UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): MAY 12, 2003
MERCER INTERNATIONAL INC.
(Exact name of Registrant as specified in its charter)
WASHINGTON
(State or other jurisdiction of incorporation or organization)
000-9409 91-6087550
(Commission File Number) (I.R.S. Employer Identification No.)
14900 INTERURBAN AVENUE SOUTH, SUITE 282, SEATTLE, WA 98168
(Address of Office)
(206) 674-4639
(Registrant's telephone number, including area code)
ITEM 9. REGULATION FD DISCLOSURE.
On May 8, 2003, Mercer International Inc. ("Mercer") announced its
intention to make a private offering of convertible notes or equity related
securities subject to market and other conditions. Mercer expects to raise
approximately $65 million through the offering. The securities will be offered
to qualified institutional buyers in reliance on Rule 144A and to certain buyers
outside the United States in reliance on Regulation S under the Securities Act
of 1933, as amended.
In connection with the proposed offering, Mercer plans to distribute an
offering memorandum to potential investors. The following excerpts from the
offering memorandum include certain information either not previously disclosed
by Mercer in or revised from its public filings:
In this report, please note the following:
* references to "we", "our", "us", the "Company" or "Mercer" mean
Mercer International Inc. and its subsidiaries, unless the context
clearly suggests otherwise, and reference to "Mercer Inc." means
Mercer International Inc. excluding its subsidiaries;
* a "tonne" is one metric ton or 2,204.6 pounds;
* all references to monetary amounts are to "Euros", the lawful
currency adopted by most members of the European Union, unless
otherwise stated; and
* "E" refers to Euros and "$" refers to U.S. dollars.
RISK FACTORS
RISKS RELATED TO MERCER
OUR LEVEL OF INDEBTEDNESS COULD NEGATIVELY IMPACT OUR FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
We may incur additional indebtedness in the future. Our high debt levels
may have important consequences for us, including, but not limited to the
following:
* our ability to obtain additional financing to fund future operations
or meet our working capital needs or any such financing may not be
available on terms favorable to us or at all;
* a certain amount of our operating cash flow is dedicated to the
payment of principal and interest on our indebtedness, thereby
diminishing funds that would otherwise be available for our
operations and for other purposes;
* a substantial decrease in net operating cash flows or increase in our
expenses could make it more difficult for us to meet our debt
service requirements, which could force us to modify our operations;
and
* our leveraged capital structure may place us at a competitive
disadvantage by hindering our ability to adjust rapidly to changing
market conditions or by making us vulnerable to a downturn in
our business or the economy in general.
Our ability to repay or refinance our indebtedness will depend on our
future financial and operating performance. Our performance, in turn, will be
subject to prevailing economic and competitive conditions, as well as financial,
business, legislative, regulatory, industry and other factors, many of which are
beyond our control. Our ability to meet our future debt service and other
obligations may depend in significant part on the success of the softwood kraft
pulp mill (the "Stendal mill") being constructed near the town of Stendal,
Germany (the "Stendal project") and the extent to which we can
2
implement successfully our business and growth strategy. We cannot assure you
that we will be able to implement our strategy fully or that the anticipated
results of our strategy will be realized.
OUR BUSINESS IS CYCLICAL IN NATURE.
The pulp and paper business is cyclical in nature and markets for our
principal products are characterized by periods of supply and demand imbalance,
which in turn affects product prices. The markets for pulp and paper are highly
competitive and are sensitive to cyclical changes in industry capacity and in
the global economy, all of which can have a significant influence on selling
prices and our earnings. Demand for pulp and paper products has historically
been determined by the level of economic growth and has been closely tied to
overall business activity. During the past three years, list pulp prices have
fallen significantly. Although pulp prices have increased in recent months, we
cannot predict the impact of continued economic weakness in most world markets,
the impact of the SARS (severe acute respiratory syndrome) crisis on economic
activity in Asia, or the impact of war, terrorist activity or other events on
our markets.
Our production costs are influenced by the availability and cost of raw
materials, energy and labor, and our plant efficiencies and productivity. Our
main raw material is fiber in the form of wood chips and pulplogs for pulp
production, and waste paper and pulp for paper production. Fiber costs are
primarily affected by the supply of, and demand for, lumber and pulp, which are
both highly cyclical in nature. Production costs also depend on the total volume
of production. Lower operating rates and production efficiencies during periods
of cyclically low demand result in higher average production costs and lower
margins.
THE STENDAL PROJECT IS IN THE DEVELOPMENT STAGES.
