10-Q 1 0001.txt MERCER INTERNATIONAL INC. - 2ND QTR 00 FORM 10-Q 1 ========================================================================== UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------- ------- Commission File No.: 000-09409 MERCER INTERNATIONAL INC. (Exact name of Registrant as specified in its charter) Washington 91-6087550 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) Giesshubelstrasse 15, Zurich, Switzerland CH 8045 (Address of principal executive offices) (Zip Code) 41(1) 201 7710 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- The Registrant had 16,734,899 shares of beneficial interest outstanding as at August 10, 2000. ========================================================================== 2 PART I. FINANCIAL INFORMATION --------------------- ITEM 1. FINANCIAL STATEMENTS MERCER INTERNATIONAL INC. CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 2000 (Unaudited) FORM 10-Q QUARTERLY REPORT - PAGE 2 3 MERCER INTERNATIONAL INC. CONSOLIDATED BALANCE SHEETS As at June 30, 2000 and December 31, 1999 (Unaudited) (dollars in thousands)

June 30, December 31, 2000 1999 ---------- ------------ ASSETS Current Assets Cash and cash equivalents $ 7,968 $ 1,722 Investments 19,617 5,392 Receivables 47,149 41,448 Inventories 14,619 17,697 Prepaid and other 2,530 2,857 --------- --------- Total current assets 91,883 69,116 Long-Term Assets Cash restricted 12,203 12,865 Properties 275,175 351,828 Investments 5,613 6,925 Note receivable 4,869 4,869 Deferred income tax 9,766 10,242 --------- --------- 307,626 386,729 --------- --------- $ 399,509 $ 455,845 ========= ========= LIABILITIES Current Liabilities Accounts payable and accrued expenses $ 41,369 $ 40,287 Pulp mill conversion costs payable 4,292 56,195 Note payable 66 553 Debt 11,311 19,121 --------- --------- Total current liabilities 57,038 116,156 Long-Term Liabilities Debt 233,402 233,163 Other 2,672 3,506 --------- --------- 236,074 236,669 --------- --------- Total liabilities 293,112 352,825 SHAREHOLDERS' EQUITY Shares of beneficial interest 99,038 99,038 Accumulated other comprehensive loss (61,912) (55,242) Retained earnings 69,271 59,224 --------- --------- 106,397 103,020 --------- --------- $ 399,509 $ 455,845 ========= =========

The accompanying notes are an integral part of these financial statements. FORM 10-Q QUARTERLY REPORT - PAGE 3 4 MERCER INTERNATIONAL INC. CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS For Six Months Ended June 30, 2000 and 1999 (Unaudited) (dollars in thousands, except for earnings per share)

2000 1999 ---------- ---------- Revenues Sales $ 114,818 $ 74,730 Other 4,657 1,349 ---------- ---------- 119,475 76,079 Expenses Cost of sales 97,076 67,721 General and administrative 5,251 9,880 Interest expense 7,110 1,189 ---------- ---------- 109,437 78,790 ---------- ---------- Income (loss) before income taxes 10,038 (2,711) Income taxes (recovery) (9) - ---------- ---------- Net income (loss) 10,047 (2,711) Retained earnings, beginning of period 59,224 98,167 Dividend - (834) ---------- ---------- Retained earnings, end of period $ 69,271 $ 94,622 ========== ========== Earnings (loss) per share Basic $ 0.60 $ (0.17) ========== ========== Diluted $ 0.59 $ (0.17) ========== ==========

The accompanying notes are an integral part of these financial statements. FORM 10-Q QUARTERLY REPORT - PAGE 4 5 MERCER INTERNATIONAL INC. CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS For Three Months Ended June 30, 2000 and 1999 (Unaudited) (dollars in thousands, except for earnings per share)

