UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______ TO _______
COMMISSION FILE NO.: 000-09409
MERCER INTERNATIONAL INC.
(Exact name of Registrant as specified in its charter)
WASHINGTON 91-6087550
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
GIESSHUBELSTRASSE 15, ZURICH, SWITZERLAND CH 8045
(Address of principal executive offices) (Zip Code)
41(1) 201 7710
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
----- -----
The Registrant had 16,794,899 shares of beneficial interest outstanding as at
August 13, 2001.
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
MERCER INTERNATIONAL INC.
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2001
(UNAUDITED)
MERCER INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
AS AT JUNE 30, 2001 AND DECEMBER 31, 2000
(UNAUDITED)
(DOLLARS IN THOUSANDS)
JUNE 30, DECEMBER 31,
2001 2000
---------- --------------
ASSETS
Current Assets
Cash and cash equivalents . . . . . $ 14,061 $ 18,496
Investments . . . . . . . . . . . . 5,683 5,320
Receivables . . . . . . . . . . . . 38,210 46,088
Inventories . . . . . . . . . . . . 16,378 19,977
Prepaid and other . . . . . . . . . 2,713 3,000
---------- --------------
Total current assets. . . . . . . 77,045 92,881
Long-Term Assets
Cash restricted . . . . . . . . . . 21,394 25,150
Properties. . . . . . . . . . . . . 234,007 265,607
Investments . . . . . . . . . . . . 6,461 6,101
Notes receivable. . . . . . . . . . - 4,296
Deferred income tax . . . . . . . . 8,778 9,624
---------- --------------
270,640 310,778
---------- --------------
$ 347,685 $ 403,659
========== ==============
LIABILITIES
Current Liabilities
Accounts payable and accrued
expenses . . . . . . . . . . . . . $ 31,737 $ 37,058
Pulp mill renovation costs payable. 183 1,146
Note payable. . . . . . . . . . . . 578 839
Debt. . . . . . . . . . . . . . . . 10,397 27,173
---------- --------------
Total current liabilities . . . . 42,895 66,216
Long-Term Liabilities
Debt. . . . . . . . . . . . . . . . 183,101 208,315
Other . . . . . . . . . . . . . . . 3,264 3,721
---------- --------------
186,365 212,036
---------- --------------
Total liabilities . . . . . . . . 229,260 278,252
SHAREHOLDERS' EQUITY
Shares of beneficial interest . . . . 99,995 99,995
Retained earnings . . . . . . . . . . 93,202 88,698
Accumulated other comprehensive loss. (74,772) (63,286)
---------- --------------
118,425 125,407
---------- --------------
$ 347,685 $ 403,659
========== ==============
The accompanying notes are an integral part of these financial statements.
MERCER INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
FOR SIX MONTHS ENDED JUNE 30, 2001 AND 2000
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT FOR EARNINGS PER SHARE)
2001 2000
-------- ---------
Revenues
Sales. . . . . . . . . . . . . . . . . . . . $100,820 $114,818
Other. . . . . . . . . . . . . . . . . . . . 7,486 4,657
-------- ---------
108,306 119,475
Expenses
Cost of sales. . . . . . . . . . . . . . . . 85,241 97,076
General and administrative . . . . . . . . . 8,478 5,251
Interest expense . . . . . . . . . . . . . . 7,504 7,110
Loss on foreign currency derivative
contracts . . . . . . . . . . . . . . . . . 2,553 -
-------- ---------
103,776 109,437
-------- ---------
Income before income taxes . . . . . . . . . . 4,530 10,038
Income taxes (recovery). . . . . . . . . . . . 26 (9)
-------- ---------
Net income . . . . . . . . . . . . . . . . . . 4,504 10,047
Retained earnings, beginning of period . . . . 88,698 59,224
-------- ---------
Retained earnings, end of period . . . . . . . $ 93,202 $ 69,271
======== =========
Earnings per share
Basic. . . . . . . . . . . . . . . . . . . . $ 0.27 $ 0.60
======== =========
Diluted. . . . . . . . . . . . . . . . . . . $ 0.26 $ 0.59
======== =========
The accompanying notes are an integral part of these financial statements.
