<PAGE>
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
------------------------
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ---------------- to ----------------
COMMISSION FILE NO.: 0-9409
MERCER INTERNATIONAL INC.
EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER
<TABLE>
<S> <C>
WASHINGTON 91-6087550
STATE OR OTHER JURISDICTION IRS EMPLOYER IDENTIFICATION NO.
OF INCORPORATION OR ORGANIZATION
</TABLE>
BURGLISTRASSE 6, ZURICH, SWITZERLAND, 8002
ADDRESS OF PRINCIPAL EXECUTIVE OFFICE ZIP CODE
Registrant's telephone number including area code: 41(1) 201 7710
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
------------------------
SHARES OF BENEFICIAL INTEREST, $1.00 PAR VALUE
PREFERRED STOCK PURCHASE RIGHTS
TITLE OF CLASS
------------------------------
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 / /
Indicate by check mark if disclosure of delinquent filers pursuant to Rule
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
The aggregate market value of the Registrant's voting stock held by
non-affiliates of the Registrant as of March 26, 1999 was approximately
$51,357,181. The last reported sale price of the common shares of beneficial
interest on the NASDAQ Stock Market's National Market on March 26, 1999 was
$6.13 per share.
As of March 26, 1999, the Registrant had 16,034,846 common shares of
beneficial interest, $1.00 par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The Proxy Statement for the Annual Meeting of Shareholders to be held June
30, 1999 is incorporated by reference in Part III hereof. Certain exhibits in
Part IV of this Form 10-K are incorporated by reference from prior filings made
by the Registrant under the SECURITIES ACT OF 1933, as amended, and the
SECURITIES EXCHANGE ACT OF 1934, as amended.
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C> <C>
PART I
ITEM 1. BUSINESS........................................................................................ 4
The Company..................................................................................... 4
Products........................................................................................ 5
Sales, Marketing and Distribution............................................................... 6
Fibre........................................................................................... 7
Capital Expenditures and Government Financing................................................... 8
Pulp Mill Conversion Project.................................................................... 9
Environmental................................................................................... 12
Human Resources................................................................................. 13
Acquisitions.................................................................................... 13
ITEM 2. PROPERTIES...................................................................................... 14
ITEM 3. LEGAL PROCEEDINGS............................................................................... 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............................................. 15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS........................... 16
ITEM 6. SELECTED FINANCIAL DATA......................................................................... 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION............ 17
Results of Operations........................................................................... 18
Year Ended December 31, 1998 Compared to the Year Ended December 31, 1997..................... 18
Year Ended December 31, 1997 Compared to the Year Ended December 31, 1996..................... 19
Liquidity and Capital Resources................................................................. 21
Operating Activities.......................................................................... 21
Investing Activities.......................................................................... 21
Financing Activities.......................................................................... 22
Foreign Currency................................................................................ 22
Cyclical Nature of Business; Competitive Position............................................... 23
Year 2000....................................................................................... 23
Conversion Project Uncertainties................................................................ 24
European Economic and Monetary Union............................................................ 24
Inflation....................................................................................... 24
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...................................... 25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..................................................... 25
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE............ 25
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.............................................. 26
ITEM 11. EXECUTIVE COMPENSATION.......................................................................... 26
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.................................. 26
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................................................. 26
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K................................ 27
Financial Statements............................................................................ 29
Supplementary Financial Information............................................................. 51
SIGNATURES...................................................................................... 52
</TABLE>
2
<PAGE>
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, 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 general economic
and business conditions, cyclical changes in supply and demand for pulp and
paper products, governmental regulations, the ability of management to execute
its business plan, product prices, interest rates, 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.
3
<PAGE>
PART I
ITEM 1. BUSINESS
THE COMPANY
Mercer International Inc. is a Massachusetts trust organized under the laws
of the State of Washington in 1968. Under Washington law, shareholders of a
Massachusetts trust have the same limited liability as shareholders of a
corporation.
In this document: (i) unless the context otherwise requires, the "Company"
or "Mercer" refers to Mercer International Inc. and its subsidiaries; (ii) a
"tonne" is one metric ton or 2,204.6 pounds; (iii) "DM" refers to deutschmarks,
the lawful currency of Germany; and (iv) foreign assets and liabilities
denominated in DM have been translated to U.S. dollars at the December 31, 1998
rate of exchange of DM 1.6665 to $1.00, and revenues and expenses denominated in
DM have been translated to U.S. dollars at the average rate of exchange
throughout 1998 of DM 1.7589 to $1.00.
Mercer is a pulp and paper company headquartered in Zurich, Switzerland,
with operations primarily located in Germany. The Company's pulp operations are
conducted through Spezialpapierfabrik Blankenstein GmbH (formerly called
Zellstoff-und Papierfabrik Rosenthal GmbH) and its affiliates ("SPB") and its
paper operations are conducted through Dresden Papier GmbH (formerly called
Dresden Papier AG) and its affiliates ("DPAG"), all of which are wholly-owned
subsidiaries of Mercer. The Company previously also operated in the financial
services segment until June 1996, when it completed the spin-off of its
financial services business to its shareholders by way of a special dividend.
The Company currently employs approximately 785 people and its manufacturing
plants consist of four paper mills (the "Paper mills") and a pulp mill (the
"Pulp mill") with aggregate annual production capacities of approximately
170,000 tonnes and 160,000 tonnes, respectively. The Paper mills produce three
primary classes of paper products, being packaging, printing and specialty, and
the Pulp mill produces sulphite pulp.
In 1998, the Company commenced construction of a major capital project
designed to convert the Pulp mill from the production of sulphite pulp to kraft
(sulphate) pulp and increase its annual production capacity to approximately
280,000 tonnes (the "Conversion Project"). The aggregate cost of the Conversion
Project is estimated to be approximately $400 million and construction is
expected to be completed around the end of 1999. See "Business--Pulp Mill
Conversion Project".
During the last five years, the Company has expended an aggregate of
approximately $168.7 million on capital investments at the Company's mills, of
which approximately $43.3 million was financed through non-refundable government
grants, on plant upgrades to improve efficiency, reduce effluent discharges and
emissions and modernize its manufacturing plants.
In late 1997, the Company embarked on a strategy of focusing on its core
operations and rationalizing assets that either are not part of such core
operations or do not provide the desired level of return. In accordance with
this strategy, the Company took a special charge of $48.5 million in the fourth
quarter of 1997 relating to the limited service life of various assets due to
the Conversion Project, severance and related costs, the write-down of specific
capital assets to their estimated realizable value and a decrease in the
deferred income tax asset. In 1998, the Company completed the sale of its
packaging paper mill in Greiz, and its carton paper mill in Raschau which had
been leased to another party since 1995. The foregoing restructuring will enable
the Company to concentrate its management and financial resources on its core
operations and pursue new opportunities in the same or related industries.
The markets for pulp and paper are highly competitive and sensitive to
cyclical changes in industry capacity, the economy, interest rates and
fluctuations in currency exchange rates, all of which can have a significant
influence on the Company's selling prices and overall profitability. The Company
competes with European and international pulp and paper firms ranging from very
large integrated firms to smaller
4
<PAGE>
specialty firms. Areas of competition include price, innovation, quality and
service. The Company's competitive position is influenced by the availability
and cost of its raw materials, energy and labour, and its plant efficiencies and
productivity in relation to its competitors.
The corporate strategy of the Company is to expand its asset and earnings
base both in Europe and internationally through the acquisition of interests in
companies and assets in the pulp and paper and related businesses.
PRODUCTS
The Company manufactures and sells sulphite pulp and three primary classes
of paper products. The Company's products are produced from both virgin fibre,
being wood chips and pulpwood, and recycled fibre, being waste paper. The
Company's manufacturing plants are all located in Germany in the States of
Saxony and Thuringia. The Paper mills are located at Heidenau, Hainsberg,
Fahrbrucke and Trebsen and have an aggregate annual production capacity of
approximately 170,000 tonnes. The Pulp mill is situated near the town of
Blankenstein and has an annual production capacity of approximately 160,000
tonnes.
The following table sets out the Company's primary classes of paper products
and the mills at which they are produced:
<TABLE>
<CAPTION>
PAPER PRODUCT CLASS MILL PRODUCT DESCRIPTION
- - ------------------------------------- ------------------------------ ----------------------------------------
<S> <C> <C>
Packaging Paper...................... Trebsen Corrugated medium and testliner used in
the production of boxes and corrugated
shipping containers.
Specialty Paper...................... Heidenau and Fahrbrucke Greaseproof paper and coated and
uncoated wallpaper.
