<PAGE> 1
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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 September 30, 1998
[ ] 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 15,395,722 shares of beneficial interest outstanding as at
November 10, 1998.
==============================================================================
<PAGE> 2
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.
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
MERCER INTERNATIONAL INC.
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(Unaudited)
FORM 10-Q
QUARTERLY REPORT - PAGE 2
<PAGE> 3
MERCER INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
As at September 30, 1998 and December 31, 1997
(Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 39,682 $ 4,414
Investments 15,447 56,285
Receivables 41,293 22,329
Inventories 22,559 15,799
Other 2,084 1,557
----------- -----------
Total current assets 121,065 100,384
Long-Term Assets
Properties 136,120 87,806
Investments 11,646 4,118
Notes receivable 10,150 7,000
Deferred income tax assets 11,759 10,986
----------- -----------
169,675 109,910
----------- -----------
$ 290,740 $ 210,294
=========== ===========
LIABILITIES
Current Liabilities
Accounts payable and accrued expenses $ 54,870 $ 50,172
Notes payable 1,568 3,252
Debt 2,064 4,329
----------- -----------
Total current liabilities 58,502 57,753
Long-Term Liabilities
Debt 73,988 15,039
Other 1,998 2,027
----------- -----------
75,986 17,066
----------- -----------
Total liabilities 134,488 74,819
SHAREHOLDERS' EQUITY
Shares of beneficial interest 91,648 88,603
Cumulative translation adjustment (29,241) (41,376)
Net unrealized loss on investments valuation (10,346) (1,517)
Retained earnings 104,191 89,765
----------- -----------
156,252 135,475
----------- -----------
$ 290,740 $ 210,294
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
FORM 10-Q
QUARTERLY REPORT - PAGE 3
<PAGE> 4
MERCER INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
For Nine Months Ended September 30, 1998 and 1997
(Unaudited)
(dollars in thousands, except for earnings per share)
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Revenues
Sales $ 132,036 $ 130,234
Investments 8,470 8,166
----------- -----------
140,506 138,400
Expenses
Cost of sales 105,141 106,587
General and administrative 17,532 17,574
Interest expense 2,720 2,149
----------- -----------
125,393 126,310
----------- -----------
Income from operations before income taxes 15,113 12,090
Income taxes 77 41
----------- -----------
Net income 15,036 12,049
Retained earnings, beginning of period 89,765 122,838
Dividend (610) (450)
----------- -----------
Retained earnings, end of period $ 104,191 $ 134,437
=========== ===========
Earnings per share
Basic $ 0.98 $ 0.80
=========== ===========
Diluted $ 0.98 $ 0.80
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
FORM 10-Q
QUARTERLY REPORT - PAGE 4
<PAGE> 5
MERCER INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
For Three Months Ended September 30, 1998 and 1997
(Unaudited)
(dollars in thousands, except for earnings per share)
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Revenues
Sales $ 36,054 $ 45,515
Investments 3,648 2,791
----------- -----------
39,702 48,306
Expenses
Cost of sales 28,971 37,328
General and administrative 5,511 5,465
Interest expense 947 746
----------- -----------
35,429 43,539
----------- -----------
Income from operations before income taxes 4,273 4,767
Income taxes 34 13
----------- -----------
Net income 4,239 4,754
Retained earnings, beginning of period 99,952 129,683
----------- -----------
Retained earnings, end of period $ 104,191 $ 134,437
=========== ===========
Earnings per share
Basic $ 0.28 $ 0.32
=========== ===========
Diluted $ 0.28 $ 0.31
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
FORM 10-Q
QUARTERLY REPORT - PAGE 5
<PAGE> 6
MERCER INTERNATIONAL INC.
STATEMENT OF COMPREHENSIVE INCOME
For Nine Months Ended September 30, 1998 and 1997
(Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Net income $ 15,036 $ 12,049
Other comprehensive income (loss):
Foreign currency translation adjustments 12,135 (26,206)
Unrealised (loss) gain on securities (8,829) 732
----------- -----------
Other comprehensive income (loss) 3,306 (25,474)
----------- -----------
Total comprehensive income (loss) $ 18,342 $ (13,425)
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
FORM 10-Q
QUARTERLY REPORT - PAGE 6
<PAGE> 7
MERCER INTERNATIONAL INC.