MERCER INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
FOR THREE MONTHS ENDED JUNE 30, 2001 AND 2000
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT FOR EARNINGS PER SHARE)
2001 2000
-------- -------
Revenues
Sales. . . . . . . . . . . . . . . . . . . . $48,454 $59,575
Other. . . . . . . . . . . . . . . . . . . . 3,856 4,140
-------- -------
52,310 63,715
Expenses
Cost of sales. . . . . . . . . . . . . . . . 43,264 48,184
General and administrative . . . . . . . . . 4,918 3,563
Interest expense . . . . . . . . . . . . . . 3,960 2,978
Loss on foreign currency derivative
contracts . . . . . . . . . . . . . . . . . 213 -
-------- -------
52,355 54,725
-------- -------
Income (loss) before income taxes. . . . . . . (45) 8,990
Income taxes . . . . . . . . . . . . . . . . . 26 14
-------- -------
Net income (loss). . . . . . . . . . . . . . . (71) 8,976
Retained earnings, beginning of period . . . . 93,273 60,295
-------- -------
Retained earnings, end of period . . . . . . . $93,202 $69,271
======== =======
Earnings (loss) per share
Basic. . . . . . . . . . . . . . . . . . . . $ (0.00) $ 0.54
======== =======
Diluted. . . . . . . . . . . . . . . . . . . $ (0.00) $ 0.52
======== =======
The accompanying notes are an integral part of these financial statements.
MERCER INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR SIX MONTHS ENDED JUNE 30, 2001 AND 2000
(UNAUDITED)
(DOLLARS IN THOUSANDS)
2001 2000
--------- --------
Net income. . . . . . . . . . . . . . . . . $ 4,504 $10,047
Other comprehensive gain (loss):
Foreign currency translation adjustments. (13,004) (6,048)
Unrealized gain (loss) on securities. . . 1,518 (622)
--------- --------
Other comprehensive loss. . . . . . . . . (11,486) (6,670)
--------- --------
Total comprehensive gain (loss) . . . . . . $ (6,982) $ 3,377
========= ========
The accompanying notes are an integral part of these financial statements.
MERCER INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THREE MONTHS ENDED JUNE 30, 2001 AND 2000
(UNAUDITED)
(DOLLARS IN THOUSANDS)
2001 2000
-------- -------
Net income (loss) . . . . . . . . . . . . . $ (71) $8,976
Other comprehensive gain (loss):
Foreign currency translation adjustments. (5,036) (196)
Unrealized gain (loss) on securities. . . 475 (607)
-------- -------
Other comprehensive loss. . . . . . . . . (4,561) (803)
-------- -------
Total comprehensive gain (loss) . . . . . . $(4,632) $8,173
======== =======
The accompanying notes are an integral part of these financial statements.
MERCER INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR SIX MONTHS ENDED JUNE 30, 2001 AND 2000
(UNAUDITED)
(DOLLARS IN THOUSANDS)
2001 2000
--------- ---------
Cash Flows from Operating Activities:
Net income . . . . . . . . . . . . . . . . . . . . $ 4,504 $ 10,047
Adjustments to reconcile net income from
operations to cash
Depreciation and amortization. . . . . . . . . . 10,398 13,491
Changes in current assets and liabilities
Investments. . . . . . . . . . . . . . . . . . . (816) (14,270)
Inventories. . . . . . . . . . . . . . . . . . . 1,741 2,180
Receivables. . . . . . . . . . . . . . . . . . . 4,702 1,437
Accounts payable and accrued expenses. . . . . . (1,515) 2,531
Other. . . . . . . . . . . . . . . . . . . . . . (9) 20
--------- ---------
Net cash provided by operating activities. . . 19,005 15,436
Cash Flows from Investing Activities:
Purchase of fixed assets, net of investment grants (4,416) 36,308
Decrease in notes receivable . . . . . . . . . . . 4,296 10
Other. . . . . . . . . . . . . . . . . . . . . . . 58 -
--------- ---------
Net cash provided by (used in) investing
activities. . . . . . . . . . . . . . . . . . (62) 36,318
Cash Flows from Financing Activities:
Cash restricted. . . . . . . . . . . . . . . . . . 1,372 -
Increase in indebtedness . . . . . . . . . . . . . - 5,888
Decrease in indebtedness . . . . . . . . . . . . . (21,244) (1,139)
Decrease in pulp mill conversion costs payable . . (900) (49,264)
--------- ---------
Net cash used in financing activities. . . . . (20,772) (44,515)
Effect of exchange rate changes on cash and
cash equivalents. . . . . . . . . . . . . . . . . . (2,606) (993)
--------- ---------
Net increase (decrease) in cash and cash equivalents (4,435) 6,246
Cash and cash equivalents, beginning of period . . . 18,496 1,722
--------- ---------
Cash and cash equivalents, end of period . . . . . . $ 14,061 $ 7,968
========= =========
The accompanying notes are an integral part of these financial statements.