Printing Paper....................... Hainsberg and Fahrbrucke Recycled and woodfree printing and
writing paper.
</TABLE>
Pulp is generally classified according to fibre type, the process used and
the degree to which it is bleached. The sulphite pulp currently produced by the
Pulp mill is a chemical wood pulp manufactured by a magnesium bisulphite acid
cooking process. The majority of the production of the mill is used to make
paper grade pulp. The dissolving sulphite pulp produced by the mill is a
specialty pulp used in the production of synthetic textile fibre such as viscose
staple fibre (rayon). A number of factors beyond economic supply and demand have
an impact on the market for chemical pulp, including requirements for pulp
bleached without any chlorine compounds or without the use of chlorine gas. The
Pulp mill has the capability of producing both "totally chlorine free" ("TCF")
and "elemental-chlorine free" ("ECF") pulp. TCF pulp is bleached to a high
brightness using oxygen and hydrogen peroxide as bleaching agents, whereas ECF
pulp is produced by substituting chlorine dioxide for chlorine gas in the
bleaching process. This substitution virtually eliminates complex chloro-organic
compounds from mill effluent. Ethanol, a byproduct of pulp production, is sold
by the Company to industrial producers and used in making paints, lacquers,
films and printing colours.
In 1998, the Company commenced construction of the Conversion Project to
convert the Pulp mill to produce kraft pulp. The kraft pulp to be produced at
the Pulp mill is a long-fibred softwood pulp produced by a sulphate cooking
process and manufactured primarily from wood chips and pulpwood. Kraft pulp is
noted for its strength, whiteness and absorption properties and is used to
produce a variety of products, including lightweight publication grades of
paper, tissues and paper related products. See "Business--Pulp Mill Conversion
Project".
5
<PAGE>
SALES, MARKETING AND DISTRIBUTION
The Company's sales and marketing operations focus primarily on western
European countries and are responsible for the majority of the Company's paper
sales. In 1998, paper sales conducted through agents were approximately 29% of
total paper sales, compared to approximately 34% in 1997 and 35% in 1996. The
majority of the Company's paper products are sold to printers, wallpaper
manufacturers, corrugators and converters. Sales of sulphite pulp within Germany
are conducted primarily by the Company's own sales staff, while sales outside of
Germany are carried out primarily through agents. The Company's sulphite pulp is
sold principally to tissue and paper mills and rayon producers. Pulp and paper
sales are made on terms customary to the industry. At December 31, 1998, there
were no material payment delinquencies. The Company's products are delivered to
market by truck, rail and ship.
The distribution of the Company's sales by volume, product class and
geographic area is set out in the following table for the periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1998 1997 1996
-------- -------- --------
(TONNES)
<S> <C> <C> <C>
SALES BY VOLUME
Papers
Packaging Papers...................... 91,157(1) 110,428 110,179
Specialty Papers...................... 36,001 36,991 26,548
Printing Papers....................... 56,866 54,538 46,416
-------- -------- --------
Total Papers........................ 184,024 201,957 183,143
-------- -------- --------
Pulp.................................... 145,451 160,432 133,005
-------- -------- --------
Total(2)................................ 329,475 362,389 316,148
-------- -------- --------
-------- -------- --------
(IN THOUSANDS)
SALES BY PRODUCT CLASS
Papers
Packaging Papers...................... $ 24,722(1) $ 29,313 $ 33,165
Specialty Papers...................... 30,401 29,244 27,012
Printing Papers....................... 41,192 35,915 36,469
-------- -------- --------
Total Papers........................ 96,315 94,472 96,646
-------- -------- --------
Pulp.................................... 69,918 75,460 72,456
Other................................... 3,438 5,405 4,995
-------- -------- --------
Total................................... $169,671 $175,337 $174,097
-------- -------- --------
-------- -------- --------
SALES BY GEOGRAPHIC AREA
Germany................................. $ 93,267 $ 97,525 $101,351
European Union(3)....................... 65,806 59,794 48,795
Other................................... 10,598 18,018 23,951
-------- -------- --------
Total................................... $169,671 $175,337 $174,097
-------- -------- --------
-------- -------- --------
</TABLE>
- - ------------------------
(1) The Company sold its packaging paper mill in Greiz effective July 1998.
Paper sales from the Greiz mill prior to its sale are included in the
Company's results of operations for 1998. The Greiz mill sold approximately
25,490 tonnes of packaging paper for approximately $7.2 million in 1998.
(2) Excluding intercompany sales of approximately 1,072, 4,257 and 3,609 tonnes
of pulp in 1998, 1997 and 1996, respectively.
(3) Not including Germany.
6
<PAGE>
The following charts illustrate the geographic distribution of the Company's
sales for the periods indicated:
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1998
<S> <C>
European(1) Union 38.8%
Germany 55.0%
Other 6.2%
</TABLE>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1997
<S> <C>
European(1) Union 34.1%
Germany 55.6%
Other 10.3%
</TABLE>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1996
<S> <C>
European(1) Union 28.0%
Germany 58.2%
Other 13.8%
</TABLE>
- - ------------------------
(1) Not including Germany.
In 1998 and 1997, no single customer accounted for more than 10% of the
Company's pulp and paper sales. The Company's sales are not dependent upon a
single customer or upon a concentrated group of major customers. The loss of any
one customer would not have a material adverse effect on the Company.
FIBRE
The fibre used by the Paper mills consists of waste paper (recycled paper)
and pulp, which are cyclical in both price and supply. The cost of such fibre is
primarily affected by the supply and demand for paper and pulp. Approximately
80% of the fibre used in the Company's paper operations consists of waste paper.
Germany has extensive waste paper recycling and collection laws which result in
a readily available supply. The cost of lower grade waste paper is currently
relatively low in comparison to virgin pulp fibre. The remaining 20% of the
fibre is made up of market pulps and chemical additives, both of which are
available at market prices from various suppliers throughout Europe. In 1998,
the Paper mills consumed approximately 151,347 tonnes of waste paper. Prices for
waste paper and pulp were relatively low in 1998 as a result of excess world
pulp inventories and weak Asian markets.
The fibre used by the Pulp mill consists of wood chips produced by local
sawmills and pulpwood, which are cyclical in both price and supply. Wood chips
are small pieces of wood used to make pulp and are a product of either wood
waste from sawmills or pulpwood processed especially for this purpose. Pulpwood
consists of lower quality logs not used in the production of lumber. The costs
of wood chips and pulpwood are primarily affected by the supply and demand for
lumber. The Pulp mill is situated in a region which offers a stable fibre
supply. The wood chips are procured from approximately 60 sawmills located in
the States of Bavaria and Thuringia within a 150 kilometre radius of the Pulp
mill. Within this radius, the Pulp mill is by far the largest consumer of wood
chips. Wood chips are normally procured from sawmills pursuant to one year
supply contracts, which provide for quarterly price adjustments. Pulpwood is
partly
7
<PAGE>
procured from the state forest agency in Thuringia on a contract basis and
partly from private holders. The Pulp mill's fibre requirements are handled and
procured primarily by PWA Holz, which is the largest wood procurement company in
Germany and handles a total volume of approximately four million cubic metres
per year. In 1998, the Pulp mill consumed approximately 790,961 cubic metres of
fibre comprised of approximately 632,769 cubic metres of wood chips and 158,192
cubic metres of pulpwood.
While fibre costs for pulp remained relatively low throughout 1998 due to
excess world pulp inventories, they were approximately 9.8% higher than in 1997.
In 1998, fibre supplies decreased as a result of poor lumber markets, which
resulted in less lumber production by local sawmills, and harsh weather
conditions in late 1998, which reduced timber harvesting. This resulted in fibre
costs at the end of 1998 being approximately 13% higher than at the lowest point
during 1997. Overall, in 1998, relatively low fibre prices were reflected in
relatively low pulp prices. While fibre costs and supply are subject to cyclical
changes, the Company expects that it will be able to obtain an adequate supply
of fibre on reasonably satisfactory terms due to the favourable location of the
Pulp mill and its long-term relationship with suppliers.
CAPITAL EXPENDITURES AND GOVERNMENT FINANCING
In 1998, the Company continued its capital investment programs to improve
efficiency, reduce effluent discharges and emissions and increase production
capacity at its manufacturing plants. Such capital investments were partially
financed through non-refundable grants made available by German federal and
state governments and were used to offset certain wastewater fees.
