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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 September 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
--- ---
Commission File No.: 000-09409
MERCER INTERNATIONAL INC.
(Exact name of Registrant as specified in its charter)
Washington 91-6087550
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
One Renton Place, 555 S. Renton Village Place, Suite 700, Renton, Washington
98055
(Address of office)
(425) 687-4229
(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
November 14, 2002.
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PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
MERCER INTERNATIONAL INC.
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
(UNAUDITED)
FORM 10-Q
QUARTERLY REPORT - PAGE 2
MERCER INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
As at September 30, 2002 and December 31, 2001
(Unaudited)
(Euros in thousands)
September 30, December 31,
2002 2001
------------- ------------
ASSETS
Current Assets
Cash and cash equivalents E 22,936 E 11,741
Cash restricted, Stendal project
under construction 24,041 -
Investments 1,586 4,549
Receivables 43,494 47,892
Inventories 25,833 25,062
Prepaid and other 3,707 3,968
--------- ---------
Total current assets 121,597 93,212
Long-Term Assets
Cash restricted 38,608 33,388
Properties 267,213 278,617
Stendal project under construction 145,943 -
Investments 7,654 8,598
Notes receivable - 5,475
Deferred income tax 10,194 10,303
--------- ---------
469,612 336,381
--------- ---------
E 591,209 E 429,593
========= =========
LIABILITIES
Current Liabilities
Accounts payable and accrued expenses E 40,960 E 51,916
Stendal project costs payable 51,826 -
Notes payable 2,701 7,392
Debt 20,116 18,360
--------- ---------
Total current liabilities 115,603 77,668
Long-Term Liabilities
Debt 212,022 216,871
Debt, Stendal project
under construction 91,000 -
Provision for interest rate swap
contracts, Stendal project under
construction 22,011 -
Other 2,843 3,441
--------- ---------
327,876 220,312
--------- ---------
Total liabilities 443,479 297,980
Minority Interest 22,599 -
SHAREHOLDERS' EQUITY
Shares of beneficial interest 76,722 76,722
Retained earnings 51,670 59,111
Accumulated other comprehensive loss (3,261) (4,220)
--------- ---------
125,131 131,613
--------- ---------
E 591,209 E 429,593
========= =========
The accompanying notes are an integral part of these financial statements.
FORM 10-Q
QUARTERLY REPORT - PAGE 3
MERCER INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
For Nine Months Ended September 30, 2002 and 2001
(Unaudited)
(Euros in thousands, except for earnings per share)
2002 2001
---------- ----------
Revenues
Sales E 174,289 E 160,333
Transportation 3,885 4,225
Other 6,898 9,258
--------- ---------
185,072 173,816
Expenses
Cost of sales 152,270 136,715
Transportation 3,747 3,063
General and administrative 20,400 14,765
Interest expenses 10,838 12,172
Litigation claim - 1,026
Flooding loss 2,107 -
--------- ---------
189,362 167,741
--------- ---------
(Loss) income from operations (4,290) 6,075
Gain (loss) on interest and currency
contracts 10,855 (817)
Loss on interest rate swap contracts,
Stendal project (22,011) -
--------- ---------
(Loss) income before income taxes (15,446) 5,258
Income taxes 11 38
--------- ---------
(Loss) income before minority interest (15,457) 5,220
Minority interest 8,016 -
--------- ---------
Net (loss) income (7,441) 5,220
Retained earnings, beginning of period 59,111 61,934
--------- ---------
Retained earnings, end of period E 51,670 E 67,154
========= =========
(Loss) earnings per share
Basic E (0.44) E 0.31
========= =========
Diluted E (0.44) E 0.30
========= =========
The accompanying notes are an integral part of these financial statements.
FORM 10-Q
QUARTERLY REPORT - PAGE 4
MERCER INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
For Three Months Ended September 30, 2002 and 2001
(Unaudited)
(Euros in thousands, except for earnings per share)
2002 2001
--------- ---------
Revenues
Sales E 54,754 E 47,929
Transportation 1,132 1,453
Other 1,324 3,683
--------- ---------
57,210 53,065
Expenses
Cost of sales 47,667 43,711
Transportation 1,269 1,032
General and administrative 6,004 5,313
Interest expenses 2,739 3,806
Litigation claim - 1,026
Flooding loss 2,107 -
--------- ---------
59,786 54,888
--------- ---------
Loss from operations (2,576) (1,823)
(Loss) gain on interest and currency contracts (4,026) 2,029
Loss on interest rate swap contracts,
Stendal project (22,011) -
--------- ---------
(Loss) income before income taxes (28,613) 206
Income taxes - 9
--------- ---------
(Loss) income before minority interest (28,613) 197
Minority interest 8,016 -
--------- ---------
Net (loss) income (20,597) 197
Retained earnings, beginning of period 72,267 66,957
--------- ---------
Retained earnings, end of period E 51,670 E 67,154
========= =========
(Loss) earnings per share, basic and diluted E (1.23) E 0.01
========= =========
The accompanying notes are an integral part of these financial statements.
FORM 10-Q
QUARTERLY REPORT - PAGE 5
MERCER INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For Nine Months Ended September 30, 2002 and 2001
(Unaudited)
(Euros in thousands)
2002 2001
--------- ---------
Net (loss) income E (7,441) E 5,220
Other comprehensive income:
Foreign currency translation adjustments 3,894 92
Unrealized (loss) gain on securities (2,935) 1,412
--------- ---------
959 1,504
--------- ---------
Total comprehensive (loss) income E (6,482) E 6,724
========= =========
The accompanying notes are an integral part of these financial statements.
FORM 10-Q
QUARTERLY REPORT - PAGE 6
MERCER INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For Three Months Ended September 30, 2002 and 2001
(Unaudited)
(Euros in thousands)
2002 2001
---------- ---------
Net (loss) income E (20,597) E 197
Other comprehensive income (loss):
Foreign currency translation adjustments 381 (141)
Unrealized (loss) gain on securities (1,646) 424
---------- ---------
(1,265) 283
---------- ---------
Total comprehensive (loss) income E (21,862) E 480
========== =========
The accompanying notes are an integral part of these financial statements.