MERCER INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR SIX MONTHS ENDED JUNE 30, 2001
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The interim period consolidated financial statements contained herein include
the accounts of Mercer International Inc. and its subsidiaries (the "Company").
The interim period consolidated financial statements have been prepared by the
Company pursuant to the rules and regulations of the U.S. Securities and
Exchange Commission (the "SEC"). Certain information and footnote disclosure
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
SEC rules and regulations. The interim period consolidated financial statements
should be read together with the audited consolidated financial statements and
accompanying notes included in the Company's latest annual report on Form 10-K
for the fiscal year ended December 31, 2000. In the opinion of the Company, the
unaudited consolidated financial statements contained herein contain all
adjustments necessary to present a fair statement of the results of the interim
periods presented.
NOTE 2. EARNINGS PER SHARE
Basic earnings per share is computed by dividing income available to common
shareholders by the weighted average number of shares outstanding during a
period. Diluted earnings per share takes into consideration shares outstanding
(computed under basic earnings per share) and potentially dilutive shares. The
weighted average number of shares outstanding for the purposes of calculating
basic earnings per share was 16,874,899 and 16,715,399 for the six months ended
June 30, 2001 and 2000, respectively, and 16,874,899 and 16,715,399 for the
three months ended June 30, 2001 and 2000, respectively. The weighted average
number of shares outstanding for the purposes of calculating diluted earnings
per share was 17,154,277 and 17,101,499 for the six months ended June 30, 2001
and 2000, respectively, and 16,874,899 and 17,210,116 for the three months ended
June 30, 2001 and 2000, respectively.
NOTE 3. ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities", established accounting and
reporting standards for derivative instruments and hedging activities. SFAS No.
133 was amended by SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133",
which deferred the implementation date of SFAS 133 to fiscal years beginning
after June 15, 2000. Retroactive application is prohibited.
The Company adopts SFAS No. 133 effective from January 1, 2001. All derivative
instruments are measured at fair value and reported in the balance sheet as
assets or liabilities. Accounting for gains and losses depends on the intended
use of the derivative instrument. Gains and losses on derivative instruments not
designated as hedging instruments are recognized in earnings in the period of
the change in fair value. Accounting for gains and losses on derivative
instruments designated as hedging instruments depends on the type of hedge, and
such gains and losses are recognized in either earnings or other comprehensive
income.
NOTE 4. BUSINESS SEGMENT INFORMATION
The Company operates in two reportable business segments: pulp and paper. The
segments are managed separately because each business requires different
production and marketing strategies.
Summarized financial information concerning the segments is shown in the
following table:
PULP PAPER TOTAL
-------- ------- --------
SIX MONTHS ENDED JUNE 30, 2001
Sales to external customers. . . . . . . . . . $72,158 $28,662 $100,820
Intersegment net sales . . . . . . . . . . . . 3,236 - 3,236
Segment profit . . . . . . . . . . . . . . . . 6,504 786 7,290
Reconciliation of profit:
Total profit for reportable segments. . . . . $ 7,290
Elimination of intersegment profits . . . . . 602
Unallocated amounts, other corporate expenses (3,362)
--------
Consolidated income before income taxes . . $ 4,530
========
SIX MONTHS ENDED JUNE 30, 2000
Sales to external customers. . . . . . . . . . $70,100 $44,718 $114,818
Intersegment net sales . . . . . . . . . . . . 352 - 352
Segment profit . . . . . . . . . . . . . . . . 10,614 1,230 11,844
Reconciliation of profit:
Total profit for reportable segments. . . . . $11,844
Elimination of intersegment profits . . . . . -
Unallocated amounts, other corporate expenses (1,806)
--------
Consolidated income before income taxes . . $10,038
========
PULP PAPER TOTAL
-------- ------- --------
THREE MONTHS ENDED JUNE 30, 2001
Sales to external customers. . . . . . . . . . $35,567 $12,887 $ 48,454
Intersegment net sales . . . . . . . . . . . . 1,534 - 1,534
Segment profit . . . . . . . . . . . . . . . . 991 717 1,708
Reconciliation of profit:
Total profit for reportable segments. . . . . $ 1,708
Elimination of intersegment profits . . . . . 333
Unallocated amounts, other corporate expenses (2,086)
--------
Consolidated loss before income taxes . . . $ (45)
========
THREE MONTHS ENDED JUNE 30, 2000
Sales to external customers. . . . . . . . . . $37,814 $21,761 $ 59,575
Intersegment net sales . . . . . . . . . . . . 219 - 219
Segment profit . . . . . . . . . . . . . . . . 9,716 65 9,781
Reconciliation of profit:
Total profit for reportable segments. . . . . $ 9,781
Elimination of intersegment profits . . . . . -
Unallocated amounts, other corporate expenses (791)
--------
Consolidated income before income taxes . . $ 8,990
========
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Mercer International Inc. is a pulp and paper company and its operations are
primarily located in Germany. The following discussion and analysis of the
results of operations and financial condition of the Company for the six months
and three months ended June 30, 2001 should be read in conjunction with the
consolidated financial statements and related notes included elsewhere herein.
