more detailed financial statements and
related notes contained elsewhere herein.in this annual report and "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
YEARSYEAR ENDED DECEMBER 31,
------------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(in thousands, other than per share amounts)----------------------------------------------------------------------
2002(1) 2001(1) 2000 1999(2) 1998(3)
---------- ---------- ---------- ---------- ----------
(EURO AND DOLLARS IN THOUSANDS, OTHER THAN PER SHARE AND PER TONNE
AMOUNTS)
Revenues(1).................... $186,729 $300,737 $197,359 $ 66,260 $ 9,346STATEMENT OF OPERATIONS DATA
Revenues............................. E239,132 E216,447 E258,883 E121,639 E152,586
Cost of sales........................ 213,463 184,679 193,704 110,120 124,736
Gross profit......................... 25,669 31,768 65,179 11,519 27,850
Income (loss) from operations........ 690 13,332 49,665 (9,527) 6,725
Net income from continuing
operations................... $ 15,557 $ 65,637 $ 41,499 $ 18,663 $ 4,697(loss).................... (6,322) (2,823) 32,013 (35,773)(4) 8,104
Net income from continuing
operations,(loss) per common
share........................ $ 1.12 $ 5.14 $ 3.69 $ 1.79 $ 0.46share,
Basic.............................. E (0.38) E (0.17) E 1.91 E (2.18)(4) E 0.53
Diluted............................ E (0.38) E (0.17) E 1.87 E (2.18)(4) E 0.53
Weighted average shares outstanding
(in thousands),
Basic.............................. 16,775 16,875 16,779 16,390 15,352
Diluted............................ 16,775 16,875 17,144 16,390 15,384
BALANCE SHEET DATA
Current assets................. $132,651 $140,618 $111,374 $ 71,460 $ 6,561assets....................... E 96,217 E 93,212 E 98,881 E 68,674 E103,714
Current liabilities............ $ 53,988 $ 49,915 $ 57,063 $ 54,456 $ 8,048liabilities.................. 89,889 77,668 70,493 115,413 48,310
Working capital................ $ 78,663 $ 90,703 $ 54,311 $ 17,004 $ (1,487)capital...................... 6,328 15,544 28,388 (46,739) 55,404
Total assets................... $279,839(1) $328,750(2) $245,326(2) $165,102(2) $ 69,638(2)assets......................... 599,750(5) 429,593 429,724 452,932 283,988
Long-term liabilities.......... $ 31,312 $ 51,820 $ 52,049 $ 33,501 $ 12,997liabilities................ 384,892(6) 220,312 225,734 235,154 105,294
Shareholders' equity........... $194,539(1)(3) $227,015(2) $111,540(2) $ 77,120(2) $ 48,593(2)equity................. 124,969 131,613 133,497 102,365 130,384
OTHER DATA
Pulp Operations(7):
Pulp sales......................... E130,173 E146,245 E159,713 E 37,622 E 62,878
Sales volume (tonnes).............. 293,607 285,654 239,552 94,523 145,451
Average price realized (per
tonne)........................... E 443 E 512 E 667 E 398 E 432
Dividends:
Cash dividends................. $dividends..................... -- -- -- E 789 E 560
Cash dividends per share........... -- -- -- E 0.05 E 0.04
Cash dividends ($)................. -- -- -- $ 834 $ 610
Cash dividends per share ($)....... -- -- -- $ --0.05 $ -- $ --0.04
- ---------------------------------------
(1) Excludes spun-off operations.We acquired the specialty paper mill in Landqart effective December 2001 and
we reorganized our interest in Landqart at the end of 2002. Results from the
Landqart mill are not included in our results for 2001, but are included for
2002. The Landqart mill sold approximately 18,613 tonnes for approximately
E43.2 million in 2001 and approximately 18,222 tonnes for approximately
E39.7 million in 2002.
30
(2) The Rosenthal mill was shut-down from July to December 1999 in connection
with its conversion from sulphite to kraft pulp production.
(3) The exchange rates for 1998 are based upon the conversion of U.S. dollars to
Deutschmarks and Deutschmarks to Euros.
(4) Net loss before a special charge was E15.0 million, or E0.91 per share.
(5) Includes net assetsapproximately E186.9 million related to properties construction in
progress at the site of spun-off operations.
(3) After stock dividend.the Stendal mill.
(6) Includes approximately E176.6 million related to construction in progress at
the site of the Stendal mill.
(7) Excluding intercompany sales.
31
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONOPERATIONS
The following discussion and analysis of theour financial condition and results
of operations as of the Companyand for the three years ended December 31, 19962002 should be
read in conjunction with the consolidated financial statements and related notes
included elsewhere in this annual report. The Company's previous
interest in the operating results and net assets of the financial services
segment, which were spun-off to shareholders of beneficial interest on June 3,
1996, are classified separately within the Company's financial statements as
"spun-off operations" and are excludedEffective January 1, 2002, we changed our
reporting currency from the amounts of revenues and expenses
ofU.S. dollar to the Company's continuing operations. Previously reportedEuro. Accordingly, our financial
statements for all periods and certain amountsthe year ended December 31, 2002 included in the Company'sthis annual report
are stated in Euros. Our financial statements and
related notesfor periods prior to the year
ended December 31, 2002 included in this annual report have been restated in
Euros and reclassified to conform to the current presentation. The following
management discussion and analysis of our financial condition and results of
operations areis based upon the restated financial statements for all prior
years as aforesaid.
13
14periods.
RESULTS OF OPERATIONS
OVERVIEW
We operate in the pulp and paper business and our operations are located
primarily in Germany. Our manufacturing facilities are comprised of: (a) the
Rosenthal mill which produces softwood kraft pulp and has an annual production
capacity of approximately 300,000 tonnes; (b) the Stendal project, a
"greenfield" project to construct a new, state-of-the-art softwood kraft pulp
mill, which will have an annual production capacity of approximately 552,000
tonnes; and (c) the Paper mills which produce specialty papers and printing and
writing papers and have an aggregate annual production capacity of approximately
85,000 tonnes.
Total investment costs in respect of the Stendal project are estimated to be
approximately E1.0 billion, the majority of which is being financed under the
Stendal Loan Facility in the amount of E828 million. The construction of the
Stendal mill commenced in August 2002 and is scheduled to be completed in the
third quarter of 2004. Costs, including interest, in respect of the Stendal
project are capitalized. A variable-to-fixed rate interest rate swap entered
into by Stendal to fix the interest rate for the full term of the Stendal Loan
Facility is marked to market on a quarterly and annual basis and gains or losses
are recognized in our earnings for the period.
Our financial performance depends on a number of variables that impact sales
and production costs. Sales and production results are influenced largely by the
market price for products and raw materials, the mix of products produced and
foreign currency exchange rates. Kraft pulp and paper markets are highly
cyclical, with prices determined by supply and demand. Demand for kraft pulp and
paper is influenced to a significant degree by global levels of economic
activity and supply is driven by industry capacity and utilization rates. Our
product mix is important because premium grades of kraft pulp and specialty
papers generally achieve higher prices and profit margins.
Our production costs are influenced by the availability and cost of raw
materials, energy and labor, and our plant efficiencies and productivity. Our
main raw material is fiber in the form of wood chips and pulplogs for pulp
production, and waste paper and pulp for paper production. Fiber costs are
primarily affected by the supply of, and demand for, lumber and pulp, which are
both highly cyclical. Production costs also depend on the total volume of
production. High operating rates and production efficiencies permit us to lower
our average cost by spreading fixed costs over more units.
Global economic conditions, changes in production capacity and inventory
levels are the primary factors affecting kraft pulp and paper prices.
Historically kraft pulp and paper prices have been cyclical in nature. Kraft
pulp prices, which had been at historically low levels between 1996 and 1999,
rebounded in 2000 as a result of recoveries in Asian economies and a decline in
capacity resulting from the shut-down of unprofitable or older mills requiring
environmental upgrades. This contributed to tightening inventory levels among
Norscan producers, which fell to approximately 1.1 million tonnes in mid-2000
and prices
32
increasing to an average of approximately $710 per tonne in the fourth quarter
of 2000. However, the decline of North American and European economies in 2001
caused a sharp reduction in paper demand. As a result, Norscan pulp inventories
rose to a high of approximately two million tonnes in early 2001 and price
levels eroded to an average of approximately $460 per tonne in late 2001.
Inventory levels ranged between 1.3 and 1.9 million tonnes in 2002 and prices
averaged approximately $463 per tonne in 2002. Low producer inventories in early
2003 resulted in producers increasing list prices for kraft pulp in Europe to
approximately $520 per tonne in March 2003.
As kraft pulp is quoted in dollars and Rosenthal's debt facilities and costs
are in Euros, Rosenthal enters into currency swaps to help manage its exposure
to exchange fluctuations between the dollar and the Euro. Gains or losses on
such swaps are recorded in our earnings either as they are settled or as they
are marked to market for each reporting period.
Selected sales data for the Company for each of theour last three years is as follows:
YEARSYEAR ENDED DECEMBER 31,
----------------------------------
1996 1995(1) 1994(2)--------------------------------------
2002 2001 2000
-------- -------- --------
(in thousands)(TONNES)
SALES VOLUME BY PRODUCT CLASS
Pulp(1).................................................. 293,607 285,654 239,552
Papers
Packaging Papers......................................... $ 33,165 $ 66,776 $ 42,239Papers....................................... -- -- 29,111(2)
Specialty Papers......................................... 27,012 34,370 28,342Papers....................................... 61,727(3) 40,437(3) 41,422
Printing Papers.......................................... 36,469 50,960 29,536
Pulp..................................................... 72,456 115,934 40,512
Other.................................................... 4,995 7,292 7,142Papers........................................ 23,195 26,815 53,552(4)
-------- -------- --------
Total.................................................... $174,097 $275,332 $147,771
========Total Papers......................................... 84,922 67,252 124,085
-------- -------- --------
Total(1)................................................. 378,529 352,906 363,637
======== ======== (tonnes)
SALES========
YEAR ENDED DECEMBER 31,
--------------------------------------
2002 2001 2000
-------- -------- --------
(IN THOUSANDS)
REVENUES BY VOLUMEPRODUCT CLASS
Pulp(1).................................................. E130,173 E146,245 E159,713
Papers
Packaging Papers....................................... -- -- 9,512(2)
Specialty Papers....................................... 79,358(3) 35,959(3) 35,964
Printing Papers........................................ 18,352 22,797 39,870(4)
-------- -------- --------
Total Papers......................................... 110,179 121,145 98,387
Specialty Papers......................................... 26,548 29,813 28,371
Printing Papers.......................................... 46,416 47,089 40,893
Pulp..................................................... 133,005 126,562 64,167
------- ------- -------
Total(3)97,710 58,756 85,346
-------- -------- --------
Total(1)................................................. 316,148 324,609 231,818
======= ======= =======E227,883 E205,001 E245,059
======== ======== ========
- ---------------------------------------
(1) In 1995, the Company divested the corrugating box plant at Heidenau and the
Raschau paper mill. These plants had combined sales of $17.2 million or
22,123 tonnes of packaging papers in 1995 and sales of $15.2 million or
24,540 tonnes of packaging papers in 1994.
(2) The Company acquired its pulp operations effective July 1, 1994.
(3) Excluding intercompany sales volumes of 3,609, 3,54510,768, 10,447 and 1,7741,893 tonnes of
pulp and intercompany net sales revenues of approximately E4.9 million,
E5.8 million and E1.4 million in 1996, 19952002, 2001 and 1994,2000, respectively.
(2) We sold our packaging paper mill in Trebsen effective June 2000 and no
longer produce packaging papers. Sales of approximately 29,111 tonnes for
approximately E9.5 million from the Trebsen mill are included in our results
for 2000.
(3) We acquired the specialty paper mill in Landqart effective December 2001 and
we reorganized our interest in Landqart at the end of 2002. Sales from the
Landqart mill are not included in our results for 2001, but are included for
2002. The Landqart mill sold approximately 18,613 tonnes for
33
approximately E43.2 million in 2001 and approximately 18,222 tonnes for
approximately E39.7 million in 2002. As of December 31, 2002, our interest
in the Landqart mill will no longer be consolidated and will be included in
our financial results on an equity basis.
(4) We sold our printing paper mill in Hainsberg effective November 2000. Sales
of approximately 24,964 tonnes for approximately E16.8 million from the
Hainsberg mill are included in our results for 2000.
YEAR ENDED DECEMBER 31, 19962002 COMPARED TO THE YEAR ENDED DECEMBER 31, 19952001
In 1996, revenues decreased by 37.9% to $186.7 million from $300.7 million
in 1995, primarily as a result of decreased sales volumes, lower prices for pulp
and paper products, and the divesture of the Company's corrugated box plant at
Heidenau and the Raschau paper mill which occurred in the second half of 1995.
As the Company's products are principally sold in deutschmarks, the depreciation
of the deutschmark against the U.S. dollar in 1996 compared to 1995 also
contributed to lower revenues.
Costs and expenses decreased to $174.3 million in 1996 compared to $238.5
million in 1995, primarily as a result of lower sales revenues and decreased
fibre costs (raw materials). In 1995, cost and expenses included $7.0 million in
respect of a litigation settlement. General and administration expenses
decreased to $24.9 million in 1996 from $35.2 million in 1995. Interest expense
decreased to $4.0 million from $4.5 million in 1995 as a result of lower
interest rates. The acquisition of the Company's pulp and paper operations
resulted in a purchase credit, which was allocated to property and equipment.
See Note 3 to the financial statements included in this annual report.
In 1996, net earnings from continuing operations were $15.6 million or
$1.12 per share, compared to $65.6 million or $5.14 per share in 1995. Net
earnings in 1996 reflected the acquisition of the 30% minority interest in the
Company's pulp and paper operations for the entire year, compared to nine months
in 1995 and a net deferred income tax benefit of $3.1 million.
On June 3, 1996, the Company completed the spin-off of its financial
services business. As a result, these operations are classified separately
within the Company's financial statements as "spun-off" operations, are excluded
from the amounts of revenues and expenses of continuing operations and its
assets and liabilities are not consolidated into the Company's continuing
operations.
In 1996, the Company's sales, operating income and net earnings were all
lower than in 1995. The primary factors contributing to the decrease in 1996
were the sudden and prolonged collapse in the pulp
14
15
market and weak paper market. Lower prices for pulp and paper were in sharp
contrast with the 1995 record levels, accounting for the decline in the
Company's 1996 earnings. In 1996, world pulp and paper markets were generally
weak throughout the year. List prices for pulp in 1996 were, on average,
approximately 40.5% lower than in 1995, primarily as a result of weak demand for
pulp and high world pulp inventories. Sulphite pulp prices were also negatively
impacted by price reductions implemented by a large Eastern European producer to
solidify its market position. The Company's pulp sales decreased by 37.5% to
$72.5 million in 1996 from $115.9 million in 1995 on a volume increase of 5% and
an average price decrease of 40.5%. The overall effect of weaker pulp demand
resulting from weaker paper markets was partially offset by the Company's
increased production and sales of dissolving sulphite pulp. Paper sales in 1996
decreased by 36.5% to $96.6 million from $152.1 million in 1995 on a volume
decrease of 7.5% and an average price decrease of 31.3%. The average price for
specialty papers remained relatively stable, while prices for packaging and
printing papers declined during 1996. Sales volumes for all papers declined in
1996, compared to 1995. The 1995 results included other revenue of $14.8 million
related to a pre-acquisition contingent asset.
The deterioration in pulp and paper prices in 1996 was partially offset by
decreased fibre costs from lower prices for wood chips and pulpwood used to
produce pulp and lower prices for pulp and recycled fibre (waste paper) used to
produce paper. Weak pulp and paper markets resulted in manufacturing facilities
taking market-related downtime. Recycled fibre costs decreased dramatically in
1996 and were down approximately 61.0% compared to 1995, although there can be
no assurance that they will not escalate in the future. The price of wood for
pulp production also decreased in 1996, primarily due to weak pulp demand and a
build-up of wood inventories. By the end of 1996, the price of pulpwood began to
experience upward pressure in Europe. On average, the Company's fibre costs for
pulp production were down approximately 23% in 1996, compared to 1995 and remain
among the lowest in Europe. Decreased fibre costs in 1996 were generally
reflected in lower product prices.
In the fourth quarter of 1996, pulp and paper markets remained weak as a
result of lower demand and a sharp increase in pulp inventories. Customers
generally reduced purchases to decrease their excess inventories. As a result,
prices for pulp and paper remained depressed in the last quarter of 1996 and
have remained weak in early 1997. This price weakness is expected to continue
until the excess inventory situation corrects itself.
Since the acquisition of its pulp and paper operations, the Company has
been implementing operational changes to its operations to improve efficiency,
increase export sales to markets outside of Germany and upgrade its product mix.
In 1995, the Company centralized its pulp and paper administration in Heidenau.
It also closed the corrugated box plant at the Heidenau mill, sold the
corrugating machine for $2.6 million and eliminated 60 employee positions
thereat. The Company also leased the Raschau paper mill and its operations, with
an option to purchase, to third parties in 1995. The Raschau mill and Heidenau
corrugated box plant had a combined annual production capacity of 20,000 tonnes
and neither made a positive contribution to the Company or were considered to be
long-term strategic assets. In 1996, the Company increased its sales outside of
Germany by approximately 3.8%, increased its production of dissolving sulphite
pulp to 26.6% of2002, total pulp production from 24.5% in 1995 and upgraded its paper
product mix. The implementation of operating changes resulted in downtime at
some of the Company's mills in 1996. In addition, the Pulp mill, like many other
pulp producers, took market-related downtime in 1996. Operating changes and
upgrades to the mills will continue in 1997 and may result in further downtime
at the Company's operations. In any given future reporting period, such downtime
may affect the Company's results of operation.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO THE YEAR ENDED DECEMBER 31, 1994
The Company's results of operation in 1995 did not include any government
supplements, whereas its results for 1994 reflected $44.4 million of government
supplements, including $38.8 million of one-time non-refundable government
supplements for its pulp operations (the "pulp supplement").
In 1995, revenues increased by 52.4%approximately 10.5% to $300.7E239.1 million
from $197.3E216.4 million ($158.5 million excluding the pulp supplement) in 1994,2001, primarily as a result of increased sales volumes, higher prices forof
specialty papers resulting from the acquisition of the Landqart mill in
December 2001. In 2002, pulp and paper products and the
inclusionrevenues increased by approximately 11.2%
to E227.9 million from E205 million in 2001, on a 66.3% increase in paper sales
partially offset by an 11.0% decrease in pulp sales.
Costs of pulp sales for the entire year in 1995, compared to six months in
1994. As the
15
16
Company's products are principally sold in deutschmarks, the strength of the
deutschmark against the U.S. dollar in 1995 compared to 1994 also contributed to
higher revenues.
Pulp and paper costs2002 increased to $191.7E213.5 million from E184.7 million in
1995 compared to $116.7
million in 1994,2001, primarily as a result of higher revenues.
Pulp sales in 2002 decreased to E130.2 million from E146.2 million in 2001,
as global economic weakness and high producer inventory levels lead to lower
prices. List prices for kraft pulp in Europe decreased from approximately E528
($470) per tonne at the end of 2001 to approximately E420 ($440) per tonne at
the end of the fourth quarter of 2002, before improving in early 2003 due
primarily to supply disruptions. Our pulp sales realizations in 2002 decreased
to E443 per tonne from E512 per tonne in 2001 as a result of such lower sales
prices and the weaker dollar versus the Euro during 2002 compared to the prior
period. Pulp sales by volume increased to 293,607 tonnes in 2002 from 285,654
tonnes in 2001, when we had 19 days of unscheduled technical downtime at the
Rosenthal mill.
Cost of sales revenues and general, administrative and other expenses for our pulp
operations decreased to E125.4 million in 2002 from E126.4 million in 2001
despite higher production and sales volumes. On average, our per tonne fiber
costs for fibre (raw materials). Generalpulp production decreased by approximately 5.8% in 2002 compared to
2001 primarily because of lower fiber costs. Additionally, efficiency
improvements at the Rosenthal mill also reduced energy and administration expenseschemical costs
relative to 2001. Depreciation was E21.6 million in 2002 compared to
E21.4 million in 2001. In 2002, our average per tonne production costs
(excluding depreciation) were reduced by approximately 9% compared to 2001.
Our pulp operations generated E4.8 million of income from operations in
2002, compared to E19.9 million in 2001.
Paper sales in 2002 increased to $35.2E97.7 million from E58.8 million in 19952001.
Sales of specialty papers in 2002 increased to E79.4 million from $19.6E36.0 million
in 1994. The increase in general and
administrative expenses is primarily2001 as a result of the inclusion of pulp
operationsthe results of the Landqart mill, which
contributed sales volumes of 18,222 tonnes in 2002. Excluding Landqart, our
sales volumes for these grades increased to 43,505 tonnes in 2002 from 40,437
tonnes in 2001. This increase in specialty paper sales is largely the entire yearresult of
our strategy to focus on niche products. In response to market conditions, we
adjusted our product mix to more specialty products at our Heidenau mill where
volumes of printing papers decreased to 23,195 tonnes in 1995,2002 from 26,815 in the
prior period. On average, prices for specialty papers realized in 2002 increased
by approximately 44.6% and for printing papers decreased by approximately 6.9%,
compared to six months in 1994. Interest
expense2001.
Cost of sales and general, administrative and other expenses for our paper
operations increased to $4.5 million from $3.5E99.5 million in 19942002 from E62.0 million in 2001 as a
result of increases in the Company's borrowings. The acquisitioninclusion of the Company'sLandqart. This increase was partially offset by lower
raw material prices, particularly for virgin pulp and waste paper operationsas compared to
2001. Furthermore, the flooding experienced at our Heidenau and Fahrbrucke Paper
mills in August 2002 resulted in a purchase credit, which was allocatedperiod of reduced production and increased
costs. Depreciation increased to property
and equipment. See Note 3 toE4.0 million in 2002 from E1.5 million in the
Financial Statements included in this annual
report.
In 1995, net earnings from continuing operations were $65.6 million or
$5.14 per share in 1995, compared to $41.5 million or $3.69 per share ($14.4
million or $1.28 per share excluding the pulp supplement) in 1994. Net earnings
in 1995 reflected the acquisition effective April 1995prior year, as a result of the 30% minority
interest in the Company's pulp andinclusion of Landqart.
34
A loss from operations of E1.8 million was recorded by our paper operations
includedin 2002 relative to a deferred income
tax benefit of $9.1E2.5 million loss from operations in 2001.
General and a one-time expense of $7.0 million resulting
from the settlement of a securities class action suit filed in 1994 against the
Company.
On December 28, 1995, the Company announced that it would distribute
approximately 83% of the issued shares of Arbatax to its shareholders as a
special dividend. As a result, the Company has accounted for Arbatax separately
within its financial statements as "spun-off operations" and it is excluded from
the amounts of revenues andadministrative expenses of the Company's continuing operations. In
the year ended December 31, 1995, the spin-off operations resulted in a loss of
$1.5 million or $0.11 per share, compared to earning of $4.6 million or $0.41
per share in 1994.