FORM 10-Q
QUARTERLY REPORT - PAGE 7
MERCER INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For Nine Months Ended September 30, 2002 and 2001
(Unaudited)
(Euros in thousands)
2002 2001
---------- ---------
Cash Flows from Operating Activities:
Net (loss) income E (7,441) E 5,220
Adjustments to reconcile net (loss) income from
operations to cash
Depreciation and amortization 20,231 17,323
Loss on interest rate swap contracts,
Stendal project 22,011 -
Minority interest (8,016) -
Changes in current assets and liabilities
Investments 4,004 (881)
Inventories (675) 5,277
Receivables 5,623 6,980
Accounts payable and accrued expenses (12,363) (4,526)
Other 651 412
--------- ---------
Net cash provided by operating activities 24,025 29,805
Cash Flows from Investing Activities:
Purchase of fixed assets, net of investment grants (7,070) (5,651)
Construction of Stendal project (145,943) -
Purchase of long-term investments (3,000) (636)
Sales of available-for-sale investments 966 -
Decrease in notes receivable - 4,799
Other - 65
--------- ---------
Net cash used in investing activities (155,047) (1,423)
Cash Flows from Financing Activities:
Cash restricted (29,261) 2,049
Increase in indebtedness 16,053 -
Increase in indebtedness, Stendal project 91,000 -
Decrease in indebtedness (17,570) (28,961)
Decrease in pulp mill conversion costs payable - (1,008)
Increase in Stendal project costs payable 51,826 -
Equity and loans from minority shareholders 30,615 -
--------- ---------
Net cash provided by (used in)
financing activities 142,663 (27,920)
Effect of exchange rate changes on cash and
cash equivalents (446) 61
--------- ---------
Net increase in cash and cash equivalents 11,195 523
Cash and cash equivalents, beginning of period 11,741 19,691
--------- ---------
Cash and cash equivalents, end of period E 22,936 E 20,214
========= =========
The accompanying notes are an integral part of these financial statements.
FORM 10-Q
QUARTERLY REPORT - PAGE 8
MERCER INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR NINE MONTHS ENDED SEPTEMBER 30, 2002
(UNAUDITED)
Note 1. Basis of Presentation
The interim period consolidated financial statements contained herein include
the accounts of Mercer International Inc. and its subsidiaries (the "Company").
The interim period consolidated financial statements have been prepared by the
Company pursuant to the rules and regulations of the U.S. Securities and
Exchange Commission (the "SEC"). Certain information and footnote disclosure
normally included in financial statements prepared in accordance with 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 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 nine months ended September 30, 2001, there
was a foreign currency translation loss of $3,992 (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.
FORM 10-Q
QUARTERLY REPORT - PAGE 9
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.
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 16,794,899 for nine months and three months ended
September 30, 2002, respectively, and 16,874,899 for the nine months and three
months ended September 30, 2001, respectively. The weighted average number of
shares outstanding for the purposes of calculating diluted earnings per share
was 16,794,899 and 17,181,616 for the nine months ended September 30, 2002 and
2001, respectively, and 16,794,899 and 17,236,295 for the three months ended
September 30, 2002 and 2001, respectively. For the nine months and three months
ended September 30, 2002, warrants and options were not included in the
computation of diluted earnings per share because they were anti-dilutive.
Note 4. Stendal Pulp Mill Project
In August 2002, the Company completed financing arrangements for the design,
development, financing, construction and operation of a "greenfield" project to
construct and operate a 552,000-tonne softwood kraft pulp mill to be located at
Stendal, Germany (the "Stendal Project"). The Stendal Project is being
implemented through an approximately 63.6% owned subsidiary of the Company. Two
other minority shareholders own approximately 29.4% and 7%, respectively, of the
project company. Accordingly, the results of the subsidiary are consolidated
into the results of the Company. Construction costs of the Stendal Project
include costs relating to the financing of the Stendal Project which are
incurred during the construction period. The construction costs of the Stendal
Project will commence to depreciate when the Stendal Project is completed and
commences its commercial production. Minority interests on the balance sheet
represent the share capital contribution and loans from the minority
shareholders, adjusted for their proportionate share of income and loss.
Note 5. Business Segment Information
The Company operates in two reportable business segments: pulp and paper. The
segments are managed separately because each business requires different
production and marketing strategies.
FORM 10-Q
QUARTERLY REPORT - PAGE 10
Summarized financial information concerning the segments is shown in the
following tables:
Pulp Paper Total
-------- --------- ---------
(Euros in thousands)
Nine Months Ended September 30, 2002
- ------------------------------------
Sales to external customers E 98,962 E 75,327 E174,289
Intersegment net sales 3,919 - 3,919
Segment profit 10,659 133 10,792
Reconciliation of profit:
Total profit for reportable segments E 10,792
Elimination of intersegment profits 1,295
Loss on interest rate swap contracts, Stendal project (22,011)
Unallocated amounts, other corporate expenses (5,522)
--------
Consolidated loss before income taxes and
minority interest E(15,446)
========
Nine Months Ended September 30, 2001
- ------------------------------------
Sales to external customers E114,130 E 46,203 E160,333
Intersegment net sales 4,778 - 4,778
Segment profit 8,867 1,298 10,165
Reconciliation of profit:
Total profit for reportable segments E 10,165
Elimination of intersegment profits 673
Unallocated amounts, other corporate expenses (5,580)
--------
Consolidated income before income taxes E 5,258
========
Three Months Ended September 30, 2002
- -------------------------------------
Sales to external customers E 30,878 E 23,876 E 54,754
Intersegment net sales 994 - 994
Segment loss (2,380) (3,243) (5,623)
Reconciliation of loss:
Total loss for reportable segments E (5,623)
Elimination of intersegment profits 462
Loss on interest rate swap contracts, Stendal project (22,011)
Unallocated amounts, other corporate expenses (1,441)
--------
Consolidated loss before income taxes and
minority interest E(28,613)
========
FORM 10-Q
QUARTERLY REPORT - PAGE 11
Pulp Paper Total
-------- --------- ---------
(Euros in thousands)
Three Months Ended September 30, 2001
- -------------------------------------
Sales to external customers E 33,681 E 14,248 E 47,929
Intersegment net sales 1,170 - 1,170
Segment profit 1,616 422 2,038
Reconciliation of profit:
Total profit for reportable segments E 2,038
Elimination of intersegment profits 2
Unallocated amounts, other corporate expenses (1,834)
--------
Consolidated income before income taxes E 206
========
The pulp mill under construction in connection with the Stendal Project incurred
capital expenditures of E 145,943 (thousand) during the nine months ended
September 30, 2002 and had assets of E 196,573 (thousand) at September 30, 2002.