We are the majority shareholder of a project company that is constructing a
softwood kraft pulp mill near the town of Stendal, Germany. We estimate the
overall cost of this project at about E1.0 billion, and the performance of this
project will have a material impact on our financial condition and operating
performance. The construction of the Stendal mill is subject to various risks
and uncertainties customary to larger "greenfield" projects of this nature which
may result in the Stendal project not proceeding or being completed as scheduled
or budgeted. Such delays and cost overruns may result from the lack of
availability and cost of materials and labor, construction delays, equipment
failures or damage, weather conditions, industrial accidents, governmental
regulations, changes to government assistance, delays in obtaining or amending
our permits, errors or miscalculations in engineering, design specifications or
equipment manufacturing, faulty construction or workmanship or defective
equipment or installation. Further, the Stendal mill could experience operating
difficulties or delays during the start-up period when production is being
ramped up and the Stendal mill may not achieve our planned production, quality
or cost projections.
The Stendal project will also be subject to extensive and complex
regulations and environmental compliance which may result in unanticipated
delays, in substantial costs to Zellstoff Stendal GmbH ("Stendal") and/or its
shareholders, including us, or in the Stendal project being changed or not being
completed at all. Any change in the foregoing could have a material adverse
impact on our business, financial condition, results of operations and cash
flow.
The implementation of the Stendal project commenced in 2002 and is
currently scheduled to be completed by the third quarter of 2004. However, there
can be no assurance that the Stendal project will be completed as currently
planned or that, if completed, the mill will perform as currently planned.
3
WE ARE EXPOSED TO CURRENCY EXCHANGE RATE FLUCTUATIONS.
Approximately 67.9% of our sales in the three months ended March 31, 2003
were in products quoted and listed in U.S. dollars while most of our operating
costs and expenses are incurred in Euros. Our results of operations and
financial condition are reported in Euros. A significant increase in the value
of the Euro relative to the U.S. dollar would reduce the amount of revenues in
Euros realized by us from sales denominated or priced in U.S. dollars. This
would reduce our operating margin and the cash flow available to fund our
operations and to service our debt. This could have a material adverse effect on
our business, financial condition, results of operation and cash flow.
WE USE DERIVATIVES TO MANAGE CERTAIN RISK.
A significant amount of our sales revenue is based on pulp sales priced in
U.S. dollars while our reporting currency is Euros and our costs are
predominantly in Euros. We therefore use foreign currency derivative instruments
primarily to manage against depreciation of the U.S. dollar against the Euro.
We also use derivative instruments to limit our exposure to interest rate
fluctuations. Concurrently with entering into the financing for the Stendal
project, Stendal entered into variable to fixed rate interest swaps for the full
term of the facility to manage its interest rate risk exposure with respect to a
maximum aggregate amount of approximately $612.6 million of the principal amount
of such facility. Zellstoff-und Papierfabrik Rosenthal GmbH & Co. KG
("Rosenthal") also enters into currency swap, currency forward, interest rate
and interest cap derivative instruments in connection with its outstanding
floating rate indebtedness. Our derivative instruments are marked to market. If
any of the variety of instruments and strategies we utilize are not effective,
we may incur losses which may have a materially adverse effect on our business,
financial condition, results of operations and cash flow. For example, in 2002
our operating results were affected by our derivative instruments, including net
gains of E23.4 million on Rosenthal derivatives and E30.1 million in unrealized
losses when our Stendal derivatives were marked to market.
Further, we may in the future use derivative instruments to manage pulp
price risks. The purpose of our derivative activity may also be considered
speculative in nature; our management does not use these instruments with
respect to any pre-set percentage of revenues or other formula, but either to
augment our potential gains or reduce our potential losses depending on our
management's perception of future economic events and developments.
FLUCTUATIONS IN THE PRICE AND SUPPLY OF OUR RAW MATERIALS COULD ADVERSELY AFFECT
OUR BUSINESS.
Wood chips and pulplogs comprise the fiber used by the mill operated by
Rosenthal (the "Rosenthal mill") and which will be used by the Stendal mill. The
fiber used by our paper mills consists of waste paper and pulp. Such fiber is
cyclical in terms of both price and supply. The cost of wood chips and pulplogs
is primarily affected by the supply and demand for lumber. The cost of fiber for
our paper mills is primarily affected by the supply and demand for paper and
pulp. Demand for these raw materials is determined by the volume of pulp and
paper products produced globally and regionally. The markets for pulp and paper
products, including our products, are highly variable and are characterized by
periods of excess product supply due to many factors, including periods of
insufficient demand due to weak general economic activity or other causes. The
cyclical nature of pricing for these raw materials represents a potential risk
to our profit margins if we are unable to pass along price increases to our
customers.
We do not own any timberlands, have any governmental timber concessions or
have any long-term fiber contracts. Although raw materials are available from a
number of suppliers, and we have not historically experienced supply
interruptions or substantial price increases, our requirements will increase
when the Stendal mill commences production and we may not be able to purchase
sufficient quantities of these raw materials to meet our production requirements
at prices acceptable to us during times of tight supply. In addition, the
quality of fiber we receive could be reduced as a result of industrial disputes,
material curtailments or shut-down of operations by suppliers, government orders
and legislation, acts of god and other events beyond our control. An
insufficient supply of fiber or reduction in the quality of fiber we receive
would materially adversely affect our business, financial condition, results of
operations and cash flow.
