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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
---- ----
COMMISSION FILE NO.: 000-09409
MERCER INTERNATIONAL INC.
(Exact name of Registrant as specified in its charter)
WASHINGTON 91-6087550
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
SCHUTZENGASSE 32, ZURICH, SWITZERLAND, 8001
(Address of Office)
41 (43) 344 7070
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
----- -----
The Registrant had 16,794,899 shares of beneficial interest outstanding as at
May 15, 2002.
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PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
MERCER INTERNATIONAL INC.
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2002
(UNAUDITED)
2
MERCER INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
AS AT MARCH 31, 2002 AND DECEMBER 31, 2001
(UNAUDITED)
(EUROS IN THOUSANDS)
MARCH 31, DECEMBER 31,
2002 2001
--------- ------------
ASSETS
Current Assets
Cash and cash equivalents E 5,644 E 11,741
Investments 3,811 4,549
Receivables 50,347 47,892
Inventories 24,074 25,062
Prepaid and other 3,264 3,968
--------- -----------
Total current assets 87,140 93,212
Long-Term Assets
Cash restricted 34,156 33,388
Properties 270,949 278,617
Investments 9,612 8,598
Notes receivable 5,572 5,475
Deferred income tax 10,327 10,303
--------- -----------
330,616 336,381
--------- -----------
E 417,756 E 429,593
========= ===========
LIABILITIES
Current Liabilities
Accounts payable and accrued expenses E 51,496 E 51,916
Notes payable 7,568 7,392
Debt 17,264 18,360
--------- -----------
Total current liabilities 76,328 77,668
Long-Term Liabilities
Debt 209,777 216,871
Other 3,241 3,441
--------- -----------
213,018 220,312
--------- -----------
Total liabilities 289,346 297,980
SHAREHOLDERS' EQUITY
Shares of beneficial interest 76,722 76,722
Retained earnings 53,722 59,111
Accumulated other comprehensive loss (2,034) (4,220)
--------- -----------
128,410 131,613
--------- -----------
E 417,756 E 429,593
========= ===========
The accompanying notes are an integral part of these financial statements.
3
MERCER INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF LOSS AND RETAINED EARNINGS
FOR THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(UNAUDITED)
(EUROS IN THOUSANDS, EXCEPT FOR EARNINGS PER SHARE)
2002 2001
--------- ---------
Revenues
Sales E 59,207 E 56,796
Transportation 1,416 1,295
Other 3,664 2,642
--------- ---------
64,287 60,733
Expenses
Cost of pulp and paper 53,919 44,424
Transportation 1,042 1,104
General and administrative 6,630 3,861
Interest expense 4,018 3,844
Loss on foreign currency derivative contracts 4,067 2,538
--------- ---------
69,676 55,771
--------- ---------
Net (loss) income (5,389) 4,962
Retained earnings, beginning of period 59,111 61,934
--------- ---------
Retained earnings, end of period E 53,722 E 66,896
========= =========
Earnings per share
Basic E (0.32) E 0.29
========= =========
Diluted E (0.32) E 0.29
========= =========
The accompanying notes are an integral part of these financial statements.
4
MERCER INTERNATIONAL INC.
STATEMENTS OF COMPREHENSIVE INCOME
FOR THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(UNAUDITED)
(EUROS IN THOUSANDS)
2002 2001
--------- ---------
Net (loss) income E (5,389) E 4,962
Other comprehensive income:
Foreign currency translation adjustments 1,327 841
Unrealized gain on securities 859 679
--------- ---------
Other comprehensive income 2,186 1,520
--------- ---------
Total comprehensive (loss) income E (3,203) E 6,482
========= =========
The accompanying notes are an integral part of these financial statements.