STATEMENT OF COMPREHENSIVE INCOME
For Three Months Ended September 30, 1998 and 1997
(Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Net income $ 4,239 $ 4,754
Other comprehensive income (loss):
Foreign currency translation adjustments 10,841 (2,516)
Unrealised (loss) gain on securities (3,758) 192
----------- -----------
Other comprehensive income (loss) 7,083 (2,324)
----------- -----------
Total comprehensive income $ 11,322 $ 2,430
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
FORM 10-Q
QUARTERLY REPORT - PAGE 7
<PAGE> 8
MERCER INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For Nine Months Ended September 30, 1998 and 1997
(Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income from continuing operations $ 15,036 $ 12,049
Adjustments to reconcile net income from
continuing operations to cash
Depreciation and amortization 10,054 8,880
Non-cash asset acquisitions (7,634) (11,670)
----------- -----------
17,456 9,259
Changes in current assets and liabilities
Investments 23,091 2,672
Inventories (5,162) 3,118
Receivables (19,153) (2,319)
Accounts payable and accrued expenses 10,407 (6,314)
Other 49 112
----------- -----------
Net cash provided by operating activities 26,688 6,528
Cash Flows from Investing Activities:
Increase in notes receivable, net (4,233) -
Purchase of fixed assets (40,973) (8,496)
Other 6 26
----------- -----------
Net cash used in investing activities (45,200) (8,470)
Cash Flows from Financing Activities:
Increase in bank indebtedness 55,554 6,471
Decrease in bank indebtedness (5,771) (8,854)
Net proceeds on issuance of shares
of beneficial interest 3,045 487
Payment of dividend (610) (450)
Other (172) -
----------- -----------
Net cash provided by (used in)
financing activities 52,046 (2,346)
Effect of exchange rate changes on cash and
cash equivalents 1,734 (570)
----------- -----------
Net increase (decrease) in cash and
cash equivalents 35,268 (4,858)
Cash and cash equivalents, beginning of period 4,414 9,967
----------- -----------
Cash and cash equivalents, end of period $ 39,682 $ 5,109
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
FORM 10-Q
QUARTERLY REPORT - PAGE 8
<PAGE> 9
MERCER INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR NINE MONTHS ENDED SEPTEMBER 30, 1998
(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, 1997. 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 15,338,801 and
15,086,761 for the nine months ended September 30, 1998 and 1997,
respectively, and 15,352,602 and 15,111,084 for the three months ended
September 30, 1998 and 1997, respectively.
FORM 10-Q
QUARTERLY REPORT - PAGE 9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Mercer International Inc. is a pulp and paper company headquartered in Zurich,
Switzerland and its operations are primarily located in Germany. 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.
The following discussion and analysis of the results of operations and
financial condition of the Company for the nine months and three months ended
September 30, 1998, respectively, should be read in conjunction with the
consolidated financial statements and related notes included elsewhere herein.
RESULTS OF OPERATIONS - Nine Months Ended September 30, 1998
- ------------------------------------------------------------
In the nine months ended September 30, 1998, revenues increased to $140.5
million from $138.4 million in the same period in 1997, as higher product
prices offset a decrease in sales volumes. As the Company's products are
principally sold in deutschmarks, the depreciation of the deutschmark against
the U.S. dollar by approximately 3.7% in the nine months ended September 30,
1998, compared to the same period in 1997, resulted in lower prices in U.S.
dollar terms for the Company's products.
Expenses decreased to $125.4 million in the nine months ended September 30,
1998, compared to $126.3 million in the same period of 1997, primarily as a
result of a decrease in sales volumes for the Company's products in the
current period. General and administrative expenses were $17.5 million in the
nine months ended September 30, 1998, compared to $17.6 million in the
comparative period of 1997. Interest expense increased to $2.7 million in the
nine months ended September 30, 1998 from $2.1 million in the nine months
ended September 30, 1997, as a result of increased indebtedness during the
current period.
In the nine months ended September 30, 1998, net income was $15.0 million or
$0.98 per share, compared to $12.0 million or $0.80 per share for the nine
months ended September 30, 1997.