4
WE ARE CHANGING OUR SYSTEM FOR PROCURING FIBER.
Historically, the fiber requirements for the Rosenthal mill were procured
by a third party. The agreement with this party will expire shortly and will not
be renewed as we have organized our own internal wood procurement department.
There can be no assurance that this department will be able to procure our fiber
requirements on terms as favorable as those achieved by the third party.
WE OPERATE IN HIGHLY COMPETITIVE MARKETS.
We sell our products primarily in Europe and the markets for our products
are highly competitive. A number of global companies compete in each of our
markets and no company holds a dominant position. For both pulp and paper, many
companies produce products that are largely standardized. As a result, the
primary basis for competition in our markets has been price. Many of our
competitors have greater resources and lower leverage than we do and may be able
to adapt more quickly to industry or market changes or devote greater resources
to the sale of products than we can. There can be no assurance that we will
continue to be competitive in the future.
WE ARE DEVELOPING A NEW SALES ORGANIZATION.
Historically, most of our kraft pulp sales were handled through an
independent sales agency agreement. We chose not to renew this sales agency
agreement when it expired in December 2002. We are now conducting all sales and
marketing of our kraft pulp internally through our sales staff and through
independent agents and also intend to handle all of the pulp sales for the
Stendal mill in this manner when it is operational. We cannot assure you that
our internal sales staff and independent agents will be able to sell the
combined pulp production of the Rosenthal mill and Stendal mill on terms as
favorable as those achieved by the independent third party. Accordingly, this
could have a material adverse impact on our business, financial condition,
results of operations and cash flow.
WE ARE SUBJECT TO EXTENSIVE ENVIRONMENTAL REGULATION.
We are subject to extensive environmental laws and regulations. These laws
and regulations impose stringent standards on us regarding, among other things,
air emissions, effluent discharges and remediation of environmental
contamination. We may incur substantial costs to comply with current
requirements or newer environmental laws that might be adopted. In addition, we
may discover currently unknown environmental problems or conditions in the
future and may incur substantial costs in correcting such problems or
conditions.
WE ARE SUBJECT TO RISKS RELATED TO OUR EMPLOYEES.
The majority of our employees in Germany are represented by the
Industriegewerkschaft Bergbau-Chemie-Energie, a national union that represents
pulp and paper workers in Germany. The collective agreement relating to
employees at our paper mills expires at the end of 2003. We expect to negotiate
a new collective agreement for employees at our paper mills in the second half
of 2003. For our pulp workers, we have agreed to negotiate in respect of an
additional wage increase for August 2003 depending upon the general economic
conditions. Although we have not experienced any work stoppages in the past,
there can be no assurance that we will be able to negotiate an acceptable
collective agreement with our employees, either upon the expiration of the
existing collective agreement with our employees at the paper mills or in
potential wage negotiations with our pulp workers. This could result in a strike
or work stoppage by the affected workers. The renewal of the collective
agreements or the outcome of our wage negotiations could result in higher wages
or benefits paid to union members. Accordingly, we could experience a
significant disruption of our operations or higher on-going labor costs, which
could have a material adverse effect on our business, financial condition,
results of operations and cash flow.
WE RELY ON GERMAN FEDERAL AND STATE GOVERNMENT GRANTS AND GUARANTEES.
We currently benefit from a subsidized capital expenditure program and
lower cost of financing as a result of German federal and state government
grants and guarantees. Should either the German federal or state governments
fail to honor legislative grants and guarantees, this may have a material
adverse effect on our business, financial condition, results of operations and
cash flow.
5
WE ARE DEPENDENT ON KEY PERSONNEL.
Our future success depends, to a large extent, on the efforts and abilities
of our executive and senior mill operating officers. Such officers are industry
professionals many of whom have operated through multiple business cycles. Our
officers play an integral role in, among other things:
* sales and marketing;
* reducing operating costs;
* identifying capital projects which provide a high rate of return; and
* prioritizing expenditures and maintaining employee relations.
The loss of our officers or any one of them could make us less competitive
in these areas which could materially adversely affect our business, financial
condition, results of operations and cash flows. We do not maintain any key
person life insurance on any of our executive or senior mill operating officers.
WE MAY EXPERIENCE DISRUPTIONS TO OUR PRODUCTION AND DELIVERY.
Major production disruptions over an extended period of time, such as
disruptions caused by fire, earthquake or flood or other natural disasters, as
well as disruptions due to equipment failure due to wear and tear, design error
or operator error, among other things, could adversely affect our business,
financial condition, results of operation and cash flow. Our operations also
depend upon various forms of transportation to receive raw materials and to
deliver our products. Any prolonged disruption in any of these transportation
networks could have a material adverse impact on our business, financial
condition, results of operations and cash flow.
