Form 10-K for the fiscal year ended December 31/06
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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For
the fiscal year ended December 31, 2006 |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ____________ to
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Commission file no.: 1333274
MERCER INTERNATIONAL INC.
Exact name of Registrant as specified in its charter
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Washington
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47-0956945 |
State or other jurisdiction
of incorporation or organization |
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IRS Employer
Identification No. |
Suite 2840, 650 West Georgia Street, Vancouver,
British Columbia, Canada, V6B 4N8
Address of Office
Registrants telephone number including area code:
(604) 684-1099
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
Title of Class
Indicate
by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate
by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the
Securities
Act. Yes o No þ
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 þ No o
Indicate
by check mark if disclosure of delinquent filers pursuant to
Item 405 of
Regulation S-K is
not contained herein, and will not be contained, to the best of
Registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any
amendment to this
Form 10-K.
þ
Indicate
by check mark whether the Registrant is a large accelerated
filer, an accelerated filer or a non-accelerated filer.
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
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Indicate
by check mark whether the registrant is a shell company (as
defined in
Rule 12b-2 of the
Act). Yes o No þ
The
aggregate market value of the Registrants voting and
non-voting common equity held by non-affiliates of the
Registrant as of June 30, 2006, the last business day of
the Registrants most recently completed second fiscal
quarter, based on the closing price of the voting stock on the
NASDAQ Global Market on such date, was approximately
$287,994,935.
As of
March 1, 2007, the Registrant had 35,465,176 shares of
common stock, $1.00 par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain
information that will be contained in the definitive proxy
statement for the Registrants annual meeting to be held in
2007 is incorporated by reference into Part III of this
Form 10-K.
TABLE OF CONTENTS
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PART I |
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PART II |
Item 5. |
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Item 6. |
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2
3
EXCHANGE RATES
Our reporting currency and financial statements included in this
report are in Euros, as a significant majority of our business
transactions are originally denominated in Euros. We translate
non-Euro denominated assets and liabilities at the rate of
exchange on the balance sheet date. Revenues and expenses are
translated at the average rate of exchange prevailing during the
period.
The following table sets out exchange rates, based on the noon
buying rates in New York City for cable transfers in foreign
currencies as certified for customs purposes by the Federal
Reserve Bank of New York (the Noon Buying Rate) for
the conversion of Euros and Canadian dollars to
U.S. dollars in effect at the end of the following periods,
the average exchange rates during these periods (based on daily
Noon Buying Rates) and the range of high and low exchange rates
for these periods:
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Years Ended December 31, | |
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2006 | |
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2005 | |
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2004 | |
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2003 | |
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2002 | |
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(/$) | |
End of period
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0.7577 |
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0.8445 |
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0.7942 |
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0.7938 |
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0.9536 |
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High for period
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0.8432 |
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0.8571 |
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0.8473 |
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0.9652 |
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1.1638 |
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Low for period
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0.7504 |
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0.7421 |
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0.7339 |
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0.7938 |
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0.9536 |
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Average for period
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0.7962 |
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0.8033 |
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0.8040 |
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0.8838 |
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1.0660 |
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(C$/$) | |
End of period
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1.1653 |
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1.1659 |
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1.2034 |
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1.2923 |
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1.5800 |
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High for period
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1.0989 |
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1.1507 |
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1.1775 |
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1.2923 |
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1.5108 |
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Low for period
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1.1726 |
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1.2704 |
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1.3970 |
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1.5751 |
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1.6129 |
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Average for period
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1.1344 |
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1.2116 |
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1.3017 |
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1.3916 |
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1.5704 |
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On March 1, 2007, the Noon Buying Rate for the conversion
of Euros and Canadian dollars to U.S. dollars was
0.7591 per
U.S. dollar and C$1.1713 per U.S. dollar.
In addition, certain financial information relating to our
Celgar pulp mill, which we acquired in February 2005, included
in this annual report is stated in Canadian dollars while we
report our financial results in Euros. The following table sets
out exchange rates, based on the noon rates as provided by the
Bank of Canada, for the conversion of Canadian dollars to Euros
in effect at the end of the following periods, the average
exchange rates during these periods (based on daily noon rates)
and the range of high and low exchange rates for these periods:
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Years Ended December 31, | |
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2006 | |
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2005 | |
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2004 | |
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2003 | |
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2002 | |
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(C$/) | |
End of period
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1.5377 |
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1.3805 |
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1.6292 |
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1.6280 |
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1.6564 |
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High for period
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1.3523 |
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1.3576 |
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1.5431 |
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1.4967 |
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1.3682 |
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Low for period
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1.5377 |
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1.6400 |
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1.6915 |
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1.6643 |
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1.6564 |
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Average for period
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1.4244 |
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1.5095 |
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1.6169 |
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1.5826 |
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1.4832 |
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On March 1, 2007, the noon rate for the conversion of
Canadian dollars to Euros was C$1.5430 per Euro.
4
PART I
ITEM 1. BUSINESS
In this document, please note the following:
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references to we, our, us,
the Company or Mercer mean Mercer
International Inc. and its subsidiaries, unless the context
clearly suggests otherwise; and references to Mercer
Inc. mean Mercer International Inc. excluding its
subsidiaries; |
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references to ADMTs mean air-dried metric tonnes; |
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information is provided as of December 31, 2006, unless
otherwise stated or the context clearly suggests otherwise; |
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all references to monetary amounts are to Euros, the
lawful currency adopted by most members of the European Union,
unless otherwise stated; and |
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refers to Euros; $ refers to U.S. dollars; and
C$ refers to Canadian dollars. |
The Company
Mercer Inc. was initially organized as a Washington business
trust in 1968 and, effective March 1, 2006, converted,
referred to as the Conversion, to a Washington
corporation. The Conversion effected a change in legal form, but
did not result in any change in business, management, fiscal
year, accounting practices, assets or liabilities (except to the
extent of legal and other costs of effecting the Conversion and
maintaining ongoing corporate status) or location of offices and
facilities. We continue to operate under the name Mercer
International Inc. following consummation of the
Conversion and continue to be engaged in the same business that
we were engaged in previously and our shares of common stock
continue to be quoted and listed for trading on the NASDAQ
Global Market and the Toronto Stock Exchange.
We operate in the pulp business and are one of the largest
producers of market northern bleached softwood kraft, or
NBSK, pulp in the world. We are the sole kraft pulp
producer, and the only producer of pulp for resale, known as
market pulp, in Germany, which is the largest pulp
import market in Europe. Our operations are currently located in
eastern Germany and western Canada. We currently employ
approximately 1,052 people at our German operations, 401 people
at our Celgar mill in Canada and 16 people at our office in
Vancouver, British Columbia, Canada. We operate three NBSK pulp
mills with a consolidated annual production capacity of
approximately 1.4 million ADMTs:
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Rosenthal mill. Our wholly-owned subsidiary,
Rosenthal, owns and operates a modern, efficient ISO 9002
certified NBSK pulp mill that has an annual production capacity
of approximately 310,000 ADMTs. Located near the town of
Blankenstein, Germany, the Rosenthal mill is currently one of
only two producers of market NBSK pulp in Germany, the other
being our Stendal mill. |
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Stendal mill. Our 70.6% owned subsidiary, Stendal,
completed construction of a new,
state-of-the-art,
single-line NBSK pulp mill in September 2004, which had an
initial annual production capacity of approximately 552,000
ADMTs. The addition of two new digesters in December 2005, along
with other measures, increased its production capacity to
approximately 600,000 ADMTs. The Stendal mill is one of the
largest NBSK pulp mills in Europe. The aggregate cost of the
Stendal mill was approximately
1.0 billion.
The Stendal project was financed through a combination of
government grants totaling approximately
274.5 million,
low-cost, long-term project debt which is largely severally
guaranteed by the federal government of Germany and the state
government of Sachsen-Anhalt, and equity contributions. The
Stendal mill is situated near the town of Stendal, Germany,
approximately 300 kilometers north of the Rosenthal mill. |
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Celgar mill. In February 2005, we acquired,
referred to as the Acquisition, the Celgar mill, a
modern, efficient ISO 9001 certified NBSK pulp mill that at the
time had an annual production capacity of approximately 430,000
ADMTs. A C$28.0 million capital project initiated in 2006
has increased its capacity to approximately 470,000 ADMTs. The
Celgar mill was completely rebuilt in |
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the early 1990s through an C$850.0 million modernization
and expansion project, which transformed it into a low-cost
producer. The Celgar mill is located near the city of Castlegar,
British Columbia, Canada, approximately 600 kilometers east of
the port city of Vancouver, British Columbia. |
We also operated two paper mills in Germany that had an
aggregate annual production capacity of approximately 70,000
ADMTs. We viewed these as non-core operations and divested them
in 2006 and no longer operate in this business. Pursuant to
SFAS 144, we account for this business as discontinued
operations. As a result, certain previously reported amounts and
the financial statements and related notes herein have been
reclassified to conform to the current presentation. In 2006, we
also divested our equity interest in a non-consolidated
specialty paper mill in Switzerland. All of these divestitures
were effected so that we could focus on our core pulp business.
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History and Development of Business |
We originally invested in various real estate assets with the
intention of becoming a real estate investment trust, but in
1985 changed our operational direction to acquiring controlling
interests in operating companies. We acquired our initial pulp
and paper operations in 1993.
In late 1999, we completed a major capital project which, among
other things, converted the Rosenthal mill to the production of
kraft pulp from sulphite pulp, increased its annual production
capacity from approximately 160,000 ADMTs to approximately
280,000 ADMTs, reduced costs and improved efficiencies.
Subsequent minor capital investments and efficiency improvements
increased the Rosenthal mills annual production capacity
to approximately 310,000 ADMTs, and reduced emissions and energy
costs. The aggregate cost of the project was approximately
361.0 million.
In September 2004, we completed construction of the Stendal mill
substantially on its planned schedule and budget at an aggregate
cost of approximately
1.0 billion.
We initially had a 63.6% ownership interest in Stendal and, in
October 2006, increased our interest to 70.6% by acquiring a 7%
minority interest therein for
8.1 million,
of which
6.7 million
was paid by a note that, at our election, we can satisfy in
shares of our common stock.
The Stendal mill is located near the town of Stendal, in the
German State of Sachsen-Anhalt, approximately 300 kilometers
north of the Rosenthal mill. As a result of the proximity of the
Stendal mill to the Rosenthal mill and the use of similar
equipment at both mills, we believe we realize operating
synergies between the two operations, particularly in the areas
of raw materials and supplies procurement, production
engineering, maintenance and marketing.
The Stendal mill is the largest market kraft pulp mill in
Germany, the only other being our Rosenthal mill. The addition
of production from the Stendal mill has allowed us to expand our
customer base, as our two pulp mills produce slightly different
grades of softwood kraft pulp suitable for different end uses.
A significant portion of the capital investments at our German
pulp mills, including the construction of the Stendal mill, were
financed in large part through government guaranteed term
financing and government grants. See
Government Financing.
In February 2005, we completed the Acquisition of the Celgar
mill for $210.0 million, of which $170.0 million was
paid in cash and $40.0 million was paid in our shares, plus
$16.0 million for the defined working capital at the mill
on closing.
The Acquisition of the Celgar mill reflects our strategy of
acquiring world-class market NBSK pulp production capacity on
terms below comparable replacement cost where we can use our
management focus to enhance operations, improve profitability
and create value for our stakeholders. The Acquisition makes us
one of the largest producers of market NBSK pulp in the world.
We now have a consolidated annual production capacity of
approximately 1.4 million ADMTs of high quality NBSK pulp
from three modern NBSK pulp mills located in Europe and North
America. This has improved our service to those larger paper and
tissue producing customers who wish to develop purchasing
arrangements with pulp suppliers that can service them on a
worldwide basis. The Celgar mill also diversified our revenue
and cost base. Prior to the Acquisition, substantially all of
our revenues resulted from sales in Europe. Approximately 81%
and 69% of the Celgar mills sales in 2006 and 2005,
respectively, were in Asia, which is currently the fastest
growing market for
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NBSK pulp imports. The Celgar mills costs are largely in
Canadian dollars, which has reduced our relative exposure to the
exchange rate between the U.S. dollar and Euro.
In conjunction with the Acquisition, we sold $310.0 million
in principal amount of 9.25% senior notes maturing in 2013
and an aggregate of approximately $91.0 million of our
shares by way of separate public offerings. The net proceeds
from the offering of the senior notes, our shares and cash on
hand were utilized to pay the cash portion of the purchase price
of the Acquisition, including defined working capital,
transaction costs and to refinance all of the bank indebtedness
of our Rosenthal mill and for working capital.
In 2006, we divested our paper operations and interests to focus
exclusively on our core pulp business.
The following chart sets out our directly and indirectly owned
principal operating subsidiaries, their jurisdictions of
organization and their principal activities:
Competitive Strengths
Our competitive strengths include the following:
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Modern Low Cost NBSK Pulp Mills. We operate three
large, modern, low cost NBSK pulp mills. The significant capital
investments at the Rosenthal mill have resulted in a facility
which ranks in the lowest cost quartile for NBSK pulp delivered
to Europe. As a result of its
state-of-the-art
facilities and larger production capacity, the Stendal mill is
designed to have lower production costs than the Rosenthal mill.
The Celgar mill is a low cost producer of NBSK pulp and we are
in the process of completing a capital improvement project for
the Celgar mill that we believe will improve price realizations,
increase production, improve reliability and lower production
costs. The relative age and production capacity of our NBSK pulp
mills provide us with certain manufacturing cost advantages over
many of our competitors including lower maintenance capital
expenditures. |
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High Quality NBSK Pulp Products. Our mills produce
high quality NBSK pulp which is a premium grade of kraft pulp.
Our Rosenthal mill continues to increase the proportion of its
sales of reinforcement NBSK pulp, which is used to produce
stronger papers and generally obtains the highest price. The
Stendal mill produces a very high quality NBSK pulp product,
although from a slightly different species mix, resulting in a
complementary product more suitable for different end uses. The
pulp produced at our Celgar mill also has excellent product
characteristics. |
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Close Proximity to Customers. We are the sole
kraft pulp producer and the only producer of market pulp in
Germany, which is the largest pulp import market in Europe. Due
to the proximity of the Rosenthal and Stendal mills to most of
our European customers and the new member countries of the
European Union, we benefit from lower transportation costs
relative to our major competitors. Our Celgar mill, which is
located in western Canada, is well situated to serve Asian and
North American customers. We believe our ability to deliver pulp
on a timely basis enhances customer satisfaction and has made us
a preferred supplier for many customers. |
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Stable and Abundant Fiber Supply. There is a
significant amount of high-quality fiber within a close radius
of each of our mills. This fiber supply, combined with our
purchasing power, lets us enter into contracts and arrangements
which have generally provided us with a satisfactory fiber
supply. |
Corporate Strategy
Our corporate strategy is to create shareholder value by
focusing on the expansion of our asset and earnings base through
organic growth and acquisitions primarily in Europe and North
America. We pursue organic growth through active management and
targeted capital expenditures designed to produce a high return
by increasing production, reducing costs and improving quality.
We seek to acquire interests in companies and assets in the pulp
industry and related businesses where we can leverage our
experience and expertise in adding value through a focused
management approach. Key features of our strategy include:
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Focusing on NBSK Market Pulp. We focus on NBSK
pulp because it is a premium grade kraft pulp known for its
strength and generally obtains the highest price relative to
other kraft pulps. Although demand is cyclical, worldwide demand
for kraft market pulp has grown at an average of approximately
3% per annum over the last ten years with higher growth
rates in certain markets such as eastern Europe and Asia. We do
not believe there are any significant new NBSK pulp production
capacity increases coming online in the next several years due
in part to fiber supply constraints and high capital costs. |
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Operating Modern, World-Class NBSK Pulp Production
Facilities. In order to keep our operating costs as low
as possible, with a goal of operating profitably in all market
conditions, we operate large, modern NBSK pulp production
facilities. We believe such production facilities provide the
best platform to be an efficient, low cost producer of high
quality NBSK pulp without the need for significant sustaining
capital. We believe that this, coupled with announced and
predicted potential pulp mill closures, assists us in becoming a
preferred supplier to customers seeking a reliable, stable,
long-term provider of high quality NBSK pulp. |
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Improving Efficiency and Reducing Operating Costs.
We focus on increasing the productivity and operating efficiency
of our production facilities through cost reduction initiatives,
including targeted capital investments. We seek to make high
return capital investments that increase the production and
operating efficiency at our production facilities, reduce costs
and improve product quality. We also seek to reduce operating
costs by better managing certain operating activities at our
facilities such as fiber procurement and sales and marketing
activities. We coordinate these activities at our pulp
facilities to realize on potential synergies among them. In
particular, we are completing a number of initiatives to realize
upon opportunities to reduce the operating costs, increase
production and improve the financial results of the Celgar mill. |
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Enhancing Customer Relationships. We focus on
continually improving our marketing and distribution
capabilities to enhance our customer relationships and
capitalize on our geographic diversification. We seek to
differentiate ourselves from our competitors by consistently
delivering high quality products to our customers on a global
basis. We coordinate the marketing and distribution activities
at our pulp mills to better service our customers. |
The Pulp Industry
Pulp is used in the production of paper, tissues and paper
related products. Pulp is generally classified according to
fiber type, the process used in its production and the degree to
which it is bleached. Kraft pulp is produced through a sulphate
chemical process in which lignin, the component of wood which
binds individual fibers, is dissolved in a chemical reaction.
Chemically prepared pulp allows the woods fiber to retain
its length and flexibility, resulting in stronger paper
products. Kraft pulp can be bleached to increase its brightness.
Kraft pulp is noted for its strength, brightness and absorption
properties and is used to produce a variety of products,
including lightweight publication grades of paper, tissues and
paper related products.
The market value of kraft pulp depends in part on the fiber used
in the production process. There are two primary species of wood
used as fiber: softwood and hardwood. Softwood species generally
have long, flexible
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fibers which add strength to paper while fibers from species of
hardwood contain shorter fibers which lend bulk and opacity.
Prices for softwood pulp are generally much higher than for
hardwood pulp. Currently, the kraft pulp market is roughly
evenly split between softwood and hardwood grades. Most uses of
market kraft pulp, including fine printing papers, coated and
uncoated magazine papers and various tissue products, utilize a
mix of softwood and hardwood grades to optimize production and
product qualities. In recent years, production of hardwood pulp,
based on fast growing plantation fiber primarily from Asia and
South America, has increased much more rapidly than that of
softwood grades that have longer growth cycles. As a result of
the growth in supply and lower costs, kraft pulp customers in
recent years have substituted some of the pulp content in their
products to hardwood pulp. Counteracting customers
increased proportionate usage of hardwood pulp has been the
requirement for strength characteristics in finished goods and
paper and tissue makers focus on higher machine speeds and lower
basis weights for publishing papers which also require the
strength characteristics of softwood pulp. We believe that the
ability of kraft pulp users to further substitute hardwood for
softwood pulp is limited by such requirements.
NBSK pulp, which is a bleached kraft pulp manufactured using
species of northern softwood, is considered a premium grade
because of its strength. It generally obtains the highest price
relative to other kraft pulps. Southern bleached softwood kraft
pulp is kraft pulp manufactured using southern softwood species
and does not possess the strength found in NBSK pulp. NBSK pulp
is the sole product of our mills.
Kraft pulp can be made in different grades, with varying
technical specifications, for different end uses. High quality
kraft pulp is valued for its reinforcing role in mechanical
printing papers, while other grades of kraft pulp are used to
produce lower priced grades of paper, including tissues and
paper related products.
Producers ranging from small independent manufacturers to large
integrated companies produce pulp worldwide. In 2005, more than
130 million ADMTs of kraft pulp were converted into
printing and writing papers, tissues, cartonboards and other
white grades of paper and paperboard around the world.
Approximately 70% of this pulp was produced for internal
purposes by integrated paper and paperboard manufacturers, and
approximately 30% was produced for sale on the open market.
Although demand is cyclical, worldwide demand for kraft market
pulp has grown at an average rate of approximately 3% annually
over the last ten years. The growth rate for NBSK pulp reflects
this continuing demand, with growth rates higher than the
general softwood kraft group.
Western Europe accounts for approximately 35% of global market
pulp demand with a growth rate of approximately 2% annually over
the past ten years. Within Europe, Germany, with its large
economy and sizable paper industry, has been the largest pulp
market historically relying largely on imports from North
America and Scandinavia.
Demand for market pulp in Asia (excluding Japan) has been
growing at approximately 24% annually over the past
15 years and currently accounts for approximately 30% of
global demand. This demand growth has been driven by increasing
per capita consumption combined with the mandated closure of
numerous small, often non-wood based, pulp facilities in China.
Canada is the largest exporter to this region.
We expect Europe and Asia to continue to be significant net
importers of pulp in the foreseeable future. The markets for
kraft pulp are cyclical in nature and demand for kraft pulp is
related to global and regional levels of economic activity. A
measure of demand for kraft pulp is the ratio obtained by
dividing the worldwide consumption of kraft pulp by the
worldwide capacity for the production of kraft pulp, or the
consumption/capacity ratio. An increase in this
ratio generally occurs when there is an increase in global and
regional levels of economic activity and low inventories of
kraft pulp. An increase in this ratio generally indicates
greater demand as consumption increases, which generally results
in rising kraft pulp prices and a
build-up of inventories
by buyers and a reduction by producers. As prices continue to
rise, producers continue to run at higher operating rates.
However, an adverse change in global and regional levels of
economic activity generally negatively affects demand for kraft
pulp, often leading to a high level of inventory
build-up by buyers. As
demand falls, buyers generally reduce their purchases and rely
on inventories of kraft pulp and many producers will run at
lower operating rates by taking downtime to limit the
build-up of their own
inventories.
9
The consumption/capacity ratio, excluding Indonesian and eastern
European pulp producers, was approximately 96% in 2004,
approximately 93% in 2005 and approximately 95% in 2006. We
expect the long lead time and significant capital investment
required to bring new pulp mills on stream to limit growth in
industry capacity in the next few years.
Global economic conditions, changes in production capacity,
inventory levels, and currency exchange rates are the primary
factors affecting NBSK pulp list prices. The average annual
European list prices for NBSK pulp between 1990 and 2006 ranged
from a low of approximately $444 per ADMT in 1993 to a high
of approximately $875 per ADMT in 1995.
The 1995 price peak was followed by a steep decline as inventory
levels for North American and Scandinavian, or
Norscan, producers grew to over 2.5 million
ADMTs by early 1996. Norscan producers currently produce a
majority of the market NBSK pulp sold in North America and
Europe and inventory levels held by Norscan producers are
considered an industry benchmark in determining industry
inventory levels. Between 1996 and 1999, list pulp prices
remained relatively low due in part to the Asian financial
crisis which began in late 1997.
Prices started to recover in 1999 due to a combination of
factors including a recovery in the Asian economy, the shutdown
of unprofitable mills or older mills in need of environmental
upgrades and a decline in capacity expansion. This contributed
to tightening inventory levels among Norscan producers,
resulting in list prices increasing to an average of
approximately $710 per ADMT 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 increased materially and list
price levels eroded to an average of approximately $460 per
ADMT in late 2001. Inventory levels ranged between approximately
1.3 million and 1.9 million ADMTs in 2002, and list
prices averaged approximately $463 per ADMT in 2002. The
weakening of the U.S. dollar against the Euro and other
major currencies and an increase in demand resulting from
improving American and major European economies in 2003 resulted
in list prices for kraft pulp in Europe increasing to
approximately $560 per ADMT in December 2003 despite
relatively high inventory levels. List prices for kraft pulp in
Europe continued to strengthen in 2004 due to the relatively
weak U.S. dollar and improving world economies, and were
approximately $625 per ADMT in December 2004. However, list
prices for NBSK pulp declined in 2005 primarily due to the
strengthening of the U.S. dollar and were approximately
$600 per ADMT in Europe at the end of 2005. Pulp prices
increased steadily in 2006 primarily as a result of the closure
of several pulp mills, particularly in North America, which
reduced NBSK capacity by approximately 1.2 million ADMTs,
better demand and the general weakness of the U.S. dollar
against the Euro and the Canadian dollar. At the end of 2006,
list prices for NBSK pulp in Northern Europe had increased to
$730 per ADMT.
The following chart sets out European list prices for NBSK pulp
for the periods indicated:
A producers sales realizations will reflect customer
discounts, commissions and other items and prices will continue
to fluctuate in the future.
10
|
|
|
The Manufacturing Process |
The following diagram provides a simplified description of the
kraft pulp manufacturing process at our pulp mills:
In order to transform wood chips into kraft pulp, wood chips
undergo a multi-step process involving the following principal
stages: chip screening, digesting, pulp washing, screening,
bleaching and drying.
In the initial processing stage, wood chips are screened to
remove oversized chips and sawdust and are conveyed to a
pressurized digester where they are heated and cooked with
chemicals. This occurs in a continuous process at the Celgar and
Rosenthal mills and in a batch process at the Stendal mill. This
process softens and eventually dissolves the phenolic material
called lignin that binds the fibers to each other in the wood.
Cooked pulp flows out of the digester and is washed and screened
to remove most of the residual spent chemicals, called black
liquor, and partially cooked wood chips. The pulp then undergoes
a series of bleaching stages where the brightness of the pulp is
gradually increased. Finally, the bleached pulp is sent to the
pulp machine where it is dried to achieve a dryness level of
more than 90%. The pulp is then ready to be baled for shipment
to customers.
A significant feature of kraft pulping technology is the
recovery system, whereby chemicals used in the cooking process
are captured and extracted for re-use, which reduces chemical
costs and improves environmental performance. During the cooking
stage, dissolved organic wood materials and black liquor are
extracted from the digester. After undergoing an evaporation
process, black liquor is burned in a recovery boiler. The
chemical compounds of the black liquor are collected from the
recovery boiler and are reconstituted into cooking chemicals
used in the digesting stage through additional processing in the
recausticizing plant.
The heat produced by the recovery boiler is used to generate
high-pressure steam. Additional steam is generated by a power
boiler through the combustion of biomass consisting of bark and
other wood residues from sawmills and our woodrooms, residue
generated by the effluent treatment system and natural gas. The
11
steam produced by the recovery and power boilers is used to
power a turbogenerator to generate electricity, as well as to
provide heat for the digesting and pulp drying processes.
Raw Materials
Our mills are situated in regions which generally provide a
relatively stable supply of fiber. The fiber consumed by our
mills consists of wood chips produced by sawmills and pulp logs,
which are cyclical in both price and supply. Wood chips are
small pieces of wood used to make pulp and are a product of
either wood waste from sawmills or pulp logs processed, or
chipped, especially for this purpose. Pulp logs consist of lower
quality logs not used in the production of lumber. The costs of
wood chips and pulp logs are primarily affected by the supply
and demand for lumber.
In 2006 in Germany, the price of wood chips was also affected by
increased demand from alternative or renewable energy producers
and imbalances in supply because of low harvest levels resulting
from severe winter conditions in late 2005 and early 2006. These
low harvest levels were not made up during the course of 2006.
These factors contributed to upward pressure on our fiber prices
in the latter part of 2006 and for deliveries going into the
first half of 2007. Severe winter storms in central Europe,
including Germany in January 2007, resulted in very significant
damage to the forests. We believe the damage to forests in
Germany may be in excess of 20.0 million cubic meters of
wood. We expect these damaged forests will be harvested by
stakeholders as rapidly as practicable to preserve the value of
the wood. We currently expect the harvesting and availability of
this damaged wood to temper and moderate fiber prices in the
second half of 2007.
The wood chips for the Rosenthal mill are sourced from
approximately 24 sawmills located in the States of Bavaria and
Thuringia within a 150 kilometer radius of the Rosenthal mill.
Within this radius, the Rosenthal mill is the largest consumer
of wood chips. Given its location and size, the Rosenthal mill
is often the best economic outlet for the sale of wood chips in
the area. In 2006, the Rosenthal mill consumed approximately
1.7 million cubic meters of fiber. Approximately 68%, or
approximately 1.1 million cubic meters, of such consumption
was in the form of sawmill wood chips. The balance of
approximately 32%, or approximately 0.5 million cubic
meters, was in the form of pulp logs. Approximately 85% to 90%
of the fiber consumed by the Rosenthal mill is spruce and the
remainder is pine. We believe the Rosenthal mills fiber
costs have historically been among the lowest for European pulp
producers. The Rosenthal mills transportation division
handled approximately 53% of our wood chip deliveries to the
mill in 2006. While fiber costs and supply are subject to
cyclical changes largely in the sawmill industry, we expect that
we will be able to continue to obtain an adequate supply of
fiber on reasonably satisfactory terms for the Rosenthal mill
due to its location and our long-term relationships with
suppliers. We have not historically experienced any material
fiber supply interruptions at the Rosenthal mill.
Wood chips for the Rosenthal mill are normally sourced from
sawmills under one year or quarterly supply contracts with fixed
volumes, which provide for price adjustments. More than 90% of
our chip supply is sourced from suppliers with which we have a
long standing relationship. At the end of March 2007, a
three-year agreement for the supply of approximately 600,000
cubic meters of wood chips annually will conclude. We are
currently negotiating a new agreement with this supplier, which
we expect will have similar characteristics except for the term
which will likely be shorter. Pulp logs are partly sourced from
the state forest agencies in Thuringia, Saxony and Bavaria on a
contract basis and partly from private holders, on the same
basis as wood chips. Like the wood chip supply arrangements,
these contracts tend to be of less than one year terms with
quarterly adjustments for market pricing. We organize the
harvesting of pulp logs sourced from the state forest agencies
in Thuringia, Saxony and Bavaria after discussions with the
agencies regarding the quantities of pulp logs that we require.
Our own internal wood procurement department handles and sources
the fiber requirements for the Rosenthal mill. Five people are
employed in the department currently. We coordinate the fiber
procurement for the Rosenthal and Stendal mills.
The fiber consumed by the Stendal mill consists of wood chips
and pulp logs. In 2006, the Stendal mill consumed approximately
2.8 million cubic meters of fiber. The core wood supply
region for the Stendal mill includes most of the northern part
of Germany within an approximate 240 kilometer radius of the
mill. The wood supply potential in this core region is not yet
fully utilized and we expect that it should be able to supply
all of the fiber needed by the mill. We also purchase wood chips
from southwestern and southern Germany.
12
The fiber base in the planned wood supply area for the Stendal
mill consisted of approximately 55% pine and 45% spruce and fir
in 2006. Approximately 20% of the fiber consumed by the Stendal
mill in 2006 was in the form of sawmill wood chips and
approximately 80% in the form of pulp logs. The Stendal mill has
sufficient chipping capacity to fully operate using solely pulp
logs, if required. We source wood chips from sawmills within an
approximate 600 kilometer radius of the Stendal mill. We source
pulp logs partly from private forest holders and partly from
state forest agencies in Thuringia, Sachsen-Anhalt,
Mecklenburg-Vorpommern, Sachsen, Niedersachsen,
Nordrhein-Westfalen, Hessen and Brandenburg.
Stendal has its own wood procurement organization to handle the
fiber requirements. Currently, there are approximately 113
people employed in this division. This division focuses on three
principal activities, being wood procurement and sales,
harvesting and transportation. The procurement and sales main
activity is to procure the required wood chip and pulp log
assortments for the mills annual production. In
conjunction with this activity, it may also procure higher
quality sawlogs, either through harvesting or through purchases
that it can sell or trade with others for wood chips in order to
optimize the fiber mix. These trading activities employ two
people. The harvesting activities in 2007 will focus on
acquiring up to approximately 500,000 cubic meters per annum of
harvestable timber, of which approximately 65% is expected to be
pulp logs and the balance likely to be higher quality logs to be
sold or traded to third parties for wood chips. We currently
expect that approximately 62% of this volume may be harvested
directly by us and the balance contracted out to third parties.
Approximately 48 employees will be engaged in such harvesting
activities. Transportation activities focus on managing,
controlling and optimizing shipping and flows of pulp logs to
the mill and employ up to 33 people.
We believe we are the largest consumer of wood chips and pulp
logs in Germany and often provide the best, long-term economic
outlet for the sale of wood chips in eastern Germany. We
coordinate the wood procurement activities for the Rosenthal and
Stendal mills to reduce overall personnel and administrative
costs, provide greater purchasing power and coordinate buying
and trading activities. This coordination and integration of
fiber flows also allows us to optimize transportation costs, and
the species and fiber mix for both mills.
The Celgar mill has a secure supply of high quality fiber that
it purchases from a number of Canadian and U.S. suppliers.
The supply of fiber at the mill is characterized by a mix of a
variety of species (whitewoods and cedar). In 2006, the Celgar
mill consumed approximately 3.0 million cubic meters of
fiber. Two sources of fiber are used to meet this demand: chips
purchased from nearby sawmills and chipping facilities, and pulp
logs purchased from local logging contractors. All of the Celgar
mills fiber is sourced externally with approximately 90%
covered under chip contracts and the remaining 10% coming from
the pulp logs processed through its woodroom.
The Celgar mill has entered into long and short-term chip supply
agreements with approximately 30 different suppliers from
British Columbia, Canada and the U.S. for a total of
approximately 2.8 million cubic meters (excluding chips
from its own woodroom). This represents approximately 90% of
total annual fiber requirements at the mill. The woodroom
supplies the remaining chips to meet the mills annual
fiber requirements. Chips are purchased in Canada and the
U.S. in accordance with chip purchase agreements.
Generally, pricing is reviewed and adjusted to reflect market
prices on a regular basis. The majority of the agreements are
for periods ranging between two and five years. Several of the
longer-term contracts are so-called evergreen
agreements, where the contract remains in effect until one of
the parties elects to terminate. Termination requires a minimum
of two, and in some cases, five years written notice. Certain
non-evergreen long-term agreements provide for renewal
negotiations prior to expiry. The Celgar mill has contracts with
two sawmills, which are both owned by the same parent. These
sawmills comprise approximately 25% of the Celgar mills
total fiber supply. One of these chip agreements remains in
effect until December 31, 2008 and thereafter, if not
extended, continues, subject to volume reductions, indefinitely,
subject to termination by either party upon two years
prior notice. The other agreement is an evergreen agreement that
remains in effect until terminated upon five years prior
notice. The chip agreements each contain provisions that may
vary chip volume delivery commitments based on certain criteria.
Except for occasional minor purchases from smaller suppliers,
the balance of the Celgar mills fiber requirements is met
by the production of chips from its own woodroom. Currently the
woodroom is operating on a one shift basis. To secure the volume
of pulp logs required to meet its requirements, the Celgar mill
has
13
entered into annual pulp log supply agreements with a number of
different suppliers, many of whom are also contract chip
suppliers to the mill. The woodroom is capable of running a
second shift and additional pulp logs could be purchased to
support the ramp up of the woodroom. All of the pulp log
agreements can be terminated by either party for any reason,
upon seven days written notice.
Pulp Cash Production Costs
Cash production costs for our pulp mills for 2006 and 2005 and
our Rosenthal mill for 2004 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
Costs |
|
2006 | |
|
2005(1)(2) | |
|
2004(2) | |
|
|
| |
|
| |
|
| |
|
|
(per ADMT) | |
Fiber
|
|
|
192 |
|
|
|
171 |
|
|
|
171 |
|
Labor
|
|
|
46 |
|
|
|
46 |
|
|
|
52 |
|
Chemicals
|
|
|
42 |
|
|
|
42 |
|
|
|
43 |
|
Energy(3)
|
|
|
7 |
|
|
|
8 |
|
|
|
(1 |
) |
Other
|
|
|
41 |
|
|
|
40 |
|
|
|
33 |
|
|
|
|
|
|
|
|
|
|
|
Total cash production costs(4)
|
|
|
328 |
|
|
|
307 |
|
|
|
298 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
The amounts presented are from the time of the Acquisition of
the Celgar mill in February 2005. Amounts in respect of the
Celgar mill are included in Euros and have been converted at the
average rate of exchange in 2006 and 2005, respectively, for the
conversion of Canadian dollars to Euros. |
|
(2) |
The Stendal mill was completed and started up in September 2004.
During the balance of 2004, the Stendal mill underwent extensive
testing and evaluation. As a result, cash production costs for
the Stendal mill for 2004 are not included as they are not
meaningful. In 2005, the Stendal mill was ramping up production
and cash production costs are not necessarily indicative of its
operating capability. |
|
(3) |
Net of energy revenues. |
|
(4) |
Cost of production per ADMT produced excluding depreciation. |
Our Product
We manufacture and sell NBSK pulp produced from wood chips and
pulp logs.
The kraft pulp produced at the Rosenthal mill is a long-fibered
softwood pulp produced by a sulphate cooking process and
manufactured primarily from wood chips and pulp logs. A number
of factors beyond economic supply and demand have an impact on
the market for chemical pulp, including requirements for pulp
bleached without any chlorine compounds or without the use of
chlorine gas. The Rosenthal mill has the capability of producing
both totally chlorine free and elemental
chlorine free pulp. Totally chlorine free pulp is bleached
to a high brightness using oxygen, ozone and hydrogen peroxide
as bleaching agents, whereas elemental chlorine free pulp is
produced by substituting chlorine dioxide for chlorine gas in
the bleaching process. This substitution virtually eliminates
complex chloro-organic compounds from mill effluent.
Kraft pulp is valued for its reinforcing role in mechanical
printing papers and is sought after by producers of paper for
the publishing industry, primarily for magazines and advertising
materials. Kraft pulp produced for reinforcement fibers is
considered the highest grade of kraft pulp and generally obtains
the highest price. Through a focused technical and marketing
effort, we have changed the mix of the kraft pulp that we
produce at the Rosenthal mill to substantially increase our
relative amount of reinforcement fibers from approximately 16%
at the beginning of 2000 to approximately 50% at the end of 2006.
The Rosenthal mill produces pulp for reinforcement fibers to the
specifications of certain of our customers. We believe that a
number of our customers consider us their supplier of choice.
For more information about the facilities at the Rosenthal mill,
see Item 2 Properties.
The kraft pulp produced at the Stendal mill is of a slightly
different grade than the pulp produced at the Rosenthal mill as
the mix of softwood fiber used is slightly different. This
results in a complementary product more suitable for different
end uses. The Stendal mill is capable of producing both totally
chlorine free and elemental chlorine free pulp. For more
information about the facilities at the Stendal mill, see
Item 2 Properties.
14
The Celgar mill produces high quality kraft pulp that is made
from a unique blend of slow growing/long-fiber western Canadian
tree species. It is used in the manufacture of high quality
paper and tissue products. We believe the Celgar mills
pulp is known for its excellent product characteristics,
including tensile strength, wet strength and brightness. The
Celgar mill is a long-established supplier to paper producers in
Asia. For more information about the facilities at the Celgar
mill, see Item 2 Properties.
Sales, Marketing and Distribution
The distribution of our pulp sales volume and revenues by
geographic area are set out in the following table for the
periods indicated:
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,(1) | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
Revenues by Geographic Area
|
|
|
|
|
|
|
|
|
|
|
|
|
Germany
|
|
|
154,388 |
|
|
|
91,460 |
|
|
|
56,526 |
|
China
|
|
|
141,296 |
|
|
|
82,356 |
|
|
|
8,463 |
|
Italy
|
|
|
60,057 |
|
|
|
71,742 |
|
|
|
51,504 |
|
Other European Union countries(2)
|
|
|
117,016 |
|
|
|
91,308 |
|
|
|
48,890 |
|
Other Asia
|
|
|
75,522 |
|
|
|
56,953 |
|
|
|
4,362 |
|
North America
|
|
|
39,761 |
|
|
|
37,643 |
|
|
|
|
|
Other countries
|
|
|
28,586 |
|
|
|
16,191 |
|
|
|
8,767 |
|
|
|
|
|
|
|
|
|
|
|
Total(3)
|
|
|
616,626 |
|
|
|
447,653 |
|
|
|
178,512 |
|
|
|
|
|
|
|
|
|
|
|
(1) We completed construction of and started up our
Stendal mill in the third quarter of 2004. As a result, the data
for 2004 includes results from the Stendal mill from the time of
its start up in mid-September 2004. The data presented also
includes results from the Celgar mill from the time we acquired
the mill in February 2005.
(2) Not including Germany or Italy; includes new
entrant countries to the European Union from their time of
admission.
(3) Excluding intercompany sales volumes of 13,234,
14,289 and 6,576 of pulp and intercompany net sales revenues of
approximately
6.4 million,
6.3 million
and
2.8 million
in 2006, 2005 and 2004, respectively.
The following charts illustrate the geographic distribution of
our revenues for the periods indicated:
|
|
|
|
|
Year Ended |
|
Year Ended |
|
Year Ended |
December 31, 2006 |
|
December 31, 2005 |
|
December 31, 2004 |
|
|
|
|
|
|
|
|
|
|
(1) Includes new entrant countries to the European
Union from their time of admission.