Selected sales data for the Company for the nine months ended September 30,
1998 and 1997, respectively, is as follows:
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
(dollars in thousands)
Sales by Product Class
- ----------------------
Packaging papers(1) $ 20,339 $ 22,483
Specialty papers 23,573 21,419
Printing papers 31,440 26,744
Pulp 54,177 56,706
Other 2,507 2,882
------------ ------------
Total(2) $ 132,036 $ 130,234
============ ============
</TABLE>
FORM 10-Q
QUARTERLY REPORT - PAGE 10
<PAGE> 11
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
(dollars in thousands)
Sales by Geographic Area
- ------------------------
Germany $ 71,973 $ 71,125
European Union(3) 51,321 46,933
Other 8,742 12,176
------------ ------------
Total $ 132,036 $ 130,234
============ ============
(tonnes)
Sales by Volume
- ---------------
Packaging papers(1) 75,309 84,099
Specialty papers 28,300 27,092
Printing papers 43,482 40,647
Pulp 108,975 125,571
------------ ------------
Total 256,066 277,409
============ ============
- -------------------------
(1) The Company sold its packaging paper mill in Greitz during the nine
months ended September 30, 1998. Paper sales from the Greitz paper mill
for the third quarter of 1998 were not included in the Company's results
of operations for the nine months ended September 30, 1998. The Greitz
paper mill sold 6,568 tonnes of packaging paper for $1.9 million in
revenues in the third quarter of 1998.
(2) Excluding intercompany sales.
(3) Not including Germany.
</TABLE>
Pulp and paper markets were generally stable in the current period with
overall product prices 10.2% higher than in the comparative period of 1997.
Sales volumes were 7.7% lower in the first nine months of 1998, compared to
the same period in 1997.
In the nine months ended September 30, 1998, pulp prices, on average, were up
approximately 10.1% compared to the same period of 1997, as European pulp
inventories were reduced. Pulp sales decreased by 4.5% to $54.2 million in
the nine months ended September 30, 1998 from $56.7 million in the comparative
period of 1997, primarily as a result of a sales volume decrease of 13.2%.
Paper prices, on average, were up approximately 10.1% in the nine months ended
September 30, 1998, compared to the same period of 1997, primarily as a result
of increased demand for specialty and printing papers. Paper sales in the nine
months ended September 30, 1998 increased by 6.7% to $75.4 million from $70.6
million in the nine months ended September 30, 1997, on a volume decrease of
3.1% and an average price increase of 10.1%. In the nine months ended
September 30, 1998, sales volumes for packaging papers decreased by 10.5% and
sales volumes for specialty and printing papers increased by 4.5% and 7.0%,
respectively, compared to the nine months ended September 30, 1997.
Improved pulp and paper prices in the nine months ended September 30, 1998
were partially offset during the period by increased fibre costs for wood
chips and pulp wood used to produce pulp and increased prices for pulp used to
produce paper, as compared to the same period in 1997. As a result, during
the current period the Company changed its fibre input mix to use more lower-
grade materials, which partially reduced the effect of higher fibre costs. On
average, the Company's fibre
FORM 10-Q
QUARTERLY REPORT - PAGE 11
<PAGE> 12
costs for pulp production were up approximately 13.8% in the nine months ended
September 30, 1998, compared to the same period in 1997, but remained among
the lowest in Europe. Recycled fibre costs were down approximately 5.8% in
the nine months ended September 30, 1998, compared to the same period in 1997.
RESULTS OF OPERATIONS - Three Months Ended September 30, 1998
- -------------------------------------------------------------
In the three months ended September 30, 1998, revenues decreased to $39.7
million from $48.3 million in the same period in 1997, primarily as a result
of a decrease in sales volumes for the Company's products in the current
period. However, as the Company's products are principally sold in
deutschmarks, the appreciation of the deutschmark against the U.S. dollar by
approximately 2.6% in the three months ended September 30, 1998, compared to
the same period in 1997, resulted in higher prices in U.S. dollar terms for
the Company's products.
Expenses decreased to $35.4 million in the three months ended September 30,
1998, compared to $43.5 million in the same period of 1997, primarily as a
result of lower sales volumes. General and administrative expenses were $5.5
million in the three months ended September 30, 1998 and 1997, respectively.
Interest expense increased to $0.9 million in the three months ended September
30, 1998 from $0.7 million in the three months ended September 30, 1997, as a
result of increased indebtedness during the current period.
In the three months ended September 30, 1998, net income was $4.2 million or
$0.28 per share, compared to $4.8 million or $0.32 per share on a basic
basis for the three months ended September 30, 1997.