OUR INSURANCE COVERAGE MAY NOT BE ADEQUATE.
We have obtained insurance coverage that we believe would ordinarily be
maintained by an operator of facilities similar to our pulp and paper mills. Our
insurance is subject to various limits and exclusions. Damage or destruction to
our facilities could result in claims that are excluded by, or exceed the limits
of, our insurance coverage.
OUR DECLARATION OF TRUST, SHAREHOLDER RIGHTS PLAN AND WASHINGTON STATE LAW MAY
HAVE ANTI-TAKEOVER EFFECTS WHICH WILL MAKE AN ACQUISITION OF OUR COMPANY BY
ANOTHER COMPANY MORE DIFFICULT.
Our board of trustees is divided into three classes of trustees with
staggered terms. The existence of a classified board may render certain hostile
takeovers more difficult and make it more difficult for a third party to acquire
control of Mercer in certain instances, thereby delaying, deferring or
preventing a change in control that a holder of our shares of beneficial
interest might consider in its best interest. Further, if shareholders are
dissatisfied with the policies and/or decisions of our board of trustees, the
existence of a classified board will make it more difficult for the shareholders
to change the composition (and therefore the policies) of our board of trustees
in a relatively short period of time.
We have adopted a shareholder rights plan, which we expect to renew,
pursuant to which we have granted to our shareholders rights to purchase shares
of junior participating preferred stock or shares of beneficial interest upon
the happening of certain events. These rights could generally discourage a
merger or tender offer for our shares of beneficial interest that is not
approved by our board of trustees by increasing the cost of effecting any such
transaction and, accordingly, could have an adverse impact on a takeover attempt
that a shareholder might consider to be in its best interest.
Furthermore, we may in the future adopt certain other measures that may
have the effect of delaying, deferring or preventing a change in control of
Mercer. Certain of such measures may be adopted without any further vote or
action by the holders of our shares of beneficial interest. These measures may
have anti-takeover effects, which may delay, defer or prevent a takeover attempt
that a holder of our shares of beneficial interest might consider in its best
interest.
6
We are subject to the provisions of the Revised Code of Washington, Chapter
23B.19, which prohibits a Washington corporation, including Mercer, from
engaging in any business combination with an "acquiring person" for a period of
five years after the date of the transaction in which the person became an
acquiring person, unless the business combination is approved in a prescribed
manner. A business combination includes mergers, asset sales as well as certain
transactions resulting in a financial benefit to the acquiring person. Subject
to certain exceptions, an "acquiring person" is a person who, together with
affiliates and associates, owns, or within five years did own, 10% or more of
the corporation's voting stock.
FIXED CHARGES COVERAGE
Our consolidated ratio of earnings to fixed charges is as set forth in the
table below:
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
----------------------- ----------------------------
1998 1999(1) 2000 2001 2002 2002 2003
---- ------ ---- ----- ---- ---- ----
Ratio of earnings to fixed charges(2) 1.5 -(3) 3.1 0.8(3) -(3) -(3) -(3)
___________
(1) In 1999, we effected the conversion of our Rosenthal mill from a
sulphite to a kraft process, which resulted in production downtime from July to
December.
(2) The ratio of earnings to fixed charges has been computed by dividing
income before income taxes, minority interest and fixed charges, by fixed
charges. Fixed charges consist of interest expense plus capitalized interest.
(3) For the years ended December 31, 1999, 2001 and 2002, our deficiency of
earnings to fixed charges was 44.0 million, 2.7 million and 20.7 million,
respectively. For the three month periods ended March 31, 2002 and 2003, our
deficiency of earnings to fixed charges was 5.4 million and 18.0 million,
respectively.
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
The following tables set forth selected historical financial and operating
data as at and for the periods indicated. Effective January 1, 2002, we changed
our reporting currency from the U.S. dollar to the Euro. Accordingly, the
following selected financial data for periods prior to the year ended December
31, 2002 has been restated in Euros and reclassified to conform with the current
year's presentation. The following selected financial data is qualified in its
entirety by, and should be read in conjunction with, our consolidated financial
statements and related notes.
Selected historical financial data as at and for the periods ended December
31, 1998 and 1999 are included in our Annual Report on Form 10-K for the year
ended December 31, 2002, which is incorporated by reference in this offering
memorandum. Management believes that the financial data relating to 1998 and
1999 does not provide a meaningful comparison of financial and operating data to
the periods shown below. In 1999, the Rosenthal mill was shut down from July to
December while we completed a major capital project which converted the
Rosenthal mill to the production of kraft pulp from sulphite pulp and increased
its annual production capacity from approximately 160,000 tonnes to
approximately 300,000 tonnes. Between 1998 and 2000, we owned and operated an
additional four paper mills that produced packaging, carton and printing papers
which have been divested pursuant to our strategy to focus on our core
operations.