2000 1999 ---------- ---------- Revenues Sales $ 59,575 $ 35,854 Other 4,140 (854) ---------- ---------- 63,715 35,000 Expenses Cost of sales 48,184 32,290 General and administrative 3,563 4,892 Interest expense 2,978 661 ---------- ---------- 54,725 37,843 ---------- ---------- Income (loss) before income taxes 8,990 (2,843) Income taxes 14 - ---------- ---------- Net income (loss) 8,976 (2,843) Retained earnings, beginning of period 60,295 98,299 Dividend - (834) ---------- ---------- Retained earnings, end of period $ 69,271 $ 94,622 ========== ========== Earnings (loss) per share Basic $ 0.54 $ (0.17) ========== ========== Diluted $ 0.52 $ (0.17) ========== ==========

The accompanying notes are an integral part of these financial statements. FORM 10-Q QUARTERLY REPORT - PAGE 5 6 MERCER INTERNATIONAL INC. STATEMENTS OF COMPREHENSIVE INCOME For Six Months Ended June 30, 2000 and 1999 (Unaudited) (dollars in thousands)

2000 1999 ---------- ---------- Net income (loss) $ 10,047 $ (2,711) Other comprehensive (loss) income: Foreign currency translation adjustments (6,048) (18,421) Unrealized (loss) gain on securities (622) 3,080 ---------- ---------- Other comprehensive loss (6,670) (15,341) ---------- ---------- Total comprehensive gain (loss) $ 3,377 $ (18,052) ========== ==========

The accompanying notes are an integral part of these financial statements. FORM 10-Q QUARTERLY REPORT - PAGE 6 7 MERCER INTERNATIONAL INC. STATEMENTS OF COMPREHENSIVE INCOME For Three Months Ended June 30, 2000 and 1999 (Unaudited) (dollars in thousands)

2000 1999 ---------- ---------- Net income (loss) $ 8,976 $ (2,843) Other comprehensive (loss) income: Foreign currency translation adjustments (196) (6,307) Unrealized (loss) gain on securities (607) 1,967 ---------- ---------- Other comprehensive loss (803) (4,340) ---------- ---------- Total comprehensive gain (loss) $ 8,173 $ (7,183) ========== ==========

The accompanying notes are an integral part of these financial statements. FORM 10-Q QUARTERLY REPORT - PAGE 7 8 MERCER INTERNATIONAL INC. CONSOLIDATED STATEMENTS OF CASH FLOWS For Six Months Ended June 30, 2000 and 1999 (Unaudited) (dollars in thousands)

2000 1999 ---------- ---------- Cash Flows from Operating Activities: Net income (loss) $ 10,047 $ (2,711) Adjustments to reconcile net income (loss) from operations to cash Depreciation and amortization 13,491 6,394 Non-cash asset acquisitions - (265) ---------- ---------- 23,538 3,418 Changes in current assets and liabilities Investments (14,270) 3,917 Inventories 2,180 819 Receivables 1,437 (16,482) Accounts payable and accrued expenses 2,531 (1,636) Other 20 (3,002) ---------- ---------- Net cash provided by (used in) operating activities 15,436 (12,966) Cash Flows from Investing Activities: Purchase of fixed assets, net of investment grants 36,308 (112,970) Decrease in notes receivable 10 - ---------- ---------- Net cash provided by (used in) investing activities 36,318 (112,970) Cash Flows from Financing Activities: Increase in indebtedness 5,888 72,895 Decrease in indebtedness (1,139) (714) Payment of dividend - (834) (Decrease) increase in pulp mill conversion costs payable (49,264) 9,063 ---------- ---------- Net cash (used in) provided by financing activities (44,515) 80,410 Effect of exchange rate changes on cash and cash equivalents (993) (4,003) ---------- ---------- Net increase (decrease) in cash and cash equivalents 6,246 (49,529) Cash and cash equivalents, beginning of period 1,722 53,250 ---------- ---------- Cash and cash equivalents, end of period $ 7,968 $ 3,721 ========== ==========