In 1995, the Company's sales, operating income and net earnings were all
higher than in 1994. The improved results were due to higher pulp and paper
prices, increased sales volumes and operating changes implemented by the
Company. In 1995, world pulp and paper markets were generally strong. Strong
paper markets and a tight supply resulted in higher pulp prices, and in the
first three quarters of 1995 list prices for pulp were near historical highs. In
1995, list prices for pulp were, on average, approximately 45% higher than in
1994. Pulp sales increased to $115.9E25.0 million in 19952002 from
$40.5E18.4 million in 1994,2001, primarily as a result of the inclusion of pulp salesthe results of
the Landqart mill and a foreign exchange transaction loss of E3.0 million in
2002. In 2001, we recorded a foreign exchange transaction gain of $3.4 million.
We had income from operations of E0.7 million in 2002, compared to
E13.3 million in 2001. Interest expense (excluding capitalized interest of
E3.1 million in respect of the Stendal project) in 2002 decreased to
E13.8 million from E16.2 million in 2001, primarily as a result of repayments
made on outstanding indebtedness.
Pursuant to the Stendal Loan Facility, Stendal entered into
variable-to-fixed rate interest swaps for the entire year in 1995
comparedfull term of the facility to
six months in 1994manage the risk exposure with respect to an aggregate maximum amount of
approximately E612.6 million of the principal amount of the Stendal Loan
Facility, referred to as the "Stendal Interest Rate Swap Agreements". Under
these swaps, Stendal pays a fixed rate and improved prices. Paper sales in 1995
increased by 51.9%receives a floating rate with respect
to $152.1 million from $100.1 million in 1994interest payments calculated on a volume
increasenotional 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 18.1%each
reporting period and all unrealized gains and losses are recognized in earnings
for a reporting period. We recognized a holding loss of E30.1 million before
minority interests in respect of these swaps for the year ended December 31,
2002. For more information about these swaps, see "Quantitative and Qualitative
Disclosures About Market Risk -- Derivative Instruments".
In 2002, we also entered into currency swaps, referred to as the "Rosenthal
Currency Swaps", to manage our exposure with respect to an average price increaseaggregate amount of
25%. The Pulp mill owns two
waste disposal sites. At the time of acquisitionapproximately E223.3 million of the Company's pulp
operations,principal long-term indebtedness under the
extentRosenthal Loan Facility. During 2002, we settled two Rosenthal Currency Swaps to
realize gains. We then subsequently re-entered into two Rosenthal Currency Swaps
and one of them was settled and conditionsa gain was realized in December 2002. In
addition, we have entered into currency forward contracts, referred to as
"Currency Forwards", and forward interest rate and interest cap contracts,
referred to as the "Interest Rate Contracts", in connection with certain
indebtedness relating to the future useRosenthal mill. These derivative instruments are
also marked to market at the end of such
siteseach reporting period and all gains and
losses are recognized in earnings for a reporting period. In 2002, we realized a
total gain of E23.4 million from these derivative contracts. For more
information about these derivatives, see "Quantitative and Qualitative
Disclosures About Market Risk -- Derivative Instruments".
Income tax impacts were not determinable. In 1995,negligible in both 2002 and 2001 given the Company clarifiedpre-tax
losses sustained in both years. Minority interest in 2002 amounted to
E11 million and represented the conditionsminority shareholders' interest in the losses of
Stendal. There was no minority interest in 2001.
For 2002, we reported a net loss of E6.3 million, or E0.38 per share on a
basic and diluted basis, compared to a net loss of E2.8 million, or E0.17 per
share on a basic and diluted basis, in 2001.
For 2002, excluding items related to the Stendal project, net income would
have been E12.8 million, or E0.76 per share on a diluted basis, which was
determined by adding the loss on derivative financial instruments of
E30.1 million to, and subtracting minority interest of E11.0 million from, the
reported net loss of E6.3 million. As the Stendal project is currently under
construction and because of its overall size relative to our other facilities,
management uses our consolidated operating results excluding items relating to
the useStendal project to measure the performance and results of such waste disposal sites and, pursuantour operating
units. Management believes this measure provides meaningful information on the
performance of our operating facilities for a reporting period.
35
YEAR ENDED DECEMBER 31, 2001 COMPARED TO THE YEAR ENDED DECEMBER 31, 2000
In 2001, revenues decreased by E42.4 million to Statement of
Financial Accounting Standards No. 38, recorded the value thereof, being $14.8E216.4 million as other revenue.
Improvementsfrom
E258.9 million in pulp and paper prices in 1995 were partially offset by
increased fibre costs from higher prices for wood chips and pulpwood used to
produce pulp and higher prices for pulp and recycled fibre (waste paper) used to
produce paper. Strong pulp and paper markets resulted in manufacturing
facilities operating at or near full production capacity and contributed to
higher fibre costs. Recycled fibre costs were extremely volatile in 1995. Such
costs, which on a relative basis were extremely low at the beginning of 1995,
were on average 125% higher in 1995 compared to 1994. Recycled fibre costs
increased dramatically in the first half of 1995, and for the first six months
of 1995 were up approximately 416% over the corresponding period in 1994.
Recycled fibre costs stabilized in the third quarter of 1995 and certain grades
decreased markedly in the last quarter of 1995, although there can be no
assurance that they will not escalate in the future. Fibre costs for pulp
production were also up in the first half of 1995 and then stabilized and
decreased in the last quarter of 1995. On average, fibre costs for pulp
production were up 34% in 1995 compared to 1994. Increased fibre costs in 1995
were generally reflected in higher product prices and the Company has not
experienced any significant difficulty in obtaining fibre in the economic
proximity to its mills.
In the fourth quarter of 1995, pulp and paper markets began to weaken2000, primarily as a result of lower demandpulp prices and lower
paper sales. We completed construction of the capital project at the Rosenthal
mill in late 1999 to convert the Rosenthal mill's production to kraft pulp and
increase its annual production capacity. The Rosenthal mill ramped up production
in early 2000 and operated in excess of 90% of capacity after the first quarter
of 2000.
Cost of sales decreased to E184.7 million in 2001 from E193.7 million in
2000, primarily as a result of lower paper sales volumes.
In 2001, our pulp and paper sales decreased by approximately 16.3% to
E205.0 million from E245.1 million in 2000 on an 8.4% decrease in pulp sales and
a sharp increase31.2% decrease in paper sales. In 2001, pulp sales were lower than in 2000 as
a result of weakening demand due to global economic weakness and high producer
inventory levels that lead to a decline in prices. Overall, in 2001, paper
markets were generally stable with prices increasing marginally.
On average, pulp prices realized by us in 2001 decreased by approximately
23.2% compared to 2000. Pulp sales decreased to E146.2 million in 2001 from
E159.7 million in 2000, primarily as a result of a decrease in pulp inventories. Customers
generally reduced purchasesprices. Pulp
sales volumes increased in 2001 as a result of increased production. List prices
for kraft pulp in Europe decreased from approximately E756 ($710) per tonne at
the end of 2000 to approximately E705 ($650) per tonne during the first quarter
of 2001, approximately E591 ($530) per tonne during the second quarter of 2001,
approximately E514 ($460) per tonne during the third quarter of 2001 and
approximately E525 ($470) per tonne during the fourth quarter of 2001. Kraft
pulp prices continued to weaken at the end of 2001 as a result of high product
inventories and weakening prices continued in the early part of 2002. We
undertook a planned eight-day maintenance and modification shutdown at the
Rosenthal mill in August 2001, and it was shutdown for an additional 19 days
over the year to correct technical difficulties.
On average, our per tonne fiber costs for pulp production increased by
approximately 6.3% in 2001 compared to 2000 and remained among the lowest in
Europe.
Paper prices realized by us increased by approximately 27.0% on average in
2001, compared to 2000, primarily as a result of the disposition of lower priced
product lines. Paper sales in 2001 decreased to E58.8 million from
E85.3 million in 2000, on a volume decrease their excess inventories.
16
17of 45.8%. In 2001, sales volumes for
printing papers decreased by approximately 49.9%, primarily due to the sale of
the printing paper mill in Hainsberg effective November 2000. Sales volumes for
specialty papers decreased by 2.4% compared to 2000. We did not sell any
packaging paper in 2001 as a result of the sale of our packaging paper mill
in 2000.
While prices for waste paper, which comprises approximately 25% of the fiber
for the Paper mills, increased by approximately 30.0% in 2001 compared to 2000,
they remained relatively low compared to the cost of virgin fiber.
General and administrative expenses increased to E18.4 million in 2001, from
E15.5 million in 2000, primarily as a result of payments made in connection with
profit sharing bonuses for the prior year and costs related to specific
projects.
We had income from operations of E13.3 million in 2001, compared to
E49.7 million in 2000. Interest expense in 2001 increased to E16.2 million from
E15.2 million in 2000.
We sold our printing paper mill located in Hainsberg, Germany effective
November 2000 for approximately E5.0 million plus an amount equal to the net
working capital associated with the Hainsberg mill from the sale. We also sold
our packaging paper mill located in Trebsen, Germany effective June 2000 for
approximately E9.5 million plus an amount equal to the net working capital
associated with the Trebsen mill from the sale. As a result, prices for pulpwe no longer
produce packaging papers.
36
In 2001, we reported a net loss of E2.8 million, or E0.17 per share on a
basic and certain gradesdiluted basis, compared to net income of paper began to declineE32.0 million, or E1.91 per
share on a basic basis and E1.87 per share on a diluted basis, in the
last quarter of 1995 and remained weak through 1996.
Since acquisition, the Company has been implementing operational changes to
its operations to improve efficiency, increase export sales to markets outside
of Germany and upgrade its product mix. In 1995, the Company centralized its
pulp and paper administration in Heidenau. It also closed the corrugated box
plant at the Heidenau mill, sold the corrugating machine for $2.6 million and
eliminated 60 employee positions thereat. The Company also leased the Raschau
paper mill and its operations, with an option to purchase, to third parties in
1995. The Raschau mill employed 70 people and all ongoing employees were
transferred to the lessee. The Raschau mill and Heidenau corrugated box plant
had a combined annual production capacity of 20,000 tonnes and neither made a
positive contribution to the Company or were considered to be long-term
strategic assets. In 1995, the Company increased its sales outside of Germany by
approximately 8.1%, increased its production of dissolving sulphite pulp to
24.5% of total pulp production from 16.6% in 1994 and upgraded its paper product
mix. The implementation of operating changes resulted in downtime at some of the
Company's mills in 1995.2000.
LIQUIDITY AND CAPITAL RESOURCES
The following table is a summary of selected financial information concerning the Company for the
periods indicated:
AS AT DECEMBER 31,
1996 DECEMBER 31, 1995
----------------- -----------------
(in thousands, other than per share amounts)-----------------------
2002 2001
-------- --------
(IN THOUSANDS)
FINANCIAL POSITION
Working capital........................................... $ 78,663 $ 90,703
Property, plant and equipment (net)....................... 125,116 104,038capital............................................. E 6,328 E 15,544
Properties, net............................................. 441,990 278,617
Total assets.............................................. 279,839(1) 328,750(2)assets................................................ 599,750(1) 429,593
Long-term government debt................................. 9,184 10,522
Long-term debt -- other................................... 19,426 12,238
Due to spun-off operations................................ 368 21,778
CAPITAL SOURCESdebt.............................................. 351,878(2) 216,871
Shareholders' equity...................................... $ 194,539(1)(3) $ 227,015(2)
Cash flow(4).............................................. 8,688 45,480
Cash flow per share(4).................................... 0.62 3.56equity........................................ 124,969 131,613
- ---------------------------------------
(1) Excludes spun-off operations.Includes approximately E186.9 million related to properties construction in
progress at the site of the Stendal mill.
(2) Includes net assetsapproximately E146.5 million related to construction in progress at
the site of spun-off operations.
(3) After stock dividend.
(4) Cash flow provided by operations before net purchases of trading securities.the Stendal mill.
At December 31, 1996, the Company's2002, our cash and cash equivalents totalled
$10.0was E30.3 million, a net
decreaseincrease of $19.2E18.5 million from $29.2E11.7 million at the end of 1995.2001. We also had
E9.5 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 E19.7 million of cash restricted in a debt service account relating to the
Rosenthal mill. At December 31, 1996, the Company had2002, short-term trading securities totalling $83.4decreased to
E0.3 million compared to $65.3from E4.5 million at December 31, 1995.
Effective June 3, 1996, the Company completed the spin-off of its financial
services segment in a one for two stock dividend of approximately 83% of its
previously held 92% interest in Arbatax. The Distribution was recorded as a
stock dividend from shareholders' equity at the carrying amount of the net
assets of the spin-off operations. As a result, the Company's total assets and
shareholders' equity were each reduced by approximately $50.7 million after the
Distribution. The stock distribution itself is a non-cash transaction which did
not affect the Company's cash flow statement.2001.
OPERATING ACTIVITIES
NetOperating activities in 2002 provided cash used by operating activities was $6.4of E39.7 million, compared to
E29.8 million in 1996,2001. Net changes in trading securities provided cash of
E4.4 million in 2002, compared to $16.5E0.5 million in 1995. Reductions2001. Decreases in receivables
and inventories accounted forprovided cash of E14.9 million and E1.7 million, respectively,
in the majority of cash provided by operations. Net purchases of trading securitiescurrent period, compared to E7.8 million and E2.6 million, respectively,
in 2001. A decrease in accounts payable and accrued expenses used cash of
$15.1E13.4 million in 1996,2002, compared to $61.9E0.9 million in 1995. The
Company expects2001. We expect to continue
to generate sufficient cash flow from operations to pay our interest expense and
meet itsthe working capital requirements.
17
18requirements for our operations.
INVESTING ACTIVITIES
Investing activities in 19962002 used cash of approximately $16.3E196.0 million, consisting primarily of capital expenditures for upgrades to the Company's
manufacturing plants, compared to $11.0 million in 1995.
The Company has undertaken significant capital investments to upgrade its
manufacturing plants including approximately $23.5 million in 1996, of which
$5.3 million was funded by non-refundable government grants. Asas a
result of the Company's plansacquisition of properties, net of investment grants, in connection
with the Stendal project, compared to convertE10.3 million in 2001. The acquisition of
properties in connection with the productionStendal project used cash of E186.9 million in
2002. The acquisition of properties, net of investment grants, in 2001 used cash
of E7.6 million. The sale of properties in 2002 provided cash of E4.4 million.
Purchases of available-for-sale securities used cash of E0.6 million in 2002 and
2001, respectively. The disposition of a subsidiary in 2002 used cash of
E1.2 million, net of cash disposed, compared to the Pulp mill from sulphitepurchase of a subsidiary,
net of cash acquired, using cash of E2.1 million in 2001.
37
In 2002, we applied for investment grants totaling E38.0 million with
respect to kraft pulp, the Company's previous capital investment program has been modifiedStendal project, which we expect to reflectreceive in the conversion project.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 Company expects capital investments in 1997aggregate equipment costs are
estimated to be approximately $10.7E3.3 million, of which will be funded from cash, cash flow from operations and
non-refundable government grants. Such non-refundable grants are made available
byapproximately E0.2 million
was incurred in 2002. We have applied for German federal and state governments to qualifying businesses. At December
31, 1996, the Company has a receivable of non-refundable grants totalling $1.3
million. These non-refundable government grants are not recorded inand for
assistance under special credit programs instituted by the income
of the Company, but instead reduce the cost base of the assets purchased with
the proceeds thereof. In addition, loan guarantees are available to the Company
from state governments in GermanyGerman government for
up to 80% of the cost of qualified
investments. Such guarantees permit businesses to obtain term loans at below
market interest rates. The Company has not used such state guarantees to date,
but anticipates utilizing the sameflooding victims in connection with its conversion plansthese costs. Although we have received
approval for the Pulp mill. See "Business -- Capital Expenditures and Government Financing."
The Company plans to convert the Pulp mill from the productioncertain of sulphite
pulp to kraft pulp. The conversion is, among other things, expected to increase
the capacity of the Pulp mill from 160,000 tonnes per annum to 280,000 tonnes
and reduce the mill's emissions of sulphur dioxides and effluent substantially.
The estimated cost for the conversion is approximately $325 million, which will
be financed through a combination of non-refundable governmentalthese grants, of
approximately $97.5 million and governmental assistance and guarantees for
long-term project financing. The conversion project is expected to commence in
1998 and to be completed at or about the end of 1999.
The conversion project is subject to, among other things, the Company
settling all financing and governmental grants and obtaining all necessary
environmental and operating permits. Although the Company's plan to convert the
Pulp mill to produce kraft pulp has received favourable support from German
governmental and regulatory bodies to date, there can be no assurance that current governmental financialwe will
receive such grants and assistance programs will not be amended in the futureamounts applied for, or thatat all.
We reorganized our interest in Landqart at the end of 2002 by selling a 20%
interest to a Swiss bank and exchanging the other 80% interest for an indirect
39% minority interest through a limited partnership on a non-cash basis. We
effected the reorganization as the markets for the specialty papers produced by
Landqart are significantly different from the markets for the more consumer
oriented types of specialty papers produced by us. The reorganization will allow
the management of Landqart to focus on its operations and financial assistancerequirements
without regard to our other operations. Further, to develop the business of
Landqart will require a substantial amount of capital investment in the Landqart
mill. The Swiss bank has agreed to reduce and refinance a portion of Landqart's
debt and may be able to assist Landqart in securing the funds necessary to make
the required capital investment in the Landqart mill.
We are in the process of constructing a wastewater treatment plant at the
Fahrbrucke mill and reconstructing the landfill at the Rosenthal mill. For more
information, see "Business -- Environmental" and "Business -- Capital
Expenditures", respectively.
In August 2002, we completed financing arrangements for the Stendal project.
Total investment cost in connection with the project are approximately
E1.0 billion, the majority of which is to be provided under the Stendal Loan
Facility. We also contributed approximately E63.5 million to Stendal from cash
on hand and through the Company on
satisfactory terms or that all necessary environmental and operating permits
will be received on satisfactory terms or in time to permitBridge Loans. For more information about the Company to
proceed and complete theStendal
project, as currently planned. Seesee "Business -- Stendal Pulp Mill Conversion Project."Project and Financing".
FINANCING ACTIVITIES
CashFinancing activities provided by financing activities was $5.8cash of E175.8 million in 1996,2002, primarily as a
result of increased bank indebtedness. Casha net increase in indebtedness of E166.2 million relating to the
Stendal project. An increase in restricted cash, including in connection with
the Stendal project, used cash of E14.9 million in the current period. An
increase in construction in progress costs in connection with the Stendal
project provided cash of E24.9 million in 2002. Equity invested by financingminority
shareholders in connection with the Stendal project provided cash of
E6.3 million in 2002. We made a repayment of E12.5 million in connection with
the Rosenthal Loan Facility in 2002. Financing activities used cash of
E30.1 million in 1995 was also $5.8 million. The overall depreciation2001, primarily as a result of the deutschmark againstreduction of indebtedness
during the U.S. dollar in 1996 resulted in an unrealized foreign
exchange translation loss of $1.0 million from cash and cash equivalents, which
is included as shareholders' equity in the Company's balance sheet and does not
affect the Company's net earnings. See "Foreign Currency."
In 1996, the Company settled bank debt of $13.4 million through a partial
repayment, the issuance of 650,000 shares of beneficial interest and a
promissory note in the amount of $0.9 million due in July 1997. The Company also
settled its indebtedness to Arbatax in 1996 of $22.3 million through the
issuance of 700,000 shares of beneficial interest and a note in the amount of
$14.5 million due in January 1998.
The Company'speriod.
Our pulp and paper operations had net operating tax losses of
approximately $242.0 million at December 31, 1996, which under German tax laws
may be carried forward indefinitely. Pursuant to the terms of acquisition, if
the Company utilized the pre-acquisition tax losses of its pulp operations, it
was required to pay to BVS either a portion of all tax savings realized or a
one-time payment of approximately $6.3 million to be made on or before December
31, 1996. In 1996, the Company paid the $6.3 million which was deducted
18
19
from the long-term portion of government receivables due to the Company from
BVS. As a result, no payments are due to BVS if the Company utilizes any of its
tax losses. These tax losses may resultwere reorganized in a substantial deferred tax benefit
being recognized by the Company, which under FASB Statement No. 109 may be
reflected in an increase to earnings. In 1996, the Company re-examined its
operations and ability to utilize its tax losses and reduced the valuation
allowance therefor,2002 which resulted in a
net deferredreduction of tax benefitlosses being carried forward from December 31, 2001 and these
tax losses were fully utilized. For more information, see Note 9 of $3.1 million
being recognized. In 1995, the Company recognized a deferred tax benefit of $9.1
million.
The Company is continuing discussions with third parties to divest certain
redundant assets, including a substantial amount of real property which is
excess to its requirements. The Company has entered into certain lease
arrangements with respect to some of the redundant assets whereby the Company
has the right to "put" the assets to the tenant at a prearranged price
commencingour
consolidated financial statements included in 1997.
In 1996, net proceeds used to repurchase shares were $0.8 million. In 1995,
the Company received, net of share repurchases, proceeds of $7.1 million from
the issuance of shares.this annual report.
Other than the Company's planagreements entered into by Stendal relating to convert the production of the Pulp mill
from sulphite to kraft pulp, the CompanyStendal
project, we had no material commitments to acquire assets or operating
businesses as at December 31, 1996. The Company anticipates2002. We anticipate that there will be acquisitions
of businesses or commitments to projects in the future. To achieve itsour long-term
goals of expanding theour asset and earnings base by mergersthrough the acquisition of
interests in companies and acquisitions,assets in the Companypulp 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 will be generated from cash flow from operations, cash on
hand, borrowing against itsour assets, and/or the sale of assets.debt
38
and/or equity securities and/or asset sales. In addition, in connection with our
obligation to repay or refinance the Bridge Loans, we may in 2003 issue debt,
equity or convertible securities.
SENSITIVITY ANALYSIS
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 changes in industry capacity and in the economy,
both of which can have a significant influence on our selling prices and
earnings. Approximately E130.2 million, or approximately 54.4%, of our revenues
in 2002 were from pulp sales. The following table illustrates the effect on our
net operating results in 2002 of a $20 change in our average selling price per
tonne for NBSK pulp in 2002, based upon our pulp sales during the year:
YEAR ENDED
DECEMBER 31, 2002
------------------
(IN THOUSANDS,
EXCEPT PER SHARE
AMOUNT)
NBSK Pulp -- $20 per tonne change
Change in net operating results........................... E6,260
Change in net operating results per share................. 0.37
FOREIGN CURRENCY
Substantially allEffective January 1, 2002, we changed our reporting currency from the
U.S. dollar to the Euro as a significant majority of our business transactions
are originally denominated in Euros. By adopting the Company's operations are conductedEuro, most cumulative
foreign currency translation losses were eliminated. However, we hold certain
assets and liabilities in international marketsU.S. dollars, Swiss francs and, itsto a lesser extent, in
Canadian dollars. Accordingly, our consolidated financial results are subject to
foreign currency exchange rate fluctuations and in particular those in Germany.
The Company's pulp and paper products are principally sold in deutschmarks and
approximately 99% of the Company revenues werefluctuations.
We translate foreign denominated in deutschmarks.
The Company translates foreign assets and liabilities into U.S. dollarsEuros at the
rate of exchange on the balance sheet date. Revenues and expenses are
translated at the average rate of exchange prevailing during the year. 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 net earnings of the Company.