In this document: (i) unless the context otherwise requires, the "Company"
refers to Mercer International Inc. and its subsidiaries; and (ii) a "tonne" is
one metric ton or 2,204.6 pounds.
Based upon period average exchange rates, the U.S. dollar appreciated by
approximately 7.0% against the deutschmark in the six months and three months
ended June 30, 2001, respectively, compared to the same periods of 2000.
RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 2001
The following table sets forth selected sales data for the Company for the
periods indicated:
SIX MONTHS ENDED
JUNE 30,
------------------
2001 2000
-------- --------
(UNAUDITED)
(IN THOUSANDS)
SALES BY PRODUCT CLASS
Packaging papers(1) . . . $ - $ 8,758
Specialty papers. . . . . 17,579 16,860
Printing papers(2). . . . 11,083 19,100
Pulp. . . . . . . . . . . 72,158 70,100
-------- --------
Total(3). . . . . . . . . $100,820 $114,818
======== ========
SALES BY GEOGRAPHIC AREA
Germany . . . . . . . . . $ 47,557 $ 46,952
European Union(4) . . . . 35,600 41,295
Eastern Europe and other. 17,663 26,571
-------- --------
Total(3). . . . . . . . . $100,820 $114,818
======== ========
(TONNES)
SALES BY VOLUME
Packaging papers(1) . . . - 29,111
Specialty papers. . . . . 20,909 21,056
Printing papers(2). . . . 13,848 27,853
Pulp. . . . . . . . . . . 142,082 119,252
-------- --------
Total(3). . . . . . . . . 176,839 197,272
======== ========
(1) The Company sold its packaging paper mill in Trebsen, Germany effective
June 2000.
(2) The Company sold its printing paper mill in Hainsberg, Germany effective
November 2000.
(3) Excluding intercompany sales.
(4) Not including Germany.
In the six months ended June 30, 2001, revenues decreased by approximately 9.3%
to $108.3 million from $119.5 million in the six months ended June 30, 2000,
primarily as a result of lower paper sales and lower pulp prices in the current
period. The decrease in revenues in the current period was partially offset by
higher pulp volumes. In the six months ended June 30, 2001, pulp and paper
revenues decreased by approximately 12.2% from the comparable period of 2000, on
a 2.9% increase in pulp sales and a 35.9% decrease in paper sales.
Pulp sales in the six months ended June 30, 2001 increased to $72.2 million from
$70.1 million in the comparable period of 2000. In late 1999, the Company
completed the conversion of the Company's pulp mill to the production of kraft
pulp and the increase of the pulp mill's annual production capacity to 280,000
tonnes (the "Conversion Project"). The pulp mill ramped up production in early
2000 and has operated in excess of 90% of capacity since the beginning of the
second quarter of 2000. List prices for kraft pulp in Europe decreased from
approximately $710 per tonne at the end of 2000 to approximately $650 per tonne
during the first quarter of 2001 and approximately $530 per tonne during the
second quarter of 2001.
Paper sales in the six months ended June 30, 2001 decreased to $28.7 million
from $44.7 million in the comparable period of 2000. Sales of specialty papers
increased in the six months ended June 30, 2001 compared to the six months ended
June 30, 2000 as a result of higher sales prices, while sales of printing papers
declined primarily as a result of the sale of one of the Company's printing
paper mills effective November 2000. The Company did not sell any packaging
papers during the six months ended June 30, 2001 as a result of the divestiture
of its packaging paper mill effective June 2000. On average, prices for
specialty and printing papers realized by the Company in the six months ended
June 30, 2001 increased by approximately 5.0% and 16.7%, respectively, compared
to the same period in 2000.