The accompanying notes are an integral part of these financial statements. FORM 10-Q QUARTERLY REPORT - PAGE 8 9 MERCER INTERNATIONAL INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR SIX MONTHS ENDED JUNE 30, 2000 (Unaudited) Note 1. Basis of Presentation The interim period consolidated financial statements contained herein include the accounts of Mercer International Inc. and its subsidiaries (the "Company"). The interim period consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the "SEC"). Certain information and footnote disclosure normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such SEC rules and regulations. The interim period consolidated financial statements should be read together with the audited consolidated financial statements and accompanying notes included in the Company's latest annual report on Form 10-K for the fiscal year ended December 31, 1999. In the opinion of the Company, the unaudited consolidated financial statements contained herein contain all adjustments necessary to present a fair statement of the results of the interim periods presented. Certain reclassifications have been made to the prior period's financial statements to conform with the current period's presentation. Note 2. Earnings Per Share Earnings per share is computed on the basis of the weighted average number of shares outstanding during a period after considering convertible securities, warrants and options. The weighted average number of shares outstanding for the purposes of calculating basic earnings per share was 16,715,399 and 16,103,017 for the six months ended June 30, 2000 and 1999, respectively, and 16,715,399 and 16,309,869 for the three months ended June 30, 2000 and 1999, respectively. The weighted average number of shares outstanding for the purposes of calculating diluted earnings per share was 17,101,499 and 16,142,561 for the six months ended June 30, 2000 and 1999, respectively, and 17,210,116 and 16,322,920 for the three months ended June 30, 2000 and 1999, respectively. Note 3. Disposition of Assets Effective June 1, 2000, the Company sold its packaging paper mill located in Trebsen, Germany (the "Trebsen Facility") for approximately $9.1 million plus an amount equal to the net working capital associated with the Trebsen Facility. FORM 10-Q QUARTERLY REPORT - PAGE 9 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Mercer International Inc. is a pulp and paper company and its operations are primarily located in Germany. The following discussion and analysis of the results of operations and financial condition of the Company for the six months and three months ended June 30, 2000 should be read in conjunction with the consolidated financial statements and related notes included elsewhere herein. In this document: (i) unless the context otherwise requires, the "Company" refers to Mercer International Inc. and its subsidiaries; and (ii) a "tonne" is one metric ton or 2,204.6 pounds. Based upon period average exchange rates, the U.S. dollar appreciated by approximately 13.4% against the deutschmark in the six months ended June 30, 2000, compared to the same period of 1999, and by approximately 13.1% in the three months ended June 30, 2000, compared to the same period of 1999. Effective June 1, 2000, the Company sold its packaging paper mill located in Trebsen, Germany (the "Trebsen Facility"). The Company's results of operations include the results of operations of the Trebsen Facility to June 1, 2000. RESULTS OF OPERATIONS - Six Months Ended June 30, 2000 The following table sets forth selected sales data for the Company for the periods indicated:

Six Months Ended June 30, ------------------------------- 2000 1999 ---------- ---------- (unaudited) (in thousands) Sales by Product Class Packaging papers $ 8,758 $ 8,898 Specialty papers 16,860 15,011 Printing papers 19,100 19,149 Pulp 70,100 31,672 ---------- ---------- Total(1) $ 114,818 $ 74,730 ========== ========== Sales by Geographic Area Germany $ 46,952 $ 38,502 European Union(2) 41,295 32,014 Other 26,571 4,214 ---------- ---------- Total $ 114,818 $ 74,730 ========== ========== Sales by Volume (tonnes) Packaging papers 29,111 34,987 Specialty papers 21,056 18,037 Printing papers 27,853 28,464 Pulp 119,252 74,454 ---------- ---------- Total 197,272 155,942 ========== ========== -------------------- (1) Excluding intercompany sales. (2) Not including Germany.