Since substantially all of the Company's revenues are received in
deutschmarks, the financial position of the Company for any given period, when
reported in U.S. dollars, can be significantly affected by the exchange rate for
deutschmarks prevailing during that period. Atyear ended December 31, 1996, the cumulative
foreign exchange translation resulted in a loss of $12.0 million. During 1996,
the overall depreciation of the deutschmark against the U.S. dollar resulted in2002, we reported a net $10.3E2.2 million foreign
exchange translation lossgain and, as a result, the cumulative foreign exchange
translation loss wasgain increased from $1.7to E3.5 million at December 31, 1995 to $12.02002 from
E1.3 million at December 31, 1996.
As both2001.
Based upon the Company's principal sourcesexchange rate at December 31, 2002, the U.S. dollar decreased
by approximately 15.1% in value against the Euro since December 31, 2001. See
"Quantitative and Qualitative Disclosures about Market Risk -- Derivative
Instruments".
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, described below, that are the most
important to the portrayal of our current financial condition and results of
operations. Our significant accounting policies are disclosed in deutschmarks,Note 1 to our
consolidated financial statements included in this annual report.
39
DERIVATIVE INSTRUMENTS. We adopted Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" effective January 1, 2001. Derivative instruments are measured at
fair value and reported in the Company doesbalance sheet as assets or liabilities.
Accounting for gains or losses depends on the intended use of the derivative
instruments. Gains or losses on derivative instruments which are not currently enter into any currency hedging
arrangementsdesignated
hedges are recognized in earnings in the period of the change in fair value.
Accounting for exchange rate fluctuations.
The averagegains or losses on derivative instruments designated as hedges
depends on the type of hedge and period ending exchange ratesthese gains or losses are recognized in either
earnings or other comprehensive income.
Retroactive application of this standard was not allowed. There is no
cumulative effect in our financial statements as a result of adopting this
standard. We reported a holding loss of E30.1 million before minority interests
in respect of the Stendal Interest Rate Swap Agreements and a realized gain of
E23.4 million in respect of the Rosenthal Currency Swaps and Interest Rate
Contracts in our loss for the deutschmarkyear ended December 31, 2002.
IMPAIRMENT OF LONG-LIVED ASSETS. We periodically evaluate long-lived assets
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. In performing the review of recoverability, we
estimate future cash flows expected to result from the use of the asset and its
eventual disposition. The estimates of future cash flows, based on reasonable
and supportable assumptions and projections, require our management to make
subjective judgments. In addition, the time periods for estimating future cash
flows is often lengthy, which increases the sensitivity of the assumptions made.
Depending on the assumptions and estimates used, the estimated future cash flows
projected in the evaluation of long-lived assets can vary within a wide range of
outcomes. Our management considers the likelihood of possible outcomes in
determining the best estimate of future cash flows.
DEFERRED TAXES. We currently have deferred tax assets which are comprised
primarily of tax loss carryforwards and deductible temporary differences, both
of which will reduce taxable income in the future. We assess the realization of
these deferred tax assets on a periodic basis to determine whether a valuation
allowance is required. We determine whether it is more likely than not that all
or a portion of the deferred tax assets will be realized, based on currently
available information, including, but not limited to, the U.S. dollarfollowing:
- the history of the tax loss carryforwards and their expiry dates;
- our projected earnings; and
- tax planning opportunities.
If we believe that it is more likely than not that some of these deferred
tax assets will not be realized, based on currently available information, an
income tax valuation allowance is recorded against these deferred tax assets. As
at December 31, 2002, we had E53.9 million in deferred tax assets and
E43.7 million in valuation allowances, resulting in a net deferred tax asset of
E10.1 million.
If market conditions improve or tax planning opportunities arise in the
future, we will reduce our valuation allowances, resulting in future tax
benefits. If market conditions deteriorate in the future, we will increase our
valuation allowances, resulting in future tax expenses. Any change in tax laws,
particularly in Germany, will change the valuation allowances in future periods.
ENVIRONMENTAL. Our operations are subject to a wide range of German
federal, state and local environmental laws and regulations, dealing primarily
with water, air and land pollution control. In recent years, we have devoted
significant financial and management resources to comply with all applicable
environmental laws and regulations. We believe our operations are currently in
substantial compliance with the requirements of all applicable environmental
laws and regulations and our respective operating permits.
40
Under German state environmental rules relating to effluent discharges,
industrial users are required to pay wastewater fees based upon the amount of
their effluent discharge. These rules also provide that an industrial user which
undertakes environmental capital expenditures and lowers certain effluent
discharges to prescribed levels may offset the amount of these expenditures
against the wastewater fees that they would otherwise be required to pay in a
three-year period. The requirement and timing of capital expenditures and the
amount of wastewater fee charges are subject to negotiation with government
agencies. As a result, we believe that our capital investment programs for our
manufacturing plants will fully offset the wastewater fees that would have been
payable for the periods indicated arepast three years, subject to environmental audits. We estimate
the aggregate wastewater fees for the past three years to be approximately
E11.2 million.
Other than wastewater fees, we accrue for environmental remediation
liabilities on a site-by-site basis when it is probable that a loss can be
reasonably estimated, or as follows:
YEARS ENDED DECEMBER 31,
-------------------------- ---------------------------------------------------------
1997 1996 1995
-------------------------- --------------------------- ---------------------------
PERIOD AVERAGE
MARCH 21, TO MARCH 21, PERIOD END PERIOD AVERAGE PERIOD END PERIOD AVERAGE
--------- -------------- ---------- -------------- ---------- --------------
RATES OF EXCHANGE
Deutschmark................ 1.6888 1.6707 1.5389 1.5075 1.4339 1.4209
Based upon the period average exchange rate in 1996, the U.S. dollar increased
by approximately 5% in value against the deutschmark sincea result of an environmental action or claim,
environmental studies that we conduct or regulatory assessment. As at
December 31, 2002, we recorded a liability for environmental conservation
expenditures of E2.3 million, based on environmental studies that we conducted.
We believe that the liability amount recorded is sufficient, subject to future
changes in German environmental regulations.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
Statements in this report that are not reported financial results or other
historical information are "forward-looking statements" within the meaning of
the United States PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. 19These
statements are based on present information we have related to our existing
business circumstances and involve a number of risks and uncertainties, any of
which could cause actual results to differ materially from these forward-looking
statements. We caution you that we do not assume any obligation to update
forward-looking statements based on unanticipated events or changed
expectations. Factors that could cause actual results to differ materially
include, but are not limited to:
INDEBTEDNESS. We have incurred a significant amount of debt. Our high debt
levels may have important consequences for us, including, but not limited to the
following:
- our ability to obtain additional financing to fund future operations or
meet our working capital needs or any such financing may not be available
on terms favorable to us;
- a certain amount of our operating cash flow is dedicated to the payment of
principal and interest on our indebtedness, thereby diminishing funds that
would otherwise be available for our operations and for other purposes;
- a substantial decrease in net operating cash flows or increase in our
expenses could make it more difficult for us to meet our debt service
requirements, which could force us to modify our operations; and
- our leveraged capital structure may place us at a competitive disadvantage
by hindering our ability to adjust rapidly to changing market conditions
or by making us vulnerable to a downturn in our business or the economy in
general.
Our ability to repay or refinance our indebtedness will depend on our future
financial and operating performance. Our performance, in turn, will be subject
to prevailing economic and competitive conditions, as well as financial,
business, legislative, regulatory, industry and other factors, many of which are
beyond our control. Our ability to meet our future debt service and other
obligations may depend in significant part on the success of the Stendal mill
and the extent to which we can implement successfully our business and growth
strategy. We cannot assure you that we will be able to implement our strategy
fully or that the anticipated results of our strategy will be realized.
41
20
CYCLICAL NATURE OF BUSINESS; COMPETITIVE POSITIONPOSITION. The pulp and paper
business is cyclical in nature and markets for the
Company'sour principal products are
affectedcharacterized by fluctuations inperiods of supply and demand in each cycle,imbalance, which in turn affects
product prices. The markets for pulp and paper are highly competitive and
sensitive to cyclical changes in the industry capacity and in the global economy,
bothall of which can have a significant influence on selling prices and the earnings of the Company.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. TheDuring the past three years, pulp prices have fallen significantly.
Our competitive position of
the Company is influenced by the availability and quality of raw
materials (fibre) and itsour experience in relation to other producers with respect to
inflation, energy, labourtransportation, labor costs, productivity and productivity.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.
RAW MATERIALS. Wood chips and pulpwood comprise the fiber used by the
Rosenthal mill and which will be used by the Stendal mill. The fiber used by our
Paper mills consists of waste paper and pulp. Such fiber is cyclical in terms of
both price and supply. The cost of wood chips and pulplogs is primarily affected
by the supply and demand for lumber. The cost of fiber for our Paper mills is
primarily affected by the supply and demand for paper and pulp. Demand for these
raw materials is determined by the volume of pulp and paper products produced
globally. The markets for pulp and paper products, including our products, are
highly variable and are characterized by periods of excess product supply due to
many factors, including periods of insufficient demand due to weak general
economic activity or other causes. The cyclical nature of pricing for these raw
materials represents a potential risk to our profit margins if we are unable to
pass along price increases to our customers. Although these materials are
available from a number of suppliers, we may not be able to purchase sufficient
quantities of these raw materials to meet our production requirements at prices
acceptable to us during times of tight supply. In addition, the quality of fiber
we receive could be reduced as a result of industrial disputes, material
curtailments or shut-down of operations by suppliers for market or other
reasons, government orders and legislation, acts of god and other events beyond
our control. Historically, the fiber requirements for the Rosenthal mill were
procured by a third party. The agreement with this party will expire shortly and
will not be renewed as we have organized our own internal wood procurement
department. There can be no assurance that this department will be able to
procure our fiber requirements on terms as favorable as those procured by the
third party. An insufficient supply of fiber or reduction in the quality of
fiber we receive would materially adversely affect our business, financial
condition and results of operations.
ENVIRONMENTAL REGULATION. We are subject to extensive environmental laws
and regulations. These laws and regulations impose stringent standards on us
regarding, among other things, air emissions, effluent discharges and
remediation of environmental contamination. We may incur substantial costs to
comply with current requirements or new environmental laws that might be
adopted. In addition, we may discover currently unknown environmental problems
or conditions in the future and may incur substantial costs in correcting such
problems or conditions.
STENDAL PULP MILL PROJECT UNCERTAINTIES. The Stendal project is subject to
various risks and uncertainties customary to large "greenfield" projects of this
nature which may result in the Stendal project not being completed as currently
scheduled or budgeted. Such delays and/or cost overruns may result from:
- the availability and cost of materials and labor;
- construction delays;
- equipment failures or damage;
- weather conditions;
- industrial accidents;
- government regulations;
42
- changes to government assistance;
- delays in obtaining or amending our permits;
- errors or miscalculations in engineering, design specifications or
equipment manufacturing;
- faulty construction or workmanship; or
- defective equipment or installation.
The Stendal project will also be subject to extensive and complex
regulations and environmental compliance which may result in delays, in Stendal
and/or its shareholders, including us, incurring substantial costs, or in the
Stendal project being changed or not being completed at all.
The implementation of the Stendal project commenced in 2002 and is scheduled
to be completed in the third quarter of 2004. However, there can be no assurance
that the Stendal project will be completed or start-up will occur as currently
planned or that, if completed, the mill will perform as currently planned. For
more information about the Stendal project, see "Business -- Stendal Pulp Mill
Project and Financing".
COMPETITIVE MARKETS. We sell our products primarily in Europe and the
markets for our products are highly competitive. A number of global companies
compete in each of our markets and no company holds a dominant position. For
both pulp and paper, a large number of companies produce products that are
reasonably standardized. As a result, the traditional basis for competition in
our markets has been price. Many of our competitors have greater resources than
we do and may be able to adapt more quickly to industrial changes or devote
greater resources to the sale of products than we can. We cannot assure you that
we will be able to compete successfully against these competitors.
DERIVATIVES. We use derivative instruments in regard to our exposure to
interest rate and currency fluctuations and may in the future use derivative
instruments to mitigate pulp price risks. The derivative instruments may not be
designated as hedging instruments for accounting purposes. The purpose of the
derivative activity may be speculative in nature, as our management uses these
derivative instruments either to augment our potential gains or reduce our
potential losses, depending on our management's perception of future economic
events and developments. If any of the variety of instruments and strategies we
utilize are not effective, we may incur losses, which may have a materially
adverse effect on our results of operations and financial condition. See
"Quantitative and Qualitative Disclosures about Market Risk -- Derivative
Instruments".
LABOR AGREEMENTS. The majority of our employees in Germany are represented
by the IG-BCE, a national union that represents pulp and paper workers in
Germany. The collective agreement relating to employees at our Paper mills
expires at the end of 2003. We expect to negotiate a new collective agreement
for employees at our Paper mills in 2003. For our pulp workers, we have agreed
to negotiate in respect of an additional wage increase for August 2003 depending
upon the general economic conditions. Although we have not experienced any
significant work stoppages in the past, there can be no assurance that we will
be able to negotiate an acceptable collective agreement with our employees upon
expiration of the existing collective agreement with our employees at the Paper
mills. This could result in a strike or work stoppage by the affected workers.
The renewal of the collective agreements could result in higher wages or
benefits paid to union members. Accordingly, we could experience a significant
disruption of our operations or higher on-going labor costs, which could have a
material adverse effect on our business, financial condition, results of
operations and cash flow.
INSURANCE. We have obtained insurance coverage that we believe would
ordinarily be maintained by an operator of facilities similar to our pulp and
paper mills. Our insurance is subject to various limits and exclusions. Damage
or destruction to our facilities could result in claims that are excluded by, or
exceed the limits of, our insurance coverage.
43
LEGAL PROCEEDINGS. Although we are not currently subject to any material
legal proceedings, should legal proceedings be initiated against us in the
future, whether in connection with environmental matters or otherwise, pursuant
to which we are required to pay significant amounts under an order issued in or
to settle such a proceeding, our results of operations and financial condition
would be materially adversely affected.
OTHER RISKS. Our future results could be adversely affected by a variety of
other factors beyond our control, including, but not limited to:
- general economic and business conditions, including changes in interest
rates;
- prices and other economic conditions;
- natural phenomena;
- actions by government authorities, including changes in government
regulation;
- uncertainties associated with legal proceedings;
- technological development;
- future decisions by management in response to changing conditions;
- our ability to execute prospective business plans; and
- misjudgments in the course of preparing forward-looking statements.
INFLATION
The Company doesWe do not believe that inflation has had a material impact on revenues or
income during 1996.2002.
ITEM 7A. 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.
DERIVATIVE INSTRUMENTS
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
44
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
Swap, Rosenthal effectively pays the principal and interest in U.S. dollars and
at U.S. dollar borrowing rates.
In December 2000, Rosenthal entered into U.S. dollar/Euro Rosenthal Currency
Swaps to manage its risk exposure with respect to in aggregate approximately
E223.3 million of the principal amount under the Rosenthal Loan Facility. These
swaps were subsequently settled and realized in July 2002. A currency gain was
recognized when loan repayments were made under the currency swap contracts
during the current period. As a consequence of the settlement of these Rosenthal
Currency Swaps, commencing from April 1, 2002, interest was paid 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, Rosenthal re-entered the Rosenthal Currency Swaps
for the principal amounts of E74.5 million and E130.4 million. In
December 2002, the swap relating to the principal amount of E130.4 million under
the Rosenthal Loan Facility was settled. In January 2003, Rosenthal re-entered
the Rosenthal Currency Swap for the principal amount of E130.4 million.
In addition, Rosenthal entered into the Interest Rate Contracts in the
fourth quarter of 2002 to either fix or limit the interest rates in connection
with certain of its indebtedness. Rosenthal also has entered into various
Currency Forwards to reduce or limit its exposure to currency risks and to
augment its potential gains or to reduce its potential losses.
In August 2002, Stendal 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.
These contracts were entered into under a specific credit line under the Stendal
Loan Facility and are subject to prescribed controls, including certain maximum
amounts for notional and at-risk amounts. Under the Stendal Interest Rate Swap
Agreement, Stendal pays a fixed rate and receives a floating rate with the
interest payments being calculated on a notional amount. The interest rates
payable under the Stendal Loan Facility were swapped into 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. As at December 31, 2002, the aggregated notional
amount outstanding was E1.1 billion.
In addition, pursuant to the Bridge Loan which related to our investment in
the Stendal project, the bank has an option to demand that the E30.0 million
loan be repaid in Euros or U.S. dollars at an exchange rate of E1.00 = $0.9731,
which was the exchange rate prevailing at the date of the loan, if the Euro
falls below this exchange rate on the repayment date of the loan. At
December 31, 2002, the Euro had appreciated to exceed this rate. Such an option
is considered an embedded derivative.
The Rosenthal Currency Swaps, Interest Rate Contracts, Currency Forwards,
the Stendal Interest Rate Swap Agreements and embedded derivative are marked to
market at the end of each reporting period, and all unrealized gains and losses
are recognized in earnings for a reporting period.
45
The following table sets forth the maturity date, the notional amount and
the recognized gain or loss, for derivative instruments that were transacted
during the year 2002:
RECOGNIZED GAIN
(LOSS) YEAR ENDED
DERIVATIVE INSTRUMENT MATURITY DATE NOTIONAL AMOUNT DECEMBER 31, 2002
- --------------------- -------------- ---------------- ------------------
(IN MILLIONS) (IN THOUSANDS)
ROSENTHAL
Currency Forward.......................... Settled $ 20.0 E 319
Currency Forward.......................... Settled $ 20.0 591
Currency Forward.......................... Settled $ 20.0 724
Currency Forward.......................... Settled $ 10.0 582
Currency Forward.......................... Settled $ 1.0 (79)
Rosenthal Currency Swaps.................. Settled E 223.3 13,890
Repayment of Loan under Currency Swap..... Settled $ 5.2 245
Rosenthal Currency Swap................... Settled E 130.4 6,974
--------
23,246
--------
AT DECEMBER 31, 2002
Rosenthal Currency Swap(1)................ September 2013 E 74.5 2,486
Interest Rate Cap Agreements(2)........... September 2007 $ 205.9 (1,612)
Forward Rate Agreements(3)................ September 2003 $ 199.3 (509)
Forward Rate Agreement.................... June 2003 $ 124.8 (182)
--------
183
--------
E 23,429
========
STENDAL
Stendal Interest Rate Swap
Agreements(4)........................... October 2017 E1,108.4 E(30,108)
========
CORPORATE
Bridge Loan, embedded derivative.......... February 2004 E 30.0 --
========
- ------------------------
(1) The interest component of the swaps is required under the terms of the
Rosenthal Loan Facility, and became effective for the period starting
September 30, 2002. For the outstanding principal amounts of E74.5 million
under the Rosenthal Loan Facility, all repayment installments from
September 30, 2002 until September 30, 2013, were swapped into U.S. dollar
amounts at a rate of Euro 1.0050. The interest rate was swapped into the
six-month U.S. dollar/Libor plus bank margin rate with a cap of 6.8% until
September 28, 2007.
(2) Rosenthal entered into two interest rate cap contracts with notional amounts
of $131.0 million and $74.9 million, both maturing on September 28, 2007
with a strike rate of 6.8%.
(3) Rosenthal entered into two forward interest rate contracts with notional
amounts of $74.5 million and $124.8 million both maturing on
September 30, 2003.
(4) In connection with the Stendal Loan Facility, in the third quarter of 2002
Stendal entered into the Stendal Interest Rate Swap Agreements, which are
variable-to-fixed interest rate swaps, for the term of the Stendal Loan
Facility, with respect to an aggregate maximum amount of approximately
E612.6 million of the principal amount of the long-term indebtedness under
the Stendal Loan Facility. The swaps took effect on October 1, 2002 and are
comprised of three contracts. The first contract commenced in October 2002
for a notional amount of E4.1 million, gradually increasing to
E464.9 million, with an interest rate of 3.795%, and matures in May 2004.
The second contract is to commence in May 2004 for a notional amount of
E464.9 million, gradually increasing to
46
E612.6 million, with an interest rate of 5.28%, and matures in April 2005.
The third contract is to commence in April 2005 for a notional amount of
E612.6 million, with an interest rate of 5.28%, and the notional amount
gradually decreases and the contract terminates upon the maturity of the
Stendal Loan Facility in October 2017. As at December 31, 2002, the notional
amount of these three contracts was E30.9 million, E464.9 million and
E612.6 million, respectively.
We are exposed to very modest credit-related risks in the event of
non-performance by counterparties to derivative contracts. However, we do not
expect that the counterparties, which are major financial institutions, will
fail to meet their obligations.
Other than the embedded derivative within the Bridge Loans, as of
December 31, 2002, we have not entered into any material financial derivatives
outside of our project companies, Rosenthal and Stendal, under their existing
lines of credit. As at December 31, 2002, no derivative contract had been
executed with respect to pulp prices.
INTEREST RATE RISK
Fluctuations in interest rates may affect the fair value of fixed interest
rate financial instruments which are sensitive to such fluctuations. A decrease
in interest rates may increase the fair value of such fixed interest rate
financial instrument assets and an increase in interest rates may decrease the
fair value of such fixed interest rate financial instrument liabilities, thereby
increasing our fair value. An increase in interest rates may decrease the fair
value of such fixed interest rate financial instrument assets and a decrease in
interest rates may increase the fair value of such fixed interest rate financial
instrument liabilities, thereby decreasing our fair value. The following tables
provide information about our exposure to interest rate fluctuations for the
carrying amount of financial instruments sensitive to such fluctuations as at
December 31, 2002 and 2001, respectively, and expected cash flows from these
instruments:
AS AT DECEMBER 31, 2002
EXPECTED FUTURE CASH FLOW*
CARRYING FAIR -----------------------------------------------------------------
VALUE VALUE 2003 2004 2005 2006 2007 THEREAFTER
-------- -------- -------- -------- -------- -------- -------- ----------
(IN THOUSANDS)
Cash restricted....... E 48,254 E 48,254 E10,762 E 1,296 E 1,296 E 1,296 E 1,296 E 48,858
Debt obligations(1)... 224,257 224,257 23,403 29,755 20,152 36,983 38,658 144,167
- --------------------------
* Including dividends and interest where applicable.
(1) Debt obligations consist of our debt, including the gross amount of loans
payable to minority shareholders of Stendal.
AS AT DECEMBER 31, 2001
EXPECTED FUTURE CASH FLOW*
CARRYING FAIR ---------------------------------------------------------------
VALUE VALUE 2002 2003 2004 2005 2006 2007
-------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
Investments(1)........ E 2,424 E 2,424 E 2,424 E -- E -- E -- E -- E --
Cash restricted....... 33,388 33,388 9,570 992 992 992 992 31,757
Notes receivable...... 5,475 5,475 383 5,858 -- -- -- --
Debt obligations(2)... 154,193 154,193 23,084 26,912 17,828 17,148 16,468 91,058
- --------------------------
* Including dividends and interest where applicable.
(1) Investments consist of debt securities.
(2) Debt obligations consist of our debt.
