-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IcW2hSr+Oe+YAKfoqBWe8+Pc1aVcJs9UPWBJnmQBRpGis4XqPc/zPsxwI5eQb37/ GmS1rIvpbUHV44Ws9sfYyw== 0001012410-99-000028.txt : 19990816 0001012410-99-000028.hdr.sgml : 19990816 ACCESSION NUMBER: 0001012410-99-000028 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990813 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MERCER INTERNATIONAL INC CENTRAL INDEX KEY: 0000075659 STANDARD INDUSTRIAL CLASSIFICATION: PAPER MILLS [2621] IRS NUMBER: 916087550 STATE OF INCORPORATION: WA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-09409 FILM NUMBER: 99687727 BUSINESS ADDRESS: STREET 1: BRNDSCHENKE STR 64 CITY: ZURICH SWITZERLAND C STATE: V6 BUSINESS PHONE: 4112017710 MAIL ADDRESS: STREET 1: 400 BURRARD ST STE 1250 STREET 2: VANCOUVER PROVINCE CITY: B C V6C 3A6 10-Q 1 MERCER INTERNATIONAL INC. - 2ND QTR 1999 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, 1999 [ ] 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.) Burglistrasse 6, Zurich, Switzerland CH 8002 (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 16,435,399 shares of beneficial interest outstanding as at August 10, 1999. ============================================================================== 2 PART I. FINANCIAL INFORMATION --------------------- ITEM 1. FINANCIAL STATEMENTS MERCER INTERNATIONAL INC. CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 1999 (Unaudited) FORM 10-Q QUARTERLY REPORT - PAGE 2 3 MERCER INTERNATIONAL INC. CONSOLIDATED BALANCE SHEETS As at June 30, 1999 and December 31, 1998 (Unaudited) (dollars in thousands)
June 30, December 31, 1999 1998 ------------ ------------ ASSETS Current Assets Cash and cash equivalents $ 3,721 $ 53,250 Investments 10,523 12,891 Receivables 45,389 33,828 Inventories 16,373 19,540 Other 5,081 2,207 ------------ ------------ Total current assets 81,087 121,716 Long-Term Assets Cash restricted 13,166 15,000 Properties 242,917 161,012 Investments 14,411 13,626 Receivables 10,150 10,150 Deferred income tax 10,458 11,780 ------------ ------------ 291,102 211,568 ------------ ------------ $ 372,189 $ 333,284 ============ ============ LIABILITIES Current Liabilities Accounts payable and accrued expenses $ 56,966 $ 53,518 Notes payable 1,772 1,839 Debt 1,047 1,338 ------------ ------------ Total current liabilities 59,785 56,695 Long-Term Liabilities Debt 170,324 121,548 Other 1,775 2,022 ------------ ------------ 172,099 123,570 ------------ ------------ Total liabilities 231,884 180,265 SHAREHOLDERS' EQUITY Shares of beneficial interest 98,085 91,913 Cumulative translation adjustment (47,084) (28,663) Net unrealized loss on investments valuation (5,318) (8,398) Retained earnings 94,622 98,167 ------------ ------------ 140,305 153,019 ------------ ------------ $ 372,189 $ 333,284 ============ ============
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, 1999 and 1998 (Unaudited) (dollars in thousands, except for earnings per share)
1999 1998 ------------ ------------ Revenues Sales $ 76,499 $ 95,982 Investments and other (420) 4,822 ------------ ------------ 76,079 100,804 Expenses Cost of sales 67,721 76,170 General and administrative 9,880 12,021 Interest expense 1,189 1,773 ------------ ------------ 78,790 89,964 ------------ ------------ (Loss) income from operations before income taxes (2,711) 10,840 Income taxes - 43 ------------ ------------ Net (loss) income (2,711) 10,797 Retained earnings, beginning of period 98,167 89,765 Dividend (834) (610) ------------ ------------ Retained earnings, end of period $ 94,622 $ 99,952 ============ ============ Earnings (loss) per share Basic $ (0.17) $ 0.71 ============ ============ Diluted $ (0.17) $ 0.71 ============ ============
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, 1999 and 1998 (Unaudited) (dollars in thousands, except for earnings per share)
1999 1998 ------------ ------------ Revenues Sales $ 36,770 $ 46,889 Investments and other (1,770) 1,406 ------------ ------------ 35,000 48,295 Expenses Cost of sales 32,290 36,590 General and administrative 4,892 6,147 Interest expense 661 980 ------------ ------------ 37,843 43,717 ------------ ------------ (Loss) income from operations before income taxes (2,843) 4,578 Income taxes - 43 ------------ ------------ Net (loss) income (2,843) 4,535 Retained earnings, beginning of period 98,299 96,027 Dividend (834) (610) ------------ ------------ Retained earnings, end of period $ 94,622 $ 99,952 ============ ============ Earnings (loss) per share Basic $ (0.17) $ 0.30 ============ ============ Diluted $ (0.17) $ 0.30 ============ ============
