<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, 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.
==============================================================================
<PAGE> 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
<PAGE> 3
MERCER INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
As at June 30, 1999 and December 31, 1998
(Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------ ------------
<S> <C> <C>
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
============ ============
</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, 1999 and 1998
(Unaudited)
(dollars in thousands, except for earnings per share)
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
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
============ ============
</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, 1999 and 1998
(Unaudited)
(dollars in thousands, except for earnings per share)
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
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
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
FORM 10-Q
QUARTERLY REPORT - PAGE 5
<PAGE> 6
MERCER INTERNATIONAL INC.
STATEMENTS OF COMPREHENSIVE INCOME
For Six Months Ended June 30, 1999 and 1998
(Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
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
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
FORM 10-Q
QUARTERLY REPORT - PAGE 6
<PAGE> 7
MERCER INTERNATIONAL INC.
STATEMENTS OF COMPREHENSIVE INCOME
For Three Months Ended June 30, 1999 and 1998
(Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
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
============ ============
</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, 1999 and 1998
(Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
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
============ ============
</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, 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
<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 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:
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1999 1998
----------- -----------
(in thousands)
<S> <C> <C>
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
=========== ===========
</TABLE>
- ----------
(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
<PAGE> 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
<PAGE> 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:
<TABLE>
<CAPTION>
Three Months Ended June 30,
---------------------------
1999 1998
------------ ------------
(in thousands)
<S> <C> <C>
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
============ ============
</TABLE>
- ----------
(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
<PAGE> 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
<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, 1999 December 31, 1998
------------- -----------------
(in thousands)
<S> <C> <C>
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
</TABLE>
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
<PAGE> 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
<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 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:
<TABLE>
<CAPTION>
Quarter Ended Quarter Ended
June 30, 1999 June 30, 1998
-------------------------- --------------------------
Period End Period Average Period End Period Average
---------- -------------- ---------- --------------
<S> <C> <C> <C> <C>
RATE OF EXCHANGE
Deutschmark 1.8989 1.8513 1.8032 1.7930
</TABLE>
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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 21
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
27 Article 5 - Financial Data Schedule for the 2nd Quarter
1999 - 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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 3,721
<SECURITIES> 10,523
<RECEIVABLES> 45,389
<ALLOWANCES> 0
<INVENTORY> 16,373
<CURRENT-ASSETS> 81,087
<PP&E> 242,917
<DEPRECIATION> 0
<TOTAL-ASSETS> 372,189
<CURRENT-LIABILITIES> 59,785
<BONDS> 170,324
0
0
<COMMON> 98,085
<OTHER-SE> 42,220
<TOTAL-LIABILITY-AND-EQUITY> 372,189
<SALES> 76,499
<TOTAL-REVENUES> 76,079
<CGS> 67,721
<TOTAL-COSTS> 78,790
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,189
<INCOME-PRETAX> (2,711)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,711)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,711)
<EPS-BASIC> (0.17)
<EPS-DILUTED> (0.17)
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