47
FOREIGN CURRENCY EXCHANGE RATE RISK
Our reporting currency is the Euro. However, we hold financial instruments
denominated in U.S. dollars, Swiss francs and, to a lesser extent, in Canadian
dollars, which are sensitive to foreign currency exchange rate fluctuations. A
depreciation of these currencies against the Euro will decrease the fair value
of such financial instrument assets and an appreciation of these currencies
against the Euro will increase the fair value of such financial instrument
liabilities, thereby decreasing our fair value. An appreciation of these
currencies against the Euro will increase the fair value of such financial
instrument assets and a depreciation of these currencies against the Euro will
decrease the fair value of financial instrument liabilities, thereby increasing
our fair value. As a result of the change in our reporting currency from the
U.S. dollar to the Euro, we re-calculated our financial instrument assets and
liabilities that are sensitive to foreign currency exchange rate risk to measure
their risk against the Euro, and cash restricted is no longer sensitive to
foreign currency exchange rate risk. The following tables provide information
about our exposure to foreign currency exchange rate fluctuations for the
carrying amount of financial instruments sensitive to such fluctuations as at
December 31, 2002 and 2001, respectively, and expected cash flows from these
instruments:
AS AT DECEMBER 31, 2002
EXPECTED FUTURE CASH FLOW*
CARRYING FAIR -----------------------------------------------------------------
VALUE VALUE 2003 2004 2005 2006 2007 THEREAFTER
-------- -------- -------- -------- -------- -------- -------- ----------
(IN THOUSANDS)
Investments(1)............... E 5,842 E 5,842 E 305 E -- E -- E -- E -- E5,537
Debt obligations(2).......... 11,686 11,686 3,197 9,355 -- -- -- --
- --------------------------
* Including dividends and interest where applicable.
(1) Investments consist of equity securities, which are denominated primarily in
U.S. dollars, and to a lesser extent, in Canadian dollars.
(2) Debt obligations consist of our debt, denominated in U.S. dollars.
AS AT DECEMBER 31, 2001
EXPECTED FUTURE CASH FLOW*
CARRYING FAIR -----------------------------------------------------------------
VALUE VALUE 2002 2003 2004 2005 2006 THEREAFTER
-------- -------- -------- -------- -------- -------- -------- ----------
(IN THOUSANDS)
Investments(1).............. E13,139 E13,139 E4,546 E -- E -- E -- E -- E8,593
Debt obligations(2)......... 17,545 17,545 4,282 14,706 -- -- -- --
- --------------------------
* Including dividends and interest where applicable.
(1) Investments consist of debt and equity securities. Debt securities are
denominated in U.S. dollars. Equity securities are denominated primarily in
U.S. dollars, and to a lesser extent, in Canadian dollars and Swiss francs.
(2) Debt obligations consist of our debt, denominated in U.S. dollars and Swiss
francs.
EQUITY PRICE RISK
Changes in trading prices of equity securities may affect the fair value of
equity securities or the fair value of other securities convertible into equity
securities. An increase in trading prices will increase the fair value of equity
based financial instrument assets, thereby increasing our fair value. A decrease
in trading prices will decrease the fair value of equity based financial
instrument assets, thereby decreasing our fair value. The following tables
provide information about our exposure to fluctuations in trading
48
prices for the carrying amount of equity based financial instruments sensitive
to such fluctuations as at December 31, 2002 and 2001, respectively, and
expected cash flows from these instruments:
AS AT DECEMBER 31, 2002
EXPECTED FUTURE CASH FLOW*
CARRYING FAIR -----------------------------------------------------------------
VALUE VALUE 2003 2004 2005 2006 2007 THEREAFTER
-------- -------- -------- -------- -------- -------- -------- ----------
(IN THOUSANDS)
Investments(1).................. E5,899 E5,899 E305 E -- E -- E -- E -- E5,594
- --------------------------
* Including dividends where applicable.
(1) Investments consist of equity securities.
AS AT DECEMBER 31, 2001
EXPECTED FUTURE CASH FLOW*
CARRYING FAIR -----------------------------------------------------------------
VALUE VALUE 2002 2003 2004 2005 2006 THEREAFTER
-------- -------- -------- -------- -------- -------- -------- ----------
(IN THOUSANDS)
Investments(1)............... E10,723 E10,723 E2,126 E -- E -- E -- E -- E8,597
- --------------------------
* Including dividends where applicable.
(1) Investments consist of equity securities and debt securities convertible
into equity securities.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and supplementary data required with
respect to this Item 8, and as listed in Item 1415 of this annual report, are
included in this annual report commencing on page 24.59.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
2049
21
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
As a Massachusetts trust, the Company iswe are managed by "trustees", who have comparable
duties and responsibilities as directors of corporations. Trustees are elected
by shareholders at annual meetings for staggered three-year terms. Each issued
and outstanding share of beneficial interest is entitled to one vote at such
meetings. Our trustees and executive officers are as follows:
J.S.H. Lee,LEE, age 39,45, has been a Trusteetrustee since May 1985 and President and
Chief Executive Officer since 1992. Previously, Mr. Lee served with MFC
Bancorp Ltd. (formerly Arbatax International Inc.) as a director from 1986, Chairman from 1987 and President from 1988
to December 1996, respectively.
C.S. Moon,MOON, age 49,56, has been a Trusteetrustee since June 1994. Mr. Moon is an
independent consultant. He was formerly the Executive Director of Shin Ho Group
of Korea, an international paper manufacturer headquartered in Korea.Korea until 1998.
Mr. Moon joined Shin Ho Group in 1990 and previously served in managerial
positions with Moo Kim Paper Manufacturing Co., Ltd. and Sam Yung
Pulp Co., Ltd.
M. Arnulphy,ARNULPHY, age 62,69, has been a Trusteetrustee since June 1995. From 1975 to
present, Mr. Arnulphy has
been the Managing Director of Electro Orient Ltd., a merchandise trading company
located in Hong Kong, since 1998. From 1975 to 1998, Mr. Arnulphy was the
Managing Director of J. Mortenson & Co., Ltd. in Hong Kong. J. Mortenson & Co., Ltd. manufacturesKong, a water treatment
equipment.equipment manufacturing company.
M. Reidel,REIDEL, age 33,39, has been a Trusteetrustee since December 1996, and Secretary and
Chief Financial Officer since November 2002. Mr. Reidel also acted as our
Secretary and Chief Financial Officer from December 1996 to October 1999.
Mr. Reidel was the Chief Financial Officer of Ision Internet AG from
August 1999 to February 2002. Mr. Reidel was a Managing Director of ZPR since NovemberRosenthal
from 1994 to 1999 and the Chairman of the Management Board of DPAG since 1995.Dresden from 1995
to 1998. Previously, he was a member of the Supervisory Board of DPAGDresden from
1992 to 1994, a membervice-president of BVSBundesanstalt fur Vereinigungsbedingte
Sonderaufgaben, the privatization agency of the German government, responsible
for portfolios of service industry and wood and paper industry companies from
1992 to 1994, and an accountant with Arthur Andersen & Co. from 1987 to 1992.
Dr. R. Aurell,J. L. RYU, age 61,43, has been a trustee since May 2002. Mr. Ryu has been the
Managing Director of ZPRCSC Corporation of Korea, a general merchandise trading
company, since 1993. Mr. Ryu previously founded Sam Heung Trading Co. of Korea
in 1988 and subsequently merged it into CSC Corporation in 1993.
W. MCCARTNEY, age 47, has been a trustee since January 2003. Mr. McCartney
has been President and a director of Pemcorp Management Inc., a management
services company, since 1990. Mr. McCartney is a member of the Institute of
Chartered Accountants in Canada.
G. WITTS, age 64, has been a trustee since January 2003. Mr. Witts organized
Sanne Trust Company Limited, a trust company located in the Channel Islands, in
1988 and was managing director from 1988 to 2000, when he retired.
W. RIDDER, age 41, was appointed a managing director of Stendal in
September 2002. Mr. Ridder was the principal assistant to our chief executive
officer from November 1994. From November 19911995 until September 2002.
The terms of Mr. Arnulphy, Mr. McCartney and Mr. Ryu as trustees expire at
the annual meeting of shareholders to 1994, Dr. Aurell servedbe held in 2003. The terms of Mr. Moon and
Mr. Reidel as an independent consultant
advising clients, includingtrustees expire at the Company, onannual meeting of shareholders to be held
in 2004. The terms of Mr. Lee and Mr. Witts as trustees expire at the pulpannual
meeting of shareholders to be held in 2005.
50
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the SECURITIES EXCHANGE ACT OF 1934, as amended, requires
that our officers and paper industry.
Previously, he held managerial positionstrustees and persons who own more than 10% of our shares
file reports of ownership and changes in ownership with North British Newsprint Ltd.,
Jaakko Poyry OY, MoDo-Chemetics AGthe SEC and Stora Forest Industries.furnish us
with copies of all such reports that they file. Based solely upon a review of
the copies of these reports received by us, and upon written representations by
our trustees and officers regarding their compliance with the applicable
reporting requirements under Section 16(a) of the Exchange Act, we believe that
all of our trustees and officers filed all required reports under Section 16(a)
in a timely manner for the year ended December 31, 2002.
ITEM 11. EXECUTIVE COMPENSATION
IncorporatedSUMMARY COMPENSATION TABLE
The following table sets forth information on the annual compensation for
each of the last three years paid to our chief executive officer and those
executive officers that earned in excess of $100,000 during the most recently
completed fiscal year, referred to as the "Named Executive Officers":
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION ------------
--------------------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
SALARY BONUS COMPENSATION OPTIONS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) (#) ($)
- --------------------------- -------- -------- -------- ------------ ------------ ------------
Jimmy S.H. Lee................ 2002 238,504 -- 90,941 -- --
Chief Executive Officer 2001 213,012 309,137 10,679 -- --
2000 220,112 -- -- 1,360,000 --
Maarten Reidel(1)............. 2002 282,699 -- -- -- --
Chief Financial Officer
Wolfram Ridder(2)............. 2002 188,466 -- -- -- --
Managing Director of Stendal
- ------------------------
(1) Mr. Reidel was appointed Chief Financial Officer in November 2002. The
amounts presented for Mr. Reidel have been annualized.
(2) Mr. Ridder was appointed a managing director of Stendal effective
September 2002 for an indefinite term at a salary of E200,000 per annum,
increasing to E240,000 in April 2003, and a bonus of up to 25% of his annual
salary based upon performance targets. The amounts presented for Mr. Ridder
have been annualized.
STOCK OPTIONS
None of our Named Executive Officers were granted options to purchase our
shares during 2002. Pursuant to Mr. Reidel's employment agreement effective
July 1, 2002, in March 2003, we granted Mr. Reidel options to acquire up to
100,000 of our shares under our stock option plan at an exercise price of $6.375
per share, exercisable immediately as to one-third of the options granted and
one-third on each of the first and second anniversaries of the date of grant.
51
The table below provides information regarding the exercise of options
during 2002 by reference from Registrant's definitive proxy statementour Named Executive Officers and information with respect to
be filed within 120 daysunexercised options held by them at December 31, 2002:
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES
SHARES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
ACQUIRED VALUE OPTIONS AT FISCAL IN-THE-MONEY OPTIONS AT
ON EXERCISE REALIZED YEAR-END (#) FISCAL YEAR-END ($)
NAME (#) ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ---- ----------- -------- ------------------------- -------------------------
Jimmy S.H. Lee.................. -- -- 1,685,000/Nil Nil/Nil
Chief Executive Officer
Wolfram Ridder.................. -- -- 60,000/Nil Nil/Nil
Managing Director of Stendal
COMPENSATION OF TRUSTEES
Our non-management trustees receive $20,000 annually for their services and
$500 for each meeting of trustees that they attend. We also reimburse our
trustees and officers for expenses incurred in connection with their duties as
our trustees and officers. Trustees that are not also our officers or employees
and who are in office at the end of Registrant'sa fiscal year may receive options to acquire
up to 6,000 of our shares at an exercise price equal to the closing price of our
shares on the NASDAQ National Market on the last trading day of a fiscal year.
INDEMNITY AGREEMENTS
We have entered into a Trustee's Indemnity Agreement with each of our
trustees. We have agreed under each of these agreements to indemnify each of our
trustees against any and all claims and costs that are or may be brought against
him as a result of his being one of our trustees, officers or employees or that
of a company related to us. However, under the agreements, we are not obligated
to indemnify a trustee against any claims or costs in certain instances,
including if it is determined that the trustee failed to act honestly and in
good faith with a view to our best interests, if the trustee failed to disclose
his interest or conflicts as required under corporate legislation in Washington
or we are not permitted to indemnify the trustee under such legislation, or if
the trustee has violated any insider trading rules under United States federal
and state securities laws.
If there is a change in control (as defined in the agreement) of Mercer
other than a change in control which has been approved by a majority of our
trustees, we are required to seek legal advice as to whether and to what extent
a trustee would be permitted to be indemnified under applicable law. In
addition, the agreements allow us to defend any claim made against a trustee.
EMPLOYMENT AGREEMENTS
Mr. Lee is a party to an amended and restated employment agreement dated
November 20, 2000 with us. The agreement generally provides, subject to certain
termination provisions, for the continued employment of Mr. Lee as president and
chief executive officer for a period of 36 months with automatic one month
renewals, so that the contract at all times has a remaining term of 36 months.
The agreement provides for a base salary of $240,000 (which is paid in a foreign
currency) and other compensation as determined by the board of trustees. The
agreement contains change in control provisions pursuant to which, if a change
in control (as defined in the agreement) occurs, Mr. Lee may only be discharged
for cause. In the event Mr. Lee is terminated without cause or resigns for good
reason (as defined in the agreement) within eighteen months of the change in
control, he shall be entitled to a severance payment of
52
three times his annual salary under the agreement and all unvested rights in any
stock option or other benefit plans shall vest in full. If Mr. Lee is terminated
without cause or resigns for good reason within three years of the change in
control, he shall be entitled to a severance payment of three times the sum of
his then annual salary under the agreement plus the higher of his last annual
bonus and the highest bonus received during the preceding five years. In
addition, all unvested rights in any stock option or other benefit plans will
vest in full. Mr. Lee will also continue to receive equivalent benefits as were
provided at the date of termination for the remaining term of the agreement.
Mr. Lee may terminate his employment with us at any time for good reason (as
described in his employment agreement) within 180 days after the occurrence of
the good reason event.
Mr. Reidel is a party to an employment agreement effective July 1, 2002 with
us. The agreement is for an indefinite term, except that it automatically
terminates at the end of the month in which Mr. Reidel turns 65 years old. Under
the agreement, Mr. Reidel is to act as chief financial officer and is
responsible for, among other things, the strategic development of Mercer. In
consideration for services provided under the agreement, Mr. Reidel is entitled
to an annual gross salary of E300,000 and options to acquire up to a maximum of
100,000 of our shares, and is entitled to participate in our bonus program. The
agreement may be terminated by either party upon three months' prior written
notice, except that no notice period is required where such termination is for
cause.
INCENTIVE BONUS PLAN
We have adopted an employee incentive bonus plan which provides for the
award of interests in an incentive bonus pool established under the plan to our
trustees, officers and employees. The purpose of the plan is to attract and
retain the services of qualified people and to provide additional incentive to
them by granting them the opportunity to participate in our profits. Under the
plan, up to 5% of our Net Income (as defined in the plan) for each fiscal year
is set aside as a bonus pool. Units in the bonus pool may be granted by our
board of trustees at its discretion to eligible persons during a fiscal year.
The amount payable to a person from the bonus pool equals the percentage of the
total number of units granted during the fiscal year which are held by the
person at the end of the fiscal year.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
C.S. Moon and Michel Arnulphy served as members of the compensation
committee of our board of trustees during the year ended December 31, 2002.
Neither Mr. Moon nor Mr. Arnulphy was one of our officers or employees during
the year ended December 31, 2002, or has formerly been one of our officers.
53
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
IncorporatedThe following table sets forth information regarding the beneficial
ownership of our shares as of March 21, 2003 by reference from Registrant's definitive proxy statementeach shareholder who is known by
us to own more than five percent of our outstanding shares. The following is
based solely on statements made in filings with the SEC or other information we
believe to be filed within 120 daysreliable.
NUMBER OF PERCENTAGE OF
NAME AND ADDRESS OF OWNER SHARES OWNED OUTSTANDING SHARES
- ------------------------- ------------ ------------------
Greenlight Capital, L.L.C................................... 2,517,500 14.9%
420 Lexington Ave.
Suite 875
New York, NY 10170
Cramer Rosenthal McGlynn.................................... 1,729,700 10.3%
707 Westchester Avenue
White Plains, NY 10604
Merrill Lynch & Co., Inc.................................... 1,596,700 9.5%
4 World Financial Center
New York, NY 10080
FMR Corp.(1)................................................ 1,564,400 9.3%
82 Devonshire Street
Boston, MA 02109
- ------------------------
(1) Filed jointly with Edward C. Johnson III and Abigail P. Johnson.
The following table sets forth information regarding ownership of our shares
as of March 28, 2003 by each of our trustees and all of our trustees and
executive officers as a group. Unless otherwise indicated, each trustee has sole
voting and disposition power with respect to the endshares set forth opposite
his name.
NUMBER OF PERCENTAGE OF
NAME OF OWNER SHARES OWNED OUTSTANDING SHARES
- ------------- ------------ ------------------
Jimmy S.H. Lee(1)........................................... 1,619,800 8.8%
C.S. Moon(2)................................................ 29,000 *
Michel Arnulphy(2).......................................... 23,000 *
Maarten Reidel(3)........................................... 153,333 *
Jong L. Ryu................................................. -- --
William McCartney........................................... -- --
Graeme Witts................................................ -- --
Wolfram Ridder(2)........................................... 60,000 *
Trustees and Officers as a Group (7 persons)(4)............. 1,885,133 10.1%
- ------------------------
* Less than 1%.
(1) Includes presently exercisable stock options to acquire up to 1,585,000
shares.
(2) Represents presently exercisable stock options.
(3) Includes presently exercisable stock options to acquire up to
33,333 shares.
(4) Includes presently exercisable stock options to acquire up to 1,730,333
shares.
54
The following table sets forth information as at December 31, 2002 regarding
our stock option plan under which options to acquire an aggregate of Registrant's fiscal year.3,600,000
of our shares may be granted to our officers and employees, and to our trustees
who are not our officers or employees up to a maximum of 130,000 shares:
NUMBER OF SHARES TO BE WEIGHTED-AVERAGE NUMBER OF SHARES
ISSUED UPON EXERCISE OF EXERCISE PRICE OF AVAILABLE FOR FUTURE
OUTSTANDING OPTIONS OUTSTANDING OPTIONS ISSUANCE UNDER PLAN
----------------------- ------------------- --------------------
Stock Option Plan..................... 2,118,000 $7.28 158,000
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference from Registrant's definitive proxy statementNot applicable.
ITEM 14. 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 filed within 120 daysincluded in our periodic
reports on file with the SEC. It should be noted that the design of any system
of controls is based in part upon certain assumptions about the endlikelihood of
Registrant's fiscal year.
21certain 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.
55
22
PART IV
ITEM 14.15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
INDEX
(a) (1) FINANCIAL STATEMENTS
Independent Auditors' Report
PAGE
--------
(a)(1) FINANCIAL STATEMENTS
Independent Auditors' Report................................ 59
Consolidated Balance Sheets................................. 60
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Changes in Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to the Consolidated Financial Statements of Operations....................... 61
Consolidated Statements of Comprehensive Income............. 62
Consolidated Statements of Changes in Shareholders'
Equity.................................................... 63
Consolidated Statements of Cash Flows....................... 64
Notes to the Consolidated Financial Statements.............. 65
56
(2) FINANCIAL STATEMENT SCHEDULES
Independent Auditors' Report
SCHEDULE I - Condensed Financial Information of Registrant
All other schedules have been omitted because they are not applicable
or the required information is shown in the financial statements or
notes thereto.
(3) LIST OF EXHIBITS
3.1(a)3.1 (a) * Restated Declaration of Trust of the Company as filed with
the Secretary of State of Washington on June 11, 1990
together with an Amendment to Declaration of Trust dated
December 12, 1991.
(b)* Amendments to Declaration of Trust dated July 8, 1993;
August 17, 1993; and September 9, 1993.
3.2* Trustees' Regulations dated September 24, 1973.
4.1 Shareholder Rights Plan. Incorporated by reference from
Form 8-A dated August 17, 1993.
4.2 Trust Indenture for Convertible Subordinated Debentures between Mercer
International Inc. and Montreal Trust Company of Canada dated as of September
10, 1992. Incorporated by reference from Form 8-K of Mercer International Inc.
dated October 31, 1992.
4.3* Trust Indenture for Subordinated Debentures between Mercer International Inc.
and Montreal Trust Company of Canada as Trustee dated as of December 22, 1992.
10.1 Acquisition Agreement among Treuhandanstalt, Dresden Papier
AG, Dresden Papier Holding GmbH, Mercer
International Inc., and Shin Ho Paper Mfg. Co., Ltd.
Incorporated by reference from Form 8-K dated
September 20, 1993.
10.2 Acquisition Agreement among Treuhandanstalt, Zellstoff- undZellstoff-und
Papierfabrik Rosenthal GmbH, Raboisen
Einhundertsechsundfunfzigste VermogensverwaltungsgesellschaftVermogensverwaltungs-
gesellschaft GmbH, to be renamed ZPR Zellstoff- undZellstoff-und
Papierfabrik Rosenthal Holding GmbH, Mercer
International Inc. and 448380 B.C. Ltd. dated July 3,
1994. Incorporated by reference from Form 8-K dated
July 3, 1994.
10.3* Assignment Agreement between Nalcap Holdings Inc. and CanCapital Corporation
dated as of January 1, 1992.
10.4*10.3 Amended and Restated 1992 Stock Option Plan. 10.5* 1994 Employee Incentive Bonus Plan.
10.6 Stock Purchase Agreement between CVD Financial Corporation and Mercer
International Inc. dated March 22, 1995. Incorporated by reference from Item 7,
Amendment No. 5 to Schedule 13D filed by Mercer International Inc. with respect
to the common shares of CVD Financial Corporation.
10.7 Acquisition Agreement between Mercer International Inc. and Five Continents
International dated for reference March 31, 1995. Incorporated by
reference from Form 8-KS-8 dated August 12, 1995.
22
23
10.8*March 2, 2000.
10.4 2002 Employee Incentive Bonus Plan.
10.5* Form of Separation Agreement between Mercer
International Inc. and Arbatax International Inc.
21.10.6 English Translation of a Loan Agreement in the amount of
DM508,000,000 between Zellstoff-und Papierfabrik
Rosenthal GmbH & Co. KG, Blankenstein on the one hand and
Bayerische Hypotheken-und Wechsel-Bank Aktiengesellschaft,
Munich and Bayerische Vereinsbank Aktiengesellschaft,
Munich on the other hand dated July 6, 1998. Incorporated
by reference from Form 8-K dated July 16, 1998.
10.7 English Translation of Agreement on the obligations of the
shareholders between Mercer International Inc.,
Spezialpapierfabrik Blankenstein GmbH and Zellstoff-und
Papierfabrik Rosenthal Verwaltungs GmbH and Bayerische
Hypo-und Vereinsbank Aktiengesellschaft dated
February 11, 1999.
10.8* Amended and Restated Employment Agreement between Mercer
International Inc. and Jimmy S.H. Lee dated
November 20, 2000.