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, 1999 and 1998 (Unaudited) (dollars in thousands)
1999 1998 ------------ ------------ Net (loss) income $ (2,711) $ 10,797 Other comprehensive (loss) income: Foreign currency translation adjustments (18,421) 1,294 Unrealised gain (loss) on securities 3,080 (5,071) ------------ ------------ Other comprehensive loss (15,341) (3,777) ------------ ------------ Total comprehensive (loss) income $ (18,052) $ 7,020 ============ ============
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, 1999 and 1998 (Unaudited) (dollars in thousands)
1999 1998 ------------ ------------ Net (loss) income $ (2,843) $ 4,535 Other comprehensive (loss) income: Foreign currency translation adjustments (6,307) 3,472 Unrealised gain (loss) on securities 1,967 (5,676) ------------ ------------ Other comprehensive loss (4,340) (2,204) ------------ ------------ Total comprehensive (loss) income $ (7,183) $ 2,331 ============ ============
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, 1999 and 1998 (Unaudited) (dollars in thousands)
1999 1998 ------------ ------------ Cash Flows from Operating Activities: Net (loss) income from continuing operations $ (2,711) $ 10,797 Adjustments to reconcile net (loss) income from continuing operations to cash Depreciation and amortization 6,394 6,611 Non-cash asset acquisitions (265) (5,042) ------------ ------------ 3,418 12,366 Changes in current assets and liabilities Investments 3,917 (956) Inventories 819 (1,341) Receivables (16,482) (10,104) Accounts payable and accrued expenses 7,427 4,173 Other (3,002) (538) ------------ ------------ Net cash (used in) provided by operating activities (3,903) 3,600 Cash Flows from Investing Activities: Purchase of fixed assets, net of investment grants (112,970) (11,457) Increase in notes receivable - (11,358) Other - 15 ------------ ------------ Net cash used in investing activities (112,970) (22,800) Cash Flows from Financing Activities: Increase in indebtedness 72,895 20,041 Decrease in indebtedness (714) (2,599) Net proceeds on issuance of shares of beneficial interest - 2,046 Payment of dividend (834) (610) Other - (172) ------------ ------------ Net cash provided by financing activities 71,347 18,706 Effect of exchange rate changes on cash and cash equivalents (4,003) 124 ------------ ------------ Net decrease in cash and cash equivalents (49,529) (370) Cash and cash equivalents, beginning of period 53,250 4,414 ------------ ------------ Cash and cash equivalents, end of period $ 3,721 $ 4,044 ============ ============
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, 1999 (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, 1998. In the opinion of the Company, the unaudited consolidated financial statements contained herein contain all adjustments necessary to present a fair statement of the results of the interim periods presented. Note 2. 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 diluted earnings per share was 16,142,561 and 15,292,315 for the six months ended June 30, 1999 and 1998, respectively, and 16,322,920 and 15,341,796 for the three months ended June 30, 1999 and 1998, respectively. 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 ended June 30, 1999 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. RESULTS OF OPERATIONS - Six Months Ended June 30, 1999 - ------------------------------------------------------ The following table sets forth selected sales data for the Company for the periods indicated:
Six Months Ended June 30, ------------------------- 1999 1998 ----------- ----------- (in thousands) Sales by Product Class - ---------------------- Packaging papers(1) $ 8,898 $ 15,847 Specialty papers 15,011 16,145 Printing papers 19,149 20,946 Pulp 31,672 40,383 Other 1,769 2,661 ----------- ----------- Total(2) $ 76,499 $ 95,982 =========== =========== Sales by Geographic Area - ------------------------ Germany $ 40,271 $ 52,273 European Union(3) 32,014 38,566 Other 4,214 5,143 ----------- ----------- Total $ 76,499 $ 95,982 =========== =========== Sales by Volume (tonnes) - --------------- Packaging papers(1) 34,987 58,960 Specialty papers 18,037 19,576 Printing papers 28,464 29,062 Pulp 74,454 81,984 ----------- ----------- Total 155,942 189,582 =========== ===========