FORM 10-Q
QUARTERLY REPORT - PAGE 12
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 nine months
and three months ended September 30, 2002 should be read in conjunction with the
consolidated financial statements and related notes included in this quarterly
report, as well as the Company's most recent annual report on Form 10-K for the
fiscal year ended December 31, 2001 filed with the U.S. Securities and Exchange
Commission (the "SEC"). In this document: (i) unless the context otherwise
requires, references to the "Company" or "Mercer" mean Mercer International Inc.
and its subsidiaries; (ii) "Euro" or "E" means Euros, the lawful currency of the
European Economic Union; and (iii) a "tonne" is one metric ton or 2,204.6
pounds.
Effective January 1, 2002, the Company changed its reporting currency from the
U.S. dollar to the Euro, as a significant majority of the Company's business
transactions are originally denominated in Euros. As a result, the Company's
financial statements for prior periods included in this quarterly report have
been restated in Euros, but depict the same trends as previously shown. The
Company translates foreign assets and liabilities at the rate of exchange on the
balance sheet date. Revenues and expenses are translated at the average rate of
exchange prevailing during the period. The period end exchange rate for the
U.S. dollar to the Euro as at September 30, 2002 was Euro 1.0123. The period
average exchange rates for the U.S. dollar to the Euro for the nine month and
three month periods ended September 30, 2002 were Euro 1.0817 and Euro 1.0164,
respectively. See Note 2 to the interim period consolidated financial
statements included in this quarterly report.
RESULTS OF OPERATIONS - Nine Months Ended September 30, 2002
- ---------------------------------------------------------------------
The following table sets forth selected sales data for the Company for the
periods indicated:
Nine Months Ended September 30,
-----------------------------------
2002 2001
---------- ----------
(unaudited)
(Euros in thousands)
Sales by Product Class
Specialty papers(1) E 60,816 E 28,014
Printing papers 14,511 18,189
Pulp 98,962 114,130
--------- ---------
Total(2) E 174,289 E 160,333
========= =========
Sales by Geographic Area
Germany E 70,178 E 74,226
European Union(3) 56,967 55,565
Eastern Europe and other 47,144 30,542
--------- ---------
Total(2) E 174,289 E 160,333
========= =========
Sales by Volume (tonnes)
Specialty papers(1) 47,135 30,320
Printing papers 17,922 20,666
Pulp 217,555 216,019
--------- ---------
Total(2) 282,612 267,005
========= =========
- ------------------
(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.
FORM 10-Q
QUARTERLY REPORT - PAGE 13
In the nine months ended September 30, 2002, revenues increased by approximately
6.5% to E 185.1 million from E 173.8 million in the nine months ended September
30, 2001, primarily as a result of increased sales of specialty papers resulting
from the acquisition of the paper mill in Landqart, Switzerland in December
2001. In the current period, pulp and paper revenues increased by approximately
8.7% from the comparable period of 2001, on a 13.3% decrease in pulp sales and a
63.0% increase in paper sales.
Pulp sales in the nine months ended September 30, 2002 decreased to E 99.0
million from E 114.1 million in the comparable period of 2001, as global
economic weakness and high producer inventory levels lead to lower prices. List
prices for kraft pulp in Europe decreased from approximately E 528 (U.S.$470)
per tonne at the end of 2001 to approximately E 505 (U.S.$440) per tonne at the
end of the first quarter of 2002 and approximately E 477 (U.S.$470) per tonne at
the end of the second quarter of 2002, before improving marginally to
approximately E 486 (U.S.$480) per tonne at the end of the third quarter of
2002.
Paper sales in the nine months ended September 30, 2002 increased to E 75.3
million from E 46.2 million in the comparable period of 2001. Sales of specialty
papers in the nine months ended September 30, 2002 increased to E 60.8 million
from E 28.0 million in the nine months ended September 30, 2001 as a result of
the acquisition of the Landqart mill. On average, prices for specialty papers
realized by the Company in the nine months ended September 30, 2002 increased
by approximately 39.7% and for printing papers decreased by approximately 8.0%,
compared to the same period in 2001.
Expenses increased to E 189.4 million in the nine months ended September 30,
2002 from E 167.7 million in the comparable period of 2001. Operating expenses
in the current period increased from the comparable period of 2001, primarily as
a result of the inclusion of the results of the Landqart mill. Flooding in parts
of Germany and certain other Eastern European countries in the third quarter of
2002 resulted in damage to inventory and equipment at the Heidenau and
Fahrbrucke paper mills and in their taking approximately 20 days and 3 days of
downtime, respectively, to conduct repairs and cleaning and to replace damaged
equipment. Operating expenses in the current period included a loss of E 2.1
million, representing inventory losses and clean-up and repair expenses
resulting from flooding damage at the Fahrbrucke and Heidenau paper mills. On
average, the Company's unit fibre costs for pulp production in the nine months
ended September 30, 2002 decreased by approximately 6.5%, compared to the same
period in 2001. As a result of the acquisition of the Landqart mill, waste paper
no longer represents a significant portion of the fibre used at the Company's
paper mills.
General and administrative expenses increased to E 20.4 million in the nine
months ended September 30, 2002 from E 14.8 million in the nine months ended
September 30, 2001, primarily due to increased administrative expenses as a
result of the acquisition of the Landqart mill and an increase in professional
fees, costs and expenses. Interest expense in the nine months ended September
30, 2002 decreased to E 10.8 million from E 12.2 million in the comparable
period of 2001, primarily as a result of payments made on outstanding
indebtedness during the current period.
For the nine months ended September 30, 2002, the Company reported a net loss of
E 7.4 million, or E 0.44 per basic and diluted share, compared to net income of
E 5.2 million, or E 0.31 per basic share and E 0.30 per diluted share, for the
comparable period of 2001.