5
MERCER INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(UNAUDITED)
(EUROS IN THOUSANDS)
2002 2001
---------- ---------
Cash Flows from Operating Activities:
Net (loss) income E (5,389) E 4,962
Adjustments to reconcile net (loss)
income from operations to cash
Depreciation and amortization 6,769 5,798
Changes in current assets and liabilities
Investments 1,785 (836)
Inventories 1,041 (1,664)
Receivables (1,374) 7,099
Accounts payable and accrued expenses (1,045) 1,321
Other 470 203
--------- ---------
Net cash provided by operating activities 2,257 16,883
Cash Flows from Investing Activities:
Sales (Purchases) of fixed assets,
net of investment grants 773 (1,526)
---------- ---------
Net cash provided by (used in)
investing activities 773 (1,526)
Cash Flows from Financing Activities:
Cash restricted (768) 2,143
Increase in indebtedness 1,021 -
Decrease in indebtedness (9,371) (23,071)
---------- ---------
Net cash used in financing activities (9,118) (20,928)
Effect of exchange rate changes on cash and
cash equivalents (9) 4
---------- ---------
Net decrease in cash and cash equivalents (6,097) (5,567)
Cash and cash equivalents,
beginning of period 11,741 19,691
---------- ---------
Cash and cash equivalents,
end of period E 5,644 E 14,124
========== =========
The accompanying notes are an integral part of these financial statements.
6
MERCER INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THREE MONTHS ENDED MARCH 31, 2002
(UNAUDITED)
Note 1. Basis of Presentation
- -------- -----------------------
The interim period consolidated financial statements contained herein include
the accounts of Mercer International Inc. and its subsidiaries (the "Company").
The interim period consolidated financial statements have been prepared by the
Company pursuant to the rules and regulations of the U.S. Securities and
Exchange Commission (the "SEC"). Certain information and footnote disclosure
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States have been condensed or
omitted pursuant to such SEC rules and regulations. The interim period
consolidated financial statements should be read together with the audited
consolidated financial statements and accompanying notes included in the
Company's latest annual report on Form 10-K for the fiscal year ended December
31, 2001. In the opinion of the Company, the unaudited consolidated financial
statements contained herein contain all adjustments necessary to present a fair
statement of the results of the interim periods presented.
Note 2. Reporting Currency
- -------- -------------------
Effective January 1, 2002, the Company changed its reporting currency from the
U.S. dollar to the Euro. The reason for this change is because a significant
majority of the Company's business transactions are originally denominated in
Euros. The Company's functional currency and reporting currency are now the
same. Prior years' financial statements had been reported in U.S. dollars, but
have been restated into Euros using the guidance of Statement of Financial
Accounting Standards No. 52, "Foreign Currency Translation" ("SFAS 52").
Therefore, the financial statements for prior years depict the same trends that
the previous financial statements presented in U.S. dollars show.
The Euro was initially implemented by the European Community on January 1, 1999.
By adopting the Euro as the Company's reporting currency, most of the cumulative
foreign currency translation losses were eliminated from the Company's balance
sheets and most of the foreign currency translation losses were eliminated from
the 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 three months ended March 31, 2001, there was a
foreign currency translation loss of $7,968 (in thousands of U.S. dollars)
included as part of comprehensive income (loss). In conjunction with the
restatement, the majority of this amount was eliminated.
For periods prior to 1999, when the Company's functional currency was the German
deutschmark, the financial statements were restated using a fixed rate of 0.5113
Euros to each deutschmark. As a result of using the fixed exchange rate, the
Company's consolidated financial statements for those periods may not be
comparable to the financial statements of companies from other countries
reporting in the Euro.
7
Note 3. Earnings Per Share
- -------- --------------------
Basic earnings per share is computed by dividing income available to common
shareholders by the weighted average number of shares outstanding during a
period. Diluted earnings per share takes into consideration shares outstanding
(computed under basic earnings per share) and potentially dilutive shares. The
weighted average number of shares outstanding for the purposes of calculating
basic earnings per share was 16,874,899 for the three months ended March 31,
2002 and 2001, respectively. The weighted average number of shares outstanding
for the purposes of calculating diluted earnings per share was 16,874,899 and
17,218,749 for the three months ended March 31, 2002 and 2001, respectively.