Under legislation adopted by the federal and certain state governments of
Germany, non-refundable grants are provided to qualifying businesses operating
in eastern Germany to finance capital investments. The grants are made to
encourage investment and job creation. Pursuant to the current terms of such
grants, state governments will provide funding for up to 35% of the cost of
qualified investments. Additional non-refundable grants, equal to 5% of
qualified investments, are available from the federal government to the extent
that the qualified investments did not receive maximum state government funding.
These grants are not refundable or repayable by the recipient, unless the
proceeds are used for a non-specified purpose. These non-refundable grants are
not recorded in the income of the Company, but instead reduce the cost basis of
the assets purchased by the proceeds thereof.
Loan guarantees are also available from the German federal and state
governments for up to 80% of the cost of qualifying investments. These
guarantees are provided by such federal and state governments to assist
qualifying businesses with financing capital investments. The guarantees permit
such businesses to obtain term loans at below market interest rates. In
addition, subsidized interest rate loans are also available from public
financial institutions in Germany, which provide loans at below market interest
rates for qualified investments.
The capital investments made by the Company to reduce effluent discharges
have been applied to offset wastewater fees that would otherwise be payable. At
December 31, 1998, the aggregate wastewater fees saved by the Company over the
last five years as a result of environmental capital expenditures were $14.3
million. See "Business--Environmental".
8
<PAGE>
The following table sets out the Company's capital expenditures and
non-refundable grants recorded for the periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------
TOTAL 1998 1997 1996 1995 1994(1)
----------- ----------- ----------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Capital Expenditures.......... $ 168,723(2) $ 85,954(3) $ 14,791(5) $ 23,865 $ 18,968 $ 25,145
----------- ----------- ----------- -------- -------- --------
----------- ----------- ----------- -------- -------- --------
Non-refundable grants......... $ 43,349 $ 16,125(4) $ 1,723 $ 5,328 $ 7,291 $ 12,882
----------- ----------- ----------- -------- -------- --------
----------- ----------- ----------- -------- -------- --------
</TABLE>
- - ------------------------
(1) The Company acquired its pulp operations effective July 1, 1994.
(2) To December 31, 1998, capital expenditures have offset $14.3 million in
wastewater fees.
(3) $82.2 million was related to the Conversion Project.
(4) $16.0 million was related to the Conversion Project.
(5) $5.9 million was related to the Conversion Project.
In 1998, the Company completed its capital investment program initiated in
1993 to modernize and upgrade the Paper mills. The Company has expended an
aggregate of approximately $67.0 million under this program, including
approximately $3.8 million in 1998. Capital investments in 1998 included a
variety of smaller projects, the largest of which was the replacement of a
natural gas powered turbine at the Fahrbrucke mill at a cost of approximately
$0.8 million. The Company anticipates that capital investments at its Paper
mills for maintenance and environmental projects will total approximately $6.2
million in 1999. The Company is reviewing a number of strategic initiatives
designed to upgrade the product mix at the Paper mills and provide a high rate
of return, including adding coating facilities at the Hainsberg and Fahrbrucke
mills. These initiatives are still under review and implementation is also
subject to the availability of capital. The aggregate cost of all such strategic
initiatives at the Paper mills is estimated to be approximately $12.0 million.
In 1994, the Company initiated a capital investment program to reduce
effluent discharges and emissions and upgrade the Pulp mill. The program was
estimated to cost approximately $48.4 million and be completed by December 31,
1998. As at December 31, 1997, the program was substantially completed and
approximately $37.3 million had been expended thereon. The balance of this
investment program has been modified as a result of the Conversion Project.
PULP MILL CONVERSION PROJECT
In 1998, the Company commenced construction of the Conversion Project to
convert the Pulp mill from the production of sulphite pulp to kraft pulp. Kraft
pulp is a fibrous material produced by chemically reducing wood into its
component parts using a sulphate cooking process and is primarily used in the
production of paper, tissues and paper related products. This grade of pulp is
noted for its strength, whiteness and absorption properties and is the main type
of pulp imported and sold in the European market. Germany is one of the most
significant pulp markets in Europe and the Company is the only non-integrated
pulp producer in the country. As a result, most of the Company's kraft pulp
production will be sold on the domestic German market.
The Conversion Project is expected to increase the Pulp mill's annual
production capacity from 160,000 tonnes to 280,000 tonnes and substantially
reduce effluent and sulphur dioxide emissions and reduce energy costs. The
increase in annual pulp production capacity is expected to substantially
increase the annual revenues of the Pulp mill.
The aggregate costs of the Conversion Project, including project financing
and soft costs and an amount for contingencies, are estimated to be
approximately $400 million and construction is expected to
9
<PAGE>
be completed around the end of 1999. The Conversion Project is being financed
through a combination of a project loan, non-refundable governmental grants,
governmental assistance and guarantees for long-term project financing and an
equity investment by the Company.
In 1998, SPB entered into a project loan agreement (the "Project Loan
Agreement") having a 15 year term with a merged German bank and other syndicated
lenders (the "Lenders"), in the aggregate amount of DM 508.0 million ($304.8
million) (the "Loan Facility"), the proceeds of which will be utilized to fund
the Conversion Project. The following summary of the material provisions of the
Project Loan Agreement is not complete and such provisions, including
definitions of certain terms, are qualified by reference to the Project Loan
Agreement.
The Loan Facility of DM 508.0 million provides for a main facility of DM
453.0 million ($271.8 million) for costs and expenses associated with the
project (the "General Tranche"), a working capital facility (the "Working
Capital Tranche") of DM 28.0 million ($16.8 million) which can also be utilized
by SPB for project costs, and a cost overrun facility (the "Cost Overrun
Tranche") of DM 27.0 million ($16.2 million). If SPB utilizes the Cost Overrun
Tranche, the Company is required to advance to SPB, on a one to one basis, DM
28.3 million ($17.0 million) in the form of additional equity or subordinated
loans to fund cost overruns. The Company has deposited DM 25 million ($15.0
million) into a restricted account (the "Overrun Account") with the Lenders to
secure its obligation to advance funds to SPB to fund cost overruns, if any, for
the project. The German federal government and the state government of Thuringia
have provided a guarantee (the "Governmental Guarantee") for 80% of the Loan
Facility and the Loan Facility is also secured by liens on substantially all of
the assets of SPB. In addition to the Governmental Guarantee, the state
government of Thuringia has agreed to provide governmental grants of DM 144.0
million ($86.4 million) in respect of the project. These grants are
non-repayable provided that SPB maintains certain employment levels for a period
of five years after the completion of the project. In addition, the German
federal government will provide, under existing programs, non-repayable
investment subsidies and grants totalling DM 37.0 million ($22.2 million) in
respect of the project.
As provided for in the Loan Facility, an aggregate of DM 290.0 million
($174.0 million) will be drawn by SPB pursuant to special credit programs (the
"Special Credits") established by certain German public banks for projects which
enhance environmental performance. The amounts to be drawn as Special Credits
are part of the overall Loan Facility and repayment structure. The rates of
interest for the Special Credits will be fixed for the first 10 years at an
annual amount equal to the Lenders' costs of such funds of approximately 4.58%
and 5.23%, respectively. The rate of interest will be adjusted and reset after
10 years for the balance of the term. These Special Credits permit qualifying
borrowers to borrow money at favourable rates of interest.
The rate of interest for the Loan Facility (other than for amounts drawn as
Special Credits) will be an amount equal to the three or six month LIBOR rates
for DM plus a margin of between 60 and 75 basis points. In connection with the
Loan Facility, SPB paid to the Lenders a 1% up front commitment/loan fee, and
will pay a quarterly standby fee of 0.375% on the undrawn portions of the Loan
Facility less the amount of Special Credits and certain annual administration
fees during the term of the Loan Facility.
The Loan Facility is available for drawdown by SPB until the earlier of the
completion and start-up of the Conversion Project or February 28, 2001.
Repayment of the General Tranche and the Cost Overrun Tranche (if utilized)
commences on March 31, 2001 with semi-annual payments on each of March 31 and
September 30 thereafter until final maturity on September 30, 2013. The actual
amounts of repayments will be based upon a percentage of SPB's overall debt
service profile. The Working Capital Tranche will mature on the seventh
anniversary of its initial drawdown and is to be repaid in four equal annual
installments commencing on September 30 of the fourth calendar year after the
first drawdown thereunder.