10.9 English Translation of Amendment Agreement No. 4 dated
December 13, 2000 between Zellstoff-und Papierfabrik
Rosenthal GmbH & Co. KG and Bayerische Hypo-und
Vereinsbank Aktiengesellschaft to the Loan Agreement dated
July 6, 1998. Incorporated by reference from Form 8-K
dated January 23, 2001.
10.10* Purchase Agreement between Sihl and Mercer
International Inc. dated December 14, 2001 relating to
the acquisition of Landqart AG.
10.11 Project Financing Facility Agreement dated August 26, 2002
between Zellstoff Stendal GmbH and Bayerische Hypo-und
Vereinsbank AG. Incorporated by reference from Form 8-K
dated September 10, 2002.
10.12 Shareholders' Undertaking Agreement dated August 26, 2002
among Mercer International Inc., Stendal Pulp
Holdings GmbH, RWE Industrie-Losungen GmbH, AIG Altmark
Industrie AG and FAHR Beteiligungen AG and Zellstoff
Stendal GmbH and Bayerische Hypo-und Vereinsbank AG.
Incorporated by reference from Form 8-K dated
September 10, 2002.
10.13 Shareholders' Agreement dated August 26, 2002 among
Zellstoff Stendal GmbH, Stendal Pulp Holdings GmbH, RWE
Industrie- Losungen GmbH and FAHR Beteiligungen AG.
57
10.14 Loan Agreement dated August 26, 2002 among Babcock & Brown
Investment Management Partners LP, Babcock & Brown
Investment Management Partners LP et. al. and Mercer
International Inc. Incorporated by reference from
Form 8-K dated September 10, 2002.
10.15 Loan Agreement dated August 26, 2002 among MFC Merchant
Bank S.A., MFC Merchant Bank S.A. et. al. and Mercer
International Inc. Incorporated by reference from
Form 8-K dated September 10, 2002.
10.16 Contract for the Engineering, Design, Procurement,
Construction, Erection and Start-Up of a Kraft Pulp Mill
between Zellstoff Stendal GmbH and RWE Industrie-
Losungen GmbH dated August 26, 2002.
10.17 Purchase and Sale Agreement dated December 30, 2002 between
Equitable Industries Limited Partnership and Mercer
International Inc. relating to the sale of Landqart AG.
10.18 Employment Agreement effective July 1, 2002 between ZPR
Zellstoff-und Papierfabrik Rosenthal Holding GmbH and
Maarten Reidel.
10.19 Form of Trustee's Indemnity Agreement between Mercer
International Inc. and its Trustees.
10.20 English Translation of Agreement between Zellstoff-und
Papierfabrik Rosenthal GmbH & Co. KG, Blankenstein a.d.
Saale and Bayerische Hypo-und Vereinsbank AG dated
May 27, 2002.
21 List of Subsidiaries of Registrant.
23. Consent23 Independent Auditors Consent.
99.1 Certification of Independent Auditors.
27. Article 5 - Financial Data Schedule for the Year Ended
December 31, 1996.
---------------Periodic Report.
99.2 Certification of Periodic Report.
-----------------------------
* Filed in Form 10-K for prior years.
(b) REPORTS ON FORM 8-K
The Registrant filed the following reports on Form 8-K with
respect to the indicated items during the fourth quarter of
the fiscal year:
Form 8-K/A dated October 4, 2002:
Item 7. Exhibits
(b) Registrant filed no reports on Form 8-K during the fourth quarter of the
fiscal year.
2358
24
LETTERHEAD
INDEPENDENT AUDITORS' REPORT
To the Shareholders
MERCER INTERNATIONAL INC.Mercer International Inc.
We have audited the accompanying consolidated balance sheets of Mercer
International Inc. and Subsidiaries as of December 31, 19962002 and 1995,2001, and the
related consolidated statements of operations, comprehensive income, changes in
shareholders' equity, and cash flows for the years ended December 31, 1996, 19952002, 2001
and 1994.2000. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted auditing
standards.in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Mercer
International Inc. and Subsidiaries as of December 31, 19962002 and 1995,2001, and the
consolidated results of their operations and their cash flows for the years
ended December 31, 1996, 19952002, 2001 and 19942000, in conformity with accounting principles
generally accepted accounting
principles.in the United States.
/s/ PETERSON SULLIVAN P.L.L.C.
March 12, 1997
Seattle, Washington
24January 31, 2003
59
25
MERCER INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 19962002 AND 1995
(In Thousands of Dollars)2001
(IN THOUSANDS OF EUROS)
1996 19952002 2001
-------- --------
ASSETS
Current Assets
Cash and cash equivalents.......................................... $ 9,967 $ 29,230
Investments........................................................ 83,359 65,311
Receivables........................................................ 18,366 17,711
Inventories........................................................ 20,668 27,723
Other.............................................................. 291 643equivalents................................. E 30,261 E 11,741
Cash restricted........................................... 9,459 --
Investments............................................... 307 4,549
Receivables............................................... 31,924 47,892
Inventories............................................... 16,375 25,062
Prepaid expenses.......................................... 7,891 3,968
-------- --------
132,651.. 140,618Total current assets.................................. 96,217 93,212
Long-Term Assets
Net assets of spun-off operation...................................Cash restricted........................................... 38,795 33,388
Properties................................................ 441,990 278,617
Investments............................................... 5,592 8,598
Equity method investment.................................. 7,019 --
55,366
Investments........................................................ 3,759 5,653
Government receivable..............................................Note receivable........................................... -- 12,450
Properties......................................................... 125,116 104,0385,475
Deferred income tax assets......................................... 18,313 10,625tax....................................... 10,137 10,303
-------- --------
147,188.. 188,132503,533 336,381
-------- --------
$279,839 $328,750E599,750 E429,593
======== ========
LIABILITIES
Current Liabilities
Accounts payable and accrued expenses.............................. $ 45,324 $ 47,455
Notes payable...................................................... 6,017 2,460
Current portion of long-term debt.................................. 2,647expenses..................... E 32,866 E 51,916
Construction in progress costs payable.................... 24,885 --
-------- --------
53,988 49,915
Long-Term Liabilities
Debt............................................................... 28,610 22,760
Due to spun-off operation.......................................... 368 21,778
Other.............................................................. 2,334 7,282
-------- --------
31,312 51,820Note payable.............................................. 832 7,392
Note payable, construction in progress.................... 15,000 --
Debt, current portion..................................... 16,306 18,360
-------- --------
Total liabilities............................................... 85,300 101,735current liabilities............................. 89,889 77,668
Long-Term Liabilities
Debt, construction in progress, less current portion...... 146,485 --
Debt, less current portion................................ 205,393 216,871
Derivative financial instruments, construction in
progress................................................ 30,108 --
Other..................................................... 2,906 3,441
-------- --------
384,892 220,312
-------- --------
Total liabilities..................................... 474,781 297,980
Minority Interest........................................... -- --
SHAREHOLDERS' EQUITY
Shareholders' Equity
Preferred shares, no par value:value; 50,000,000 authorized and
issuable in series
Series A, 500,000 authorized, none issued and
outstanding.......outstanding............................................. -- --
Series B, 3,500,000 authorized, none issued and
outstanding.....outstanding............................................. -- --
Shares of beneficial interest, U.S. $1 par value:value; unlimited
authorized, 14,750,638 and 13,326,023authorized; 16,874,899 issued and outstanding at
December 31, 19962002 and 1995............ 85,965 70,765
Cumulative translation adjustment.................................. (12,014) (1,732)
Net unrealized loss on investments valuation....................... (2,250) (2,974)16,794,899 at December 31, 2001..... 76,995 76,722
Retained earnings.................................................. 122,838 160,956earnings........................................... 52,789 59,111
Accumulated other comprehensive loss........................ (4,815) (4,220)
-------- --------
194,539 227,015124,969 131,613
-------- --------
$279,839 $328,750E599,750 E429,593
======== ========
The accompanying notes are an integral part of these financial statements.
2560
26
MERCER INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 19952002, 2001 AND 1994
(In Thousands of Dollars, Except Earnings Per Share)2000
(IN THOUSANDS OF EUROS, EXCEPT PER SHARE DATA)
1996 1995 19942002 2001 2000
-------- -------- --------
Revenues
Sales.................................................... $174,097 $275,332 $147,771
Supplements.............................................. -- -- 44,356
Investments.............................................. 11,060 10,359 2,202
Other.................................................... 1,572 15,046 3,030Sales of pulp and paper................................... E227,883 E205,001 E245,059
Transportation............................................ 4,953 5,491 4,189
Other..................................................... 6,296 5,955 9,635
-------- -------- --------
186,729 300,737 197,359
Expenses239,132 216,447 258,883
Cost of sales............................................ 145,432 191,726 116,681
Generalsales
Pulp and administrative............................... 24,863 35,217 19,637
Litigation settlement.................................... -- 7,000 --
Interest expense......................................... 3,978 4,543 3,522paper............................................ 208,454 180,603 190,529
Transportation............................................ 5,009 4,076 3,175
-------- -------- --------
174,273 238,486 139,840Gross profit.......................................... 25,669 31,768 65,179
General, administrative and other........................... 24,979 18,436 15,514
-------- -------- --------
Income from continuing operationsoperations................................ 690 13,332 49,665
Other income (expense)
Interest expense.......................................... (13,753) (16,170) (15,198)
Investment income (loss).................................. 436 2,872 (2,337)
Derivative financial instruments
Unrealized loss, construction in progress financing..... (30,108) -- --
Realized gains (losses), other.......................... 23,429 (2,504) --
Other..................................................... 1,755 (270) --
-------- -------- --------
Total other (expense)................................. (18,241) (16,072) (17,535)
-------- -------- --------
Income (loss) before income taxes and minority
interest........................................ 12,456 62,251 57,519interest............................................ (17,551) (2,740) 32,130
Income tax benefit......................................... 3,101 9,132 581benefit (provision).............................. 264 (83) (117)
-------- -------- --------
Income from continuing operations(loss) before minority interest................................................. 15,557 71,383 58,100interest................ (17,287) (2,823) 32,013
Minority interest..........................................interest........................................... 10,965 -- (5,746) (16,601)
-------- -------- --------
Income from continuing operations.......................... 15,557 65,637 41,499
Income (loss) of spun-off operation, net of applicable
income tax recovery (provision for) income tax of $(219)
in 1996, $(463) in 1995 and $1,784 in 1994............... 466 (1,454) 4,597--
-------- -------- --------
Net income............................................... $ 16,023 $ 64,183 $ 46,096income (loss)..................................... E (6,322) E (2,823) E 32,013
======== ======== ========
Earnings (loss) per share
Income from continuing operations........................ $ 1.12 $ 5.14 $ 3.69
Income (loss) of spun-off operation...................... 0.03 (0.11) 0.41
-------- -------- --------
Net income................................................. $ 1.15 $ 5.03 $ 4.10Basic..................................................... E (0.38) E (0.17) E 1.91
======== ======== ========
Diluted................................................... E (0.38) E (0.17) E 1.87
======== ======== ========
The accompanying notes are an integral part of these financial statements.
2661
27MERCER INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(IN THOUSANDS OF EUROS)
2002 2001 2000
-------- -------- --------
Net income (loss)........................................... E(6,322) E(2,823) E32,013
Other comprehensive income (loss)
Foreign currency translation adjustment................... 2,186 (942) 187
Unrealized gains (losses) on securities
Unrealized holding gains (losses) arising during the
period................................................ (3,615) 1,881 (2,219)
Reclassification adjustment for losses included in net
income (loss)......................................... 834 -- 92
------- ------- -------
(2,781) 1,881 (2,127)
------- ------- -------
Other comprehensive income (loss)........................... (595) 939 (1,940)
------- ------- -------
Comprehensive income (loss)................................. E(6,917) E(1,884) E30,073
======= ======= =======
The accompanying notes are an integral part of these financial statements.
62
MERCER INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 19952002, 2001 AND 1994
(In Thousands of Dollars)2000
(IN THOUSANDS OF EUROS)
ACCUMULATED OTHER COMPREHENSIVE
SHARES OF BENEFICIAL INTEREST NET
--------------------------------- UNREALIZED
PREFERRED SHARESINCOME (LOSS)
---------------------------------- --------------------------------------
AMOUNT LOSS ON
-------------------FOREIGN
PAID IN CUMULATIVE INVESTMENT
NUMBER OF AMOUNTCURRENCY UNREALIZED
NUMBER OF EXCESS OF RETAINED TRANSLATION VALUATION
SHARES PAIDGAINS (LOSSES)
SHARES PAR VALUE PAR VALUE EARNINGS ADJUSTMENT AMOUNTADJUSTMENTS ON SECURITIES TOTAL
--------- ------- ------------------- --------- --------- -------- ---------- ---------- ------------------- -------------- -------
Balance at December 31, 1993.................. 63,517 $1,227 11,758,089 $11,758 $ 21,908 $50,677 $ (6,793) $ (1,657) $ 77,120
Repurchase of shares.... (71,517) (1,072) (1,778,314) (1,778) (17,824) -- -- -- (20,674)1999.......... 16,635,399 E12,603 E63,060 E29,921 E2,060 E(5,279) E(3,219)
Shares issued for conversion of
debentures and
preferred shares and
exercise of
warrants.............. 8,000 (155) 870,536 870 5,990 -- -- -- 6,705
Translation
adjustments...........options............................. 159,500 178 881 -- -- -- --
Net income............................ -- -- 2,043 -- 2,043
Reduction of investment
valuation account.....32,013 -- -- --
Other comprehensive income (loss)..... -- -- -- -- 187 (2,127) (1,940)
---------- ------- ------- ------- ------ ------- -------
Balance at December 31, 2000.......... 16,794,899 12,781 63,941 61,934 2,247 (7,406) (5,159)
Net loss.............................. -- -- -- 250 250
Net income..............(2,823) -- -- --
Other comprehensive income (loss)..... -- -- -- -- -- 46,096(942) 1,881 939
---------- ------- ------- ------- ------ ------- -------
Balance at December 31, 2001.......... 16,794,899 12,781 63,941 59,111 1,305 (5,525) (4,220)
Shares issued for cash................ 200,000 191 695 -- -- 46,096
----------- --
Repurchase of shares.................. (120,000) (121) (492) -- -- -- --
Net loss.............................. -- -- -- (6,322) -- -- --
Other comprehensive income (loss)..... -- -- -- -- 2,186 (2,781) (595)
---------- ------- --------- --------- --------- -------- ---------- ----------------- ------- ------ ------- -------
Balance at December 31, 2002.......... 16,874,899 E12,851 E64,144 E52,789 E3,491 E(8,306) E(4,815)
========== ======= ======= ======= ====== ======= =======
SHAREHOLDERS'
EQUITY
-------------
Balance at December 31, 1999.......... E102,365
Shares issued for exercise of
options............................. 1,059
Net income............................ 32,013
Other comprehensive income (loss)..... (1,940)
--------
Balance at December 31, 1994.................. -- -- 10,850,311 10,850 10,074 96,773 (4,750) (1,407) 111,540
Repurchase of shares.... -- -- (28,000) (28) (638) -- -- -- (666)
Shares issued for
acquisition of
minority interest in
subsidiaries.......... -- -- 2,000,000 2,000 40,000 -- (4,872) -- 37,128
Shares issued for
conversion of
debentures and
exercise of
warrants.............. -- -- 26,212 26 276 -- -- -- 302
Shares issued on
exercise of options... -- -- 477,500 478 7,727 -- -- -- 8,205
Translation
adjustments........... -- -- -- -- -- -- 7,890 -- 7,890
Increase of investment
valuation account..... -- -- -- -- -- -- -- (1,567) (1,567)2000.......... 133,497
Net income.............. -- -- -- -- -- 64,183 -- -- 64,183
--------- ------- --------- --------- --------- -------- ---------- ----------loss.............................. (2,823)
Other comprehensive income (loss)..... 939
--------
Balance at December 31, 1995.................. -- -- 13,326,023 13,326 57,439 160,956 (1,732) (2,974) 227,015
Dividend of shares
pursuant to spin-off
transaction........... -- -- -- -- -- (54,141) 3,406 -- (50,735)2001.......... 131,613
Shares issued for conversion
debentures............ -- -- 81,515 82 726 -- -- -- 808
Shares issued for
exercise of options... -- -- 152,500 152 1,478 -- -- -- 1,630
Shares issued for the
settlement of debt.... -- -- 1,350,000 1,350 13,831 -- -- -- 15,181cash................ 886
Repurchase of shares.... -- -- (159,400) (159) (2,260) -- -- -- (2,419)
Translation
adjustments........... -- -- -- -- -- -- (13,688) -- (13,688)
Decrease in investment
valuation account..... -- -- -- -- -- -- -- 724 724shares.................. (613)
Net income.............. -- -- -- -- -- 16,023 -- -- 16,023
--------- ------- --------- --------- --------- -------- ---------- ----------loss.............................. (6,322)
Other comprehensive income (loss)..... (595)
--------
Balance at December 31, 1996.................. -- -- 14,750,638 $14,751 $ 71,214 $122,838 $(12,014) $ (2,250) $194,539
========== ======= ========= ========= ========= ======== ========== =========2002.......... E124,969
========
The accompanying notes are an integral part of these financial statements.
2763
28
MERCER INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 19952002, 2001 AND 1994
(In Thousands of Dollars)2000
(IN THOUSANDS OF EUROS)
1996 1995 1994
--------2002 2001 2000
--------- -------- --------
Cash Flows from Continuing Operating Activities
Income from continuing operations........................ $ 15,557 $ 65,637 $ 41,499Net income (loss)......................................... E (6,322) E (2,823) E 32,013
Adjustments to reconcile net income from continuing
operations(loss) to cash flows
from continuing operating activities
Depreciation and amortization, net.................... (10,960) (13,883) (10,263)
GainUnrealized loss on sale of property.............................. (1,572)derivative financial instruments..... 30,108 -- --
Losses on facilities to be sold.......................Depreciation............................................ 25,614 22,966 24,046
Minority interest....................................... (10,965) -- -- 1,899
Recognition of preacquisition contingency............. -- (14,779) --
Gains in trading securities........................... (5,934) (3,736) --
Deferred income taxes................................. (3,101) (9,132) (581)
Minority interest..................................... -- 5,746 16,601
Other................................................. (55) (400) 40
Changes in current assets and liabilities
net of effects
of companies acquired
Investment in trading securities...................... (15,071) (61,948) 1,0684,356 514 (875)
Inventories........................................... 5,271 (7,291) (7,506)1,717 2,611 (3,683)
Receivables........................................... 9,442 33,153 (13,196)14,909 7,770 (7,849)
Accounts payable and accrued expenses................. 287 (9,826) (9,049)
Other................................................. (247) (9) 1,799
--------(13,373) (873) 290
Prepaid expenses and other............................ (6,310) (382) (547)
--------- -------- --------
Net cash provided by (used in) continuingfrom operating activities.......................................... (6,383) (16,468) 22,311activities.................. 39,734 29,783 43,395
Cash Flows from Investing Activities
Acquisition of Continuing
Operations
Proceeds from the sales of available-for-sale
securities............................................ 1,946 2,364 517
Purchase of available-for-sale securities................ -- (6,268) (203)
Purchase of fixed assets,properties, net of investment grants....... (18,200) (8,419) (9,829)
Decrease in notes receivable.............................(199,556) (7,647) 28,319
Sale of properties........................................ 4,394 -- 1,219 21914,495
Purchase of subsidiaries,subsidiary, net of cash acquired...........acquired.............. -- (2,055) --
Purchases of available-for-sale securities................ (612) (636) (2,083)
Disposal of subsidiary.................................... (1,156) -- --
(1,278)
Other.................................................... (81) 90Other..................................................... 892 -- --------840
--------- -------- --------
Net cash used infrom investing activities of continuing
operations.......................................... (16,335) (11,014) (10,574)activities.................. (196,038) (10,338) 41,571
Cash Flows from Financing Activities
of Continuing
OperationsCash restricted........................................... (14,866) (6,615) (13,343)
Increase in bank debts................................... 7,504 47,048 34,750construction in progress costs payable........ 24,885 -- --
Decrease in bank debts................................... (959) (47,730) (27,813)
Net proceeds on the issuance of (cost to repurchase)
sharesoperating pulp mill renovation costs
payable................................................. -- (1,008) (54,617)
Increase in notes payable and debt........................ 183,017 6,503 6,136
Decrease in notes payable and debt........................ (23,725) (28,962) (6,063)
Shares of beneficial interest......................... (789) 7,117 (19,602)
Redemptioninterest issued for cash, net of
preferred shares...........................repurchases............................................. 273 -- 1,059
Equity from minority shareholders......................... 6,259 -- --
(1,072)
Contribution from minority shareholders.................. -- -- 7,978
Debenture redemption..................................... -- -- (931)
Other.................................................... -- (634) 518
----------------- -------- --------
Net cash provided by (used in)from financing activities of
continuing operations............................... 5,756 5,801 (6,172)activities.................. 175,843 (30,082) (66,828)
Effect of exchange rate changes on cash and cash
equivalents.............................................. (1,028) 4,062 112
-------- -------- --------
Net cash provided by (used in) continuing operations....... (17,990) (17,619) 5,677
Net cash provided by (used in) spun-off operation.......... (1,273) 4,337 12,619
--------equivalents............................................... (1,019) 2,689 (160)
--------- -------- --------
Net increase (decrease) in cash and cash equivalents....... (19,263) (13,282) 18,296equivalents........ 18,520 (7,948) 17,978
Cash and Cash Equivalents, beginning of year............... 29,230 42,512 24,216
--------year................ 11,741 19,689 1,711
--------- -------- --------
Cash and Cash Equivalents, end of year..................... $ 9,967 $ 29,230 $ 42,512
========year...................... E 30,261 E 11,741 E 19,689
========= ======== ========
The accompanying notes are an integral part of these financial statements.
2864
29
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The CompanyMercer International Inc. ("the Company") is a business trust organized
under the laws of the State of Washington, USA.U.S. Under Washington law,
shareholders of a business trust have the same limited liability as shareholders
of a corporation. The consolidated
financial statements have been prepared in conformity with generally accepted
accounting principles applicableCompany produces and markets pulp and paper products. The
amounts in the United States of America andnotes are stated
in United States dollars, as rounded to the nearest thousand.
The Company presently operates in the pulp and paper industry in Europe.
The industry is cyclical in nature and the marketsthousand except for the Company's products
are affected by fluctuations in supply and demand in each cycle which has an
affect on prices.
Basis of Presentation
Effective June 3, 1996, the Company completed the spin-off of approximately
83% of the outstanding shares of common stock of Arbatax International Inc.
("Arbatax") as a dividend to the Company's shareholders. Subsequent to the
spin-off, Arbatax changed its name to MFC Bancorp Ltd. The operating results of
Arbatax are included in these consolidated statements of operations and cash
flows for the period of January 1, 1996 through June 2, 1996 and the years ended
December 31, 1995 and 1994. The December 31, 1996 consolidated balance sheet
reflects the reductions related to the spin-off and at December 31, 1995 the net
assets of Arbatax of $55,366 have been reported separately.
