| 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 report, including the description of business in “Item 1 |
| We cannot guarantee that our actual results will be consistent with the forward looking statements we make in this 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 |
| Our level of indebtedness could negatively impact our financial condition and results of operations |
| As of December 31, 2005, we had approximately €950dtta2 million of indebtedness outstanding, of which €603dtta0 million is project debt of Stendal |
| In February 2005, we sold dlra310 million in principal amount of 9dtta25prca senior notes due 2013 as well as repaid all of the net bank indebtedness of our Rosenthal mill |
| 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: • our ability to obtain additional financing to fund future operations or meet our working capital needs or any such financing may not be available on terms favorable to us or at all; • a certain amount of our operating cash flow is dedicated to the payment of principal and interest on our indebtedness, thereby diminishing funds that would otherwise be available for our operations and for other purposes; • a substantial decrease in net operating cash flows or increase in our expenses could make it more difficult for us to meet our debt service requirements, which could force us to modify our operations; and 34 _________________________________________________________________ [126]Table of Contents • 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, our ability to successfully integrate the Celgar mill into our operations 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, that we will be able to successfully integrate the Celgar mill into our operations or that we will be able to implement our strategy fully or that the anticipated results of our strategy will be realized |
| Our business is highly cyclical in nature |
| The pulp and paper business is cyclical in nature and markets for our principal products are characterized by periods of supply and demand imbalance, which in turn affects product prices |
| The markets for pulp and paper are highly competitive and are sensitive to cyclical changes in industry capacity and in the global economy, all of which can have a significant influence on selling prices and our earnings |
| 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 and paper products has historically been determined by the level of economic growth and has been closely tied to overall business activity |
| Although pulp prices have improved overall since then, they will continue to fluctuate in the future |
| Further, we cannot predict the impact of economic weakness in certain world markets or the impact of war, terrorist activity or other events on our markets |
| Because market conditions beyond our control determine the prices for our products, the price for any one or more of these products 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 these products 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 for pulp production, and waste paper and pulp for paper production |
| Fiber costs are primarily affected by the supply of, and demand for, lumber and pulp, which are both highly cyclical in nature 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 |
| Our Stendal mill is subject to risks commonly associated with the ramp up of large greenfield industrial projects |
| The Stendal mill has been constructed near the town of Stendal, Germany |
| The aggregate cost of the mill is approximately €1dtta0 billion |
| The performance of the Stendal mill has had a material impact on our financial 35 _________________________________________________________________ [127]Table of Contents condition and operating performance |
| The construction of the Stendal mill commenced in 2002 and was completed in the third quarter of 2004 |
| We are currently ramping up production at the Stendal mill |
| Our ongoing ramp up of the Stendal mill is subject to risks commonly associated with the ramp up of large greenfield industrial projects which could result in the Stendal mill experiencing operating difficulties or delays and 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, 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 |
| The failure to successfully integrate the Celgar mill with our business may adversely affect our results of operations |
| Our future performance will depend in part on how well we integrate the Celgar mill with our operations |
| The Acquisition is larger than any of the other acquisitions we have made |
| Integrating the Celgar mill with our operations will be a complex, time consuming and potentially expensive process |
| Further, the expense of upgrading the Celgar mill to enhance its operations may be more significant than currently anticipated |
| All of the pulp produced by the Celgar mill was sold by third party agents |
| We are now supervising and performing most of its sales functions directly |
| We cannot assure you that our internal sales staff and third party agents will be able to sell the combined pulp production of our three pulp mills on terms as favorable as those achieved by such agents previously |
| We estimate that we will incur significant costs associated with the assimilation of the Celgar mill with our operations |
| The actual costs may substantially exceed our estimates and unanticipated expenses associated with such integration may arise |
| Furthermore, we may not have identified adverse information or all of the risks concerning the assets we have acquired |
| If we are unable to address any of these risks, our results of operations and financial condition could be materially adversely affected and the operations of the Celgar mill may not achieve the results or otherwise perform as expected |
| Further, if the benefits of the Acquisition do not exceed the costs, our financial results will be adversely affected |
| We cannot guarantee that we will successfully integrate the Celgar mill with our operations |
| If we are unable to address any of these risks, our results of operations and financial condition could be materially adversely affected and the operations of the Celgar mill may not achieve the results or otherwise perform as expected |
| We have only limited recourse under the acquisition agreement for losses relating to the Acquisition |
| The diligence conducted in connection with the Acquisition and the indemnification provided in the acquisition agreement may not be sufficient to protect us from, or compensate us for, all losses resulting from the Acquisition |
| Subject to certain exceptions, the maximum amount we may claim is limited to dlra30dtta0 million (dlra20dtta0 million in the case of environmental losses) |
| Subject to certain exceptions, the vendor is only liable for misrepresentations or breaches of warranty for 15 months from the closing date of the Acquisition (12 months in the case of environmental losses) |
| A material loss associated with the Acquisition for which there is no adequate remedy under the acquisition agreement could materially adversely affect our results of operations and financial condition and reduce the anticipated benefits of the Acquisition |
| While we are implementing a number of initiatives to reduce operating costs, increase production and improve the financial results of the Celgar mill, we may not be able to achieve our planned operating improvements, cost reductions, capacity increases or improved price realizations in our expected time periods, if at all |
| In addition, some of the improvements that we hope to achieve depend upon capital expenditure projects that we are implementing at the Celgar mill |