7
YEAR ENDED DECEMBER 31,
-----------------------
2000 2001(1) 2002(1)
---- ------ -------
(in thousands, except for per share, tonne and ratio data)
STATEMENT OF OPERATIONS DATA:
Revenues E258,883 E216,447 E239,132
Cost of sales 193,704 184,679 213,463
General administration and other 15,514 18,436 24,979
-------- -------- --------
Income (loss) from operations 49,665 13,332 690
Interest expense (15,198) (16,170) (13,753)
Other income (expense) (2,337) 98 (4,488)
-------- -------- --------
Income (loss) before income taxes and minority interest 32,130 (2,740) (17,551)
Benefit from (provision for) income taxes (117) (83) 264
Minority interest - - 10,965
-------- -------- --------
Net income (loss) E 32,013 E (2,823) E (6,322)(2)
======== ======== ===========
Earnings (loss) per share:
Basic E 1.91 E (0.17) E (0.38)
Diluted E 1.87 E (0.17) E (0.38)(2)
Shares used in computing earnings (loss) per share:
Basic 16,779 16,875 16,775
Diluted 17,144 16,875 16,775
THREE MONTHS ENDED MARCH 31,
----------------------------
2002(1) 2003(1)
-------- --------
(unaudited)
(in thousands, except for per share, tonne and ratio data)
STATEMENT OF OPERATIONS DATA:
Revenues E 62,477 E 50,401
Cost of sales 54,961 46,066
General administration and other 6,630 4,807
-------- --------
Income (loss) from operations 886 (472)
Interest expense (4,018) (2,463)
Other income (expense) (2,257) (11,811)
-------- --------
Income (loss) before income taxes and minority interest (5,389) (14,746)
Benefit from (provision for) income taxes - (12)
Minority interest - 3,836
-------- --------
Net income (loss) E (5,389) E (10,922)(2)
======== =========
Earnings (loss) per share:
Basic E (0.32) E (0.65)
Diluted E (0.32) E (0.65)(2)
Shares used in computing earnings (loss) per share:
Basic 16,875 16,875
Diluted 16,875 16,875
YEAR ENDED DECEMBER 31, AS OF MARCH 31,
------------------------------ ---------------
2000 2001(1) 2002(1) 2003(1)
---- ------- ------ ------
(unaudited)
(in thousand)
BALANCE SHEET DATA:
Cash and cash equivalents E 19,689 E 11,741 E 30,261 E 21,981
Restricted cash 26,775 33,388 48,254(3) 48,836(3)
Working capital 28,388 15,544 6,328 13,501
Total assets 429,724 429,593 599,750(4) 594,193(4)
Debt, current portion, and note payable 29,822 25,752 17,138 18,114
Note payable, construction in progress - - 15,000 15,000
Debt, less current portion(5) 221,772 216,871 205,393(5) 198,106
Debt, construction in progress, less current portion - - 146,485 159,649
Shareholders' equity 133,497 131,613 124,969 119,554
YEAR ENDED DECEMBER 31,
-----------------------
2000 2001(1) 2002(1)
---- ------ ------
(in thousands, except tonne and ratio data)
OTHER DATA:
Net cash from operating activities E 43,395 E 29,783 E 39,734
Capital expenditures E 27,028 E 10,097 E 13,800(6)
EBITDA(7) E 73,711 E 36,298 E 26,304
Ratio of EBITDA to interest expense 4.9 2.2 1.9
Ratio of debt, less current portion,(5) to EBITDA 3.0 6.0 7.8
Net cash from operating activities interest coverage(8) 3.9 2.9 3.3
EBITDA TO INCOME (LOSS) FROM OPERATIONS RECONCILIATION:
Income (loss) from operations E 49,665 E 13,332 E 690
8
Add: Depreciation 24,046 22,966 25,614
-------- -------- --------
EBITDA E 73,711 E 36,298 E 26,304
======== ======== ========
PULP SEGMENT - OPERATING DATA:
Sales volume (tonnes) 239,552 285,654 293,607
Productivity (tonnes produced per day) 736 876 887
Average price realized (per tonne) E 667 E 512 E 443
Cash production costs (per tonne sold)(9) E 353 E 342 E 312
Income (loss) from operations E 54,999 E 19,854 E 4,773
Depreciation E 20,481 E 21,422 E 21,567
THREE MONTHS ENDED MARCH 31,
----------------------------
2002(1) 2003(1)
------- --------
(unaudited)
OTHER DATA:
Net cash from operating activities E 2,257 E 4,837
Capital expenditures E 3,188 E 2,196(6)
EBITDA(7) E 7,655 E 5,449
Ratio of EBITDA to interest expense 1.9 2.2
Ratio of debt, less current portion,(5) to EBITDA n/a n/a
Net cash from operating activities interest coverage(8). 1.6 1.9
EBITDA TO INCOME (LOSS) FROM OPERATIONS RECONCILIATION:
Income (loss) from operations E 886 E (472)
Add: Depreciation 6,769 5,921
-------- --------
EBITDA E 7,655 E 5,449
======== ========
PULP SEGMENT - OPERATING DATA:
Sales volume (tonnes) 73,498 78,479
Productivity (tonnes produced per day) 826 840
Average price realized (per tonne) E 458 E 400
Cash production costs (per tonne sold)(9) E 320 E 310
Income (loss) from operations E 2,186 E (1,438)
Depreciation E 5,397 E 5,384
_____________
(1) In December 2001, we acquired Landqart AG ("Landqart"), which operates a
specialty paper mill, for approximately $2.7 million. Results from the Landqart
mill are not included in our results for 2001, but are included for 2002. The
Landqart mill sold approximately 18,222 tonnes for E39.7 million in the year
ended December 31, 2002 and 4,562 tonnes for E10.0 million in the three months
ended March 31, 2002. At the end of 2002, we sold 20% of our interest in
Landqart and reorganized our remaining interest into an indirect 39% minority
interest through a limited partnership without recognizing a gain or loss. As of
December 31, 2002, our interest in the Landqart mill was no longer consolidated
and is included in our financial results on an equity basis.