Principles of Consolidationper
share amounts.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company's
subsidiaries, Dresden Papier GmbH, Papierfabrik Fahrbrucke GmbH, Spezial
Papierfabrik Blankenstein GmbH, Zellstoff-und Papierfabrik
Rosenthal GmbH & Co., KG and Zellstoff Stendal GmbH. Investments in entities
where the Company and its subsidiaries.owns at least a 20% voting interest, but does not have
control, are accounted for under the equity method. The amount of earnings from
equity investees was not material. Significant intercompany accounts and
transactions of
continuing operations have been eliminated.
Unless otherwise stated, all notes
relate to continuing operations.
Cash and Cash EquivalentsCASH AND CASH EQUIVALENTS
Cash and cash equivalents include highly liquid investments with original
maturities of three months or less. These are recorded at cost which
approximates market. The Company maintains cash balances in
foreign financial institutions in excess of insured limits.
InvestmentsAt December 31, 2002, E9,459 in cash was restricted by a lender to pay
construction in progress costs payable. In addition, the Company had E38,795 of
long-term restricted cash representing debt service reserve accounts required by
long-term debt agreements.
INVESTMENTS
The Company's available-for-sale and trading securities are stated at their
fair values. Realized gains or losses of investments are included in the results
of operations. Any unrealized holding gains or losses for trading securities are
included in the results of operations. Any unrealized gains or losses for
available-for-sale securities are reported as a separate component of
shareholders' equitycomprehensive income until realized and included in earnings for trading securities.realized. If a loss in value in available-for-sale
securities is considered to be other than temporary, it is recognized in the
determination of net income. Cost is based on the specific identification method
to determine realized gains or losses.
InventoriesThe Company uses the equity method to account for an investment when it has
the ability to significantly influence the investee's operating and financial
policies. Under the equity method, the investment is initially recorded at cost,
then reduced by dividends and increased or decreased by the Company's
proportionate share of the investee's net earnings or loss.
INVENTORIES
Inventories of pulp are stated at the lower of cost (average cost(average-cost method) or
market. Paper products are stated at the lower of cost (first-in, first-out
method) or market.
Depreciation
Depreciable assetsPROPERTIES
Properties are stated at cost.cost less accumulated depreciation, unless the
estimated future undiscounted cash flows expected to result from either the use
of an asset or its eventual disposition is less than its
65
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
carrying amount in which case an impairment loss is recognized based on the fair
value of the asset. Grants received from a government reduce cost of property
improvements.
Depreciation of buildings and production equipment is based on the estimated
useful lives of the assets and is computed using the straight-line method.
Buildings are depreciated over a 10 to 50 year lifeyears and production equipment over 8 to
20 years. 29
30
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Foreign Currency TranslationRepairs and maintenance are charged to expense as incurred.
Expenditures for new facilities and those expenditures that substantially
increase the useful lives of existing properties are capitalized, as well as
interest costs associated with major capital projects until ready for their
intended use.
FOREIGN OPERATIONS AND CURRENCY TRANSLATION
The Company translates foreign assets and liabilities of its subsidiaries,
other than those not denominated in Euros, at the rate of exchange at the
balance sheet date. Revenues and expenses are translated at the average rate of
exchange throughout the year. Unrealized gainsGains or losses from these translations are
includedreported as a separate component of other comprehensive income (loss), until all
or a part of the investment in the equity section of the
balance sheet. Realized gainssubsidiaries is sold or losses are included in general and
administrative expenses in the income statement.liquidated. The
translation adjustments do not recognize the effect of income tax because the
Company expects to reinvest the amounts indefinitely in operations.
Environmental ConservationTransaction gains and losses that arise from exchange rate fluctuations on
transactions denominated in a currency other than the local functional currency
are included in "General, administrative and other" in the statement of
operations, which amounted to E(3,026), E3,361 and E(355) for the years ended
December 31, 2002, 2001 and 2000, respectively.
Effective January 1, 2002, the Company changed its reporting currency from
the U.S. dollar to the Euro (except for currency amounts as contractually
required). The reason for this change was because a significant majority of the
Company's assets and operations are located in Germany where the currency is the
Euro. 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." Therefore, the financial
statements for prior years depict the same trends as the previous financial
statements presented in U.S. dollars.
The Euro was initially implemented by the European Union 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 years ended December 31, 2001 and 2000, there
were foreign currency translation losses of $7,687 and $6,400 (in thousands of
U.S. dollars), respectively, included as part of other comprehensive income
(loss). In conjunction with the restatement, the majority of these amounts were
eliminated.
REVENUE AND RELATED COST RECOGNITION
The Company recognized revenue from product sales when the sales price is
fixed or determinable, title of ownership and risk of loss have passed to the
customer and collectibility is reasonably assured. Sales
66
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
are reported net of discounts and allowances. Amounts charged to customers for
shipping and handling are recognized as revenue. Shipping and handling costs
incurred by the Company are included in cost of sales.
ENVIRONMENTAL CONSERVATION
Liabilities for environmental conservation are recorded when it is probable
that obligations have been incurred and the amounts can be reasonably estimated.
Any potential recoveries of such liabilities are recorded when there is an
agreement with the reimbursing entity.
Stock-Based CompensationSTOCK-BASED COMPENSATION
The Company has a stock-based employee compensation plan, which is described
more fully in Note 11. 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 stock on the date of grant. The following table illustrates the effect on
net income and earnings 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," encourages, but does not require, companies to record
compensation cost for stock-based employee compensation plans at fair value. The
Company has chosen to account for stock-based compensation using Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees."
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the quoted market price of the Company's stock at the date of the grant
over the amount an employee is required to pay for the stock.
Earnings Per Share
Earnings per share is computed on the weighted average number of shares
outstanding during the year, after considering convertible securities, warrants
and options. The weighted average number of shares was 13,935,349, 12,758,753
and 11,255,775 for the years ended December 31, 1996, 1995 and 1994,
respectively.
Accounting for Acquisitions
Acquisitions have been accounted for using the purchase method. The amount
by which book value of the acquired entity exceeds or is less than cost is
amortized over the estimated benefit period.
Taxes on Incomecompensation.
2002 2001 2000
-------- -------- --------
NET INCOME (LOSS)
As reported............................................... E(6,322) E(2,823) E32,013
Deduct: Total stock-based employee compensation expense
determined under fair value based methods for all
awards,
net of any related tax effects.......................... (9) (3,213) (3,124)
------- ------- -------
Proforma.................................................. E(6,331) E(6,036) E28,889
======= ======= =======
2002 2001 2000
-------- -------- --------
BASIC EARNINGS (LOSS) PER SHARE
As reported............................................... E(.38) E(.17) E1.91
Proforma.................................................. E(.38) E(.36) E1.72
DILUTED EARNINGS (LOSS) PER SHARE
As reported............................................... E(.38) E(.17) E1.87
Proforma.................................................. E(.38) E(.36) E1.69
TAXES ON INCOME
The Company accounts for income taxes under an asset and liability approach
that requires the recognition of deferred tax assets and liabilities for
expected future tax consequences of events that have been recognized in the
Company's financial statements or tax returns. In estimating future tax
consequences, the Company generally considers all expected future events other
than enactments of changes in the tax laws or rates.
Estimates67
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DERIVATIVE FINANCIAL INSTRUMENTS
The Company adopted Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities," effective
January 1, 2001. Derivative instruments are measured at fair value and reported
in the consolidated balance sheets as assets or liabilities. Accounting for
gains or losses depends on the Company's intended use of the derivative
instruments. Gains or losses on derivative instruments which are not designated
hedges are recognized in earnings in the period of the change in fair value.
Accounting for gains or losses on derivative instruments designated as hedges
depends on the type of hedge and such gains or losses are recognized in either
earnings or other comprehensive income.
EARNINGS PER SHARE
Basic earnings per share is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding in the
period. Diluted earnings per share takes into consideration common shares
outstanding (computed under basic earnings per share) and potentially dilutive
common shares.
RECLASSIFICATIONS
Certain prior year amounts in the consolidated financial statements have
been reclassified to conform to the current year presentation (primarily in the
consolidated statements of operations because management has determined that the
2002 presentation better portrays operating results).
ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted accounting principlesin the United States requires 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 period. Actual results could differ from those estimates.
NOTE 2. SPIN-OFF OF ARBATAX
As discussed in Note 1, 83%NEW ACCOUNTING STANDARDS
Statements of Arbatax's common shares were spun-offFinancial Accounting Standards No. ("SFAS") 145 and 146 are
generally modifications to previously adopted standards. A part of SFAS 145 is
effective for years beginning after May 15, 2002, and SFAS 146 is effective for
years beginning after December 31, 2002. These new standards do not have an
effect on the Company's shareholders effective June 3, 1996. The spin-off was a taxable
transaction for U.S. income tax purposes. However, because
30consolidated financial statements.
68
31MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the estimated valuation of the transaction for U.S. tax purposes is less than
the Company's basis in Arbatax, no U.S. income tax has been provided. Further,
no tax was provided in any foreign tax jurisdiction on the transaction because
it has been deemed not taxable under appropriate foreign tax law. Since the
spin-off has not been reviewed by either U.S. or foreign tax authorities, there
can be no assurance that a tax audit may not result in a potential future
liability. But, management believes that it is more likely than not that no
significant income tax will ultimately be incurred because of this transaction.
The separation agreement between the Company and Arbatax contains a tax
indemnification provision.
Arbatax represented the Company's financial services segment which
consisted of managing insurance, royalties and other activities primarily in
Canada and the United States. Revenues for Arbatax were $14,927 for the period
January 1, 1996 through June 2, 1996, $20,895 and $20,366 for the years ended
December 31, 1995 and 1994, respectively. Revenues included preferred share
dividends from an affiliate of $823 in 1996, $2,967 in 1995 and $3,286 in 1994.
The Company's December 31, 1996 consolidated balance sheet reflects a
$54,141 reduction in retained earnings and a $3,406 foreign currency translation
adjustment due to the dividend of the Arbatax shares. The following is a summary
of Arbatax's consolidated net assets:
JUNE 2, 1996 DECEMBER 31,
(UNAUDITED) 1995
------------ ------------
Assets
Cash, cash equivalents and investments $ 57,190 $ 21,602
Receivables and other 31,794 17,427
Due from the Company 20,118 21,778
Resource properties 24,119 12,643
-------- --------
133,221 73,450
Liabilities
Accounts payable and accrued liabilities 16,581 2,661
Accrued losses, claims and settlement expenses 10,062 11,982
Long-term debt 46,984 --
Minority interest 3,767 3,441
-------- --------
77,394 18,084
-------- --------
Consolidated net assets $ 55,827 $ 55,366
======== ========
The amount due from the Company was settled on September 5, 1996 with
700,000 shares of the Company's stock at a fair value of $7,787 and a promissory
note amounting to $14,543, inclusive of $2,212 which the Company paid on behalf
of another affiliate. The note is due January 1, 1998 and bears interest at 8%.
NOTE 3. PULP AND PAPER COMPANIES
Zellstoff-und Papierfabrik Rosenthal GmbH ("ZPR")
ZPR is a pulp production company located in Germany. Effective July 1,
1994, the Company along with another entity acquired ZPR from a German
governmental agency. The Company acquired the other entity's interest in ZPR
effective April 1, 1995, resulting in ZPR becoming a wholly-owned subsidiary.
The 1995 and 1994 acquisitions resulted in purchase credits which were
allocated to property and equipment. Both credits are being amortized over a
five-year life. The total amount of credit amortized was $11,512, $12,389 and
$5,169 in 1996, 1995 and 1994, respectively. In December 1995, the Company
recorded a pre-acquisition contingent asset of $14,779 which is being amortized
on the straightline method over its estimated useful life of twenty-two years.
31
32
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Under the 1994 agreement, ZPR received privatization supplements amounting
to $40,274. Since the receivable was due in installments through 1998, it was
discounted at a rate of 5.5%. The total amount of the supplements, net of the
discount, amounting to $38,757 was recorded as revenue in 1994. The net current
portion of the receivable amounted to $4,847 and the long-term portion amounted
to $6,706 at December 31, 1995. The remaining discount at December 31, 1995 was
$711. In 1996, the receivable was paid down to $6,300 which was legally offset
in payment for the utilization of preacquisition income tax loss carryforwards
as originally provided in the acquisition agreement. This amount was considered
in the reduction of the income tax benefit reserve discussed in Note 11.
ZPR agreed to invest $48,360 in property and equipment improvements through
1998, of which $33,820 has been spent. Also, the governmental agency is to
reimburse ZPR up to a total of $12,000 of defined environmental costs as actual
expenditures take place. At December 31, 1996 and 1995, ZPR recorded $1,949 and
$2,092, respectively, in environmental expenditures as a liability.
ZPR is not permitted under the original purchase agreement to make
distributions to the Company or make payments on a $12,896 loan payable to the
Company prior to January 1999. The net assets which may not be distributed
amounted to $137,510 at December 31, 1996. However, the Company may expand or
invest through ZPR.
ZPR has a fiber supply contract with another company which expires December
31, 1997, at a cost-plus rate. ZPR has a labor agreement which expires in June
1997 and Dresden Papier AG has a labour agreement which is currently under
negotiation.
Dresden Papier AG ("DPAG")
DPAG is a paper manufacturing company located in Germany which the Company
acquired during 1993 from the same governmental agency discussed above. In
addition, the same entity as discussed with ZPR acquired an interest in DPAG
during 1994. The Company purchased the other entity's interest in DPAG effective
April 1, 1995, which resulted in DPAG also becoming a wholly-owned subsidiary.
The 1993 acquisition resulted in a purchase credit which was allocated to
property and equipment and is being amortized over a five-year period expiring
June 30, 1998. The amortization was $13,712, $15,473 and $14,028 for the years
ended December 31, 1996, 1995 and 1994, respectively. The 1995 purchase resulted
in an excess of cost over the interest in DPAG acquired which is being amortized
over a sixty-month period resulting in amortization of $1,741 for 1996 and
$2,319 for 1995.
DPAG also received privatization supplements. During 1994, $5,599 of these
supplements was recorded as income. The final supplement payment was received in
1995.
DPAG has recorded $325 and $6,395 as estimated potential liabilities for
environmental conservation expenditures. The 1993 agreement provides for
reimbursements with respect to the potential liability. The Company has no
reimbursement receivable at December 31, 1996 and $5,465 at December 31, 1995.
Finally, ZPR and DPAG's revenues are derived from the following geographic
areas:
YEARS ENDED DECEMBER 31
-------------------------
1996 1995 1994
----- ----- -----
Germany............................................................ 58.2% 62.4% 70.5%
European Union..................................................... 28.0% 26.3% 23.5%
Other.............................................................. 13.8% 11.3% 6.0%
32
33
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4.2. INVESTMENTS
Trading securities are classified as current assetsinvestments and are summarized
as follows:
DECEMBER 31
-------------------
1996 1995
------- -------2002 2001
-------- --------
Bonds.................................................................... $52,043 $58,294Bonds....................................................... E -- E2,424
Equity securities........................................................ 29,820 7,017
------- -------
$81,863 $65,311
======= =======securities........................................... 307 2,125
---- ------
E307 E4,549
==== ======
Included within trading securities at December 31, 2002, is an investment in
common shares of one company that represents 95% of the total value of trading
securities. Included within trading securities at December 31, 2001, are
investments in a bond and common shares of two companies that represent 53% of
the total value of trading securities. The change in net unrealized holding
gains (losses) on trading securities which has been included in earnings was
$888E(501), E1,383 and $3,736E(186) during 19962002, 2001 and 1995,2000, respectively. Included with trading securities in current investments at
December 31, 1996 is $1,496 of securities in an affiliate, as described in Note
14.
Available-for-sale securities consist of equity securities and have been
classified as long-term investments. Equity securities of two companies
represented 98% and 85% of the total available-for-sale securities at
December 31, 2002 and 2001, respectively. The proceeds from sales of these
securities amounted to E948, none and E205 which resulted in realized gains
(losses) of E66, none and E(84) during 2002, 2001 and 2000, respectively. The
fair value of available-for-sale securities included on the balance sheets at
December 31, 2002, 2001 and 2000, was E4,727, E8,202 and E5,585, respectively.
The cost of these securities was $1,015E13,033, E13,727 and $2,900E12,991 which resulted in
unrealized losses being recorded in comprehensive income of E(8,306), E(5,525)
and the unrealized total losses amounted to $2,250 and $2,974E(7,406) at December 31, 19962002, 2001 and 1995,2000, respectively. The loss on investment valuation in
shareholders' equity was decreased by $724 at December 31, 1996 and increased by
$1,567 at December 31, 1995. The Company sold available-for-sale securities
during 1996 for $1,946 which resulted in a realized loss of $415. During 1995,
the Company sold available-for-sale securities representing all of its 34.6%
interest in an affiliate for $2,364. This sale resulted in no gain or loss and
was to another affiliate where a director and officer of the Company was a board
member. During 1994, the proceeds from sales of available-for-sale securities
amounted to $517 and realized gains were $273.
IncludedAlso, included
in long-term investments are preferred shares in an affiliate of
the spun-off entity which arewere equity securities stated at cost of $2,744E865 and $2,753E396
at December 31, 19962002 and 1995, respectively. These securities2001, respectively, which did not have noa readily
determinable fair value. Fair Value of Financial Instruments
The fair value of other financial instruments at December 31 is summarized
as follows:
1996 1995
----------------- ------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------ -------- -------
Cash and cash equivalents.................................. $9,967 $9,967 $ 29,230 $29,226
Preferred shares in affiliate.............................. 2,744 2,744 2,753 2,764
Long-term government receivables........................... -- -- 12,450 12,450
Notes payable.............................................. 6,017 6,017 2,460 2,460
Long-term debt............................................. 31,257 30,613 22,760 23,368
None ofHowever, management believes that the Company's financial instruments are derivatives. The fair value
of cash and cash equivalents is based on reportedestimated market value. The preferred
shares in affiliate's
value is based on their retractability feature and
dividend rate compared to other securities. The fair value of government
receivables at December 31, 1995 is equal togreater than the carrying amount because a
discount had already been recorded. The fair value of notes payable was based on
the value of similar debt incurred in the pulp and paper industry. The fair
value of long-term debt was determined using discounted cash flows at prevailing
market rates. The other long-term liabilities which have a carrying value of
$2,334 and $7,282 at December 31, 1996 and 1995, respectively are primarily
accrued environmental liabilities at ZPR and DPAG. These liabilities may be
partially reimbursable. Further, the Company cannot estimate at this time when
these amounts will be paid. Therefore, the fair value of other long-term
liabilities cannot be determined.
33
34
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)value.
NOTE 5. CURRENT3. RECEIVABLES
DECEMBER 31
--------------------
1996 1995
------- --------------------------
2002 2001
-------- --------
Sale of paper and pulp products........................................ $10,146 $10,387
Sale of property....................................................... 2,391products............................. E13,582 E23,809
Securities trading.......................................... -- Government............................................................. -- 4,847
Other.................................................................. 5,829 2,47714,137
Derivative transactions..................................... 3,792 463
Value added tax............................................. 7,096 1,073
Other....................................................... 7,454 8,410
------- -------
$18,366 $17,711E31,924 E47,892
======= =======
Receivables are stated at their outstanding principal balances. The Company
had a long-term note receivable at December 31, 2001, on which interest income
was accrued as earned. This note was used to reduce debt during 2002. Management
reviews the collectability of receivables on a periodic basis and determines the
appropriate amount of any allowance. Based on this review procedure, management
has determined that any allowance would not be material at either December 31,
2002 or 2001. The Company
69
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6.3. RECEIVABLES (CONTINUED)
charges off receivables to any allowance when management determines that a
receivable is not collectible. The Company does not generally require collateral
for any of its receivables.
At December 31, 2001, the Company pledged E14,137 in securities trading
receivables as collateral, for amounts payable for securities.
NOTE 4. INVENTORIES
DECEMBER 31
--------------------
1996 1995
------- --------------------------
2002 2001
-------- --------
Pulp and paper
Raw materials........................................................ $ 9,426 $13,211materials............................................. E10,394 E14,604
Work in process and finished goods................................... 11,242 14,512goods........................ 5,981 10,458
------- -------
$20,668 $27,723E16,375 E25,062
======= =======
NOTE 7.5. PROPERTIES
DECEMBER 31
---------------------
1996 1995-------------------
2002 2001
-------- --------
Land................................................................... $ 14,740 $ 12,060
Buildings.............................................................. 21,769 16,166Land........................................................ E 7,945 E 9,564
Buildings................................................... 12,490 19,369
Production and other equipment......................................... 124,858 99,714equipment.............................. 335,403 327,186
-------- --------
161,367 127,940355,838 356,119
Less: Accumulated depreciation 36,251 23,902depreciation.............................. 100,753 77,502
-------- --------
$125,116 $104,038255,085 278,617
Construction in progress.................................... 186,905 --
-------- --------
E441,990 E278,617
======== ========
Depreciation expense was $13,373, $13,431Construction in progress represents the costs incurred (including E3,134 of
debt interest capitalized in 2002) to build a 552,000 tonne softwood kraft pulp
mill located in Stendal, Germany. A subsidiary that is owned 63.6% by the
Company is building the mill and $8,553will operate it on completion. Management
estimates the total cost of the mill will be E1,000,000. Under German
legislation, non-repayable grants are provided to qualifying businesses that
comply with the terms of the grants and are operating in eastern Germany to
finance capital investments. Management expects to receive these government
grants and when received, they will reduce the overall cost. The Company has
applied for approximately E38,000 in construction grants which are expected to
be received prior to the years ended
December 31, 1996, 1995 and 1994, respectively.
NOTE 8. NOTES PAYABLE
DECEMBER 31
-------------------
1996 1995
------ ------
Bank loan, 7% interest payable monthly, due April 1997,
collateralized by inventory.......................................... $3,077 $2,460
Bank loan, 6.5% interest payable monthly, due February 1997,
collateralized by inventory.......................................... 1,981 --
Bank loan, 10% interest, due July 1997, unsecured...................... 959 --
------ ------
$6,017 $2,460
====== ======
34end of 2003.
70
35MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9.6. NOTES PAYABLE
At December 31, 2002, the Company has a note payable to a financial
institution in the amount of E15,000 relating to the Company's investment in the
Stendal pulp mill project, interest rate at Euribor plus 6.5% in initial term
(9.75% at December 31, 2002), Euribor plus 9.0% in extended period and Euribor
plus 11.5% in second extended period; principal plus interest due April 26,
2003, or at the Company's option on October 26, 2003 (extended period) or at the
lender's option on February 26, 2004 (second extended period); secured by an
interest in the Company's operating pulp mill.
The Company also has notes payable to banks of E832 and E7,392 at
December 31, 2002 and 2001, respectively. The notes bear interest at rates
ranging from 6.75% to 7%.