FORM 10-Q QUARTERLY REPORT - PAGE 10 11 In the six months ended June 30, 2000, revenues increased by approximately 57.0% to $119.5 million from $76.1 million in the comparative period of 1999, primarily as a result of increased pulp sales resulting from the ramping-up of production and the conversion of production to kraft pulp at the Company's pulp mill. In the six months ended June 30, 2000, pulp and paper revenues increased by approximately 53.6% from the comparable period of 1999, with pulp sales increasing by approximately 121.3%. The Company completed a project in late 1999 to convert the Company's pulp mill from the production of sulphite pulp to the production of kraft pulp and increase its annual production capacity from 160,000 tonnes to 280,000 tonnes (the "Conversion Project"). During the first half of 2000, the pulp mill ramped up production of kraft pulp, and by June 30, 2000 was operating at in excess of 95% of capacity. In the six months ended June 30, 2000, kraft pulp sales continued to benefit from increased demand and low producer inventories. List prices for kraft pulp in Europe increased from approximately $600 per tonne at the end of 1999 to approximately $670 per tonne during the second quarter of 2000 and approximately $710 per tonne effective July 1, 2000. Pulp sales in the six months ended June 30, 2000 increased to $70.1 million from $31.7 million in the comparable period of 1999. In the first half of 2000, sales of specialty papers increased as a result of increased demand, while sales of packaging and printing papers declined marginally, compared to the first half of 1999. Overall, paper sales in the six months ended June 30, 2000 increased to $44.7 million from $43.1 million in the comparable period of 1999. On average, paper prices realized by the Company in the six months ended June 30, 2000 increased by approximately 8.5% compared to the same period in 1999. Expenses increased to $109.4 million in the six months ended June 30, 2000 from $78.8 million in the comparable period of 1999, primarily as a result of higher sales volumes. On average, the Company's fibre costs for pulp production in the six months ended June 30, 2000 increased by approximately 7.9% compared to the same period in 1999. Prices for waste paper, which comprises approximately 80% of the fibre for the Company's paper mills, increased by approximately 161.9% in the six months ended June 30, 2000, compared to the same period of 1999. General and administrative expenses were $5.3 million in the six months ended June 30, 2000, compared to $9.9 million in the comparable period of 1999. Interest expense in the six months ended June 30, 2000 increased to $7.1 million from $1.2 million in the comparable period of 1999, primarily as a result of increased indebtedness during the current period resulting from the Conversion Project. Interest costs incurred in 1999 in respect of the Conversion Project were capitalized. For the six months ended June 30, 2000, the Company reported net income of $10.0 million, or $0.59 per share on a diluted basis, compared to a net loss of $2.7 million, or $0.17 per share, in the comparable period of 1999. FORM 10-Q QUARTERLY REPORT - PAGE 11 12 RESULTS OF OPERATIONS - Three Months Ended June 30, 2000 The following table sets forth selected sales data for the Company for the periods indicated:

Three Months Ended June 30, --------------------------------- 2000 1999 ------------ ------------ (unaudited) (in thousands) Sales by Product Class Packaging papers $ 3,553 $ 4,277 Specialty papers 8,365 6,904 Printing papers 9,843 9,133 Pulp 37,814 15,540 ------------ ------------ Total(1) $ 59,575 $ 35,854 ============ ============ Sales by Geographic Area Germany $ 24,153 $ 18,606 European Union(2) 21,828 16,281 Other 13,594 967 ------------ ------------ Total $ 59,575 $ 35,854 ============ ============ Sales by Volume (tonnes) Packaging papers 11,394 17,589 Specialty papers 10,398 8,562 Printing papers 14,364 14,289 Pulp 60,941 36,421 ------------ ------------ Total 97,097 76,861 ============ ============ -------------------- (1) Excluding intercompany sales. (2) Not including Germany.