Note 4. Business Segment Information
- -------- ------------------------------
The Company operates in two reportable business segments: pulp and paper. The
segments are managed separately because each business requires different
production and marketing strategies.
Summarized financial information concerning the segments is shown in the
following table:
PULP PAPER TOTAL
--------- --------- --------
(Euros in thousands)
Three Months Ended March 31, 2002
- ---------------------------------
Sales to external customers E 33,633 E 25,574 E 59,207
Intersegment net sales 1,401 - 1,401
Segment profit (loss) (5,867) 2,780 (3,087)
Reconciliation of loss:
Total loss for reportable segments E (3,087)
Elimination of intersegment profits 377
Unallocated amounts, other corporate expenses (2,679)
---------
Consolidated loss before income taxes E (5,389)
=========
Three Months Ended March 31, 2001
- ---------------------------------
Sales to external customers E 39,686 E 17,110 E 56,796
Intersegment net sales 1,846 - 1,846
Segment profit 5,979 75 6,054
Reconciliation of profit:
Total profit for reportable segments E 6,054
Elimination of intersegment profits 292
Unallocated amounts, other corporate expenses (1,384)
---------
Consolidated income before income taxes E 4,962
=========
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Mercer International Inc. is a pulp and paper company and its operations are
primarily located in Germany and Switzerland. The following discussion and
analysis of the results of operations and financial condition of the Company for
the three months ended March 31, 2002 should be read in conjunction with the
consolidated financial statements and related notes included in this quarterly
report, as well as the Company's most recent annual report on Form 10-K for the
fiscal year ended December 31, 2001 filed with the U.S. Securities and Exchange
Commission. In this document: (i) unless the context otherwise requires, the
"Company" refers to Mercer International Inc. and its subsidiaries; and (ii) a
"tonne" is one metric ton or 2,204.6 pounds.
Effective January 1, 2002, the Company changed its reporting currency from the
U.S. dollar to the Euro, as a significant majority of the Company's business
transactions are originally denominated in Euros. As a result, the Company's
financial statements for prior periods included herein have been restated to
Euros, but depict the same trends as previously shown. The Company translates
foreign assets and liabilities at the rate of exchange on the balance sheet
date. Revenues and expenses are translated at the average rate of exchange
prevailing during the period. The period end and period average exchange rates
for the U.S. dollar to the Euro for the three month period ended March 31, 2002
were 1.1480 and 1.1403, respectively. See Note 2 to the interim period
consolidated financial statements included in this quarterly report.
RESULTS OF OPERATIONS - Three Months Ended March 31, 2002
- ----------------------- --------------------------------------
The following table sets forth selected sales data for the Company for the
periods indicated:
THREE MONTHS ENDED MARCH 31,
----------------------------------
2002 2001
-------- --------
(unaudited)
(Euros in thousands)
SALES BY PRODUCT CLASS
Specialty papers(1) E 20,437 E 10,626
Printing papers 5,137 6,484
Pulp 33,633 39,686
--------- ---------
Total(2) E 59,207 E 56,796
========= =========
SALES BY GEOGRAPHIC AREA
Germany E 24,369 E 28,555
European Union(3) 17,768 18,372
Eastern Europe and other 17,070 9,869
--------- ---------
Total(2) E 59,207 E 56,796
========= =========
SALES BY VOLUME (tonnes)
Specialty papers(1) 16,438 11,044
Printing papers 6,114 7,049
Pulp 73,498 61,742
--------- ---------
Total(2) 96,050 79,835
========= =========
- -------------
(1) The Company acquired its specialty paper mill in Landqart, Switzerland
in December 2001. These amounts include the results from the
Landqart mill as of January 1, 2002.
(2) Excluding intercompany sales.
(3) Not including Germany.
9
In the three months ended March 31, 2002, revenues increased by approximately
5.9% to Euro 64.3 million from Euro 60.7 million in the three months ended March
31, 2001, primarily as a result of increased sales of specialty papers resulting
from the acquisition of the paper mill in Landqart, Switzerland in December
2001. In the three months ended March 31, 2002, pulp and paper revenues
increased by approximately 4.2% from the comparable period of 2001, on a 15.3%
decrease in pulp sales and a 49.5% increase in paper sales.