FORM 10-Q
QUARTERLY REPORT - PAGE 14
For the nine months ended September 30, 2002, excluding items related to its
"greenfield" project to construct and operate a 552,000-tonne softwood kraft
pulp mill (the "Stendal mill") at Stendal, Germany (the "Stendal Project"), the
Company reported net income of E 6.6 million. Total investment costs in respect
of the Stendal Project are estimated to be approximately E 1.0 billion, the
majority of which is being financed under a senior project finance facility (the
"Facility") in the aggregate amount of E 828.0 million entered into by the
Company's approximately 63.6% owned subsidiary in August 2002. See "- Liquidity
and Capital Resources - Financing Activities." Pursuant to the Facility, the
project subsidiary entered into variable-to-fixed rate interest swaps for the
full term of the Facility to manage its risk exposure with respect to an
aggregate maximum amount of approximately E 612.6 million of the principal
amount of the Facility (the "Stendal Interest Rate Swap Agreements"). Under such
swaps, the project subsidiary pays a fixed rate and receives a floating rate
with respect to interest payments calculated on a notional amount. These swaps
hedge the variable cash flow risk from the variable interest payments under the
Facility. The swaps are marked to market at the end of each reporting period and
all unrealized gains and losses are recognized in earnings for a reporting
period. A holding loss of E 22.0 million before minority interests was
recognized in respect of the swaps in the Company's loss for the nine months
ended September 30, 2002. See "Item 3. Quantitative and Qualitative Disclosures
about Market Risk."
As the Stendal Project is currently under construction and because of its
overall size relative to the Company's other facilities, management of the
Company uses its consolidated operating results excluding items relating to the
Stendal Project to measure the performance and results of its operating units.
Management believes this measure provides meaningful information on the
performance of its operating facilities for a reporting period.
RESULTS OF OPERATIONS - Three Months Ended September 30, 2002
- ----------------------------------------------------------------------
The following table sets forth selected sales data for the Company for the
periods indicated:
Three Months Ended September 30,
-----------------------------------
2002 2001
---------- ----------
(unaudited)
(Euros in thousands)
SALES BY PRODUCT CLASS
Specialty papers(1) E 19,830 E 8,415
Printing papers 4,046 5,833
Pulp 30,878 33,681
--------- ---------
Total(2) E 54,754 E 47,929
========= =========
SALES BY GEOGRAPHIC AREA
Germany E 23,253 E 21,205
European Union(3) 16,797 15,875
Eastern Europe and other 14,704 10,849
--------- ---------
Total(2) E 54,754 E 47,929
========= =========
SALES BY VOLUME (tonnes)
Specialty papers(1) 15,265 9,411
Printing papers 5,715 6,818
Pulp 67,757 73,937
--------- ---------
Total(2) 88,737 90,166
========= =========
- -----------------
(1) The Company acquired its specialty paper mill in Landqart, Switzerland
in December 2001. These amounts include the results from the Landqart mill
for the third quarter of 2002.
(2) Excluding intercompany sales.
(3) Not including Germany.
FORM 10-Q
QUARTERLY REPORT - PAGE 15
In the three months ended September 30, 2002, revenues increased by
approximately 7.8% to E 57.2 million from E 53.1 million in the three months
ended September 30, 2001, primarily as a result of increased sales of specialty
papers resulting from the acquisition of the paper mill in Landqart, Switzerland
in December 2001. In the current period, pulp and paper revenues increased by
approximately 14.2% from the comparable period of 2001, on an 8.3% decrease in
pulp sales and a 67.6% increase in paper sales.
Pulp sales in the three months ended September 30, 2002 decreased to E 30.9
million from E 33.7 million in the comparable period of 2001, as global economic
weakness and high producer inventory levels continued to lead to lower prices.
List prices for kraft pulp in Europe decreased from approximately E 528
(U.S.$470) per tonne at the end of 2001 to approximately E 486 (U.S.$480) per
tonne at the end of the third quarter of 2002.
Paper sales in the three months ended September 30, 2002 increased to E 23.9
million from E 14.2 million in the comparable period of 2001. Sales of specialty
papers in the three months ended September 30, 2002 increased to E 19.8 million
from E 8.4 million in the three months ended September 30, 2001 as a result of
the acquisition of the Landqart mill. On average, prices for specialty papers
realized by the Company in the three months ended September 30, 2002 increased
by approximately 45.3% and for printing papers increased by approximately 17.3%,
compared to the same period in 2001.
Expenses increased to E 59.8 million in the three months ended September 30,
2002 from E 54.9 million in the comparable period of 2001. Operating expenses in
the current period increased from the comparable period of 2001, primarily as a
result of the inclusion of the results of the Landqart mill. Flooding damaged
inventory and equipment at the Heidenau and Fahrbrucke paper mills in the
current period and resulted in their taking approximately 20 days and 3 days of
downtime, respectively. Operating expenses in the current period included a loss
of E 2.1 million for inventory losses and clean-up and repair expenses resulting
from flooding damage at the Fahrbrucke and Heidenau paper mills. On average, the
Company's unit fibre costs for pulp production in the three months ended
September 30, 2002 decreased by approximately 4.4%, 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 E 6.0 million in the three
months ended September 30, 2002 from E 5.3 million in the three months ended
September 30, 2001, primarily due to increased administrative expenses as a
result of the acquisition of the Landqart mill and an increase in professional
fees, costs and expenses. Interest expense in the three months ended September
30, 2002 decreased to E 2.7 million from E 3.8 million in the comparable period
of 2001, primarily as a result of payments made on outstanding indebtedness
during the current period.
For the third quarter of 2002, the Company reported a net loss of E 20.6
million, or E 1.23 per basic and diluted share, compared to net income of E 0.2
million, or E 0.01 per basic and diluted share, for the comparable quarter of
2001. During the current quarter, costs associated with flooding damage at the
Company's Heidenau and Fahrbrucke paper mills resulted in the Company taking a
charge of approximately E 2.1 million.