In the three months ended June 30, 2000, revenues increased by approximately 82.0% to $63.7 million from $35.0 million in the comparative period of 1999, primarily as a result of increased pulp sales resulting from the ramping-up of production and the conversion of production to kraft pulp at the Company's pulp mill. In the three months ended June 30, 2000, pulp and paper revenues increased by approximately 66.2% from the comparable period of 1999, with pulp sales increasing by approximately 143.3%. In the three months ended June 30, 2000, kraft pulp sales continued to benefit from increased demand and low producer inventories. List prices for kraft pulp in Europe increased from approximately $630 per tonne during the first quarter of 2000 to approximately $670 per tonne during the second quarter of 2000 and approximately $710 per tonne effective July 1, 2000. Pulp sales in the three months ended June 30, 2000 increased to $37.8 million from $15.5 million in the comparable period of 1999. FORM 10-Q QUARTERLY REPORT - PAGE 12 13 In the three months ended June 30, 2000, sales of specialty and printing papers increased as a result of increased demand, while sales of packaging papers declined, compared to the three months ended June 30, 1999. Overall, paper sales in the three months ended June 30, 2000 increased to $21.8 million from $20.3 million in the comparable period of 1999. On average, paper prices realized by the Company in the three months ended June 30, 2000 increased by approximately 19.8% compared to the same period in 1999. Expenses increased to $54.7 million in the three months ended June 30, 2000 from $37.8 million in the comparable period of 1999, primarily as a result of higher sales volumes. On average, the Company's fibre costs for pulp production in the three months ended June 30, 2000 increased by approximately 6.7% compared to the same period in 1999. Prices for waste paper, which comprises approximately 80% of the fibre for the Company's paper mills, increased by approximately 267.1% in the three months ended June 30, 2000, compared to the same period of 1999. General and administrative expenses were $3.6 million in the three months ended June 30, 2000, compared to $4.9 million in the comparable period of 1999. Interest expense in the three months ended June 30, 2000 increased to $3.0 million from $0.7 million in the comparable period of 1999, primarily as a result of increased indebtedness during the current period resulting from the Conversion Project. Interest costs incurred in 1999 in respect of the Conversion Project were capitalized. For the three months ended June 30, 2000, the Company reported net income of $9.0 million, or $0.52 per share on a diluted basis, compared to a net loss of $2.8 million, or $0.17 per share, in the comparable period of 1999. LIQUIDITY AND CAPITAL RESOURCES The following table is a summary of selected financial information concerning the Company for the periods indicated:

As at As at June 30, 2000 December 31, 1999 ------------- ----------------- (unaudited) (in thousands) Financial Position Working capital $ 34,845 $ (47,040) Total assets 399,509 455,845 Long-term government debt - 5,490 Long-term debt - other 233,402 227,673