Pulp sales in the three months ended March 31, 2002 decreased to Euro 33.6
million from Euro 39.7 million in the comparable period of 2001, as global
economic weakness and high producer inventory levels lead to a marked decline in
prices. List prices for kraft pulp in Europe decreased from approximately Euro
755 (U.S. $710) per tonne at the end of 2000 to approximately Euro 528 (U.S.
$470) per tonne at the end of 2001 and approximately Euro 505 (U.S. $440) per
tonne at the end of the first quarter of 2002.
Paper sales in the three months ended March 31, 2002 increased to Euro 25.6
million from Euro 17.1 million in the comparable period of 2001. Sales of
specialty papers in the three months ended March 31, 2002 increased to Euro 20.4
million from Euro 10.6 million in the three months ended March 31, 2001, as a
result of the acquisition of the Landqart mill. On average, prices realized by
the Company in the three months ended March 31, 2002 for specialty papers
increased by approximately 29.2% and for printing papers decreased by
approximately 8.7%, compared to the same period in 2001.
Expenses increased to Euro 69.7 million in the three months ended March 31, 2002
from Euro 55.8 million in the comparable period of 2001, primarily as a result
of the inclusion of the results of the Landqart mill. On average, the Company's
unit fibre costs for pulp production in the three months ended March 31, 2002
decreased by approximately 8.0%, compared to the same period in 2001. As a
result of the acquisition of the Landqart mill, waste paper no longer represents
a significant portion of the fibre used at the Company's paper mills.
General and administrative expenses increased to Euro 6.6 million in the three
months ended March 31, 2002 from Euro 3.9 million in the three months ended
March 31, 2001, primarily due to increased administrative expenses as a result
of the acquisition of the Landqart mill and an increase in professional fees,
costs and expenses. Interest expense in the three months ended March 31, 2002
increased to Euro 4.0 million from Euro 3.8 million in the comparable period of
2001, primarily as a result of the acquisition of the Landqart mill. The
Company recorded a loss of Euro 4.1 million on its foreign currency derivative
contracts in the three months ended March 31, 2002. See "Item 3. Quantitative
and Qualitative Disclosures About Market Risk" for information with respect to
foreign currency derivatives.
For the three months ended March 31, 2002, the Company reported a net loss of
Euro 5.4 million, or Euro 0.32 per share on a basic and diluted basis, compared
to net income of Euro 5.0 million, or Euro 0.29 per share on a basic and diluted
basis, in the comparable period of 2001.
10
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
MARCH 31, 2002 DECEMBER 31, 2001
-------------- -----------------
(unaudited)
(Euros in thousands)
FINANCIAL POSITION
Working capital E 10,812 E 15,544
Property, plant and equipment (net) 270,949 278,617
Total assets 417,756 429,593
Long-term debt 209,777 216,871
Shareholders' equity 128,410 131,613
At March 31, 2002, the Company's cash and cash equivalents totalled Euro 5.6
million, a net decrease of Euro 6.1 million from Euro 11.7 million at December
31, 2001. At March 31, 2002, the Company had short-term trading securities
totalling Euro 3.8 million, compared to Euro 4.5 million at December 31, 2001.
Operating Activities
- ---------------------
Operating activities provided cash of Euro 2.3 million in the three months ended
March 31, 2002, compared to Euro 16.9 million in the same period in 2001. An
increase in receivables used cash of Euro 1.4 million in the current period,
compared to a decrease in receivables providing cash of Euro 7.1 million in the
comparative period of 2001. A decrease in accounts payable and accrued expenses
used cash of Euro 1.0 million in the three months ended March 31, 2002, compared
to an increase in accounts payable and accrued expenses providing cash of Euro
1.3 million in the three months ended March 31, 2001. Lower inventories provided
cash of Euro 1.0 million in the three months ended March 31, 2002, compared to
higher inventories using cash of Euro 1.7 million in the three months ended
March 31, 2001. Net sales of investment securities provided cash of Euro 1.8
million in the three months ended March 31, 2002, compared to net purchases of
investment securities using cash of Euro 0.8 million in the comparative period
of 2001.