FORM 10-Q
QUARTERLY REPORT - PAGE 16
For the third quarter of 2002, excluding items related to the Stendal Project,
the Company reported a net loss of E 6.6 million. Total investment costs in
respect of the project are estimated to be approximately E 1.0 billion, the
majority of which is being financed under the Facility. See "- Liquidity and
Capital Resources - Financing Activities." Pursuant to the Facility, the
Company's approximately 63.6% owned project subsidiary entered into the Stendal
Interest Rate Swap Agreements for the full term of the Facility to manage its
risk exposure with respect to an aggregate maximum amount of approximately E
612.6 million of the principal amount of the Facility. The Stendal Interest Rate
Swap Agreements 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. A
holding loss of E 22.0 million before minority interests was recognized in
respect of such interest rate swaps in the Company's loss for the quarter ended
September 30, 2002. See "Item 3. Quantitative and Qualitative Disclosures about
Market Risk."
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
September 30, 2002 December 31, 2001
-------------------- -----------------
(unaudited)
(Euros in thousands)
Financial Position
Working capital E 5,994 E 15,544
Property, plant and equipment (net) 413,156 278,617
Total assets 591,209 429,593
Long-term debt 303,022 216,871
Shareholders' equity 125,131 131,613
At September 30, 2002, the Company's cash and cash equivalents totalled E 22.9
million, compared to E 11.7 million at December 31, 2001. At September 30, 2002,
the Company had short-term trading securities totalling approximately E 1.6
million, compared to E 4.5 million at December 31, 2001.
Operating Activities
- ---------------------
Operating activities provided cash of E 24.0 million in the nine months ended
September 30, 2002, compared to E 29.8 million in the same period in 2001. A
decrease in receivables provided cash of E 5.6 million in the current period,
compared to E 7.0 million in the comparative period of 2001. A decrease in
accounts payable and accrued expenses used cash of E 12.4 million in the nine
months ended September 30, 2002, compared to E 4.5 million in the nine months
ended September 30, 2001. A net decrease in investment securities provided cash
of E 4.0 million in the nine months ended September 30, 2002, compared to a net
increase in investment securities using cash of E 0.9 million in the comparative
period of 2001.
Investing Activities
- ---------------------
Investing activities in the nine months ended September 30, 2002 used cash of
E 155.0 million, primarily as a result of construction in connection with the
Stendal Project, compared to using cash of E 1.4 million in the nine months
ended September 30, 2001. Construction in connection with the
FORM 10-Q
QUARTERLY REPORT - PAGE 17
Stendal Project used cash of E 145.9 million in the current period. Net
purchases of properties in the nine months ended September 30, 2002, not
including in respect of the Stendal Project, used cash of E 7.1 million,
compared to E 5.7 million in the comparative period of 2001. Purchases of
long-term investments in the nine months ended September 30, 2002 used cash of
E 3.0 million, compared to E 0.6 million in the comparative period of 2001.
Sales of available-for-sale investments in the nine months ended September 30,
2002 provided cash of E 1.0 million.
The Company's paper mills in Germany have or will have to replace certain
equipment that was damaged as a result of the flooding in parts of Germany and
certain other Eastern European countries during the third quarter of 2002. The
aggregate equipment costs are estimated to be approximately E 3.3 million, of
which approximately E 0.3 million is expected to be incurred in 2002. The
Company has applied for German governmental grants and for assistance under
special credit programs instituted by the German government for flooding victims
in connection with such costs. However, there can be no assurance that the
Company will receive such grants and assistance in the amounts applied for, or
at all.
In August 2002 (the "Closing Date"), Mercer completed financing arrangements for
the Stendal Project. Total investment costs in connection with the project are
approximately E 1.0 billion, the majority of which is to be provided under the
Facility arranged by Bayerische Hypo-und Vereinsbank AG ("BHV") pursuant to a
project finance loan agreement (the "Project Finance Loan Agreement") entered
into between Zellstoff Stendal GmbH ("ZSG"), a 63.6% owned project subsidiary of
Mercer founded to develop, own and operate the Stendal mill, and BHV. Mercer
also contributed financing to ZSG of approximately E 63.5 million from cash on
hand and through bridge loans (the "Bridge Loans") from a U.S. investment
partnership ("Bridge Loan A") and a Swiss bank ("Bridge Loan B").
Financing Activities
- ---------------------
Financing activities provided cash of E 142.7 million in the nine months ended
September 30, 2002, primarily as a result of increased indebtedness of E 91.0
million relating to the Stendal Project. An increase in restricted cash,
including in connection with the Stendal Project, used cash of E 29.3 million in
the current period. An increase in Stendal Project costs payable provided cash
of E 51.8 million in the nine months ended September 30, 2002. Equity invested
and loans received from minority shareholders in connection with the Stendal
Project provided cash of E 30.6 million in the current period. A net decrease
in other indebtedness used cash of E 1.5 million in the current period,
including the repayment of E 12.5 million of indebtedness incurred in connection
with the project to convert the Company's pulp mill from the production of
sulphite pulp to kraft pulp (the "Conversion Project"). Financing activities
used cash of E 27.9 million in the nine months ended September 30, 2001,
primarily as a result of the reduction of indebtedness during the period.
Mercer completed financing arrangements in connection with the Stendal Project
in the third quarter of 2002. The following description of the financing
arrangements for the Stendal Project is a brief summary of certain material
attributes and characteristics thereof, which does not purport to be complete
and is qualified in its entirety by reference to the Project Finance Loan
Agreement, the Bridge Loan agreements and other agreements relating to such
financing arrangements, copies of which are attached to Mercer's Form 8-K
filed September 10, 2002 with the SEC.
FORM 10-Q
QUARTERLY REPORT - PAGE 18
The Facility is in the aggregate amount of E 828.0 million and is to be used for
the following purposes: (i) Tranche A in the principal sum of E 464.6 million
for project construction and development costs; (ii) Tranche B, which is divided
into four Sub-Tranches, in the aggregate principal sum of E 122.0 million for:
(a) financing costs up until the date upon which ZSG issues a final acceptance
certificate in connection with the Stendal Project (the "Acceptance Date"); (b)
start-up costs until the Acceptance Date; (c) project construction and
development costs not financed under Tranche A; and (d) working capital costs;
(iii) Tranche C in the principal sum of E 42.0 million to provide partial
funding of a debt service reserve account (the "Debt Service Reserve Account");
(iv) Tranche D1 in the principal sum of E 9.4 million for project construction
costs; (v) Tranche D2 in the principal sum of E 30.0 million to finance approved
cost overruns until the Acceptance Date and thereafter to repay Tranche A; and
(vi) Tranche E, a revolving loan facility in the aggregate amount of up to
E 160.0 million, to provide short term bridge financing for expected government
grants and recoverable payments on construction costs. The Project Finance Loan
Agreement also provides for hedging facilities to allow ZSG to hedge against
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. During the
third quarter of 2002, ZSG entered into the Stendal Interest Rate Swap
Agreements.