Our global sales and marketing group has been responsible for
conducting all sales and marketing of the pulp produced at our
three pulp mills since 2005. About 19 employees are currently
engaged full time in such activities. We co-ordinate and
integrate the sales and marketing activities at the Rosenthal
mill and the Stendal mill to realize on a number of synergies
between them. These include reduced overall administrative and
personnel costs and co-ordinated selling, marketing and
transportation activities. We also coordinate sales from the
Celgar mill with our German mills on a global basis, thereby
providing our larger customers with
15
seamless service across all major geographies. Coordinating
overall pulp sales from our three pulp mills also allows us to
focus our sales on our most transport logical customers.
The Rosenthal and Stendal mills are currently the only market
kraft pulp producers in Germany, which is the leading import
market for kraft pulp in Europe. We therefore have a material
competitive transportation cost advantage compared to Norscan
pulp producers when shipping to customers in Europe. Due to the
location of our German mills, we are able to deliver pulp to
many of our customers primarily by truck. Most trucks that
deliver goods into eastern Germany generally do not also haul
goods out of the region as eastern Germany is primarily an
importer of goods. We are therefore able to obtain relatively
low freight rates for the delivery of our products to many of
our customers. Since many of our customers are located within a
500 kilometer radius of our Rosenthal and Stendal mills, we can
generally supply pulp to customers of these mills faster than
our competitors because of the short distances between the mills
and our customers. For our customers in western Europe, we can,
if requested, often supply them with pulp within one day of it
being ordered.
Historically, the Celgar mill sold all of its pulp through sales
agents. In 2005, our sales force took over responsibility for
supervising and managing all of Celgars sales agents and
performing some of its sales functions directly. Such changes
have resulted in reduced agents commissions and fees,
increased contract sales and improved pulp price realizations.
We are also focusing sales from the Celgar mill to our most
transport logical customers, including expanding sales from the
mill to the U.S. midwest.
The Celgar mills pulp production is transported to
customers by rail, truck and ocean carrier using strategically
located third party warehouses to ensure timely delivery. All
overseas exports are shipped through warehouse facilities in the
Vancouver, British Columbia area. The majority of Celgars
pulp for overseas markets is initially delivered primarily by
rail to the port of Vancouver for shipment overseas by ocean
carrier. As a western Canada based pulp mill, the Celgar mill
enjoys a transportation advantage in sales to Asian customers,
in comparison to certain other NBSK pulp producers.
The majority of the Celgar mills pulp for domestic markets
is shipped by rail to third party warehouses in the
U.S. midwest or directly to the customer.
Our pulp sales are on customary industry terms. At
December 31, 2006, we had no material payment
delinquencies. In 2006 and 2005, no single customer accounted
for more than 10% of our pulp sales. In 2004, one customer
accounted for approximately 10% of our pulp sales. Our pulp
sales are not dependent upon the activities of any single
customer or upon a concentrated group of major customers.
Capital Expenditures
In 2006, we continued with our capital investment programs
designed to increase production capacity, improve efficiency and
reduce effluent discharges and emissions at our manufacturing
facilities. The improvements made at our mills over the past
five years have reduced operating costs and increased the
competitive position of our facilities.
Capital investments at the Rosenthal mill in 2006 related mainly
to the installation of a wash press in the bleach plant and the
surface improvements to the chip yard at an aggregate cost of
approximately
13.4 million
and other projects relating to maintaining the quality and
efficiency of the mill. We estimate capital expenditures at the
Rosenthal mill to be approximately
5.2 million
for 2007 relating primarily to a dust filter for the lime kiln,
a new white liquor tank, noise reduction for the cooling towers
and other smaller projects relating to maintaining the quality
and efficiency of the mill.
Construction of the Stendal mill was completed in the third
quarter of 2004. Total capital costs incurred in respect of the
project in 2004 were approximately
396.6 million.
Total capital expenditures at the Stendal mill in 2006 and 2005
were
2.5 million
and
8.3 million,
respectively. Capital expenditures in 2006 and 2007 related
primarily to replacement investment and smaller optimization
items. We estimate capital expenditures for the Stendal mill for
2007 to be approximately
6.0 million.
Qualifying capital investments at industrial facilities in
Germany to reduce effluent discharges offset wastewater fees
that would otherwise be required to be paid. For more
information about our environmental capital expenditures, see
Environmental.
16
Total capital expenditures at the Celgar mill in 2006 and since
its acquisition in February 2005 were
16.0 million
and
21.3 million,
respectively. In 2005, we commenced the C$28.0 million
capital improvement project at the Celgar mill. The objective of
this project was to reduce operating costs, increase production
capacity and enhance the operating efficiency and reliability of
the mill. The major components of the capital project consisted
of the installation of two new Compact Wash Presses and the
expansion of one of the pulp machine dryers at an aggregate cost
of approximately C$28.0 million. The project commenced in
2005 and is expected to be completed in 2007. In 2006, the most
significant capital expenditures related to a capital
improvement project in the amount of approximately
13.0 million.
We estimate capital expenditures for the Celgar mill for 2007 to
be approximately
9.3 million
and to primarily relate to finalization of the aforesaid capital
project, specifically the installation of dryer decks on
the #2 pulp machine.
Government Financing
Our capital investment programs in Germany are partially
financed through government grants made available by German
federal and state governments. Under legislation adopted by the
federal and certain state governments of Germany, government
grants are provided to qualifying businesses operating in
eastern Germany to finance capital investments. The grants are
made to encourage investment and job creation. Pursuant to the
current terms of these grants, federal and state governments
will provide funding for up to 35% of the cost of qualified
investments. The terms of such government grants also require
that at least one permanent job be created for each
500,000 of
capital investment eligible for such grants and that such jobs
be maintained for a period of five years from the completion of
the capital investment project. Such government grants are not
repayable by a recipient unless it fails to complete the
proposed capital investment or fails to create or maintain the
requisite amount of jobs. In the case of such failure, the
government is entitled to revoke the grants and seek repayment
unless such failure resulted from material unforeseen market
developments beyond the control of the recipient, wherein the
government may refrain from reclaiming previous grants. Pursuant
to such grants being provided in respect of the Stendal mill, we
have agreed to maintain stipulated job levels at the Stendal
mill for the specified five-year period. We believe that we are
in compliance in all material respects with all of the terms and
conditions governing the government grants we have received in
Germany. Our commitment to maintain the stipulated number of
jobs at the Rosenthal mill for the required five-year period
expired in 2005. For more information, see
Human Resources.
Such government grants are not reported in our income. These
grants reduce the cost basis of the assets purchased when the
grants are received.
The following table sets out the capital expenditures and
government grants recorded by Mercer for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(in thousands) | |
Capital expenditures, gross
|
|
|
31,958 |
|
|
|
20,761 |
|
|
|
400,516 |
|
|
|
453,235 |
(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Government grants
|
|
|
9,101 |
|
|
|
84,694 |
|
|
|
103,574 |
|
|
|
197,369 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
The total cost of the conversion of the Rosenthal mill to
produce kraft pulp was approximately
361.0 million.
We also received government grants totaling approximately
101.7 million
in connection with such capital investments. |
In addition, the Stendal mill qualified for approximately
274.5 million
of government grants, all of which have been received as at
December 31, 2006. For more information about the Stendal
mill, see Stendal Pulp Mill.
17
The following table sets out for the periods indicated the
effect of these government grants on the recorded value of such
assets in our consolidated balance sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As at December 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
|
(in thousands) | |
Properties, net (as shown on consolidated balance sheets)
|
|
|
972,143 |
|
|
|
1,015,363 |
|
|
|
927,055 |
|
Add back: government grants less amortization, deducted
from properties
|
|
|
341,710 |
|
|
|
327,723 |
|
|
|
259,133 |
|
|
|
|
|
|
|
|
|
|
|
Properties, gross amount including government grants less
amortization
|
|
|
1,313,853 |
|
|
|
1,343,086 |
|
|
|
1,186,188 |
|
|
|
|
|
|
|
|
|
|
|
Loan Guarantees
Loan guarantees are available from German federal and state
governments for up to an aggregate of 80% of the borrowed amount
for qualifying capital investments made in certain parts of
Germany. The federal and state governments are each severally
committed to a portion of the guaranteed amount. These
guarantees are provided by German federal and state governments
to assist any qualifying businesses with financing capital
investments. The guarantees permit qualifying businesses to
obtain term loans for such capital investments on terms and at
interest rates that are more favorable than available in the
general market. In addition, subsidized interest rate loans are
available from public financial institutions in Germany, which
provide loans at below market interest rates for qualified
investments.
Our Stendal Project Facility is guaranteed up to 80% pursuant to
such governmental guarantees. As a result, such facility
benefits from lower interest costs and other credit terms than
would otherwise be available.
Stendal Pulp Mill
We are a 70.6% owner in Stendal, which operates the Stendal
mill. The other shareholder of Stendal is E&Z
Industrie-Lösungen GmbH, formerly called RWE
Industrie-Lösungen GmbH, or RWE, as to a 29.4%
interest. We initially had a 63.6% interest in Stendal and
acquired an additional 7% interest in October 2006 for
8.1 million.
Construction of the Stendal mill was completed in September
2004. The aggregate cost of the Stendal mill was approximately
1.0 billion.
The summaries of certain material provisions of agreements
entered into in connection with the Stendal mill set forth
herein are not complete and such summaries, including
definitions of certain terms, are qualified in their entirety by
reference to such agreements on file with the SEC.
We, Stendal and its other current shareholder, RWE, are parties
to a shareholders agreement dated August 26, 2002, as
amended, to govern our respective interests in Stendal. The
agreement contains terms and conditions customary for these
types of agreements, including restrictions on transfers of
share capital and shareholder loans other than to affiliates,
rights of first refusal on share and shareholder loan transfers,
pre-emptive rights and piggyback rights on dispositions of our
interest. The shareholders are not obligated to fund any further
equity capital contributions to the project. Pursuant to the
shareholders agreement, we are entitled to transfer up to
12.5% of our interest in Stendal without the prior consent of
the other shareholders. The shareholders agreement
provides that Stendals managing directors may be appointed
by holders of a simple majority of its share capital. Further,
shareholder decisions, other than those mandated by law or for
the provision of financial assistance to a shareholder, are
determined by a simple majority of Stendals share capital.
If a shareholder is in default under the shareholders
agreement or commits certain acts of insolvency or bankruptcy,
it shall be considered to be a defaulting shareholder and must
offer to sell its share capital and shareholder loans to the
remaining shareholders on a pro rata basis, to a third party
nominated by the other shareholders or permit them to be
redeemed by Stendal. Other than in circumstances where a
shareholder is considered to be a defaulting shareholder, the
shareholders agreement does not provide for any mandatory
or forced purchases and sales of a shareholders interest
in Stendal.
18
We coordinate and integrate various activities at the Rosenthal
and Stendal mills to realize efficiencies and optimize the cost
structure of each mill. Such activities include wood
procurement, a sales organization that coordinates and handles
the sales and marketing of the pulp produced by both mills,
purchases of supplies and stores, maintenance activities,
workforce and management training and transportation. We are
also coordinating sales from the Celgar mill with our Rosenthal
and Stendal mills on a global basis, thereby providing our
larger customers with seamless service across all major
geographies.
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EPC Contract/ Acceptance of the Stendal Mill |
The Stendal mill was constructed under a
716.0 million
fixed-price turn-key engineering, procurement and construction,
or EPC, contract between Stendal and RWE, referred
to as the principal or EPC contractor.
RWEs obligations under the EPC contract are guaranteed by
its parent company.
The contract price for the completion of the project was fixed.
Payments under the EPC contract were made periodically against
milestones as and when achieved by RWE.
Under the EPC contract, RWE was responsible for all planning,
design, engineering, procurement, construction and testing in
connection with the build-out and
start-up of the mill.
We were responsible for obtaining legal title and possession of
the site and providing the site and certain equipment, materials
and services, as well as personnel, raw materials and other
items in connection with the
start-up of the mill.
RWE was also primarily responsible for obtaining construction
and operating permits. We constructed approximately
23.5 million
of the site infrastructure and additional general site
infrastructure connections were constructed by the local
government. The costs of such infrastructure construction were
90% subsidized and co-financed by us, among others. Our
co-financing obligations amounted to approximately
3.0 million
and were funded out of the project loan facility.
Pursuant to the EPC contract, construction of the Stendal mill
was completed substantially on its planned schedule and budget
in September 2004. Such completion meant that the construction
and installation of all equipment and works were essentially
finished and final checks occurred so that continuous production
from the mill could commence. The mill underwent extensive
testing and evaluation in December 2004 to determine whether
certain performance requirements had been met, referred to as
the Acceptance Test. The Acceptance Test required,
among other things, that the mill continuously produce pulp for
a 72-hour period in
compliance with specified operational, quality and environmental
requirements. The Acceptance Test was generally successful. We
reviewed the results of the Acceptance Test with the lenders
under the project finance facility related to the Stendal mill
and certain suppliers. RWE and certain suppliers entered into a
definitive agreement with us in the first quarter of 2005
pursuant to which they implemented certain remedial measures at
the mill. These included the installation of two additional
digesters and related equipment, improvements to the
non-condensable gas, or NCG, boiler and water
treatment plant, reimbursement to Stendal of certain costs and
the provision of certain warranties.
The installation of the two additional digesters was completed
in the fourth quarter of 2005 and increased the number of
digesters at the Stendal mill from eight to ten. These
additional digesters, along with other measures, have increased
the annual production capacity of the Stendal mill to
approximately 600,000 ADMTs. These digesters have enhanced the
reliability and overall operating performance of the Stendal
mill. The two additional digesters had a capital cost of
approximately
8.0 million,
of which we paid
2.0 million
and the balance was paid by RWE and certain suppliers.
In the first quarter of 2005, we delivered the acceptance
certificate to RWE and assumed responsibility for the operation
of the mill, subject to RWEs warranty obligations.
The EPC contract provides for reciprocal indemnities between us
and RWE pursuant to which we each agree to indemnify the other
in respect of losses or claims arising from negligent, illegal
or other wrongful acts in connection with the agreement or
arising out of any violation of applicable laws or permits.
Notwithstanding the Acceptance Test, pursuant to the EPC
contract, each department of the mill is also tested on a
stand-alone basis for compliance with its design specifications.
Under the EPC contract, RWE warrants conformity to
specifications, compliance with permits and laws, suitability
for intended use, compliance with performance requirements and
against defects in construction for a stipulated period, subject
to extension in certain circumstances. The testing and warranty
are highly technical and include detailed
19
design and performance specifications. Some of the prescribed
testing was unsatisfactory to Stendal. As is common in large
greenfield projects like the Stendal mill, Stendal made a
significant number of claims, including rights to penalties
and/or liquidated damages against the contractor under the EPC
contract prior to the expiry of the applicable warranty claim
period in 2006. Many claims are highly technical and relate to,
among other things, design and performance specifications and
reliability, as well as penalties in regards to delays. During
the last quarter of 2006, Stendal and the contractor agreed to
try to work to resolve such outstanding claims without either
party seeking recourse to arbitration or other similar legal
remedies under the EPC contract.
The most significant performance claim by Stendal pursuant to
the EPC contract related to the mills steam turbine.
Stendal believed that the turbine equipment had design
limitations that prevented it from realizing its full capacity
and achieving the stipulated power generation targets. In late
2006, the contractor and Stendal agreed in principal to correct
the turbine deficiency, which is expected to be completed during
Stendals annual planned maintenance shut down in the
second quarter of 2007. Pursuant to the agreement in principal,
the contractor will design, engineer, manufacture, procure and
construct stipulated repair and refurbishment works to ancillary
equipment at the turbine. The cost of such refurbishment work,
along with lost power generation revenues during the
refurbishment period, shall be at the cost of the contractor and
its subcontractors. Except as otherwise agreed, the agreement in
principal will not amend or alter the warranties or performance
specifications of the EPC contract. The agreement in principal
is subject to the parties reaching a formal binding agreement
which is expected to be completed in the first quarter of 2007.
Currently, we cannot predict with any certainty which claims of
Stendal the contractor may accept, the amount, if any, of any
recoveries associated therewith, whether the agreement in
principal for the turbine refurbishment will be implemented or
the final determination of such claims, whether through further
work and retesting by the contractor, legal proceedings,
negotiation or other settlement.
Under the EPC contract, RWE has provided irrevocable bank
guarantees in our favor, in agreed upon amounts, as security for
an initial advance payment and for any deficiencies arising
during the warranty period. In July 2006, RWE was required to
provide an additional guarantee in the same form, in respect of
the same matters, in an amount not less than 5% of the contract
price which shall remain in effect until January 1, 2009.
Total investment costs in connection with the project are
approximately
1.0 billion,
the majority of which was provided under a senior project
finance facility, referred to as the Stendal
Loan Facility, arranged by Bayerische Hypo-und
Vereinsbank AG, referred to as HVB, pursuant to a
project finance loan agreement, referred to as the Project
Finance Loan Agreement, entered into between Stendal and
HVB. See Description of Certain
Indebtedness Stendal Loan Facility.
As the site of the Stendal mill is located in eastern Germany,
it qualified for approximately
274.5 million
of government grants, which are applied to reduce the cost basis
of the assets acquired with such grants. In accordance with our
accounting policies, these grants are not recorded by us until
they are received.
Under European Union rules, the Commission of the European
Communities, referred to as the Commission, was
formally notified in March 2002 by Germany of plans to provide
support to the Stendal mill through grants and guarantees. The
Commission considered these plans and, on June 19, 2002,
decided not to raise any objection against such support being
provided by the German federal and state governments in respect
of the Stendal mill. In its decision, the Commission was not
called upon to determine whether the governmental aid schemes,
on which the support is based, were acceptable, but was limited
to a determination as to whether a reduction of the pre-approved
aid level for investment in the German State of Sachsen-Anhalt
under the previously approved schemes was required under
European Union law in the case of the Stendal mill. In coming to
its decision, the Commission generally has a wide margin of
discretion in its assessment of facts and data. Under European
Union law, member states, competitors or trade associations
directly affected by a decision of the Commission may appeal
such decision within a period of two months and twenty-four days
after publication of the Commission decision. On
December 23, 2002, Kronoply and Kronotex, two related
manufacturers of, among other things, OSB and MDF boards that do
not compete with the Stendal mill by selling pulp or paper,
filed an appeal with the Court of First Instance of the European
Communities (Luxembourg), referred to as the Court,
against the Commission decision of June 19, 2002. Generally
to be
20
successful, an appeal must show that the Commission failed to
comply with procedural requirements or committed a manifest
error in assessing facts and data in adopting its decision.
In late 2004, the Court in an unrelated case determined that the
Commission committed a procedural error in determining the
amount of state aid that could be granted by Germany to a
recipient in a different business. The Court found the
Commission erred when reviewing the effect of state aid on
competition by only considering capacity utilization and not
also considering product demand trends prior to providing its
approval. As a result, in that case the Court set aside the
Commission approval and remanded the matter back to the
Commission to redetermine. The Courts decision is being
appealed by the aid recipient and the government of Germany. If
such appeal is unsuccessful, the Commission will have to
redetermine the matter based upon its mandated criteria and may
come to the same determination as before. The procedure followed
by the Commission in this remanded decision was similar to that
it used in determining not to reduce the amount of state aid
available to the Stendal mill.
Although no assurance can be provided, we continue to believe
that the appellant does not have any standing to bring the
appeal as it is not a competitor of Stendal and, in any event,
that the appeal is without merit. Further, the procedural error
found by the Court in the remanded case was not raised in the
Stendal appeal and we do not believe the Court should permit the
appellant to amend its appeal at this stage.
Subject to the Courts schedule, we believe a hearing as to
whether the appellant has standing to bring the appeal may be
heard in 2007. If the Court determined the appellant had
standing, such decision was upheld on appeal and the matter is
not otherwise settled, we believe that a hearing on the merits
of the appeal would occur in late 2007 or 2008. In the event the
appellant was then successful on the merits and such decision
was again upheld on appeal, the issue of whether the amount of
state aid granted to the Stendal mill should be reduced would be
remanded back to the Commission for reconsideration. Although we
cannot assure you as to the outcome of any such redetermination,
we believe that, given the Commissions criteria and the
factual circumstances related to the Stendal mill including
demand trends in the pulp business, there would be no basis for
the Commission to reduce the level of state aid. If the
Commission determined to reduce the level of state aid available
to the Stendal mill and such decision was upheld on appeal,
Stendal would be required to repay a portion of the previously
received state aid back to the German government. While we do
not expect an adverse outcome, litigation is inherently
uncertain and there can be no assurance of the final outcome.
Description of Certain Indebtedness
The following summaries of certain material provisions of:
(i) the Rosenthal working capital facility; (ii) the
Stendal Loan Facility; (iii) our convertible notes;
(iv) our senior notes; and (v) the Celgar working
capital facility, are not complete and these provisions,
including definitions of certain terms, are qualified by
reference to the applicable documents and the applicable
amendments to such documents on file with the SEC.
The Stendal Loan Facility is in the aggregate amount of
828.0 million
and is divided into tranches which cover, among other things,
project construction and development costs, financing and
start-up costs and
working capital, as well as the financing of a debt service
reserve account, approved cost overruns and a revolving loan
facility to cover any time lag for receipt of grant funding and
value-added tax refunds in the amount of
160.0 million,
referred to as Tranche E. Other than the
revolving working capital tranche, no further advances are
currently available under the Stendal Loan Facility.
Further, Stendal has repaid and discharged Tranche E with
the proceeds from grant funding and value added tax refunds.
Pursuant to the Project Finance Loan Agreement, interest on the
credit facilities was to accrue at variable rates between
Euribor plus 0.60% and Euribor plus 1.55% per year. The
Project Finance Loan Agreement provides for facilities to allow
us to manage our risk exposure to interest rate risk, currency
risk and pulp price risk by way of interest rate swaps, Euro and
U.S. dollar swaps and pulp hedging transactions, subject to
certain controls, including certain maximum notional and at-risk
amounts. Pursuant to the terms of the Project Finance Loan
Agreement, in 2002 Stendal entered into interest rate swap
agreements in respect of borrowings under the Stendal
Loan Facility to fix most of the interest costs under the
Stendal Loan Facility at a rate of 3.795% per year
until April 2004 and at a rate of 5.28% commencing May 2004,
plus margin, until final
21
payment in October 2017. For more information, see
Item 7A Quantitative and Qualitative
Disclosures about Market Risk. In March 2003, as part of
its loan syndication, HVB exercised its right under the Stendal
Loan Facility to increase its up-front arrangement fee by
20 basis points and the rate of interest under the facility
by 30 basis points.
As required, Stendal reduced the aggregate advances outstanding
under the Stendal Loan Facility to
599.0 million
at the end of 2006 from a maximum original amount of
638.0 million
(assuming no draws for approved cost overruns). The tranches are
generally repayable in installments and mature between the fifth
and 15th anniversary of the first advance under the Stendal
Loan Facility for project construction and development
costs. Subject to various conditions, including a minimum debt
service coverage test, Stendal may make distributions, in the
form of interest and capital payments on shareholder debt or
dividends on equity invested, to its shareholders, including us.
The tranches under the Stendal Loan Facility for project
construction and development costs, financing costs,
start-up costs and
working capital are severally guaranteed by German federal and
state governments in respect of an aggregate of 80% of the
principal amount of these tranches, but the tranche under the
Stendal Loan Facility for financing and
start-up costs, working
capital and certain of the project construction and development
costs benefiting from these guarantees will be reduced
semi-annually by 12.5% per year beginning on the first
repayment date following the fourth anniversary of the first
advance under the Stendal Loan Facility for each of these
costs. Under the guarantees, the German federal and state
governments that provide the guarantees are responsible for the
performance of our payment obligations for the guaranteed
amounts.
The Stendal Loan Facility is secured by all of the assets
of Stendal. In addition, the Project Finance Loan Agreement
provides for the establishment of an equity reserve account into
which excess start-up
cash flows may be deposited. The account will be used to secure
claims and amounts owing to the lenders in priority to the
funding of the debt service reserve account under the Stendal
Loan Facility. The Project Finance Loan Agreement also
provides that revenues held by Stendal after certain payments
may be paid to a shareholders account.
In connection with the Stendal Loan Facility, we entered
into a shareholders undertaking agreement, referred to as
the Undertaking, dated August 26, 2002, as
amended, with RWE and HVB in order to finance the
shareholders contribution to the Stendal mill. Pursuant to
the terms of the Undertaking, on the Stendal Financing Closing
Date the shareholders of Stendal, on a pro rata basis,
subscribed for
15.0 million
of share capital of Stendal and advanced to it
55.0 million
in subordinated loans. In addition, on a pro rata basis, the
shareholders of Stendal advanced to it
30.0 million
of stand-by equity to, among other things, cover approved cost
overruns, fund the equity reserve account and partially fund the
debt service reserve account under the Stendal
Loan Facility. On the closing of the Stendal
Loan Facility, we provided HVB with a cash deposit for our
pro rata portion of such equity reserve account. Our total
funding commitment under the Undertaking was
63.5 million,
all of which was effected in August 2002. In 2006, when we
acquired an additional 7% minority interest in Stendal, we also
acquired the holders pro rata interest in the outstanding
shareholder loans and standby equity of Stendal. Pursuant to the
Undertaking, we have agreed, for as long as Stendal has any
liability under the Stendal Loan Facility to HVB, to retain
control over at least 51% of the voting shares of Stendal. We
have no further capital commitments with relation to the Stendal
mill.
In conjunction with the Acquisition and the repayment of
Rosenthals prior bank indebtedness, in February 2005, we
established a new revolving working capital facility for the
Rosenthal mill, referred to as the Rosenthal
Loan Facility. The
40.0 million
revolving working capital facility for the Rosenthal mill,
arranged by HVB, consists of a revolving credit facility which
may be utilized by way of cash advances or advances by way of
letter of credit or bank guarantees. The facility matures in
February 2010. The interest payable on cash advances is LIBOR or
EURIBOR plus 1.55%, plus certain other costs incurred by the
lenders in connection with the facility. Each cash advance is to
be repaid on the last day of the respective interest period and
in full on the termination date and each advance by way of a
letter of credit or bank guarantee shall be repaid on the
applicable expiry date of such letter of credit or bank
guarantee. An interest period for cash advances shall be three,
six or 12 months or any other period as Rosenthal and the
lenders may determine.
22
There is also a 0.35% per annum commitment fee on the
unused and uncancelled amount of the revolving facility which is
payable quarterly in arrears. This facility is secured by a
first fixed charge on the inventories, receivables and accounts
of Rosenthal. It also provides Rosenthal with a hedging facility
relating to the hedging of the interest, currency and pulp
prices as they affect Rosenthal pursuant to a strategy agreed to
by Rosenthal and HVB from time to time.
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|
|
Celgar Working Capital Facility |
In May 2006, we replaced our $30.0 million working capital
facility for the Celgar mill with a new C$40.0 million
facility. The replacement facility consists of a three-year
revolving working capital credit facility maturing in May 2009.
The borrower under the facility is Zellstoff Celgar Limited
Partnership, which is our wholly owned subsidiary that owns the
Celgar mill. Availability of drawdowns under the facility is
subject to a borrowing base limit that is based upon the Celgar
mills eligible accounts receivable and inventory levels
from time to time. The revolving facility is available by way
of: (i) Canadian and U.S. denominated advances which
bear interest at a designated prime rate plus 0.50% for Canadian
advances and at a designated base rate plus 0.50% per annum
for U.S. advances; (ii) bankers acceptance
equivalent loans which bear interest at the applicable Canadian
dollar bankers acceptance rate plus 2.25% per annum;
and/or (iii) LIBOR advances which bear interest at the
applicable LIBO rate plus 2.25% per annum. The facility
incorporates two sub lines, a $2.0 million letter of credit
sub line and a $3.0 million foreign exchange contract sub
line. Under these sub lines the lender will provide letters of
credit guarantees and foreign exchange contract guarantees up to
a maximum of $2.0 million and $3.0 million,
respectively, subject, in each case, to the facility limit and
payment of applicable fees. The borrower is also required to pay
a 0.25% per annum standby fee monthly in arrears on any
unutilized portion of the revolving facility. This facility is
secured by, among other things, a first fixed charge on the
current assets of the borrower.
In October 2003, we issued $82.5 million in aggregate
principal amount of 8.5% convertible senior subordinated
notes due 2010, referred to as the convertible
notes. In December 2006, we purchased and cancelled an
aggregate of approximately $15.2 million principal amount
of such notes in exchange for approximately 2.2 million
shares of our common stock.
We pay interest semi-annually on the convertible notes on April
15 and October 15 of each year, beginning on April 15,
2004. The convertible notes mature on October 15, 2010. The
convertible notes are redeemable on and after October 15,
2008, at any time in whole or in part, at our option on not less
than 20 and not more than 60 days prior notice at a
redemption price equal to 100% of the principal amount thereof
plus accrued and unpaid interest, if any, to, but not including,
the date of redemption, subject to the restrictions in the
indenture governing the notes.
The convertible notes are convertible, at the option of the
holder, unless previously redeemed, at any time on or prior to
maturity into our common shares at a conversion price of
$7.75 per share, which is equal to a conversion rate of
approximately 129 shares per $1,000 principal amount of
convertible notes, subject to adjustment.
Holders of the convertible notes have the right to require us to
purchase all or any part of the convertible notes 30
business days after the occurrence of a change of control with
respect to us at a purchase price equal to the principal amount
thereof plus accrued and unpaid interest, if any, to the date of
purchase.
The convertible notes are unsecured obligations of Mercer Inc.
and are subordinated in right of payment to existing and future
senior indebtedness (including our 9.25% senior notes
described below) and are effectively subordinated to all of the
indebtedness and liabilities of our subsidiaries. The indenture
governing the convertible notes limits the incurrence by us, but
not our subsidiaries, of senior indebtedness.
In conjunction with the Acquisition of the Celgar mill and the
repayment of Rosenthals bank indebtedness, in February
2005, we issued $310.0 million in principal amount of
senior notes. The senior notes bear interest at the rate of
9.25% per annum and mature on February 15, 2013.
Interest on such notes is
23
payable in arrears on February 15 and August 15 of each year the
notes are outstanding. The notes are our senior unsecured
obligations and, accordingly, will rank junior in right of
payment to all existing and future secured indebtedness and all
indebtedness and liabilities of our subsidiaries, equal in right
of payment with all existing and future unsecured senior
indebtedness and senior in right of payment to the
8.5% convertible senior subordinated notes due 2010 and any
future subordinated indebtedness. We may redeem the notes on or
after February 15, 2009, in whole or in part, at the
applicable redemption prices plus accrued and unpaid interest,
if any, to the redemption date. In certain circumstances, we may
also redeem up to 35% of the aggregate principal amount of the
notes at any time prior to February 15, 2008 at a
redemption price of 109.35% of the principal amount, plus
accrued and unpaid interest, if any, to the redemption date with
the net cash proceeds of certain equity offerings. The notes
were issued under an indenture which, among other things,
restricts our ability and the ability of our restricted
subsidiaries under the indenture to: (i) incur additional
indebtedness or issue preferred stock; (ii) pay dividends
or make other distributions to our stockholders;
(iii) purchase or redeem capital stock or subordinated
indebtedness; (iv) make investments; (v) create liens
and enter into sale and lease back transactions; (vi) incur
restrictions on the ability of our restricted subsidiaries to
pay dividends or make other payments to us; (vii) sell
assets; (viii) consolidate or merge with or into other
companies or transfer all or substantially all of our assets;
and (ix) engage in transactions with affiliates. These
limitations are subject to other important qualifications and
exceptions.
Environmental
Our operations are subject to a wide range of environmental laws
and regulations, dealing primarily with water, air and land
pollution control. In recent years, we have devoted significant
financial and management resources to comply with all applicable
environmental laws and regulations. Our total capital
expenditures on environmental projects at our production
facilities were approximately
2.0 million
in 2006 and are expected to be approximately
3.2 million
in 2007.
We believe we have all required environmental permits,
authorizations and approvals for our operations. We believe our
operations are currently in substantial compliance with the
requirements of all applicable environmental laws and
regulations and our respective operating permits.
Under German state environmental rules relating to effluent
discharges, industrial users are required to pay wastewater fees
based upon the amount of their effluent discharge. These rules
also provide that an industrial user which undertakes
environmental capital expenditures and lowers certain effluent
discharges to prescribed levels may offset the amount of these
expenditures against the wastewater fees that they would
otherwise be required to pay. In 2006, we received confirmation
from German environmental authorities that certain environmental
initiatives and capital expenditures undertaken by us would
qualify to offset approximately
14.0 million
of accrued wastewater fees for the period of mid-2004 to the end
of 2006. As a result, in 2006, we reversed such accruals. We
estimate that the aggregate wastewater fees we saved in 2006 as
a result of environmental capital expenditures and initiatives
to reduce allowable emissions and discharges at our German pulp
mills were approximately
7.7 million.
We expect that capital investment programs and other
environmental initiatives at our German pulp mills will mostly
offset the wastewater fees that may be payable for 2007 and 2008
and will ensure that our operations continue in substantial
compliance with prescribed standards.
Beginning in 2005, our German operations became subject to the
European Union Emissions Trading Scheme pursuant to which our
German mills were granted emission allowances. Emission
allowances are granted based upon production volumes and the
types of fuels consumed by manufacturing facilities in Germany.
Excess allowances, which are the result of variations in
production volumes and the overall consumption of fuels, are
available for sale.
Environmental compliance is a priority for our operations. To
ensure compliance with environmental laws and regulations, we
regularly monitor emissions at our mills and periodically
perform environmental audits of operational sites and procedures
both with our internal personnel and outside consultants. These
audits identify opportunities for improvement and allow us to
take proactive measures at the mills as considered appropriate.
The Rosenthal mill has a relatively modern biological wastewater
treatment and oxygen bleaching facility. We have significantly
reduced our levels of Adsorbable Organic Halogen discharge at
the Rosenthal
24
mill and we believe the Rosenthal mills Adsorbable Organic
Halogen and Chemical Oxygen Demand discharges are in compliance
with the standards currently mandated by the German government.
In 2003 we completed a strategic capital project to reconstruct
the landfill at the Rosenthal mill so that it will be useable
for an additional 15 years.
The Stendal mill, which commenced operations in September 2004,
has been in substantial compliance with applicable environmental
laws, regulations and permits, but has experienced certain minor
exceedances from time to time which are typical for a mill in
the ramp up phase of its operations. Management believes that,
as the Stendal mill is a
state-of-the-art
facility, once the ramp up phase has been completed and all
necessary adjustments have been made the mill will operate in
compliance with the applicable environmental requirements. Under
the terms of the EPC contract, the contractor has provided
various representations and warranties as to compliance with
permits and laws and is responsible for ensuring such compliance
for a period of 18 months from acceptance.
The Celgar mill has a number of permits regulating air
emissions, including those with respect to sulphur dioxide,
referred to as
SO2.
While the mills overall
SO2
emissions are generally well below the total
SO2
emissions permitted to be discharged under its air permits, the
mills lime kiln
SO2
emissions periodically exceed emissions allowed under its
individual
SO2
air permit. The Ministry of Water, Land and Air Protection in
British Columbia, referred to as MWLAP, has been advised of the
level of
SO2
emissions at the lime kiln and apprised of the mills
efforts to correct the same. The mill is monitoring the level of
SO2
emissions from the lime kiln and has submitted an application to
the MWLAP to amend its air permits to lower overall
SO2
emissions for the mill while increasing the
SO2
emission discharge limit on its lime kiln permit. The requested
amendments to the mills air permits are classified as
minor and have not been opposed by any third party. Although no
assurances can be provided, we currently expect the MWLAP to
approve the amendments of the mills air permits in 2007.
In the event that such permit amendments are not available, our
consulting engineers have preliminarily estimated the capital
cost to correct the
SO2
emissions at the lime kiln to be in the range of
C$1.5 million to C$2.0 million. Although the MWLAP has
not taken actions or imposed any fines to date, there can be no
assurance that any permit amendment will be successful, that
MWLAP may not take action in the future or that the capital
requirements to address the same will not exceed the preliminary
estimates.
The Celgar mill operates two landfills, a newly commissioned
site and an older site. The Celgar mill intends to decommission
the old landfill and is developing a closure plan and reviewing
such plan with the MWLAP. However, the MWLAP, in conjunction
with the provincial pulp and paper industry, is in the process
of developing a standard for landfill closures. In addition, the
portion of the landfill owned by an adjacent sawmill continues
to be active. Accordingly, the mill has not been able to move
forward with the closure. The Celgar mill currently believes it
may receive regulatory approval for such closure plan in 2008
and would commence closure activities thereafter. At the time of
the Acquisition, our consulting engineers estimated that the
closure program would cost up to C$3.0 million. As the
closure program for the old landfill has not been finalized or
approved, there can be no assurance that the decommissioning of
the old landfill will not exceed such cost estimate.
Future regulations or permits may place lower limits on
allowable types of emissions, including air, water, waste and
hazardous materials, and may increase the financial consequences
of maintaining compliance with environmental laws and
regulations or conducting remediation. Our ongoing monitoring
and policies have enabled us to develop and implement effective
measures to maintain emissions in material compliance with
environmental laws and regulations to date in a cost-effective
manner. However, there can be no assurances that this will be
the case in the future.
Human Resources
We currently employ or hold positions for approximately
1,469 people. Our German operations have approximately
1,052 employees working in our pulp operations, including
our transportation subsidiaries. In addition, there are
approximately 16 people working at the office we maintain
in Vancouver, British Columbia, Canada. The Celgar mill
currently employs approximately 401 people in its
operations, the vast majority of which are unionized.
25
Stendal and its subsidiaries employ approximately
590 people. Pursuant to the government grants and financing
arranged in connection with the Stendal mill, we have agreed
with German state authorities to maintain this number of jobs
until 2010.
Rosenthal is bound by collective agreements negotiated with
Bergbau-Chemie Energie, or IG-BCE, a national union
that represents pulp and paper workers. In 2005, we entered into
a new labor agreement with IG-BCE for our pulp workers which
provides for a 2.5% wage increase for a two year period
effective July 1, 2005.
Stendal has not yet entered into any collective agreements with
IG-BCE, although it may
do so in the future. In January 2007, Stendals wage levels
approximated 90% of the lowest eastern German wage level for a
40 hour work week for similar industrial companies. We
expect that, over time, as the Stendal mill ramps up production
and subject to general economic conditions, wage levels at the
Stendal mill will correspond with those for similarly situated
producers in Germany.
We consider the relationships with our employees to be good. We
have implemented profit sharing plans, training programs and
early retirement schemes for the benefit of our German
employees. Although no assurances can be provided, we have not
had any significant work stoppages at any of our German
operations and we would therefore expect to enter into labor
agreements with our pulp workers in Germany without any
significant work stoppages at our German mills.
A collective agreement was reached with the union hourly workers
at the Celgar mill in January 2003 which has a term of five
years. The agreement provides for wage increases effective May
2003 of 2.5% in each of 2003 and 2004, and 2% in each of the
following three years.
Discontinued Operations
In August 2006, we divested our equity interest in the Heidenau
paper mill and Landqart AG for cash proceeds of
5.0 million
and a secured note of
5.0 million.
In November 2006, we sold substantially all of the assets
comprising the Fährbrücke paper mill. We recorded an
aggregate net loss of
6.0 million
on the disposal of these assets which included an accrual of
1.9 million
for net costs expected in connection with funding and other
commitments related to the Fährbrücke sale.
Additional Information
We make available free of charge on or through our website at
www.mercerint.com annual reports on
Form 10-K,
quarterly reports on
Form 10-Q and
current reports on
Form 8-K, and all
amendments to these reports, as soon as reasonably practicable
after we file these materials with the SEC. The public may read
and copy any material we file with the SEC at the SECs
Public Reference Room at 100 F Street, NE, Washington, DC 20549.
The public may also obtain information on the operation of the
Public Reference Room by calling the SEC at
1-800-SEC-0330. The SEC
maintains an internet site at www.sec.gov that contains
reports, proxy and information statements, and other information
regarding us.
ITEM 1A. RISK FACTORS
This annual report on
Form 10-K contains
forward looking statements. Statements that are not historical
or current facts, including statements about our expectations,
anticipated financial results, projected capital expenditures
and future business prospects, are forward looking statements.
You can identify these statements by our use of words such as
may, will, expect,
believe, should, plan,
anticipate and other similar expressions. You can
find examples of these statements throughout this annual report,
including the description of business in Item 1.
Business and Item 7. Managements
Discussion and Analysis of Financial Condition and Results of
Operations. We cannot guarantee that our actual results
will be consistent with the forward looking statements we make
in this annual report. You should review carefully the risk
factors listed below, as well as those factors listed in other
documents we file with the SEC. We note that additional risks
not presently known to us or that we may currently deem
immaterial may also impair our business and operations. We do
not assume an obligation to update any forward looking statement.