Selected sales data for the Company for the three months ended September 30,
1998 and 1997, respectively, is as follows:
<TABLE>
<CAPTION>
Quarter Ended September 30,
---------------------------
1998 1997
------------ ------------
<S> <C> <C>
(dollars in thousands)
Sales by Product Class
- ----------------------
Packaging papers(1) $ 4,492 $ 7,469
Specialty papers 7,428 7,089
Printing papers 10,494 8,877
Pulp 13,794 20,924
Other (154) 1,156
---------- ----------
Total(2) $ 36,054 $ 45,515
========== ==========
</TABLE>
FORM 10-Q
QUARTERLY REPORT - PAGE 12
<PAGE> 13
<TABLE>
<CAPTION>
Quarter Ended September 30,
---------------------------
1998 1997
------------ ------------
<S> <C> <C>
(dollars in thousands)
Sales by Geographic Area
- ------------------------
Germany $ 19,700 $ 23,064
European Union(3) 12,755 16,800
Other 3,599 5,651
---------- ----------
Total $ 36,054 $ 45,515
========== ==========
(tonnes)
Sales by Volume
- ---------------
Packaging papers(1) 16,349 28,499
Specialty papers 8,724 9,360
Printing papers 14,420 14,099
Pulp 26,991 43,603
---------- ----------
Total 66,484 95,561
========== ==========
- -------------------------
(1) The Company sold its packaging paper mill in Greitz during the nine
months ended September 30, 1998. Paper sales from the Greitz paper mill
for the third quarter of 1998 were not included in the Company's results
of operations for the three months ended September 30, 1998. The Greitz
paper mill sold 6,568 tonnes of packaging paper for $1.9 million in
revenues in the third quarter of 1998.
(2) Excluding intercompany sales.
(3) Not including Germany.
</TABLE>
While product prices were higher in the current period compared to the same
period of 1997, product demand was materially weaker. As a result, sales
volumes were 30.4% lower in the three months ended September 30, 1998, compared
to the same period of 1997. Paper prices remained relatively stable during the
current period, but the weakness in demand eroded pulp prices towards the end
of the current period.
In the three months ended September 30, 1998, pulp prices increased, on
average, by approximately 6.5% compared to the three months ended September
30, 1997, as European pulp inventories were reduced. The Company's pulp sales
decreased by 34.1% to $13.8 million in the three months ended September 30,
1998 from $20.9 million in the comparative period of 1997, on a volume
decrease of 38.1% and an average price increase of 6.5%.
Paper sales in the three months ended September 30, 1998 decreased by 4.4% to
$22.4 million from $23.4 million in the three months ended September 30, 1997,
on a volume decrease of 24.0% and an average price increase of 25.8%. In the
three months ended September 30, 1998, sales volume for packaging and
specialty papers decreased by 42.6% and 6.8%, respectively, and sales volume
for printing papers increased by 2.3%, compared to the three months ended
September 30, 1997.
Improvements in prices in the current period were partially offset by
increased fibre costs, as compared to the same period in 1997. During the
current period, the Company changed its fibre input mix to use more lower-
grade materials. On average, the Company's pulp fibre costs were up
approximately 14.2% in the three months ended September 30, 1998, compared to
the same period
FORM 10-Q
QUARTERLY REPORT - PAGE 13
<PAGE> 14
in 1997. Recycled fibre costs were down approximately 5.5% in the three
months ended September 30, 1998, compared to the same period in 1997.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The following table is a summary of selected financial information concerning
the Company for the periods indicated:
<TABLE>
<CAPTION>
As at As at
September 30, 1998 December 31, 1997
------------------ -----------------
<S> <C> <C>
(in thousands)
Financial Position
- ------------------
Working capital $ 62,563 $ 42,631
Total assets 290,740 210,294
Long-term government debt 7,588 8,338
Long-term debt - other 66,400 6,701
</TABLE>
At September 30, 1998, the Company's cash and cash equivalents totalled $39.7
million, a net increase of $35.3 million from $4.4 million at December 31,
1997. At September 30, 1998, the Company had short-term trading securities
totalling $15.4 million, compared to $56.3 million at December 31, 1997.