Interest on the credit facilities accrues at the rate of Euribor plus .75% per
annum in respect of Tranche A, Euribor plus .60% per annum in respect of the
guaranteed portion of Tranche B, Euribor plus 1.50% per annum in respect of the
unguaranteed portion of Tranche B, Euribor plus 1.55% per annum in respect of
Tranches C, D1 and D2 and Euribor plus 1.25% per annum in respect of Tranche E.
The Facility is available for disbursement from the Closing Date until the
earlier of the Acceptance Date and forty months following the Closing Date (the
"Availability Period"), provided that Tranche D2 will be available up to one
month prior to the First Repayment Date (as defined below). The Facility is
secured by the assets of ZSG in respect of the Stendal Project.
The Tranches and Sub-Tranches are repayable and mature on different dates. Under
the terms of the Project Finance Loan Agreement: (i) the "First Repayment Date"
is the date upon which the First Repayment (as defined below) is made in full;
and (ii) "Repayment Date" is the First Repayment Date and each subsequent March
31 and September 30 on which a repayment of any part of any Tranche or
Sub-Tranche is scheduled to take place.
Under the Facility, ZSG covenants to pay an amount which will reduce the
aggregate advances outstanding, other than under Tranche E, to no more than
E 590.0 million plus 30% of the aggregate advances made under Tranche D2, but in
any event to no more than E 599.0 million (the "First Repayment") to the lenders
on or before the date that is not later than the first March 31 or September 30
immediately following the fourth anniversary of the first advance under Tranche
A (the "Scheduled First Repayment Date"). Tranche A is repayable in 22
semi-annual installments on the Repayment Dates following the Scheduled First
Repayment Date in accordance with an amortization schedule and matures on the
first Repayment Date following the fifteenth anniversary of the first advance
under Tranche A. Sub-Tranches B1, B2 and B3 are repayable in eight equal
semi-annual installments on the eight Repayment Dates following the First
Repayment and each mature on the first Repayment Date following the eighth
anniversary of the first advance under each such Sub-Tranche. Sub-Tranche B4 is
repayable in full and matures on the first Repayment Date following the
fifteenth anniversary of the first advance under Tranche A. Tranches C, D1 and
D2 are
FORM 10-Q
QUARTERLY REPORT - PAGE 19
repayable in three equal semi-annual installments on the three Repayment
Dates after the Scheduled First Repayment Date and each mature on the third
Repayment Date following the Scheduled First Repayment Date.
Tranche E is repayable in an amount equal to the proceeds of all government
grants and/or value added tax refunds on project costs received from
time-to-time and/or out of one or more drawings made pursuant to the
shareholders' undertaking agreement dated as of the Closing Date between the
shareholders of ZSG, Mercer and BHV and/or monies available for such purposes in
the Proceeds Account (as defined below). Tranche E matures on the first
Repayment Date following the fifth anniversary of the first advance under
Tranche A.
Tranches A and B will be subject to German federal and state guarantees (the
"Guarantees") in respect of 80% of the principal amount thereof, provided that
the amount of each Sub-Tranche under Tranche B benefiting from such guarantees
will be reduced semi-annually by 12.5% per annum beginning on the first
Repayment Date following the fourth anniversary of the first advance of each
Sub-Tranche under Tranche B. Under the Guarantees, the guarantors are
responsible for ZSG's performance of its payment obligations in respect of the
guaranteed amounts.
Until the Acceptance Date, all payments received by ZSG, including all drawings
under the Facility, all funding received from ZSG's shareholders and all
operating cash flows, subject to certain exceptions, shall be credited to a
disbursement account and will be applied to project costs, operating costs and
working capital costs incurred during the Availability Period in relation to the
Stendal Project. Following the Acceptance Date, all revenue received by ZSG,
subject to certain exceptions, shall be credited to a proceeds account (the
"Proceeds Account") and, subject to certain exceptions, applied toward, in an
agreed priority of payments, operating, financing and other costs and expenses
and to make repayments and other distributions. Excess start-up cash flows may
be deposited into an equity reserve account to be used to secure claims and
amounts owing to the lenders in priority to the funding of the Debt Service
Reserve Account. The Debt Service Reserve Account will be funded in an amount
sufficient at specified times to service the amounts due and payable under the
Facility during the following twelve months. The Facility also requires that an
Annual Debt Service Cover Ratio (as defined in the Project Finance Loan
Agreement) of not less than 1.15:1 be maintained, failing which monies that
would otherwise be payable into the shareholders' account will be retained in
the Proceeds Account.
The shareholders paid into the Proceeds Account E 15.0 million in subscription
for share capital of ZSG and E 55.0 million in respect of fully-subordinated
loans to ZSG, and agreed to make subordinated loans to ZSG of up to E 30.0
million as a standby equity amount to cover cost overruns and to partially fund
the Debt Service Reserve Account.
In connection with its obligation to provide funding in respect of the
Stendal Project, on the Closing Date, Mercer entered into and completed funding
under two bridge financing loan agreements. Mercer utilized the net proceeds
from the Bridge Loans to fund, in part, its approximately E 63.5 million
contribution to the Stendal Project.
The loan agreement in respect of Bridge Loan A (the "Bridge Loan A Agreement")
is in the principal amount of E 15.0 million, which was disbursed on the Closing
Date, after deduction of fees and expenses, as a non-revolving single advance.
The loan matures eight months (the "Initial
FORM 10-Q
QUARTERLY REPORT - PAGE 20
Period") after the Closing Date, with Mercer having an option to extend the
maturity date for an additional six months (the "Extended Period") and for a
further four months if agreed to by the lender (the "Second Extended Period").