26
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Our level of indebtedness could negatively impact our
financial condition and results of operations. |
As of December 31, 2006, we had approximately
907.8 million
of indebtedness outstanding, of which
599.0 million
is project debt of Stendal. We may also incur additional
indebtedness in the future. Our high debt levels may have
important consequences for us, including, but not limited to the
following:
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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; |
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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; |
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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 |
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our leveraged capital structure may place us at a competitive
disadvantage by hindering our ability to adjust rapidly to
changing market conditions or by making us vulnerable to a
downturn in our business or the economy in general. |
Our ability to repay or refinance our indebtedness will depend
on our future financial and operating performance. Our
performance, in turn, will be subject to prevailing economic and
competitive conditions, as well as financial, business,
legislative, regulatory, industry and other factors, many of
which are beyond our control. Our ability to meet our future
debt service and other obligations may depend in significant
part on the success of the Stendal mill and the extent to which
we can implement successfully our business and growth strategy.
We cannot assure you that the Stendal mill will be successful or
that we will be able to implement our strategy fully or that the
anticipated results of our strategy will be realized.
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Our business is highly cyclical in nature. |
The pulp 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. Pulp
markets are highly competitive and are sensitive to cyclical
changes in the global economy, industry capacity and foreign
exchange rates, all of which can have a significant influence on
selling prices and our earnings. The length and magnitude of
industry cycles have varied over time but generally reflect
changes in macroeconomic conditions and levels of industry
capacity.
Industry capacity can fluctuate as changing industry conditions
can influence producers to idle production or permanently close
machines or entire mills. In addition, to avoid substantial cash
costs in idling or closing a mill, some producers will choose to
operate at a loss, sometimes even a cash loss, which can prolong
weak pricing environments due to oversupply. Oversupply of our
products can also result from producers introducing new capacity
in response to favorable pricing trends.
Demand for pulp has historically been determined by the level of
economic growth and has been closely tied to overall business
activity. Although pulp prices have improved commencing in the
latter part of 2005 and through 2006, we cannot predict the
impact of future economic weakness in certain world markets or
the impact of war, terrorist activity or other events on our
markets.
Prices for pulp are driven by many factors outside our control,
and we have little influence over the timing and extent of price
changes, which are often volatile. Because market conditions
beyond our control determine the prices for our products, the
price for pulp may fall below our cash production costs,
requiring us to either incur short-term losses on product sales
or cease production at one or more of our manufacturing
facilities. Therefore, our profitability with respect to pulp
depends on managing our cost structure, particularly raw
materials which represent a significant component of our
operating costs and can fluctuate based upon factors beyond our
control. If the prices of our products decline, or if raw
materials increase, or both, demand for our products may decline
and our sales and profitability could be materially adversely
affected.
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 pulp logs.
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Fiber costs are primarily affected by the supply of, and demand
for, lumber which is highly cyclical in nature and can vary
significantly by location. 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.
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Cyclical Fluctuations in the price and supply of our raw
materials could adversely affect our business. |
We rely heavily on fiber in our pulp manufacturing process. Wood
chips and pulp logs comprise the fiber used by our mills. Such
fiber is cyclical in terms of both price and supply. The cost of
wood chips and pulp logs is primarily affected by the supply and
demand for lumber. Demand for these raw materials is determined
by the volume of pulp produced globally and regionally.
Recently, continued high energy prices, a focus on
green or renewable energy and governmental
initiatives have led to an increase in renewable energy projects
in Europe, including Germany. Demand for wood residuals from
such energy producers has put upward pressure on prices for wood
residuals such as wood chips in Germany and its neighboring
countries. This has resulted in higher fiber costs for our
German pulp mills and such trend could continue to put further
upward pressure on wood chip prices. The markets for pulp 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
pulp producers are unable to pass along price increases to their
customers.
We do not own any timberlands or have any long-term governmental
timber concessions nor do we have any long-term fiber contracts
at our German operations. Although raw materials are available
from a number of suppliers, and we have not historically
experienced material supply interruptions or substantial
sustained price increases, our requirements have increased as
the Stendal mill is operating at full production capacity and as
we increase the production capacity of our Celgar mill, 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,
weather conditions, transportation disruptions, 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. In addition to the supply of wood
fiber, we are dependent on the supply of certain chemicals and
other inputs used in our production facilities. Any disruption
in the supply of these chemicals or other inputs could affect
our ability to meet customer demand in a timely manner and would
harm our reputation. Any material increase in the cost of these
chemicals or other inputs could have a material adverse effect
on our business, results of operations, financial condition and
cash flows.
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We operate in highly competitive markets. |
We sell our pulp globally, with a large percentage sold in
Europe, North America and Asia. The markets for pulp are highly
competitive. A number of other global companies compete in each
of these markets and no company holds a dominant position. For
pulp, 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.
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Our Stendal mill is subject to risks commonly associated
with a new large complex mill. |
The Stendal mill has been constructed near the town of Stendal,
Germany. The aggregate cost of the mill was approximately
1.0 billion.
The performance of the Stendal mill has had a material impact on
our financial condition and operating performance. The Stendal
mill was completed in September 2004 and thereafter commenced
ramping up production. As the Stendal mill was completed
relatively recently, it is subject to risks commonly associated
with new, large, complex industrial projects which could result
in it experiencing operating difficulties or delays. As a
result, the Stendal mill may not achieve our planned production,
timing, quality, environmental or cost projections, which could
have a material adverse effect on our results of operations,
financial condition and cash flows. These risks include, without
limitation, equipment failures or damage, errors or
miscalculations in engineering, design specifications or
equipment manufacturing,
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faulty construction or workmanship, defective equipment or
installation, human error, industrial accidents, weather
conditions, failure to comply with environmental and other
permits, and complex integration of processes and equipment.
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Increases in our capital expenditures or maintenance costs
could have a material adverse effect on our cash flow and our
ability to satisfy our debt obligations. |
Our business is capital intensive. Our annual capital
expenditures may vary due to fluctuations in requirements for
maintenance, business capital, expansion and as a result of
changes to environmental regulations that require capital
expenditures to bring our operations into compliance with such
regulations. In addition, our senior management and board of
directors may approve projects in the future that will require
significant capital expenditures. Increased capital expenditures
could have a material adverse effect on our cash flow and our
ability to satisfy our debt obligations. Further, while we
regularly perform maintenance on our manufacturing equipment,
key pieces of equipment in our various production processes may
still need to be repaired or replaced. If we do not have
sufficient funds or such repairs or replacements are delayed,
the costs of repairing or replacing such equipment and the
associated downtime of the affected production line could have a
material adverse effect on our business, financial condition,
results of operations and cash flows.
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Any failure by us to efficiently and effectively manage
our growth could adversely affect our business. |
Expansion of our business, including increasing the production
of the Stendal and Celgar mills, may place strains on our
personnel, financial and other resources. In order to
successfully manage our growth we must identify, attract,
motivate, train and retain skilled managerial, financial,
engineering, business development, sales and marketing and other
personnel. Competition for these types of personnel is intense.
If we fail to efficiently manage our growth and compete for
these types of personnel, it could adversely affect the quality
of our services and, in turn, materially adversely affect our
business and the price of our shares.
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We are exposed to currency exchange rate and interest rate
fluctuations. |
In 2006, a large majority of our sales were in products quoted
in U.S. dollars while most of our operating costs and
expenses, other than those of the Celgar mill, were incurred in
Euros. In addition, all of the products sold by the Celgar mill
are quoted in U.S. dollars and the costs of the Celgar mill
are primarily incurred in Canadian dollars. Our results of
operations and financial condition are reported in Euros. As a
result, our revenues have been adversely affected by the
decrease in the value of the U.S. dollar relative to the
Euro and to the Canadian dollar. Such shifts in currencies
relative to the Euro and the Canadian dollar reduce our
operating margins 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
operations and cash flows.
In 2002, Stendal entered into
variable-to-fixed
interest rate swaps to fix interest payments under the Stendal
mill financing facility, which had kept Stendal from benefiting
from the general decline in interest rates that ensued. These
derivatives are marked to market at the end of each reporting
period and all unrealized gains and losses are recognized in
earnings for the relevant reporting periods.
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We use derivatives to manage certain risk which has caused
significant fluctuations in our operating results. |
A significant amount of our sales revenue is based on pulp sales
quoted in U.S. dollars while our reporting currency is
Euros and our costs are predominantly in Euros and, since the
Acquisition of the Celgar pulp mill, in Canadian dollars. We
therefore use foreign currency derivative instruments primarily
to try 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
Stendal financing, 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.
We record unrealized gains or losses on our derivative
instruments when they are marked to market at the end of each
reporting period and realized gains or losses on them when they
are settled. These unrealized and
29
realized gains and losses can materially impact our operating
results for any reporting period. For example, our operating
results for 2006 included realized and unrealized net gains of
105.8 million
on our currency and interest rate derivatives. Conversely, our
operating results for 2005 included realized and unrealized
losses of
71.8 million
on currency and interest rate derivatives. In 2004, we recorded
a net realized gain of
44.5 million
on our currency derivatives and a net unrealized loss of
32.3 million
on our interest rate derivatives.
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. 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; we do 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 perception of future economic
events and developments.
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We are subject to extensive environmental regulation and
we could have environmental liabilities at our
facilities. |
Our operations are subject to numerous environmental laws as
well as permits, guidelines and policies. These laws, permits,
guidelines and policies govern, among other things:
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unlawful discharges to land, air, water and sewers; |
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waste collection, storage, transportation and disposal; |
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hazardous waste; |
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dangerous goods and hazardous materials and the collection,
storage, transportation and disposal of such substances; |
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the clean-up of
unlawful discharges; |
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land use planning; |
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municipal zoning; and |
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employee health and safety. |
In addition, as a result of our operations, we may be subject to
remediation, clean up or other administrative orders, or
amendments to our operating permits, and we may be involved from
time to time in administrative and judicial proceedings or
inquiries. Future orders, proceedings or inquiries could have a
material adverse effect on our business, financial condition and
results of operations. Environmental laws and land use laws and
regulations are constantly changing. New regulations or the
increased enforcement of existing laws could have a material
adverse effect on our business and financial condition. In
addition, compliance with regulatory requirements is expensive,
at times requiring the replacement, enhancement or modification
of equipment, facilities or operations. There can be no
assurance that we will be able to maintain our profitability by
offsetting any increased costs of complying with future
regulatory requirements.
We are subject to liability for environmental damage at the
facilities that we own or operate, including damage to
neighboring landowners, residents or employees, particularly as
a result of the contamination of soil, groundwater or surface
water and especially drinking water. The costs of such
liabilities can be substantial. Our potential liability may
include damages resulting from conditions existing before we
purchased or operated these facilities. We may also be subject
to liability for any off-site environmental contamination caused
by pollutants or hazardous substances that we or our
predecessors arranged to transport, treat or dispose of at other
locations. In addition, we may be held legally responsible for
liabilities as a successor owner of businesses that we acquire
or have acquired. Except for Stendal, our facilities have been
operating for decades and we have not done invasive testing to
determine whether or to what extent environmental contamination
exists. As a result, these businesses may have liabilities for
conditions that we discover or that become apparent, including
liabilities arising from non-compliance with environmental laws
by prior owners. Because of the limited availability of
insurance coverage for environmental liability, any substantial
liability for environmental damage could materially adversely
affect our results of operations and financial condition.
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Enactment of new environmental laws or regulations or changes in
existing laws or regulations might require significant capital
expenditures. We may be unable to generate sufficient funds or
access other sources of capital to fund unforeseen environmental
liabilities or expenditures.
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We are subject to risks related to our employees. |
The majority of our employees are unionized. The collective
agreement relating to our pulp workers at the Rosenthal mill
expires in the third quarter of 2007. In addition, in the future
we may enter into a collective agreement with our pulp workers
at the Stendal mill. The collective agreement relating to our
hourly workers at the Celgar mill expires in 2008. Although we
have not experienced any work stoppages in the past, there can
be no assurance that we will be able to negotiate acceptable
collective agreements or other satisfactory arrangements with
our employees upon the expiration of our collective agreements
or in conjunction with the establishment of a new agreement or
arrangement with our pulp workers at the Stendal mill. This
could result in a strike or work stoppage by the affected
workers. The registration or 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 at our
Stendal mill. Should either the German federal or state
governments be prohibited from honoring legislative grants and
guarantees at Stendal, or should we be required to repay any
such legislative grants, this may have a material adverse effect
on our business, financial condition, results of operations and
cash flow.
|
|
|
The sale of emission allowances is relatively new and
volatile and subject to governmental amendment. |
Commencing in 2005, our German operations became subject to the
European Emissions Trading Scheme. Over the last two years, we
have benefited from the sales of emission allowances. The market
for emission allowances is relatively new and volatile. Further,
the allocation of emission allowances, which is currently based
upon production volumes and the types of fuels consumed by
manufacturing facilities in Germany, is subject to governmental
review and potential changes in 2008. As a result, we cannot
predict with any certainty either the amount of future sales of
emission allowances or the amount of emission allowances we may
be granted.
|
|
|
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 one or more of our officers 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.
31
|
|
|
We may experience material disruptions to our
production. |
A material disruption at one of our manufacturing facilities
could prevent us from meeting customer demand, reduce our sales
and/or negatively impact our results of operations. Any of our
pulp manufacturing facilities could cease operations
unexpectedly due to a number of events, including:
|
|
|
|
|
unscheduled maintenance outages; |
|
|
|
prolonged power failures; |
|
|
|
an equipment failure; |
|
|
|
design error or operator error; |
|
|
|
chemical spill or release; |
|
|
|
explosion of a boiler; |
|
|
|
disruptions in the transportation infrastructure, including
roads, bridges, railway tracks and tunnels; |
|
|
|
fires, floods, earthquakes or other natural catastrophes; |
|
|
|
labour difficulties; and |
|
|
|
other operational problems. |
Any such downtime or facility damage could prevent us from
meeting customer demand for our products and/or require us to
make unplanned capital expenditures. If any of our facilities
were to incur significant downtime, our ability to meet our
production capacity targets and satisfy customer requirements
would be impaired and could have a material adverse effect on
our business, financial condition, results of operations and
cash flows.
We rely on third parties for transportation
services.
Our business primarily relies upon third parties for the
transportation of pulp to our customers, as well as for the
delivery of our raw materials to our mills. Our pulp and raw
materials are principally transported by truck, barge, rail and
sea-going vessels, all of which are highly regulated. Increases
in transportation rates can also materially adversely affect our
results of operation.
Further, if our transportation providers fail to deliver our
pulp in a timely manner, it could negatively impact our customer
relationships and we may be unable to sell it at full value. If
our transportation providers fail to deliver our raw materials
in a timely fashion, we may be unable to manufacture pulp in
response to customer orders. Also, if any of our transportation
providers were to cease operations, we may be unable to replace
them at a reasonable cost. The occurrence of any of the
foregoing events could materially adversely affect our results
of operations.
|
|
|
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 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.
|
|
|
Washington State law and our Articles of Incorporation may
have anti-takeover effects which will make an acquisition of our
Company by another company more difficult. |
We are subject to the provisions of the Revised Code of
Washington, Chapter 23B.19, which prohibits a Washington
corporation, including our Company, 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 corporations voting stock. We may in the
32
future adopt certain measures that may have the effect of
delaying, deferring or preventing a change in control of our
Company. Certain of such measures, including, without
limitation, a shareholder rights plan, may be adopted without
any further vote or action by the holders of our shares. These
measures may have anti-takeover effects, which may delay, defer
or prevent a takeover attempt that a holder of our shares might
consider in its best interest.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
We lease offices in Seattle, Washington, Vancouver, British
Columbia, and in Berlin, Germany. We own the Rosenthal and
Celgar mills and the underlying property. The Stendal mill is
situated on property owned by Stendal, our 70.6% owned
subsidiary.
The Rosenthal mill is situated on a 220 acre site near the
town of Blankenstein in the State of Thuringia, approximately
300 kilometers south of the Stendal mill. The Saale river flows
through the site of the mill. In late 1999, we completed a major
capital project which converted the Rosenthal mill to the
production of kraft pulp. It is a single line mill with an
annual production capacity of approximately 310,000 ADMTs of
kraft pulp. The mill is self-sufficient in steam and electrical
power. Some excess electrical power which is constantly
generated is sold to the regional power grid. The facilities at
the mill include:
|
|
|
|
|
an approximately 723,000 square feet fiber storage area; |
|
|
|
barking and chipping facilities for pulp logs; |
|
|
|
a fiber line, which includes a Kamyr continuous digester and
bleaching facilities; |
|
|
|
a pulp machine, which includes a dryer, a cutter and a bailing
line; |
|
|
|
an approximately 63,000 square feet finished goods storage
area; |
|
|
|
a chemical recovery system, which includes a recovery boiler,
evaporation plant and recausticizing plant; |
|
|
|
a fresh water plant; |
|
|
|
a wastewater treatment plant; and |
|
|
|
a power station with a turbine capable of producing 45 megawatts
of electric power from steam produced by the recovery boiler. |
The Stendal mill is situated on a 200 acre site owned by
Stendal that is part of a larger 1,250 acre industrial park
near the town of Stendal in the State of Sachsen-Anhalt,
approximately 300 kilometers north of the Rosenthal mill
and 130 kilometers from the city of Berlin. The mill is
adjacent to the Elbe river and has access to harbor facilities
for water transportation. Construction of the Stendal mill was
completed in the third quarter of 2004. The mill is a single
line mill with an initial annual design production capacity of
approximately 552,000 ADMTs of kraft pulp. In December
2005, two additional digesters were added to the Stendal mill
which, along with other measures, increased its annual
production capacity to approximately 600,000 ADMTs. The
Stendal mill is self-sufficient in steam and electrical power.
Some excess electrical power which is constantly being generated
is sold to the regional power grid. The facilities at the mill
include:
|
|
|
|
|
an approximately 920,000 square feet fiber storage area; |
|
|
|
barking and chipping facilities for pulp logs; |
|
|
|
a fiber line, which includes ten Superbatch digester and
bleaching facilities; |
|
|
|
a pulp machine, which includes a dryer, a cutter and a bailing
line; |
|
|
|
an approximately 108,000 square feet finished goods storage
area; |
33
|
|
|
|
|
a recovery line, which includes a recovery boiler, evaporation
plant, recausticizing plant and lime kiln; |
|
|
|
a fresh water plant; |
|
|
|
a wastewater treatment plant; and |
|
|
|
a power station with a turbine capable of producing
approximately 100 megawatts of electric power from steam
produced by the recovery boiler and a power boiler. |
The Celgar mill is situated on a 400 acre site near the
city of Castlegar, British Columbia in Canada. The mill is
located on the south bank of the Columbia River, approximately
600 kilometers east of the port city of Vancouver, British
Columbia, and approximately 32 kilometers north of the
Canada-United States border. The city of Seattle, Washington is
approximately 650 kilometers southwest of Castlegar. It is
a single line mill with a current annual production capacity of
approximately 470,000 ADMTs of NBSK pulp. Internal power
generating capacity could, with certain capital improvements,
enable the Celgar mill to be self-sufficient in electrical power
and at times to sell surplus electricity. The facilities at the
Celgar mill include:
|
|
|
|
|
fiber storage facilities consisting of four vertical silos and
an asphalt surfaced yard with a capacity of 200,000
m3
of chips; |
|
|
|
a woodroom containing debarking and chipping equipment for pulp
logs; |
|
|
|
a fiber line, which includes a dual vessel hydraulic digester,
pressure knotting and screening, single stage oxygen
delignification and bleaching facilities; |
|
|
|
two pulp machines, which include a dryer, a cutter and a bailing
line; |
|
|
|
a chemical recovery system, which includes a recovery boiler,
evaporation plant, recausticizing area and effluent treatment
system; and |
|
|
|
a turbine generator capable of producing approximately 52
megawatts of electric power from steam produced by a recovery
boiler and power boiler. |
The following table sets out our pulp production capacity and
actual production sales volumes and revenues by mill for the
periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual | |
|
Years Ended December 31, | |
|
|
Production | |
|
| |
|
|
Capacity(2) | |
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
|
|
(ADMTs) | |
Pulp Production by Mill(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rosenthal
|
|
|
310,000 |
|
|
|
306,188 |
|
|
|
316,600 |
|
|
|
314,016 |
|
|
Celgar
|
|
|
470,000 |
|
|
|
438,855 |
|
|
|
388,956 |
|
|
|
|
|
|
Stendal
|
|
|
600,000 |
|
|
|
557,217 |
|
|
|
479,063 |
|
|
|
132,694 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total pulp production
|
|
|
1,380,000 |
|
|
|
1,302,260 |
|
|
|
1,184,619 |
|
|
|
446,710 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
As the Stendal mill was started up in mid-September 2004, the
actual production for 2004 includes production from the Stendal
mill from the time of its start up. In addition, as we acquired
the Celgar mill in February 2005, the actual production for 2005
includes production from the Celgar mill from the time of its
Acquisition. |
|
(2) |
Capacity is the rated capacity of the plants for the year ended
December 31, 2006, which is based upon production for
365 days a year. Targeted production is generally based
upon 353 days per year for the Rosenthal and Stendal mills
and 350 days per year for the Celgar mill. |
At the end of 2006, substantially all of our pulp related assets
relating to the Stendal mill were pledged to secure the Stendal
Loan Facility. The working capital loan facilities
established for the Rosenthal and Celgar mills are secured by
first charges against the inventories and receivables at the
respective mills.
34
|
|
ITEM 3. |
LEGAL PROCEEDINGS |
In October 2005, our wholly owned subsidiary, Zellstoff Celgar
Limited, received a re-assessment for real property transfer tax
payable in British Columbia, Canada, in the amount of
approximately
3.5 million
in connection with the transfer of the land where the Celgar
mill is situated. The Company is contesting the assessment and
the amount, if any, that may be payable in connection therewith
is not yet determinable.
We are subject to routine litigation incidental to our business.
We do not believe that the outcome of such litigation will have
a material adverse effect on our business or financial condition.
|
|
ITEM 4. |
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
Not applicable.
35
PART II
|
|
ITEM 5. |
MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS |
(a) Market Information. Our shares are quoted for
trading on the NASDAQ Global Market under the symbol
MERC and listed in U.S. dollars on the Toronto
Stock Exchange under the symbol MRI.U. The following
table sets forth the high and low reported sale prices of our
shares on the NASDAQ Global Market for each quarter in the two
year period ended December 31, 2006, and for the period
ended March 1, 2007:
|
|
|
|
|
|
|
|
|
Fiscal Quarter Ended |
|
High | |
|
Low | |
|
|
| |
|
| |
2005
|
|
|
|
|
|
|
|
|
March 31
|
|
$ |
11.40 |
|
|
$ |
8.50 |
|
June 30
|
|
|
9.21 |
|
|
|
6.89 |
|
September 30
|
|
|
8.95 |
|
|
|
6.86 |
|
December 31
|
|
|
8.39 |
|
|
|
6.78 |
|
|
2006
|
|
|
|
|
|
|
|
|
March 31
|
|
|
9.31 |
|
|
|
7.74 |
|
June 30
|
|
|
9.68 |
|
|
|
8.15 |
|
September 30
|
|
|
9.76 |
|
|
|
8.36 |
|
December 31
|
|
|
12.00 |
|
|
|
9.20 |
|
|
2007
|
|
|
|
|
|
|
|
|
Period ended March 1
|
|
|
13.68 |
|
|
|
11.88 |
|
(b) Shareholder Information. As at March 1,
2007, there were approximately 473 holders of record of our
shares and a total of 35,465,176 shares were outstanding.
(c) Dividend Information. The declaration and
payment of dividends is at the discretion of our board of
directors. Our board of directors has not declared or paid any
dividends on our shares in the past two years and does not
anticipate declaring or paying dividends in the foreseeable
future.
(d) Equity Compensation Plans. The following table
sets forth information as at December 31, 2006 regarding:
(i) our 1992 amended and restated stock option plan under
which options to acquire an aggregate of 3,600,000 of our shares
may be granted; and (ii) our 2004 Stock Incentive Plan
pursuant to which 1,000,000 of our shares may be issued pursuant
to options, stock appreciation rights and restricted shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares | |
|
|
Number of Shares to be | |
|
Weighted-average | |
|
Available for Future | |
|
|
Issued Upon Exercise | |
|
Exercise Price of | |
|
Issuance Under | |
|
|
of Outstanding Options | |
|
Outstanding Options | |
|
Plan | |
|
|
| |
|
| |
|
| |
1992 Amended Stock Option Plan
|
|
|
1,095,000 |
|
|
$ |
6.71 |
|
|
|
130,500 |
|
2004 Stock Incentive Plan
|
|
|
30,000 |
|
|
$ |
7.30 |
|
|
|
814,315 |
(1) |
|
|
(1) |
An aggregate of 190,686 restricted shares are issued and
outstanding under the plan. |
(e) Private Placements. In February 2005, pursuant
to the Acquisition of the Celgar mill, we issued 4,210,526 of
our shares at a price of $9.50 per share to the vendor of
the Celgar mill for gross proceeds of $40.0 million in
reliance on Regulation S under the Securities Act. In
connection with the issuance of these shares, we filed a shelf
registration statement on
Form S-3 with the
SEC in 2005 to register these shares for resale. The shelf
registration statement was withdrawn in February 2007.
In December 2006, we purchased and cancelled an aggregate of
$15,245,000 principal amount of our convertible notes in
exchange for 2,201,035 shares of our common stock. The
shares were issued pursuant to Section 3(a)(9) of the
Securities Act of 1933, as amended.
36
ITEM 6. SELECTED FINANCIAL
DATA
The following table sets forth selected historical financial and
operating data as at and for the periods indicated. 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 contained in this annual
report and Managements Discussion and Analysis of
Financial Condition and Results of Operations. The
following selected financial data:
|
|
|
|
|
includes the operating results of the Stendal mill from its
start up in September 2004 and the results of operations and
financial condition of the Celgar mill from the time of its
Acquisition in February 2005; and |
|
|
|
excludes the results of operations of our paper operations which
were sold in 2006 and, pursuant to SFAS 144, are accounted
for as discontinued operations. Previously reported data and the
financial statements and related notes included herein have been
reclassified to conform to the current presentation. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(Euro in thousands, other than per share and per ADMT amounts) | |
Statement of Operations Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
623,977 |
|
|
|
452,437 |
|
|
|
182,242 |
|
|
|
129,282 |
|
|
|
170,805 |
|
Costs and expenses
|
|
|
518,377 |
|
|
|
426,568 |
|
|
|
168,055 |
|
|
|
118,769 |
|
|
|
149,230 |
|
Operating income (loss) from continuing operations
|
|
|
92,504 |
|
|
|
18,650 |
|
|
|
(8,201 |
) |
|
|
(4,683 |
) |
|
|
5,254 |
|
Unrealized gains (losses) on derivative financial instruments
|
|
|
109,358 |
|
|
|
(69,308 |
) |
|
|
(32,331 |
) |
|
|
(13,153 |
) |
|
|
(32,411 |
) |
Realized gains (losses) on derivative financial instruments
|
|
|
(3,510 |
) |
|
|
(2,455 |
) |
|
|
44,467 |
|
|
|
29,321 |
|
|
|
25,732 |
|
Interest expense(1)
|
|
|
91,931 |
|
|
|
86,326 |
|
|
|
23,185 |
|
|
|
12,576 |
|
|
|
12,522 |
|
Investment income
|
|
|
6,090 |
|
|
|
2,422 |
|
|
|
2,772 |
|
|
|
5,912 |
|
|
|
1,501 |
|
Net income (loss) from continuing operations
|
|
|
69,242 |
|
|
|
(112,058 |
) |
|
|
30,139 |
|
|
|
5,409 |
|
|
|
(4,190 |
) |
Net income (loss) (including discontinued operations)
|
|
|
63,210 |
|
|
|
(117,146 |
) |
|
|
19,980 |
|
|
|
(3,593 |
) |
|
|
(6,321 |
) |
Net income (loss) per share from continuing operations,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
2.08 |
|
|
|
(3.59 |
) |
|
|
1.73 |
|
|
|
0.32 |
|
|
|
(0.25 |
) |
|
Diluted
|
|
|
1.72 |
|
|
|
(3.59 |
) |
|
|
1.25 |
|
|
|
0.32 |
|
|
|
(0.25 |
) |
Net income (loss) per share (including discontinued operations)
|
|
|
1.90 |
|
|
|
(3.75 |
) |
|
|
1.15 |
|
|
|
(0.21 |
) |
|
|
(0.38 |
) |
Weighted average shares outstanding (in thousands),
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
33,336 |
|
|
|
31,218 |
|
|
|
17,426 |
|
|
|
16,941 |
|
|
|
16,775 |
|
|
Diluted
|
|
|
43,084 |
|
|
|
31,218 |
|
|
|
28,525 |
|
|
|
16,941 |
|
|
|
16,775 |
|
Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
221,800 |
|
|
|
251,522 |
|
|
|
207,409 |
|
|
|
128,401 |
|
|
|
96,217 |
|
Current liabilities
|
|
|
120,002 |
|
|
|
140,327 |
|
|
|
229,068 |
|
|
|
177,348 |
|
|
|
89,889 |
|
Working capital
|
|
|
101,798 |
(2) |
|
|
111,195 |
(2) |
|
|
(21,659 |
)(2) |
|
|
(48,947 |
) |
|
|
6,328 |
|
Total assets(3)
|
|
|
1,302,594 |
|
|
|
1,393,816 |
|
|
|
1,255,649 |
|
|
|
935,905 |
|
|
|
599,750 |
|
Long-term liabilities
|
|
|
963,791 |
|
|
|
1,104,746 |
|
|
|
863,840 |
|
|
|
625,702 |
|
|
|
384,892 |
|
Shareholders equity
|
|
|
218,801 |
|
|
|
148,743 |
|
|
|
162,741 |
|
|
|
132,855 |
|
|
|
124,969 |
|
Other Pulp Data(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales volume (ADMTs)
|
|
|
1,326,355 |
|
|
|
1,101,304 |
|
|
|
421,716 |
|
|
|
303,655 |
|
|
|
293,607 |
|
|
Production
|
|
|
1,302,260 |
|
|
|
1,184,619 |
|
|
|
446,710 |
|
|
|
310,244 |
|
|
|
304,854 |
|
|
Average price realized (per ADMT)
|
|
|
465 |
|
|
|
407 |
|
|
|
423 |
|
|
|
417 |
|
|
|
443 |
|
|
|
(1) |
We capitalized most of the interest related to the Stendal mill
prior to September 18, 2004. |
|
(2) |
We have applied for investment grants from the federal and state
governments of Germany and had claims of approximately
1.8 million
outstanding at December 31, 2006, which we expect to
receive in 2007 and approximately
7.0 million
outstanding at December 31, 2005, all of which was received
in 2006. However, in accordance with our accounting policies, we
do not record these grants until they are received. |
|
(3) |
We do not report the effect of government grants relating to our
assets in our income. These grants reduce the cost basis of the
assets purchased when the grants are received. See
Business Government Financing. |
|
(4) |
Excluding intercompany sales. |
37
|
|
ITEM 7. |
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS |
The following discussion and analysis of our financial condition
and results of operations as at and for the three years ended
December 31, 2006 is based upon and should be read in
conjunction with the consolidated financial statements and
related notes included elsewhere in this annual report. The
following Managements Discussion and Analysis of Financial
Condition and Results of Operations reflects:
|
|
|
|
|
the results of operations of our Stendal mill since it commenced
production in September 2004 and the results of operations and
financial condition of the Celgar mill from the time of its
Acquisition in February 2005; |
|
|
|
the disposition of our paper operations in 2006. In accordance
with SFAS No. 144 Accounting for the Impairment
or Disposal of Long-Lived Assets, the results of this
business have been classified as discontinued operations and
their financial results are reported separately as discontinued
operations for all periods presented. Previously reported
financial statements for all periods and certain amounts in our
financial statements and related notes included herein have been
reclassified to conform to the current presentation; and |
|
|
|
only our continuing operations except as otherwise expressly
noted. |
Results of Operations
We operate in the pulp business and our operations are located
in Germany and Western Canada. Our pulp mills are comprised of:
(a) an NBSK pulp mill operated by our wholly-owned
subsidiary, Rosenthal, near Blankenstein, Germany, which has an
annual production capacity of approximately 310,000 ADMTs;
(b) a new,
state-of-the-art NBSK
pulp mill, with a production capacity of approximately 600,000
ADMTs per year, near Stendal, Germany owned and operated by our
70.6% owned subsidiary, Stendal; and (c) the Celgar NBSK
pulp mill operated by our wholly-owned subsidiary, Celgar, with
an annual production capacity of approximately 470,000 ADMTs
located near Castlegar, British Columbia, Canada.
The Stendal mill was completed and commenced production in
mid-September 2004. Prior to such date, most of the costs
associated with the Stendal mill, including interest, were
capitalized. Total investment costs in respect of the Stendal
mill were approximately
1.0 billion.
The Stendal mill underwent extensive testing and evaluation in
December 2004 and, in the first quarter of 2005, we delivered an
acceptance certificate and assumed responsibility for the
operation of the mill.
In February 2005, we acquired the Celgar pulp mill for
approximately $210.0 million
(162.0 million),
excluding defined working capital. Since its Acquisition, we
have integrated the mill with our operations and expect to
complete an approximately C$28.0 million capital
improvement project at the mill in mid-2007.
In 2006, we disposed of our paper operations and are no longer
in such business. These operations are reported separately as
discontinued operations.
Our financial performance depends on a number of variables that
impact sales and production costs. Sales and production results
are influenced largely by the market price for products and raw
materials, the mix of products produced and foreign currency
exchange rates. Kraft pulp markets are highly cyclical, with
prices determined by supply and demand. Demand for kraft pulp is
influenced to a significant degree by global levels of economic
activity and supply is driven by industry capacity and
utilization rates. Our product mix is important because premium
grades of NBSK pulp generally achieve higher prices and profit
margins.
Our production costs are influenced by the availability and cost
of raw materials, energy and labor, and our plant efficiencies
and productivity. Our main raw material is fiber in the form of
wood chips and pulp logs. Wood chip and pulp log costs are
primarily affected by the supply of, and demand for, lumber and
pulp, which are both highly cyclical. Production costs also
depend on the total volume of production. High operating rates
and production efficiencies permit us to lower our average cost
by spreading fixed costs over more units.
Global economic conditions, changes in production capacity and
inventory levels are the primary factors affecting kraft pulp
prices. Historically, kraft pulp prices have been cyclical in
nature. The average annual
38
European list prices for NBSK pulp between 1990 and 2006 ranged
from a low of $444 per ADMT in 1993 to a high of
$875 per ADMT in 1995.
List prices for NBSK pulp in Europe increased overall in 2004
from approximately $560 per ADMT at the start of the year to
$625 per ADMT at the end. Prices increased primarily due to the
relatively weak U.S. dollar and improving world economies.
List prices for NBSK pulp weakened in 2005 primarily due to the
strengthening of the U.S. dollar and were approximately
$600 per ADMT in Europe in December 2005. Pulp prices increased
steadily in 2006 primarily as a result of the closure of several
pulp mills, particularly in North America, which reduced NBSK
pulp capacity by approximately 1.2 million ADMTs, better
demand and the general weakness of the U.S. dollar. At the
end of 2006, list prices for NBSK pulp in Northern Europe had
increased to approximately $730 per ADMT.
A producers sales realizations will reflect customer
discounts, commissions and other items and NBSK pulp prices will
continue to fluctuate in the future.
Our financial performance for any reporting period is also
impacted by changes in the U.S. dollar to Euro and Canadian
dollar exchange rate and in interest rates. Changes in currency
rates affect our operating results because the price for our
principal product, NBSK pulp, is generally based on a global
industry benchmark that is quoted in U.S. dollars, even
though a significant portion of the sales from our German mills
is invoiced in Euros. Therefore, a weakening of the
U.S. dollar against the Euro and the Canadian dollar will
generally reduce the amount of revenues of our pulp operations.
Most of our operating costs at our German mills, including our
debt obligations under the Stendal Loan Facility and
Rosenthal working capital facility, are incurred in Euros. Most
of our operating costs at the Celgar mill, including under its
working capital facility, are in Canadian dollars. These costs
do not fluctuate with the U.S. dollar to Euro or Canadian
dollar exchange rates. Thus, a weakening of the U.S. dollar
against the Euro and the Canadian dollar tends to reduce our
sales revenue, gross profit and income from operations. We seek
to mitigate the effect of such weakening against the Euro
through foreign currency derivatives we put into place from time
to time to protect against such currency movements.
Changes in interest rates can impact our operating results
because the credit facilities established for our pulp mills
provide for floating rates of interest.
Changes in currency exchange and interest rates also impact
certain foreign currency and interest rate derivatives used by
Stendal and Rosenthal from time to time to partially protect
against the effect of such changes. Gains or losses on such
derivatives are included in our earnings, either as they are
settled or as they are marked to market for each reporting
period. See Quantitative and Qualitative Disclosures about
Market Risk.
In 2005, Stendal entered into currency swaps in the aggregate
principal amount of
612.6 million
to convert all of its long-term indebtedness under the Stendal
Loan Facility from Euros into U.S. dollars, as well as
certain currency forwards, such swaps and forwards being
collectively referred to as the Currency
Derivatives. In 2006, we recorded a net realized loss of
3.5 million
on the settlement of such swaps and a net unrealized non-cash
gain of
72.1 million
on the balance of the Currency Derivatives. In 2005, we recorded
a net unrealized non-cash holding loss of
66.1 million
before minority interests in respect of outstanding Currency
Derivatives and a net realized loss of
2.2 million
before minority interests on Currency Derivatives that were
settled. In 2004, we recorded a realized gain of approximately
44.5 million
upon the settlement of Currency Derivatives. See
Quantitative and Qualitative Disclosures About Market
Risk for more information.
Stendal, as required under its project financing, entered into
variable-to-fixed rate
interest swaps, referred to as the Stendal Interest Rate
Swaps, in August 2002 to fix the interest rate on
approximately
612.6 million
of indebtedness for the full term of the Stendal
Loan Facility. Rosenthal had also entered into forward
interest rate and interest cap contracts, referred to as the
Rosenthal Interest Rate Contracts and, together with
the Stendal Interest Rate Swaps, the Interest Rate
Contracts, in respect of a portion of its long-term
indebtedness under its previous project loan facility. The
Rosenthal Interest Rate Contracts were settled in February 2005
in connection with the repayment of such loan facility.
In 2006, we recorded a net unrealized non-cash holding gain of
37.3 million
before minority interests on the marked to market valuation of
the Stendal Interest Rate Contracts. In 2005, we recorded a
realized loss of
39
0.3 million
upon the settlement of the Rosenthal Interest Rate Contracts and
a net unrealized non-cash holding loss of
3.2 million
before minority interests on the Stendal Interest Rate
Contracts. In 2004, we recorded a negligible realized loss upon
the settlement of the Rosenthal Interest Rate Contracts and a
net unrealized non-cash holding loss of
32.3 million
before minority interests on the Stendal Interest Rate Contracts.
Improving world economies resulted in an increase in long-term
interest rates in 2006. If world economies continue to
strengthen, we would expect interest rates to continue to rise.
Higher interest rates could result in our recording marked to
market non-cash holding gains on the Stendal Interest Rate
Contracts in future periods. However, a fall in interest rates
could result in our recording non-cash holding losses on the
Stendal Interest Rate Contracts in future periods when they are
marked to market.
Selected production, sales and exchange rate data for each of
our last three years is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
|
(ADMTs) | |
Pulp Production
|
|
|
1,302,260 |
|
|
|
1,184,619 |
|
|
|
446,710 |
|
|
|
|
|
|
|
|
|
|
|
Pulp Sales By Volume(1)
|
|
|
1,326,355 |
|
|
|
1,101,304 |
|
|
|
421,716 |
|
|
|
|
|
|
|
|
|
|
|
Revenues(1)
|
|
|
623,977 |
|
|
|
452,437 |
|
|
|
182,242 |
|
NBSK list prices in Europe ($/ADMT)
|
|
$ |
680 |
|
|
$ |
610 |
|
|
$ |
616 |
|
Average pulp price realizations
(/ ADMT)
|
|
|
465 |
|
|
|
407 |
|
|
|
423 |
|
Average Spot Currency Exchange Rates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/$
|
|
|
0.7962 |
|
|
|
0.8033 |
|
|
|
0.8040 |
|
|
C$/$
|
|
|
1.1344 |
|
|
|
1.2116 |
|
|
|
1.3017 |
|
|
C$/
|
|
|
1.4244 |
|
|
|
1.5095 |
|
|
|
1.6169 |
|
|
|
(1) |
Excluding intercompany sales volumes of 13,234, 14,289 and 6,756
ADMTs of pulp and intercompany net sales revenues of
approximately
6.4 million,
6.3 million
and
2.8 million
in 2006, 2005 and 2004, respectively. |
Year Ended December 31, 2006 Compared to Year Ended
December 31, 2005
In the year ended December 31, 2006, revenues increased by
approximately 38% to
624.0 million
from
452.4 million
in 2005, primarily as a result of higher pulp prices and higher
sales volumes at our Stendal and Celgar mills. Pulp prices
increased steadily in 2006 primarily as a result of the closure
of several pulp mills, particularly in North America, which
reduced NBSK capacity by approximately 1.2 million ADMTs,
better demand and the general weakness of the U.S. dollar
against the Euro and the Canadian dollar. List prices for NBSK
pulp in Europe were approximately $680
(542) per ADMT
in 2006, compared to approximately $610
(490) per ADMT
in 2005. At the end of 2006, list prices increased to
approximately $730
(553) per ADMT
in Europe and between $700
(530) and $730
(553) per ADMT
in Asia, depending upon the country of delivery. At
December 31, 2006, Norscan producers inventories for
softwood kraft were at 24 days supply, compared to
30 days at the end of 2005.