NOTE 7. LONG-TERM DEBT
Long-term debt consists of the following:
DECEMBER 31
--------------------
1996 1995
------- --------------------------
2002 2001
-------- --------
Note payable to spun-off entity, 8% interest, due January 1998,
unsecured............................................................ $14,543 $ --
Loan from governmental agency, 7% interest payable annually, due 2004,
collateralized by fixed assets....................................... 6,584 7,035
Loan from governmental agency, non-interest bearing, due 2001.......... 3,249 3,487
Bank loan, 9.25% interest, due 1998, collateralized by securities...... -- 10,406
Subordinated debenture, Series I,bank, included in a total credit facility of
E827,950 to finance our construction in progress related
to the Stendal pulp mill, interest at 6% due annually,
duerates varying from
Euribor plus .75% to Euribor plus 1.55% (rates on amounts
of borrowing at December 31, 1997................................................ 1,079 1,587
Bank loan, interest at 5.5% payable quarterly,2002, range from 3.6% to
4.2%), principal due in March
2001,required installments beginning
September 30, 2006 until September 30, 2017,
collateralized by landthe assets of the Stendal pulp mill
subsidiary, and buildings........................... 2,924 --
Bank loan, interest at LIBOR plus 2% (5.125% at December 31, 1996)
payable monthly,2002, restricted cash
amounting to E19,074, with 48% and 32% guaranteed by the
Federal Republic of Germany and the State of Sachsen-
Anhalt, respectively, of up to E586,550 of outstanding
principal balance, subject to a debt service reserve
account required to pay amounts due in March 2001, collateralizedthe following
twelve months under the terms of credit facility (none
required at December 31, 2002); payment of dividends by
land and
buildings............................................................ 1,631the subsidiary are restricted based on certain cash flow
requirements being met (none restricted at December 31,
2002)..................................................... E101,000 E --
Note payable to bank, interest at 13.5%rates varying from 4.5% to
6.8% at December 31, 2002, principal due in semi-annual
installments based on a percentage of the final loan
amount beginning at 2.4% to 5.1% at September 30, 2001,
after an initial payment of E23,547 on March 31, 2001,
until the note is due on September 30, 2013,
collateralized by receivables (amounting to E10,522 and
E14,313 at December 31, 2002 and 2001, respectively),
inventory (amounting to E10,885 and E12,002 at
December 31, 2002 and 2001, respectively) and a
subsidiary's operating pulp mill assets with 48% and 32%
principal plus interest guaranteed by the Federal Republic
of Germany and the State of Thuringia, respectively; cash
restricted amounted to E19,721 and E33,388 at
December 31, 2002 and 2001, respectively, in connection
with this borrowing; payment of dividends by the
subsidiary are restricted based on certain cash flow
requirements being met (restricted amount is E66,366 at
December 31, 2002). This borrowing was used to finance the
completed conversion of the operating pulp mill........... 204,855 217,363
71
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7. LONG-TERM DEBT (CONTINUED)
DECEMBER 31
-------------------
2002 2001
-------- --------
Note payable $256to bank relating to the Company's investment in
the Stendal pulp mill project, interest rate at Euribor
plus 6.5% to April 26, 2003 (9.75% at December 31, 2002),
Euribor plus 9.0% from April 27, 2003 to October 26,
2003, and Euribor plus 11.5% from October 27, 2003 to
February 26, 2004; principal plus interest due on
February 26, 2004; secured by an interest in the Company's
operating pulp mill....................................... 30,000 --
Loans payable to minority shareholders of Stendal pulp mill,
interest at 7% accrued and payable in September 2006 then
payable semi-annually beginning March 2007, unsecured,
subordinated to all liabilities of the Stendal pulp mill,
due in 2017, E4,707 was applied to these loans in 2002 due
to right of offset under German law....................... 15,485 --
Note payable to a company, interest at 6%, due February 26,
2004, unsecured........................................... 8,582 --
Note payable to bank, interest at Euribor plus 4.5% (rate on
amount of borrowing at December 31, 2002, is 7.4%),
unsecured, due in semi-annual installments beginning in
March 2004, due in 2013................................... 5,158 --
Debenture payable, 8% interest payable semi-annually, due in
2003, unsecured, with attached warrants which allows a
debenture holder to acquire common shares of the Company
at the higher of U.S. $6 per quarter,share or the average price of
the stock for the ten days prior to conversion............ 3,104 4,643
Loans payable to a bank, interest at rates varying from
3.875% to 6.5%, payment terms varying from on demand to
due June 1998, unsecured............................................. 1,247in full on December 31, 2003, secured by receivables
(amounting to E5,176 at December 31, 2001) and
properties................................................ -- Other..................................................................12,902
Other....................................................... -- 245
------- -------
31,257 22,760323
-------- --------
368,184 235,231
Less: Current portion.................................................. 2,647 --
------- -------
$28,610 $22,760
======= =======portion....................................... (16,306) (18,360)
-------- --------
E351,878 E216,871
======== ========
During 1996,The Company has entered into interest rate and foreign exchange derivative
contracts in connection with the $10,406 bank loan above was increasedfirst three notes payable in the table above.
The contracts were entered into consistent with the Company's policy to $13,418manage
interest rate and foreign currency exchange risks. The contracts are with the
same banks which was
paid down to $959 as ofhold the notes and the Company does not anticipate
nonperformance by the banks. At December 31, 1996.2002 and 2001, the interest rate
contracts had a notional amount of E1,614,157 and none, and the foreign exchange
contracts had a notional amount of E101,413 and E225,723, respectively. The
payment was made by transferring
650,000 shares ofchange in the Company with a market value of $7,394 and other securities
with a fair value of $5,065. The remaining balance was paid with 100,000 of the
Company's shares subsequent to year-end andthese contracts is classified as a current note
payable.
Series I subordinated debentures have a total of 65,880 warrants attached
at December 31, 1996, which entitle the debenture holder to purchase one share
of beneficial interest at $10.25included in 1997.net income (loss).
72
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7. LONG-TERM DEBT (CONTINUED)
As of December 31, 1996,2002, the principal maturities of long-term debt are as
follows:
MATURES AMOUNT
- ------- ---------------
1997..................................................... $ 2,647
1998..................................................... 16,439
1999..................................................... 2,022
2000..................................................... 2,022
2001..................................................... 1,544
Thereafter............................................... 6,583
-------
$31,257
=======2003........................................................ E 16,306
2004........................................................ 53,334
2005........................................................ 15,735
2006........................................................ 28,488
2007........................................................ 76,382
Thereafter.................................................. 177,939
--------
E368,184
========
Interest paid amounted to $2,693E13,894 (net of E922 capitalized) in 1996, $3,6972002, E15,854
in 19952001 and $2,230E12,451 in 1994. Interest amounting to $246, $668 and $880 has been capitalized in property
and equipment during 1996, 1995 and 1994, respectively.
35
36
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)2000.
NOTE 10.8. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
DECEMBER 31
-------------------
1996 1995
------- -------2002 2001
-------- --------
Trade payables.............................................. E13,691 E21,191
Accounts payable and accrued expenses.................................... $11,835 $ 8,637
Trade payables........................................................... 25,773 37,865expenses....................... 16,872 19,408
Derivative transactions..................................... 2,303 396
Payable for securities................................................... 6,838securities...................................... -- Other.................................................................... 878 9538,921
Other....................................................... -- 2,000
------- -------
$45,324 $47,455E32,866 E51,916
======= =======
73
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11.9. INCOME TAXES
The current recovery of (provision for)provision for income taxes on incomeis current and consists of the following:
YEAR ENDED
DECEMBER 31
---------------------------
1996 1995 1994
------- ------ ----------------------------------
2002 2001 2000
-------- -------- --------
U.S............................................................... $(1,456) $2,380 $581
Non U.S........................................................... 4,557 6,752 --
------- ------ ----
Recovery ofProvision for income taxes.......................................... $ 3,101 $9,132 $581
======= ======taxes, non U.S......................... E264 E(83) E(117)
==== ==== =====
Differences between the U.S. Federal Statutory and the Company's effective
rates are as follows:
YEAR ENDED DECEMBER 31
-------------------------------
1996 1995 1994
-------------------------------------
2002 2001 2000
-------- -------- --------
U.S. Federal statutory rates on income from continuing
operations
before considering minority interest............. $ 4,234 $ 20,907 $ 19,988
Reduction in taxes resulting from:
Non U.S. income............................................. (2,778) (20,907) (19,988)
Benefit of operating loss carryforward...................... (1,456) --benefit (provision)....................................... E 5,967 E 932 E(10,924)
Tax differential on foreign income (loss)................... 474 3,521 (869)
Valuation allowance......................................... (6,356) (6,138) 11,676
Other....................................................... 179 1,602 --
------- ------- --------
E 264 E (83) E (117)
======= ======= ========
Deferred tax assets are composed of the following:
DECEMBER 31
-------------------
2002 2001
-------- --------
$
German tax loss carryforwards............................... E -- $E 72,010
Basis difference between income tax and financial reporting
with respect to German operating pulp mill................ 37,442 693
Derivative financial instruments............................ 10,983 --
$U.S. tax loss carryforwards................................. 5,440 6,820
Swiss tax loss carryforwards................................ -- =======3,462
-------- --------
53,865 82,985
Valuation allowance......................................... (43,728) (72,682)
-------- --------
Net deferred tax asset.................................... E 10,137 E 10,303
======== ========
In 1995,During 2002, the Company instituted a U.S.plan to reorganize its German
subsidiaries. As a part of the plan, the German tax benefit was recognized basedbasis of the Company's
operating pulp mill will be increased to the extent of available German tax loss
carryforwards. The reorganization together with other adjustments resulted in a
reduction of losses being carried forward from December 31, 2001. Further, the
Company is the subject of income tax audits in Germany on a temporary difference
resulting fromcontinuing basis
which may result in changes to the amounts in the preceding table. Because of
this and other uncertainties regarding future amounts of taxable income in
Germany, the Company has provided a litigation settlement. The provision in 1996 represents a
partial utilizationvaluation reserve for much of that benefit. Managementthe German
deferred tax assets. However, management believes that, while realization of the
remaining U.S. incomenet deferred tax benefits amounting to $924asset in Germany is not assured, that it is more likely than not
that theyit will be realized. At December 31, 2002, the Company has no significant
German tax loss carryforward amount.
74
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9. INCOME TAXES (CONTINUED)
The Company's U.S. net operating losses amountingamount to approximately $2,718E16,000 at
December 31, 19962002, which will expire in 2011years ending in 2021, if not utilized.
Both ZPRused.
Management believes that these tax loss carryforwards are not likely to be
utilized under current circumstances and DPAG have Germanhas fully reserved any resulting
potential tax net operating lossesbenefit. Further, the Company fully reserved any tax benefit which
may be carried
forward indefinitely. ZPR has approximately $97,000 and DPAG has $145,000resulted from the Swiss tax loss carryforwards in 2001 because of such losses availableuncertainties
as ofto their use. There were no Swiss tax loss carryforwards at
December 31, 1996.
In 1994, the tax benefit associated with ZPR's tax losses was fully
reserved. During 1995, management, in consultation with industry experts,
undertook a study to determine if the reserve should be reduced. Management
considered plant improvements, more efficient utilization of labor and the
significant downward price trends in the pulp market, among other factors, to
determine an appropriate reserve reduction. Management concluded that a
reduction of $6,752 was appropriate for 1995 given the state of the pulp market.
During 1996, because the pulp market had stabilized to a degree, management,
along with its consultants, again considered a further reduction in the reserve.
Based on the factors considered in the original study together with the analysis
performed in 1996, the reserve was reduced by $4,557. Even though realization of
the resulting benefit is not assured, management believes that it is more likely
than not that the reductions in ZPR's reserve are appropriate. Included in the
deferred tax asset is the $6,300 paid to a German governmental agency to utilize
ZPR's tax losses as required under the 1994 purchase agreement discussed in Note
3. This amount will be amortized based on the tax loss benefit utilized
annually.
36
37
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has continued to fully reserve DPAG's tax loss benefit. Even
though the Company is seeking alternative uses for these losses, management
believes that it does not have sufficient information necessary to reduce the
reserve. There are no other temporary differences at either ZPR or DPAG.2002.
Income (loss) from foreign source operations amounted to $20,015, $72,437E(3,275), E2,366
and $58,805E32,749 for the years ended December 31, 1996, 19952002, 2001 and 1994,2000, respectively.
These amounts are intended to be indefinitely reinvested in operations. Further,
any U.S. income tax benefit which may be attributable to the stock option plan
or unrealized losses inSince
available-for-sale securities have been fully reserved.
The Company hasare primarily securities held by foreign
tax credits availablesubsidiaries and the proceeds are expected to be used against U.S.
incomereinvested, no tax resulting from general limitation incomehas been
provided in the approximate amountdetermination of $2,500. Of these credits, $900 will expire in 1999 and $1,600 in 2000 if they
are not utilized.
NOTE 12. STOCK-BASED COMPENSATION
The Company has a non-qualified stock option plan which providesother comprehensive income for options to be granted to officers and employees to acquire a maximum of
1,000,000 shares of beneficial interest. Additionally, the plan provides that
options may be granted to directors who are not officers or employees to acquire
up to 100,000 shares.
During 1996, options to acquire 139,500 shares at $21.50, 35,000 shares at
$13.88 and 60,000 shares at $9.50 were granted to officers and employees of the
Company. The 35,000 options and the 60,000 options vest one-third at the grant
date and one-third each year thereafter. All other options discussed in this
note vest one-half at the grant date and the rest at the end of one year. All
options have a contractual life of ten years. Also during 1996, directors of the
Company were granted options to acquire 12,000 shares at $20.50.
The Company repriced the 139,500 options granted to employees and the
12,000 granted to directors during August 1996. After consideration of this
repricing, the weighted fair value per option granted in 1996 amounted to $3.33
each.
During 1995, options to acquire 600,000 shares at $19.75 each were granted
to officers and employees of the Company. The weighted fair value of these
options was $5.03 each.
During 1994, options to acquire 435,000 shares at $12.50 each were granted
to officers and employees. In addition, directors of the Company were granted
options to acquire 6,000 shares at $14.13. In prior years directors were
granted 12,000 options to acquire shares at $14.13.
Following is a summary of the status of the plan during 1996 and 1995:
WEIGHTED
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
--------- --------------
Outstanding at January 1, 1995...................................... 453,000 $12.55
Granted............................................................. 600,000 19.75
Exercised........................................................... (477,500) 16.29
Forfeited........................................................... (45,000) 18.14
-------- ------
Outstanding at December 31, 1995.................................... 530,500 16.84
Granted............................................................. 246,500 15.58
Exercised........................................................... (152,500) 10.69
Forfeited........................................................... (229,000) 17.33
-------- ------
Outstanding at December 31, 1996.................................... 395,500 $14.88
======== ======
37
38
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Following is a summary of the status of options outstanding atended
December 31, 1996:
OUTSTANDING OPTIONS EXERCISABLE OPTIONS
- ---------------------------------------------------------------- --------------------------
WEIGHTED AVERAGE WEIGHTED WEIGHTED
EXERCISE REMAINING AVERAGE AVERAGE
PRICE RANGE NUMBER CONTRACTUAL LIFE EXERCISE PRICE NUMBER EXERCISE PRICE
- ------------- ------- ---------------- -------------- ------- --------------
$9.50-13.88 156,000 9.2 $10.98 92,666 $10.89
$16.89-18.47 239,500 8.7 $17.41 196,000 $17.21
Compensation
The Company applies Accounting Principles Board Opinion No. 25 in
accounting for its stock option plan. There was no compensation cost incurred
based on options granted in either 1996 or 1994. However, compensation costs
charged to operations was $420 in 1995 as a result of options granted. Had
compensation cost been recognized on the basis of fair value pursuant to
Statement of Financial Accounting Standards No. 123, net income2002, 2001 and earnings per
share would have been adjusted as follows:
DECEMBER 31
-------------------
1996 1995
------- -------
Net Income
As reported............................................................ $16,023 $64,183
======= =======
Pro forma.............................................................. $15,027 $63,205
======= =======
Primary Earnings Per Share
As reported............................................................ $ 1.15 $ 5.03
======= =======
Pro forma.............................................................. $ 1.08 $ 4.95
======= =======
The fair value of each option granted is estimated using the Black Scholes
Model. The assumptions used in calculating fair value are as follows:
1996 1995
------ ------
Risk-free interest rate................................................... 5.0% 5.0%
2 2
Expected life of the options.............................................. years years
Expected volatility....................................................... 49.62% 38.45%
Expected dividend yield................................................... 0.0% 0.0%
2000.
NOTE 13.10. SHAREHOLDERS' EQUITY
In a prior year, the Company issued one attached preferred share purchase
right for each outstanding share of beneficial interest. A total of 11,958,993
rights were issued which allow the holder to acquire from the Company one
one-hundredth of a share of Series A Junior Participating Preferred Stock at a
price of U.S. $75 per one one-hundredth of a preferred share. The rights will
expire on December 31, 2003. The Company has the right to repurchase the rights
for U.S. $.01 each.
The Company has reserved 110,000 Series A Junior Participating Preferred
Shares in connection with the rights. The preferred shares are entitled to
quarterly dividends of U.S. $10 per share and have 100 votes per share. However,
the preferred stockshares will be entitled to an aggregate dividend of 100 times any
dividends declared on shares of beneficial interest and an aggregate of 100
times any payment to shares of beneficial interest on merger or liquidation.
Also, during a prior year, the Company authorized the issuance of
3.5 million shares of Cumulative Retractable Convertible Preferred Shares,
Series B at a price of U.S. $20 per share. These shares have a cumulative
38
39
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
dividend rate of up to 4%, a liquidation preference of $20 per share plus unpaid
dividends, a redemption right beginning January 1, 2004, at $20 per share plus
unpaid dividends, and may convert up to 10% of the issued and outstanding shares
into common shares of beneficial interest based on dividing the issue price plus unpaid
dividends by $20 per share.
NOTE 14. TRANSACTIONS WITH AFFILIATES
In connection with the spin-off discussed in Note 2,11. STOCK-BASED COMPENSATION
The Company has a non-qualified stock option plan which provides for options
to be granted to officers and employees to acquire a maximum of 3,600,000 shares
of beneficial interest including options for 130,000 shares to trustees who are
not officers or employees.
During 2002, options to acquire 18,000 shares of beneficial interest at
U.S. $7.46 per share were granted to trustees of the Company assumedwhich vest
one-third at the debtgrant date and one-third each of an affiliate of Arbataxthe next two years. The
options expire in the amount of $2,052. In prior years, the
Company had been the guarantor on the loan. In exchange for the assumption, the
Company received shares in a publicly-traded affiliate having aten years. The weighted fair value of $1,496, which is less than fair value at December 31, 1996, and a note for $556.these options was
U.S. $2.07 each. The note is dueoptions granted to one trustee expired upon his resignation
in quarterly installments2002.
During 2000, options to acquire 1,600,000 shares of $256 until paid, bearsbeneficial interest at
10%U.S. $6.375 per share were granted to officers and is unsecured. Under the termsemployees of the exchange, the affiliate may replace
the shares with other assets. The affiliate is engaged in a legal actionCompany
which could result in replacement. Therefore, these shares are being held as a
temporary investment statedvest one-third at the transfer price.
After the spin-off discussed in Note 2, the Company had a remaining 9%
interest in the outstanding shares of the spun-off entity. These shares which
had a fair value of $5,065, were used to reduce the debt described in Note 9.
During 1996, ZPR acquired bonds in a subsidiary of the spun-off entity with
a face amount of $5,922 for $4,548. ZPR acquired $6,000 in convertible
debentures of the spun-off entity. The spun-off entity acquired the subsidiary's
bonds for $5,922grant date and ZPR recorded income of $1,374 as a result of this
transaction for the year ended December 31, 1996. Finally, ZPR converted the
debentures into 857,143 common shares of the spun-off entity at the market
price.
The Company has net receivables from two officers and directors amounting
to $366 as of December 31, 1996. An entity related to one of these
officer-directors charged fees of $232 to the Company during 1996 and was due
$77 from the Company at December 31, 1996.
The Company incurred accounting and management fees to an affiliate
amounting to $191 and $535 during 1996 and 1995, respectively. The Company has
an open account payable to this affiliate amounting to $217 and $972 at December
31, 1996 and 1995, respectively. Further, the Company has an open receivable
from the affiliate amounting to $426 as of December 31, 1996.
During 1994, the Company acquired 650,000 of its shares from an affiliate
for $8,786 which was the amount the affiliate paid for the shares during 1993.
The amount paid by the Company was approximately market value at date of
acquisition.
NOTE 15. SUPPLEMENTAL DISCLOSURES WITH RESPECT TO STATEMENTS OF CASH FLOWS
Significant noncash transactions in 1996 included:
1. The Company received 546,441 shares of common stock and a note in
exchange for assuming debt amounting to $2,052 of an affiliate. The
shares had a fair value of $1,496 and the note amounted to $556.
2. The Company settled its amount payable to the spun-off entity with
700,000 shares of its common stock with a fair value of $7,787 and a
promissory note for $14,543.
3. The Company paid bank debt of $12,459 with 650,000 of the Company's
shares with a market value of $7,394 and securities with a fair value of
$5,065.
4. As discussed in Note 2, the Company spun-off 83% of Arbatax amounting
to $50,735 net of a foreign currency translation adjustment.
39one-third each
75
40MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Significant noncash transactionsNOTE 11. STOCK-BASED COMPENSATION (CONTINUED)
for the next two years. These options expire in 1995 included:
1. Duringten years. The weighted fair
value of these options was U.S. $3.60 each.
Following is a summary of the year, 2,000,000 sharesstatus of beneficial interest amountingthe plan during 2002, 2001 and 2000:
WEIGHTED
NUMBER OF AVERAGE EXERCISE
SHARES PRICE
--------- -------------------
(IN U.S. DOLLARS)
Outstanding at December 31, 1999............................ 765,500 $10.03
Granted..................................................... 1,600,000 6.375
Exercised................................................... (159,500) 6.00
---------
Outstanding at December 31, 2001 and 2000................... 2,206,000 7.67
Granted..................................................... 18,000 7.46
Cancelled................................................... (6,000) 7.46
---------
Outstanding at December 31, 2002............................ 2,218,000 $ 7.67
========= ======
Following is a summary of the status of options outstanding at December 31,
2002:
OUTSTANDING OPTIONS EXERCISABLE OPTIONS
- ---------------------------------------------------------- -------------------------------
WEIGHTED
AVERAGE WEIGHTED
REMAINING AVERAGE WEIGHTED
CONTRACTUAL EXERCISE AVERAGE EXERCISE
EXERCISE PRICE RANGE NUMBER LIFE PRICE NUMBER PRICE
- -------------------- --------- ----------- -------- --------- -------------------
(IN U.S. DOLLARS) (IN U.S. DOLLARS)
6.$00 - 6.375 1,770,000 7.0 $ 6.34 1,770,000 $ 6.34
7.46 12,000 9.3 7.46 4,000 7.46
8.50 - 11.66 231,500 4.1 9.19 231,500 9.19
16.89 - 18.47 204,500 2.9 17.50 204,500 17.50
The fair value of each option granted is estimated on the grant date using
the Black Scholes Model. The assumptions used in calculating fair value are as
follows:
2002 2001 2000
-------- -------- --------
Risk-free interest rate..................................... 8.03% -- 8.5%
Expected life of the options................................ 3 years -- 2 years
Expected volatility......................................... 34.7% -- 78.4%
Expected dividend yield..................................... 0.0% -- 0.0%
76
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12. EARNINGS PER SHARE
Earnings per share data for years ended December 31 is summarized as
follows:
NET INCOME (LOSS)
------------------------------
2002 2001 2000
-------- -------- --------
Net income (loss) available to shareholders of beneficial
interest.................................................. E(6,322) E(2,823) E32,013
======= ======= =======
SHARES
------------------------------------
2002 2001 2000
---------- ---------- ----------
Weighted average number of shares outstanding -- basic... 16,774,515 16,874,899 16,778,962
Effect of dilutive securities:
Options................................................ -- -- 365,528
---------- ---------- ----------
Weighted average number of shares
outstanding -- diluted................................. 16,774,515 16,874,899 17,144,490
========== ========== ==========
For 2002 and 2001, options and warrants were not included in the computation
of diluted earnings per share because they were anti-dilutive. Warrants were not
dilutive in 2000.