The Project Loan Agreement contains representations, warranties and
covenants customary to term project/construction loans of this nature,
including, without limitation, covenants to maintain an Annual
10
<PAGE>
Debt Service Cover Ratio (as defined therein) of 1.1:1 and restrictions on
encumbrances, distributions, dispositions of material assets and further
indebtedness for borrowed money. The Project Loan Agreement contains various
events of default customary for term project/construction loans of this type
which, after expiry of any applicable curative periods, permit the Lenders to
accelerate the Loan Facility, including failure to make required payments,
failure to comply with the covenants in the Project Loan Agreement, failure to
comply with certain other obligations and the Company ceasing, without the prior
consent of the Lenders, not to be unreasonably withheld, to own directly or
indirectly 51% or more of the outstanding voting securities of SPB, unless a new
third party owns at least 51% of the voting securities of SPB and assumes all of
the Company's obligations to the Lenders.
As at December 31, 1998, DM 170.0 million ($102.0 million) had been drawn
under the Loan Facility in respect of the Conversion Project.
During 1998, the Conversion Project was on schedule. The Company has entered
into contracts for the purchase of equipment in excess of 82% of the capital
budget for the project and the Company does not currently anticipate any
significant delays with respect to the Conversion Project. In addition, the
Company has commenced site preparation at the Pulp mill for the installation of
certain key items of equipment, including a new recovery boiler. Approximately
26% of the basic civil engineering work with respect to the project, such as the
laying of foundations, was completed by December 31, 1998 and the Company had
expended approximately $88.0 million on the Conversion Project by that date.
Although the Conversion Project is on schedule, the Company believes that
the project may incur cost overruns of up to DM 25.0 million ($15.0 million), 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 Agreement, such cost overruns will be funded in equal
proportions through borrowings under the Cost Overrun Tranche and draw down of
the Overrun Account. The Company is endeavoring to eliminate any discretionary
expenditures in order to reduce any cost overruns in respect of the project.
The Conversion Project will result in the Pulp mill taking approximately
three months downtime prior to the switch to kraft pulp production. The Company
is endeavoring to take such downtime between August and October 1999 to coincide
with the European summer holiday season and to avoid unfavourable winter weather
conditions. Once operational, the Pulp mill will go through a "start-up" or
"ramping-up" period. The Company anticipates that the Pulp mill will operate at
80% of capacity by mid-2000 and at or near full capacity by the end of 2000. The
Finnish engineering firm Jaakko Poyry OY has been appointed as the project
engineer for the Conversion Project. The fibre requirements for the converted
mill will continue to be met by the Company's existing sources.
As with all major capital projects of such size and scope, the Conversion
Project has and will continue to adversely affect and disrupt the operations and
sulphite pulp production at the Pulp mill 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, after the
first quarter of 1999, the Pulp mill will no longer produce dissolving sulphite
pulp because of changes relating to the Conversion Project.
The start-up of the Pulp mill to produce kraft pulp is subject to customary
risks and uncertainties inherent for large capital projects which alter the
production of a major manufacturing facility and increase its production
capacity. Such risks and uncertainties include, among other things, risks that
the tie-in or connection of new equipment and its interface with existing
equipment will not be implemented on schedule or without any operational
difficulties or interruptions, that the new equipment will not perform to or
achieve projected quality and capacity standards on schedule or at all, that the
ramp-up of production will not be achieved on schedule, that the employees will
not be sufficiently trained to operate all new equipment without disruptions to
quality and that the quality of the manufactured kraft pulp will not improve to
customer standards in the scheduled time frame and in time to win market
acceptance.
11
<PAGE>
As a consequence of the Conversion Project, certain equipment at the Pulp
mill has a limited service life because either it is no longer useful or
required substantial modification. Accordingly, in 1997, the Company took a
special charge of $26.4 million in respect of such equipment. The special charge
was equal to the excess of the carrying value of the equipment over its
estimated fair value.
Although the Conversion Project has received favourable support from German
governmental and regulatory bodies to date, there can be no assurance that
current governmental assistance programs will not be amended in the future or
that all necessary permits will be received on satisfactory terms or in time to
permit the Company to complete the project and ramp-up of production as
currently planned.
ENVIRONMENTAL
The Company's operations are subject to a broad range of German federal,
state and local environmental laws and regulations, dealing primarily with
water, air and land pollution control. In recent years, the Company has devoted
significant financial and management resources to comply with all applicable
environmental laws and regulations. The Company's total capital expenditures on
environmental projects, excluding those incurred in connection with the
Conversion Project, were approximately $0.2 million in 1998 and are expected to
be approximately $2.8 million in 1999.
The Company believes its operations are currently in substantial compliance
with the requirements of all applicable environmental legislation and
regulations and its respective operating permits.
The Hainsberg paper mill is currently using the municipal wastewater
treatment plant, but due to increased user charges, the Company is currently
negotiating the fees for using the municipal wastewater treatment plant and
exploring the possibility of building its own biological wastewater treatment
plant in 1999. The Company has started construction of a wastewater treatment
plant on land owned by the Company at the Heidenau mill, which is expected to be
completed at the end of 1999 at a cost of approximately $2.1 million.
The Pulp mill, which has a relatively modern biological wastewater treatment
and oxygen bleaching facility, will have to gradually satisfy more stringent
state regulations with respect to both air emissions and effluent discharges.
The Company has reduced its levels of AOX (Adsorbable Organic Halogen) discharge
to 0.6 kilograms per tonne, in order to comply with prescribed effluent
discharge levels. The date by which the Pulp mill must further reduce its levels
of AOX discharge to 0.35 kilograms per tonne has been deferred to January 1,
2002. In addition, the requirement to reduce levels of COD (Chemical Oxygen
Demand) discharge at the Pulp mill to 44 kilograms per tonne has been postponed
to January 1, 2001. The Company will continue to modify its wastewater and
bleaching facilities at the Pulp mill to meet or exceed these prescribed
regulations, which will be further enhanced as a result of the Conversion
Project.
Under German state environmental rules relating to effluent discharges,
industrial users are required to pay wastewater fees based upon the amount of
their effluent discharge. These rules also provide that an industrial user which
undertakes environmental capital expenditures and lowers certain effluent
discharges to prescribed levels may offset the amount of such expenditures
against the wastewater fees that would otherwise be payable. As a result, the
Company has offset the amount of environmental capital expenditures made at the
manufacturing plants against wastewater fees for the period from 1993 to 1997,
which totalled approximately $14.3 million. The Company expects that its capital
investment programs for its manufacturing plants will offset the full amount of
wastewater fees that may be payable in respect of 1998 and 1999 and will ensure
that its operations continue in substantial compliance with prescribed
standards.
The Company periodically performs environmental audits of operational sites
and procedures both with Company personnel and outside consultants.
12
<PAGE>
HUMAN RESOURCES
The Company currently employs approximately 785 people, of which
approximately 393 are engaged in paper operations and approximately 392 in pulp
operations. Since the end of 1996 and 1998, respectively, there were no further
contractual obligations of the Company to Bundesanstalt fur Vereinigungsbedingte
Sonderaufgaben ("BVS"), the privatization agency of the German government, to
maintain prescribed employment levels at its paper operations and pulp
operations.
The majority of the Company's employees are represented by the
Industriegewerkschaft Chemie-Papier-Keramik (the "ICPK"), a national union which
represents pulp and paper workers in Germany. The Company was previously a
member of an employers' association, now called the Arbeitgeberverband
ostdeutsche Papierindustrie (the "AGOP"), which represents pulp and paper
producers in Germany and negotiates collectively on their behalf with the ICPK.
In 1996, the Company gave notice to the AGOP that it was withdrawing from the
association and since 1997 has negotiated independently with its workers with
respect to wages. Effective January 1, 1998, the standard work week for
employees in the pulp and paper industry in eastern Germany was reduced by one
hour to 39 hours per week.
In 1998, the labour agreement for workers at the Company's Paper mills was
renewed until the end of 1999, upon terms which provide for wage increases of
1.2% in October 1998, 1.3% in July 1999 and 1.3% in December 1999.
In 1997, the Company entered into a new five year labour agreement with its
pulp workers which provided for, among other things, wage increases of 1.5% in
September 1997, 2.0% in January 1998, 1.5% in August 1998, and 2.5% in January
1999 and 2000, respectively; a profit sharing plan; and the Company to maintain
its existing employment levels for a period of three years. This labour
agreement establishes a wage rate that will be approximately 90% of the union
wage rate in the year 2000 for pulp workers in western Germany and will be at
par with such rate by the year 2002. The labour agreement provides for smaller
wage increases and a slower reduction of the work week than most other labour
agreements in eastern Germany.