Pulp sales realizations increased to
465 per
ADMT on average in 2006 from
407 per
ADMT in 2005, primarily as a result of higher pulp prices.
Cost of sales and general, administrative and other expenses
increased to
531.5 million
in the year ended December 31, 2006 from
433.8 million
in 2005, primarily as a result of higher sales volume, partially
offset by a reversal of accruals for wastewater fees of
13.0 million.
In 2006, German environmental authorities confirmed that certain
initiatives and capital expenditures undertaken by us qualified
to offset such fees.
Beginning in 2005, our German operations became subject to the
European Union Emissions Trading Scheme, pursuant to which our
German mills have been granted emission allowances. We recorded
a contribution to income from the sale of emission allowances of
15.6 million
and
17.3 million
in 2006 and 2005, respectively.
40
On average, our fiber costs for our German mills increased by
approximately 12% compared to 2005 as a result of both a supply
imbalance and increased demand. The supply imbalance resulted
primarily from low harvest levels during the severe winter
conditions in late 2005 and early 2006 in central Europe. Such
low harvest levels were not made up over the course of the year.
The increase in demand resulted from demand for wood residuals
from alternative or renewable energy producers. These factors
contributed to upward pressure on fiber prices in the latter
half of 2006 and for fiber deliveries into the start of 2007.
Severe winter storms in central Europe in January 2007
reportedly caused the downfall of over 40 million cubic
meters of wood. This wood will need to be harvested and
processed in a timely manner and we expect this to increase the
fiber supply to our German mills and to temper and moderate
fiber prices in the second half of 2007. In 2006, fiber costs
for our Celgar mill increased by approximately 10% over the
prior year, primarily because of fluctuations in regional wood
chip availability caused by slumping North American lumber
markets.
Depreciation for the pulp operations increased to
55.5 million
in the current period, from
50.9 million
in 2005, primarily as a result of the inclusion of a full year
of depreciation at our Celgar mill.
For the year ended December 31, 2006, operating income
increased almost fourfold to
92.5 million
from
18.7 million
in the prior year, primarily as a result of overall higher pulp
prices and sales volumes and improved productivity at our
Stendal and Celgar mills.
Interest expense in the year ended December 31, 2006
increased to
91.9 million
from
86.3 million
a year ago because of the inclusion of a full years
interest on our senior notes issued in February 2005 and
2.1 million
of interest expense recorded on the repurchase of approximately
$15.2 million principal amount of our convertible notes.
In 2006, due to the strengthening of the Euro versus the
U.S. dollar, we recorded a net unrealized non-cash holding
gain of
72.1 million
before minority interests upon the marked to market valuation of
our outstanding Currency Derivatives. In 2006, we also recorded
a net realized loss of
3.5 million
before minority interests in respect of Currency Derivatives
that we settled during the period. In 2005, due to the
strengthening of the U.S. dollar versus the Euro, we
recorded a net unrealized non-cash holding loss of
66.1 million
before minority interests upon the marked to market valuation of
outstanding Currency Derivatives. In 2005, we also recorded a
net realized loss of
2.2 million
before minority interests in respect of such derivatives that
were settled during the period.
In 2006, as a result of an increase in long-term European
interest rates, we also recorded an unrealized non-cash holding
gain of
37.3 million
before minority interests on the marked to market valuation of
the Stendal Interest Rate Contracts. In 2005, we recorded an
unrealized non-cash loss on the Stendal Interest Rate Contracts
of
3.2 million
and a realized loss of
0.3 million
upon the settlement of the Rosenthal Interest Rate Contracts. We
also recorded an unrealized non-cash foreign exchange gain on
our long-term debt of
15.2 million
in 2006 due to the strengthening of the Euro versus the
U.S. dollar, compared to an unrealized loss of
4.2 million
thereon in 2005.
In the year ended December 31, 2006, minority interest,
representing the minority shareholders proportionate
interest in the Stendal mill, was
1.1 million,
compared to
17.7 million
in 2005. In 2005, we recorded an adjustment of
1.7 million
for the non-cash impact of other-than-temporary impairment
losses on our available-for-sale securities and a loan.
We reported net income for 2006 of
69.2 million,
or 2.08 per
basic and
1.72 per
diluted share, which reflected higher pulp prices and generally
stronger pulp markets and the net gains on our currency and
interest rate derivatives of
68.6 million
and
37.3 million.
In 2005, we reported a net loss of
112.1 million,
or 3.59 per
basic and diluted share, which reflected generally weak pulp
markets, the realized and unrealized net losses on our currency
and interest rate derivatives of
71.8 million,
interest expense relating to our Stendal mill of
56.8 million,
the unrealized non-cash foreign exchange loss on our long-term
debt of
4.2 million
and the non-cash impairment charge of
1.7 million
relating to investments, partially offset by a non-cash benefit
for income taxes of
13.1 million.
In 2006, net income including discontinued operations was
63.2 million,
or 1.90 per
basic and
1.58 per
diluted share. In 2005, the net loss including discontinued
operations was
117.1 million,
or 3.75 per
basic and diluted share.
41
In 2006, Operating EBITDA increased to
148.3 million
from
69.8 million
in 2005. Operating EBITDA is defined as operating income (loss)
from continuing operations plus depreciation and amortization
and non-recurring capital asset impairment charges. Operating
EBITDA is calculated by adding depreciation and amortization and
non-recurring capital asset impairment charges of
55.8 million
and
51.2 million
to the operating income from continuing operations of
92.5 million
and
18.7 million
for the years ended December 31, 2006 and 2005,
respectively.
Management uses Operating 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 and non-recurring capital
asset impairment charges are not an actual cash cost, and
depreciation expense 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 Operating EBITDA is commonly used by
securities analysts, investors and other interested parties to
evaluate our financial performance.
Operating 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. Operating EBITDA
is not a measure of financial performance under GAAP, and should
not be 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.
Operating EBITDA has significant limitations as an analytical
tool, and should not be considered in isolation, or as a
substitute for analysis of our results as reported under GAAP.
Some of these limitations are that Operating EBITDA does not
reflect: (i) our cash expenditures, or future requirements,
for capital expenditures or contractual commitments;
(ii) changes in, or cash requirements for, working capital
needs; (iii) the significant interest expense, or the cash
requirements necessary to service interest or principal
payments, on our outstanding debt; (iv) minority interests
on our Stendal NBSK pulp mill operations; (v) the impact of
realized or marked to market changes in our derivative
positions, which can be substantial; and (vi) Operating
EBITDA does not reflect the impact of impairment charges against
our investments or assets. Because of these limitations,
Operating EBITDA should only be considered as a supplemental
performance measure and should not be considered as a measure of
liquidity or cash available to us to invest in the growth of our
business. See the Statement of Cash Flows set out in our
consolidated financial statements included herein. Because all
companies do not calculate Operating EBITDA in the same manner,
Operating EBITDA as calculated by us may differ from Operating
EBITDA or EBITDA as calculated by other companies. We compensate
for these limitations by using Operating EBITDA as a
supplemental measure of our performance and relying primarily on
our GAAP financial statements.
The following table provides a reconciliation of net income
(loss) from continuing operations to operating income from
continuing operations and Operating EBITDA for the periods
indicated:
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
|
(in thousands) | |
Net income (loss) from continuing operations
|
|
|
69,242 |
|
|
|
(112,058 |
) |
Minority interest
|
|
|
1,071 |
|
|
|
(17,674 |
) |
Income taxes provision (benefit)
|
|
|
57,443 |
|
|
|
(13,140 |
) |
Interest expense
|
|
|
91,931 |
|
|
|
86,326 |
|
Investment income
|
|
|
(6,090 |
) |
|
|
(2,422 |
) |
Derivative financial instruments, net
|
|
|
(105,848 |
) |
|
|
71,763 |
|
Foreign exchange (gain) loss on debt
|
|
|
(15,245 |
) |
|
|
4,156 |
|
Impairment of investments
|
|
|
|
|
|
|
1,699 |
|
|
|
|
|
|
|
|
Operating income from continuing operations
|
|
|
92,504 |
|
|
|
18,650 |
|
Add: Depreciation and amortization
|
|
|
55,834 |
|
|
|
51,160 |
|
|
|
|
|
|
|
|
Operating EBITDA
|
|
|
148,338 |
|
|
|
69,810 |
|
|
|
|
|
|
|
|
42
Year Ended December 31, 2005 Compared to Year Ended
December 31, 2004
In the year ended December 31, 2005, revenues increased by
approximately 148% to
452.4 million
from
182.2 million
in 2004, primarily as a result of the inclusion of a full year
of sales at our Stendal mill and sales from our Celgar mill from
February 2005. Pulp sales by volume increased to 1,101,304 ADMTs
in 2005 from 421,716 ADMTs in 2004. In the year ended
December 31, 2005, the Stendal and Celgar mills sold
783,133 ADMTs of NBSK pulp and had sales of
315.2 million.
List prices for NBSK pulp in Europe were approximately
490 ($610) per
ADMT in 2005, compared to approximately
496 ($616) per
ADMT in 2004. The decrease in NBSK pulp prices was partially
offset by the strengthening of the U.S. dollar versus the
Euro in 2005. Norscan producers inventories at the end of
2005 remained largely unchanged from 2004 at about
30 days supply.
Cost of sales and general, administrative and other expenses in
the year ended December 31, 2005 increased to
433.8 million
from
190.4 million
in the comparative period of 2004, primarily as a result of the
inclusion of a full years results of our Stendal mill and
the results of our Celgar mill. We commenced expensing all of
the costs, including interest, relating to the Stendal mill
effective September 2004 when the mill was started up, prior to
which most of the costs, including interest, relating to the
Stendal mill were capitalized during its construction.
Pulp sales realizations decreased to
407 per
ADMT on average in the year ended December 31, 2005 from
423 per
ADMT in 2004, primarily as a result of lower price realizations
of the Stendal and Celgar mills. The Stendal mill sold pulp at a
discounted price as a result of its ramp up and the Celgar mill
sold a large portion of its production in Asian markets which
had lower prices than European markets.
Beginning in 2005, our German operations became subject to the
European Union Emissions Trading Scheme, pursuant to which our
German mills have been granted emission allowances. In 2005, we
sold some of these emission allowances for a gain of
17.3 million,
which contributed to income from operations.
On average, our fiber costs for pulp production at the Rosenthal
mill decreased marginally compared to last year.
Depreciation for the pulp operations increased to
51.2 million
in the current period, from
26.8 million
in 2004, primarily as a result of
37.8 million
of depreciation from the Stendal and Celgar mills.
For the year ended December 31, 2005, we generated
operating income of
18.7 million,
versus an operating loss of
8.2 million
in 2004, primarily as a result of higher operating income at our
German pulp mills including income from operations of
8.3 million
from our Stendal mill, partially offset by an operating loss at
our Celgar mill. The overall strength of the Canadian dollar
versus the U.S. dollar in 2005 negatively impacted the
results of our Celgar mill.
Interest expense in the year ended December 31, 2005
increased to
86.3 million
from
23.2 million
a year ago, due to interest associated with our
$310 million senior note issue completed in February 2005
and higher borrowings relating to the Stendal mill. We
capitalized most of the interest relating to the Stendal mill
prior to its start up in mid-September 2004.
In 2005, Stendal entered into certain foreign currency
derivatives to swap all of its long-term bank indebtedness from
Euros to U.S. dollars and certain currency forwards. Due to
the strengthening of the U.S. dollar versus the Euro in
2005, we recorded a net unrealized non-cash holding loss of
66.1 million
before minority interests upon the marked to market valuation of
the Currency Derivatives that were outstanding at the end of the
2005 period and a net realized loss of
2.2 million
before minority interests in respect of such derivatives that
matured during the period. In 2004, we recorded a realized gain
of
44.5 million
before minority interests upon the settlement of the currency
derivatives relating to the Stendal and Rosenthal mills due to
the weakening of the U.S. dollar versus the Euro in 2004.
In 2005, as a result of a decrease in long-term European
interest rates, we also recorded an unrealized non-cash holding
loss of
3.2 million
before minority interests on the marked to market valuation of
the Stendal Interest Rate Contracts and a net realized loss of
0.3 million
before minority interests upon the settlement of the Rosenthal
Interest Rate Contracts. In 2004, we recorded a net unrealized
non-cash holding loss of
32.3 million
before minority interests on the marked to market valuation of
the Rosenthal and Stendal Interest Rate Contracts. See
Quantitative and Qualitative Disclosures About Market
Risk for more information about our derivatives. We also
recorded an unrealized
43
non-cash foreign exchange loss on our long-term debt of
4.2 million
in 2005 due to the weakening of the Euro versus the
U.S. dollar.
In the year ended December 31, 2005, minority interest,
representing the minority shareholders proportionate
interest in the Stendal mill, was
17.7 million,
compared to
2.5 million
in 2004.
On May 6, 2005, our management determined to record, and
our Audit Committee approved, an adjustment of
1.7 million
for the non-cash impact of other-than-temporary impairment
losses on our available-for-sale securities and a loan
receivable that relate to an investment in a venture company,
which was a legacy investment that we had held since
approximately 1996. In April 2005, the venture company proposed
to place itself into liquidation. As a result, management
determined to record impairment charges sufficient to reduce its
investment to the net amount estimated to be recovered. We do
not currently expect the impairment charge to result in any
future cash expenditures.
We reported a net loss for the year ended December 31, 2005
of
112.1 million,
or 3.59 per
basic and diluted share, which reflected generally weak pulp
markets, the realized and unrealized net losses on our currency
and interest rate derivatives of
71.8 million,
interest expense relating to our Stendal mill of
56.8 million,
the unrealized non-cash foreign exchange loss on our long-term
debt of
4.2 million
and the non-cash impairment charge of
1.7 million
relating to investments, partially offset by a non-cash benefit
for income taxes of
13.1 million.
In 2004, we reported net income of
30.1 million,
or 1.73 per
basic share and
1.25 per
diluted share, which included an income tax benefit of
44.2 million
relating to a reorganization of certain of our subsidiary
companies.
We generated Operating EBITDA of
69.8 million
and
18.6 million
in the years ended December 31, 2005 and 2004,
respectively. Operating EBITDA is defined as operating income
(loss) from continuing operations plus depreciation and
amortization and non-recurring capital asset impairment charges.
Operating EBITDA is calculated by adding depreciation and
amortization and non-recurring capital asset impairment charges
of
51.2 million
and
26.8 million
to the operating income from continuing operations of
18.7 million
and operating loss from continuing operations of
8.2 million
for the years ended December 31, 2005 and 2004,
respectively.
Operating EBITDA has significant limitations as an analytical
tool, and should not be considered in isolation, or as a
substitute for analysis of our results as reported under GAAP.
See the discussion of our results for the year ended
December 31, 2006 for additional information relating to
such limitations and Operating EBITDA.
The following table provides a reconciliation of net (loss)
income from continuing operations to operating income (loss)
from continuing operations and Operating EBITDA for the periods
indicated:
|
|
|
|
|
|
|
|
|
|
|
Years Ended | |
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(in thousands) | |
Net (loss) income from continuing operations
|
|
|
(112,058 |
) |
|
|
30,139 |
|
Minority interest
|
|
|
(17,674 |
) |
|
|
(2,454 |
) |
Income taxes benefit
|
|
|
(13,140 |
) |
|
|
(44,163 |
) |
Interest expense
|
|
|
86,326 |
|
|
|
23,185 |
|
Investment income
|
|
|
(2,422 |
) |
|
|
(2,772 |
) |
Derivative financial instruments, net
|
|
|
71,763 |
|
|
|
(12,136 |
) |
Foreign exchange loss on debt
|
|
|
4,156 |
|
|
|
|
|
Impairment of investments
|
|
|
1,699 |
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) from continuing operations
|
|
|
18,650 |
|
|
|
(8,201 |
) |
Add: Depreciation and amortization
|
|
|
51,160 |
|
|
|
26,788 |
|
|
|
|
|
|
|
|
Operating EBITDA
|
|
|
69,810 |
|
|
|
18,587 |
|
|
|
|
|
|
|
|
44
Liquidity and Capital Resources
The following table is a summary of selected financial
information for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
|
(in thousands) | |
Financial Position
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
69,367 |
|
|
|
82,775 |
|
Working capital(1)
|
|
|
101,630 |
|
|
|
113,078 |
|
Property, plant and equipment
|
|
|
972,143 |
|
|
|
1,015,363 |
|
Total assets(1)
|
|
|
1,300,500 |
|
|
|
1,371,908 |
|
Long-term liabilities
|
|
|
963,791 |
|
|
|
1,104,746 |
|
Shareholders equity
|
|
|
218,801 |
|
|
|
148,743 |
|
|
|
(1) |
Excluding assets and liabilities of discontinued operations. |
At December 31, 2006, our cash and cash equivalents were
69.4 million,
compared to
82.8 million
at the end of 2005. We also had
57.0 million
of cash restricted in a debt service account related to the
financing for the Stendal mill, compared to
31.6 million
as at the end of 2005.
We expect to meet our interest and debt service expenses and the
working and maintenance capital requirements for our operations
from cash flow from operations, cash on hand and the revolving
working capital loan facilities for our mills.
Operating Activities
We operate in a cyclical industry and our operating cash flows
vary accordingly. Our principal operating cash expenditures are
for compensation, fiber, chemicals and debt service.
Operating activities in 2006 provided cash of
49.2 million,
compared to
11.3 million
in 2005. An increase in receivables due primarily to higher pulp
sales used cash of
7.4 million
in 2006, compared to
18.8 million
in 2005. A reduction in inventories provided cash of
7.4 million
in 2006, compared to an increase using cash of
4.2 million
in 2005. A decrease in accounts payable and accrued expenses
primarily due to the reversal of accrued wastewater fees used
cash of
9.3 million
in 2006, compared to an increase therein providing cash of
50.6 million
in 2005.
Working capital is subject to cyclical operating needs, the
timing of collection of receivables and the payment of payables
and expenses.
Investing Activities
Investing activities in 2006 used cash of
62.2 million,
primarily related to the purchase of property, plant and
equipment at our pulp mills of
32.9 million
and a build up in our Stendal mills debt service reserve
account of
25.4 million.
Investing activities in 2005 used cash of
108.2 million
primarily related to the Acquisition of the Celgar mill which
used cash of
146.6 million
and the purchase of property, plant and equipment primarily
attributable to the Stendal mill which used cash of
22.0 million
and the purchase of available for sale securities, partially
offset by a decrease in restricted cash which provided cash of
61.2 million.
We expect capital expenditures in 2007 to total approximately
20.5 million.
This level of capital expenditures could increase or decrease as
a result of a number of factors, including our financial results
and future economic conditions. Our planned capital spending in
2007 will be for efficiency and quality projects, replacement
projects and on-going environmental compliance.
Financing Activities
Financing activities provided cash of
1.0 million
in the year ended December 31, 2006, compared to
126.9 million
in 2005. In 2006, net repayment of debt used cash of
9.8 million
and the repayment of capital leases used cash of
4.1 million.
In 2006, we received the last of the outstanding government
grants related to
45
the Stendal mill of
9.1 million.
Under our accounting policies, we do not record these grants
until they are received. The grants are not reported in our
income and reduce the cost basis of the assets purchased when
they are received. In 2005, the issuance of shares primarily in
connection with the Acquisition of the Celgar mill provided cash
of
66.6 million.
In 2005, we fully repaid our project loan facility and
indebtedness relating to a landfill for our Rosenthal mill in
the aggregate amount of
150.7 million
from the proceeds of the share and senior note offerings in
connection with the Acquisition. In 2005, we received government
grants related to the Stendal mill of
84.7 million.
As at December 31, 2006, we had drawn down none of the
40.0 million
revolving term credit facility relating to the Rosenthal mill
and C$12.2 million under the C$40.0 million revolving
credit facility relating to the Celgar mill.
We have no material commitments to acquire assets or operating
businesses. We anticipate that there will be acquisitions of
businesses or commitments to projects in the future. To achieve
our long-term goals of expanding our asset and earnings base
through the acquisition of interests in companies and assets in
the pulp and related businesses, and organically through high
return capital expenditures at our operating facilities, we will
require substantial capital resources. The required necessary
resources for such long-term goals will be generated from cash
flow from operations, cash on hand, the sale of securities
and/or assets, and borrowing against our assets. In addition, we
have amounts available under a revolving tranche of the Stendal
Loan Facility, and the two revolving working capital
facilities established for the Rosenthal and Celgar mills.
Discontinued Operations
Our discontinued operations consist of two paper mills in
Germany that had an aggregate annual production capacity of
approximately 70,000 ADMTs. Since we viewed these paper mills as
non-core operations, we successfully divested them in 2006 and
now account for them as discontinued operations.
The following represents the results of our discontinued
operations for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
|
(in thousands) | |
Revenues
|
|
|
46,351 |
|
|
|
61,471 |
|
|
|
54,970 |
|
Gain (loss) from discontinued operations
|
|
|
394 |
|
|
|
(2,306 |
) |
|
|
(9,771 |
) |
Net loss on sale of discontinued operations
|
|
|
(5,957 |
) |
|
|
|
|
|
|
|
|
Net loss
|
|
|
(6,032 |
) |
|
|
(5,088 |
) |
|
|
(10,159 |
) |
The following represents the statement of cash flows of our
discontinued operations for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
Years Ended | |
|
|
December 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
|
(in thousands) | |
Cash flow from operating activities
|
|
|
(2,121 |
) |
|
|
(347 |
) |
Cash flow from investing activities
|
|
|
5,944 |
|
|
|
(1,200 |
) |
Cash flow from financing activities
|
|
|
(4,158 |
) |
|
|
(700 |
) |
See Note 18, Discontinued Operations, of the consolidated
financial statements and related notes contained in this annual
report for additional information relating to the discontinued
operations.
46
Contractual Obligations and Commitments
The following table sets out our contractual obligations and
commitments as at December 31, 2006 in connection with our
long-term liabilities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due By Period | |
|
|
| |
Contractual Obligations |
|
2007 | |
|
2008-2009 | |
|
2010-2011 | |
|
Beyond 2011 | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(in thousands) | |
Long-term debt(1)
|
|
|
|
|
|
|
14,660 |
|
|
|
50,962 |
|
|
|
243,209 |
|
|
|
308,831 |
|
Debt, Stendal(2)
|
|
|
33,903 |
|
|
|
70,622 |
|
|
|
83,801 |
|
|
|
410,674 |
|
|
|
599,000 |
|
Capital lease obligations(3)
|
|
|
5,392 |
|
|
|
5,022 |
|
|
|
1,661 |
|
|
|
|
|
|
|
12,075 |
|
Operating lease obligations(4)
|
|
|
905 |
|
|
|
696 |
|
|
|
138 |
|
|
|
|
|
|
|
1,739 |
|
Purchase obligations(5)
|
|
|
83,203 |
|
|
|
4,124 |
|
|
|
4,112 |
|
|
|
8,590 |
|
|
|
100,029 |
|
Other long-term liabilities(6)
|
|
|
376 |
|
|
|
427 |
|
|
|
16 |
|
|
|
13 |
|
|
|
832 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
123,779 |
|
|
|
95,551 |
|
|
|
140,690 |
|
|
|
662,486 |
|
|
|
1,022,506 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
This reflects principal only relating primarily to indebtedness
under credit facilities relating to the pulp mills, but does not
reflect indebtedness relating to the Stendal mill. See
Business Description of Certain
Indebtedness, footnote 2 below and Note 8 to our
annual financial statements included herein for a description of
such indebtedness. See Quantitative and Qualitative
Disclosure about Market Risk for information about our
derivatives. |
|
(2) |
This reflects principal only in connection with indebtedness
relating to the Stendal mill, including under the Stendal
Loan Facility and convertible notes. See
Business Description of Certain
Indebtedness and Note 8 to our annual financial
statements included herein for a description of such
indebtedness. Does not include amounts associated with
derivatives entered into in connection with the Stendal
Loan Facility. See Quantitative and Qualitative
Disclosure about Market Risk for information about our
derivatives. |
|
(3) |
Capital lease obligations relate to transportation vehicles and
production equipment. These amounts reflect principal and
interest. |
|
(4) |
Operating lease obligations relate to transportation vehicles
and other production and office equipment. |
|
(5) |
Purchase obligations relate primarily to take-or-pay contracts,
including for purchases of raw materials, made in the ordinary
course of business. |
|
(6) |
Other long-term liabilities relate primarily to pension
liability. Does not include obligations under employment
agreements. |
Capital Resources
In addition to the revolving credit facilities for the Rosenthal
and Celgar mills and the revolving working capital tranche of
the Stendal Loan Facility, respectively, we may seek to
raise future funding in the debt markets if our indenture
relating to our 9.25% senior notes permits, subject to
compliance with the indenture. The indenture governing the
senior notes contains various restrictive covenants, including
several that are based on a formulation of the financial measure
EBITDA, which is net income (loss) adjusted to exclude interest,
taxes, depreciation and amortization, certain non-cash charges
and extraordinary or otherwise unusual gains or losses, and
certain other items. We refer to this formulation of EBITDA as
Indenture EBITDA which is defined in the senior note
indenture as Consolidated EBITDA.
The indenture governing the senior notes provides that, in order
for Mercer Inc. and its restricted subsidiaries (as defined in
the indenture) to enter into certain types of transactions,
including the incurrence of additional indebtedness, the making
of restricted payments and the completion of mergers and
consolidations (other than, in each case, those specifically
permitted by our senior note indenture), we must meet a minimum
ratio of Indenture EBITDA to Fixed Charges as defined in the
senior note indenture of 2.0 to 1.0 on a pro forma basis for the
most recently ended four full fiscal quarters. This ratio is
referred to and defined as the Fixed Charge Coverage Ratio in
the senior note indenture.
For a description of our senior notes and credit facilities, see
Item 1. Business Description of Certain
Indebtedness.
Foreign Currency
Our reporting currency is the Euro as a significant majority of
our business transactions are originally denominated in Euros.
By using the Euro, most cumulative foreign currency translation
losses are eliminated. However, we hold certain assets and
liabilities in U.S. dollars, Canadian dollars and, to a
lesser extent, Swiss
47
francs. Accordingly, our consolidated financial results are
subject to foreign currency exchange rate fluctuations.
We translate foreign 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
in our consolidated statement of comprehensive income and impact
on shareholders equity on the balance sheet but do not
affect our net earnings.
In the year ended December 31, 2006, we reported a net
11.3 million
foreign exchange translation loss and, as a result, the
cumulative foreign exchange translation gain reported within
comprehensive income decreased to
4.3 million
at December 31, 2006 from
15.6 million
at December 31, 2005.
Based upon the exchange rate at December 31, 2006, the
U.S. dollar decreased by approximately 11% in value against
the Euro since December 31, 2005. See Item 7A.
Quantitative and Qualitative Disclosures about Market Risk.
Results of Operations of the Restricted Group Under Our
Senior Note Indenture
The indenture governing our 9.25% senior notes requires
that we also provide a discussion in annual and quarterly
reports we file with the SEC under Managements
Discussion and Analysis of Financial Condition and Results of
Operations of the results of operations and financial
condition of Mercer Inc. and our restricted subsidiaries under
the indenture, referred to as the Restricted Group.
As at and during the year ended December 31, 2006, the
Restricted Group was comprised of Mercer Inc., certain holding
subsidiaries and Rosenthal, and the Celgar mill from the time of
its Acquisition in February 2005. As at and during the years
ended December 31, 2005 and 2004, the Restricted Group was
comprised of Mercer Inc., certain holding subsidiaries and
Rosenthal, which was the only member of the Restricted Group
with material operations during such periods. The results of the
Celgar pulp mill are included since the date of its acquisition
in February 2005 and are not included in the discussion relating
to the Restricted Group for 2004. The Restricted Group excludes
our Stendal mill and our discontinued operations.
The following is a discussion of the results of operations and
financial condition of the Restricted Group. For further
information regarding the Restricted Group including, without
limitation, a reconciliation to our consolidated results of
operations, see Note 20 of our annual financial statements
included elsewhere herein.
Restricted Group Results Year Ended
December 31, 2006 Compared to Year Ended December 31,
2005
Total revenues for the Restricted Group for the year ended
December 31, 2006 increased to
361.0 million
from
276.4 million
in the comparative period of 2005, primarily because of higher
pulp sales and the inclusion of a full year of sales for the
Celgar mill. Pulp sales realizations for the Restricted Group
increased to
472 per
ADMT on average in the year ended December 31, 2006 from
413 per
ADMT in 2005, primarily as a result of higher sales prices.
Costs of sales and general, administrative and other expenses
for the Restricted Group in the year ended December 31,
2006 increased to
326.6 million
from
265.7 million
in the comparative period of 2005, primarily as a result of
higher sales volumes.
Depreciation for the Restricted Group was
27.8 million
in the current period, versus
23.9 million
in 2005, primarily as a result of the inclusion of a full year
of depreciation for the Celgar mill.
In the year ended December 31, 2006, income from operations
of the Restricted Group increased to
34.4 million
from
10.7 million
last year, primarily as a result of higher prices and improved
results at our Celgar mill. Interest expense for the Restricted
Group in 2006 increased to
34.4 million
from
32.4 million
a year ago, primarily due to the inclusion of a full years
interest on outstanding senior notes issued in February 2005 and
2.1 million
of interest expense recorded on the repurchase of approximately
$15.2 million principal amount of our convertible notes.
In 2005, the Restricted Group recorded a non-cash impairment
charge of
1.7 million
related to a legacy investment in a venture company.
48
In 2005, the Restricted Group had a marginal unrealized non-cash
holding loss on the marked to market valuation of the interest
rate derivatives related to the Rosenthal mill. The Restricted
Group did not have any currency derivatives outstanding during
2006 that materially affected its results. In addition, the
Restricted Group recorded an unrealized non-cash foreign
exchange gain on debt of
15.2 million
in 2006.
The net income for the Restricted Group for the year ended
December 31, 2006 was
9.4 million,
which reflected improved markets and an unrealized non-cash
foreign exchange gain on debt of
15.2 million.
In 2005, the Restricted Group reported a net loss of
25.2 million,
which reflected generally weak markets, higher interest expense
of
32.4 million,
the unrealized non-cash foreign exchange loss on debt of
4.2 million
and the non-cash impairment charge of
1.7 million
on investments.
The Restricted Group generated Operating EBITDA of
62.2 million
and
34.6 million
in the years ended December 31, 2006 and 2005,
respectively. Operating EBITDA is defined as operating income
(loss) from continuing operations plus depreciation and
amortization and non-recurring capital asset impairment charges.
Operating EBITDA for the Restricted Group is calculated by
adding depreciation and amortization and non-recurring capital
asset impairment charges of
27.8 million
and
23.8 million
to the income from operations of
34.4 million
and
10.7 million
for the years ended December 31, 2006 and 2005,
respectively.
Operating EBITDA has significant limitations as an analytical
tool, and should not be considered in isolation, or as a
substitute for analysis of our results as reported under GAAP.
See the discussion of our results for the year ended
December 31, 2006 for additional information relating to
such limitations and Operating EBITDA.
The following table provides a reconciliation of net income
(loss) from continuing operations to operating income from
continuing operations and Operating EBITDA for the Restricted
Group for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
Year Ended | |
|
|
December 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
|
(in thousands) | |
Restricted Group(1)(2)
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations(3)
|
|
|
9,351 |
|
|
|
(25,206 |
) |
Income taxes benefit
|
|
|
11,258 |
|
|
|
1,161 |
|
Interest expense
|
|
|
34,354 |
|
|
|
32,352 |
|
Investment and other income
|
|
|
(5,316 |
) |
|
|
(3,742 |
) |
Derivative financial instruments, net
|
|
|
|
|
|
|
295 |
|
Foreign exchange (gain) loss on debt
|
|
|
(15,245 |
) |
|
|
4,156 |
|
Impairment of investments
|
|
|
|
|
|
|
1,699 |
|
|
|
|
|
|
|
|
Operating income from continuing operations
|
|
|
34,402 |
|
|
|
10,715 |
|
Add: Depreciation and amortization
|
|
|
27,819 |
|
|
|
23,898 |
|
|
|
|
|
|
|
|
Operating EBITDA
|
|
|
62,221 |
|
|
|
34,613 |
|
|
|
|
|
|
|
|
|
|
(1) |
The results of the Celgar mill are included from the date of its
acquisition in February 2005. |
|
(2) |
See Note 20 of the financial statements included elsewhere
herein for a reconciliation to our consolidated results. |
|
(3) |
For the Restricted Group net income (loss) from continuing
operations and net income (loss) are the same. |
Restricted Group Results Year Ended
December 31, 2005 Compared to Year Ended December 31,
2004
Total revenues for the Restricted Group for the year ended
December 31, 2005 increased to
276.4 million
from
142.2 million
in the comparative period of 2004, primarily because of the
inclusion of pulp sales from the Celgar mill. Pulp sales
realizations for the Restricted Group decreased to
413 per
ADMT on average in the year ended December 31, 2005 from
446 per
ADMT in 2004, primarily as a result of lower sales prices
realized by the Celgar mill, which sells a large portion of its
production in Asian markets which had lower sales prices than
European markets. The decrease in NBSK pulp prices was partially
offset by the strengthening of the U.S. dollar versus the
Euro in 2005.
49
Costs of sales and general, administrative and other expenses
for the Restricted Group in the year ended December 31,
2005 increased to
265.7 million
from
129.7 million
in the comparative period of 2004, primarily as a result of the
inclusion of the results of the Celgar mill, partially offset by
lower production costs at the Rosenthal mill.
Depreciation for the Restricted Group was
23.9 million
in 2005, versus
17.8 million
in 2004, primarily as a result of the inclusion of depreciation
of the Celgar mill, partially offset by lower depreciation at
our Rosenthal mill.
In the year ended December 31, 2005, the Restricted Group
reported income from operations of
10.7 million,
compared to
12.4 million
last year, primarily as a result of higher operating income from
our Rosenthal mill, offset by an operating loss at our Celgar
mill. The overall strength of the Canadian dollar versus the
U.S. dollar in 2005 negatively impacted the results of our
Celgar mill. Interest expense for the Restricted Group in the
year ended December 31, 2005 increased to
32.4 million
from
10.9 million
a year ago, primarily due to higher borrowings resulting from
our $310 senior note offering in February 2005.
On May 6, 2005, our management determined to record, and
our Audit Committee approved, a non-cash impairment charge of
1.7 million
related to an investment in a venture company, which is the last
of a legacy investment that we have held since approximately
1996. We do not currently expect to incur any future cash
expenditures related thereto.
In the year ended December 31, 2005, the Restricted Group
realized a loss of
0.3 million
on the settlement of the Rosenthal interest rate derivatives,
versus a marginal unrealized non-cash holding loss on the marked
to market valuation of the interest rate derivatives related to
the Rosenthal mill in 2004. In the year ended December 31,
2004, the Restricted Group recorded a realized gain of
approximately
13.2 million
on the settlement of the currency derivatives related to the
Rosenthal mill. The Restricted Group did not have any currency
derivatives outstanding during 2005 that materially affected its
results. In addition, the Restricted Group recorded an
unrealized non-cash foreign exchange loss on debt of
4.2 million
in 2005.
The net loss for the Restricted Group for the year ended
December 31, 2005 was
25.2 million,
which reflected generally weak markets, higher interest expense
of
32.4 million,
the unrealized non-cash foreign exchange loss on debt of
4.2 million
and the non-cash impairment charge of
1.7 million
on investments. The overall strength of the Canadian dollar
versus the U.S. dollar in 2005 negatively impacted the
results of our Celgar mill. In 2004, the Restricted Group
reported net income of
35.1 million,
which included an income tax benefit of
17.2 million
relating to a reorganization of certain of our subsidiary
companies and the gain on derivative instruments of
13.2 million.
The Restricted Group generated Operating EBITDA of
34.6 million
and
30.2 million
in the years ended December 31, 2005 and 2004,
respectively. Operating EBITDA is defined as operating income
(loss) from continuing operations plus depreciation and
amortization and non-recurring capital asset impairment charges.
Operating EBITDA for the Restricted Group is calculated by
adding depreciation and amortization and non-recurring capital
asset impairment charges of
23.9 million
and
17.8 million
to the income from operations of
10.7 million
and
12.4 million
for the years ended December 31, 2005 and 2004,
respectively.
Operating EBITDA has significant limitations as an analytical
tool, and should not be considered in isolation, or as a
substitute for analysis of our results as reported under GAAP.
See the discussion of Mercers results for the year ended
December 31, 2006 for additional information relating to
such limitations and Operating EBITDA.
50
The following table provides a reconciliation of net (loss)
income from continuing operations to operating income from
continuing operations and Operating EBITDA for the Restricted
Group for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
Year Ended | |
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(in thousands) | |
Restricted Group(1)(2)
|
|
|
|
|
|
|
|
|
Net (loss) income from continuing operations(3)
|
|
|
(25,206 |
) |
|
|
35,113 |
|
Income taxes provision (benefit)
|
|
|
1,161 |
|
|
|
(17,235 |
) |
Interest expense
|
|
|
32,352 |
|
|
|
10,941 |
|
Investment and other income
|
|
|
(3,742 |
) |
|
|
(3,132 |
) |
Derivative financial instruments, net
|
|
|
295 |
|
|
|
(13,242 |
) |
Foreign exchange loss on debt
|
|
|
4,156 |
|
|
|
|
|
Impairment of investments
|
|
|
1,699 |
|
|
|
|
|
|
|
|
|
|
|
|
Operating income from continuing operations
|
|
|
10,715 |
|
|
|
12,445 |
|
Add: Depreciation and amortization
|
|
|
23,898 |
|
|
|
17,766 |
|
|
|
|
|
|
|
|
Operating EBITDA
|
|
|
34,613 |
|
|
|
30,211 |
|
|
|
|
|
|
|
|
|
|
(1) |
The results of the Celgar mill are not included for 2004. |
|
(2) |
See Note 20 of the financial statements included elsewhere
herein for a reconciliation to our consolidated results. |
|
(3) |
For the Restricted Group net (loss) income from continuing
operations and net (loss) income are the same. |
Liquidity and Capital Resources of the Restricted Group
The following table is a summary of selected financial
information for the Restricted Group for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
Year Ended | |
|
|
December 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
|
(in thousands) | |
Restricted Group Financial Position(1)
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
39,078 |
|
|
|
48,790 |
|
Working capital
|
|
|
74,961 |
|
|
|
93,312 |
|
Property, plant and equipment, net
|
|
|
408,957 |
|
|
|
404,151 |
|
Total assets
|
|
|
609,515 |
|
|
|
625,578 |
|
Long-term liabilities
|
|
|
318,728 |
|
|
|
364,596 |
|
Shareholders equity
|
|
|
243,949 |
|
|
|
214,115 |
|
|
|
(1) |
See Note 20 of the financial statements included elsewhere
herein for a reconciliation to our consolidated results. |
At December 31, 2006, the Restricted Group had cash and
cash equivalents of
39.1 million,
compared to
48.8 million
at the end of 2005. At December 31, 2006, the Restricted
Group had working capital of
75.0 million.
We expect the Restricted Group to meet its interest and debt
service expenses and meet the working and maintenance capital
requirements for its current operations from cash flow from
operations, cash on hand and two working capital facilities for
the Rosenthal and Celgar mills in the amounts of
40.0 million
and
$40.0 million,
respectively.
Critical Accounting Policies
The preparation of financial statements and related disclosures
in conformity with GAAP requires management to make estimates
and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Estimates are used
for, but not limited to, the accounting for doubtful accounts,
depreciation and amortization, asset impairments, derivative
financial instruments, environmental
51
conservation, asset retirement obligations, pensions and
post-retirement benefit obligations, income taxes, and
contingencies. Actual results could differ from these estimates.
Our management routinely makes judgments and estimates about the
effects of matters that are inherently uncertain. As the number
of variables and assumptions affecting the probable future
resolution of the uncertainties increase, these judgments become
even more subjective and complex. We have identified certain
accounting policies, described below, that are the most
important to the portrayal of our current financial condition
and results of operations. Our significant accounting policies
are disclosed in Note 1 to our annual audited consolidated
financial statements included elsewhere in this annual report.
Derivative Instruments. We adopted Statement of
Financial Accounting Standards No. 133, Accounting
for Derivative Instruments and Hedging Activities
effective January 1, 2001. Derivative instruments are
measured at fair value and reported in the balance sheet as
assets or liabilities. Accounting for gains or losses depends on
the intended use of the derivative instruments. Gains or losses
on derivative instruments which are not designated hedges are
recognized in earnings in the period of the change in fair
value. Accounting for gains or losses on derivative instruments
designated as hedges depends on the type of hedge and these
gains or losses are recognized in either earnings or other
comprehensive income.