Expenses decreased to $103.8 million in the six months ended June 30, 2001 from
$109.4 million in the comparable period of 2000, primarily as a result of an
improvement in pulp production efficiency due to the ramping-up of pulp
production in early 2000 and a decrease in the production of paper products. On
average, the Company's unit fibre costs for pulp production in the six months
ended June 30, 2001 increased by approximately 12.9% compared to the same period
in 2000. Prices for waste paper, which currently comprises approximately 25% of
the fibre for the Company's paper mills, also increased in the six months ended
June 30, 2001, compared to the same period of 2000.
General and administrative expenses were $8.5 million in the six months ended
June 30, 2001, compared to $5.3 million in the six months ended June 30, 2000.
Interest expense in the six months ended June 30, 2001 increased to $7.5 million
from $7.1 million in the comparable period of 2000, primarily as a result of the
payment of government guarantee fees and higher interest rates in connection
with the entering into of foreign currency forward rate swaps relating to the
Company's bank loans. The Company recorded a loss of $2.6 million on its foreign
currency derivative contracts in the six months ended June 30, 2001. See "Item
3. Quantitative and Qualitative Disclosures About Market Risk" for information
with respect to foreign currency derivatives.
For the six months ended June 30, 2001, the Company reported net income of $4.5
million, or $0.26 per share on a diluted basis, compared to $10.0 million, or
$0.59 per share, in the comparable period of 2000.
RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 2001
The following table sets forth selected sales data for the Company for the
periods indicated:
THREE MONTHS ENDED
JUNE 30,
------------------
2001 2000
--------- -------
(UNAUDITED)
(IN THOUSANDS)
SALES BY PRODUCT CLASS
Packaging papers(1) . . . . . $ - $ 3,553
Specialty papers. . . . . . . 7,782 8,365
Printing papers(2). . . . . . 5,105 9,843
Pulp. . . . . . . . . . . . . 35,567 37,814
--------- -------
Total(3). . . . . . . . . . . $ 48,454 $59,575
========= =======
SALES BY GEOGRAPHIC AREA
Germany . . . . . . . . . . . $ 21,229 $24,153
European Union(4) . . . . . . 18,661 21,828
Eastern Europe and other. . . 8,564 13,594
--------- -------
Total(3). . . . . . . . . . . $ 48,454 $59,575
========= =======
(TONNES)
SALES BY VOLUME
Packaging papers(1) . . . . . - 11,394
Specialty papers. . . . . . . 9,865 10,398
Printing papers(2). . . . . . 6,799 14,364
Pulp. . . . . . . . . . . . . 80,340 60,941
--------- -------
Total(3). . . . . . . . . . . 97,004 97,097
========= =======
(1) The Company sold its packaging paper mill in Trebsen, Germany effective
June 2000.
(2) The Company sold its printing paper mill in Hainsberg, Germany effective
November 2000.
(3) Excluding intercompany sales.
(4) Not including Germany.
In the three months ended June 30, 2001, revenues decreased by approximately
17.9% to $52.3 million from $63.7 million in the three months ended June 30,
2000, primarily as a result of lower paper sales and lower pulp prices in the
current period. The decrease in revenues in the current period was partially
offset by higher pulp volumes. In the three months ended June 30, 2001, pulp
and paper revenues decreased by approximately 18.7% from the comparable period
of 2000, on a 5.9% decrease in pulp sales and a 40.8% decrease in paper sales.
Pulp sales in the three months ended June 30, 2001 decreased to $35.6 million
from $37.8 million in the comparable period of 2000 as a result of lower sales
prices. In late 1999, the Company completed the Conversion Project to convert
the Company's pulp mill to the production of kraft pulp and increase its annual
production capacity to 280,000 tonnes. The pulp mill ramped up production
in early 2000 and has operated in excess of 90% of capacity since the beginning
of the second quarter of 2000. A decrease in pulp demand and high pulp
inventories resulted in list prices for kraft pulp in Europe decreasing from
approximately $620 per tonne at March 31, 2001 to approximately $500 per tonne
at June 30, 2001. List prices continued to deteriorate into the third quarter
of 2001. In order to balance pulp inventory levels, many pulp producers have
announced market downtime in the third quarter of 2001.