ACQUISITIONS
The Company initially acquired its interest in its paper operations from BVS
effective July 1, 1993. The Company initially acquired a 70% interest in its
pulp operations from BVS effective July 1, 1994 and, effective April 1, 1995,
the Company acquired the 30% minority interest and related assets in its pulp
and paper operations.
In 1996, the Company acquired the net operating tax losses of its pulp
operations of approximately $97.0 million for the fixed amount of $6.3 million,
which, under German tax laws then in effect, could be carried forward
indefinitely to offset future taxable income. However, the German government has
amended its tax laws to restrict the use of tax losses to offset future taxable
income in taxation years completed after 1996. As a result of these amendments,
SPB has revised its prior income tax filings to maximize the benefits under the
loss carryforward provisions in effect in those years.
Pursuant to the terms of their acquisition from BVS, the Company's pulp and
paper operations were obligated to make a predetermined amount of capital
investments, maintain certain employment levels for specified periods and, in
the event of the sale of certain assets or businesses prior to certain periods,
pay a portion of the proceeds to BVS. The obligations in respect of the
Company's pulp operations expired on December 31, 1998. The obligations in
respect of the Company's paper operations expired on December 31, 1996, except
that in 1998 the Company agreed with BVS to make further capital investments of
at least $7.2 million on or before April 30, 2000, of which $1.3 million had
been expended by the end of 1998.
13
<PAGE>
ITEM 2. PROPERTIES
The Company's corporate head office is located in Zurich, Switzerland and is
leased. The Company also maintains offices in Germany which are owned.
The Company's Paper mills and the Pulp mill are located in Germany in the
States of Saxony and Thuringia. All of the mills are situated on property owned
by the Company. All of the Paper mills operate their own power plants to produce
electricity and steam, other than the Trebsen mill which has a power plant to
produce steam. The Trebsen mill previously leased a power plant to produce
electricity, which lease was terminated in 1998.
The Heidenau paper mill serves as headquarters for the Company's pulp and
paper operations. It produces specialty papers and has an annual production
capacity of 35,000 tonnes. The Fahrbrucke mill produces both specialty and
printing papers and the Hainsberg mill produces printing papers, and each has an
annual production capacity of 30,000 tonnes. The de-inking plant at the
Hainsberg mill improves paper brightness and general product quality and allows
for the increased usage of lower priced waste paper. Both mills use virgin and
recycled fibre in producing various grades of printing papers.
The Trebsen mill produces packaging papers and has an annual production
capacity of 75,000 tonnes. The fibre supply for this mill is almost entirely
from waste paper.
In 1998, the Company divested the Greiz and Raschau mills for aggregate
proceeds of approximately $10.6 million, as they were not considered to be part
of the Company's core operations.
The Pulp mill has an annual production capacity of 160,000 tonnes and is
situated on a 220 acre site in close proximity to the Saale River and the town
of Blankenstein in the State of Thuringia. The Pulp mill was constructed between
1973 and 1977 and has been upgraded in several stages. Its facilities include a
complete wood fibre processing line with an oxygen bleaching plant, chemical
recovery systems, power plant, a biological wastewater treatment facility and a
waste disposal site. The Conversion Project will convert the Pulp mill to
produce kraft pulp and is expected to increase its annual production capacity to
280,000 tonnes. See "Business--Pulp Mill Conversion Project".
The following table sets out, by primary product class, the production
capacity and actual production of the Company for the periods indicated:
<TABLE>
<CAPTION>
PRODUCTION
------------------------------
ANNUAL YEARS ENDED DECEMBER 31,
PRODUCTION ------------------------------
PRODUCT CLASS CAPACITY(1) 1998 1997 1996
- - ------------------------------ ------------ ---------- ------- -------
(TONNES)
<S> <C> <C> <C> <C>
Papers
Packaging Papers............ 120,000(2) 96,614(3) 111,002 110,304
Specialty Papers............ 40,000 37,372 35,654 26,179
Printing Papers............. 60,000 57,274 54,224 45,568
------------ ---------- ------- -------
Total Papers.............. 220,000 191,260 200,880 182,051
------------ ---------- ------- -------
Pulp.......................... 160,000 150,381 157,844 134,950
------------ ---------- ------- -------
Total......................... 380,000(2) 341,641 358,724 317,001
------------ ---------- ------- -------
------------ ---------- ------- -------
</TABLE>
- - ------------------------
(1) Capacity is stated upon the rated capacity of the plants as at December 31,
1998, which is based upon production for 365 days a year. Actual production
is generally based upon 340 days per year.
(2) The Company sold its packaging paper mill in Greiz effective July 1998. The
Griez mill had an annual production capacity of 50,000 tonnes, which is
included in the calculation of the annual production capacity of the Company
for packaging papers.
(3) Includes production of approximately 24,612 tonnes from the Greiz mill prior
to its sale effective July 1998.
14
<PAGE>
The Company owns a substantial amount of real estate adjacent to its Paper
mills, which is excess to its production requirements and may be divested.
ITEM 3. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
15
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) MARKET INFORMATION. The Company's shares of beneficial interest trade
on the NASDAQ Stock Market's National Market under the symbol "MERCS" and on
EASDAQ under the symbol "MERC". The following table sets forth the quarterly
high and low closing prices on NASDAQ for the two years ended December 31, 1997
and 1998, and for the period ended March 26, 1999:
<TABLE>
<CAPTION>
FISCAL QUARTER ENDED HIGH LOW
- - ------------------------------------------------------------ ------ -----
<S> <C> <C>
1997
March 31.................................................... $12.63 $8.63
June 30..................................................... $11.75 $7.88
September 30................................................ $11.56 $8.13
December 31................................................. $13.00 $7.94
1998
March 31.................................................... $10.63 $8.00
June 30..................................................... $12.06 $9.31
September 30................................................ $10.19 $5.81
December 31................................................. $ 7.75 $5.56
1999
Period ended March 26....................................... $ 7.13 $6.13
</TABLE>
(b) SHAREHOLDER INFORMATION. As of March 26, 1999, there were approximately
754 holders of record of the Company's shares and a total of 16,034,846 shares
were outstanding.
(c) DIVIDEND INFORMATION. Effective June 3, 1996, the Company spun-off its
financial services segment in a one for two stock dividend of 6,697,716 shares
of MFC Bancorp Ltd. In 1997, the Company resolved, subject to, among other
things, the availability of earnings and its anticipated cash requirements, to
pay regular dividends on its shares of beneficial interest. The first dividend
in the amount of $0.03 per share was paid on May 9, 1997 to shareholders of
record as of April 30, 1997. In 1998, the Company paid a cash dividend of $0.04
per share to shareholders of record as of April 30, 1998. In March 1999, the
Company resolved to pay a cash dividend of $0.05 per share to shareholders of
record as of April 30, 1999. The actual timing, payment and amount of future
dividends paid by the Company will be determined by the board of trustees of the
Company from time to time based upon, among other things, the cash flow, results
of operations and financial condition of the Company, the need for funds to
finance ongoing operations and such other business considerations as the board
of trustees of the Company considers relevant.
16
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial information for the
Company for each of the last five years. The Company's previous interest in the
operating results and net assets of the financial services segment, which were
spun-off to shareholders of beneficial interest on June 3, 1996, have been
classified separately within the Company's financial statements as "spun-off
operations" and are excluded from the amounts of revenues, expenses, assets and
liabilities of the Company's continuing operations. The following financial
information has been reclassified to conform with the current year's
presentation.
The following selected financial data is qualified in its entirety by, and
should be read in conjunction with, the more detailed financial statements and
related notes contained elsewhere herein.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ------------ -------------- ----------- -----------
(IN THOUSANDS, OTHER THAN PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Revenues(1)................... $ 174,896 $ 184,107 $ 186,729 $ 300,737 $ 197,359
Net income (loss) from
continuing operations....... $ 9,012 $ (32,623)(2) $ 15,557 $ 65,637 $ 41,499
Net income (loss) from
continuing operations, per
common share,
Basic....................... $ 0.59 $ (2.18)(2) $ 1.12 $ 5.24 $ 3.74
Diluted..................... $ 0.59 $ (2.18)(2) $ 1.12 $ 5.13 $ 3.67
Weighted average common shares
outstanding,
Basic....................... 15,352 14,995 13,829 12,526 11,110
Diluted..................... 15,384 14,995 13,957 12,787 11,323
Current assets................ $ 121,716 $ 100,384 $ 132,651 $ 140,618 $ 111,374
Current liabilities........... $ 56,695 $ 57,753 $ 71,129 $ 73,977 $ 87,679
Working capital............... $ 65,021 $ 42,631 $ 61,522 $ 66,641 $ 23,695
Total assets.................. $ 333,284 $ 210,294 $ 296,980(1) $ 369,953(4) $ 317,145(4)
Long-term liabilities......... $ 123,570 $ 17,066 $ 31,312 $ 68,961 $ 93,252
Shareholders' equity.......... $ 153,019 $ 135,475 $ 194,539(1)(3) $ 227,015(4) $ 111,540(4)
Cash dividends................ $ 610 $ 450 $ -- $ -- $ --
</TABLE>
- - ------------------------
(1) Excludes spun-off operations.