We reported a net unrealized non-cash holding gain of
37.3 million
before minority interests in respect of the Stendal Interest
Rate Contracts. We also reported a net unrealized non-cash
holding gain of
72.1 million
in respect of the Currency Derivatives that were outstanding at
the end of 2006 and a net realized loss of
3.5 million
in respect of the Currency Derivatives settled in 2006.
Impairment of Long-Lived Assets. We periodically
evaluate long-lived assets whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. In performing the review of recoverability,
we estimate future cash flows expected to result from the use of
the asset and its eventual disposition. The estimates of future
cash flows, based on reasonable and supportable assumptions and
projections, require our management to make subjective
judgments. In addition, the time periods for estimating future
cash flows is often lengthy, which increases the sensitivity of
the assumptions made. Depending on the assumptions and estimates
used, the estimated future cash flows projected in the
evaluation of long-lived assets can vary within a wide range of
outcomes. Our management considers the likelihood of possible
outcomes in determining the best estimate of future cash flows.
Deferred Taxes. We currently have deferred tax
assets which are comprised primarily of tax loss carryforwards
and deductible temporary differences, both of which will reduce
taxable income in the future. We assess the realization of these
deferred tax assets on a periodic basis to determine whether a
valuation allowance is required. We determine whether it is more
likely than not that all or a portion of the deferred tax assets
will be realized, based on currently available information,
including, but not limited to, the following:
|
|
|
|
|
the history of the tax loss carryforwards and their expiry dates; |
|
|
|
our projected earnings; and |
|
|
|
tax planning opportunities. |
If we believe that it is more likely than not that some of these
deferred tax assets will not be realized, based on currently
available information, an income tax valuation allowance is
recorded against these deferred tax assets. As at
December 31, 2006, we had
94.9 million
in deferred tax assets and
87.9 million
in valuation allowances, resulting in a net deferred tax asset
of
7.1 million.
If market conditions improve or tax planning opportunities arise
in the future, we will reduce our valuation allowances,
resulting in future tax benefits. If market conditions
deteriorate in the future, we will increase our valuation
allowances, resulting in future tax expenses. Any change in tax
laws, particularly in Germany, will change the valuation
allowances in future periods.
Environmental. Our operations are subject to a
wide range of federal, state, provincial and local environmental
laws and regulations, dealing primarily with water, air and land
pollution control. In recent years, we have devoted significant
financial and management resources to comply with all applicable
environmental laws and regulations. We believe our operations
are currently in substantial compliance with the requirements of
all applicable environmental laws and regulations and our
respective operating permits.
52
Under German state environmental rules relating to effluent
discharges, industrial users are required to pay wastewater fees
based upon the amount of their effluent discharge. These rules
also provide that an industrial user which undertakes
environmental capital expenditures and lowers certain effluent
discharges to prescribed levels may offset the amount of these
expenditures against the wastewater fees that they would
otherwise be required to pay in a three-year period. The
requirement and timing of capital expenditures and the amount of
wastewater fee charges are subject to negotiation with German
government agencies. As a result, we believe that our capital
investment programs for our German manufacturing plants will
largely offset the wastewater fees that would have been payable
for the past three years, subject to environmental audits. We
estimate the aggregate wastewater fees offset by capital
expenditures for the past three years to be approximately
21.8 million.
Other than wastewater fees, we accrue for environmental
remediation liabilities on a site-by-site basis when it is
probable that costs can be reasonably estimated, or as a result
of an environmental action or claim, environmental studies that
we conduct or regulatory assessment. As at December 31,
2006, we recorded a liability for environmental conservation
expenditures of
2.0 million,
based on environmental studies that we conducted. We believe
that the liability amount recorded is sufficient, subject to
future changes in environmental regulations.
New Accounting Standards
In September 2006, the FASB issued Statement of Financial
Accounting Standards No. 158, Employers Accounting
for Defined Benefit Pension and Other Postretirement
Plans an amendment of FASB Statement No. 87,
88, 106 and 132R (SFAS 158). This Statement requires an
employer to recognize in its statement of financial position an
asset of a plans over funded status or a liability for a
plans under funded status, measure a plans assets
and its obligations that determine its funded status as of the
end of the employers fiscal year (with limited
exceptions), and recognize changes in the funded status of a
defined benefit postretirement plan in the year in which the
changes occur. SFAS 158 is effective for fiscal years
ending after December 15, 2006. In accordance with the
effective dates and transition guidelines of this standard, the
Company has adopted the recognition and disclosure provisions of
SFAS 158 effective December 31, 2006, the most notable
of which is the recognition of the funded status. Prior to the
adoption of the recognition provisions of
SFAS No. 158, the Company accounted for its
postretirement benefits under SFAS No. 87 and
SFAS No. 106. Under these standards, changes in the
funded status were not immediately recognized, but instead were
deferred and recognized in a systematic manner in later periods.
The adoption of this standard requires issuers to recognize the
change in the funded status of the plan through other
comprehensive income. Upon adoption of the recognition
provisions of SFAS No. 158, the Company recognized the
amounts of prior changes in funded status of postretirement
obligations through accumulated other comprehensive income. The
adoption of SFAS No. 158 had no effect on the
Companys consolidated statement of operations for the
years ended December 31, 2006, 2005 or 2004.
For a discussion of other new accounting standards see
Note 1 to our annual audited consolidated financial
statements included elsewhere in this annual report.
Cautionary Statement Regarding Forward-Looking Information
Statements in this annual report that are not reported financial
results or other historical information are
forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995, as
amended. These statements use forward looking terminology, are
based on present information we have related to our existing
business circumstances and various assumptions we make and
involve a number of risks and uncertainties, any of which could
cause actual results to differ materially from these
forward-looking statements. We caution you that we do not assume
any obligation to update forward-looking statements based on
unanticipated events or changed expectations. Factors that could
cause actual results to differ materially include, but are not
limited to those set forth under Item 1A. Risk
Factors.
Inflation
We do not believe that inflation has had a material impact on
revenues or income during 2006.
53
|
|
ITEM 7A. |
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
We are exposed to market risks from changes in interest rates
and foreign currency exchange rates, particularly the exchange
rates between the Euro and the U.S. dollar and, since 2005,
the Canadian dollar versus the U.S. dollar and the Euro.
Changes in these rates may affect our results of operations and
financial condition and, consequently, our fair value. We seek
to manage these risks through internal risk management policies
as well as the use of derivatives. We use derivatives to reduce
or limit our exposure to interest rate and currency risks. We
may in the future use derivatives to reduce or limit our
exposure to fluctuations in pulp prices. We also use derivatives
to reduce our potential losses or to augment our potential
gains, depending on our managements perception of future
economic events and developments. These types of derivatives are
generally highly speculative in nature. They are also very
volatile as they are highly leveraged given that margin
requirements are relatively low in proportion to notional
amounts.
Many of our strategies, including the use of derivatives, and
the types of derivatives selected by us, are based on historical
trading patterns and correlations and our managements
expectations of future events. However, these strategies may not
be effective in all market environments or against all types of
risks. Unexpected market developments may affect our risk
management strategies during this time, and unanticipated
developments could impact our risk management strategies in the
future. If any of the variety of instruments and strategies we
utilize are not effective, we may incur significant losses.
Derivatives
Derivatives are contracts between two parties where payments
between the parties are dependent upon movements in the price of
an underlying asset, index or financial rate. Examples of
derivatives include swaps, options and forward rate agreements.
The notional amount of the derivatives is the contract amount
used as a reference point to calculate the payments to be
exchanged between the two parties and the notional amount itself
is not generally exchanged by the parties.
The principal derivatives we use are foreign exchange
derivatives and interest rate derivatives.
Foreign exchange derivatives include currency swaps which
involve the exchange of fixed payments in one currency for the
receipt of fixed payments in another currency. Such cross
currency swaps involve the exchange of both interest and
principal amounts in two different currencies. They also include
foreign exchange forwards which are contractual obligations in
which two counterparties agree to exchange one currency for
another at a specified price for settlement at a pre-determined
future date. Forward contracts are effectively tailor-made
agreements that are transacted between counterparties in the
over-the-counter market.
Interest rate derivatives include interest rate forwards
(forward rate agreements) which are contractual obligations to
buy or sell an interest-rate-sensitive financial instrument on a
future date at a specified price. Forward contracts are
effectively tailor-made agreements that are transacted between
different counterparties in the
over-the-counter
market. They also include interest rate swaps which are
over-the-counter
contracts in which two counterparties exchange interest payments
based upon rates applied to a notional amount.
We use foreign exchange derivatives to convert some of our costs
(including currency swaps relating to our long-term
indebtedness) from Euros to U.S. dollars as our principal
product is priced in U.S. dollars. We have also converted
some of our costs to U.S. dollars by issuing long-term
U.S. dollar denominated debt in the form of our 8.5%
convertible subordinated notes and $310 million 9.25%
senior notes issued in February 2005. The proceeds of the 9.25%
senior notes were used in part to repay the Rosenthal project
loan facility. We use interest rate derivatives to fix the rate
of interest on indebtedness, including under the Stendal
Loan Facility and, prior to its repayment in February 2005,
the Rosenthal project loan facility.
All of the derivatives we entered into were either pursuant to a
project loan facility related to the Rosenthal mill, which was
repaid and discharged in February 2005, or the Stendal Loan
Facility. Each of these loan facilities provided facilities for
foreign exchange derivatives, interest rate derivatives and
commodities derivatives, subject to prescribed controls,
including maximum notional and at-risk amounts. The Stendal Loan
Facility is secured by substantially all of the assets of the
Stendal mill and has the benefit of certain German governmental
guarantees. Prior to its discharge in 2005, the project loan
facility for the Rosenthal mill was secured by substantially all
of the mills assets and also had the benefit of certain
German governmental grants. Neither of these credit facilities
had any separate margin requirements when derivatives
54
are entered into pursuant to their terms and are subsequently
marked to market. The revolving working capital credit facility
we established in February 2005 for the Rosenthal mill allows us
to enter into derivative instruments to manage risks relating to
its operations.
We record unrealized gains and losses on our outstanding
derivatives when they are marked to market at the end of each
reporting period and realized gains or losses on them when they
are settled. We determine market valuations based primarily upon
valuations provided by our counterparties.
In March 2004, Rosenthal entered into currency derivatives which
included two currency swaps in the aggregate principal amount of
184.5 million
that mature in September 2008 and September 2013, respectively.
As NBSK pulp prices are quoted in U.S. dollars and the
majority of our business transactions are denominated in Euros,
Rosenthal had entered into the currency swaps to reduce the
effects of exchange rate fluctuations between the
U.S. dollar and the Euro on notional amounts outstanding
under its project loan facility. Under these currency swaps,
Rosenthal effectively paid the principal and interest in
U.S. dollars and at U.S. dollar borrowing rates. The
Rosenthal currency derivatives also included a currency forward
in the notional amount of
40.7 million
which matured in March 2005 that was entered into to reduce or
limit Rosenthals exposure to currency risks.
In August 2002, Stendal entered into the Stendal Interest Rate
Swaps in connection with its long-term indebtedness relating to
the Stendal mill to fix the interest rate under the Stendal
Loan Facility at the then low level, relative to its
historical trend and projected variable interest rate. These
contracts were entered into under a specific credit line under
the Stendal Loan Facility and are subject to prescribed
controls, including certain maximum amounts for notional and
at-risk amounts. Under the Stendal Interest Rate Swaps, Stendal
pays a fixed rate and receives a floating rate with the interest
payments being calculated on a notional amount. The interest
rates payable under the Stendal Loan Facility were swapped
into fixed rates based on the Eur-Euribor rate for the repayment
periods of the tranches under the Stendal Loan Facility.
Stendal effectively converted the Stendal Loan Facility
from a variable interest rate loan into a fixed interest rate
loan, thereby reducing interest rate uncertainty.
In March 2004, Stendal also entered into currency derivatives
which are comprised of a currency swap in the principal amount
of
306.3 million
which matures in April 2011 and a currency forward contract for
the notional amount of
20.6 million
maturing in March 2005 to reduce or limit its exposure to
currency risks and to augment its potential gains or reduce its
potential losses.
In December 2004, we settled all of our then outstanding
currency derivatives due to the substantial weakening of the
U.S. dollar versus the Euro in 2004 and realized a gain of
44.5 million
thereon. In February 2005, we settled the Rosenthal Interest
Rate Contracts in connection with the repayment and discharge of
Rosenthals project loan facility and realized a loss of
0.3 million
thereon.
In the first quarter of 2005, Stendal entered into foreign
currency derivatives in order to swap approximately
three-quarters of its long-term indebtedness outstanding under
the Stendal mills project loan facility into
U.S. dollars as follows: (i) approximately
306.3 million
in principal amount was swapped into U.S. dollars at a rate
of 1.2960 with a maturity in October 2017, and
(ii) approximately
153.2 million
in principal amount was swapped into U.S. dollars at a rate
of 1.2990 with a maturity in October 2017. In the second quarter
of 2005, Stendal swapped the balance of its long-term
indebtedness under the Stendal mills project loan
facility, being approximately
153.2 million
in principal amount, into U.S. dollars at a rate of 1.2799
with a maturity in October 2017. All of these currency swaps
were entered into by Stendal to reduce the effects of exchange
rate fluctuations between the U.S. dollar and the Euro on
notional amounts under the Stendal Loan Facility.
During the first quarter of 2005, Stendal entered into a
$50.0 million currency forward contract at a rate of 1.3108
which matured in February 2006 and a $25.0 million currency
forward at a rate of 1.3080 which matured in September 2005.
During the second quarter of 2005, Stendal entered into a
$25.0 million currency forward contract at a rate of 1.2357
which also matured in September 2005. In the third quarter of
2005, Stendal entered into a $13.9 million currency forward
at a rate of 1.2048 which matured in October 2005. These
currency derivatives were entered into by Stendal to reduce or
limit its exposure to currency risks.
55
We are exposed to very modest credit related risks in the event
of non-performance by counterparties to derivative contracts.
However, we do not expect that the counterparties, which are
major financial institutions, will fail to meet their
obligations.
The following table and the notes thereto sets forth the
maturity date, the notional amount, the recognized gain or loss
and the strike and swap rates for derivatives that were in
effect during 2005 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognized Gain | |
|
|
|
Recognized Gain | |
|
|
|
|
|
|
(Loss) Year | |
|
|
|
(Loss) Year | |
|
|
|
|
Notional | |
|
Ended | |
|
Notional | |
|
Ended | |
Derivative Instrument |
|
Maturity Date |
|
Amount | |
|
December 31, 2005 | |
|
Amount | |
|
December 31, 2006 | |
|
|
|
|
| |
|
| |
|
| |
|
| |
|
|
|
|
(in millions) | |
|
(in thousands) | |
|
(in millions) | |
|
(in thousands) | |
Interest Rate Derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rosenthal Interest Rate Cap Agreements(1)
|
|
Settled |
|
$ |
178.3 |
|
|
|
(295 |
) |
|
|
|
|
|
|
|
|
Stendal Interest Rate Swaps(2)(3)
|
|
October 2017 |
|
|
612.6 |
|
|
|
(3,176 |
) |
|
|
590.0 |
|
|
|
37,292 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,471 |
) |
|
|
|
|
|
|
37,292 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Exchange Rate Derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stendal Currency Swap(4)
|
|
October 2017 |
|
|
306.3 |
|
|
|
(31,741 |
) |
|
|
295.0 |
|
|
|
33,683 |
|
Stendal Currency Swap(5)
|
|
Settled |
|
|
153.2 |
|
|
|
(16,363 |
) |
|
|
147.5 |
|
|
|
17,629 |
|
Stendal Currency Swap(6)
|
|
October 2017 |
|
|
153.2 |
|
|
|
(13,875 |
) |
|
|
147.5 |
|
|
|
16,654 |
|
Stendal Currency Forward(7)
|
|
Settled |
|
$ |
50.0 |
|
|
|
(4,153 |
) |
|
|
$50.0 |
|
|
|
590 |
|
Stendal Currency Forward
|
|
Settled |
|
$ |
25.0 |
|
|
|
(521 |
) |
|
|
|
|
|
|
|
|
Stendal Currency Forward
|
|
Settled |
|
$ |
25.0 |
|
|
|
(1,639 |
) |
|
|
|
|
|
|
|
|
Stendal Currency Forward
|
|
Settled |
|
$ |
13.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(68,292 |
) |
|
|
|
|
|
|
68,556 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Rosenthal entered into two interest rate cap contracts with
notional amounts of $106.2 million (2004:
$118.6 million) and $72.1 million (2004:
$74.0 million), both maturing on September 28, 2007
with a strike rate of 6.8%. These derivatives were settled in
February 2005. |
|
(2) |
In connection with the Stendal Loan Facility, in the third
quarter of 2002 Stendal entered into the Stendal Interest Rate
Swap Agreements, which are
variable-to-fixed
interest rate swaps, for the term of the Stendal
Loan Facility, with respect to an aggregate maximum amount
of approximately
612.6 million
of the principal amount of the long-term indebtedness under the
Stendal Loan Facility. The swaps took effect on
October 1, 2002 and are comprised of three contracts. The
first contract commenced in October 2002 for a notional amount
of
4.1 million,
gradually increasing to
464.9 million,
with an interest rate of 3.795%, and matured in May 2004. The
second contract commenced in May 2004 for a notional amount of
464.9 million,
gradually increasing to
612.6 million,
with an interest rate of 5.28%, and matured in April 2005. The
third contract commenced in April 2005 for a notional amount of
612.6 million,
with an interest rate of 5.28%, and the notional amount
gradually decreases and the contract terminates upon the
maturity of the Stendal Loan Facility in October 2017. As
at December 31, 2005 and 2006, the notional amounts of the
remaining outstanding contract were
612.6 million
and
590.0 million,
respectively. |
|
(3) |
For the years ended December 31, 2002 through to 2004 the
unrealized non-cash losses for the Stendal Interest Rate Swap
Agreements were
30,108,
13,042 and
32,320,
respectively. |
|
(4) |
For
306.3 million
of the outstanding principal amount under the Stendal
Loan Facility, all repayment installments from
February 7, 2005 until October 2, 2017 were swapped
into U.S. dollar amounts at a rate of U.S. 1.2960. The
interest rate was swapped into the following payments: pay
six-month U.S. dollar to LIBOR plus 12 basis points
and receive the six-month Euribor. |
|
(5) |
For
153.2 million
of the outstanding principal amount under the Stendal
Loan Facility, all repayment installments from
April 1, 2005 until October 2, 2017 were swapped into
U.S. dollar amounts at a rate of U.S. 1.2990. The
interest rate was swapped into the following payments: pay
six-month U.S. dollar to LIBOR plus 13 basis points
and receive the six-month Euribor. The swap was settled in
December 2006. |
|
(6) |
For
153.2 million
of the outstanding principal amount under the Stendal
Loan Facility, all repayment installments from
April 18, 2005 until October 2, 2017 were swapped into
U.S. dollar amounts at a rate of U.S. 1.2799. The
interest rate was swapped into the following payments: pay
six-month U.S. dollar to LIBOR plus 13 basis points
and receive the six-month Euribor. |
|
(7) |
Currency forward entered into in the first quarter of 2005 in
the notional amount of $50.0 million at a rate of 1.3108
which matured in February 2006. |
Interest Rate Risk
Fluctuations in interest rates may affect the fair value of
fixed interest rate financial instruments which are sensitive to
such fluctuations. A decrease in interest rates may increase the
fair value of such fixed interest rate financial instrument
assets and an increase in interest rates may decrease the fair
value of such fixed interest rate financial instrument
liabilities, thereby increasing our fair value. An increase in
interest rates may
56
decrease the fair value of such fixed interest rate financial
instrument assets and a decrease in interest rates may increase
the fair value of such fixed interest rate financial instrument
liabilities, thereby decreasing our fair value. We seek to
manage our interest rate risks through the use of interest rate
derivatives. For a discussion of our interest rate derivatives
including maturities, notional amounts, gains or losses and swap
rates, see Derivatives in this Item 7A. The
following tables provide information about our exposure to
interest rate fluctuations (other than for our interest rate
derivatives) for the carrying amount of financial instruments
sensitive to such fluctuations as at December 31, 2006 and
2005, respectively, and expected cash flows from these
instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As at December 31, 2006 | |
|
|
| |
|
|
|
|
Expected Future Cash Flow* | |
|
|
Carrying | |
|
Fair | |
|
| |
|
|
Value | |
|
Value | |
|
2007 | |
|
2008 | |
|
2009 | |
|
2010 | |
|
2011 | |
|
Thereafter | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(in thousands) | |
Cash restricted(1)
|
|
|
57,000 |
|
|
|
57,000 |
|
|
|
1,140 |
|
|
|
1,140 |
|
|
|
1,140 |
|
|
|
1,140 |
|
|
|
1,140 |
|
|
|
63,840 |
|
Debt obligations(2)
|
|
|
7,917 |
|
|
|
7,917 |
|
|
|
(8,174 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital lease obligations(3)
|
|
|
11,360 |
|
|
|
11,360 |
|
|
|
(5,392 |
) |
|
|
(3,590 |
) |
|
|
(1,432 |
) |
|
|
(998 |
) |
|
|
(663 |
) |
|
|
|
|
|
|
* |
Including interest where applicable. |
|
(1) |
Assuming a rate of return of 2% and a release of restricted cash
after 2011. |
|
(2) |
Debt obligations consist of our debt, including the gross amount
of loans payable to a minority shareholder of Stendal. |
|
(3) |
Capital lease obligations relate to transportation vehicles and
production equipment. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As at December 31, 2005 | |
|
|
| |
|
|
|
|
Expected Future Cash Flow* | |
|
|
Carrying | |
|
Fair | |
|
| |
|
|
Value | |
|
Value | |
|
2006 | |
|
2007 | |
|
2008 | |
|
2009 | |
|
2010 | |
|
Thereafter | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(in thousands) | |
Cash restricted(1)
|
|
|
31,612 |
|
|
|
31,612 |
|
|
|
26,528 |
|
|
|
1,140 |
|
|
|
1,140 |
|
|
|
1,140 |
|
|
|
1,140 |
|
|
|
39,592 |
|
Debt obligations(2)
|
|
|
10,576 |
|
|
|
10,576 |
|
|
|
4,257 |
|
|
|
(7,212 |
) |
|
|
(9,254 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Capital lease obligations(3)
|
|
|
12,300 |
|
|
|
12,300 |
|
|
|
(4,098 |
) |
|
|
(4,737 |
) |
|
|
(2,953 |
) |
|
|
(993 |
) |
|
|
(354 |
) |
|
|
|
|
|
|
* |
Including interest where applicable. |
|
(1) |
Including a build up of Stendals restricted cash in 2006
of 25,388 and
assuming a rate of return of 2% and a release of restricted cash
after 2011. |
|
(2) |
Debt obligations consist of our debt, including the gross amount
of loans payable to minority shareholders of Stendal. |
|
(3) |
Capital lease obligations relate to transportation vehicles and
production equipment. |
Foreign Currency Exchange Rate Risk
Our reporting currency is the Euro. However, we hold financial
instruments denominated in U.S. dollars, Canadian dollars
and, to a lesser extent, Swiss francs, which are sensitive to
foreign currency exchange rate fluctuations. A depreciation of
these currencies against the Euro will decrease the fair value
of such financial instrument assets and an appreciation of these
currencies against the Euro will increase the fair value of such
financial instrument liabilities, thereby decreasing our fair
value. An appreciation of these currencies against the Euro will
increase the fair value of such financial instrument assets and
a depreciation of these currencies against the Euro will
decrease the fair value of financial instrument liabilities,
thereby increasing our fair value. We seek to manage our foreign
currency risks by utilizing foreign exchange rate derivatives.
For a discussion of such derivatives including maturities,
notional amounts, gains or losses and strike rates, see
Derivatives in this Item 7A. The following
tables provide information about our exposure to foreign
currency exchange rate fluctuations for the carrying amount of
financial instruments (other than foreign
57
exchange rate derivatives) sensitive to such fluctuations as at
December 31, 2006 and 2005, respectively, and expected cash
flows from these instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As at December 31, 2006 | |
|
|
| |
|
|
|
|
Expected Future Cash Flow* | |
|
|
Carrying | |
|
Fair | |
|
| |
|
|
Value | |
|
Value | |
|
2007 | |
|
2008 | |
|
2009 | |
|
2010 | |
|
2011 | |
|
Thereafter | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(in thousands) | |
Debt obligations(1)(2)
|
|
|
285,864 |
|
|
|
285,864 |
|
|
|
(26,060 |
) |
|
|
(26,060 |
) |
|
|
(26,060 |
) |
|
|
(76,120 |
) |
|
|
(21,728 |
) |
|
|
(270,211 |
) |
|
|
* |
Including interest where applicable. |
|
(1) |
U.S. dollar denominated debt comprised of $310 million
of senior notes with a 9.25% interest rate and
$67.3 million of convertible subordinated notes with an
8.5% interest rate. |
|
(2) |
Based on the December 31, 2006
/$ exchange
rate. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As at December 31, 2005 | |
|
|
| |
|
|
|
|
Expected Future Cash Flow* | |
|
|
Carrying | |
|
Fair | |
|
| |
|
|
Value | |
|
Value | |
|
2006 | |
|
2007 | |
|
2008 | |
|
2009 | |
|
2010 | |
|
Thereafter | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(in thousands) | |
Investments(1)
|
|
|
2,362 |
|
|
|
2,362 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,362 |
|
Debt obligations(2)(3)
|
|
|
331,447 |
|
|
|
331,447 |
|
|
|
(30,136 |
) |
|
|
(30,136 |
) |
|
|
(30,136 |
) |
|
|
(30,136 |
) |
|
|
(98,570 |
) |
|
|
(325,343 |
) |
|
|
* |
Including interest where applicable. |
|
(1) |
Investments consist of equity securities, which are denominated
primarily in U.S. dollars, and to a lesser extent, in
Canadian dollars. |
|
(2) |
U.S. dollar denominated debt comprised of $310 million
of senior notes with a 9.25% interest rate and
$82.5 million of convertible subordinated notes with an
8.5% interest rate. |
|
(3) |
Based on the December 31, 2005
/$ exchange
rate. |
|
|
ITEM 8. |
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
The consolidated financial statements and supplementary data
required with respect to this Item 8, and as listed in
Item 15 of this annual report, are included in this annual
report commencing on page 68.
|
|
ITEM 9. |
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE |
Not applicable.
|
|
ITEM 9A. |
CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Principal
Executive Officer and Principal Financial Officer, has evaluated
the effectiveness of our disclosure controls and procedures (as
such term is defined in
Rules 13a-15(e)
and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the Exchange
Act)), as of the end of the period covered by this report.
Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information
required to be disclosed in the reports we file or submit under
the Exchange Act is accumulated and communicated to management,
including our Principal Executive Officer and Principal
Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure. Based on such evaluation, our
Principal Executive Officer and Principal Financial Officer have
concluded that, as of the end of the period covered by this
report, our disclosure controls and procedures are effective in
recording, processing, summarizing and reporting, on a timely
basis, information required to be disclosed by us in the reports
that we file or submit under the Exchange Act.
It should be noted that any system of controls is based in part
upon certain assumptions designed to obtain reasonable (and not
absolute) assurance as to its effectiveness, and there can be no
assurance that any design will succeed in achieving its stated
goals.
58
Managements Report on Internal Control Over Financial
Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting.
Mercers internal control over financial reporting is
designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles.
Our internal control over financial reporting includes those
policies and procedures that:
|
|
|
|
|
Pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and
dispositions of the assets of Mercer; |
|
|
|
Provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and
that receipts and expenditures are being made only in accordance
with authorizations of management and directors; and |
|
|
|
Provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of
assets that could have a material effect on the financial
statements. |
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
or compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of Mercers internal
control over financial reporting as of December 31, 2006.
In making this assessment, management used the criteria set
forth by the Committee of Sponsoring Organizations of the
Treadway Commission in Internal Control-Integrated Framework.
Based on our assessment and those criteria, management believes
that Mercer maintained effective internal control over financial
reporting as of December 31, 2006.
Mercers independent registered chartered accountants have
audited and issued their report on managements assessment
of Mercers internal control over financial reporting,
which appears below.
Report of Independent Registered Chartered Accountants
To the Board of Directors and Shareholders of
Mercer International Inc.
We have audited managements assessment, included in the
accompanying Managements Report on Internal Control Over
Financial Reporting, that Mercer International Inc. and
subsidiaries (the Company) maintained effective
internal control over financial reporting as of
December 31, 2006, based on criteria established in
Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway
Commission. The Companys management is responsible for
maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control
over financial reporting. Our responsibility is to express an
opinion on managements assessment and an opinion on the
effectiveness of the Companys internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
managements assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinions.
A companys internal control over financial reporting is a
process designed by, or under the supervision of, the
companys principal executive and principal financial
officers, or persons performing similar functions, and effected
by the companys board of directors, management, and other
personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over
59
financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of the inherent limitations of internal control over
financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a
timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting
to future periods are subject to the risk that the controls may
become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.
In our opinion, managements assessment that the Company
maintained effective internal control over financial reporting
as of December 31, 2006, is fairly stated, in all material
respects, based on the criteria established in Internal
Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway
Commission. Also in our opinion, the Company maintained, in all
material respects, effective internal control over financial
reporting as of December 31, 2006, based on the criteria
established in Internal Control Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated financial statements as of and for the year ended
December 31, 2006 of the Company and our report dated
February 28, 2007, expressed an unqualified opinion on
those financial statements and included an explanatory paragraph
regarding the Companys adoption of new accounting
standards for share-based payments and pension and other
postretirement benefits.
/s/ Deloitte & Touche LLP
Independent Registered Chartered Accountants
Vancouver, Canada
February 28, 2007
Changes in Internal Controls
There have been no changes in our internal control over
financial reporting (as defined in
Rules 13a-15(f)
and 15d-15(f) under the
Exchange Act) during the quarter ended December 31, 2006
that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
|
|
ITEM 9B. |
OTHER INFORMATION |
Not applicable.
60
PART III
|
|
ITEM 10. |
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
Subsequent to our Conversion to a corporate form, we are
governed by a board of directors, each member of which is
elected annually, beginning with our annual meeting held in
2006. Prior to the Conversion, as a business trust, we were
managed by trustees, who have comparable duties and
responsibilities as directors of corporations. Trustees were
elected by shareholders at annual meetings for staggered
three-year terms. Each of our issued and outstanding shares of
common stock is entitled to one vote at such meetings. The
following sets forth information relating to our directors and
executive officers, each of whom was also a trustee and/or
executive officer prior to the Conversion:
Jimmy S.H. Lee, age 49, has been a director since
May 1985 and President and Chief Executive Officer since 1992.
Previously, Mr. Lee served with MFC Bancorp Ltd. as a
director from 1986, Chairman from 1987 and President from 1988
to December 1996, respectively. During Mr. Lees
tenure with the Company, the Company acquired the Rosenthal
mill, converted the Rosenthal mill to the production of kraft
pulp, constructed and started up the Stendal mill and acquired
the Celgar mill.
William D. McCartney, age 51, has been a director
since January 2003. Mr. McCartney has been President and
Chief Executive Officer of Pemcorp Management Inc., a management
services company, since 1990. Mr. McCartney is a director
of Southwestern Resources Corp., where he has served since March
2004. Mr. McCartney is also a member of the Institute of
Chartered Accountants in Canada.
Kenneth A. Shields, age 58, has been a director
since August 2003. Mr. Shields was a founder of the
institutional firm of Goepel Shields & Partners Inc.,
where he held the position of President and Chief Executive
Officer. In April of 1998, the firm merged with McDermid St.
Lawrence Securities Ltd. to become the investment firm of Goepel
McDermid Inc. which was subsequently acquired, in January of
2001, by Florida-based Raymond James Financial, Inc.
Mr. Shields currently serves as a member of the board of
directors of Raymond James Financial, Inc. and serves as the
Chairman, Chief Executive Officer and a member of the board of
directors of the Canadian subsidiary, Raymond James Ltd.
Mr. Shields is also a director of TimberWest Forest Corp.,
a member of the Accounting Standards Oversight Council, and a
Director of the Council for Business and the Arts in Canada.
Additionally, Mr. Shields has served as past Chairman of
the Investment Dealers Association of Canada and Pacifica Papers
Inc., and is a former director of each of Slocan Forest Products
Ltd. and the Investment Dealers Association of Canada.
Guy W. Adams, age 55, has been a director since
August 2003. Mr. Adams is the managing member of GWA
Advisors, LLC, GWA Investments, LLC, referred to as
GWA, and GWA Capital Partners, LLC, where he has
served since 2002, and is the managing member of GWA Master
Fund, LP since October 2004. GWA Advisors, LLC is a private
equity investment firm and a holding company for
Mr. Adams private equity investments. GWA is an
investment fund investing in publicly traded securities managed
by GWA Capital Partners, LLC, a registered investment advisor.
Prior to 2002, Mr. Adams was the President of GWA Capital,
which he founded in 1996 to invest his own capital in public and
private equity transactions, and a business consultant to
entities seeking refinancing or recapitalization.
Eric Lauritzen, age 68, has been a director since
June 2004. Mr. Lauritzen was President and Chief Executive
Officer of Harmac Pacific, Inc., a North American producer of
softwood kraft pulp previously listed on the Toronto Stock
Exchange and acquired by Pope & Talbot Inc. in 1998,
from May 1994 to July 1998, when he retired. Mr. Lauritzen
was Vice President, Pulp and Paper Marketing of MacMillan
Bloedel Limited, a North American pulp and paper company
previously listed on the Toronto Stock Exchange and acquired by
Weyerhaeuser Company Limited in 1999, from July 1981 to April
1994.
Graeme A. Witts, age 68, has been a director since
January 2003. Mr. Witts organized Sanne Trust Company
Limited, a trust company located in the Channel Islands, in 1988
and was managing director from 1988 to 2000, when he retired. He
is now managing director of Azure Property Group, SA, a European
hotel group. Mr. Witts is also a fellow of the Institute of
Chartered Accountants of England and Wales and has previous
experience in the soap and shoe industries as well as government
auditing.
61
George Malpass, age 67, has been a director since
November 2006. Mr. Malpass was formerly the Chief Executive
Officer and a director of Primex Forest Products Ltd. and is
also a former director of both International Forest Products
Ltd. and Riverside Forest Products Ltd.
David M. Gandossi, age 49, has been Secretary,
Executive Vice-President and Chief Financial Officer since
August 15, 2003. Mr. Gandossi was formerly the Chief
Financial Officer and Executive Vice-President of Formation
Forest Products (a closely held corporation) from June 2002 to
August 2003. Mr. Gandossi previously served as Chief
Financial Officer, Vice-President, Finance and Secretary of
Pacifica Papers Inc., a North American specialty pulp and paper
manufacturing company previously listed on the Toronto Stock
Exchange, from December 1999 to August 2001 and Controller and
Treasurer from June 1998 to December 1999. From June 1998 to
August 31, 1998, he also served as Secretary to Pacifica
Papers Inc. From March 1998 to June 1998, Mr. Gandossi
served as Controller, Treasurer and Secretary of MB Paper Ltd.
From April 1994 to March 1998, Mr. Gandossi held the
position of Controller and Treasurer with Harmac Pacific Inc., a
Canadian pulp manufacturing company previously listed on the
Toronto Stock Exchange. Mr. Gandossi is a member of the
Institute of Chartered Accountants in Canada.
Claes-Inge Isacson, age 62, has been our Chief
Operating Officer since November 2006 and is based in our Berlin
office. Mr. Isacson brings over 24 years of senior
level pulp and paper management to our senior management team,
with a focus on kraft pulp. Mr. Isacson held the positions
of President Norske Skog Europe, and then Senior Vice President
Production for Norske Skogindustrier ASA between 1989 and 2004.
His most recent position was President, AF Process, a consulting
and engineering company working worldwide. He holds a Masters of
Science, Mechanical Engineering.
David K. Ure, age 39, has been our Vice President,
Controller, since October 16, 2006. Mr. Ure was
formerly the Controller of Catalyst Paper Corporation from 2001
to 2006 and Controller of Pacifica Papers Inc. from 2000 to
2001. He also served as U.S. Controller of Crown Packaging
Ltd. in 1999 and the Chief Financial Officer and Secretary of
Finlay Forest Industries Inc. from 1997 to 1998. He is on the
Board of Trustees of the Pulp and Paper Industry Pension Plan
and has over fifteen years experience in the forest products
industry. Mr. Ure is a member of the Certified General
Accountants Association of Canada.
Leonhard Nossol, age 49, has been our Group
Controller for Europe since August 2005. He has also been a
managing director of Rosenthal since 1997 and the sole managing
director of Rosenthal since September 2005. Mr. Nossol had
a significant involvement in the conversion of the Rosenthal
mill to the production of kraft pulp in 1999 and the related
increase in the mills annual production capacity to
280,000 ADMTs, and subsequently to 310,000 ADMTs, as well as the
reduction in production costs at the mill.
David M. Cooper, age 53, has been Vice President of
Sales and Marketing for Europe since June 2005. Mr. Cooper
previously held a variety of senior positions around the world
in Sappi Ltd., a large global forest products group, from 1982
to 2005, including the sales and marketing of various pulp and
paper grades and the management of a manufacturing facility. He
has more than 23 years of diversified experience in the
international pulp and paper industry.
Eric X. Heine, age 43, has been Vice President of
Sales and Marketing for North America and Asia since June 2005.
Mr. Heine was previously Vice President Pulp and
International Paper Sales and Marketing for Domtar Inc., a
global pulp and paper corporation, from 1999 to 2005. He has
over 18 years of experience in the pulp and paper industry,
including developing strategic sales channels and market
partners to build corporate brands.
Werner Stüber, age 65, has been Vice President
of Technical Support and Pulp Operations since August 2005.
Mr. Stüber was previously a managing director of our
Rosenthal mill from 1996 to 2005. Mr. Stüber had a
significant involvement in the conversion of the Rosenthal mill
to the production of kraft pulp in 1999 and the related increase
in the mills annual production capacity to 280,000 ADMTs,
and subsequently to 310,000 ADMTs, as well as the reduction in
production costs at the mill.
Wolfram Ridder, age 45, was appointed Vice President
of Business Development in August 2005, prior to which he was a
managing director of Stendal. Mr. Ridder was the principal
assistant to our Chief Executive Officer from November 1995
until September 2002.
62
We also have experienced mill managers at all of our mills who
have operated through multiple business cycles in the pulp
industry.
Our board of directors, referred to as the Board,
met 16 times during 2006 and each current member of the Board
attended 75% or more of the total number of such meetings and
meetings of the committees of the Board on which they serve
during their term. In addition, our independent directors
regularly meet in separate executive sessions without any member
of our management present. The Lead Director presides over these
meetings. Although we do not have a formal policy with respect
to attendance of directors at our annual meetings, all directors
are encouraged and expected to attend such meetings if possible.
All of our directors attended our 2006 annual meeting.
Our Board has developed corporate governance guidelines in
respect of: (i) the duties and responsibilities of the
Board, its committees and the officers of the Company; and
(ii) practices with respect to the holding of regular
quarterly and strategic meetings of the Board including separate
meetings of non-management directors. Our Board has established
four standing committees, the Audit Committee, the Compensation
Committee, the Governance and Nominating Committee and the
Environmental, Health and Safety Committee.
Audit Committee
The Audit Committee functions pursuant to a charter adopted by
the directors. A copy of the current charter is attached as
Appendix A to the definitive proxy statement on
Schedule 14A relating to our annual meeting of shareholders
held in June 2005. The function of the Audit Committee generally
is to meet with and review the results of the audit of our
financial statements performed by the independent public
accountants and to recommend the selection of independent public
accountants. The members of the Audit Committee are
Mr. McCartney, Mr. Witts and Mr. Lauritzen, each
of whom is independent under applicable laws and regulations and
the listing requirements of the NASDAQ Global Market. Both
Mr. McCartney and Mr. Witts are Chartered Accountants
and Mr. McCartney is a financial expert within
the meaning of such term under the Sarbanes-Oxley Act of 2002.
The Audit Committee met eight times during 2006.
The Audit Committee has established procedures for: (i) the
receipt, retention and treatment of complaints received by the
Company regarding accounting, internal accounting controls or
auditing matters; and (ii) the confidential and anonymous
submission by the Companys employees and others of
concerns regarding questionable accounting or auditing matters.
A person wishing to notify the Company of such a complaint or
concern should send a written notice thereof, marked
Private & Confidential, to the Chairman of
the Audit Committee, Mercer International Inc.,
c/o Suite 2840, P.O. Box 11576, 650 West
Georgia Street, Vancouver, B.C.,V6B 4N8 Canada.