- ---------- (1) The Company sold its packaging paper mill in Greiz in the third quarter of 1998. Sales from the Greiz mill are included in the Company's results for the six months ended June 30, 1998. The Greiz mill sold 25,490 tonnes of packaging paper for $7.2 million in the six months ended June 30, 1998. (2) Excluding intercompany sales. (3) Not including Germany. FORM 10-Q QUARTERLY REPORT - PAGE 10 11 In the six months ended June 30, 1999, revenues decreased by 24.5% to $76.1 million from $100.8 million in the comparative period of 1998, primarily as a result of lower sales volumes. In the first half of 1999, pulp sales decreased by 21.6% and paper sales decreased by 18.7% from the comparable period of 1998. In the six months ended June 30, 1999, pulp markets remained generally weak. While prices improved marginally during the period, they were largely offset by the devaluation of the deutschmark and euro against the U.S. dollar in the same period. On average, pulp prices realized by the Company in the six months ended June 30, 1999 were approximately 13.6% lower than in the same period of 1998. Overall, pulp sales decreased to $31.7 million in the six months ended June 30, 1999 from $40.4 million in the comparative period of 1998. In the six months ended June 30, 1999, markets for specialty paper were generally stable while markets for packaging and printing papers were weaker than in the comparative period of 1998. On average, paper prices realized by the Company increased by approximately 7.4% in the six months ended June 30, 1999, compared to the same period in 1998, primarily as a result of higher prices for specialty papers. Overall, paper sales in the six months ended June 30, 1999 decreased to $43.1 million from $52.9 million in the same period of 1998, primarily as a result of a sales volume decrease of 24.3% resulting from the sale of the Greiz mill in the third quarter of 1998. Expenses decreased to $78.8 million in the six months ended June 30, 1999 from $90.0 million in the comparable period of 1998, primarily as a result of lower sales volumes. On average, the Company's fibre costs for pulp production in the six months ended June 30, 1999 decreased by approximately 0.2%, compared to the same period in 1998. Prices for waste paper, which comprises approximately 80% of the fibre for the Company's paper mills, increased by approximately 21.3% in the six months ended June 30, 1999, compared to the same period of 1998, due to the change in the product mix to produce more premium priced products. General and administrative expenses were $9.9 million in the six months ended June 30, 1999, compared to $12.0 million in the comparable period of 1998. Interest expense in the six months ended June 30, 1999 decreased to $1.2 million from $1.8 million in the comparable period of 1998, primarily as a result of reduced indebtedness during the current period, other than with respect to the financing for the project to convert the Company's pulp mill from the production of sulphite pulp to kraft pulp (the "Conversion Project"). Interest costs in respect of the Conversion Project are being capitalized. For the six months ended June 30, 1999, the Company reported a net loss of $2.7 million or $0.17 per share, compared to net earnings of $10.8 million or $0.71 per share in the comparable period of 1998. FORM 1O-Q QUARTERLY REPORT - PAGE 11 12 RESULTS OF OPERATIONS - Three Months Ended June 30, 1999 - -------------------------------------------------------- The following table sets forth selected sales data for the Company for the periods indicated:
Three Months Ended June 30, --------------------------- 1999 1998 ------------ ------------ (in thousands) Sales by Product Class - ---------------------- Packaging papers(1) $ 4,277 $ 7,416 Specialty papers 6,904 7,517 Printing papers 9,133 10,274 Pulp 15,540 19,790 Other 916 1,892 ------------ ------------ Total(2) $ 36,770 $ 46,889 ============ ============ Sales by Geographic Area - ------------------------ Germany $ 19,522 $ 24,954 European Union(3) 16,281 19,955 Other 967 1,980 ------------ ------------ Total $ 36,770 $ 46,889 ============ ============ Sales by Volume (tonnes) - --------------- Packaging papers(1) 17,589 27,067 Specialty papers 8,562 9,033 Printing papers 14,289 14,158 Pulp 36,421 39,695 ------------ ------------ Total 76,861 89,953 ============ ============
