<PAGE> 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, 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 15,398,722 shares of beneficial interest outstanding as at
August 11, 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 SIX MONTHS ENDED JUNE 30, 1998
(Unaudited)
FORM 10-Q
QUARTERLY REPORT - PAGE 2
<PAGE> 3
MERCER INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
As at June 30, 1998 and December 31, 1997
(Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 4,044 $ 4,414
Investments 37,054 56,285
Receivables 35,136 22,329
Inventories 17,106 15,799
Other 2,753 1,557
------------ ------------
Total current assets 96,093 100,384
Long-Term Assets
Properties 95,669 87,806
Investments 17,029 4,118
Notes receivable 13,876 7,000
Deferred income tax assets 10,961 10,986
------------ ------------
137,535 109,910
------------ ------------
$ 233,628 $ 210,294
============ ============
LIABILITIES
Current Liabilities
Accounts payable and accrued expenses $ 51,719 $ 50,172
Notes payable 2,348 3,252
Debt 3,588 4,329
------------ ------------
Total current liabilities 57,655 57,753
Long-Term Liabilities
Debt 30,192 15,039
Other 1,850 2,027
------------ ------------
32,042 17,066
------------ ------------
Total liabilities 89,697 74,819
SHAREHOLDERS' EQUITY
Shares of beneficial interest 90,649 88,603
Cumulative translation adjustment (40,082) (41,376)
Net unrealized loss on investments valuation (6,588) (1,517)
Retained earnings 99,952 89,765
------------ ------------
143,931 135,475
------------ ------------
$ 233,628 $ 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 Six Months Ended June 30, 1998 and 1997
(Unaudited)
(dollars in thousands, except for earnings per share)
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Revenues
Sales $ 95,982 $ 84,719
Investments 4,822 5,375
------------ ------------
100,804 90,094
Expenses
Cost of sales 76,170 69,259
General and administrative 12,021 12,109
Interest expense 1,773 1,403
------------ ------------
89,964 82,771
------------ ------------
Income from operations before income taxes 10,840 7,323
Income taxes 43 28
------------ ------------
Net income 10,797 7,295
Retained earnings, beginning of period 89,765 122,838
Dividend (610) (450)
------------ ------------
Retained earnings, end of period $ 99,952 $ 129,683
============ ============
Earnings per share
Basic $ 0.71 $ 0.49
============ ============
Diluted $ 0.71 $ 0.49
============ ============
</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 June 30, 1998 and 1997
(Unaudited)
(dollars in thousands, except for earnings per share)
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Revenues
Sales $ 46,889 $ 42,587
Investments 1,406 3,153
------------ ------------
48,295 45,740
Expenses
Cost of sales 36,590 34,791
General and administrative 6,147 6,305
Interest expense 980 519
------------ ------------
43,717 41,615
------------ ------------
Income from operations before income taxes 4,578 4,125
Income taxes 43 14
------------ ------------
Net income 4,535 4,111
Retained earnings, beginning of period 96,027 126,022
Dividend (610) (450)
------------ ------------
Retained earnings, end of period $ 99,952 $ 129,683
============ ============
Earnings per share
Basic $ 0.30 $ 0.27
============ ============
Diluted $ 0.30 $ 0.27
============ ============
</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 Six Months Ended June 30, 1998 and 1997
(Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Net income $ 10,797 $ 7,295
Other comprehensive income (loss):
Foreign currency translation adjustments 1,294 (23,690)
Unrealised (loss) gain on securities (5,071) 540
------------ ------------
Other comprehensive loss (3,777) (23,150)
------------ ------------
Total comprehensive income (loss) $ 7,020 $ (15,855)
============ ============
</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 June 30, 1998 and 1997
(Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Net income $ 4,535 $ 4,111
Other comprehensive income (loss):
Foreign currency translation adjustments 3,472 (8,024)
Unrealised (loss) gain on securities (5,676) 128
------------ ------------
Other comprehensive loss (2,204) (7,896)
------------ ------------
Total comprehensive income (loss) $ 2,331 $ (3,785)
============ ============
</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 Six Months Ended June 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 $ 10,797 $ 7,295
Adjustments to reconcile net income from
operations to cash from operating activities