The loan accrues interest at a rate equal to Euribor plus 6.5% per annum during
the Initial Period, Euribor plus 9.0% per annum during the Extended Period and
Euribor plus 11.5% per annum during the Second Extended Period, in each case
calculated semi-annually, not in advance, and payable upon maturity or default.
In addition, in the event that the loan is not repaid upon maturity, the loan
shall accrue interest at the rate of Euribor plus 15% per annum thereafter.
The Bridge Loan A Agreement is secured by: (i) assignment agreements (the
"Assignment Agreements") under which Mercer and certain of its subsidiaries
assign their respective interests in intercompany loans; and (ii) securities
pledge agreements (the "Securities Pledge Agreements") under which Mercer
pledges its interest in all of the share capital of certain of its wholly-owned
subsidiaries. The security granted under the Assignment Agreements and the
Securities Pledge Agreements is held by the lender under Bridge Loan B in its
capacity as security agent (the "Security Agent") under a security trust
agreement, pari passu for the benefit of the lenders under the Bridge Loans.
The Bridge Loan A Agreement contains customary covenants in favour of the lender
thereunder. The Bridge Loan A Agreement is also subject to customary events of
default. Under the Bridge Loans, the lenders acknowledge that their rights to
realize upon any interest in Mercer's subsidiary that operates its pulp mill
("ZPR") pursuant to the security granted thereunder shall be limited to the sale
of 49% of the shares thereof unless additional sales are consented to in writing
by ZPR's senior lenders and that any right that they may otherwise have to sell
any interests in ZSG shall be limited to such percentage thereof which is
consented to by the European Commission and to no more than 12.5% of the shares
thereof unless additional sales are consented to in writing by ZSG's senior
lenders.
The loan agreement in respect of Bridge Loan B (the "Bridge Loan B Agreement")
is in the principal amount of E 30.0 million, which was disbursed on the Closing
Date, after deduction of fees and expenses, as a non-revolving single advance.
The Bridge Loan B Agreement was negotiated at the same time and in conjunction
with the Bridge Loan A Agreement and was entered into upon substantially the
same terms as those set out in the Bridge Loan A Agreement, as to loan
structure, maturity, interest, security, the appointment of the Security Agent,
Mercer's obligations in respect of asset sales and/or an issue or sale of
equity, conditions to advance, covenants, negative covenants, events of default
and ancillary matters subject to such changes as were required to reference
Bridge Loan B rather than Bridge Loan A.
Other than the Stendal Project, the Company had no material commitments to
acquire assets or operating businesses as at September 30, 2002, although it is
considering a number of initiatives relating to potential acquisitions and joint
ventures both in Europe and North America. The Company anticipates that there
will be acquisitions of businesses, the Redeployment of assets or commitments
to projects in the future. To achieve its long-term goals of expanding its
asset and earnings base through mergers and acquisitions, the Company will
require substantial capital resources. The necessary resources will be
generated from cash flow from operations, issuances of securities and/or
borrowing against and/or the sale of assets.
FORM 10-Q
QUARTERLY REPORT - PAGE 21
Foreign Currency
- -----------------
Effective January 1, 2002, the Company changed its reporting currency from the
U.S. dollar to the Euro as a significant majority of the Company's business
transactions are originally denominated in Euros. By adopting the Euro, most
cumulative foreign currency translation losses of the Company were eliminated.
However, the Company holds certain assets and liabilities in U.S. dollars, Swiss
francs and, to a lesser extent, in Canadian dollars. Accordingly, the Company's
consolidated financial results are subject to foreign currency exchange rate
fluctuations.
The Company translates U.S. dollar, Swiss franc and Canadian dollar denominated
assets and liabilities into Euros at the rate of exchange on the balance sheet
date. Unrealized gains or losses from these translations are recorded as
shareholders' equity on the Company's balance sheet and do not affect the net
earnings of the Company.
The Company's cumulative foreign exchange translation gain increased from E 1.3
million at December 31, 2001 to E 5.2 million at September 30, 2002.
The average and period end exchange rates for the U.S. dollar to the Euro for
the periods indicated are as follows:
Quarter Ended Quarter Ended
September 30, 2002 September 30, 2001
-------------------------- --------------------------
Period End Period Average Period End Period Average
---------- -------------- ---------- --------------
RATE OF EXCHANGE
Euro 1.0123 1.0164 1.0990 1.1218
Based upon the period average exchange rate in the nine months ended September
30, 2002, the U.S. dollar decreased by approximately 3.7% 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 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 proceeding or being completed as currently planned, 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
FORM 10-Q
QUARTERLY REPORT - PAGE 22
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 being completed at all.
The implementation of the Stendal Project commenced in August 2002 and is
expected to be completed in 2004. However, there can be no assurance that the
Stendal Project will proceed or be completed as currently planned.
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 misjudgements 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 for accounting purposes.
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.
The Company has entered into currency and interest rate swaps ("Currency and
Interest Swaps") in connection with its long-term indebtedness relating to the
Conversion Project. The Company has also entered into the Stendal Interest Rate
Swap Agreements in connection with its long-term indebtedness relating to the
Stendal Project. In addition, the Company has entered into currency
FORM 10-Q
QUARTERLY REPORT - PAGE 23
forward contracts ("Currency Forwards"). The Company's Currency and Interest
Swaps, Currency Forwards and the Stendal Interest Rate Swap Agreements 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.
In December 2000, the Company entered into U.S. dollar/Euro Currency and
Interest Swaps to manage its risk exposure with respect to in aggregate
approximately E 223.3 million of the principal amount of its long-term
indebtedness relating to the Conversion Project. These Currency and Interest
Swaps were subsequently settled and realized in July 2002 at a gain of E 13.9
million, which was accrued for in the current period. A currency gain of E 0.2
million was recognized when loan repayments were made under the currency swap
contracts during the current period.
As a consequence of the settlement of these Currency and Interest Swaps,
interest on these swaps was paid from April 1, 2002 to September 29, 2002 at the
six-month Euribor plus bank margin rate and 4.5% fixed rate including bank
margin, as applicable, in accordance with the terms of the original underlying
loans.
Subsequently in July 2002, the Company renewed these previously settled Currency
and Interest Swaps in terms of both the currency and interest components.