Paper sales in the three months ended June 30, 2001 decreased to $12.9 million
from $21.8 million in the comparable period of 2000. Sales of specialty papers
declined in the three months ended June 30, 2001 compared to the three months
ended June 30, 2000 as a result of lower sales prices and volumes, while sales
of printing papers declined primarily as a result of the sale of one of the
Company's printing paper mills effective November 2000. The Company did not
sell any packaging papers during the second quarter of 2001 as a result of the
divestiture of its packaging paper mill effective June 2000. On average, prices
for specialty papers realized by the Company in the three months ended June 30,
2001 decreased by approximately 1.9% compared to the same period in 2000, while
prices for printing papers increased by approximately 9.6%.
Expenses decreased to $52.4 million in the three months ended June 30, 2001 from
$54.7 million in the comparable period of 2000, primarily as a result of an
improvement in pulp production efficiency due to the ramping-up of pulp
production in early 2000 and a decrease in the production of paper products. On
average, the Company's unit fibre costs for pulp production in the three months
ended June 30, 2001 increased by approximately 11.6% compared to the same period
in 2000. Prices for waste paper, which currently comprises approximately 25% of
the fibre for the Company's paper mills, also increased in the three months
ended June 30, 2001, compared to the same period of 2000.
General and administrative expenses were $4.9 million in the three months ended
June 30, 2001, compared to $3.6 million in the three months ended June 30, 2000.
Interest expense in the three months ended June 30, 2001 increased to $4.0
million from $3.0 million in the comparable period of 2000, primarily as a
result of the payment of government guarantee fees and higher interest rates in
connection with the entering into of foreign currency forward rate swaps
relating to the Company's bank loans. The Company recorded a loss of $0.2
million on its foreign currency derivative contracts in the three months ended
June 30, 2001. See "Item 3. Quantitative and Qualitative Disclosures About
Market Risk" for information with respect to foreign currency derivatives.
For the three months ended June 30, 2001, the Company reported a net loss of
$71,000, or $0.00 per share on a diluted basis, compared to net income of $9.0
million, or $0.52 per share, in the comparable period of 2000.
LIQUIDITY AND CAPITAL RESOURCES
The following table is a summary of selected financial information concerning
the Company for the periods indicated:
AS AT AS AT
JUNE 30, 2001 DECEMBER 31, 2000
--------------- ------------------
(UNAUDITED)
(IN THOUSANDS)
FINANCIAL POSITION
Working capital . . . . . . . . . . $ 34,150 $ 26,665
Property, plant and equipment (net) 234,007 265,607
Total assets. . . . . . . . . . . . 347,685 403,659
Long-term debt. . . . . . . . . . . 183,101 208,315
Shareholders' equity. . . . . . . . 118,425 125,407
At June 30, 2001, the Company's cash and cash equivalents totalled $14.1
million, a net decrease of $4.4 million from $18.5 million at December 31, 2000.
At June 30, 2001, the Company had short-term trading securities totalling $5.7
million, compared to $5.3 million at December 31, 2000.
OPERATING ACTIVITIES
Operating activities provided cash of $19.0 million in the six months ended June
30, 2001, compared to $15.4 million in the same period in 2000. A decrease in
receivables provided cash of $4.7 million in the current period, compared to
$1.4 million in the comparative period of 2000. A decrease in accounts payable
and accrued expenses used cash of $1.5 million in the six months ended June 30,
2001, compared to an increase in accounts payable and accrued expenses providing
cash of $2.5 million in the six months ended June 30, 2000. Lower inventories
provided cash of $1.7 million in the six months ended June 30, 2001, compared to
$2.2 million in the six months ended June 30, 2000. Net purchases of investment
securities used cash of $0.8 million in the six months ended June 30, 2001,
compared to $14.3 million in the comparative period of 2000.
INVESTING ACTIVITIES
Investing activities in the six months ended June 30, 2001 used cash of $62,000,
consisting primarily of capital expenditures on properties and partially offset
by a reduction in notes receivable, compared to providing cash of $36.3 million
in the six months ended June 30, 2000.
The Company completed the Conversion Project in late 1999. The Conversion
Project was financed through a combination of borrowings under a project loan,
non-refundable governmental grants, governmental assistance and guarantees for
long-term project financing and an equity investment by the Company.
The Company is continuing to review its paper operations to define a long-term
core competency in respect of products produced in order that future investment
may be directed towards that segment.