Compensation and Human Resource Committee
The Board has established a Compensation and Human Resource
Committee. The Compensation and Human Resource Committee is
responsible for reviewing and approving the strategy and design
of the Companys compensation, equity-based and benefits
programs. The Compensation and Human Resource Committee is also
responsible for approving all compensation actions relating to
executive officers. The members of the Compensation and Human
Resource Committee are Mr. Malpass, Mr. Lauritzen and
Mr. Adams, each of whom is independent under applicable
laws and regulations and the listing requirements of the NASDAQ
Global Market. The Compensation and Human Resource Committee met
three times during 2006.
Governance and Nominating Committee
Our Board has established a Governance and Nominating Committee
comprised of Mr. Shields, Mr. McCartney and
Mr. Witts, each of whom is independent under applicable
laws and regulations and the listing requirements of the NASDAQ
Global Market. The Governance and Nominating Committee functions
pursuant to a charter adopted by the directors, a copy of which
is attached as Appendix B to the definitive proxy
statement on Schedule 14A relating to our annual meeting of
shareholders held in June 2004. The purpose of the committee is
to: (i) manage the corporate governance system of the
Board; (ii) assist the Board in fulfilling its duties to
meet applicable legal and regulatory and self-regulatory
business principles and
63
codes of best practice; (iii) assist in the creation of a
corporate culture and environment of integrity and
accountability; (iv) in conjunction with the Lead Director,
monitor the quality of the relationship between the Board and
management; (v) review management succession plans;
(vi) recommend to the Board nominees for appointment to the
Board; (vii) lead the Boards annual review of the
Chief Executive Officers performance; and (viii) set
the Boards forward meeting agenda. The Governance and
Nominating Committee met four times in 2006.
Environmental, Safety and Health Committee
Our Board established an Environmental, Safety and Health
Committee in 2006, currently comprised of Mr. Lauritzen,
Mr. Malpass and Mr. Lee, to review on behalf of the
Board the policies and processes implemented by management, and
the resulting impact and assessments of all environmental,
safety and health related activities of the Company. More
specifically, the Environmental, Safety and Health Committee is
to: (i) review and approve, and if necessary revise, the
environmental, safety and health policies and environmental
compliance programs of the Company; (ii) monitor the
Companys environmental, safety and health management
systems including internal and external audit results and
reporting; and (iii) provide direction to management on the
frequency and focus of external independent environmental,
safety and health audits. The Environmental, Safety and Health
Committee met twice in 2006.
Lead Director/ Deputy Chairman
Our Board appointed Mr. Shields as its Lead Director in
September 2003 and in 2006 as Deputy Chairman of the Board. The
role of the Lead Director is to provide leadership to the
non-management directors on the Board and to ensure that the
Board can operate independently of management and that directors
have an independent leadership contact. The duties of the Lead
Director include, among other things: (i) ensuring that the
Board has adequate resources to support its decision-making
process and ensuring that the Board is appropriately approving
strategy and supervising managements progress against that
strategy; (ii) ensuring that the independent directors have
adequate opportunity to meet to discuss issues without
management being present; (iii) chairing meetings of
directors in the absence of the Chairman and Chief Executive
Officer; (iv) ensuring that delegated committee functions
are carried out and reported to the Board; and
(v) communicating to management, as appropriate, the
results of private discussions among outside directors and
acting as a liaison between the Board and the Chief Executive
Officer.
Code of Business Conduct and Ethics
Our Board has adopted a Code of Business Conduct and Ethics that
applies to our directors and executive officers. A copy of the
code is attached as Appendix B to our proxy
statement dated and filed on August 11, 2003 with the SEC,
and a copy may be obtained without charge upon request to
Investor Relations, Mercer International Inc., Suite 2840,
P.O. Box 11576, 650 West Georgia Street, Vancouver,
British Columbia, Canada V6B 4N8 (Telephone:
(604) 684-1099) or Investor Relations, Mercer International
Inc., 14900 Interurban Avenue South, Suite 282, Seattle WA,
U.S.A. 98168 (Telephone: (206) 674-4639).
Section 16(a) Beneficial Ownership Reporting
Compliance
Section 16(a) of the Exchange Act requires that our
officers and directors and persons who own more than 10% of our
shares file reports of ownership and changes in ownership with
the SEC and furnish us with copies of all such reports that they
file. Based solely upon a review of the copies of these reports
received by us, and upon written representations by our
directors and officers regarding their compliance with the
applicable reporting requirements under Section 16(a) of
the Exchange Act, we believe that all of our directors and
officers filed all required reports under Section 16(a) in
a timely manner for the year ended December 31, 2006.
|
|
ITEM 11. |
EXECUTIVE COMPENSATION |
The information required by this Item 11 is incorporated by
reference from the proxy statement relating to our annual
meeting to be held in 2007, which will be filed with the SEC
within 120 days of our most recently completed fiscal year.
64
|
|
ITEM 12. |
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The information required by this Item 12 is incorporated by
reference from the proxy statement relating to our annual
meeting to be held in 2007, which will be filed with the SEC
within 120 days of our most recently completed fiscal year.
|
|
ITEM 13. |
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE |
The information required by this Item 13 is incorporated by
reference from the proxy statement relating to our annual
meeting to be held in 2007, which will be filed with the SEC
within 120 days of our most recently completed fiscal year.
|
|
ITEM 14. |
PRINCIPAL ACCOUNTANT FEES AND SERVICES |
The information required by this Item 14 is incorporated by
reference from the proxy statement relating to our annual
meeting to be held in 2007, which will be filed with the SEC
within 120 days of our most recently completed fiscal year.
65
PART IV
|
|
ITEM 15. |
EXHIBITS, FINANCIAL STATEMENT SCHEDULES |
(a) (1) Financial Statements
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|
Page | |
|
|
| |
Report of Independent Registered Chartered Accountants
|
|
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68 |
|
Consolidated Balance Sheets
|
|
|
69 |
|
Consolidated Statements of Operations
|
|
|
70 |
|
Consolidated Statements of Comprehensive Income (Loss)
|
|
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71 |
|
Consolidated Statements of Changes in Shareholders Equity
|
|
|
72 |
|
Consolidated Statements of Cash Flows
|
|
|
73 |
|
Notes to the Consolidated Financial Statements
|
|
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74 |
|
(2) List of Exhibits
|
|
|
|
|
|
1 |
.1 |
|
Underwriting Agreement dated February 8, 2005 between
Mercer International Inc. and RBC Capital Markets Corporation,
on behalf of itself and CIBC World Markets Corp., Raymond
James & Associates, Inc. and D.A. Davidson &
Co. Incorporated by reference from Form 8-K dated
February 10, 2005. |
|
1 |
.2 |
|
Underwriting Agreement dated February 8, 2005 among Mercer
International Inc. and RBC Capital Markets Corporation and
Credit Suisse First Boston LLC, on behalf of themselves and CIBC
World Markets Corp. Incorporated by reference from Form 8-K
dated February 10, 2005. |
|
2 |
.1 |
|
Agreement and Plan of Merger among Mercer International Inc.,
Mercer International Regco Inc. and Mercer Delaware Inc. dated
December 14, 2005. Incorporated by reference to the Proxy
Statement/Prospectus filed on December 15, 2005. |
|
3 |
.1 |
|
Articles of Incorporation of the Company, as amended.
Incorporated by reference from Form 8-A dated March 1,
2006. |
|
3 |
.2 |
|
Bylaws of the Company. Incorporated by reference from
Form 8-A dated March 1, 2006. |
|
4 |
.1 |
|
Indenture dated as of October 10, 2003 between Mercer
International Inc. and Wells Fargo Bank Minnesota, N.A.
Incorporated by reference from Form 8-K dated
October 15, 2003. |
|
4 |
.2 |
|
Indenture dated as of December 10, 2004 between Mercer
International Inc. and Wells Fargo Bank, N.A. Incorporated by
reference from Form S-3 filed December 10, 2004. |
|
4 |
.3 |
|
First Supplemental Indenture dated February 14, 2005 to
Indenture dated December 10, 2004 between Mercer
International Inc. and Wells Fargo Bank, N.A. Incorporated by
reference from Form 8-K dated February 17, 2005. |
|
10 |
.1 |
|
Amended and Restated 1992 Stock Option Plan. Incorporated by
reference from Form S-8 dated March 2, 2000. |
|
10 |
.2* |
|
2002 Employee Incentive Bonus Plan. |
|
10 |
.3 |
|
Project Financing Facility Agreement dated August 26, 2002
between Zellstoff Stendal GmbH and Bayerische Hypo-und
Vereinsbank AG. Incorporated by reference from Form 8-K
dated September 10, 2002. |
|
10 |
.4 |
|
Shareholders Undertaking Agreement dated August 26,
2002 among Mercer International Inc., Stendal Pulp Holdings
GmbH, RWE Industrie-Lösungen GmbH, AIG Altmark Industrie AG
and FAHR Beteiligungen AG and Zellstoff Stendal GmbH and
Bayerische Hypo-und Vereinsbank AG. Incorporated by reference
from Form 8-K dated September 10, 2002. |
|
10 |
.5* |
|
Shareholders Agreement dated August 26, 2002 among
Zellstoff Stendal GmbH, Stendal Pulp Holdings GmbH, RWE
Industrie-Lösungen GmbH and FAHR Beteiligungen AG. |
|
10 |
.6* |
|
Contract for the Engineering, Design, Procurement, Construction,
Erection and Start-Up of a Kraft Pulp Mill between Zellstoff
Stendal GmbH and RWE Industrie-Lösungen GmbH dated
August 26, 2002. Certain non-public information has been
omitted from the appendices to Exhibit 10.16 pursuant to a
request for confidential treatment filed with the SEC. Such
non-public information was filed with the SEC on a confidential
basis. The SEC approved the request for confidential treatment
in January 2004. |
|
10 |
.7* |
|
Form of Trustees Indemnity Agreement between Mercer
International Inc. and its Trustees. |
66
|
|
|
|
|
|
10 |
.8 |
|
Employment Agreement dated for reference August 7, 2003
between Mercer International Inc. and David Gandossi.
Incorporated by reference from Form 8-K dated
August 11, 2003. |
|
10 |
.9 |
|
Employment Agreement effective as of April 28, 2004 between
Mercer International Inc. and Jimmy S.H. Lee. Incorporated by
reference from Form 8-K dated April 28, 2004 |
|
10 |
.10 |
|
2004 Stock Incentive Plan. Incorporated by reference from
Form S-8 dated June 15, 2004 |
|
10 |
.11 |
|
Asset Purchase Agreement by and among Mercer International Inc.,
0706906 B.C. Ltd. and KPMG Inc., as receiver of all of the
assets and undertakings of Stone Venepal (Celgar) Pulp Inc.
dated November 22, 2004. Incorporated by reference from
Form 8-K dated November 23, 2004. |
|
10 |
.12 |
|
Revolving Credit Facility Agreement dated February 9, 2005
among D&Z Holding GmbH, Zellstoff-und Papierfabrik Rosenthal
GmbH & Co. KG, ZPR Beteiligungs GmbH and Bayerische
Hypo-und Vereinsbank AG. Incorporated by reference from
Form 8-K dated February 17, 2005. |
|
10 |
.13 |
|
Shareholders Undertaking Agreement dated February 9,
2005 relating to Revolving Credit Facility Agreement.
Incorporated by reference from Form 8-K dated
February 17, 2005. |
|
10 |
.14 |
|
Revolving Term Credit Facility dated for reference May 19,
2006 among Zellstoff Celgar Limited Partnership, as borrower,
and the lenders from time to time parties thereto, as lenders
and CIT Business Credit Canada Inc., as agent. Incorporated by
reference from Form 8-K dated May 30, 2006. |
|
10 |
.15 |
|
Employment Agreement dated October 2, 2006 between Stendal
Pulp Holding GmbH and Wolfram Ridder. Incorporated by reference
from Form 8-K dated October 2, 2006. |
|
10 |
.16 |
|
Employment Agreement effective October 16, 2006 between
Mercer International Inc. and David Ure dated September 22,
2006. Incorporated by reference from Form 8-K dated
October 13, 2006. |
|
10 |
.17 |
|
Employment Agreement effective November 6, 2006 between
Mercer International Inc. and Claes-Inge Isacson dated
September 25, 2006. Incorporated by reference from
Form 8-K dated October 13, 2006. |
|
99 |
.1 |
|
Exchange Agreement dated December 4, 2006 between Mercer
International Inc. and Nisswa Master Fund Ltd. Incorporated
by reference from Form 8-K dated December 5, 2006. |
|
99 |
.2 |
|
Exchange Agreement dated December 4, 2006 between Mercer
International Inc. and CC Arbitrage Ltd. Incorporated by
reference from Form 8-K dated December 5, 2006. |
|
21 |
|
|
List of Subsidiaries of Registrant. |
|
23 |
.1 |
|
Consent of Independent Registered Chartered Accountants. |
|
31 |
.1 |
|
Section 302 Certificate of Chief Executive Officer. |
|
31 |
.2 |
|
Section 302 Certificate of Chief Financial Officer. |
|
32 |
.1** |
|
Section 906 Certificate of Chief Executive Officer. |
|
32 |
.2** |
|
Section 906 Certificate of Chief Financial Officer. |
|
|
* |
Filed in Form 10-K
for prior years. |
|
** |
In accordance with Release
33-8212 of the
Commission, these Certifications: (i) are
furnished to the Commission and are not
filed for the purposes of liability under the
Securities Exchange Act of 1934, as amended; and (ii) are
not to be subject to automatic incorporation by reference into
any of the Companys registration statements filed under
the Securities Act of 1933, as amended for the purposes of
liability thereunder or any offering memorandum, unless the
Company specifically incorporates them by reference therein. |
67
REPORT OF INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS
To the Board of Directors and Shareholders of
Mercer International Inc.
We have audited the accompanying consolidated balance sheets of
Mercer International Inc. and subsidiaries (the
Company) as of December 31, 2006 and 2005, and
the related consolidated statements of operations, comprehensive
income (loss), changes in shareholders equity, and cash
flows for each of the three years in the period ended
December 31, 2006. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of
Mercer International Inc. and subsidiaries as of
December 31, 2006 and 2005, and the results of their
operations and their cash flows for each of the three years in
the period ended December 31, 2006, in conformity with
accounting principles generally accepted in the United States of
America.
As discussed in Note 1 to the consolidated financial
statements, the Company adopted Statement of Financial
Accounting Standards No. 123(R), Share-Based
Payment, effective January 1, 2006. In addition, as
discussed in Note 1 to the consolidated financial
statements, the Company adopted the recognition and disclosure
provisions of Statement of Financial Accounting Standards
No. 158, Employers Accounting for Defined Benefit
Pension and Other Postretirement Plans an Amendment
of FASB Statements No. 87, 88, 106 and 132(R),
effective December 31, 2006.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of the Companys internal control over
financial reporting as of December 31, 2006, based on the
criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated
February 28, 2007 expressed an unqualified opinion on
managements assessment of the effectiveness of the
Companys internal control over financial reporting and an
unqualified opinion on the effectiveness of the Companys
internal control over financial reporting.
/s/ Deloitte & Touche LLP
Independent Registered Chartered Accountants
Vancouver, Canada
February 28, 2007
68
MERCER INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2006 and 2005
(In Thousands of Euros, Except Per Share Data)
|
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
ASSETS
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents (Note 3)
|
|
|
69,367 |
|
|
|
82,775 |
|
|
Cash restricted (Note 3)
|
|
|
|
|
|
|
7,039 |
|
|
Receivables (Note 4)
|
|
|
75,022 |
|
|
|
69,988 |
|
|
Note receivable, current portion
|
|
|
7,798 |
|
|
|
|
|
|
Inventories (Note 5)
|
|
|
62,857 |
|
|
|
73,742 |
|
|
Prepaid expenses and other
|
|
|
4,662 |
|
|
|
5,369 |
|
|
Current assets of discontinued operations (Note 18)
|
|
|
2,094 |
|
|
|
12,609 |
|
|
|
|
|
|
|
|
Total current assets
|
|
|
221,800 |
|
|
|
251,522 |
|
|
|
|
|
|
|
|
Long-Term Assets
|
|
|
|
|
|
|
|
|
|
Cash restricted (Note 3)
|
|
|
57,000 |
|
|
|
24,573 |
|
|
Property, plant and equipment (Note 6)
|
|
|
972,143 |
|
|
|
1,015,363 |
|
|
Investments
|
|
|
1 |
|
|
|
6,314 |
|
|
Unrealized foreign exchange rate derivative gain (Note 15)
|
|
|
5,933 |
|
|
|
|
|
|
Deferred note issuance and other costs
|
|
|
6,984 |
|
|
|
8,364 |
|
|
Deferred income tax (Note 10)
|
|
|
29,989 |
|
|
|
78,381 |
|
|
Note receivable, less current portion
|
|
|
8,744 |
|
|
|
|
|
|
Long-term assets of discontinued operations (Note 18)
|
|
|
|
|
|
|
9,299 |
|
|
|
|
|
|
|
|
|
|
|
1,080,794 |
|
|
|
1,142,294 |
|
|
|
|
|
|
|
|
Total assets
|
|
|
1,302,594 |
|
|
|
1,393,816 |
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses (Note 7)
|
|
|
83,810 |
|
|
|
100,285 |
|
|
Pension and other post-retirement benefit obligations, current
portion (Note 9)
|
|
|
363 |
|
|
|
|
|
|
Debt, current portion (Note 8)
|
|
|
33,903 |
|
|
|
25,550 |
|
|
Current liabilities of discontinued operations (Note 18)
|
|
|
1,926 |
|
|
|
14,492 |
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
120,002 |
|
|
|
140,327 |
|
|
|
|
|
|
|
|
Long-Term Liabilities
|
|
|
|
|
|
|
|
|
|
Debt, less current portion (Note 8)
|
|
|
873,928 |
|
|
|
919,423 |
|
|
Unrealized foreign exchange rate derivative loss (Note 15)
|
|
|
|
|
|
|
61,979 |
|
|
Unrealized interest rate derivative losses (Note 15)
|
|
|
41,355 |
|
|
|
78,646 |
|
|
Pension and other post-retirement benefit obligations
(Note 9)
|
|
|
17,954 |
|
|
|
17,113 |
|
|
Capital leases and other
|
|
|
7,643 |
|
|
|
9,945 |
|
|
Deferred income tax (Note 10)
|
|
|
22,911 |
|
|
|
14,444 |
|
|
Long-term liabilities of discontinued operations (Note 18)
|
|
|
|
|
|
|
3,196 |
|
|
|
|
|
|
|
|
|
|
|
963,791 |
|
|
|
1,104,746 |
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,083,793 |
|
|
|
1,245,073 |
|
|
|
|
|
|
|
|
Minority Interest
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Preferred shares, no par value; 50,000,000 authorized and
issuable in series
|
|
|
|
|
|
|
|
|
|
Series A, 500,000 authorized, none issued and outstanding
|
|
|
|
|
|
|
|
|
|
Series B, 3,500,000 authorized, none issued and outstanding
|
|
|
|
|
|
|
|
|
Common shares, U.S.$1 par value; 200,000,000 authorized;
35,465,176 issued and outstanding at December 31, 2006 and
33,169,140 at December 31, 2005
|
|
|
195,642 |
|
|
|
181,586 |
|
Additional paid-in capital
|
|
|
154 |
|
|
|
14 |
|
Retained earnings (deficit)
|
|
|
15,240 |
|
|
|
(47,970 |
) |
Accumulated other comprehensive income
|
|
|
7,765 |
|
|
|
15,113 |
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
218,801 |
|
|
|
148,743 |
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
|
1,302,594 |
|
|
|
1,393,816 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements.
69
MERCER INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2006, 2005 and 2004
(In Thousands of Euros, Except Per Share Data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
Revenues
|
|
|
623,977 |
|
|
|
452,437 |
|
|
|
182,242 |
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs
|
|
|
462,543 |
|
|
|
375,408 |
|
|
|
141,267 |
|
|
Operating depreciation and amortization
|
|
|
55,834 |
|
|
|
51,160 |
|
|
|
26,788 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
105,600 |
|
|
|
25,869 |
|
|
|
14,187 |
|
|
General and administrative expenses
|
|
|
28,705 |
|
|
|
24,511 |
|
|
|
22,388 |
|
|
(Sale) purchase of emission allowances
|
|
|
(15,609 |
) |
|
|
(17,292 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) from continuing operations
|
|
|
92,504 |
|
|
|
18,650 |
|
|
|
(8,201 |
) |
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(91,931 |
) |
|
|
(86,326 |
) |
|
|
(23,185 |
) |
|
Investment income
|
|
|
6,090 |
|
|
|
2,422 |
|
|
|
2,772 |
|
|
Unrealized foreign exchange gain (loss) on debt
|
|
|
15,245 |
|
|
|
(4,156 |
) |
|
|
|
|
|
Realized (loss) gain on derivative instruments
|
|
|
(3,510 |
) |
|
|
(2,455 |
) |
|
|
44,467 |
|
|
Unrealized gain (loss) on derivative instruments
|
|
|
109,358 |
|
|
|
(69,308 |
) |
|
|
(32,331 |
) |
|
Impairment of investments
|
|
|
|
|
|
|
(1,699 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
35,252 |
|
|
|
(161,522 |
) |
|
|
(8,277 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes and minority interest from
continuing operations
|
|
|
127,756 |
|
|
|
(142,872 |
) |
|
|
(16,478 |
) |
Income tax (provision) benefit (Note 10)
|
|
|
(57,443 |
) |
|
|
13,140 |
|
|
|
44,163 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before minority interest from continuing operations
|
|
|
70,313 |
|
|
|
(129,732 |
) |
|
|
27,685 |
|
Minority interest
|
|
|
(1,071 |
) |
|
|
17,674 |
|
|
|
2,454 |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations
|
|
|
69,242 |
|
|
|
(112,058 |
) |
|
|
30,139 |
|
|
Net loss from discontinued operations
|
|
|
(6,032 |
) |
|
|
(5,088 |
) |
|
|
(10,159 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
63,210 |
|
|
|
(117,146 |
) |
|
|
19,980 |
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share from continuing operations
(Note 13)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
2.08 |
|
|
|
(3.59 |
) |
|
|
1.73 |
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
1.72 |
|
|
|
(3.59 |
) |
|
|
1.25 |
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share (Note 13)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
1.90 |
|
|
|
(3.75 |
) |
|
|
1.15 |
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
1.58 |
|
|
|
(3.75 |
) |
|
|
0.89 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements.
70
MERCER INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the Years Ended December 31, 2006, 2005 and 2004
(In Thousands of Euros)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
Net income (loss)
|
|
|
63,210 |
|
|
|
(117,146 |
) |
|
|
19,980 |
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
(11,308 |
) |
|
|
5,156 |
|
|
|
4,467 |
|
|
Pension plan additional minimum liability
|
|
|
|
|
|
|
(331 |
) |
|
|
|
|
|
Unrealized gains on securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains arising during the year
|
|
|
171 |
|
|
|
134 |
|
|
|
390 |
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive (loss) income
|
|
|
(11,137 |
) |
|
|
4,959 |
|
|
|
4,857 |
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
|
52,073 |
|
|
|
(112,187 |
) |
|
|
24,837 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements.
71
MERCER INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS
EQUITY
For the Years Ended December 31, 2006, 2005 and 2004
(In Thousands of Euros)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Shares | |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Accumulated Other Comprehensive Income | |
|
|
|
|
|
|
|
|
Amount | |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
Paid in | |
|
|
|
|
|
Foreign | |
|
Defined | |
|
Unrealized | |
|
|
|
|
|
|
|
|
Excess of | |
|
Additional | |
|
Retained | |
|
Currency | |
|
Benefit | |
|
Gains | |
|
|
|
|
|
|
Number of | |
|
Par | |
|
Par | |
|
Paid-In | |
|
Earnings | |
|
Translation | |
|
Pension | |
|
(Losses) on | |
|
|
|
Shareholders | |
|
|
Shares | |
|
Value | |
|
Value | |
|
Capital | |
|
(Deficit) | |
|
Adjustments | |
|
Plans | |
|
Securities | |
|
Total | |
|
Equity | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Balance at December 31, 2003
|
|
|
17,099,899 |
|
|
|
13,053 |
|
|
|
65,086 |
|
|
|
223 |
|
|
|
49,196 |
|
|
|
5,992 |
|
|
|
|
|
|
|
(695 |
) |
|
|
5,297 |
|
|
|
132,855 |
|
Shares issued on exercise of stock options
|
|
|
934,330 |
|
|
|
743 |
|
|
|
4,241 |
|
|
|
(209 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,775 |
|
Shares issued on grants of restricted stock
|
|
|
40,000 |
|
|
|
40 |
|
|
|
234 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
274 |
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,980 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,980 |
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,467 |
|
|
|
|
|
|
|
390 |
|
|
|
4,857 |
|
|
|
4,857 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
18,074,229 |
|
|
|
13,836 |
|
|
|
69,561 |
|
|
|
14 |
|
|
|
69,176 |
|
|
|
10,459 |
|
|
|
|
|
|
|
(305 |
) |
|
|
10,154 |
|
|
|
162,741 |
|
Shares issued on equity offering
|
|
|
10,768,700 |
|
|
|
8,275 |
|
|
|
58,370 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66,645 |
|
Shares issued on acquisition of Celgar
|
|
|
4,210,526 |
|
|
|
3,244 |
|
|
|
27,570 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,814 |
|
Shares issued on grants of restricted stock
|
|
|
115,685 |
|
|
|
93 |
|
|
|
637 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
730 |
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(117,146 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(117,146 |
) |
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,156 |
|
|
|
(331 |
) |
|
|
134 |
|
|
|
4,959 |
|
|
|
4,959 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
33,169,140 |
|
|
|
25,448 |
|
|
|
156,138 |
|
|
|
14 |
|
|
|
(47,970 |
) |
|
|
15,615 |
|
|
|
(331 |
) |
|
|
(171 |
) |
|
|
15,113 |
|
|
|
148,743 |
|
Shares issued on exercise of stock options
|
|
|
60,000 |
|
|
|
41 |
|
|
|
251 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
292 |
|
Shares issued on grants of restricted stock
|
|
|
45,000 |
|
|
|
32 |
|
|
|
297 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
329 |
|
Shares of restricted stock cancelled
|
|
|
(9,999 |
) |
|
|
(7 |
) |
|
|
(57 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(64 |
) |
Shares issued on repurchase of notes
|
|
|
2,201,035 |
|
|
|
1,447 |
|
|
|
12,052 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,499 |
|
Stock compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
140 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
140 |
|
Adjustment to initially apply FASB
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement No. 158, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,789 |
|
|
|
|
|
|
|
3,789 |
|
|
|
3,789 |
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63,210 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63,210 |
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,308 |
) |
|
|
|
|
|
|
171 |
|
|
|
(11,137 |
) |
|
|
(11,137 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
35,465,176 |
|
|
|
26,961 |
|
|
|
168,681 |
|
|
|
154 |
|
|
|
15,240 |
|
|
|
4,307 |
|
|
|
3,458 |
|
|
|
|
|
|
|
7,765 |
|
|
|
218,801 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements.
72
MERCER INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2006, 2005 and 2004
(In Thousands of Euros)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
Cash Flows from Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
63,210 |
|
|
|
(117,146 |
) |
|
|
19,980 |
|
|
Adjustments to reconcile net income (loss) to cash flows from
operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized (gains) losses on derivatives
|
|
|
(109,358 |
) |
|
|
69,308 |
|
|
|
32,331 |
|
|
|
Unrealized foreign exchange (gain) loss on debt
|
|
|
(15,245 |
) |
|
|
4,156 |
|
|
|
|
|
|
|
Operating depreciation and amortization
|
|
|
56,085 |
|
|
|
52,041 |
|
|
|
29,144 |
|
|
|
Non-operating amortization
|
|
|
269 |
|
|
|
1,385 |
|
|
|
644 |
|
|
|
Loss on sale of assets
|
|
|
5,957 |
|
|
|
|
|
|
|
|
|
|
|
Impairment of investments
|
|
|
|
|
|
|
1,699 |
|
|
|
|
|
|
|
Minority interest
|
|
|
1,071 |
|
|
|
(17,674 |
) |
|
|
(2,454 |
) |
|
|
(Income) loss from equity investee
|
|
|
(1,206 |
) |
|
|
|
|
|
|
284 |
|
|
|
Deferred income taxes
|
|
|
56,859 |
|
|
|
(11,480 |
) |
|
|
(42,476 |
) |
|
|
Stock compensation expense
|
|
|
541 |
|
|
|
441 |
|
|
|
735 |
|
|
|
Impairment of assets
|
|
|
|
|
|
|
|
|
|
|
6,000 |
|
|
|
Other
|
|
|
1,135 |
|
|
|
1,945 |
|
|
|
(307 |
) |
|
|
Changes in current assets and liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
(7,381 |
) |
|
|
(18,810 |
) |
|
|
(21,659 |
) |
|
|
|
Inventories
|
|
|
7,364 |
|
|
|
(4,150 |
) |
|
|
(28,989 |
) |
|
|
|
Accounts payable and accrued expenses
|
|
|
(9,305 |
) |
|
|
50,582 |
|
|
|
17,011 |
|
|
|
|
Other
|
|
|
(773 |
) |
|
|
(959 |
) |
|
|
(638 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from operating activities
|
|
|
49,223 |
|
|
|
11,338 |
|
|
|
9,606 |
|
|
Cash Flows from (used in) Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash restricted
|
|
|
(25,388 |
) |
|
|
61,221 |
|
|
|
(33,466 |
) |
|
Purchase of property, plant and equipment
|
|
|
(32,937 |
) |
|
|
(21,987 |
) |
|
|
(322,219 |
) |
|
Acquisition of Celgar pulp mill
|
|
|
|
|
|
|
(146,608 |
) |
|
|
|
|
|
Purchases of available-for-sale securities
|
|
|
|
|
|
|
(1,650 |
) |
|
|
|
|
|
Proceeds from sale of properties
|
|
|
1,765 |
|
|
|
857 |
|
|
|
115 |
|
|
Proceeds from available-for-sale securities
|
|
|
1,184 |
|
|
|
|
|
|
|
1,161 |
|
|
Deferred acquisition costs
|
|
|
|
|
|
|
|
|
|
|
(770 |
) |
|
Advances to equity method investments
|
|
|
|
|
|
|
|
|
|
|
(2,071 |
) |
|
Note receivable
|
|
|
(6,870 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(62,246 |
) |
|
|
(108,167 |
) |
|
|
(357,250 |
) |
Cash Flows from (used in) Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in construction costs payable
|
|
|
(240 |
) |
|
|
(64,223 |
) |
|
|
22,680 |
|
|
Proceeds from borrowings of notes payable and debt
|
|
|
78,100 |
|
|
|
313,118 |
|
|
|
237,000 |
|
|
Proceeds from minority shareholders
|
|
|
5,463 |
|
|
|
5,463 |
|
|
|
|
|
|
Repayment of notes payable and debt
|
|
|
(87,911 |
) |
|
|
(272,391 |
) |
|
|
(21,992 |
) |
|
Repayment of capital lease obligations
|
|
|
(4,091 |
) |
|
|
(6,411 |
) |
|
|
(1,970 |
) |
|
Proceeds from investment grants
|
|
|
9,101 |
|
|
|
84,694 |
|
|
|
103,574 |
|
|
Issuance of common shares
|
|
|
556 |
|
|
|
66,645 |
|
|
|
4,241 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from financing activities
|
|
|
978 |
|
|
|
126,895 |
|
|
|
343,533 |
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
(1,698 |
) |
|
|
3,913 |
|
|
|
1,686 |
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(13,743 |
) |
|
|
33,979 |
|
|
|
(2,425 |
) |
Cash and cash equivalents, beginning of year(1)
|
|
|
83,547 |
|
|
|
49,568 |
|
|
|
51,993 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year(2)
|
|
|
69,804 |
|
|
|
83,547 |
|
|
|
49,568 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
84,382 |
|
|
|
46,411 |
|
|
|
43,581 |
|
|
|
Income taxes
|
|
|
1,304 |
|
|
|
640 |
|
|
|
16 |
|
Supplemental schedule of non-cash investing and financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of production and other equipment under capital
lease obligations
|
|
|
3,301 |
|
|
|
2,864 |
|
|
|
10,295 |
|
|
|
Property, plant and equipment on acquisition of 7% interest in
Stendal
|
|
|
8,067 |
|
|
|
|
|
|
|
|
|
|
|
Acquisition of notes receivable on sale of paper assets
|
|
|
11,321 |
|
|
|
|
|
|
|
|
|
|
|
Common shares issued on acquisition of Celgar mill
|
|
|
|
|
|
|
30,814 |
|
|
|
|
|
|
|
(1) |
Includes amounts related to discontinued operations of:
2006 - 772,
2005 - 3,019,
2004 - 211 |
|
(2) |
Includes amounts related to discontinued operations of:
2006 - 437,
2005 - 772,
2004 - 3,019 |
The accompanying notes are an integral part of these financial
statements.
73
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands of Euros, Except Per Share Data)
|
|
Note 1. |
The Company and Summary of Significant Accounting Policies |
Basis of Presentation
These consolidated financial statements contained herein include
the accounts of Mercer International Inc. (Mercer
Inc.) and its wholly-owned and majority-owned subsidiaries
(collectively, the Company).
Effective March 1, 2006, the Company was converted from a
business trust organized under the laws of the State of
Washington to a corporation organized under the laws of the
State of Washington. The conversion was effected through the
merger of Mercer Inc. with and into an indirect wholly-owned
Delaware subsidiary company followed by a merger with a direct
wholly-owned Washington subsidiary company. The conversion
effected a change in the Companys legal form, but did not
result in any change in its business, management, fiscal year,
accounting practices, assets or liabilities (except to the
extent of legal and other costs of effecting the conversion and
maintaining ongoing corporate status) or location of its
principal executive offices and facilities. The Company
continues to operate under the name Mercer International
Inc. following consummation of the conversion and
continues to be engaged in the same business that it was engaged
in prior to the conversion and its shares of common stock are
quoted and listed for trading on the NASDAQ National Market and
the Toronto Stock Exchange, respectively.
Estimates
The preparation of financial statements and related disclosures
in conformity with accounting principles generally accepted in
the United States of America requires management to make
estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Estimates are
used for, but not limited to, the accounting for doubtful
accounts, depreciation and amortization, asset impairments,
derivative financial instruments, environmental conservation,
allocation of purchase price of acquisitions, asset retirement
obligations, pensions and post-retirement benefit obligations,
income taxes, and contingencies. Actual results could differ
from these estimates.
Cash and Cash Equivalents
Cash and cash equivalents includes cash held in bank accounts
and highly liquid money market investments with original
maturities of three months or less.
Investments
Trading securities, consisting of marketable securities, are
classified as current investments and are reported at fair
values with realized gains or losses and unrealized holding
gains or losses included in the results of operations.
Investments in entities where the Company has equity investments
in publicly traded companies in which it has less than 20% of
the voting interest and in which it does not exercise
significant influence are classified as available-for-sale
securities. These securities are reported as long-term
investments at fair values; based upon quoted market prices,
with the unrealized gains or losses included as a separate
component of shareholders equity, until realized. If a
loss in value in available-for-sale securities is considered to
be other than temporary, the loss is recognized in the
determination of net income. The cost of all securities sold is
based on the specific identification method to determine
realized gains or losses.
Investments in entities where the Company owns between 20% and
50% of the voting interest, and in which the Company exercises
significant influence are accounted for using the equity method.
Under this method, the investment is initially recorded at cost
then reduced by dividends and increased or decreased by
74
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands of Euros, Except Per Share Data)
|
|
Note 1. |
The Company and Summary of Significant
Accounting Policies (Continued) |
the Companys proportionate share of the investees
net earnings or loss. The amount of earnings or losses from
equity investees is included in other investment income.
Inventories
Inventories of pulp and logs are valued at the lower of average
cost and net realizable value. Other materials and supplies are
valued at the lower of average cost and replacement cost. Cost
includes labour, materials and production overhead.
Property, Plant and Equipment
Property, plant and equipment is stated at cost less accumulated
depreciation. Depreciation of buildings and production equipment
is based on the estimated useful lives of the assets and is
computed using the straight-line method. Buildings are
depreciated over 10 to 50 years and production and other
equipment primarily over 25 years. Repairs and maintenance
are charged to operations as incurred. Expenditures for new
facilities and those expenditures that substantially increase
the useful lives of existing property, plant and equipment are
capitalized, as well as interest costs associated with major
capital projects until ready for their intended use.
The Company reviews its long-lived assets for impairment
whenever events or changes in circumstances indicate that the
carrying value of such assets may not be recoverable. To
determine recoverability, the Company compares the carrying
value of the assets to the estimated future undiscounted cash
flows. Measurement of an impairment loss for long-lived assets
held for use is based on the fair value of the asset.
The Company provides for asset retirement obligations when there
are legislated or contractual bases for those obligations.
Obligations are capitalized and amortized over the remaining
useful life of the related operations.
Government Grants
The Company records investment grants from federal and state
governments when they are received. Grants related to assets are
government grants whose primary condition is that the company
qualifying for them should purchase, construct or otherwise
acquire long-term assets. Secondary conditions may also be
attached restricting the type or location of the assets and/or
other conditions must be met. Grants related to assets, when
received, are deducted from the asset costs. Grants related to
income are government grants which are either unconditional or
related to the Companys normal business operations, and
are reported as a reduction of related expenses when received.
Deferred Note Issuance Costs
Note issuance costs are deferred and amortized as a component of
expenses over the term of the related debt instrument.
Pensions
The Company maintains a defined benefit pension plan for its
salaried employees at its Celgar mill which is funded and
non-contributory. The cost of the benefits earned by the
salaried employees is determined using the projected benefit
method pro rated on services. The pension expense reflects the
current service cost, the interest on the unfunded liability and
the amortization over the estimated average remaining service
life of the employees of (i) the unfunded liability and
(ii) experience gains or losses.
75
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands of Euros, Except Per Share Data)
|
|
Note 1. |
The Company and Summary of Significant
Accounting Policies (Continued) |
In accordance with the transition provisions of SFAS 158,
the Company reorganizes the net funded status of the plan. See
also New Accounting Standards later in this note for
a summary of changing disclosure on pensions.
In addition, hourly-paid employees at the Celgar mill are
covered by a multi-employer defined contribution pension plan
for which contributions are charged against earnings.
Foreign Operations and Currency Translation
The Company translates foreign assets and liabilities of its
subsidiaries, other than those denominated in Euros, at the rate
of exchange at the balance sheet date. Revenues and expenses are
translated at the average rate of exchange throughout the year.
Gains or losses from these translations are reported as a
separate component of other comprehensive income (loss), until
all of the investment in the subsidiaries is sold or liquidated.
The translation adjustments do not recognize the effect of
income tax because the Company expects to reinvest the amounts
indefinitely in operations.
Transaction gains (losses) that arise from exchange rate
fluctuations on transactions denominated in a currency other
than the local functional currency, other than those exchange
rate fluctuations on foreign denominated debt, are included in
General and administrative expenses in the statement
of operations, which amounted to
1,059,
(2,624) and
785 for the
years ended December 31, 2006, 2005 and 2004, respectively.
Revenue and Related Cost Recognition
The Company recognizes revenue from product sales,
transportation and other when persuasive evidence of an
arrangement exists, the sales price is fixed or determinable,
title of ownership and risk of loss have passed to the customer
and collectibility is reasonably assured. Sales are reported net
of discounts and allowances. Amounts charged to customers for
shipping and handling are recognized as revenue. Shipping and
handling costs incurred by the Company are included in cost of
sales.
Environmental Conservation
Liabilities for environmental conservation are recorded when it
is probable that obligations have been incurred and their fair
value can be reasonably estimated. Any potential recoveries of
such liabilities are recorded when there is an agreement with
the reimbursing entity and recovery is assessed as likely to
occur.
Stock-Based Compensation
The Company adopted Statement of Financial Accounting Standards
(SFAS) No. 123R, Share-Based Payment, on
January 1, 2006. This statement requires the Company to
recognize the cost of employee services received in exchange for
the Companys equity instruments. Under
SFAS No. 123R, the Company is required to record
compensation expense over an awards vesting period based
on the awards fair value at the date of grant. The Company
has elected to adopt SFAS No. 123R on a modified
prospective basis; accordingly, the financial statements for
periods prior to January 1, 2006 will not include
compensation cost calculated under the fair value method.