(2) Net income from continuing operations before the special charge was $15.8
million, or $1.06 per share.
(3) After stock dividend.
(4) Includes net assets of spun-off operations.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
The following discussion and analysis of the financial condition and results
of operations of the Company for the three years ended December 31, 1998 should
be read in conjunction with the consolidated financial statements and related
notes included elsewhere in this annual report. The Company's previous interest
in the operating results and net assets of the financial services segment, which
were spun-off to shareholders of beneficial interest on June 3, 1996, are
classified separately within the Company's financial statements as "spun-off
operations" and are excluded from the amounts of revenues and expenses of the
Company's continuing operations. Previously reported financial statements for
all periods and certain amounts in the Company's financial statements and
related notes have been restated to conform to the current presentation. The
following management discussion and analysis of financial condition and results
of operation are based upon the restated financial statements for all prior
years as aforesaid.
17
<PAGE>
RESULTS OF OPERATIONS
Selected sales data for the Company for each of the last three years is as
follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
----------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
SALES BY PRODUCT CLASS
Papers
Packaging Papers............ $ 24,722(1) $ 29,313 $ 33,165
Specialty Papers............ 30,401 29,244 27,012
Printing Papers............. 41,192 35,915 36,469
----------- -------- --------
Total Papers.............. 96,315 94,472 96,646
----------- -------- --------
Pulp.......................... 69,918 75,460 72,456
Other......................... 3,438 5,405 4,995
----------- -------- --------
Total......................... $ 169,671 $175,337 $174,097
----------- -------- --------
----------- -------- --------
<CAPTION>
(TONNES)
<S> <C> <C> <C>
SALES BY VOLUME
Papers
Packaging Papers............ 91,157(1) 110,428 110,179
Specialty Papers............ 36,001 36,991 26,548
Printing Papers............. 56,866 54,538 46,416
----------- -------- --------
Total Papers.............. 184,024 201,957 183,143
----------- -------- --------
Pulp.......................... 145,451 160,432 133,005
----------- -------- --------
Total(2)...................... 329,475 362,389 316,148
----------- -------- --------
----------- -------- --------
</TABLE>
- - ------------------------
(1) The Company sold its packaging paper mill in Greiz effective July 1998.
Paper sales from the Greiz mill prior to its sale are included in the
Company's results of operations for 1998. The Greiz mill sold approximately
25,490 tonnes of packaging paper for approximately $7.2 million in 1998.
(2) Excluding intercompany sales of approximately 1,072, 4,257 and 3,609 tonnes
of pulp in 1998, 1997 and 1996, respectively.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31, 1997
In 1998, revenues decreased to $174.9 million from $184.1 million in 1997,
as a result of a decrease in sales volumes. As the Company's products are
principally sold in DM, the depreciation of the DM against the U.S. dollar by
approximately 1.5% on average in 1998, compared to the same period in 1997,
resulted in lower prices in U.S. dollar terms for the Company's products.
Costs and expenses decreased to $165.6 million in 1998 from $168.2 million
in 1997 before a special charge of $48.5 million (or $216.7 million after the
special charge), primarily as a result of a decrease in sales volumes. General
and administrative expenses were $23.5 million in 1998, compared to $23.6
million in 1997. In 1998, interest expense increased to $3.4 million from $3.0
million in 1997 plus $5.3 million of interest was capitalized in 1998, as a
result of increased indebtedness resulting from the Conversion Project.
In 1998, net income was $9.0 million or $0.59 per share, compared to $15.8
million or $1.06 per share before the special charge in 1997. In 1997, the
Company took a special charge of $48.5 million relating to the limited service
life of various assets due to the Conversion Project, severance and unrelated
costs, the write-down of specific assets to their estimated realizable value and
a decrease in the deferred income tax asset. In 1997, after the special charge,
the Company reported a net loss of $32.6 million or $2.18 per share.
18
<PAGE>
In 1998, the Company's pulp and paper revenues decreased by approximately
2.2% from 1997 on a 7.3% decrease in pulp revenues and a 2.0% increase in paper
revenues. Overall, in 1998, paper markets were generally stable and prices were
generally stronger than in 1997. In 1998, pulp markets were generally weak with
prices subject to significant fluctuations. In 1998, pulp prices on average
improved marginally over 1997, while sales volumes were lower in 1998 compared
to 1997.
In 1998, pulp prices remained relatively low. On average, pulp prices
realized by the Company in 1998 increased marginally by approximately 2.2%
compared to 1997. Overall, pulp sales decreased by 7.3% to $69.9 million in 1998
from $75.5 million in 1997, primarily as a result of a sales volume decrease of
9.3%. Continuing economic weakness in the Asian markets and the shifting of
production by Asian and other pulp producers to other markets, including Europe,
prevented any real recovery in pulp prices or demand in 1998. Pulp prices
decreased during the first half of 1998 due to high world inventory levels,
before recovering in mid-year. Pulp prices then weakened again in the last
quarter of 1998 due to a large build-up in producer inventories and, as a
result, the Company took 28 days of market downtime at the Pulp mill for
inventory correction.
On average, paper prices realized by the Company increased by approximately
11.9% in 1998, compared to 1997, primarily as a result of increased demand for
printing papers. Paper sales in 1998 increased to $96.3 million from $94.5
million in 1997, on a volume decrease of 8.9% and an average price increase of
11.9%. In 1998, sales volumes for packaging papers and specialty papers
decreased by 17.5% and 2.7%, respectively, and sales volumes for printing papers
increased by 4.3%, compared to 1997. Paper prices remained stable at the end of
1998, primarily as a result of an increased demand for printing paper grades.
Increases in product prices in 1998 were partially offset by increased fibre
costs for pulp production compared to 1997. On average, the Company's fibre
costs for pulp production in 1998 increased by approximately 9.8%, compared to
1997, but remained among the lowest in Europe. As a result, during 1998, the
Company changed its fibre input mix to use more lower-grade materials, which
partially reduced the effect of higher fibre costs. Prices for waste paper,
which comprises approximately 80% of the fibre for the Paper mills, decreased by
approximately 5.6% in 1998 compared to 1997.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER 31, 1996
In 1997, revenues decreased marginally to $184.1 million from $186.7 million
in 1996, as a result of reduced other revenues. Despite a volume sales increase
resulting from stronger demand for pulp and paper products, sale revenues only
increased marginally. As the Company's products are principally sold in DM, the
approximate 14.9% depreciation of the DM against the U.S. dollar in 1997
compared to 1996 also contributed to lower revenues. See "Management's
Discussion and Analysis of Financial Condition and Results of Operation--Foreign
Currency".
Costs and expenses before the special charge decreased to $168.2 million in
1997, compared to $174.3 million in 1996, primarily as a result of lower
manufacturing costs and decreased fibre costs (raw materials). General and
administrative expenses decreased to $23.6 million in 1997 from $24.9 million in
1996. Interest expense decreased to $3.0 million from $4.0 million in 1996, as a
result of lower interest rates and reduced bank debt.
In 1997, net income from continuing operations before the special charge was
$15.8 million or $1.06 per share, compared to $15.6 million or $1.12 per share
in 1996.
In 1997, after a special charge of $48.5 million, the Company reported a
loss of $32.6 million or $2.18 per share. The $48.5 million special charge in
1997 included $2.2 million related to restructuring costs, $41.3 million for the
write-down of specific capital assets to their estimated realizable value and
$5.0 million for a decrease in the deferred income tax asset. The organizational
restructuring provision was related to expected employee severance in 1998
required to effect longer term reductions in operating and
19
<PAGE>
administration expenses. The asset write-downs related to the near term
replacement at the Company's Pulp mill of various capital assets which were
deemed to be overvalued in view of their limited remaining service life due to
the Conversion Project which totalled $26.4 million, and the Greiz, Trebsen and
Raschau paper mills which are no longer viewed as core assets to the Company's
operations.