FINANCING ACTIVITIES
Financing activities used cash of $20.8 million in the six months ended June 30,
2001, primarily as a result of the repayment of $21.2 million in indebtedness
relating to the Conversion Project. Financing activities used cash of $44.5
million in the six months ended June 30, 2000.
The depreciation of the deutschmark against the U.S. dollar in the six months
ended June 30, 2001 resulted in an unrealized foreign exchange translation loss
of $2.6 million on cash and cash equivalents, which is included in the Company's
statement of comprehensive income and does not affect the Company's net
earnings. See "Foreign Currency".
Effective January 2000, the Company agreed, subject to certain conditions, to
acquire a controlling interest in a "greenfield" project to construct and
operate a 550,000-tonne softwood kraft pulp mill to be located at Stendal,
Germany (the "Stendal Project"). In 2001, the Company agreed to increase its
ultimate ownership position in the Stendal Project to 57.5%. The Company's
participation in the Stendal Project is subject to, among other things,
completion of due diligence and the entering into of a shareholders' agreement
and the Stendal Project itself is subject to, among other things, financing,
final permit amendments and approval of government investment incentives. The
Stendal Project is currently estimated to cost approximately euro 1.0 billion
(or $847.5 million) and to be completed in 2005. Financing for the Stendal
Project is expected to come from the project partners, long-term bank credit
facilities and government investment incentives. In July 2001, the Company
announced that Bayerische Hypo- und Vereinsbank AG has agreed to act as the lead
financial arranger and underwriter on the credit facilities for the Stendal
Project. The aggregate amount of the facilities to be arranged is up to euro
891.4 million (or $755.4 million). See "Stendal Pulp Mill Project
Uncertainties".
Other than the agreement relating to the Stendal Project, the Company had no
material commitments to acquire assets or operating businesses as at June 30,
2001. The Company anticipates that there will be acquisitions of businesses or
commitments to projects in the future. To achieve its long-term goals of
expanding its asset and earnings base through mergers and acquisitions, the
Company will require substantial capital resources. The necessary resources
will be generated from cash flow from operations, cash on hand, borrowing
against its assets and/or the sale of assets.
FOREIGN CURRENCY
Substantially all of the Company's operations are conducted in international
markets and its consolidated financial results are subject to foreign currency
exchange rate fluctuations, in particular, those in Germany. The Company's pulp
and paper products are principally sold in deutschmarks and euros and
approximately 99% of the Company's revenues are denominated in deutschmarks and
euros. The value of the euro is fixed at 1.95583 deutschmarks.
The Company translates foreign assets and liabilities into U.S. dollars 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.
Unrealized gains or losses from these translations are recorded as shareholders'
equity on the Company's balance sheet and do not affect the net earnings of the
Company.
Since substantially all of the Company's revenues are received in deutschmarks
and euros, the financial position of the Company for any given period, when
reported in U.S. dollars, can be significantly affected by the exchange rates
for deutschmarks prevailing during that period. In the six months ended June
30, 2001, the depreciation of the deutschmark against the U.S. dollar resulted
in a net $13.0 million foreign exchange translation loss and, as a result, the
cumulative foreign exchange translation loss increased from $56.3 million at
December 31, 2000 to $69.3 million at June 30, 2001. See "Item 3. Quantitative
and Qualitative Disclosures About Market Risk" for information with respect to
foreign currency derivatives.
The average and period end exchange rates for the deutschmark to the U.S. dollar
for the periods indicated are as follows:
QUARTER ENDED QUARTER ENDED
JUNE 30, 2001 JUNE 30, 2000
----------------------------- --------------------------
PERIOD END PERIOD AVERAGE PERIOD END PERIOD AVERAGE
------------- -------------- ---------- --------------
RATE OF EXCHANGE
Deutschmark. . . 2.3079 2.2399 2.0486 2.0941
Based upon the period average exchange rate in the six months ended June 30,
2001, the U.S. dollar increased by approximately 4.7% in value against the
deutschmark since December 31, 2000.
CYCLICAL NATURE OF BUSINESS; COMPETITIVE POSITION
The pulp and paper business is cyclical in nature and markets for the Company's
principal products are characterized by periods of supply and demand imbalance,
which in turn affects product prices. The markets for pulp and paper are highly
competitive and sensitive to cyclical changes in industry capacity and in the
economy, both of which can have a significant influence on selling prices and
the earnings of the Company. Demand for pulp and paper products has
historically been determined by the level of economic growth and has been
closely tied to overall business activity. The competitive position of the
Company is influenced by the availability and quality of raw materials (fibre)
and its experience in relation to other producers with respect to inflation,
energy, transportation, labour costs and productivity.