76
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands of Euros, Except Per Share Data)
|
|
Note 1. |
The Company and Summary of Significant
Accounting Policies (Continued) |
Prior to January 1, 2006, the Company applied Accounting
Principles Board Opinion 25, Accounting for Stock Issued
to Employees, and, therefore, recorded the intrinsic value
of stock-based compensation as expense and applied the
disclosure provisions of SFAS No. 123, Accounting
for Stock-Based Compensation. The following table
illustrates the effect on net income and earnings per share if
the Company had applied the fair value recognition provisions of
SFAS No. 123 to stock-based employee compensation
prior to January 1, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Net (Loss) Income
|
|
|
|
|
|
|
|
|
|
As reported
|
|
|
(117,146 |
) |
|
|
19,980 |
|
|
Deduct: Total stock-based employee compensation expense
determined under fair value based methods for all awards, net of
any related tax effects
|
|
|
(93 |
) |
|
|
(42 |
) |
|
Add: Reversal of stock-based compensation expense recognized
under APB Opinion No. 25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma
|
|
|
(117,239 |
) |
|
|
19,938 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Basic (Loss) Income Per Share
|
|
|
|
|
|
|
|
|
|
As reported
|
|
|
(3.75 |
) |
|
|
1.15 |
|
|
Pro forma
|
|
|
(3.76 |
) |
|
|
1.15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Diluted (Loss) Income Per Share
|
|
|
|
|
|
|
|
|
|
As reported
|
|
|
(3.75 |
) |
|
|
0.89 |
|
|
Pro forma
|
|
|
(3.76 |
) |
|
|
0.89 |
|
Taxes on Income
Income taxes are reported under SFAS No. 109,
Accounting for Income Taxes, and, accordingly,
deferred income taxes are recognized using the asset and
liability method, whereby deferred tax assets and liabilities
are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases,
and operating loss and tax credit carryforwards. Valuation
allowances are provided if, after considering available
evidence, both positive and negative, it is more likely than not
that some or all of the deferred tax assets will not be realized.
Derivative Financial Instruments
The Company enters into derivative financial instruments,
including foreign currency forward contracts and swaps and
interest rate swaps, caps and forward rate agreements, to limit
exposures to changes in foreign currency exchange rates and
interest rates. These derivative instruments are not designated
as hedging instruments under SFAS No. 133 and,
accordingly, any change in the
marked-to-market fair
value is recognized in (gain) loss on derivative financial
instruments in the consolidated statements of operations.
Income (Loss) Per Share
Basic income (loss) per share is computed by dividing income
(loss) available to common shareholders by the weighted average
number of common shares outstanding in the period. Diluted
income (loss) per share
77
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands of Euros, Except Per Share Data)
|
|
Note 1. |
The Company and Summary of Significant
Accounting Policies (Continued) |
takes into consideration common shares outstanding (computed
under basic earnings per share) plus potentially dilutive common
shares. Dilutive common shares reflect the exercise of stock
options, warrants and convertible notes.
Reclassifications
Certain prior year amounts in the consolidated financial
statements have been reclassified to conform to the current year
presentation.
New Accounting Standards
In February 2006, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting
Standards No. 155, Accounting for Certain Hybrid
Financial Instruments an amendment of FASB
Statements No. 133 and 140(SFAS 155). This
Statement amends FASB Statement No. 133, Accounting for
Derivative Instruments and Hedging Activities, and Statement
No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities. This
Statement resolves issues addressed in Statement 133
Implementation Issue No. D1, Application of
Statement 133 to Beneficial Interests in Securitized
Financial Assets. This Statement will be effective for
financial instruments acquired or issued by the Company after
the beginning of its 2007 fiscal year. The Company expects that
the adoption of this Statement will not have a material effect
on its financial condition or results of operations.
In June 2006, the FASB issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes (FIN 48).
This interpretation clarifies the recognition threshold and
measurement of a tax position taken on a tax return, and
requires expanded disclosure with respect to the uncertainty in
income taxes. FIN 48 is effective for fiscal years
beginning after December 15, 2006. The adoption of
FIN 48 is not expected to have a material impact on the
Companys consolidated financial statements.
In September 2006, the FASB issued Statement of Financial
Accounting Standards No. 157, Fair Value Measurement
(SFAS 157). This statement defines fair value,
establishes guidelines for measuring fair value and expands
disclosures regarding fair value measurements. SFAS 157
does not require any new fair value measurements but rather
eliminates inconsistencies in guidance found in various prior
accounting pronouncements. SFAS 157 is effective for fiscal
years beginning after November 15, 2007 and is not expected
to have a material impact on the Companys consolidated
financial statements.
In September 2006, the FASB issued Statement of Financial
Accounting Standards No. 158, Employers Accounting
for Defined Benefit Pension and Other Postretirement
Plans an amendment of FASB Statement No. 87,
88, 106 and 132R(SFAS 158). This Statement requires an
employer to recognize in its statement of financial position an
asset of a plans over funded status or a liability for a
plans under funded status, measure a plans assets
and its obligations that determine its funded status as of the
end of the employers fiscal year (with limited
exceptions), and recognize changes in the funded status of a
defined benefit postretirement plan in the year in which the
changes occur. SFAS 158 is effective for fiscal years
ending after December 15, 2006. In accordance with the
effective dates and transition guidelines of this standard, the
Company has adopted the recognition and disclosure provisions of
SFAS 158 effective December 31, 2006, the most notable
of which is the recognition of the funded status. Prior to the
adoption of the recognition provisions of
SFAS No. 158, the Company accounted for its post
retirement benefits under SFAS No. 87 and
SFAS No. 106. Under these standards, changes in the
funded status were not immediately recognized, but instead were
deferred and recognized in a systematic manner in later periods.
The adoption of this standard requires issuers to recognize the
change in the funded status of the plan through other
comprehensive income. Upon adoption of the recognition
provisions of SFAS No. 158, the Company recognized the
amounts of prior changes in funded
78
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands of Euros, Except Per Share Data)
|
|
Note 1. |
The Company and Summary of Significant
Accounting Policies (Continued) |
status of post retirement obligations through accumulated other
comprehensive income. As a result, the Company recognized the
following adjustments in individual line items of its
Consolidated Balance Sheets as of December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior to Adoption | |
|
Effect of Adoption | |
|
As Reported at | |
|
|
of SFAS No. 158 | |
|
of SFAS No. 158 | |
|
December 31, 2006 | |
|
|
| |
|
| |
|
| |
Pension and other postretirement benefit obligations, current
portion
|
|
|
|
|
|
|
363 |
|
|
|
363 |
|
Pension and other postretirement benefit obligation
|
|
|
14,859 |
|
|
|
3,095 |
|
|
|
17,954 |
|
Total liabilities
|
|
|
1,080,335 |
|
|
|
3,458 |
|
|
|
1,083,793 |
|
Accumulated other comprehensive income
|
|
|
3,976 |
|
|
|
3,789 |
|
|
|
7,765 |
|
Total shareholders equity
|
|
|
215,012 |
|
|
|
3,789 |
|
|
|
218,801 |
|
The adoption of SFAS No. 158 had no effect on the
Companys consolidated statement of operations for the
years ended December 31, 2006, 2005 or 2004.
As of December 31, 2006, amounts recognized in accumulated
other comprehensive income included unrecognized actuarial
losses of 1.9.
The estimated actuarial loss that will be recognized in the
consolidated statement of operations in 2007 is
0.1.
In accordance with this standard, further changes to the
recognition provisions, net periodic benefit cost and associated
disclosure are effective beginning after December 15, 2008.
The adoption of the requirements of this standard is not
expected to have a material effect on the Companys
consolidated financial statements.
In September 2006, the Securities and Exchange Commission
(SEC) issued Staff Accounting Bulletin No. 108
(SAB 108). SAB 108 provides guidance on the
consideration of the effects of prior year misstatements in
quantifying current year misstatements for the purpose of a
materiality assessment. SAB 108 permits existing public
companies to record the cumulative effect of initially applying
this approach in the fiscal year ending after November 15,
2006 by recording necessary correcting adjustments to the
carrying values of assets and liabilities as of the beginning of
that year with the offsetting adjustment recorded to the opening
balance of retained earnings. The Company has reviewed the
guidance of SAB 108 and has determined that no correcting
adjustments are necessary in our implementation.
|
|
Note 2. |
Acquisition of the Celgar Mill and Related Financings |
Acquisition
On February 14, 2005, the Company completed its acquisition
of the Celgar NBSK pulp mill. The aggregate consideration for
the acquisition was
177,422, which
included 142,940
in cash, acquisition related expenditures of
3,668 and
30,814 was paid
in common shares of the Company as more fully described below.
The results of the Celgar mill are included in the consolidated
statement of operations since the acquisition date.
79
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands of Euros, Except Per Share Data)
|
|
Note 2. |
Acquisition of the Celgar Mill and
Related Financings (Continued) |
The allocation of the purchase price is summarized below.
|
|
|
|
|
|
Purchase price:
|
|
|
|
|
|
Cash (including defined working capital)
|
|
|
142,940 |
|
|
Equity common shares
|
|
|
30,814 |
|
|
Acquisition costs
|
|
|
3,668 |
|
|
|
|
|
|
|
|
177,422 |
|
|
|
|
|
Net assets acquired:
|
|
|
|
|
|
Receivables
|
|
|
32 |
|
|
Inventories
|
|
|
19,969 |
|
|
Prepaids and other assets
|
|
|
616 |
|
|
Property, plant and equipment
|
|
|
175,096 |
|
|
Accrued expenses and other liabilities
|
|
|
(4,103 |
) |
|
Pension plan and post-retirement benefits obligation
|
|
|
(14,188 |
) |
|
|
|
|
|
|
|
177,422 |
|
|
|
|
|
In October 2005, our wholly-owned subsidiary, Zellstoff Celgar
Limited, received a re-assessment for real property transfer tax
payable in British Columbia, Canada, in the amount of
approximately
3.5 million
in connection with the transfer of the land where the Celgar
mill is situated. The Company is contesting the assessment and
the amount, if any, that may be payable in connection therewith
is not yet determinable.
Pro Forma Financial Summary (Unaudited)
The following pro forma financial summary is presented as if the
acquisition of the Celgar pulp mill was completed as of
January 1, 2005 and January 1, 2004. The pro forma
combined results are not necessarily indicative of the actual
results that would have occurred had the acquisition been
consummated on those dates, or of the future operations of the
combined entities.
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Total revenues
|
|
|
535,631 |
|
|
|
434,253 |
|
Net income (loss)
|
|
|
(125,965 |
) |
|
|
23,984 |
|
Income (loss) from continuing operations per share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
(3.81 |
) |
|
|
0.74 |
|
|
Diluted
|
|
|
(3.81 |
) |
|
|
0.55 |
|
|
|
Note 3. |
Cash and Restricted Cash |
Cash and restricted cash includes an amount restricted by a
lender to pay current construction costs and long-term
restricted cash for debt service reserves as required under
long-term debt agreements (Note 8(e)).
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Cash and cash equivalents
|
|
|
69,367 |
|
|
|
82,775 |
|
Cash restricted
|
|
|
|
|
|
|
7,039 |
|
|
|
|
|
|
|
|
Total current cash, cash equivalents and restricted cash
|
|
|
69,367 |
|
|
|
89,814 |
|
|
|
|
|
|
|
|
Long-term cash restricted
|
|
|
57,000 |
|
|
|
24,573 |
|
|
|
|
|
|
|
|
The Company maintains cash balances in foreign financial
institutions in excess of insured limits.
80
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands of Euros, Except Per Share Data)
|
|
|
|
|
|
|
|
|
|
|
December 31 | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Sale of pulp (net of allowance of
470 and
529,
respectively)
|
|
|
69,163 |
|
|
|
64,572 |
|
Value added tax
|
|
|
456 |
|
|
|
1,067 |
|
Other
|
|
|
5,403 |
|
|
|
4,349 |
|
|
|
|
|
|
|
|
|
|
|
75,022 |
|
|
|
69,988 |
|
|
|
|
|
|
|
|
The Company reviews the collectibility of receivables on a
periodic basis. The Company maintains an allowance for doubtful
accounts at an amount estimated to cover the potential losses on
the receivables. Any amounts that are determined to be
uncollectible are charged off against the allowance. The amounts
of allowance and charge-off are based on the Companys
evaluation of numerous factors, including the payment history
and financial position of the debtors. The Company does not
generally require collateral for any of its receivables.
|
|
|
|
|
|
|
|
|
|
|
|
December 31 | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Pulp
|
|
|
|
|
|
|
|
|
|
Raw materials
|
|
|
38,905 |
|
|
|
39,351 |
|
|
Work in process and finished goods
|
|
|
23,952 |
|
|
|
34,391 |
|
|
|
|
|
|
|
|
|
|
|
62,857 |
|
|
|
73,742 |
|
|
|
|
|
|
|
|
|
|
Note 6. |
Property, Plant and Equipment |
|
|
|
|
|
|
|
|
|
|
|
December 31 | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Land
|
|
|
23,953 |
|
|
|
24,068 |
|
Buildings
|
|
|
127,338 |
|
|
|
128,435 |
|
Production equipment and other
|
|
|
1,062,049 |
|
|
|
1,056,327 |
|
|
|
|
|
|
|
|
|
|
|
1,213,340 |
|
|
|
1,208,830 |
|
Less: Accumulated depreciation
|
|
|
(241,197 |
) |
|
|
(193,467 |
) |
|
|
|
|
|
|
|
|
|
|
972,143 |
|
|
|
1,015,363 |
|
|
|
|
|
|
|
|
Included in production equipment and other is equipment under
capital leases which had gross amounts of
20,848 and
19,746, and
accumulated depreciation of
10,871 and
9,716,
respectively, as at December 31, 2006 and 2005. During the
years 2006, 2005 and 2004, production equipment and other
totaling 3,301,
2,847 and
10,295,
respectively, was acquired under capital lease obligations.
81
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands of Euros, Except Per Share Data)
|
|
Note 7. |
Accounts Payable and Accrued Expenses |
|
|
|
|
|
|
|
|
|
|
|
December 31 | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Trade payables
|
|
|
32,591 |
|
|
|
34,626 |
|
Accounts payable and other
|
|
|
9,509 |
|
|
|
19,516 |
|
Accrued expenses
|
|
|
36,552 |
|
|
|
38,029 |
|
Derivative contracts
|
|
|
|
|
|
|
4,154 |
|
Capital leases, current portion
|
|
|
5,158 |
|
|
|
3,960 |
|
|
|
|
|
|
|
|
|
|
|
83,810 |
|
|
|
100,285 |
|
|
|
|
|
|
|
|
Debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31 | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Senior notes due February 2013, interest at 9.25% accrued and
payable semi-annually, unsecured(a)
|
|
|
234,902 |
|
|
|
261,780 |
|
Subordinated convertible notes due October 2010, interest at
8.5% accrued and payable semi-annually(b) (Note 11)
|
|
|
50,962 |
|
|
|
69,667 |
|
Credit agreement with a syndicate of banks with respect to a
revolving credit facility of Cdn$40 million(c)
|
|
|
7,917 |
|
|
|
10,576 |
|
Credit agreement with bank with respect to a revolving credit
facility of
40 million(d)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
293,781 |
|
|
|
342,023 |
|
Less: Current portion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt, other operations
|
|
|
293,781 |
|
|
|
342,023 |
|
|
|
|
|
|
|
|
Note payable to bank, included in a total credit facility of
827,950 to
finance the construction related to the Stendal pulp mill(e)
|
|
|
599,000 |
|
|
|
602,950 |
|
Note payable to third party(f)
|
|
|
6,743 |
|
|
|
|
|
Loans payable to minority shareholders of Stendal pulp mill(g)
|
|
|
8,307 |
|
|
|
|
|
|
|
|
|
|
|
|
Debt, Stendal
|
|
|
614,050 |
|
|
|
602,950 |
|
Less: Current portion
|
|
|
(33,903 |
) |
|
|
(25,550 |
) |
|
|
|
|
|
|
|
Debt, Stendal
|
|
|
580,147 |
|
|
|
577,400 |
|
Debt, other operations
|
|
|
293,781 |
|
|
|
342,023 |
|
|
|
|
|
|
|
|
Debt, less current portion
|
|
|
873,928 |
|
|
|
919,423 |
|
|
|
|
|
|
|
|
82
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands of Euros, Except Per Share Data)
|
|
Note 8. |
Debt (Continued) |
As of December 31, 2006, the principal maturities of debt
are as follows:
|
|
|
|
|
Matures |
|
Amount | |
|
|
| |
2007
|
|
|
33,903 |
|
2008
|
|
|
40,766 |
|
2009
|
|
|
44,516 |
|
2010
|
|
|
90,796 |
|
2011
|
|
|
43,967 |
|
Thereafter
|
|
|
653,883 |
|
|
|
|
|
|
|
|
907,831 |
|
|
|
|
|
|
|
(a) |
Senior notes due February 2013, interest at 9.25% accrued and
payable semi-annually, unsecured. At any time prior to
February 15, 2008, the Company may redeem up to 35% of the
aggregate principal amount of notes issued under the indenture
at a redemption price of 109.25% of the principal amount of the
senior notes plus accrued and unpaid interest to the redemption
date, with the net cash proceeds of a sale of equity interests
of the Company. On or after February 15, 2009, the Company
may redeem all or a part of the notes at redemption prices
(expressed as a percentage of principal amount) equal to
104.625% for the twelve month period beginning on
February 15, 2009, 102.3125% for the twelve month period
beginning on February 15, 2010, and 100.00% beginning on
February 15, 2011 and at any time thereafter, plus accrued
and unpaid interest. |
|
(b) |
Subordinated convertible notes due October 2010, interest at
8.5% accrued and payable semi-annually, convertible at any time
by the holder into common shares of the Company at
U.S.$7.75 per share, unsecured. The Company may redeem for
cash all or a portion of these notes at any time on or after
October 15, 2008 at 100% of the principal amount of the
notes plus accrued and unpaid interest up to the redemption
date, the holders of the convertible notes will have the option
to require the Company to purchase for cash all or a portion of
the notes not previously redeemed upon a specified change of
control at a price equal to 100% of the principal sinking fund
requirements. |
|
(c) |
Credit agreement with respect to a revolving credit facility of
Cdn.$40 million, on a three year term. Borrowings under the
credit agreement are secured by pulp mill inventory, and
receivables. Canadian dollar denominated amounts bear interest
at bankers acceptance plus 2.25% or Canadian prime plus 0.50%.
U.S. dollar denominated amounts bear interest at LIBOR plus
2.25% or U.S. base plus 0.50%. |
|
(d) |
Credit agreement with respect to a revolving credit facility of
40.0 million.
Borrowings under the credit agreement are secured by pulp mill
inventory and receivables. Borrowings under the credit agreement
bear interest at Euribor plus 1.55%. |
|
(e) |
Note payable to bank, included in a total credit facility of
827,950 to
finance the construction related to the Stendal pulp mill,
interest at rates varying from Euribor plus 0.90% to Euribor
plus 1.85% (rates on amounts of borrowing at December 31,
2006 range from 4.469% to 5.419%), principal due in required
installments beginning September 30, 2006 until
September 30, 2017, collateralized by the assets of the
Stendal pulp mill, and at December 31, 2006, restricted
cash amounting to
57,000, with 48%
and 32% guaranteed by the Federal Republic of Germany and the
State of Sachsen-Anhalt, respectively, of up to
574,580 of
outstanding principal balance, subject to a debt service reserve
account required to pay amounts due in the following twelve
months under the terms of credit facility; payment of dividends
is only permitted if certain cash flow requirements are met. |
83
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands of Euros, Except Per Share Data)
|
|
Note 8. |
Debt (Continued) |
|
|
(f) |
Note payable to third party, due in two instalments of
5,562 and
1,166 plus
interest at six month Euribor rate on January 31, 2008 and
January 3, 2009, respectively. On March 30, 2007,
September 30, 2007, January 31, 2008, or
January 3, 2009, the note is convertible by the Company at
its sole option into common shares of the Company, based upon a
20-trading day average closing price of the Companys
common shares. |
|
(g) |
Loans payable to the minority shareholder of Stendal pulp mill,
interest at 7% payable in September 2006 then payable
semi-annually beginning March 2007, unsecured, subordinated to
all liabilities of the Stendal pulp mill, due in 2017. The
amounts outstanding on these loans were
30,604 and
30,482 as at
December 31, 2006 and 2005, respectively. Cumulative net
losses of Stendal in the amounts of
22,297 and
30,482 were
applied to these loans in 2006 and 2005 due to a right of offset
under German law. The net obligation of
8,307 and
nil is reflected
for 2006 and 2005, respectively. |
|
|
Note 9. |
Pension and Other Post-Retirement Benefit Obligations |
Included in pension and other post-retirement benefit
obligations are amounts related to our Celgar and German pulp
mills.
The largest component of this obligation is with respect to the
Celgar mill which maintains defined benefit pension plans and
post-retirement benefits plans for certain employees. Pension
benefits are based on employees earnings and years of
service. The pension plans are funded by contributions from the
Company based on actuarial estimates and statutory requirements.
84
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands of Euros, Except Per Share Data)
|
|
Note 9. |
Pension and Other Post-Retirement
Benefit Obligations (Continued) |
Information about the Celgar plans, in aggregate for the year
ended December 31, 2006 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
|
| |
|
|
|
|
Other | |
|
|
|
|
|
|
Post-Retirement | |
|
|
|
|
|
|
Benefit | |
|
|
|
|
Pension | |
|
Obligations | |
|
Total | |
|
|
| |
|
| |
|
| |
Change in benefit obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation, December 31, 2005
|
|
|
28,191 |
|
|
|
15,155 |
|
|
|
43,346 |
|
|
Service cost
|
|
|
815 |
|
|
|
414 |
|
|
|
1,229 |
|
|
Interest cost
|
|
|
1,271 |
|
|
|
695 |
|
|
|
1,966 |
|
|
Benefit payments
|
|
|
(1,493 |
) |
|
|
(210 |
) |
|
|
(1,703 |
) |
|
Actuarial (gains) losses
|
|
|
38 |
|
|
|
(637 |
) |
|
|
(599 |
) |
|
Foreign currency exchange rate changes
|
|
|
(2,832 |
) |
|
|
(1,550 |
) |
|
|
(4,382 |
) |
|
|
|
|
|
|
|
|
|
|
Benefit obligation, December 31, 2006
|
|
|
25,990 |
|
|
|
13,867 |
|
|
|
39,857 |
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of fair value of plan assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets, December 31, 2005
|
|
|
21,498 |
|
|
|
|
|
|
|
21,498 |
|
|
Actual returns
|
|
|
2,223 |
|
|
|
|
|
|
|
2,223 |
|
|
Contributions
|
|
|
1,963 |
|
|
|
210 |
|
|
|
2,173 |
|
|
Benefit payments
|
|
|
(1,493 |
) |
|
|
(210 |
) |
|
|
(1,703 |
) |
|
Foreign currency exchange rate changes
|
|
|
(2,198 |
) |
|
|
|
|
|
|
(2,198 |
) |
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets, December 31, 2006
|
|
|
21,993 |
|
|
|
|
|
|
|
21,993 |
|
|
|
|
|
|
|
|
|
|
|
Funded status, December 31, 2006
|
|
|
(3,997 |
) |
|
|
(13,867 |
) |
|
|
(17,864 |
)(1) |
|
|
|
|
|
|
|
|
|
|
Components of the net benefit cost recognized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
|
815 |
|
|
|
414 |
|
|
|
1,229 |
|
|
Interest cost
|
|
|
1,271 |
|
|
|
695 |
|
|
|
1,966 |
|
|
Expected return on plan assets
|
|
|
(1,416 |
) |
|
|
|
|
|
|
(1,416 |
) |
|
Amortization of recognized items
|
|
|
1 |
|
|
|
92 |
|
|
|
93 |
|
|
|
|
|
|
|
|
|
|
|
Net benefit costs
|
|
|
671 |
|
|
|
1,201 |
|
|
|
1,872 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
The total of
18.3 million
on the consolidated balance sheets also includes the pension
liabilities of approximately
0.4 million
relating to employees at our German operations. |
85
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands of Euros, Except Per Share Data)
|
|
Note 9. |
Pension and Other Post-Retirement
Benefit Obligations (Continued) |
Information about the Celgar plans, in aggregate for the period
February 14, 2005 to December 31, 2005 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
|
| |
|
|
|
|
Other | |
|
|
|
|
|
|
Post-Retirement | |
|
|
|
|
|
|
Benefit | |
|
|
|
|
Pension | |
|
Obligations | |
|
Total | |
|
|
| |
|
| |
|
| |
Change in benefit obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, February 14, 2005
|
|
|
20,822 |
|
|
|
10,075 |
|
|
|
30,897 |
|
|
Service cost
|
|
|
603 |
|
|
|
263 |
|
|
|
866 |
|
|
Interest cost
|
|
|
1,187 |
|
|
|
577 |
|
|
|
1,764 |
|
|
Benefit payments
|
|
|
(855 |
) |
|
|
(231 |
) |
|
|
(1,086 |
) |
|
Actuarial losses
|
|
|
2,826 |
|
|
|
2,586 |
|
|
|
5,412 |
|
|
Foreign currency exchange rate changes
|
|
|
3,608 |
|
|
|
1,885 |
|
|
|
5,493 |
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation, December 31, 2005
|
|
|
28,191 |
|
|
|
15,155 |
|
|
|
43,346 |
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of fair value of plan assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair market value, February 14, 2005
|
|
|
16,709 |
|
|
|
|
|
|
|
16,709 |
|
|
Actual returns
|
|
|
1,474 |
|
|
|
|
|
|
|
1,474 |
|
|
Contributions
|
|
|
1,325 |
|
|
|
231 |
|
|
|
1,556 |
|
|
Benefit payments
|
|
|
(855 |
) |
|
|
(231 |
) |
|
|
(1,086 |
) |
|
Foreign currency exchange rate changes
|
|
|
2,845 |
|
|
|
|
|
|
|
2,845 |
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets, December 31, 2005
|
|
|
21,498 |
|
|
|
|
|
|
|
21,498 |
|
|
|
|
|
|
|
|
|
|
|
Funded status, December 31, 2005
|
|
|
(6,693 |
) |
|
|
(15,155 |
) |
|
|
(21,848 |
) |
|
|
|
|
|
|
|
|
|
|
Plan assets in excess of (less than) accrued benefit obligation
|
|
|
(6,693 |
) |
|
|
(15,155 |
) |
|
|
(21,848 |
) |
Unamortized actuarial losses
|
|
|
2,718 |
|
|
|
2,803 |
|
|
|
5,521 |
|
|
|
|
|
|
|
|
|
|
|
Accrued benefit asset (liability)
|
|
|
(3,975 |
) |
|
|
(12,352 |
) |
|
|
(16,327 |
)(1) |
|
|
|
|
|
|
|
|
|
|
Components of the net benefit cost recognized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
|
603 |
|
|
|
263 |
|
|
|
866 |
|
|
Interest cost
|
|
|
1,187 |
|
|
|
577 |
|
|
|
1,764 |
|
|
Expected return on plan assets
|
|
|
(1,155 |
) |
|
|
|
|
|
|
(1,155 |
) |
|
|
|
|
|
|
|
|
|
|
Net benefit costs
|
|
|
635 |
|
|
|
840 |
|
|
|
1,475 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
The total of
17.1 million
on the consolidated balance sheets also includes the minimum
pension liability of
0.3 million
and pension liabilities of approximately
0.4 million
relating to employees at our German operations. |
The Company anticipates that it will make contributions to the
pension plan of approximately
1,418 in 2007.
Estimated future benefit payments under the pension and other
post-retirement benefit obligations are as follows:
2007 - 1,690,
2008 - 1,684,
2009 - 1,805,
2010 - 1,933,
2011 - 2,044,
2012 through
2016 - 11,822.
Investment Objective:
The investment objective for the Celgar plans is to sufficiently
diversify invested plan assets to maintain a reasonable level of
risk without imprudently sacrificing the return on the invested
funds. To achieve this
86
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands of Euros, Except Per Share Data)
|
|
Note 9. |
Pension and Other Post-Retirement
Benefit Obligations (Continued) |
objective, asset allocation targets have been established by
asset class as summarized below. Reviews of the investment
objectives and the independent investment management are
performed periodically.
Summary of key assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
December 31 | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Benefit obligations
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
5.00% |
|
|
|
5.00% |
|
|
Rate of compensation increase
|
|
|
3.00% |
|
|
|
3.00% |
|
Net benefit cost for year ended
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
5.00% |
|
|
|
6.00% |
|
|
Rate of compensation increase
|
|
|
3.00% |
|
|
|
3.00% |
|
|
Expected rate of return on plan assets
|
|
|
7.25% |
|
|
|
7.25% |
|
Assumed health care cost trend rate at
|
|
|
|
|
|
|
|
|
|
Initial health care cost trend rate
|
|
|
12.00% |
|
|
|
12.00% |
|
|
Annual rate of decline in trend rate
|
|
|
1.00% |
|
|
|
1.00% |
|
|
Ultimate health care cost trend rate
|
|
|
5.00% |
|
|
|
5.00% |
|
The expected rate of return on plan assets is a management
estimate based on, among other factors, historical long-term
returns, expected asset mix and active management premium.
A one-percentage point change in assumed health care cost trend
rate would have the following effect:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006 | |
|
December 31, 2005 | |
|
|
| |
|
| |
|
|
1% Increase | |
|
1% Decrease | |
|
1% Increase | |
|
1% Decrease | |
|
|
| |
|
| |
|
| |
|
| |
Effect on total service and interest rate components
|
|
|
183 |
|
|
|
(140 |
) |
|
|
143 |
|
|
|
(109 |
) |
Effect on post-retirement benefit obligation
|
|
|
1,879 |
|
|
|
(1,467 |
) |
|
|
2,070 |
|
|
|
(1,594 |
) |
Asset Allocation of Funded Plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Target | |
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
| |
Equity securities
|
|
|
50 - 70% |
|
|
|
60% |
|
|
|
62% |
|
Debt securities
|
|
|
30 - 45% |
|
|
|
35% |
|
|
|
35% |
|
Cash and cash equivalents
|
|
|
0 - 10% |
|
|
|
5% |
|
|
|
3% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100% |
|
|
|
100% |
|
|
|
|
|
|
|
|
|
|
|
The provision for current income taxes consists entirely of non
U.S. taxes for the years ended December 31, 2006, 2005
and 2004, respectively.
87
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands of Euros, Except Per Share Data)
|
|
Note 10. |
Income Taxes (Continued) |
Differences between the U.S. Federal Statutory and the
Companys effective rates are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
U.S. Federal statutory rates
|
|
|
34% |
|
|
|
34% |
|
|
|
34% |
|
U.S. Federal statutory rates on (income) loss from
continuing operations before income tax and minority interest
|
|
|
(43,437 |
) |
|
|
48,865 |
|
|
|
5,603 |
|
Tax differential on foreign income (loss)
|
|
|
(4,070 |
) |
|
|
3,951 |
|
|
|
680 |
|
Valuation allowance
|
|
|
(16,145 |
) |
|
|
(44,571 |
) |
|
|
32,537 |
|
Recovery of (provision for) tax reassessments
|
|
|
|
|
|
|
|
|
|
|
1,692 |
|
Other
|
|
|
6,209 |
|
|
|
4,895 |
|
|
|
3,651 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(57,443 |
) |
|
|
13,140 |
|
|
|
44,163 |
|
|
|
|
|
|
|
|
|
|
|
Comprised of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
(584 |
) |
|
|
(383 |
) |
|
|
1,687 |
|
|
Deferred
|
|
|
(56,859 |
) |
|
|
13,523 |
|
|
|
42,476 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(57,443 |
) |
|
|
13,140 |
|
|
|
44,163 |
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax assets and liabilities are composed of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
December 31 | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
German tax loss carryforwards
|
|
|
68,262 |
|
|
|
55,083 |
|
Canadian tax loss carryforwards
|
|
|
631 |
|
|
|
|
|
Basis difference between income tax and financial reporting with
respect to operating pulp mills
|
|
|
(4,397 |
) |
|
|
15,747 |
|
Derivative financial instruments
|
|
|
13,457 |
|
|
|
54,080 |
|
Payables and accrued expenses
|
|
|
111 |
|
|
|
|
|
Reserve for deferred pension liability
|
|
|
179 |
|
|
|
5,777 |
|
U.S. tax loss carryforwards
|
|
|
17,000 |
|
|
|
15,749 |
|
Other
|
|
|
49 |
|
|
|
737 |
|
|
|
|
|
|
|
|
|
|
|
95,292 |
|
|
|
147,173 |
|
Valuation allowance
|
|
|
(88,214 |
) |
|
|
(83,236 |
) |
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
|
7,078 |
|
|
|
63,937 |
|
|
|
|
|
|
|
|
Comprised of:
|
|
|
|
|
|
|
|
|
|
Deferred income tax asset
|
|
|
29,989 |
|
|
|
78,381 |
|
|
Deferred income tax liability
|
|
|
(22,911 |
) |
|
|
(14,444 |
) |
|
|
|
|
|
|
|
|
|
|
7,078 |
|
|
|
63,937 |
|
|
|
|
|
|
|
|
The Company is subject to income tax audits on a continuing
basis which may result in changes to the amounts in the above
table. Because of this and other uncertainties regarding future
amounts of taxable income in Germany, Canada and the United
States, the Company has provided a valuation reserve for all of
its deferred tax assets relating to tax losses carried forward
for income tax purposes.
The Companys U.S. losses carried forward amount to
approximately
50,000 at
December 31, 2006 which will expire in the tax years ending
2011 through 2026, if not used. Management believes that these
tax
88
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands of Euros, Except Per Share Data)
|
|
Note 10. |
Income Taxes (Continued) |
loss carryforwards are not likely to be utilized, under current
circumstances, and has fully reserved any resulting potential
tax benefit.
The Companys German tax losses carried forward amount to
approximately
346,772 at
December 31, 2006. Management believes that these tax loss
carryforwards are not likely to be utilized, under current
circumstances, and has fully reserved any resulting potential
tax benefit.
Income (loss) from foreign source continuing operations amounted
to 115,305,
(86,955) and
41,365 for the
years ended December 31, 2006, 2005 and 2004, respectively.
These amounts are intended to be indefinitely reinvested in
operations. A determination of any deferred tax liability for
temporary differences related to investments in foreign
subsidiaries that are essentially permanent in duration is not
practicable.
|
|
Note 11. |
Shareholders Equity |
In February 2005, the Company issued an aggregate of 4,210,526
common shares by way of private placement at a price of
U.S.$9.50 per share as part of the consideration for the
acquisition of the Celgar mill. In addition, in February 2005,
the Company issued U.S.$310 million of 9.25% senior
unsecured notes due 2013 and an aggregate of 10,768,700 common
shares at a price of U.S.$8.50 per share by way of separate
public offerings.
In December 2006, the Company purchased and cancelled an
aggregate of U.S.$15.245 million principal amount of the
Companys subordinated convertible notes in exchange for
2,201,035 common shares of the Company.
|
|
Note 12. |
Stock-Based Compensation |
Stock Options
The Company has a non-qualified stock option plan which provides
for options to be granted to officers and employees to acquire a
maximum of 3,600,000 common shares including options for
130,000 shares to directors who are not officers or
employees. During 2004, the Company adopted a stock incentive
plan which provides for options, stock appreciation rights and
restricted shares to be awarded to employees and outside
directors to a maximum of 1,000,000 common shares.
Following is a summary of the status of the plans during 2006,
2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted | |
|
|
Number | |
|
Average | |
|
|
of Shares | |
|
Exercise Price | |
|
|
| |
|
| |
|
|
|
|
(In U.S. Dollars) | |
Outstanding at December 31, 2003
|
|
|
2,045,500 |
|
|
$ |
7.12 |
|
Exercised
|
|
|
(861,000 |
) |
|
|
6.34 |
|
Cancelled
|
|
|
(129,500 |
) |
|
|
16.68 |
|
|
|
|
|
|
|
|
Outstanding at December 31, 2004
|
|
|
1,055,000 |
|
|
|
6.58 |
|
Granted
|
|
|
130,000 |
|
|
|
7.78 |
|
|
|
|
|
|
|
|
Outstanding at December 31, 2005
|
|
|
1,185,000 |
|
|
|
6.71 |
|
Exercised
|
|
|
(60,000 |
) |
|
|
6.38 |
|
|
|
|
|
|
|
|
Outstanding at December 31, 2006
|
|
|
1,125,000 |
|
|
$ |
6.69 |
|
|
|
|
|
|
|
|
89
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands of Euros, Except Per Share Data)
|
|
Note 12. |
Stock-Based Compensation (Continued) |
Following is a summary of the status of options outstanding at
December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Options | |
|
|
|
|
| |
|
|
|
|
Weighted | |
|
|
|
Exercisable Options | |
Exercise | |
|
|
|
Average | |
|
Weighted | |
|
| |
Price | |
|
|
|
Remaining | |
|
Average | |
|
|
|
Weighted Average | |
Range | |
|
Number | |
|
Contractual Life | |
|
Exercise Price | |
|
Number | |
|
Exercise Price | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
(In U.S. Dollars) | |
|
|
|
|
|
|
|
|
|
(In U.S. Dollars) | |
|
$5.65 - $6.375 |
|
|
|
860,000 |
|
|
|
3.50 |
|
|
$ |
6.29 |
|
|
|
860,000 |
|
|
$ |
6.29 |
|
|
8.50 |
|
|
|
135,000 |
|
|
|
0.50 |
|
|
|
8.50 |
|
|
|
135,000 |
|
|
|
8.50 |
|
|
7.30 |
|
|
|
30,000 |
|
|
|
8.50 |
|
|
|
7.30 |
|
|
|
20,000 |
|
|
|
7.30 |
|
|
7.92 |
|
|
|
100,000 |
|
|
|
8.75 |
|
|
|
7.92 |
|
|
|
66,667 |
|
|
|
7.92 |
|
During the year ended December 31, 2006, 60,000 options
were exercised at an exercise price of $6.375 for cash proceeds
of $382,500. The intrinsic value of the options exercised was
$4.53 per option. During the years ended December 31,
2005 and 2004 there were no options exercised.
The fair value of each option granted is estimated on the grant
date using the Black Scholes Model. The assumptions used in
calculating fair value are as follows:
|
|
|
|
|
2005 |
|
|
|
Risk-free interest rate
|
|
4.1% |
Expected life of the options
|
|
3 years |
Expected volatility(1)
|
|
50.4% |
Expected dividend yield
|
|
0.0% |
Weighted average fair value per option granted (in
U.S. dollars)
|
|
$2.94 |
|
|
(1) |
The expected volatility was based on our three year historical
stock prices. |
Stock compensation expense recognized for the year ended
December 31, 2006 was
140.
As at December 31, 2006, the total remaining unrecognized
compensation cost related to non-vested stock options amounted
to 155, which
will be amortized over their remaining vesting period of one
year.
The shares vested in the year ended December 31, 2006 are
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Number |
|
Average |
|
|
of Shares |
|
Exercise Price |
|
|
|
|
|
|
|
|
|
(In U.S. Dollars) |
Non-vested at December 31, 2005
|
|
|
120,001 |
|
|
$ |
7.18 |
|
Vested during the year
|
|
|
76,668 |
|
|
|
6.85 |
|
|
|
|
|
|
|
|
|
|
Non-vested at December 31, 2006
|
|
|
43,333 |
|
|
$ |
7.77 |
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value of options outstanding is $5.14
and the aggregate intrinsic value of options currently
exercisable is $5.18.
Restricted Stock
The fair value of restricted stock is determined based upon the
number of shares granted and the quoted price of the
Companys stock on the date of grant. Restricted stock
generally vests over two years. Expense is
90
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands of Euros, Except Per Share Data)
|
|
Note 12. |
Stock-Based Compensation (Continued) |
recognized on a straight-line basis over the vesting period.
Expense recognized for the years ended December 31, 2006
and 2005 was 401
and 441,
respectively.
As at December 31, 2006, the total remaining unrecognized
compensation cost related to restricted stock amounted to
243, which will
be amortized over their remaining vesting period.
During the year ended December 31, 2006, there were
restricted stock awards of an aggregate of 45,000
(2005 -115,685;
2004 - 40,000) of
our common shares to independent directors and officers of the
Company and 9,999
(2005 - nil;
2004 - nil)
restricted stock awards were cancelled.
As at December 31, 2006, the total number of restricted
stock awards outstanding was 190,686
(2005 -155,685;
2004 - 40,000).
|
|
Note 13. |
Net Income (Loss) Per Share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
Net income (loss) from continuing operations basic
|
|
|
69,242 |
|
|
|
(112,058 |
) |
|
|
30,139 |
|
Interest on convertible notes, net of tax
|
|
|
4,912 |
|
|
|
|
|
|
|
5,395 |
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations diluted
|
|
|
74,154 |
|
|
|
(112,058 |
) |
|
|
35,534 |
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
2.08 |
|
|
|
(3.59 |
) |
|
|
1.73 |
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
1.72 |
|
|
|
(3.59 |
) |
|
|
1.25 |
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations
|
|
|
69,242 |
|
|
|
(112,058 |
) |
|
|
30,139 |
|
Net loss from discontinued operations
|
|
|
(6,032 |
) |
|
|
(5,088 |
) |
|
|
(10,159 |
) |
|
|
|
|
|
|
|
|
|
|
Net income (loss) Basic
|
|
|
63,210 |
|
|
|
(117,146 |
) |
|
|
19,980 |
|
Interest on convertible notes, net of tax
|
|
|
4,912 |
|
|
|
|
|
|
|
5,395 |
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) Diluted
|
|
|
68,122 |
|
|
|
(117,146 |
) |
|
|
25,375 |
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
1.90 |
|
|
|
(3.75 |
) |
|
|
1.15 |
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
1.58 |
|
|
|
(3.75 |
) |
|
|
0.89 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
33,336,348 |
|
|
|
31,217,765 |
|
|
|
17,426,351 |
|
|
Effect of dilutive shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options and awards
|
|
|
319,793 |
|
|
|
|
|
|
|
453,839 |
|
|
|
Convertible notes
|
|
|
9,428,022 |
|
|
|
|
|
|
|
10,645,161 |
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
43,084,163 |
|
|
|
31,217,765 |
|
|
|
28,525,351 |
|
|
|
|
|
|
|
|
|
|
|
The calculation of diluted income (loss) per share does not
assume the exercise of stock options and awards or the
conversion of convertible notes that would have an anti-dilutive
effect on earnings per share. Stock options and awards excluded
from the calculation of diluted income (loss) per share because
they are anti-dilutive represented Nil, 213,492 and Nil for the
years ended December 31, 2006, 2005 and 2004, respectively.