Depreciation and amortization 6,611 5,999
Non-cash asset acquisitions (5,042) (10,014)
------------ ------------
12,366 3,280
Changes in current assets and liabilities
Investments (956) 8,568
Inventories (1,341) 3,968
Receivables (10,104) (1,497)
Accounts payable and accrued expenses 4,173 (5,030)
Other (538) 170
------------ ------------
Net cash provided by operating activities 3,600 9,459
Cash Flows from Investing Activities:
Purchase of fixed assets, net of investment grants (11,457) (6,036)
Increase in notes receivable (11,358) -
Other 15 16
------------ ------------
Net cash used in investing activities (22,800) (6,020)
Cash Flows from Financing Activities:
Increase in indebtedness 20,041 1,782
Decrease in indebtedness (2,599) (8,975)
Net proceeds on issuance of shares of
beneficial interest 2,046 487
Payment of dividend (610) (450)
Other (172) -
------------ ------------
Net cash provided by (used in) financing
activities 18,706 (7,156)
Effect of exchange rate changes on cash and
cash equivalents 124 (541)
------------ ------------
Net decrease in cash and cash equivalents (370) (4,258)
Cash and cash equivalents, beginning of period 4,414 9,967
------------ ------------
Cash and cash equivalents, end of period $ 4,044 $ 5,709
============ ============
</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 SIX MONTHS ENDED JUNE 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 15,292,315 and
14,978,804 for the six months ended June 30, 1998 and 1997, respectively, and
15,341,796 and 15,008,798 for the three months ended June 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 six months and three months ended
June 30, 1998, respectively, should be read in conjunction with the
consolidated financial statements and related notes included elsewhere herein.
RESULTS OF OPERATIONS - Six Months Ended June 30, 1998
- ------------------------------------------------------
In the six months ended June 30, 1998, revenues increased to $100.8 million
from $90.1 million in the same period in 1997, primarily as a result of
improved demand for pulp and paper products. However, as the Company's
products are principally sold in deutschmarks, the depreciation of the
deutschmark against the U.S. dollar by approximately 7.3% in the six months
ended June 30, 1998, compared to the same period in 1997, resulted in lower
prices in U.S. dollar terms for the Company's products.
Expenses increased to $90.0 million in the six months ended June 30, 1998,
compared to $82.8 million in the same period of 1997, primarily as a result of
increased sales volumes and fibre costs. General and administrative expenses
were $12.0 million in the six months ended June 30, 1998, compared to $12.1
million in the comparative period of 1997. Interest expense increased to $1.8
million in the six months ended June 30, 1998 from $1.4 million in the six
months ended June 30, 1997, as a result of increased indebtedness.
In the six months ended June 30, 1998, net income was $10.8 million or $0.71
per share, compared to $7.3 million or $0.49 per share for the six months
ended June 30, 1997.
Selected sales data for the Company for the six months ended June 30, 1998 and
1997, respectively, is as follows:
<TABLE>
<CAPTION>
Six Months Ended June 30,
-----------------------------
1998 1997
------------ ------------
<S> <C> <C>
(in thousands)
Sales by Product Class
- ----------------------
Packaging papers $ 15,847 $ 15,014
Specialty papers 16,145 14,330
Printing papers 20,946 17,867
Pulp 40,383 35,782
Other 2,661 1,726
------------ ------------
Total(1) $ 95,982 $ 84,719
============ ============
</TABLE>
FORM 10-Q
QUARTERLY REPORT - PAGE 10
<PAGE> 11
<TABLE>
<CAPTION>
Six Months Ended June 30,
-----------------------------
1998 1997
------------ ------------
<S> <C> <C>
(dollars in thousands)
Sales by Geographic Area
- ------------------------
Germany $ 52,273 $ 48,061
European Union(2) 38,566 30,133
Other 5,143 6,525
------------ ------------
Total $ 95,982 $ 84,719
============ ============
Sales by Volume (tonnes)
- ---------------
Packaging papers 58,960 55,600
Specialty papers 19,576 17,732
Printing papers 29,062 26,548
Pulp 81,984 81,968
------------ ------------
Total 189,582 181,848
============ ============
- --------------------
(1) Excluding intercompany sales.
(2) Not including Germany.
</TABLE>
Pulp and paper markets were generally stable in the current period with
overall product prices slightly higher than in the comparative period of 1997.