(2) Excluding items related to the Stendal project, net income (loss) would
have been E12.8 million and E(4.3) million, or E0.76 and E(0.26) per share on a
diluted basis, for the year ended December 31, 2002 and for the three months
ended March 31, 2003, respectively, which was determined by adding the loss on
derivative financial instruments of E30.1 million and E10.4 million to, and
subtracting minority interest of E11.0 million and E3.8 million from, the
reported net loss of E6.3 million and E10.9 million for the year ended December
31, 2002 and for the three months ended March 31, 2003, respectively. As the
Stendal project is currently under construction and because of its overall size
relative to our other facilities, management uses our consolidated operating
results excluding items relating to the Stendal project to measure the
performance and results of our operating units. Management believes this measure
provides meaningful information on the performance of our operating facilities
for a reporting period.
(3) Comprised of E9.5 million and E8.1 million for payment of construction
in progress costs payable, and E19.1 million and E19.1 million in a debt service
account, as at December 31, 2002 and March 31, 2003, respectively, both relating
to construction in progress at the site of the Stendal mill. In addition, E19.7
million and E21.6 million was in a debt service account as at December 31, 2002
and March 31, 2003, respectively, relating to the Rosenthal mill.
(4) Includes approximately E186.9 million and E192.8 million as at December
31, 2002 and March 31, 2003, respectively, related to properties construction in
progress at the site of the Stendal mill.
(5) Refers to debt, less current portion, as stated under long-term
liabilities in our consolidated balance sheet for the specified periods.
(6) Excluding capital expenditures of approximately E186.9 million and E23.9
million during the year ended December 31, 2002 and the three months ended March
31, 2003, respectively, relating to the Stendal project.
(7) We define EBITDA for this purpose as income (loss) from operations plus
depreciation and amortization. Management uses EBITDA as a benchmark measurement
of its own operating results and as a benchmark relative to its competitors.
Management considers it to be a meaningful supplement to operating income as a
performance measure primarily because depreciation expense is not an actual cash
cost and varies widely from company to company in a manner that management
considers largely independent of the underlying cost efficiency of their
operating facilities. In addition, we believe it is commonly used by securities
analysts, investors and other interested parties to evaluate our financial
performance. EBITDA does not reflect the impact of a number of items that affect
our net income (loss), including financing costs and the effect of derivative
instruments. EBITDA is not a measure of financial performance under accounting
principles generally accepted in the United States and should not be
9
considered as an alternative to net income (loss) or income (loss) from
operations as a measure of performance, nor as an alternative to net cash from
operating activities as a measure of liquidity. Because all companies do not
calculate EBITDA in the same manner, EBITDA as calculated by us may differ from
EBITDA as calculated by other companies.
(8) Net cash from operating activities interest coverage has been computed
by dividing net cash from operating activities plus income tax expense and
interest expense, by interest expense. Management uses this as one measure of
its ability to utilize cash from operating activities for its interest expense
requirements and management believes such information is useful to investors in
understanding operating coverage for such interest expense obligations.
(9) Cash production costs per tonne sold are determined by subtracting
depreciation and shipping and handling costs from cost of sales for the pulp
segment divided by sales volume.