Investing Activities
- ---------------------
Investing activities in the three months ended March 31, 2002 provided cash of
Euro 0.8 million, which consisted primarily of net sales of properties, compared
to using cash of Euro 1.5 million in the three months ended March 31, 2001.
The Company completed a major capital project to convert its Rosenthal pulp mill
from the production of sulphite pulp to kraft pulp, increase capacity and
improve operations (the "Conversion Project") in late 1999. The Conversion
Project was financed through a combination of borrowings under a project
loan, non-refundable governmental grants, governmental assistance and guarantees
for long-term project financing and an equity investment by the Company.
11
Financing Activities
- ---------------------
Financing activities used cash of Euro 9.1 million in the three months ended
March 31, 2002, primarily as a result of the reduction of indebtedness during
the period, including the repayment of Euro 6.2 million of indebtedness incurred
in connection with the Conversion Project. Financing activities used cash of
Euro 20.9 million in the three months ended March 31, 2001, primarily as a
result of the reduction of indebtedness during the period.
Effective January 2000, the Company agreed, subject to certain conditions, to
acquire an interest in a "greenfield" project to construct and operate a 550,000
tonne softwood kraft pulp mill to be located at Stendal, Germany (the "Stendal
Project"). In 2001, a shareholder removed itself from the Stendal Project
pursuant to a corporate reorganization and its pro rata share of the project was
redistributed among the remaining shareholders for a nominal amount. Given the
increase in the Company's participation in the Stendal Project, pursuant to the
terms of the subscription agreement, the Company's participation in the Stendal
Project will increase to approximately 57%. The increase in ownership is
subject to certain conditions, including the entering into of a formal
shareholders' agreement and the completion of financing in connection with the
project. The Stendal Project has received the necessary permits for the
construction of the Stendal Mill as well as commitments for German federal and
state grants and subsidies, as well as a financing commitment letter from a
German bank. The Company is in the process of trying to complete definitive
agreements relating to the commitment letter. In addition, financing for the
project is expected to come from third party contributions. The Company is
currently in the process of determining the proportionate financing
contributions in connection with the Stendal Project. The Stendal Project is
currently estimated to cost approximately Euro 884.2 million and to be completed
in 2004. See "Stendal Pulp Mill Project Uncertainties".
Other than the agreement relating to the Stendal Project, the Company had no
material commitments to acquire assets or operating businesses as at March 31,
2002, although it is considering a number of initiatives relating to potential
acquisitions and joint ventures both in Europe and North America. The Company
anticipates that there will be acquisitions of businesses or commitments to
projects in the future. To achieve its long-term goals of expanding its asset
and earnings base through mergers and acquisitions, the Company will require
substantial capital resources. The necessary resources will be generated from
cash flow from operations, issuances of securities and/or borrowing against
and/or the sale of assets.
Foreign Currency
- -----------------
Effective January 1, 2002, the Company changed its reporting currency from the
U.S. dollar to the Euro as a significant majority of the Company's business
transactions are originally denominated in Euros. By adopting the Euro, most
cumulative foreign currency translation losses of the Company were eliminated.
However, the Company holds certain assets and liabilities in U.S. dollars, Swiss
francs and, to a lesser extent, in Canadian dollars. Accordingly, the Company's
consolidated financial results are subject to foreign currency exchange rate
fluctuations.
12
The Company translates U.S. dollar, Swiss franc and Canadian dollar denominated
assets and liabilities into Euros at the rate of exchange on the balance sheet
date. Unrealized gains or losses from these translations are recorded as
shareholders' equity on the Company's balance sheet and do not affect the net
earnings of the Company.
The Company's cumulative foreign exchange translation gain decreased marginally
from Euro 1.3 million at December 31, 2001 to Euro 1.2 million at March 31,
2002.