Sales volumes were 4.3% higher in the six months ended June 30, 1998, compared
to the same period in 1997.
In the six months ended June 30, 1998, pulp prices increased, on average, by
approximately 12.8% compared to the six months ended June 30, 1997 as excess
European pulp inventories were reduced. However, weak Asian markets did not
allow for a significant price increase. The Company's pulp sales increased by
12.9% to $40.4 million in the six months ended June 30, 1998 from $35.8
million in the comparative period of 1997.
Overall paper prices also increased in the six months ended June 30, 1998,
compared to the same period of 1997, primarily as a result of increased
demand during the period for all paper grades. In addition, particularly
strong demand for light weight coated papers resulted in product substitution
by certain end users, which led to increased demand for other printing and
writing grades. Paper sales in the six months ended June 30, 1998 increased
by 12.1% to $52.9 million from $47.2 million in the six months ended June 30,
1997 on a volume increase of 7.7% and an average price increase of 4.1%.
Sales volumes for packaging, specialty and printing papers increased in the
six months ended June 30, 1998 by 6.0%, 10.4% and 9.5%, respectively,
compared to the six months ended June 30, 1997.
Increased pulp and paper prices in the six months ended June 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. On average, the Company's
fibre costs for pulp production were up approximately 13.6% in the six months
ended June 30, 1998, compared to the same period in 1997, but remained among
the lowest in Europe.
FORM 10-Q
QUARTERLY REPORT - PAGE 11
<PAGE> 12
Recycled fibre costs were down approximately 5.9% in the six months ended June
30, 1998, compared to the same period in 1997, and were down approximately
7.0% from December 1997.
RESULTS OF OPERATIONS - Three Months Ended June 30, 1998
- --------------------------------------------------------
In the three months ended June 30, 1998, revenues increased to $48.3 million
from $45.7 million in the same period in 1997, primarily as a result of higher
prices. However, as the Company's products are principally sold in
deutschmarks, the depreciation of the deutschmark against the U.S. dollar by
approximately 4.7% in the three months ended June 30, 1998, compared to the
same period in 1997, resulted in lower prices in U.S. dollar terms for the
Company's products. The increase in revenues in the current period was
partially offset by a decrease in investment revenue to $1.4 million in the
second quarter of 1998 from $3.2 million in the comparative period of 1997.
Expenses increased to $43.7 million in the three months ended June 30, 1998,
compared to $41.6 million in the same period of 1997, primarily as a result of
an increase in the cost of sales due to higher fibre costs. General and
administrative expenses were $6.1 million in the three months ended June 30,
1998, compared to $6.3 million in the comparative period of 1997. Interest
expense increased to $1.0 million in the three months ended June 30, 1998 from
$0.5 million in the three months ended June 30, 1997, as a result of increased
indebtedness.
In the three months ended June 30, 1998, net income was $4.5 million or $0.30
per share, compared to $4.1 million or $0.27 per share for the three months
ended June 30, 1997.
Selected sales data for the Company for the three months ended June 30, 1998
and 1997, respectively, is as follows:
<TABLE>
<CAPTION>
Quarter Ended June 30,
-----------------------------
1998 1997
------------ ------------
(in thousands)
<S> <C> <C>
Sales by Product Class
- ----------------------
Packaging papers $ 7,416 $ 8,003
Specialty papers 7,517 7,414
Printing papers 10,274 8,966
Pulp 19,790 17,381
Other 1,892 823
------------ ------------
Total(1) $ 46,889 $ 42,587
============ ============
Sales by Geographic Area
- ------------------------
Germany $ 24,954 $ 22,796
European Union(2) 19,955 17,353
Other 1,980 2,438
------------ ------------
Total $ 46,889 $ 42,587
============ ============
</TABLE>
FORM 10-Q
QUARTERLY REPORT - PAGE 12
<PAGE> 13
<TABLE>
<CAPTION>
Quarter Ended June 30,
-----------------------------
1998 1997
------------ ------------
(tonnes)
<S> <C> <C>
Sales by Volume
- ---------------
Packaging papers 27,067 29,011
Specialty papers 9,033 9,273
Printing papers 14,158 13,697
Pulp 39,695 40,523
------------ ------------
Total 89,953 92,504
============ ============
- --------------------
(1) Excluding intercompany sales.
(2) Not including Germany.