BUSINESS
CORPORATE STRATEGY AND COMPETITIVE POSITION
Our corporate strategy is to create shareholder value within the context of
a long-term, inclusive stakeholder approach. We expect to pursue focused
expansion of our asset and earnings base through acquisitions primarily in
Europe and North America and through organic growth. We seek to acquire
interests in companies and assets in the pulp and paper industry and related
businesses where we can leverage our experience and expertise in adding value
through a focused management approach. We pursue organic growth through focused
capital expenditures designed to produce a high return by increasing production,
reducing costs and improving quality. Key features of our strategy include:
* Creating Value. We only operate in areas and grades of products
where we can effectively compete. As a result, we focus on pulp production where
we maintain certain cost advantages over most competitors. Further, our paper
operations are primarily focused on producing niche paper products where our
technical skills and machine configurations permit us to exploit market
opportunities. We have made substantial capital expenditures at the Rosenthal
mill and are constructing a new state-of-the-art northern bleached softwood
kraft ("NBSK") pulp mill at Stendal in order to keep our operating costs as low
as possible and maximize potential profitability. We have restructured and sold
assets on a strategic basis, such as our recycled printing papers and our
packaging facilities, where we believe that limited opportunity existed for us
to add significant value.
* Stakeholder Approach. The ultimate measure of our success is
evidenced by our financial results and public market valuation. We believe we
can maximize this success through cooperative relationships we maintain with
management and employees, customers and suppliers, communities and the
environment, as well as governments and regulatory bodies. Our management
decisions are driven by a long-term approach to value creation.
* Pursuing Growth. We have successfully acquired under-performing
assets and implemented turn-arounds and restructurings and we continue to
evaluate similar opportunities. We view these acquisitions, which can occur at
significant discounts to replacement cost, as having the ability to generate
strong value through active management without the need for dilutive financings.
We believe that our focused corporate strategy has resulted in the
following competitive strengths:
* Stable and Abundant Fiber Supply. There is a significant amount of
high-quality fiber within a close radius of the Rosenthal mill and in the region
of the Stendal mill. This fiber supply, combined with our purchasing power,
provides us with an ability to enter into contracts which have provided us with
relatively stable prices and volumes.
* Close Proximity to Customers. A significant portion of the pulp
consumed in Europe is imported. Due to the proximity of the Rosenthal mill to
most of our customers, we benefit from lower transportation costs
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relative to our major competitors. The Stendal mill will be similarly located
and we believe it will have similar cost benefits. Additionally, we believe our
ability to deliver pulp on a timely basis enhances customer satisfaction and has
made us a preferred supplier for many customers.
* Low Cost Pulp Operations. The recent significant capital investments
at the Rosenthal mill have resulted in a facility which ranks in the lowest cost
quartile of global competitors for softwood kraft pulp delivered to Europe.
Despite low realized pulp pricing in 2002, Rosenthal generated an operating
profit and achieved debt service coverage levels sufficient to allow for cash
distributions to Mercer Inc. Furthermore, we expect our overall cost structure
to improve because the Stendal mill is designed to have even lower production
costs than the Rosenthal mill.
* Advantageous Financing Structures. As a result of government
guarantees and grants, project financing structures for both our Rosenthal mill
and the Stendal project provide us with relatively low debt costs, initial terms
of 15 years, and fixed amortization schedules, all without further financial
recourse to Mercer Inc.
* Quality of Pulp Products. Our Rosenthal mill is increasing the
proportion of its sales of reinforcement pulp, which is used to produce stronger
papers and generally obtains the highest price. The Stendal mill is similarly
expected to produce a very high quality NBSK product, although from a slightly
different species mix, resulting in a complementary product more suitable for
different end uses.
* Focused Niche Paper Operations. Our paper operations primarily focus
on producing high value products for local and regional markets, taking
advantage of the relative sizes and configurations of our paper machines, our
technical knowledge and market growth in such areas.
THE PULP INDUSTRY
PULP MARKETS
In 2001, total worldwide consumption of market pulp was approximately 42
million metric tonnes, comprised of various types of market pulp as illustrated
below:
2001 WORLD MARKET PULP CONSUMPTION BY GRADE
MARKET PULP BLEACHED SOFTWOOD KRAFT PULP
----------- ----------------------------
Bleached Softwood Kraft 45% Northern Bleached Softwood Kraft 28%
Bleached Hardwood Kraft 41% Southern Bleached Softwood Kraft 11%
Unbleached Kraft 5% Other 6%
Sulphite 3% -----
High Yield 6% 45%
---- =====
100%
====
_______________
Source: Pulp and Paper Products Council
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Although demand is cyclical and has weakened during the recent global
economic slowdown, demand for bleached market pulp has been growing over the
long term at an average rate of approximately 3% annually worldwide and
approximately 2% annually in Europe and the growth rate for demand for NBSK pulp
reflects similar trends. The following chart describes the worldwide NBSK pulp
demand for the specified periods:
WORLDWIDE NBSK PULP DEMAND
(thousands of tonnes)
YEAR TONNES
---- ------
1990 8,415
1991 8,565
1992 8,685
1993 9,315
1994 10,085
1995 10,155
1996 10,230
1997 10,730
1998 10,850
1999 11,925
2000 12,155
2001 11,670
_____________
Source: Pulp and Paper Products
Approximately 14 million tonnes of market pulp is consumed in Europe
annually, of which approximately 6.3 million tonnes is comprised of NBSK pulp.