- ---------- (1) The Company sold its packaging paper mill in Greiz in the third quarter of 1998. Sales from the Greiz mill are included in the Company's results for the three months ended June 30, 1998. The Greiz mill sold 13,229 tonnes of packaging paper for $3.9 million in the three months ended June 30, 1998. (2) Excluding intercompany sales. (3) Not including Germany. In the quarter ended June 30, 1999, revenues decreased by 27.5% to $35.0 million from $48.3 million in the comparative period of 1998, primarily as a result of lower sales volumes. In the second quarter of 1999, pulp sales decreased by 21.5% and paper sales decreased by 19.4% from the comparable period of 1998. In the quarter ended June 30, 1999, pulp markets remained generally weak. While prices improved marginally during the quarter, they were largely offset by the devaluation of the deutschmark and euro against the U.S. dollar in the same period. On average, pulp prices realized by the Company in the second quarter of 1999 were approximately 14.4% lower than in the same period of 1998. As a result of the Conversion Project, no dissolving sulphite pulp, which is a premium priced grade of sulphite pulp, was produced in the second quarter of 1999. Overall, pulp sales decreased to $15.5 FORM 10-Q QUARTERLY REPORT - PAGE 12 13 million in the quarter ended June 30, 1999 from $19.8 million in the comparative period of 1998. The normal second quarter shutdown for maintenance was extended slightly for the Conversion Project. In addition, construction activity relating to the Conversion Project resulted in a number of additional minor shutdowns, which reduced production volume. At the end of the second quarter of 1999, Norscan inventories for kraft pulp was slightly below 1.4 million tonnes. This is a level that historically has supported price increases. Certain producers have announced a $40 per tonne increase for kraft pulp in Europe for September 1999. However, there can be no assurance that such price increases will be achieved. In the quarter ended June 30, 1999, markets for specialty, packaging and printing papers were generally weaker than in the comparative period in 1998. On average, paper prices realized by the Company increased by approximately 0.2% in the quarter ended June 30, 1999, compared to the same period in 1998, primarily as a result of the change in the product mix to produce more premium priced products. Overall, paper sales in the quarter ended June 30, 1999 decreased to $20.3 million from $25.2 million in the same period of 1998, primarily as a result of a sales volume decrease of 19.5% resulting from the sale of the Greiz mill. Expenses decreased to $37.8 million in the quarter ended June 30, 1999 from $43.7 million in the comparable period of 1998, primarily as a result of lower sales volumes. On average, the Company's fibre costs for pulp production in the quarter ended June 30, 1999 increased by approximately 0.2%, compared to the same period in 1998. Prices for waste paper, which comprises approximately 80% of the fibre for the Company's paper mills, increased by approximately 30.9% in the quarter ended June 30, 1999, compared to the same period of 1998, due to the change in the product mix to produce more premium priced products. General and administrative expenses were $4.9 million in the quarter ended June 30, 1999, compared to $6.1 million in the comparable period of 1998. Interest expense in the quarter ended June 30, 1999 decreased to $0.7 million from $1.0 million in the comparable period of 1998, as a result of reduced indebtedness during the current period, other than with respect to the Conversion Project, for which interest costs are being capitalized. For the quarter ended June 30, 1999, the Company reported a net loss of $2.8 million or $0.17 per share, compared to net earnings of $4.5 million or $0.30 per share in the comparable period of 1998. FORM 10-Q QUARTERLY REPORT - PAGE 13 14 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, 1999 December 31, 1998 ------------- ----------------- (in thousands) Financial Position - ------------------ Working capital $ 21,302 $ 65,021 Total assets 372,189 333,284 Long-term government debt 5,619 7,003 Long-term debt - other 164,705 114,545
At June 30, 1999, the Company's cash and cash equivalents totalled $3.7 million, a net decrease of $49.5 million from $53.3 million at December 31, 1998. At June 30, 1999, the Company had short-term trading securities totalling $10.5 million, compared to $12.9 million at December 31, 1998. Operating Activities - -------------------- Operating activities used cash of $3.9 million in the six months ended June 30, 1999, compared to providing cash of $3.6 million in the same period in 1998, primarily as a result of an increase in receivables. An increase in accounts payable and accrued expenses provided cash of $7.4 million in the six months ended June 30, 1999, compared to $4.2 million in the six months ended June 30, 1998. Lower inventories provided cash of $0.8 million in the six months ended June 30, 1999, compared to higher inventories using cash of $1.3 million in the six months ended June 30, 1998. Net sales of investment securities provided cash of $3.9 million in