Costs and expenses increased to $216.7 million in 1997 compared to $174.3
million in 1996, primarily as a result of the special charge. Net loss from
continuing operations was $32.6 million or $2.18 per share in 1997, compared to
net earnings of $15.6 million or $1.12 per share in 1996.
In 1997, the Company's sales revenues showed a marginal improvement over
those in 1996, primarily as a result of improved demand for paper pulp and paper
products and lower manufacturing costs. However, the Company's sales prices for
all pulp and paper products were lower in 1997 compared to 1996, as a result of
the devaluation of the DM compared to the U.S. dollar. The demand for paper
products in Europe increased significantly in 1997 compared to 1996,
particularly in the second half of the year. Although the demand for pulp was
strong throughout most of the year, list prices for pulp in 1997 were, on
average, approximately 13.7% lower than in 1996, primarily as a result of high
world pulp inventories and weak Asian markets. Sulphite pulp prices were also
negatively impacted by competition among sulphite pulp producers and the price
policy implemented by a large eastern European producer to solidify its market
position. The Company's pulp sales increased by 4.1% to $75.5 million in 1997
from $72.5 million in 1996 on a volume increase of 20.6% and an average price
decrease of 13.7%. The demand for dissolving sulphite pulp decreased
significantly in 1997 and only accounted for 16% of the Company's total pulp
production, compared to 27% in 1996. The overall effect of weaker dissolving
sulphite pulp demand was offset by the Company's increased production and sales
of paper grade pulp.
Paper sales in 1997 decreased by 2.2% to $94.5 million from $96.6 million in
1996 on a volume increase of 10.3% and an average price decrease of 11.4%. The
average price for all classes of paper declined during 1997. Sales volume for
packaging, specialty and printing papers increased in 1997 by 0.2%, 39.3% and
17.5%, respectively, compared to 1996. A shortage in light weight coated paper
inventories resulted in stronger demand for paper products in 1997.
Low pulp and paper prices in 1997 were partially offset by decreased fibre
costs from lower prices for wood chips and pulpwood used to produce pulp and
lower prices for pulp and recycled fibre (waste paper) used to produce paper.
Relatively strong pulp and paper markets resulted in manufacturing facilities
operating at or near full production capacity. Recycled fibre costs decreased
dramatically in 1997 and were down approximately 30.7% compared to 1996.
However, there can be no assurance that recycled fibre costs will not escalate
in the future. The price of wood for pulp production also decreased in 1997,
primarily due to a build-up of wood inventories. Towards the end of 1997, the
price of pulpwood began to experience upward pressure in Europe. On average, the
Company's fibre costs for pulp production were down approximately 6.8% in 1997,
compared to 1996 and remained among the lowest in Europe. Decreased fibre costs
in 1997 were generally reflected in lower product prices.
20
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The following table is a summary of selected financial information
concerning the Company for the periods indicated:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
FINANCIAL POSITION
Working capital...................................................................... $ 65,021 $ 42,631
Property, plant and equipment (net).................................................. 161,021 87,806
Total assets......................................................................... 333,284 210,294
Long-term government debt............................................................ 7,003 8,338
Long-term debt--other................................................................ 114,545 6,701
Shareholders' equity................................................................. 153,019 135,475
</TABLE>
At December 31, 1998, the Company's cash and cash equivalents totalled $53.3
million, a net increase of $48.9 million from $4.4 million at the end of 1997.
At December 31, 1998, the Company had short-term trading securities totalling
$12.9 million, compared to $56.3 million at December 31, 1997.
OPERATING ACTIVITIES
Net cash provided by operating activities was $18.5 million in 1998,
compared to $16.0 million in 1997. Net changes in trading securities provided
cash of $23.3 million in 1998, compared to $9.1 million in 1997. An increase in
receivables and inventories used cash of $15.9 million and $2.4 million,
respectively, in the current period, compared to an increase in receivables
using cash of $7.2 million and a decrease in inventories providing cash of $2.0
million in 1997. A decrease in accounts payable and accrued liabilities used
cash of $1.1 million in 1998, compared to $15.6 million in 1997. In 1998, the
Company recognized a gain of $5.3 million from sales of property. The Company
expects to generate sufficient cash flow from operations to meet its working
capital requirements for its paper operations. Working capital for the Company's
pulp operations will be funded from cash flow from operations and borrowings
under the Project Loan Agreement.
INVESTING ACTIVITIES
Investing activities in 1998 used cash of $60.0 million, consisting
primarily of capital expenditures relating to the Conversion Project and other
upgrades to the Company's Paper mills, compared to $17.0 million in 1997.
Property sales from the disposition of the Paper mills at Greiz and Raschau
provided cash of $10.6 million in 1998, compared to property sales providing
cash of $3.0 million in 1997. An increase in a note receivable used cash of $3.0
million in 1998, compared to $7.0 million in 1997.
The Company expects aggregate capital expenditures in 1999, excluding the
Conversion Project, to be approximately $6.2 million, which will be funded from
cash, cash flow from operations and borrowings. In 1998, aggregate capital
expenditures, excluding costs in respect of the Conversion Project, were $3.8
million, compared to approximately $8.9 million in the same period of 1997.
The Company commenced construction of the Conversion Project in the second
quarter of 1998. The Company's aggregate capital expenditures in respect of the
Conversion Project to December 31, 1998 were approximately $88.0 million. The
project is designed to, among other things, convert the Pulp mill's production
to kraft pulp, increase its production capacity to 280,000 tonnes per annum and
substantially reduce it's emissions of sulphur dioxides and effluent. The
aggregate cost for the Conversion Project is estimated to be approximately $400
million, the financing for which is provided by a combination of borrowings
under the Project Loan Agreement, non-refundable governmental grants,
governmental
21
<PAGE>
assistance and guarantees for long-term project financing and an equity
investment by the Company. See "Business--Pulp Mill Conversion Project".
The Company estimates that capital expenditures in respect of the Conversion
Project in 1999 will be approximately $309.0 million. The construction of the
Conversion Project is expected to be completed around the end of 1999. The
Conversion Project will result in the Pulp mill taking approximately three
months of downtime to complete the project. After completion, the Pulp mill will
go through a start-up or ramp-up period. See "Business--Pulp Mill Conversion
Project" and "Management's Discussion and Analysis of Financial Condition and
Results of Operation--Conversion Project Uncertainties".
FINANCING ACTIVITIES
Cash provided by financing activities was $87.0 million in 1998, primarily
as a result of net borrowings of $102.0 million under the Project Loan Agreement
in connection with the Conversion Project. In 1997, cash used by financing
activities was $3.7 million. Pursuant to the terms of the Project Loan
Agreement, the Company has deposited $15.0 million into the Overrun Account to
fund potential cost overruns in respect of the Conversion Project. The
appreciation of the DM against the U.S. dollar at December 31, 1998 resulted in
an unrealized foreign exchange translation gain of $3.3 million from 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 "Management's
Discussion and Analysis of Financial Condition and Results of Operation--Foreign
Currency".
The Company's pulp and paper operations had net operating tax losses of
approximately $210.0 million at December 31, 1998, which under former German tax
laws could be carried forward indefinitely. However, the German government has
amended its tax laws to restrict the use of tax losses to offset future taxable
income in taxation years completed after 1996. As a result of these amendments,
SPB has revised its prior income tax filings to maximize the benefits under the
loss carryforward provisions in effect in those years and has decreased the
deferred income tax asset by $5.0 million.
In 1998, the Company received, net of share repurchases, proceeds of $3.3
million from the issuance of shares, compared to $1.5 million in 1997. The
payment of dividends used cash of $0.6 million in 1998, compared to $0.5 million
in 1997.
Other than the Conversion Project, the Company had no material commitments
to acquire assets or operating businesses as at December 31, 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 the asset
and earnings base by mergers and acquisitions, the Company will require
substantial capital resources. The required 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 DM and approximately 99% of the
Company revenues are denominated in DM.
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 DM, 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 DM prevailing
during that period. In the year ended December 31, 1998, the Company reported a
22
<PAGE>
net $12.7 million foreign exchange translation gain and, as a result, the
cumulative foreign exchange translation loss decreased to $28.7 million at
December 31, 1998 from $41.4 million at December 31, 1997.
As both the Company's principal sources of revenues and expenses are in DM,
the Company does not currently enter into any currency hedging arrangements for
exchange rate fluctuations.