The interest component of the swaps is required under the terms of the
facility agreement related to the Company's long-term indebtedness in respect
of the Conversion Project, and becomes effective for the period starting
September 30, 2002. For the outstanding principal amounts of E 74.5 million
and E 130.4 million under the facility agreement, all repayment installments
from September 30, 2002 until September 30, 2013 and September 30, 2008,
respectively, were swapped into U.S. dollar amounts at a rate of Euro 1.0050.
The interest rates were swapped into the six-month U.S. dollar/Libor plus bank
margin rate and three-month U.S. dollar/Libor rate, respectively, with a cap on
both of these floating interest rates of 6.8% until September 28, 2007. As at
September 30, 2002, a holding loss of E 3.7 million was recognized in the
third quarter.
During the second quarter of 2001, the Company entered into two U.S. dollar/Euro
Currency Forwards in the aggregate amount of approximately E 22.4 million,
which matured in the second quarter of 2002 and a net gain of E 0.2 million
was recognized in the current period.
During the second quarter of 2002, two U.S.$10 million Currency Forwards were
sold and bought, effectively cancelling out each other, and a holding gain of
E 0.6 million was recognized. One of these contracts matured in the third
Quarter of 2002 and the other is to mature in the fourth quarter of 2002.
In July 2002, the Company sold a U.S. dollar/Euro Currency Forward in the amount
Of U.S.$20 million. The contract is to mature in March 2003. A holding loss of
E 0.2 million as at September 30, 2002 was recorded in the third quarter. The
Company also settled a U.S.$1 million Currency Forward in the third quarter of
2002, resulting in a loss of E 80,000.
As at September 30, 2002, no derivative contract had been executed with respect
to pulp prices.
In connection with the Facility, in the third quarter of 2002 ZSG entered into
the Stendal Interest Rate Swap Agreements, which are variable-to-fixed interest
rate swaps, for the term of the Facility, to manage its risk exposure with
respect to an aggregate maximum amount of approximately E 612.6
FORM 10-Q
QUARTERLY REPORT - PAGE 24
million of the principal amount of its long-term indebtedness under the
Facility. The swaps took effect on October 1, 2002 and are split into three
periods, with the first period ending on May 3, 2004, the second period ending
on April 1, 2005 and the third period ending upon maturity of the Facility.
Under the swaps, the Company 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 Facility were swapped into fixed rates based on the
Eur-Euribor rate for the repayment periods of the Tranches under the Facility.
The swaps hedge the variable cash flow risk from the variable interest payments
under the Facility. The swaps are marked to market at the end of each reporting
period, and all unrealized gains and losses are recognized in earnings for
a reporting period. The notional amount under the swaps was E 612.6 million and
a holding loss of E 22.0 million as at September 30, 2002 was recognized in the
statement of operations for the nine months ended September 30, 2002.
The Company is exposed to modest credit-related risks in the event of
non-performance by counterparties to derivative contracts. However, the Company
does not expect that the counterparties, which are major financial institutions,
will fail to meet their obligations.
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.
ITEM 4. DISCLOSURE CONTROLS AND PROCEDURES
Within 90 days prior to the date of this report, we carried out an evaluation,
under the supervision and with the participation of our principal executive
officer and principal financial officer, of the effectiveness of the design and
operation of our disclosure controls and procedures. Based on this evaluation,
our principal executive officer and principal financial officer concluded that
our disclosure controls and procedures are effective in timely alerting them to
material information required to be included in our periodic reports filed with
the SEC. It should be noted that the design of any system of controls is based
in part upon certain assumptions about the likelihood of certain events, and
there can be no assurance that any design will succeed in achieving its stated
goals under all future conditions, regardless of how remote. In addition, we
reviewed our internal controls, and there have been no significant changes in
our internal controls or in other factors that could significantly affect those
controls subsequent to the date of their last evaluation.
FORM 10-Q
QUARTERLY REPORT - PAGE 25
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of shareholders on July 11, 2002. At the
meeting, Jimmy S.H. Lee and R. Ian Rigg were elected Class II Trustees and
Andrew Milligan was elected a Class III Trustee of the Company for three year
terms as follows:
ABSTENTIONS AND
VOTES FOR VOTES WITHHELD BROKER NON-VOTES
--------------- -------------- ----------------
Jimmy S. H. Lee 1,281,686 3,124,280 -
R. Ian Rigg 1,281,686 3,124,280 -
Andrew Milligan 4,412,186 2880 -
C.S. Moon, Maarten Reidel and Michel Arnulphy continued their respective terms
as Trustees of the Company. Jong L. Ryu replaced Andrew Milligan as a Trustee
upon the retirement of Mr. Milligan during the period.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
--------
99.1 - Certificate of Chief Executive Officer
99.2 - Certificate of Chief Financial Officer
(b) Reports on Form 8-K
----------------------
Form 8-K dated September 10, 2002:
Item 5. Other Events
Form 8-K/A dated October 4, 2002:
Item 7. Exhibits
FORM 10-Q
QUARTERLY REPORT - PAGE 26
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.
/s/ Maarten Reidel
------------------------------------------
Maarten Reidel
Vice President and Chief Financial Officer
Date: November 14, 2002
FORM 10-Q
QUARTERLY REPORT - PAGE 27
CERTIFICATION OF PERIODIC REPORT
I, Jimmy S.H. Lee, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Mercer International
Inc. (the "Registrant");
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly 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 with
those entities, particularly during the period in which this
quarterly 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 quarterly report (the "Evaluation Date"); and
c) presented in this quarterly 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 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
quarterly 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.
Date: November 14, 2002
/s/ Jimmy S.H. Lee
-------------------------
Jimmy S.H. Lee
Chief Executive Officer
FORM 10-Q
QUARTERLY REPORT - PAGE 28
CERTIFICATION OF PERIODIC REPORT
I, Maarten Reidel, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Mercer International
Inc. (the "Registrant");
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly 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 with those
entities, particularly during the period in which this quarterly
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 quarterly report (the "Evaluation Date"); and
c) presented in this quarterly 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 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
quarterly 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.
Date: November 14, 2002
/s/ Maarten Reidel
------------------------------
Maarten Reidel
Chief Financial Officer
FORM 10-Q
QUARTERLY REPORT - PAGE 29