| Such capital projects may not be completed in our 36 _________________________________________________________________ [128]Table of Contents expected time periods, if at all, may not achieve the results that we have estimated or may have a cost substantially in excess of our planned amounts |
| 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 |
| Any failure by us to efficiently and effectively manage our growth could adversely affect our business |
| Expansion of our business, including, particularly, the integration of the Celgar mill into our operations and the ramp up of the Stendal mill, 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 |
| We are exposed to currency exchange rate and interest rate fluctuations |
| A large majority of our sales, other than those of the Celgar mill, in 2005 were in products quoted in US dollars while most of our operating costs and expenses were incurred in Euros |
| In addition, all of the products sold by the Celgar mill are quoted in US 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 significant decrease in the value of the US dollar relative to the Euro and by a decrease in the value of the US dollar relative 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 |
| Stendal has 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 over the last two years |
| 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 |
| 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 US 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 manage against depreciation of the US 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 dlra612dtta6 million of the principal amount of such facility |
| Stendal has also entered into currency 37 _________________________________________________________________ [129]Table of Contents swaps and a currency forward contract in connection with such facility |
| Rosenthal had also entered into currency swap, currency forward, interest rate and interest cap derivative instruments in connection with its outstanding floating rate indebtedness |
| Our derivative instruments are marked to market and can materially impact our operating results |
| For example, our operating results for 2005 included realized and unrealized losses of €68dtta3 million on currency derivatives and realized and unrealized net losses of €3dtta5 million on the interest rate derivatives when they were marked to market |
| Further, in February 2005, we converted a large portion of our long-term indebtedness into US dollars by issuing dlra310 million of senior notes to refinance all of Rosenthal’s bank indebtedness and to fund a portion of the purchase price for the Acquisition of the Celgar mill |
| 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 |
| Fluctuations in the price and supply of our raw materials could adversely affect our business |
| Wood chips and pulp logs comprise the fiber used by our three pulp mills |
| The fiber used by our paper mills consists of waste paper and pulp |
| The cost of wood chips and pulp logs is primarily affected by the supply and demand for lumber |
| The cost of fiber for our paper mills is primarily affected by the supply and demand for paper and pulp |
| Demand for these raw materials is determined by the volume of pulp and paper products produced globally and regionally |
| The markets for pulp and paper products, including our products, are highly variable and are characterized by periods of excess product supply due to many factors, including periods of insufficient demand due to weak general economic activity or other causes |
| The cyclical nature of pricing for these raw materials represents a potential risk to our profit margins if 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 supply interruptions or substantial price increases, our requirements will increase as the Stendal mill reaches its full production capacity and as we upgrade the 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, acts of god, natural catastrophes, weather 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 |
| We operate in highly competitive markets |
| We sell our products globally, with a large percentage sold in Europe, North America and Asia |
| The markets for our products are highly competitive |
| A number of other global companies compete in each of these markets and no company holds a dominant position |
| For both pulp and paper, many companies produce products that are largely standardized |
| As a result, the primary basis for competition in our markets has been price |
| Many of our competitors have greater resources and lower leverage than we do and may be able to adapt more quickly to industry or market changes or devote greater resources to the sale of products than we can |
| There can be no assurance that we will continue to be competitive in the future |
| 38 _________________________________________________________________ [130]Table of Contents 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: • unlawful discharges to land, air, water and sewers; • waste collection, storage, transportation and disposal; • hazardous waste; • dangerous goods and hazardous materials and the collection, storage, transportation and disposal of such substances; • the clean-up of unlawful discharges; • land use planning; • municipal zoning; and • 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 |
| 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 |
| We may incur significant taxes if the US Internal Revenue Service and other non-US taxing authorities do not agree with our tax treatment of the Conversion |
| Changes in tax laws, treaties or regulations or the interpretation or enforcement of these tax laws, treaties or regulations, could adversely affect the tax consequences of the Conversion on us, our subsidiaries and our shareholders |
| In addition, if the US Internal Revenue Service or other taxing authorities do not agree with our assessment of the effects or interpretation of these laws, treaties and regulations, we could incur a material amount of US federal income tax as a result of the Conversion |
| The collective agreement relating to employees at our paper mills in Germany has expired and we are currently negotiating a new agreement with them |
| The collective agreement relating to our pulp workers at the Rosenthal mill expires in the third quarter of 2007 |
| In addition, we may enter into an initial collective agreement with our pulp workers at the Stendal mill in 2006 |
| 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 and the paper mills |
| 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 fail to honor or 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 |
| 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 |
| We may experience disruptions to our production and delivery |
| 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 or paper manufacturing facilities could cease operations unexpectedly due to a number of events, including: • 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; 40 _________________________________________________________________ [132]Table of Contents • fires, floods, earthquakes or other natural catastrophes; and • labour difficulties or 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 |
| Our insurance coverage may not be adequate |
| We have obtained insurance coverage that we believe would ordinarily be maintained by an operator of facilities similar to our pulp and paper mills |
| Our insurance is subject to various limits and exclusions |
| Damage or destruction to our facilities could result in claims that are excluded by, or exceed the limits of, our insurance coverage |
| 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 23B19, 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, 10prca or more of the corporation’s voting stock |
| We may in the 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 |