At June 30, 2000, the Company's cash and cash equivalents totalled $8.0 million, a net increase of $6.2 million from $1.7 million at December 31, 1999. At June 30, 2000, the Company had short-term trading securities totalling $19.6 million, compared to $5.4 million at December 31, 1999. FORM 10-Q QUARTERLY REPORT - PAGE 13 14 Operating Activities Operating activities provided cash of $15.4 million in the six months ended June 30, 2000, compared to using cash of $13.0 million in the same period in 1999. An increase in accounts payable and accrued expenses provided cash of $2.5 million in the six months ended June 30, 2000, compared to a decrease in accounts payable and accrued expenses using cash of $1.6 million in the six months ended June 30, 1999. A decrease in receivables provided cash of $1.4 million in the current period, compared to an increase in receivables using cash of $16.5 million in the comparative period of 1999. Lower inventories provided cash of $2.2 million in the six months ended June 30, 2000, compared to $0.8 million in the six months ended June 30, 1999. Net purchases of investment securities used cash of $14.3 million in the six months ended June 30, 2000, compared to net sales of investment securities providing cash of $3.9 million in the comparative period of 1999. Investing Activities Investing activities in the six months ended June 30, 2000 provided cash of $36.3 million, consisting primarily of the receipt of governmental grants of $52.6 million in connection with the Conversion Project, compared to using cash of $113.0 million in the six months ended June 30, 1999. The Company completed the Conversion Project in late 1999. In the six months ended June 30, 2000, the Company incurred $14.0 million in expenditures related to the completion of the Conversion Project. The Conversion Project was financed through a combination of borrowings under a project loan, non-refundable governmental grants, governmental assistance and guarantees for long-term project financing and an equity investment by the Company. Effective June 1, 2000, the Company sold its Trebsen Facility for approximately $9.1 million plus an amount equal to the net working capital associated with the Trebsen Facility. For further details regarding the sale of the Trebsen Facility, see the Company's Form 8-K dated June 21, 2000. The Company is continuing to review its other paper operations to define a long-term core competency in respect of products produced in order that future investment may be directed towards that segment. Currently the investment required to maintain the Company's other three paper mills has not enhanced the competitive position of any one mill and has had a dilutive effect on the Company's assets. Capital expenditures to upgrade the Company's paper mills used cash of approximately $2.5 million in the six months ended June 30, 2000, including approximately $1.3 million to complete the installation of a new paper machine drive at the Company's Fahrbrucke paper mill. Financing Activities Financing activities used cash of $44.5 million in the six months ended June 30, 2000, primarily as a result of payments of accounts payable associated with the Conversion Project. Financing activities provided cash of $80.4 million in the six months ended June 30, 1999. FORM 10-Q QUARTERLY REPORT - PAGE 14 15 The depreciation of the deutschmark against the U.S. dollar in the six months ended June 30, 2000 resulted in an unrealized foreign exchange translation loss of $1.0 million on cash and cash equivalents, which is included in the Company's statement of comprehensive income and does not affect the Company's net earnings. See "Foreign Currency". The Company will apply approximately $5.2 million of the proceeds from the sale of the Trebsen Facility to repay and discharge two governmental loans associated with the Trebsen Facility. Effective January 2000, the Company agreed, subject to certain conditions, to acquire a controlling interest in a "greenfield" project to construct and operate a 550,000-tonne softwood kraft pulp mill to be located at Stendal, Germany (the "Stendal Project"). The Company's participation in the Stendal Project is subject to, among other things, completion of due diligence and the Stendal Project itself is subject to, among other things, financing. The Stendal Project is currently estimated to cost approximately DM 1,600.0 million (or $823.3 million) and to be completed by the end of 2003. Financing for the Stendal Project is expected to come from the project partners, government financing, project financing and outside capital. See "Stendal Pulp Mill Project Uncertainties". Other than the agreement relating to the Stendal Project, the Company had no material commitments to acquire assets or operating businesses as at June 30, 2000. The Company anticipates that there will be acquisitions of businesses or commitments to projects in the future. To achieve its long- term goals of expanding its asset and earnings base through mergers and acquisitions, the Company will require substantial capital resources. The necessary resources will be generated from cash flow from operations, cash on hand, borrowing against its assets and/or the sale of assets. Foreign Currency Substantially all of the Company's operations are conducted in international markets and its consolidated financial results are subject to foreign currency exchange rate fluctuations, in particular, those in Germany. Approximately 99% of the Company's revenues are denominated in deutschmarks and euros. The value of the euro is fixed at 1.95583 deutschmarks. The Company translates foreign assets and liabilities into U.S. dollars 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. Unrealized gains or losses from these translations are recorded as shareholders' equity on the Company's balance sheet and do not affect the net earnings of the Company. Since substantially all of the Company's revenues are received in deutschmarks and euros, the financial position of the Company for any given period, when reported in U.S. dollars, can be significantly affected by the exchange rates prevailing during that period. In the six months ended June 30, 2000, the depreciation of the deutschmark against the U.S. dollar resulted in a net $6.0 million foreign exchange translation loss and, as a result, the cumulative foreign exchange translation loss increased from $49.9 million at December 31, 1999 to $56.0 million at June 30, 2000. FORM 10-Q QUARTERLY REPORT - PAGE 15 16 As both the Company's principal sources of revenues and expenses are in deutschmarks or euros, the Company does not currently enter into any currency hedging arrangements for exchange rate fluctuations. The average and period ending exchange rates for the deutschmark to the U.S. dollar for the periods indicated are as follows:

Quarter Ended Quarter Ended June 30, 2000 June 30, 1999 -------------------------- -------------------------- Period End Period Average Period End Period Average ---------- -------------- ---------- -------------- Rate of Exchange Deutschmark 2.0486 2.0941 1.8989 1.8513

Based upon the period average exchange rate in the six months ended June 30, 2000, the U.S. dollar increased by approximately 4.9% in value against the deutschmark since December 31, 1999. Cyclical Nature of Business; Competitive Position The pulp and paper business is cyclical in nature and markets for the Company's principal products are characterized by periods of supply and demand imbalance, which in turn affects product prices. The markets for pulp and paper are highly competitive and sensitive to cyclical changes in industry capacity and in the economy, both of which can have a significant influence on selling prices and the earnings of the Company. Demand for pulp and paper products has historically been determined by the level of economic growth and has been closely tied to overall business activity. The competitive position of the Company is influenced by the availability and quality of raw materials (fibre) and its experience in relation to other producers with respect to inflation, energy, transportation, labour costs and productivity. Stendal Pulp Mill Project Uncertainties The Company's participation in the Stendal Project is subject to certain conditions, including completion of its due diligence and entering into a shareholders' agreement. In addition, the Stendal Project itself is subject to various risks and uncertainties customary to large "greenfield" projects of this nature which may result in the Stendal Project not proceeding as currently planned, or at all, such as availability and cost of materials and labour, construction delays, cost overruns, weather conditions, governmental regulations, availability of adequate financing, increases in long-term interest rates and increases in taxes and other governmental fees. The Stendal Project will also be subject to extensive and complex regulations and environmental compliance which may result in delays, in the project company and/or its shareholders, including the Company, incurring substantial costs in relation thereto or in the Stendal Project being amended or not proceeding at all. The implementation of the Stendal Project is currently expected to commence at the end of 2000 or during the first half of 2001 and be completed by the end of 2003. However, there can be no assurance that the Stendal Project will proceed as currently planned, or at all. FORM 10-Q QUARTERLY REPORT - PAGE 16 17 Forward-Looking Statements Statements in this report, to the extent they are not based on historical events, constitute forward-looking statements. Forward-looking statements include, without limitation, statements regarding the outlook for future operations, forecasts of future costs and expenditures, the evaluation of market conditions, the outcome of legal proceedings, the adequacy of reserves, or other business plans. Investors are cautioned that forward- looking statements are subject to an inherent risk that actual results may vary materially from those described herein. Factors that may result in such variance, in addition to those accompanying the forward-looking statements, include changes in interest rates, commodity prices, and other economic conditions; actions by competitors; changing weather conditions and other natural phenomena; actions by government authorities; uncertainties associated with legal proceedings; technological development; future decisions by management in response to changing conditions; and misjudgments in the course of preparing forward-looking statements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Reference is made to the Company's annual report on Form 10-K for the year ended December 31, 1999 for information concerning market risk. FORM 10-Q QUARTERLY REPORT - PAGE 17 18 PART II. OTHER INFORMATION ----------------- ITEM 1. LEGAL PROCEEDINGS The Company is subject to routine litigation incidental to its business. The Company does not believe that the outcome of such litigation will have a material adverse effect on its business or financial condition. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit Number Description ------- ----------- 27 Article 5 - Financial Data Schedule for the 2nd Quarter 2000 Form 10-Q. (b) Reports on Form 8-K The Company filed the following report on Form 8-K with respect to the indicated items during the three months ended June 30, 2000: Form 8-K dated June 21, 2000: Item 5. Other Events FORM 10-Q QUARTERLY REPORT - PAGE 18 19 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MERCER INTERNATIONAL INC. By: /s/ R. Ian Rigg ----------------------------- R. Ian Rigg Vice President and Chief Financial Officer Date: August 11, 2000 FORM 10-Q QUARTERLY REPORT - PAGE 19 20 EXHIBIT INDEX Exhibit Number Description ------- ----------- 27 Article 5 - Financial Data Schedule for the 2nd Quarter 2000 Form 10-Q.