</TABLE>
Pulp and paper markets were generally stable in the second quarter of 1998
with overall product price increases in the three months ended June 30, 1998,
compared to the same period of 1997. Sales volumes were 2.8% lower in the
three months ended June 30, 1998 compared to the same period in 1997.
In the three months ended June 30, 1998, pulp prices increased, on average, by
approximately 16.2% compared to the three months ended June 30, 1997 as excess
European pulp inventories were reduced. However, weak Asian markets did not
allow for a significant price increase. The Company's pulp sales increased by
13.9% to $19.8 million in the three months ended June 30, 1998 from $17.4
million in the comparative period of 1997 on a volume decrease of 2.0% and an
average price increase of 16.2%.
Overall paper prices also increased in the three months ended June 30, 1998,
compared to the same period of 1997. In addition, particularly strong demand
for light weight coated papers resulted in product substitution by certain
end users, which led to increased prices for other printing and writing
grades. Paper sales in the three months ended June 30, 1998 increased by
3.4% to $25.2 million from $24.4 million in the three months ended June 30,
1997 on a volume decrease of 3.3% and an average price increase of 6.9%.
Sales volume for packaging and specialty papers decreased in the three months
ended June 30, 1998 by 6.7% and 2.6%, respectively, and sales volume for
printing papers increased by 3.4%, compared to the three months ended June
30, 1997.
Increased pulp and paper prices in the three months ended June 30, 1998 were
partially offset during the period by increased fibre costs from prices 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. On average,
the Company's fibre costs for pulp production were up approximately 12.7% in
the three months ended June 30, 1998, compared to the same period in 1997, but
remained among the lowest in Europe. Recycled fibre costs were down
approximately 12.4% in the three months ended June 30, 1998, compared to the
same period in 1997.
FORM 10-Q
QUARTERLY REPORT - PAGE 13
<PAGE> 14
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
June 30, 1998 December 31, 1997
------------- -----------------
(in thousands)
<S> <C> <C>
Financial Position
- ------------------
Working capital $ 38,438 $ 42,631
Total assets 233,628 210,294
Long-term government debt 6,472 8,338
Long-term debt - other 23,720 6,701
</TABLE>
At June 30, 1998, the Company's cash and cash equivalents totalled $4.0
million, a net decrease of $0.4 million from $4.4 million at December 31,
1997. At June 30, 1998, the Company had short-term trading securities
totalling $37.1 million, compared to $56.3 million at December 31, 1997.
Operating Activities
- --------------------
Cash provided by operating activities was $3.6 million in the six months ended
June 30, 1998, compared to $9.5 million in the six months ended June 30, 1997.
An increase in accounts payable and accrued liabilities provided cash of $4.2
million in the six months ended June 30, 1998, compared to a decrease in same
using cash of $5.0 million in the six months ended June 30, 1997. An increase
in investments used cash of $1.0 million in the six months ended June 30,
1998, compared to a decrease in investments providing cash of $8.6 million in
the six months ended June 30, 1997. An increase in inventories used cash of
$1.3 million in the six months ended June 30, 1998, compared to a decrease in
inventories providing cash of $4.0 million in the six months ended June 30,
1997. An increase in receivables used cash of $10.1 million in the six months
ended June 30, 1998, compared to $1.5 million in the six months ended June 30,
1997. 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, 1998 used cash of $22.8
million, consisting primarily of capital expenditures for upgrades to the
Company's manufacturing plants and an increase in notes receivable, compared
to $6.0 million in the six months ended June 30, 1997.
The Company expects gross capital expenditures in 1998, excluding the
conversion of its pulp mill from 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 half of 1998, gross capital
expenditures were $1.5 million, compared to approximately $5.4 million in
the same period of 1997.
The Company commenced the conversion of its pulp mill from the production of
sulphite pulp to kraft pulp in the second quarter of 1998. Gross capital
expenditures on the conversion project were
FORM 10-Q
QUARTERLY REPORT - PAGE 14
<PAGE> 15
$11.7 million in the first half of 1998, compared to $0.9 million in the same
period of 1997. 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 6, 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.
As part of the restructuring of the Company's paper operations, the Company
has completed the sale of its Raschau packaging paper facility and entered
into an agreement to sell its Greiz paper mill, which is expected to complete
in the second half of 1998.