The following map provides an overview of the estimated trade flows of market
pulp in 2001, with Europe importing substantial quantities of pulp from the
Americas:
2001 TRADE FLOWS IN PULP FOR EUROPE (CEPI)(1)
(thousands of tonnes)
EXPORTS TO IMPORTS FROM
---------- ------------
Africa 86 Africa 257
Asia 695 Asia 441
Europe (non-CEPI) 406 Europe (non-CEPI) 642
Latin America 12 Latin America 1,827
North America 139 North America 4,529
_____________
Source: Confederation of European Paper Industries ("CEPI")
(1) Europe (CEPI) means the European Union countries (excluding Luxembourg)
plus the Czech Republic, Hungary, Norway, the Slovak Republic and Switzerland.
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Within Europe, Germany is the largest pulp market and consumes
approximately five million tonnes of market pulp annually relying largely on
imports from North America and Scandinavia. Approximately 35% of the market pulp
consumed in Germany is NBSK grade. In 2001, the top five importing countries in
continental Europe were as follows:
IMPORTS OF KRAFT PULP FROM
------------------------------------------------
MARKET EUROPE(1) OUTSIDE EUROPE
------------- ---------------- --------------------
(thousands of tonnes)
Germany 1,796 1,418
Italy 843 1,800
France 669 1,244
Netherlands 332 319
Spain 309 310
_____________
Source: Confederation of European Paper Industries
(1) Europe means the European Union countries (excluding Luxembourg) plus
the Czech Republic, Hungary, Norway, the Slovak Republic and Switzerland.
KRAFT PULP PRICING
Global economic conditions, changes in production capacity and inventory
levels are the primary factors affecting kraft list pulp prices. Kraft list pulp
prices are quoted in U.S. dollars. Historically, kraft list pulp prices have
been cyclical in nature. The following chart illustrates average annual NBSK
list pulp prices since 1990:
GLOBAL AVERAGE ANNUAL NBSK LIST PULP PRICES
YEAR $PER TONNE
---- ----------
1990 807
1991 574
1992 559
1993 457
1994 565
1995 875
1996 572
1997 583
1998 547
1999 542
2000 685
2001 558
2002 490
April 2003(1) 560
___________
Source: Pulp & Paper Week
(1) List price during month of April 2003.
The average annual list prices for NBSK pulp between 1990 and 2002 ranged
from a low of approximately $444 per tonne in 1993 to a high of approximately
$875 per tonne in 1995.
The 1995 price peak was followed by a steep decline as inventory levels for
Norscan producers grew to over 2.5 million tonnes by early 1996. Between 1996
and 1999, list pulp prices remained relatively low due in part to the Asian
financial crisis which began in late 1997.
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Prices started to recover in 1999 due to a combination of factors including
a recovery in the Asian economy, the shutdown of unprofitable mills or older
mills in need of environmental upgrades and a decline in capacity expansion.
This contributed to tightening inventory levels among Norscan producers, which
fell to approximately 1.1 million tonnes in June 2000, resulting in list prices
increasing to an average of approximately $710 per tonne in the fourth quarter
of 2000. However, the decline of the American and major European economies in
2001 caused a sharp reduction in paper demand. As a result, Norscan pulp
inventories rose to a high of approximately two million tonnes in early 2001 and
list price levels eroded to an average of approximately $460 per tonne in late
2001. Inventory levels ranged between approximately 1.3 million and 1.9 million
tonnes in 2002, and list prices averaged approximately $463 per tonne in 2002.
Lower producer inventories in early 2003 resulted primarily from supply
disruptions and increased demand in Asia which resulted in producers increasing
list prices for kraft pulp in Europe to approximately $520 per tonne in March
2003. Pulp producers, including ourselves, implemented a further $40 per tonne
increase for NBSK list pulp prices in April 2003.
OUR PULP CASH PRODUCTION COSTS
The Rosenthal mill commenced operations in December of 1999. As production
and sales ramped-up and increased, we achieved efficiencies within our mill
operations, resulting in lower per unit costs. Cash production costs for the
periods indicated below are as follows:
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
----------------------- ----------------------------
COSTS 2000 2001 2002 2002 2003
----- ---- ---- ---- ---- ----
(unaudited)
(per tonne)
Fiber E 180 E 184 E 178 E 178 E 184
Labor 63 57 54 56 52
Chemicals 53 48 38 46 45
Energy 13 18 9 11 -
Other 44 35 33 29 29
------ ------- ------ ------ ------
Total cash production
costs(1) E 353 E 342 E 312 E 320 E 310
====== ======= ====== ====== ======
___________
(1) Excluding depreciation and shipping and handling costs.
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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 hereunto duly authorized.
MERCER INTERNATIONAL INC.
/s/ Jimmy S.H. Lee
--------------------------------------
Jimmy S.H. Lee
President and Chief Executive Officer
Date: May 12, 2003
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