Operating Activities
- --------------------
Cash provided by operating activities was $26.7 million in the nine months
ended September 30, 1998, compared to $6.5 million in the nine months ended
September 30, 1997. A decrease in investments provided cash of $23.1 million
in the nine months ended September 30, 1998, compared to $2.7 million in the
nine months ended September 30, 1997. An increase in accounts payable and
accrued liabilities provided cash of $10.4 million in the nine months ended
September 30, 1998, compared to a decrease in same using cash of $6.3 million
in the nine months ended September 30, 1997. An increase in receivables and
inventories used cash of $19.2 million and $5.2 million, respectively, in the
current period. The Company expects to generate sufficient cash flow from
operations to meet its working capital requirements.
Investing Activities
- --------------------
Investing activities in the nine months ended September 30, 1998 used cash of
$45.2 million, consisting primarily of capital expenditures for upgrades to
the Company's manufacturing plants, compared to $8.5 million in the nine
months ended September 30, 1997.
The Company expects gross capital expenditures in 1998, excluding the
conversion of its pulp mill from the production of sulphite to kraft pulp, to
be approximately $5.5 million, which will be funded from cash, cash flow from
operations and non-refundable government grants. In the first nine months of
1998, gross capital expenditures (excluding costs in respect of the pulp mill
conversion project) were $2.2 million, compared to approximately $8.9 million
in the same period of 1997.
FORM 10-Q
QUARTERLY REPORT - PAGE 14
<PAGE> 15
The Company commenced the conversion of its pulp mill from the production of
sulphite pulp to kraft pulp in the second quarter of 1998. The Company's
gross capital expenditures in respect of the conversion project to September
30, 1998 were $61.1 million. The conversion is, among other things, expected
to increase the capacity of the pulp mill from 160,000 tonnes to 280,000
tonnes per annum and reduce the mill's emissions of sulphur dioxides and
effluent substantially. The estimated cost for the conversion is
approximately $385 million, which is being financed by a 15 year term loan in
the aggregate amount of up to approximately $282 million from two merging
German banks, non-refundable governmental grants of up to approximately $97.5
million, governmental assistance and guarantees for long-term project
financing, and an additional equity investment by the Company (the
"Financing"). See the Company's Form 8-K dated July 16, 1998 for further
details with respect to the Financing. The Company estimates that, subject to
receipt of all necessary permits and consents in the anticipated time frame,
capital expenditures in respect of the conversion project in 1998 will be
approximately $100 million. The conversion project is expected to be
completed at or about the end of 1999.
In the nine months ended September 30, 1998, the conversion project was on
plan. The Company received its initial financing advance on time and has
entered into contracts for the purchase of equipment to be utilized upon the
conversion. Currently, the Company has entered into contracts in excess of
60% of the capital budget for the conversion and the Company does not
currently anticipate any significant delays or cost overruns with respect to
the conversion project. In addition, the Company has commenced preparations
for the installation of certain vital equipment at the pulp mill relating to
the conversion. Much of the basic civil engineering work with respect to the
conversion, such as the laying of foundations, is expected to be completed by
the end of November 1998. It is currently anticipated that the conversion
will be completed by the third quarter of 1999.
As part of the restructuring of the Company's paper operations, the Company
completed the sale of its Raschau packaging paper facility during the period
and completed the sale of its Greitz paper mill in early September 1998.
Financing Activities
- --------------------
Cash provided by financing activities was $52.0 million in the nine months
ended September 30, 1998, compared to cash used by financing activities of
$2.3 million in the nine months ended September 30, 1997. A net increase in
bank indebtedness, including the borrowings in connection with the Company's
pulp mill conversion project, provided cash of $49.8 million in the nine
months ended September 30, 1998, compared to a net decrease in bank
indebtedness using cash of $2.4 million in the same period of 1997. The
Company issued shares for net proceeds of $3.0 million in the nine months
ended September 30, 1998, compared to $0.5 million in the nine months ended
September 30, 1997. The Company paid a cash dividend of $0.6 million, or
$0.04 per share, in the current period of 1998.
In the nine months ended September 30, 1998, the Company reported an
unrealized foreign exchange translation gain of $1.7 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.