the current period, compared to net purchases of investment securities using cash of $1.0 million in the comparative period of 1998. The Company expects to generate sufficient cash flow from operations to meet its working capital requirements. Investing Activities - -------------------- Investing activities in the six months ended June 30, 1999 used cash of $113.0 million, consisting primarily of capital expenditures relating to the Conversion Project, compared to $22.8 million in the six months ended June 30, 1998. The Conversion Project was commenced in mid-1998 and is designed to convert the Company's pulp mill to produce kraft pulp, increase its annual production capacity from 160,000 tonnes to 280,000 tonnes and reduce its emissions of sulphur dioxides and effluent. The estimated cost for the Conversion Project is approximately $400 million, which is being financed through a combination of borrowings under a project loan (the "Project Loan"), non-refundable governmental grants, governmental assistance and guarantees for long-term project financing and an equity investment by the Company. The pulp mill is expected to take approximately three months of down-time commencing in the third quarter of 1999 to implement the final stages of the conversion. FORM 10-Q QUARTERLY REPORT - PAGE 14 15 Capital expenditures in respect of the Conversion Project in 1999 are estimated to be approximately $309.0 million and the start-up of the mill is expected to occur in the fourth quarter of 1999. During the first six months of 1999, the Conversion Project was on schedule. The Company has entered into contracts for the purchase of equipment in excess of 95% of the capital budget for the Conversion Project and the Company does not currently anticipate any significant delays with respect to the Conversion Project. As at June 30, 1999, the Company had expended approximately $202.0 million on the Conversion Project. Although the Conversion Project is on schedule, the Company believes that the project will incur cost overruns as a result of higher than expected infrastructure costs relating to site development and piping. Such additional costs have been partially offset by lower than expected costs for new equipment purchases. Pursuant to the terms of the Project Loan, such cost overruns will be funded in equal proportions through borrowings under a cost overrun tranche established under such loan facility and amounts deposited by the Company into a restricted account with the lenders under the Project Loan. Currently, the Company does not believe that such cost overruns will exceed the available facilities under the Project Loan. Financing Activities - -------------------- Financing activities provided cash of $71.3 million in the six months ended June 30, 1999, primarily as a result of increased borrowing under the Project Loan in respect of the Conversion Project. Financing activities provided cash of $18.7 million in the six months ended June 30, 1998. The depreciation of the deutschmark against the U.S. dollar in the six months ended June 30, 1999 resulted in an unrealized foreign exchange translation loss of $4.0 million on cash and cash equivalents, which is included as shareholders' equity in the Company's balance sheet and does not affect the Company's net earnings. See "Foreign Currency." Other than the Conversion Project, the Company had no material commitments to acquire assets or operating businesses as at June 30, 1999. 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. FORM 10-Q QUARTERLY REPORT - PAGE 15 16 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, 1999, the depreciation of the deutschmark against the U.S. dollar resulted in a net $18.4 million foreign exchange translation loss and, as a result, the cumulative foreign exchange translation loss increased from $28.7 million at December 31, 1998 to $47.1 million at June 30, 1999. 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, 1999 June 30, 1998 -------------------------- -------------------------- Period End Period Average Period End Period Average ---------- -------------- ---------- -------------- RATE OF EXCHANGE Deutschmark 1.8989 1.8513 1.8032 1.7930