NOTE 13. 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.
The pulp segment consists of a single operating mill located in Germany
which produces and markets kraft pulp. The paper segment consists of two mills
located in Germany and one located in Switzerland. The Swiss mill was acquired
in December 2001, and its results of operations are included for 2002.
Both segments operate in industries which are cyclical in nature and their
markets are affected by fluctuations in supply and demand in each cycle. These
fluctuations have significant effect on the cost of materials and the eventual
sales prices of products.
77
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13. BUSINESS SEGMENT INFORMATION (CONTINUED)
Summarized financial information concerning the segments is shown in the
following table:
PULP PAPER TOTAL
-------- -------- --------
2002
Sales to external customers................................. E130,173 E97,710 E227,883
Intersegment net sales...................................... 4,878 -- 4,878
Income (loss) from operations............................... 4,773 (1,818) 2,955
Segment income (loss) including gain on financial derivative
instruments for pulp operations of E23,429................ 16,557 (1,928) 14,629
Segment assets.............................................. 405,002 29,438 434,440
Capital expenditures........................................ 8,426 5,374 13,800
RECONCILIATIONS
Loss:
Total income for reportable segments...................... E 14,629
Elimination of intersegment profits....................... 3,391
Loss on financial derivative instruments, construction in
progress financing...................................... (30,108)
Unallocated amounts, other corporate expenses............. (5,463)
--------
Consolidated loss before income taxes and minority
interest.............................................. E(17,551)
========
Assets:
Total assets for reportable segments...................... E434,440
Stendal pulp mill under construction...................... 223,386
Intersegment investments and receivables.................. (67,476)
Other unallocated amounts................................. 9,400
--------
Consolidated total assets............................... E599,750
========
PULP PAPER TOTAL
-------- -------- --------
2001
Sales to external customers................................. E146,245 E58,756 E205,001
Intersegment net sales...................................... 5,795 -- 5,795
Income (loss) from operations............................... 19,854 (2,476) 17,378
Segment income (loss) including loss on financial derivative
instruments for pulp operations of E2,504................. 4,546 (3,230) 1,316
Segment assets.............................................. 374,287 53,198 427,485
Capital expenditures........................................ 7,416 2,681 10,097
RECONCILIATIONS
Loss:
Total income for reportable segments...................... E 1,316
Elimination of intersegment profits....................... 2,541
Unallocated amounts, other corporate expenses............. (6,597)
--------
Consolidated loss before income taxes................... E (2,740)
========
78
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13. BUSINESS SEGMENT INFORMATION (CONTINUED)
PULP PAPER TOTAL
-------- -------- --------
Assets:
Total assets for reportable segments...................... E427,485
Intersegment receivable................................... (7,365)
Other unallocated amounts................................. 9,473
--------
Consolidated total assets............................... E429,593
========
PULP PAPER TOTAL
-------- -------- --------
2000
Sales to external customers................................. E159,713 E85,346 E245,059
Intersegment net sales...................................... 1,378 -- 1,378
Income from operations...................................... 54,999 402 55,401
Segment income (loss)....................................... 34,679 (302) 34,377
Segment assets.............................................. 402,804 46,087 448,891
Capital expenditures........................................ 23,766 3,262 27,028
RECONCILIATIONS
Income:
Total income for reportable segments...................... E 34,377
Elimination of intersegment profits....................... 1,496
Unallocated amounts, other corporate expenses............. (3,743)
--------
Consolidated income before income taxes................. E 32,130
========
Assets:
Total assets for reportable segments...................... E448,891
Intersegment receivable................................... (24,125)
Other unallocated amounts................................. 4,969
--------
Consolidated total assets............................... E429,735
========
Income (loss) from operations stated above does not include any allocation
of corporate general, administrative and other expenses.
The following table presents net sales to $42,000 were issuedexternal customers by geographic
area based on location of the customer.
2002 2001 2000
-------- -------- --------
Germany..................................................... E 88,809 E 94,486 E103,591
Other European Union........................................ 77,658 71,954 83,444
Eastern European and other.................................. 61,416 38,561 58,024
-------- -------- --------
E227,883 E205,001 E245,059
======== ======== ========
79
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13. BUSINESS SEGMENT INFORMATION (CONTINUED)
The following table presents total assets by geographic area based on
location of the asset.
2002 2001 2000
-------- -------- --------
Germany..................................................... E590,350 E395,794 E424,766
Other....................................................... 9,400 33,799 4,969
-------- -------- --------
E599,750 E429,593 E429,735
======== ======== ========
The Company also had labor agreements which expired on December 31, 2002.
The Company is in negotiations with the employee union on a new labor agreement.
In 2002, pulp sales to acquire another entity's thirty percent ownershipone customer amounted to 12% of total pulp sales, pulp
sales to two customers amounted to 22% in ZPR2001, and DPAG.
2. A preacquisition contingency amountingpulp sales to $14,779one customer
amounted to 27% in 2000.
NOTE 14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of other financial instruments at December 31 is summarized
as follows:
2002 2001
--------------------- ---------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
Cash and cash equivalents........................... E 30,261 E 30,261 E 11,741 E 11,741
Cash restricted..................................... 48,254 48,254 33,388 33,388
Note receivable..................................... -- -- 5,475 5,475
Notes payable....................................... 15,832 15,832 7,392 7,392
Long-term debt...................................... 368,184 368,184 235,231 235,231
Interest rate contract liability.................... 30,108 30,108 -- --
Foreign currency exchange contracts -- net asset.... 1,489 1,489 67 67
The fair value of cash and cash equivalents is based on reported market
value. The fair value of cash restricted was recorded asequal to its carrying amount
because it is in an assetaccount which reflectsbears a market rate of interest. The value of
the note receivable is based on the value of similar long-term receivables. The
fair value of notes payable was based on the value of similar debt incurred in
the pulp industry. The fair value of long-term debt was determined using
discounted cash flows at prevailing market rates. The other long-term
liabilities which have a waste disposal sitecarrying value of E2,906 and E3,441 at ZPR.
Significant noncash transactionsDecember 31,
2002 and 2001, respectively, are primarily an accrued environmental liability at
the pulp mill. This liability may be partially reimbursable. Further, the
Company cannot estimate at this time when these amounts will be paid. Therefore,
the fair value of other long-term liabilities cannot be determined. The fair
values of the interest rate and foreign currency exchange contracts are obtained
from dealer quotes. These values represent the estimated amount the Company
would receive or pay to terminate agreements taking into consideration current
interest rates, the creditworthiness of the counterparties and current foreign
currency exchange rates.
80
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15. COMMITMENTS AND CONTINGENCIES
At December 31, 2002 and 2001, the Company recorded a liability for
environmental conservation expenditures of E2,309 and E2,046, respectively.
Management believes the liability amount recorded is sufficient, however, future
regulations in 1994 included:
1. During the year, 8,000 preferred shares were converted into shares of
beneficial interest on a one-for-one basis. Also, warrants attached to
$6,208 of bonds were exchanged for shares of beneficial interest.
2.Germany may result in additional liability.
The Company acquired 650,000 shares of beneficial interest from an
affiliate for $8,786 in exchange for assumption of debt and the
elimination of a receivable.
NOTE 16. CONTINGENCIES
ZPR and DPAG areis required to pay certain charges based on water pollution
levels at their manufacturing facilities.its mills. Unpaid charges can be reduced by investing in qualifying
equipment that results in less water pollution. ZPR and
DPAG believeThe Company believes that
equipment investments already made will offset most of these charges, but they haveit has
not received final determination from the appropriate authorities. Accordingly,
a liability for these water charges has only been recognized to the extent that
equipment investments have not been made.
As provided in a purchase agreement for a subsidiary company in a prior
year, the Company may be required to pay up to an additional E2,241 based on
profitability criteria being met during the period January 1 through
September 30, 2003. The purchase agreement also requires additional payments
based on any sales of the subsidiary's real estate assets. At December 30, 2002,
the Company exchanged its 80% interest in this subsidiary for a 49% interest in
Equitable Industries Limited Partnership ("Equitable") (resulting in a 39%
indirect interest in the subsidiary) which represents the equity method
investments on the December 31, 2002, consolidated balance sheet. The Company
recorded this exchange based on the carrying value of the subsidiary resulting
in no gain or loss being recorded. The exchange agreement provides that the
Company is to be indemnified by Equitable if any of the contingent payments are
to be made. This was treated as a nonmonetary transaction in 2002; there were no
significant nonmonetary transactions in 2001 and 2000.
The Company is involved in various matters of litigation arising in the
ordinary course of business. In the opinion of management, the estimated outcome
of such issues will not have a material effect on the Company's financial
statements.
4081
41
MERCER INTERNATIONAL INC.
SUPPLEMENTARY FINANCIAL INFORMATION (UNAUDITED)
QUARTERLY FINANCIAL DATA
(Thousands, Except per Share Amounts)(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
QUARTER ENDED
-----------------------------------------------------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
--------- -------- -------------------- ------------ -----------
19962002(1)
Net Sales.................................. 49,873 49,677 46,164 41,015Sales......................................... E62,477 E63,660 E 56,905 E56,090
Gross profit............................... 13,258 10,298 9,860 7,881profit...................................... 7,516 11,540 7,969 (1,356)
Income before extraordinary items and cumulative
effect of a change in accounting............................... 5,860 2,873 3,140 3,684accounting................ (5,389) 18,545 (20,597) 1,119
Income before extraordinary items and cumulative
effect of a change in accounting, per share*................... 0.43 0.21 0.23 0.25.... (0.32) 1.08 (1.23) 0.07
Net income................................. 5,890 3,309 3,140 3,684
1995income........................................ (5,389) 18,545 (20,597) 1,119
2001
Net Sales.................................. 75,225 80,505 76,529 68,478Sales......................................... E60,363 E58,767 E 49,979 E47,338
Gross profit............................... 26,642 24,949 24,860 32,560profit...................................... 14,835 9,260 5,236 2,437
Income (loss) before extraordinary items and
cumulative effect of a change in accounting............................... 12,394 15,501 17,686 20,056accounting..... 4,962 61 197 (8,043)
Income (loss) before extraordinary items and
cumulative effect of a change in accounting, per
share*................... 1.13 1.19 1.33 1.48.......................................... 0.29 0.00 0.01 (0.48)
Net Income................................. 12,019 15,617 17,761 18,786income (loss)................................. 4,962 61 197 (8,043)
- ---------------
*on------------------------
* on a fully diluted basis
41(1) The Company acquired its specialty paper mill in Landqart, Switzerland
effective December 2001 and sold it effective December 2002. The amounts for
2002 include the results from the Landqart mill, while the amounts for 2001
do not include the results from the Landqart mill.
82
42
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act ofSECURITIES
EXCHANGE ACT OF 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: March 24, 1997 MERCER INTERNATIONAL INC.
By: /s/ Jimmy S.H. Lee
---------------------------------
MERCER INTERNATIONAL INC.
By: /s/ JIMMY S.H. LEE
-----------------------------------------
Jimmy S.H. Lee
Dated: March 28, 2003 Chairman
Pursuant to the requirements of the Securities Exchange Act ofSECURITIES EXCHANGE ACT OF 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ JimmyJIMMY S.H. Lee Date: March 24, 1997
- ---------------------------------------------LEE
-------------------------------------------
Jimmy S.H. Lee
Chairman, Chief Executive Officer and Trustee Date: March 28, 2003
/s/ MICHEL ARNULPHY
-------------------------------------------
Michel Arnulphy Date: March 24, 1997
- ---------------------------------------------
Michel Arnulphy28, 2003
Trustee
/s/ C.S. MOON
-------------------------------------------
C.S. Moon Date: March 24, 1997
- ---------------------------------------------
C.S. Moon28, 2003
Trustee
/s/ M.MAARTEN REIDEL
-------------------------------------------
Maarten Reidel Date: March 24, 1997
- ---------------------------------------------
M. Reidel28, 2003
Chief Financial Officer and Trustee
/s/ WILLIAM MCCARTNEY
-------------------------------------------
William McCartney Date: March 28, 2003
Trustee
/s/ GRAEME WITTS
-------------------------------------------
Graeme Witts Date: March 28, 2003
Trustee
/s/ JONG L. RYU
-------------------------------------------
Jong L. Ryu Date: March 28, 2003
Trustee
4283
43
LETTERHEAD
INDEPENDENT AUDITORS'CERTIFICATION OF PERIODIC REPORT
To the Shareholders
MERCER INTERNATIONAL INC.
OurI, Jimmy S.H. Lee, certify that:
1. I have reviewed this annual report on the consolidated financial statementsForm 10-K of Mercer
International Inc. is included(the "Registrant");
2. Based on page 24my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this Form 10-K. In connection with our audits of
suchannual report;
3. Based on my knowledge, the financial statements, we have also audited the relatedand other financial
statement
schedule listedinformation included in Item 14 of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic consolidated financial statements taken as a
whole, presentsannual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the Registrant as of, and for, the periods presented in this annual report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and have:
(a) designed such disclosure controls and procedures to ensure that material
information set forth
therein.
/s/ PETERSON SULLIVAN P.L.L.C.
March 12, 1997
Seattle, Washington
43
44
MERCER INTERNATIONAL INC.
SCHEDULErelating to the Registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
(b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The Registrant's other certifying officers and I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEEThave disclosed, based on
our most recent evaluation, to the Registrant's auditors and the audit
committee of the Registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to record,
process, summarize and report financial data and have identified for the
Registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal
controls; and
6. The Registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
DECEMBER 31,
-------------------
1996 1995
------- -------
ASSETS
Cash................................................................... 9,967 29,230
Receivables............................................................ 18,366 30,161
Inventories............................................................ 20,668 27,723
Investments............................................................ 87,118 70,964
Investment in spun-off operations...................................... 0 55,366
Properties............................................................. 125,116 104,038
Deferred income tax assets............................................. 18,313 10,625
Other.................................................................. 291 643
------- -------
279,839 328,750
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses.................................. 48,026 76,515
Debt................................................................... 37,274 25,220
Shareholders' equity................................................... 194,539 227,015
------- -------
279,839 328,750
======= =======/s/ JIMMY S.H. LEE
---------------------------------------------
Jimmy S.H. Lee
Date: March 28, 2003 Chief Executive Officer
STATEMENT84
CERTIFICATION OF OPERATIONSPERIODIC REPORT
I, Maarten Reidel, certify that:
1. I have reviewed this annual report on Form 10-K of Mercer
International Inc. (the "Registrant");
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the Registrant as of, and for, the periods presented in this annual report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and have:
(a) designed such disclosure controls and procedures to ensure that material
information relating to the Registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
(b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the audit
committee of the Registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to record,
process, summarize and report financial data and have identified for the
Registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal
controls; and
6. The Registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
YEARS ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
------- ------- -------
Revenues
Pulp and paper and related sales and supplements............ 174,097 275,332 192,127
Investments................................................. 11,060 10,359 2,202
Other....................................................... 1,572 15,046 3,030
------- ------- -------
186,729 300,737 197,359
Expenses
Pulp and paper costs........................................ 145,432 191,726 116,681
General and administrative.................................. 24,863 35,217 19,637
Interest.................................................... 3,978 4,543 3,522
Settlement of litigation.................................... 0 7,000 0
Income tax recovery......................................... (3,101) (9,132) (581)
Minority interest........................................... 0 5,746 16,601
------- ------- -------
171,172 235,100 155,860
------- ------- -------
Income from continuing operations............................. 15,557 65,637 41,499
======= ======= =======/s/ MAARTEN REIDEL
---------------------------------------------
Maarten Reidel
Date: March 28, 2003 Chief Financial Officer
4485
45
STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
------- ------- -------
Net cash provided by (used in) operating activities........... (6,383) (16,468) 22,311
Net cash used by investing activities, purchase of fixed
assets...................................................... (16,335) (11,014) (10,574)
Net cash provided by (used in) financing activities........... 4,728 9,863 (6,060)
Net cash provided by (used in) spun-off operation............. (1,273) 4,337 12,619
------- ------- -------
Net change in cash............................................ (19,263) (13,282) 18,296
Cash and cash equivalent, beginning of year................... 29,230 42,512 24,216
------- ------- -------
Cash and cash equivalent, end of year......................... 9,967 29,230 42,512
======= ======= =======
45
46
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------------------------------------------------------------------
3.1(a)3.1 (a)* Restated Declaration of Trust of the Company as filed with
the Secretary of State of Washington on June 11, 1990
together with an Amendment to Declaration of Trust dated
December 12, 1991.
(b)* Amendments to Declaration of Trust dated July 8, 1993;
August 17, 1993; and September 9, 1993.
3.2* Trustees' Regulations dated September 24, 1973.
4.1 Shareholder Rights Plan. Incorporated by reference from
Form 8-A dated August 17, 1993.
4.2 Trust Indenture for Convertible Subordinated Debentures between Mercer
International Inc. and Montreal Trust Company of Canada dated as of
September 10, 1992. Incorporated by reference from Form 8-K of Mercer
International Inc. dated October 31, 1992.
4.3* Trust Indenture for Subordinated Debentures between Mercer
International Inc. and Montreal Trust Company of Canada as Trustee
dated as of December 22, 1992.
10.1 Acquisition Agreement among Treuhandanstalt, Dresden Papier
AG, Dresden Papier Holding GmbH, Mercer
International Inc., and Shin Ho Paper Mfg. Co., Ltd.
Incorporated by reference from Form 8-K dated
September 20, 1993.
10.2 Acquisition Agreement among Treuhandanstalt, Zellstoff- undZellstoff-und
Papierfabrik Rosenthal GmbH, Raboisen
Einhundertsechsundfunfzigste Vermogens-
verwaltungsgesellschaftVermogensverwaltungs-
gesellschaft GmbH, to be renamed ZPR Zellstoff- undZellstoff-und
Papierfabrik Rosenthal Holding GmbH, Mercer
International Inc. and 448380 B.C. Ltd. dated July 3,
1994. Incorporated by reference from Form 8-K dated
July 3, 1994.
10.3* Assignment Agreement between Nalcap Holdings Inc. and CanCapital
Corporation dated as of January 1, 1992.
10.4*10.3 Amended and Restated 1992 Stock Option Plan. 10.5* 1994 Employee Incentive Bonus Plan.
10.6 Stock Purchase Agreement between CVD Financial Corporation and Mercer
International Inc. dated March 22, 1995. Incorporated by reference from
Item 7, Amendment No. 5 to Schedule 13D filed by Mercer International
Inc. with respect to the common shares of CVD Financial Corporation.
10.7 Acquisition Agreement between Mercer International Inc. and Five
Continents International dated for reference March 31, 1995.
Incorporated by
reference from Form 8-KS-8 dated August 12, 1995.
10.8*March 2, 2000.
10.4 2002 Employee Incentive Bonus Plan.
10.5* Form of Separation Agreement between Mercer
International Inc. and Arbatax International Inc.
21.10.6 English Translation of a Loan Agreement in the amount of
DM508,000,000 between Zellstoff-und Papierfabrik
Rosenthal GmbH & Co. KG, Blankenstein on the one hand and
Bayerische Hypotheken-und Wechsel-Bank Aktiengesellschaft,
Munich and Bayerische Vereinsbank Aktiengesellschaft,
Munich on the other hand dated July 6, 1998. Incorporated
by reference from Form 8-K dated July 16, 1998.
10.7 English Translation of Agreement on the obligations of the
shareholders between Mercer International Inc.,
Spezialpapierfabrik Blankenstein GmbH and Zellstoff-und
Papierfabrik Rosenthal Verwaltungs GmbH and Bayerische
Hypo-und Vereinsbank Aktiengesellschaft dated
February 11, 1999.
10.8* Amended and Restated Employment Agreement between Mercer
International Inc. and Jimmy S.H. Lee dated November 20,
2000.
10.9 English Translation of Amendment Agreement No. 4 dated
December 13, 2000 between Zellstoff-und Papierfabrik
Rosenthal GmbH & Co. KG and Bayerische Hypo-und
Vereinsbank Aktiengesellschaft to the Loan Agreement dated
July 6, 1998. Incorporated by reference from Form 8-K
dated January 23, 2001.
10.10* Purchase Agreement between Sihl and Mercer
International Inc. dated December 14, 2001 relating to the
acquisition of Landqart AG.
10.11 Project Financing Facility Agreement dated August 26, 2002
between Zellstoff Stendal GmbH and Bayerische Hypo-und
Vereinsbank AG. Incorporated by reference from Form 8-K
dated September 10, 2002.
10.12 Shareholders' Undertaking Agreement dated August 26, 2002
among Mercer International Inc., Stendal Pulp
Holdings GmbH, RWE Industrie-Losungen GmbH, AIG Altmark
Industrie AG and FAHR Beteiligungen AG and Zellstoff
Stendal GmbH and Bayerische Hypo-und Vereinsbank AG.
Incorporated by reference from Form 8-K dated
September 10, 2002.
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ------------------------------------------------------------
10.13 Shareholders' Agreement dated August 26, 2002 among
Zellstoff Stendal GmbH, Stendal Pulp Holdings GmbH, RWE
Industrie- Losungen GmbH and FAHR Beteiligungen AG.
10.14 Loan Agreement dated August 26, 2002 among Babcock & Brown
Investment Management Partners LP, Babcock & Brown
Investment Management Partners LP et. al. and Mercer
International Inc. Incorporated by reference from
Form 8-K dated September 10, 2002.
10.15 Loan Agreement dated August 26, 2002 among MFC Merchant
Bank S.A., MFC Merchant Bank S.A. et. al. and Mercer
International Inc. Incorporated by reference from
Form 8-K dated September 10, 2002.
10.16 Contract for the Engineering, Design, Procurement,
Construction, Erection and Start-Up of a Kraft Pulp Mill
between Zellstoff Stendal GmbH and RWE Industrie-
Losungen GmbH dated August 26, 2002.
10.17 Purchase and Sale Agreement dated December 30, 2002 between
Equitable Industries Limited Partnership and Mercer
International Inc. relating to the sale of Landqart AG.
10.18 Employment Agreement effective July 1, 2002 between ZPR
Zellstoff-und Papierfabrik Rosenthal Holding GmbH and
Maarten Reidel.
10.19 Form of Trustee's Indemnity Agreement between Mercer
International Inc. and its Trustees.
10.20 English Translation of Agreement between Zellstoff-und
Papierfabrik Rosenthal GmbH & Co. KG, Blankenstein a.d.
Saale and Bayerische Hypo-und Vereinsbank AG dated
May 27, 2002.
21 List of Subsidiaries of Registrant.
23. Consent23 Independent Auditors Consent.
99.1 Certification of Independent Auditors.
27. Article 5 - Financial Data Schedule for the Year Ended
December 31, 1996.
- ---------------Periodic Report.
99.2 Certification of Periodic Report.
- ------------------------
* Filed in Form 10-K for prior years.
46