FORM 10-Q
QUARTERLY REPORT - PAGE 15
<PAGE> 16
Other than the Company's plan to convert the production of its pulp mill from
sulphite to kraft pulp, the Company had no material commitments to acquire
assets or operating businesses as at September 30, 1998. 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. The Company's
pulp and paper products are principally sold in deutschmarks and approximately
99% of the Company revenues are denominated in 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 balance sheet and do not affect the net earnings
of the Company.
Since substantially all of the Company's revenues are received in
deutschmarks, the financial position of the Company for any given period, when
reported in U.S. dollars, can be significantly affected by the exchange rate
for deutschmarks prevailing during that period. In the nine months ended
September 30, 1998, the Company reported a net $12.1 million foreign exchange
translation gain and, as a result, the cumulative foreign exchange translation
loss decreased to $29.2 million at September 30, 1998 from $41.4 million at
December 31, 1997.
As both the Company's principal sources of revenues and expenses are in
deutschmarks, the Company does not currently enter into any currency hedging
arrangements for exchange rate fluctuations.
The average and period end exchange rates for the deutschmark to the U.S.
dollar for the periods indicated are as follows:
<TABLE>
<CAPTION>
Period from Quarter Ended Quarter Ended
September 30 to November 10, 1998 September 30, 1998 September 30, 1997
--------------------------------- -------------------------- --------------------------
Period End Period Average Period End Period Average Period End Period Average
---------- -------------- ---------- -------------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
Rate of Exchange
Deutschmark 1.6873 1.6719 1.6698 1.7606 1.7670 1.8059
</TABLE>
Based upon the period average exchange rate in the first nine months of 1998,
the U.S. dollar decreased by approximately 0.5% in value against the
deutschmark since December 31, 1997.
FORM 10-Q
QUARTERLY REPORT - PAGE 16
<PAGE> 17
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 in 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 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.
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
<PAGE> 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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
As reported in the Company's Form 10-Q for the period ended June 30, 1998, in
May 1998 the Company issued $12.0 million of 8% subordinated debentures
maturing 2003 with non-detachable warrants entitling the holders to subscribe
for up to an aggregate of 2.0 million ordinary shares, subject to a minimum,
at the market price for the shares at the time of exercise. The debentures
are convertible at any time prior to maturity into shares of common stock in
the capital of the Company at a conversion price equal to the greater of: (i)
$6.00 per share, or (ii) the average trading closing price of the shares on
the NASDAQ National Market over the 10 day trading period immediately prior to
the date of conversion of the debentures.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of shareholders on July 10, 1998. At the
meeting, C.S. Moon and Maarten Reidel were re-elected as Class I Trustees of
the Company, each for a three year term, as follows:
ABSTENTIONS AND
VOTES FOR VOTES WITHHELD BROKER NON-VOTES
---------- -------------- ----------------
C.S. Moon 10,546,363 35,063 -
Maarten Reidel 10,546,363 35,063 -
Jimmy S.H. Lee and Michel Arnulphy continued their respective terms as
Trustees of the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description
------- -----------
27 Article 5 - Financial Data Schedule for the 3rd Quarter
1998 Form 10-Q.
(b) Reports on Form 8-K
None.
FORM 10-Q
QUARTERLY REPORT - PAGE 18
<PAGE> 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/ Maarten Reidel
-------------------------------------
Maarten Reidel
Secretary and Chief Financial Officer
Date: November 13, 1998
FORM 10-Q
QUARTERLY REPORT - PAGE 19
<PAGE> 20
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
27 Article 5 - Financial Data Schedule for the 3rd Quarter
1998 Form 10-Q.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
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.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 39,682
<SECURITIES> 15,447
<RECEIVABLES> 41,293
<ALLOWANCES> 0
<INVENTORY> 22,559
<CURRENT-ASSETS> 121,065
<PP&E> 136,120
<DEPRECIATION> 0
<TOTAL-ASSETS> 290,740
<CURRENT-LIABILITIES> 58,502
<BONDS> 73,988
0
0
<COMMON> 91,648
<OTHER-SE> 64,604
<TOTAL-LIABILITY-AND-EQUITY> 290,740
<SALES> 132,036
<TOTAL-REVENUES> 140,506
<CGS> 105,141
<TOTAL-COSTS> 125,393
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,720
<INCOME-PRETAX> 15,113
<INCOME-TAX> 77
<INCOME-CONTINUING> 15,036
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,036
<EPS-PRIMARY> 0.98
<EPS-DILUTED> 0.98
</TABLE>