Financing Activities
- --------------------
Cash provided by financing activities was $18.7 million in the six months
ended June 30, 1998, compared to cash used by financing activities of $7.2
million in the six months ended June 30, 1997. A net increase in indebtedness
provided cash of $17.4 million in the six months ended June 30, 1998, compared
to a net decrease of $7.2 million in the same period of 1997. The Company
issued shares for net proceeds of $2.0 million in the six months ended June
30, 1998, compared to $0.5 million in the six months ended June 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 first half of 1998, the Company reported an unrealized foreign exchange
translation gain of $0.1 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.
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 June 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.
FORM 10-Q
QUARTERLY REPORT - PAGE 15
<PAGE> 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 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 six months ended June
30, 1998, the Company reported a net $0.1 million foreign exchange translation
gain and, as a result, the cumulative foreign exchange translation loss
decreased to $40.1 million at June 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
June 30 to August 12, 1998 June 30, 1998 June 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 1.7746 1.7855 1.8032 1.7930 1.7438 1.7079
</TABLE>
Based upon the period average exchange rate in the first half of 1998, the
U.S. dollar increased by approximately 0.4% in value against the deutschmark
since December 31, 1997.
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
FORM 10-Q
QUARTERLY REPORT - PAGE 16
<PAGE> 17
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.
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
In May 1998, in reliance on an exemption from registration under the
Securities Act of 1933, as amended (the "Securities Act") and the rules
promulgated thereunder, as a transaction not involving a public offering
under Section 4(2) of the Securities Act, the Company issued, pursuant to an
underwriting agreement with Volendam Securities C.V. (the "Agent"), $12.0
million of 8% subordinated debentures maturing 2003 (as amended) with
non-detachable warrants entitling the holders to subscribe for up to an
aggregate of 2.0 million ordinary shares at, subject to a minimum, the market
price of the shares at the time of exercise. The Agent received a fee of $0.7
million and reimbursement of certain expenses.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description
------- -----------
10 English Translation of a Loan Agreement in the amount of DM
508,000,000 between Zellstoff- und Papierfabrik Rosenthal
GmbH & Co. KG,
FORM 10-Q
QUARTERLY REPORT - PAGE 17
<PAGE> 18
Blankenstein on the one hand and Bayerische Hypotheken-
und Wechsel-Bank Aktiengesellschaft, Munich and Bayerische
Vereinsbank Aktiengesellschaft, Munich on the other hand
dated July 6, 1998. Incorporated by reference from the
Company's Form 8-K dated July 6, 1998.
27 Article 5 - Financial Data Schedule for the 2nd Quarter
1998 - Form 10-Q.
(b) Reports on Form 8-K
A report on Form 8-K dated July 6, 1998 was filed reporting under:
Item 5. Other Events.
Item 7. Financial Statements and Exhibits.
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: August 12, 1998
FORM 10-Q
QUARTERLY REPORT - PAGE 19
<PAGE> 20
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
10 English Translation of a Loan Agreement in the amount of DM
508,000,000 between Zellstoff- und Papierfabrik Rosenthal
GmbH & Co. KG, Blankenstein on the one hand and Bayerische
Hypotheken- und Wechsel-Bank Aktiengesellschaft, Munich and
Bayerische Vereinsbank Aktiengesellschaft, Munich on the
other hand dated July 6, 1998. Incorporated by reference
from the Company's Form 8-K dated July 6, 1998.
27 Article 5 - Financial Data Schedule for the 2nd 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 4,044
<SECURITIES> 37,054
<RECEIVABLES> 35,136
<ALLOWANCES> 0
<INVENTORY> 17,106
<CURRENT-ASSETS> 96,093
<PP&E> 95,669
<DEPRECIATION> 0
<TOTAL-ASSETS> 233,628
<CURRENT-LIABILITIES> 57,655
<BONDS> 30,192
0
0
<COMMON> 90,649
<OTHER-SE> 53,282
<TOTAL-LIABILITY-AND-EQUITY> 233,628
<SALES> 95,982
<TOTAL-REVENUES> 100,804
<CGS> 76,170
<TOTAL-COSTS> 89,964
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,773
<INCOME-PRETAX> 10,840
<INCOME-TAX> 43
<INCOME-CONTINUING> 10,797
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,797
<EPS-PRIMARY> 0.71
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