The average and period end exchange rates for the U.S. dollar to the Euro for
the periods indicated are as follows:
QUARTER ENDED QUARTER ENDED
MARCH 31, 2002 MARCH 31, 2001
----------------------------- -----------------------------
PERIOD END PERIOD AVERAGE PERIOD END PERIOD AVERAGE
---------- -------------- ---------- --------------
Rate of
Exchange
Euro 1.1480 1.1403 1.1375 1.0846
Based upon the period average exchange rate in the three months ended March 31,
2002, the U.S. dollar increased by approximately 1.6% in value against the Euro
since December 31, 2001.
Cyclical Nature of Business; Competitive Position
- ------------------------------------------------------
The pulp and paper business is cyclical in nature and markets for the Company's
principal products are characterized by periods of supply and demand imbalance,
which in turn affects product prices. The markets for pulp and paper are highly
competitive and sensitive to cyclical changes in industry capacity and in the
economy, both of which can have a significant influence on selling prices and
the earnings of the Company. Demand for pulp and paper products has
historically been determined by the level of economic growth and has been
closely tied to overall business activity. The competitive position of the
Company is influenced by the availability and quality of raw materials (fibre)
and its experience in relation to other producers with respect to inflation,
energy, transportation, labour costs and productivity.
Stendal Pulp Mill Project Uncertainties
- -------------------------------------------
The Company's participation in the Stendal Project is subject to certain
conditions, including the completion of financing. In addition, the Stendal
Project itself is subject to various risks and uncertainties customary to large
"greenfield" projects of this nature which may result in the Stendal Project not
proceeding as currently planned, or at all, including the availability and cost
of materials and labour, construction delays, cost overruns, weather conditions,
governmental regulations, availability of adequate financing, increases in
long-term interest rates and increases in taxes and other governmental fees.
The Stendal Project is also subject to extensive and complex regulations and
environmental compliance which may result in delays, in the project company
and/or its shareholders, including the Company, incurring substantial costs in
relation thereto or in the Stendal Project being amended or not proceeding at
all.
The implementation of the Stendal Project is currently expected to commence in
2002 and be completed in 2004. However, there can be no assurance that the
Stendal Project will proceed as currently planned, or at all.
13
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. As a result of the change in the Company's
reporting currency from the U.S. dollar to the Euro, the Company is no longer
sensitive to foreign currency exchange rate fluctuations in connection with cash
restricted. The Company also uses derivative instruments in regard to its
exposure to interest rate, currency and pulp price risks. The derivative
instruments are not designated as hedging instruments and the purpose of the
derivative activity is speculative in nature, as management uses such tools
either to augment the Company's potential gains or to reduce the Company's
potential losses, depending on management's perception of future economic events
and developments. If any of the variety of instruments and strategies the
Company utilizes are not effective, the Company may incur losses. Many of the
Company's strategies are based on historical trading patterns and correlations.
However, these strategies may not be fully effective in all market environments
or against all types of risks. Unexpected market developments may affect the
Company's risk management strategies during this time, and unanticipated
developments could impact the Company's risk management strategies in the
future.
In December 2000, the Company entered into U.S. dollar/Euro foreign currency
forward rate swaps to manage its risk exposure with respect to in aggregate
approximately Euro 223.3 million of the principal amount of its long-term
indebtedness. The current nominal amount outstanding at March 31, 2002 was Euro
211.1 million and a fair value loss of Euro 4.1 million on these contracts was
recognized in the three months ended March 31, 2002. A currency gain of Euro
0.2 million was recognized when loan repayments were made under the currency
swap contracts during the current period. The Company expects that the fair
value of the currency swap contracts will continue to fluctuate until their
maturity.
14
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 Euro 0.2 million on
these contracts was recognized in the three months ended March 31, 2002.
As at March 31, 2002, no derivative contract had been executed with respect to
pulp prices.
Any change in the fair value of derivative instruments is included in the
determination of earnings.
Reference is made to the Company's annual report on Form 10-K for the year ended
December 31, 2001 for additional information concerning market risk.
15
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.
16
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: May 15, 2002
17