Based upon the period average exchange rate in the first half of 1999, the U.S. dollar increased by approximately 7.8% in value against the deutschmark since December 31, 1998. Year 2000 - --------- Many of the world's computer systems currently record years in a two-digit format. These computer systems will be unable to properly interpret dates beyond the year 1999, which could lead to business disruptions and is commonly referred to as the "Year 2000" issue. The Company is conducting a comprehensive review of all significant applications that may require modification to ensure Year 2000 compliance. The Company is utilizing both internal and external resources to make any required modifications and to test for Year 2000 compliance. The modification and testing process of all significant applications is expected to be completed approximately in the middle of the fourth quarter of 1999. In addition, the Company has initiated communications with its significant suppliers and largest customers to ascertain their Year 2000 readiness and develop contingency plans as required. Based upon its current information, management of the Company has determined that the Year 2000 issue will not pose significant operational problems for its computers. The total cost to the Company of Year 2000 compliance activities has not been and is not currently anticipated to be material to its financial position or results of operations in any given year. The costs and the dates on which the Company plans to complete Year 2000 modification and testing are based on management's best FORM 10-Q QUARTERLY REPORT - PAGE 16 17 estimates, which were derived utilizing numerous assumptions of future events. However, there can be no assurance that these estimates will be achieved and actual results could differ materially from those anticipated. Conversion Project Uncertainties - -------------------------------- The Company is subject to various uncertainties in connection with the Conversion Project, 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, which may cause fluctuations in its operating results. The Conversion Project is also subject to extensive and complex regulations and environmental compliance, which may result in delays or the Company incurring substantial costs in relation thereto. The Conversion Project has and will continue to adversely affect and disrupt the production of sulphite pulp and the operation of the Company's pulp mill in 1999, as a result of disruptions caused by construction, site development work, installation and removal of equipment, employee training and planned and unplanned downtime. In addition, as of the second quarter of 1999, the pulp mill no longer produces dissolving sulphite pulp, which is a premium priced grade of sulphite pulp. Construction of the Conversion Project is expected to be completed around the end of 1999 and the pulp mill will take approximately three months of downtime commencing in the third quarter of 1999 to facilitate its completion. Upon completion of construction, the pulp mill will go through a "start-up" or "ramp-up" period. The Company expects that the pulp mill will operate at approximately 80% of capacity by mid-2000 and at or near full capacity by the end of 2000. While the Conversion Project is on schedule, there can be no assurance that the project will not suffer delays during the construction phase as a result of, among other things, delays in the shipment and installation of equipment, materials or labour shortages, delays in the receipt of permits, weather conditions, or governmental actions. In addition, there are a number of risks and uncertainties inherent in the start-up of the pulp mill after the completion of construction. There can be no assurance that the pulp mill will not experience any operating difficulties or delays during the start-up period, any of which could have a material adverse effect on the Company's operations. 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, labour costs and productivity. FORM 10-Q QUARTERLY REPORT - PAGE 17 18 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 Not applicable. FORM 10-Q QUARTERLY REPORT - PAGE 18 19 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 1999 - Form 10-Q. (b) Reports on Form 8-K None. FORM 10-Q QUARTERLY REPORT - PAGE 19 20 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/ Maarten Reidel ------------------------------------- Maarten Reidel Secretary and Chief Financial Officer Date: August 11, 1999 FORM 10-Q QUARTERLY REPORT - PAGE 20 21 EXHIBIT INDEX Exhibit Number Description - ------- ----------- 27 Article 5 - Financial Data Schedule for the 2nd Quarter 1999 - Form 10-Q. EX-27 2 EXHIBIT 27 - ARTICLE 5 - FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES INCLUDED IN THIS FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 3,721 10,523 45,389 0 16,373 81,087 242,917 0 372,189 59,785 170,324 0 0 98,085 42,220 372,189 76,499 76,079 67,721 78,790 0 0 1,189 (2,711) 0 (2,711) 0 0 0 (2,711) (0.17) (0.17)
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