STENDAL PULP MILL PROJECT UNCERTAINTIES
The Company's participation in the Stendal Project is subject to certain
conditions, including completion of its due diligence and entering into a
shareholders' agreement. In addition, the Stendal Project itself is subject to
various risks and uncertainties customary to large "greenfield" projects of this
nature which may result in the Stendal Project not proceeding as currently
planned, or at all, such as availability and cost of materials and labour,
construction delays, cost overruns, weather conditions, governmental
regulations, availability of adequate financing, increases in long-term interest
rates and increases in taxes and other governmental fees. The Stendal Project
will also be subject to extensive and complex regulations and environmental
compliance which may result in delays, in the project company and/or its
shareholders, including the Company, incurring substantial costs in relation
thereto or in the Stendal Project being amended or not proceeding at all.
The implementation of the Stendal Project is currently expected to commence in
the first quarter of 2002 and be completed in 2005. However, there can be no
assurance that the Stendal Project will proceed as currently planned, or at all.
FORWARD-LOOKING STATEMENTS
Statements in this report, to the extent they are not based on historical
events, constitute forward-looking statements. Forward-looking statements
include, without limitation, statements regarding the outlook for future
operations, forecasts of future costs and expenditures, the evaluation of market
conditions, the outcome of legal proceedings, the adequacy of reserves, or other
business plans. Investors are cautioned that forward-looking statements are
subject to an inherent risk that actual results may vary materially from those
described herein. Factors that may result in such variance, in addition to
those accompanying the forward-looking statements, include changes in interest
rates, commodity prices, and other economic conditions; actions by competitors;
changing weather conditions and other natural phenomena; actions by government
authorities; uncertainties associated with legal proceedings; technological
development; future decisions by management in response to changing conditions;
and misjudgments in the course of preparing forward-looking statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
The Company is exposed to market risks from changes in interest rates, foreign
currency exchange rates and equity prices which may affect its results of
operations and financial condition. The Company manages these risks through
internal risk management policies. The Company also uses derivative instruments
in regard to its exposure to interest rate, currency and pulp price risks. The
derivative instruments are not designated as hedging instruments and the purpose
of the derivative activity is speculative in nature, as management uses such
tools either to augment the Company's potential gains or to reduce the Company's
potential losses, depending on management's perception of future economic events
and developments. If any of the variety of instruments and strategies the
Company utilizes are not effective, the Company may incur losses. Many of the
Company's strategies are based on historical trading patterns and correlations.
However, these strategies may not be fully effective in all market environments
or against all types of risks. Unexpected market developments may affect the
Company's risk management strategies during this time, and unanticipated
developments could impact the Company's risk management strategies in the
future.
In December 2000, the Company entered into U.S. dollar/euro foreign currency
forward rate swaps to manage its risk exposure with respect to in aggregate
approximately euro 223.3 million of the principal amount of its long-term
indebtedness. A fair value gain of $0.9 million on these contracts was
recognized in the six months ended June 30, 2001.
During the first quarter of 2001, the Company entered into a U.S. dollar/euro
forward contract in the amount of approximately euro 35.0 million, which was
settled in March 2001. The contract resulted in a $2.3 million loss.
During the second quarter of 2001, the Company entered into two U.S. dollar/euro
forward contracts in the aggregate amount of approximately euro 22.4 million,
maturing in the second quarter of 2002. A fair value loss of $1.1 million on
these contracts was recognized in the six months ended June 30, 2001.
As at June 30, 2001, no derivative contract had been executed with respect to
pulp prices.
Any change in the fair value of derivative instruments is included in the
determination of earnings.
Reference is made to the Company's annual report on Form 10-K for the year ended
December 31, 2000 for additional information concerning market risk.
PART II. OTHER INFORMATION
-----------------
ITEM 1. LEGAL PROCEEDINGS
The Company is subject to routine litigation incidental to its business. The
Company does not believe that the outcome of such litigation will have a
material adverse effect on its business or financial condition.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
None.
(b) REPORTS ON FORM 8-K
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MERCER INTERNATIONAL INC.
By: /s/ R. Ian Rigg
---------------------------
R. Ian Rigg
Vice President and Chief
Financial Officer
Date: August 13, 2001