Convertible notes excluded from the calculation of diluted
income (loss) per share because they are anti-dilutive
represented Nil, 10,645,161 and Nil for the years ended
December 31, 2006, 2005 and 2004, respectively.
91
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands of Euros, Except Per Share Data)
|
|
Note 14. |
Business Segment Information |
The Company has three operating segments, the individual pulp
mills, that are aggregated into one reportable business segment,
market pulp.
The pulp business is cyclical in nature and its market is
affected by fluctuations in supply and demand in each cycle.
These fluctuations have significant effect on the cost of
materials and the eventual sales prices of products.
The following table presents net sales from continuing
operations to external customers by geographic area based on
location of the customer.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
Germany
|
|
|
154,388 |
|
|
|
91,460 |
|
|
|
56,526 |
|
China
|
|
|
141,296 |
|
|
|
82,356 |
|
|
|
8,463 |
|
Italy
|
|
|
60,057 |
|
|
|
71,742 |
|
|
|
51,504 |
|
Other European Union countries
|
|
|
117,016 |
|
|
|
91,308 |
|
|
|
48,890 |
|
Other Asia
|
|
|
75,522 |
|
|
|
56,953 |
|
|
|
4,362 |
|
North America
|
|
|
39,761 |
|
|
|
37,643 |
|
|
|
|
|
Other countries
|
|
|
28,586 |
|
|
|
16,191 |
|
|
|
8,767 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
616,626 |
|
|
|
447,653 |
|
|
|
178,512 |
|
Third party transportation revenues
|
|
|
7,351 |
|
|
|
4,784 |
|
|
|
3,730 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
623,977 |
|
|
|
452,437 |
|
|
|
182,242 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Not including Germany or Italy; includes new entrant countries
to the European Union from their time of admission. |
The following table presents total long-lived assets from
continuing operations by geographic area based on location of
the asset.
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Germany
|
|
|
851,290 |
|
|
|
846,127 |
|
Canada
|
|
|
181,574 |
|
|
|
199,108 |
|
Other
|
|
|
5,024 |
|
|
|
1,015 |
|
|
|
|
|
|
|
|
|
|
|
1,037,888 |
|
|
|
1,046,250 |
|
|
|
|
|
|
|
|
In 2006, pulp sales to one customer amounted to 9%
(2005 - 6%;
2004 - 10%)
of total pulp sales.
92
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands of Euros, Except Per Share Data)
|
|
Note 15. |
Financial Instruments |
The fair value of financial instruments from continuing
operations at December 31 is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
|
|
Carrying | |
|
|
|
Carrying | |
|
|
|
|
Amount | |
|
Fair Value | |
|
Amount | |
|
Fair Value | |
|
|
| |
|
| |
|
| |
|
| |
Cash and cash equivalents
|
|
|
69,367 |
|
|
|
69,367 |
|
|
|
82,775 |
|
|
|
82,775 |
|
Cash restricted
|
|
|
57,000 |
|
|
|
57,000 |
|
|
|
31,612 |
|
|
|
31,612 |
|
Notes receivable
|
|
|
16,542 |
|
|
|
16,542 |
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
907,831 |
|
|
|
907,831 |
|
|
|
944,973 |
|
|
|
944,973 |
|
Foreign exchange rate derivative contracts asset
|
|
|
5,933 |
|
|
|
5,933 |
|
|
|
|
|
|
|
|
|
Interest rate derivative contracts liability
|
|
|
41,355 |
|
|
|
41,355 |
|
|
|
78,646 |
|
|
|
78,646 |
|
Foreign exchange rate derivative contracts liability
|
|
|
|
|
|
|
|
|
|
|
61,979 |
|
|
|
61,979 |
|
Cash and Debt Instruments
In common with other pulp companies, much of the Companys
transactions are denominated in foreign currencies, primarily
the U.S. dollar. As a result of these transactions the
Company and its subsidiaries has financial risk that the value
of the Companys financial instruments will vary due to
fluctuations in foreign exchange rates.
The carrying value of cash and cash equivalents approximates the
fair value due to its short-term maturity. The fair value of
cash restricted was equal to its carrying amount because it is
in an account which bears a market rate of interest. The fair
value of notes receivable was determined using discounted cash
flows at prevailing market rates. The fair value of long-term
debt reflects prevailing market conditions and the
Companys use of derivative instruments to manage interest
rate risk. The fair values of the interest rate and foreign
currency exchange contracts are obtained from dealer quotes.
These values represent the estimated amount the Company would
receive or pay to terminate agreements taking into consideration
current interest rates, the creditworthiness of the
counterparties and current foreign currency exchange rates.
The Company has entered into interest rate and foreign exchange
derivative instruments in connection with certain of its
long-term debt (Note 8). The contracts are with the same
banks which hold the debt and the Company does not anticipate
non-performance by the banks.
The Company uses interest rate derivatives to fix the rate of
interest on indebtedness under the Stendal loan facilities and
uses foreign exchange derivatives to convert some costs
(including currency swaps relating to long-term indebtedness)
from Euros to U.S. dollars.
Interest Rate Derivatives
During 2004, the Company entered into certain
variable-to-fixed
interest rate swaps in connection with the Stendal mill with
respect to an aggregate maximum amount of approximately
612.6 of the
principal amount of the long-term indebtedness under the Stendal
loan facility. The aggregate notional amount of these contracts
ranges from
464.9 to
612.6, at a
fixed interest rate of 5.28% and they mature from May 2005 to
October 2017 (the maturity of the Stendal loan facility). The
Company recognized an unrealized gain of
37.3 and an
unrealized loss of
3.2 with respect
to these interest rate swaps for the years ended
December 31, 2006 and 2005, respectively.
93
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands of Euros, Except Per Share Data)
|
|
Note 15. |
Financial Instruments (Continued) |
The Company had entered into certain interest rate contracts
with an aggregate notional amount of
134,319,
maturing September 2007 and recognized a loss of
295 with respect
to these interest rate cap contracts for the year ended
December 31, 2005.
Foreign Exchange Derivatives
The Company had entered into certain currency swaps with an
initial aggregate notional amount of
Nil and
recognized a gain of
52 for the year
ended December 31, 2006.
During 2006, the Company entered into and subsequently settled
certain currency forward contracts with an aggregate notional
amount of Nil
and recognized a loss of
3,562. During
2005, the Company entered into and subsequently settled certain
currency forward contracts with an aggregate notional amount of
Nil and
recognized a loss of
2,160.
Credit Risk
Concentrations of credit risk on the sale of pulp products are
with customers and agents based in Germany, China, Italy, other
European and Asian countries, North America, and other countries.
|
|
Note 16. |
Lease Commitments |
Minimum lease payments under capital and non-cancellable
operating leases and the present value of net minimum payments
at December 31, 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Capital | |
|
Operating | |
|
|
Leases | |
|
Leases | |
|
|
| |
|
| |
2007
|
|
|
5,392 |
|
|
|
905 |
|
2008
|
|
|
3,590 |
|
|
|
574 |
|
2009
|
|
|
1,432 |
|
|
|
122 |
|
2010
|
|
|
998 |
|
|
|
75 |
|
2011
|
|
|
663 |
|
|
|
63 |
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
12,075 |
|
|
|
1,739 |
|
|
|
|
|
|
|
|
Less imputed interest
|
|
|
(714 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total present value of minimum capitalized payments
|
|
|
11,361 |
|
|
|
|
|
Less current portion of capital lease obligations
|
|
|
(5,158 |
) |
|
|
|
|
|
|
|
|
|
|
|
Long-term capital lease obligations
|
|
|
6,203 |
|
|
|
|
|
|
|
|
|
|
|
|
Rent expense under non-cancellable operating leases was
1,453,
1,525 and
1,559 for 2006,
2005 and 2004, respectively. The current portion of the capital
lease obligations is included in accounts payable and accrued
expenses and the long-term portion is included in capital leases
and other in the consolidated balance sheets.
|
|
Note 17. |
Commitments and Contingencies |
At December 31, 2006, the Company recorded a liability for
environmental conservation expenditures of
2,027.
Management believes the liability amount recorded is sufficient.
94
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands of Euros, Except Per Share Data)
|
|
Note 17. |
Commitments and Contingencies (Continued) |
The Company is required to pay certain fees based on water
consumption levels at its German mills. Unpaid fees can be
reduced by the mills demonstration of reduced
environmental emissions. To the extent that the Company has not
agreed with regulatory authorities for fee reductions, a
liability for these water charges has been recognized.
The Company is in the process of implementing a capital
improvement project at our Celgar mill in the aggregate amount
of approximately
20,000. At
December 31, 2006, the Company had entered into commitments
totaling 3,010.
The Company is involved in various matters of litigation arising
in the ordinary course of business. In the opinion of
management, the estimated outcome of such issues will not have a
material effect on the Companys financial statements.
The Companys Celgar mill maintains industrial land fills
on its premises for the disposal of waste, primarily from the
mills pulp processing activities. The mill has an
obligation under its land fill permits to decommission these
disposal facilities pursuant to the requirements of its local
regulations. The balance of the aggregate carrying amount of the
asset retirement obligation amounted to
1,441 at
December 31, 2006.
|
|
Note 18. |
Discontinued Operations |
In August 2006, the Company reorganized and divested its equity
interests in certain paper production assets for aggregate
consideration of approximately
5.0 million
of indebtedness, in the form of a secured note, and
5.0 million
in cash. Only the cash portion of the consideration appears on
the consolidated condensed statements of cash flows.
On November 16, 2006, the Company divested its last
remaining paper production assets to focus exclusively on the
manufacture and sale of pulp. As at December 31, 2006, the
Company expects to incur costs of approximately
1.9 million
in connection with funding and other commitments related to this
divestiture.
Accordingly, the information related to the paper production
assets is presented as discontinued operations in the
Companys consolidated financial statements.
The carrying amounts of the major classes of related assets and
liabilities were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2006 | |
|
2005 | |
|
|
| |
|
| |
Assets
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
437 |
|
|
|
772 |
|
|
Receivables
|
|
|
1,657 |
|
|
|
4,327 |
|
|
Inventories
|
|
|
|
|
|
|
7,405 |
|
|
Other
|
|
|
|
|
|
|
105 |
|
|
Property, plant and equipment
|
|
|
|
|
|
|
9,299 |
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
|
1,926 |
|
|
|
12,441 |
|
|
Debt
|
|
|
|
|
|
|
5,247 |
|
95
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands of Euros, Except Per Share Data)
|
|
Note 18. |
Discontinued Operations (Continued) |
Condensed earnings from discontinued operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
Revenues
|
|
|
46,351 |
|
|
|
61,471 |
|
|
|
54,970 |
|
Operating income (loss) from discontinued operations
|
|
|
394 |
|
|
|
(2,306 |
) |
|
|
(9,771 |
) |
Total other expenses
|
|
|
(469 |
) |
|
|
(2,782 |
) |
|
|
(388 |
) |
Loss on disposal of business
|
|
|
(5,957 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from discontinued operations
|
|
|
(6,032 |
) |
|
|
(5,088 |
) |
|
|
(10,159 |
) |
Loss per common share from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
basic and diluted
|
|
|
(0.18 |
) |
|
|
(0.16 |
) |
|
|
(0.58 |
) |
Condensed cash flows from discontinued operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
Cash flows used in operating activities
|
|
|
(2,121 |
) |
|
|
(347 |
) |
|
|
(85 |
) |
Cash flows from (used in) investing activities
|
|
|
5,944 |
|
|
|
(1,200 |
) |
|
|
(3,050 |
) |
Cash flows (used in) from financing activities
|
|
|
(4,158 |
) |
|
|
(700 |
) |
|
|
4,042 |
|
|
|
|
|
|
|
|
|
|
|
Cash flows (used in) from discontinued operations
|
|
|
(335 |
) |
|
|
(2,247 |
) |
|
|
907 |
|
|
|
Note 19. |
Minority Share Purchase |
In October 2006, the Company increased its interest in the
Stendal mill to 70.6% by acquiring a 7% minority interest
therein for
8.1 million,
of which
6.7 million
was paid by a note (Note 8 (f)). The purchase price of
8.1 million
was allocated to property, plant and equipment.
|
|
Note 20. |
Restricted Group Supplemental Disclosure |
The terms of the indenture governing our 9.25% senior
unsecured notes requires that we provide the results of
operations and financial condition of Mercer International Inc.
and our restricted subsidiaries under the indenture,
collectively referred to as the Restricted Group. As
at and during the years ended December 31, 2006 and 2005,
the Restricted Group was comprised of Mercer International Inc.,
certain holding subsidiaries and Rosenthal, and the Celgar mill
from the date of its acquisition on February 14, 2005.
During the year ended December 31, 2004, the Restricted
Group was comprised of Mercer International Inc., certain
holding subsidiaries and Rosenthal, which was the only member of
the Restricted Group with material operations during this
period. We acquired the Celgar mill in February 2005 and, as a
result, its operations for the year ended December 31, 2004
are not included for such period. The Restricted Group excludes
the Stendal mill and the discontinued paper business.
96
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands of Euros, Except Per Share Data)
|
|
Note 20. |
Restricted Group
Supplemental Disclosure (Continued) |
Combined Condensed Balance Sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006 | |
|
|
| |
|
|
Restricted | |
|
Unrestricted | |
|
|
|
Consolidated | |
|
|
Group | |
|
Subsidiaries | |
|
Eliminations | |
|
Group | |
|
|
| |
|
| |
|
| |
|
| |
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
39,078 |
|
|
|
30,289 |
|
|
|
|
|
|
|
69,367 |
|
|
Receivables
|
|
|
38,662 |
|
|
|
36,360 |
|
|
|
|
|
|
|
75,022 |
|
|
Note receivable, current portion
|
|
|
620 |
|
|
|
7,178 |
|
|
|
|
|
|
|
7,798 |
|
|
Inventories
|
|
|
41,087 |
|
|
|
21,770 |
|
|
|
|
|
|
|
62,857 |
|
|
Prepaid expenses and other
|
|
|
2,352 |
|
|
|
2,310 |
|
|
|
|
|
|
|
4,662 |
|
|
Current assets from discontinued operations
|
|
|
|
|
|
|
2,094 |
|
|
|
|
|
|
|
2,094 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
121,799 |
|
|
|
100,001 |
|
|
|
|
|
|
|
221,800 |
|
Cash restricted
|
|
|
|
|
|
|
57,000 |
|
|
|
|
|
|
|
57,000 |
|
Property, plant and equipment
|
|
|
408,957 |
|
|
|
563,186 |
|
|
|
|
|
|
|
972,143 |
|
Other
|
|
|
8,155 |
|
|
|
4,763 |
|
|
|
|
|
|
|
12,918 |
|
Deferred income tax
|
|
|
14,316 |
|
|
|
15,673 |
|
|
|
|
|
|
|
29,989 |
|
Due from unrestricted group
|
|
|
51,265 |
|
|
|
|
|
|
|
(51,265 |
) |
|
|
|
|
Note receivable, less current portion
|
|
|
5,023 |
|
|
|
3,721 |
|
|
|
|
|
|
|
8,744 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
609,515 |
|
|
|
744,344 |
|
|
|
(51,265 |
) |
|
|
1,302,594 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
|
46,475 |
|
|
|
37,335 |
|
|
|
|
|
|
|
83,810 |
|
|
Pension and other post-retirement benefit obligations, current
portion
|
|
|
363 |
|
|
|
|
|
|
|
|
|
|
|
363 |
|
|
Debt, current portion
|
|
|
|
|
|
|
33,903 |
|
|
|
|
|
|
|
33,903 |
|
|
Current liabilities from discontinued operations
|
|
|
|
|
|
|
1,926 |
|
|
|
|
|
|
|
1,926 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
46,838 |
|
|
|
73,164 |
|
|
|
|
|
|
|
120,002 |
|
Debt, less current portion
|
|
|
293,781 |
|
|
|
571,840 |
|
|
|
|
|
|
|
865,621 |
|
Due to restricted group
|
|
|
|
|
|
|
51,265 |
|
|
|
(51,265 |
) |
|
|
|
|
Unrealized derivative loss
|
|
|
|
|
|
|
41,355 |
|
|
|
|
|
|
|
41,355 |
|
Capital leases and other
|
|
|
22,115 |
|
|
|
11,789 |
|
|
|
|
|
|
|
33,904 |
|
Deferred income tax
|
|
|
2,832 |
|
|
|
20,079 |
|
|
|
|
|
|
|
22,911 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
365,566 |
|
|
|
769,492 |
|
|
|
(51,265 |
) |
|
|
1,083,793 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity (deficit)
|
|
|
243,949 |
|
|
|
(25,148 |
) |
|
|
|
|
|
|
218,801 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
|
609,515 |
|
|
|
744,344 |
|
|
|
(51,265 |
) |
|
|
1,302,594 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
97
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands of Euros, Except Per Share Data)
|
|
Note 20. |
Restricted Group
Supplemental Disclosure (Continued) |
Combined Condensed Balance Sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005 | |
|
|
| |
|
|
Restricted | |
|
Unrestricted | |
|
|
|
Consolidated | |
|
|
Group | |
|
Subsidiaries | |
|
Eliminations | |
|
Group | |
|
|
| |
|
| |
|
| |
|
| |
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
48,790 |
|
|
|
33,985 |
|
|
|
|
|
|
|
82,775 |
|
|
Cash restricted
|
|
|
|
|
|
|
7,039 |
|
|
|
|
|
|
|
7,039 |
|
|
Receivables
|
|
|
41,349 |
|
|
|
28,655 |
|
|
|
|
|
|
|
70,004 |
|
|
Inventories
|
|
|
47,100 |
|
|
|
26,642 |
|
|
|
|
|
|
|
73,742 |
|
|
Prepaid expenses and other
|
|
|
2,940 |
|
|
|
2,429 |
|
|
|
|
|
|
|
5,369 |
|
|
Current assets from discontinued operations
|
|
|
|
|
|
|
12,593 |
|
|
|
|
|
|
|
12,593 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
140,179 |
|
|
|
111,343 |
|
|
|
|
|
|
|
251,522 |
|
Cash restricted
|
|
|
|
|
|
|
24,573 |
|
|
|
|
|
|
|
24,573 |
|
Property, plant and equipment
|
|
|
404,151 |
|
|
|
611,212 |
|
|
|
|
|
|
|
1,015,363 |
|
Other
|
|
|
10,533 |
|
|
|
4,145 |
|
|
|
|
|
|
|
14,678 |
|
Deferred income tax
|
|
|
24,303 |
|
|
|
54,078 |
|
|
|
|
|
|
|
78,381 |
|
Due from unrestricted group
|
|
|
46,412 |
|
|
|
|
|
|
|
(46,412 |
) |
|
|
|
|
Long-term assets from discontinued operations
|
|
|
|
|
|
|
9,299 |
|
|
|
|
|
|
|
9,299 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
625,578 |
|
|
|
814,650 |
|
|
|
(46,412 |
) |
|
|
1,393,816 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
|
46,867 |
|
|
|
53,418 |
|
|
|
|
|
|
|
100,285 |
|
|
Debt, current portion
|
|
|
|
|
|
|
25,550 |
|
|
|
|
|
|
|
25,550 |
|
|
Current liabilities from discontinued operations
|
|
|
|
|
|
|
14,492 |
|
|
|
|
|
|
|
14,492 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
46,867 |
|
|
|
93,460 |
|
|
|
|
|
|
|
140,327 |
|
Debt, less current portion
|
|
|
342,023 |
|
|
|
577,400 |
|
|
|
|
|
|
|
919,423 |
|
Due to restricted group
|
|
|
|
|
|
|
46,412 |
|
|
|
(46,412 |
) |
|
|
|
|
Unrealized derivatives loss
|
|
|
|
|
|
|
140,625 |
|
|
|
|
|
|
|
140,625 |
|
Other
|
|
|
20,722 |
|
|
|
6,336 |
|
|
|
|
|
|
|
27,058 |
|
Deferred income tax
|
|
|
1,851 |
|
|
|
12,593 |
|
|
|
|
|
|
|
14,444 |
|
Long-term liabilities from discontinued operations
|
|
|
|
|
|
|
3,196 |
|
|
|
|
|
|
|
3,196 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
411,463 |
|
|
|
880,022 |
|
|
|
(46,412 |
) |
|
|
1,245,073 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
214,115 |
|
|
|
(65,372 |
) |
|
|
|
|
|
|
148,743 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
|
625,578 |
|
|
|
814,650 |
|
|
|
(46,412 |
) |
|
|
1,393,816 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
98
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands of Euros, Except Per Share Data)
|
|
Note 20. |
Restricted Group
Supplemental Disclosure (Continued) |
Combined Condensed Statement of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006 | |
|
|
| |
|
|
Restricted | |
|
Unrestricted | |
|
|
|
Consolidated | |
|
|
Group | |
|
Subsidiaries | |
|
Eliminations | |
|
Group | |
|
|
| |
|
| |
|
| |
|
| |
Revenues
|
|
|
360,986 |
|
|
|
262,991 |
|
|
|
|
|
|
|
623,977 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs
|
|
|
286,087 |
|
|
|
176,456 |
|
|
|
|
|
|
|
462,543 |
|
Operating depreciation and amortization
|
|
|
27,819 |
|
|
|
28,015 |
|
|
|
|
|
|
|
55,834 |
|
General and administrative expenses
|
|
|
17,611 |
|
|
|
11,094 |
|
|
|
|
|
|
|
28,705 |
|
(Sale) purchase of emission allowances
|
|
|
(4,933 |
) |
|
|
(10,676 |
) |
|
|
|
|
|
|
(15,609 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income from continuing operations
|
|
|
34,402 |
|
|
|
58,102 |
|
|
|
|
|
|
|
92,504 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(34,354 |
) |
|
|
(61,137 |
) |
|
|
3,560 |
|
|
|
(91,931 |
) |
|
Investment income
|
|
|
5,316 |
|
|
|
4,334 |
|
|
|
(3,560 |
) |
|
|
6,090 |
|
|
Derivative financial instruments, net
|
|
|
|
|
|
|
105,848 |
|
|
|
|
|
|
|
105,848 |
|
|
Unrealized foreign exchange gain on debt
|
|
|
15,245 |
|
|
|
|
|
|
|
|
|
|
|
15,245 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other (expense) income
|
|
|
(13,793 |
) |
|
|
49,045 |
|
|
|
|
|
|
|
35,252 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes and minority interest from
continuing operations
|
|
|
20,609 |
|
|
|
107,147 |
|
|
|
|
|
|
|
127,756 |
|
Income tax provision
|
|
|
(11,258 |
) |
|
|
(46,185 |
) |
|
|
|
|
|
|
(57,443 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before minority interest from continuing operations
|
|
|
9,351 |
|
|
|
60,962 |
|
|
|
|
|
|
|
70,313 |
|
Minority interest
|
|
|
|
|
|
|
(1,071 |
) |
|
|
|
|
|
|
(1,071 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations
|
|
|
9,351 |
|
|
|
59,891 |
|
|
|
|
|
|
|
69,242 |
|
|
|
Net loss from discontinued operations
|
|
|
|
|
|
|
(6,032 |
) |
|
|
|
|
|
|
(6,032 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
9,351 |
|
|
|
53,859 |
|
|
|
|
|
|
|
63,210 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
99
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands of Euros, Except Per Share Data)
|
|
Note 20. |
Restricted Group
Supplemental Disclosure (Continued) |
Combined Condensed Statement of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005 | |
|
|
| |
|
|
Restricted | |
|
Unrestricted | |
|
|
|
Consolidated | |
|
|
Group | |
|
Subsidiaries | |
|
Eliminations | |
|
Group | |
|
|
| |
|
| |
|
| |
|
| |
Revenues
|
|
|
276,406 |
|
|
|
176,031 |
|
|
|
|
|
|
|
452,437 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs
|
|
|
230,039 |
|
|
|
146,974 |
|
|
|
(1,605 |
) |
|
|
375,408 |
|
Operating depreciation and amortization
|
|
|
23,898 |
|
|
|
27,262 |
|
|
|
|
|
|
|
51,160 |
|
General and administrative
|
|
|
19,025 |
|
|
|
5,486 |
|
|
|
|
|
|
|
24,511 |
|
(Sale) purchase of emission allowances
|
|
|
(7,271 |
) |
|
|
(10,021 |
) |
|
|
|
|
|
|
(17,292 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income from continuing operations
|
|
|
10,715 |
|
|
|
6,330 |
|
|
|
1,605 |
|
|
|
18,650 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(32,352 |
) |
|
|
(56,789 |
) |
|
|
2,815 |
|
|
|
(86,326 |
) |
|
Investment income
|
|
|
3,742 |
|
|
|
1,495 |
|
|
|
(2,815 |
) |
|
|
2,422 |
|
|
Derivative financial instruments, net
|
|
|
(295 |
) |
|
|
(71,468 |
) |
|
|
|
|
|
|
(71,763 |
) |
|
Unrealized foreign exchange loss on debt
|
|
|
(4,156 |
) |
|
|
|
|
|
|
|
|
|
|
(4,156 |
) |
|
Impairment of investments
|
|
|
(1,699 |
) |
|
|
|
|
|
|
|
|
|
|
(1,699 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense
|
|
|
(34,760 |
) |
|
|
(126,762 |
) |
|
|
|
|
|
|
(161,522 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes and minority interest from
continuing operations
|
|
|
(24,045 |
) |
|
|
(120,432 |
) |
|
|
1,605 |
|
|
|
(142,872 |
) |
Income tax (provision) benefit
|
|
|
(1,161 |
) |
|
|
14,301 |
|
|
|
|
|
|
|
13,140 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before minority interest from continuing operations
|
|
|
(25,206 |
) |
|
|
(106,131 |
) |
|
|
1,605 |
|
|
|
(129,732 |
) |
Minority interest
|
|
|
|
|
|
|
17,674 |
|
|
|
|
|
|
|
17,674 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
|
(25,206 |
) |
|
|
(88,457 |
) |
|
|
1,605 |
|
|
|
(112,058 |
) |
|
|
Net loss from discontinued operations
|
|
|
|
|
|
|
(5,088 |
) |
|
|
|
|
|
|
(5,088 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(25,206 |
) |
|
|
(93,545 |
) |
|
|
1,605 |
|
|
|
(117,146 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
100
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands of Euros, Except Per Share Data)
|
|
Note 20. |
Restricted Group
Supplemental Disclosure (Continued) |
Combined Condensed Statement of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2004 | |
|
|
| |
|
|
Restricted | |
|
Unrestricted | |
|
|
|
Consolidated | |
|
|
Group | |
|
Subsidiaries | |
|
Eliminations | |
|
Group | |
|
|
| |
|
| |
|
| |
|
| |
Revenues
|
|
|
142,152 |
|
|
|
40,090 |
|
|
|
|
|
|
|
182,242 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs
|
|
|
98,113 |
|
|
|
43,117 |
|
|
|
37 |
|
|
|
141,267 |
|
Operating depreciation and amortization
|
|
|
17,766 |
|
|
|
9,022 |
|
|
|
|
|
|
|
26,788 |
|
General and administrative
|
|
|
13,828 |
|
|
|
8,560 |
|
|
|
|
|
|
|
22,388 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) from continuing operations
|
|
|
12,445 |
|
|
|
(20,609 |
) |
|
|
(37 |
) |
|
|
(8,201 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense) Interest expense
|
|
|
(10,941 |
) |
|
|
(13,734 |
) |
|
|
1,490 |
|
|
|
(23,185 |
) |
|
Investment income
|
|
|
3,132 |
|
|
|
1,130 |
|
|
|
(1,490 |
) |
|
|
2,772 |
|
|
Derivative financial instruments, net
|
|
|
13,242 |
|
|
|
(1,106 |
) |
|
|
|
|
|
|
12,136 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
5,433 |
|
|
|
(13,710 |
) |
|
|
|
|
|
|
(8,277 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes and minority interest from
continuing operations
|
|
|
17,878 |
|
|
|
(34,319 |
) |
|
|
(37 |
) |
|
|
(16,478 |
) |
Income tax benefit
|
|
|
17,235 |
|
|
|
26,928 |
|
|
|
|
|
|
|
44,163 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before minority interest from continuing operations
|
|
|
35,113 |
|
|
|
(7,391 |
) |
|
|
(37 |
) |
|
|
27,685 |
|
Minority interest
|
|
|
|
|
|
|
2,454 |
|
|
|
|
|
|
|
2,454 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations
|
|
|
35,113 |
|
|
|
(4,937 |
) |
|
|
(37 |
) |
|
|
30,139 |
|
|
|
Net loss from discontinued operations
|
|
|
|
|
|
|
(10,159 |
) |
|
|
|
|
|
|
(10,159 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
35,113 |
|
|
|
(15,096 |
) |
|
|
(37 |
) |
|
|
19,980 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101
SUPPLEMENTARY FINANCIAL INFORMATION (UNAUDITED)
Quarterly Financial Data
(Thousands, Except per Share Amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended | |
|
|
| |
|
|
March 31 | |
|
June 30 | |
|
September 30 | |
|
December 31 | |
|
|
| |
|
| |
|
| |
|
| |
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
141,668 |
|
|
|
150,594 |
|
|
|
171,248 |
|
|
|
160,467 |
|
Gross profit
|
|
|
10,994 |
|
|
|
10,583 |
|
|
|
34,758 |
|
|
|
36,169 |
|
Income before extraordinary items and cumulative effect of a
change in accounting from continuing operations
|
|
|
16,184 |
|
|
|
18,324 |
|
|
|
6,128 |
|
|
|
28,606 |
|
Income before extraordinary items and cumulative effect of a
change in accounting from continuing operations, per share*
|
|
|
0.40 |
|
|
|
0.45 |
|
|
|
0.18 |
|
|
|
0.67 |
|
Net income (loss) from discontinued operations
|
|
|
404 |
|
|
|
97 |
|
|
|
600 |
|
|
|
(7,133 |
) |
Net income
|
|
|
16,588 |
|
|
|
18,421 |
|
|
|
6,728 |
|
|
|
21,473 |
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
82,510 |
|
|
|
113,512 |
|
|
|
133,413 |
|
|
|
123,002 |
|
Gross profit
|
|
|
(629 |
) |
|
|
9,998 |
|
|
|
9,026 |
|
|
|
255 |
|
Loss before extraordinary items and cumulative effect of a
change in accounting from continuing operations
|
|
|
(19,275 |
) |
|
|
(61,259 |
) |
|
|
(4,319 |
) |
|
|
(27,205 |
) |
Loss before extraordinary items and cumulative effect of a
change in accounting from continuing operations, per share*
|
|
|
(0.76 |
) |
|
|
(1.85 |
) |
|
|
(0.13 |
) |
|
|
(0.82 |
) |
Net loss from discontinued operations
|
|
|
(392 |
) |
|
|
(892 |
) |
|
|
(1,236 |
) |
|
|
(2,568 |
) |
Net loss
|
|
|
(19,667 |
) |
|
|
(62,151 |
) |
|
|
(5,555 |
) |
|
|
(29,773 |
) |
102
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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. |
|
Dated: March 1, 2007 |
|
By: |
|
/s/ Jimmy S.H. Lee
|
|
|
|
|
|
|
|
|
|
Jimmy S.H. Lee
Chairman |
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on
the dates indicated.
|
|
|
|
|
|
|
|
/s/ Jimmy S.H. Lee
Jimmy
S.H. Lee
Chairman, Chief Executive Officer and Director |
|
Date: March 1, 2007 |
|
|
|
/s/ David M. Gandossi
David
M. Gandossi
Secretary, Executive Vice President and Chief Financial Officer |
|
Date: March 1, 2007 |
|
|
|
/s/ Kenneth A. Shields
Kenneth
A. Shields
Director |
|
Date: March 1, 2007 |
|
|
|
/s/ Eric Lauritzen
Eric
Lauritzen
Director |
|
Date: March 1, 2007 |
|
|
|
/s/ William D.
McCartney
William
D. McCartney
Director |
|
Date: March 1, 2007 |
|
|
|
/s/ Graeme A. Witts
Graeme
A. Witts
Director |
|
Date: March 1, 2007 |
|
|
|
/s/ Guy W. Adams
Guy
W. Adams
Director |
|
Date: March 1, 2007 |
|
|
|
/s/ George Malpass
George
Malpass
Director |
|
Date: March 1, 2007 |
|
|
103
EXHIBIT INDEX
|
|
|
|
|
Exhibit |
|
|
No. |
|
Description of Exhibit |
|
|
|
|
1 |
.1 |
|
Underwriting Agreement dated February 8, 2005 between
Mercer International Inc. and RBC Capital Markets Corporation,
on behalf of itself and CIBC World Markets Corp., Raymond
James & Associates, Inc. and D.A. Davidson &
Co. Incorporated by reference from Form 8-K dated
February 10, 2005. |
|
1 |
.2 |
|
Underwriting Agreement dated February 8, 2005 among Mercer
International Inc. and RBC Capital Markets Corporation and
Credit Suisse First Boston LLC, on behalf of themselves and CIBC
World Markets Corp. Incorporated by reference from Form 8-K
dated February 10, 2005. |
|
2 |
.1 |
|
Agreement and Plan of Merger among Mercer International Inc.,
Mercer International Regco Inc. and Mercer Delaware Inc. dated
December 14, 2005. Incorporated by reference to the Proxy
Statement/ Prospectus filed on December 15, 2005. |
|
3 |
.1 |
|
Articles of Incorporation of the Company, as amended.
Incorporated by reference from Form 8-A dated March 1,
2006. |
|
3 |
.2 |
|
Bylaws of the Company. Incorporated by reference from
Form 8-A dated March 1, 2006. |
|
4 |
.1 |
|
Indenture dated as of October 10, 2003 between Mercer
International Inc. and Wells Fargo Bank Minnesota, N.A.
Incorporated by reference from Form 8-K dated
October 15, 2003. |
|
4 |
.2 |
|
Indenture dated as of December 10, 2004 between Mercer
International Inc. and Wells Fargo Bank, N.A. Incorporated by
reference from Form S-3 filed December 10, 2004. |
|
4 |
.3 |
|
First Supplemental Indenture dated February 14, 2005 to
Indenture dated December 10, 2004 between Mercer
International Inc. and Wells Fargo Bank, N.A. Incorporated by
reference from Form 8-K dated February 17, 2005. |
|
10 |
.1 |
|
Amended and Restated 1992 Stock Option Plan. Incorporated by
reference from Form S-8 dated March 2, 2000. |
|
10 |
.2* |
|
2002 Employee Incentive Bonus Plan. |
|
10 |
.3 |
|
Project Financing Facility Agreement dated August 26, 2002
between Zellstoff Stendal GmbH and Bayerische Hypo-und
Vereinsbank AG. Incorporated by reference from Form 8-K
dated September 10, 2002. |
|
10 |
.4 |
|
Shareholders Undertaking Agreement dated August 26,
2002 among Mercer International Inc., Stendal Pulp Holdings
GmbH, RWE Industrie-Lösungen GmbH, AIG Altmark Industrie AG
and FAHR Beteiligungen AG and Zellstoff Stendal GmbH and
Bayerische Hypo-und Vereinsbank AG. Incorporated by reference
from Form 8-K dated September 10, 2002. |
|
10 |
.5* |
|
Shareholders Agreement dated August 26, 2002 among
Zellstoff Stendal GmbH, Stendal Pulp Holdings GmbH, RWE
Industrie-Lösungen GmbH and FAHR Beteiligungen AG. |
|
10 |
.6* |
|
Contract for the Engineering, Design, Procurement, Construction,
Erection and Start-Up of a Kraft Pulp Mill between Zellstoff
Stendal GmbH and RWE Industrie-Lösungen GmbH dated
August 26, 2002. Certain non-public information has been
omitted from the appendices to Exhibit 10.16 pursuant to a
request for confidential treatment filed with the SEC. Such
non-public information was filed with the SEC on a confidential
basis. The SEC approved the request for confidential treatment
in January 2004. |
|
10 |
.7* |
|
Form of Trustees Indemnity Agreement between Mercer
International Inc. and its Trustees. |
|
10 |
.8 |
|
Employment Agreement dated for reference August 7, 2003
between Mercer International Inc. and David Gandossi.
Incorporated by reference from Form 8-K dated
August 11, 2003. |
|
10 |
.9 |
|
Employment Agreement effective as of April 28, 2004 between
Mercer International Inc. and Jimmy S.H. Lee. Incorporated by
reference from Form 8-K dated April 28, 2004. |
|
10 |
.10 |
|
2004 Stock Incentive Plan. Incorporated by reference from
Form S-8 dated June 15, 2004. |
|
10 |
.11 |
|
Asset Purchase Agreement by and among Mercer International Inc.,
0706906 B.C. Ltd. and KPMG Inc., as receiver of all of the
assets and undertakings of Stone Venepal (Celgar) Pulp Inc.
dated November 22, 2004. Incorporated by reference from
Form 8-K dated November 23, 2004. |
|
10 |
.12 |
|
Revolving Credit Facility Agreement dated February 9, 2005
among D&Z Holding GmbH, Zellstoff-und Papierfabrik Rosenthal
GmbH & Co. KG, ZPR Beteiligungs GmbH and Bayerische
Hypo-und Vereinsbank AG. Incorporated by reference from
Form 8-K dated February 17, 2005. |
|
|
|
|
|
Exhibit |
|
|
No. |
|
Description of Exhibit |
|
|
|
|
10 |
.13 |
|
Shareholders Undertaking Agreement dated February 9,
2005 relating to Revolving Credit Facility Agreement.
Incorporated by reference from Form 8-K dated
February 17, 2005. |
|
10 |
.14 |
|
Revolving Term Credit Facility dated for reference May 19,
2006 among Zellstoff Celgar Limited Partnership, as borrower,
and the lenders from time to time parties thereto, as lenders
and CIT Business Credit Canada Inc., as agent. Incorporated by
reference from Form 8-K dated May 30, 2006. |
|
10 |
.15 |
|
Employment Agreement dated October 2, 2006 between Stendal
Pulp Holding GmbH and Wolfram Ridder. Incorporated by reference
from Form 8-K dated October 2, 2006. |
|
10 |
.16 |
|
Employment Agreement effective October 16, 2006 between
Mercer International Inc. and David Ure dated September 22,
2006. Incorporated by reference from Form 8-K dated
October 13, 2006. |
|
10 |
.17 |
|
Employment Agreement effective November 6, 2006 between
Mercer International Inc. and Claes-Inge Isacson dated
September 25, 2006. Incorporated by reference from
Form 8-K dated October 13, 2006. |
|
99 |
.1 |
|
Exchange Agreement dated December 4, 2006 between Mercer
International Inc. and Nisswa Master Fund Ltd. Incorporated by
reference from Form 8-K dated December 5, 2006. |
|
99 |
.2 |
|
Exchange Agreement dated December 4, 2006 between Mercer
International Inc. and CC Arbitrage Ltd. Incorporated by
reference from Form 8-K dated December 5, 2006. |
|
21 |
|
|
List of Subsidiaries of Registrant. |
|
23 |
.1 |
|
Consent of Independent Registered Chartered Accountants. |
|
31 |
.1 |
|
Section 302 Certificate of Chief Executive Officer. |
|
31 |
.2 |
|
Section 302 Certificate of Chief Financial Officer. |
|
32 |
.1** |
|
Section 906 Certificate of Chief Executive Officer. |
|
32 |
.2** |
|
Section 906 Certificate of Chief Financial Officer. |
|
|
|
|
* |
Filed in Form 10-K
for prior years. |
|
|
** |
In accordance with Release
33-8212 of the
Commission, these Certifications: (i) are
furnished to the Commission and are not
filed for the purposes of liability under the
Securities Exchange Act of 1934, as amended; and (ii) are
not to be subject to automatic incorporation by reference into
any of the Companys registration statements filed under
the Securities Act of 1933, as amended for the purposes of
liability thereunder or any offering memorandum, unless the
Company specifically incorporates them by reference therein. |