The average and period ending exchange rates for the DM to the U.S. dollar
for the periods indicated are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------------------------
1999
---------------------------- 1998 1997
PERIOD AVERAGE ---------------------------- ----------------------------
MARCH 26, TO MARCH 26, PERIOD END PERIOD AVERAGE PERIOD END PERIOD AVERAGE
----------- --------------- ----------- --------------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
RATES OF EXCHANGE
Deutschmark.................. 1.8203 1.7508 1.6665 1.7589 1.7990 1.7321
</TABLE>
Based upon the period average exchange rate in 1998, the U.S. dollar
decreased by approximately 2.3% in value against the DM since December 31, 1997.
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. During the past three years, pulp
prices have both risen and fallen at rates faster than previously experienced by
the industry. 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.
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. The Company's expectations are based on the
assumption that there will be no general failure of external, local, national or
international systems (such as power, communications or transportation systems)
necessary for the ordinary conduct of business. However, there can be no
assurance that these estimates will be achieved and actual results could differ
materially from those anticipated.
23
<PAGE>
CONVERSION PROJECT UNCERTAINTIES
The Company is subject to various uncertainties in connection with the
Conversion Project, which may cause fluctuations in operating results such as
availability and cost of materials and labour, construction delays, cost
overruns, weather conditions, governmental regulations, availability of adequate
financing, increases in long-term interest rates and increases in taxes and
other governmental fees. The 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 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, after the first quarter of 1999, the Pulp mill will no longer produce
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 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. See
"Business--Pulp Mill Conversion Project".
EUROPEAN ECONOMIC AND MONETARY UNION
Effective January 1, 1999, the currencies of the majority of the member
countries of the European Economic and Monetary Union ("EMU") ceased to exist
and were replaced by a new currency, the "euro". The Company began coordinating
the preparations for the euro in 1998. These preparations included modifications
of the Company's computer systems and programs for the EMU and coordination with
customers, suppliers and financial institutions to ensure a smooth transition to
the new currency. The Company was able to transact business in the euro
beginning on January 1, 1999. Costs associated with the modifications necessary
to prepare for the EMU were expensed by the Company during the period in which
they were incurred. Although the Company's products are principally sold in DM,
the Company does not anticipate that the conversion rate for the DM into euro,
fixed on January 1, 1999, will significantly impact on the Company's results of
operations. However, there can be no assurance that the potential increased
competition on the German market, which is the primary market for the Company's
pulp and paper products, resulting from the introduction of the euro will not
have an adverse effect on the Company's results of operations.
INFLATION
The Company does not believe that inflation has had a material impact on
revenues or income during 1998.
24
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not use "derivatives" or "market risk sensitive
instruments" for managing exposure to market risk. However, the Company's
consolidated financial results are subject to foreign exchange rate
fluctuations. See "Managements' Discussion and Analysis of Financial Condition
and Results of Operation--Foreign Currency".
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and supplementary data required with
respect to this Item 8, and as listed in Item 14 of this annual report, are
included in this annual report commencing on page 29.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
25
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
As a Massachusetts trust, the Company is managed by "trustees", who have
comparable duties and responsibilities as directors of corporations.
J.S.H. LEE, age 41, has been a Trustee since May 1985 and President and
Chief Executive Officer since 1992. Previously, Mr. Lee served with MFC Bancorp
Ltd. as a director from 1986, Chairman from 1987 and President from 1988 to
December 1996, respectively.
C.S. MOON, age 51, has been a Trustee since June 1994. Mr. Moon is an
independent consultant. He was formerly the Executive Director of Shin Ho Group
of Korea, an international paper manufacturer headquartered in Korea until 1998.
Mr. Moon joined Shin Ho in 1990 and previously served in managerial positions
with Moo Kim Paper Manufacturing Co., Ltd. and Sam Yung Pulp Co., Ltd.
M. ARNULPHY, age 64, has been a Trustee since June 1995. Mr. Arnulphy has
been the Managing Director of Electro Orient Ltd., a merchandise trading company
located in Hong Kong, since 1998. From 1975 to 1998, Mr. Arnulphy was the
Managing Director of J. Mortenson & Co., Ltd. in Hong Kong, a water treatment
equipment manufacturing company.
M. REIDEL, age 35, has been Chief Financial Officer and a Trustee since
December 1996, a Managing Director of SPB from November 1994 and the Chairman of
the Management Board of DPAG from 1995 to 1998. Previously, he was a member of
the Supervisory Board of DPAG from 1992 to 1994, a member of BVS responsible for
portfolios of service industry and wood and paper industry companies from 1992
to 1994, and an accountant with Arthur Andersen & Co. from 1987 to 1992.
DR. R. AURELL, age 63, has been a Managing Director of pulp operations since
November 1994. From November 1991 to 1994, Dr. Aurell served as an independent
consultant advising clients, including the Company, on the pulp and paper
industry. Previously, he held managerial positions with North British Newsprint
Ltd., Jaakko Poyry OY, MoDo-Chemetics AG and Stora Forest Industries.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference from Registrant's definitive proxy statement to be
filed within 120 days of the end of Registrant's fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference from Registrant's definitive proxy statement to be
filed within 120 days of the end of Registrant's fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference from Registrant's definitive proxy statement to be
filed within 120 days of the end of Registrant's fiscal year.
26
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
INDEX
<TABLE>
<CAPTION>
PAGE
---------
<C> <S> <C>
(a)(1) FINANCIAL STATEMENTS
Independent Auditors' Report........................................................................ 29
Consolidated Balance Sheets......................................................................... 30
Consolidated Statements of Operations............................................................... 31
Consolidated Statements of Comprehensive Income..................................................... 32
Consolidated Statements of Changes in Shareholders' Equity.......................................... 33
Consolidated Statements of Cash Flows............................................................... 34
Notes to the Consolidated Financial Statements...................................................... 35
(2) FINANCIAL STATEMENT SCHEDULES
Independent Auditors' Report........................................................................ 53
SCHEDULE I--Condensed Financial Information of Registrant........................................... 54
</TABLE>
All other schedules have been omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.
27
<PAGE>
(3) LIST OF EXHIBITS
<TABLE>
<C> <C> <S>
3.1 (a)* Restated Declaration of Trust of the Company as filed with
the Secretary of State of Washington on June 11, 1990
together with an Amendment to Declaration of Trust dated
December 12, 1991.
(b)* Amendments to Declaration of Trust dated July 8, 1993;
August 17, 1993; and September 9, 1993.
3.2* Trustees' Regulations dated September 24, 1973.
4.1 Shareholder Rights Plan. Incorporated by reference from Form
8-A dated August 17, 1993.
10.1 Acquisition Agreement among Treuhandanstalt, Dresden Papier
AG, Dresden Papier Holding GmbH, Mercer International
Inc., and Shin Ho Paper Mfg. Co., Ltd. Incorporated by
reference from Form 8-K dated September 20, 1993.
10.2 Acquisition Agreement among Treuhandanstalt, Zellstoff-und
Papierfabrik Rosenthal GmbH, Raboisen
Einhundertsechsundfunfzigste
Vermogensverwaltungsgesellschaft GmbH, to be renamed ZPR
Zellstoff-und Papierfabrik Rosenthal Holding GmbH, Mercer
International Inc. and 448380 B.C. Ltd. dated July 3,
1994. Incorporated by reference from Form 8-K dated July
3, 1994.
10.3* Amended and Restated 1992 Stock Option Plan.
10.4* 1994 Employee Incentive Bonus Plan.
10.5* Form of Separation Agreement between Mercer International
Inc. and Arbatax International Inc.
10.6 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 Form 8-K dated July 16, 1998.
21 List of Subsidiaries of Registrant.
23 Independent Auditors Consent.
27 Article 5--Financial Data Schedule for the Year Ended
December 31, 1998.
</TABLE>
- - ------------------------
* Filed in Form 10-K for prior years.
(b) Registrant filed no reports on Form 8-K during the fourth quarter of the
fiscal year.
28
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders
Mercer International Inc.
We have audited the accompanying consolidated balance sheets of Mercer
International Inc. and Subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of operations, comprehensive income, changes in
shareholders' equity, and cash flows for the years ended December 31, 1998, 1997
and 1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Mercer
International Inc. and Subsidiaries as of December 31, 1998 and 1997, and the
consolidated results of their operations and their cash flows for the years
ended December 31, 1998, 1997 and 1996, in conformity with generally accepted
accounting principles.
/s/ PETERSON SULLIVAN
March 12, 1999
Seattle, Washington
29
<PAGE>
MERCER INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents............................................................... $ 53,250 $ 4,414
Investments............................................................................. 12,891 56,285
Receivables............................................................................. 33,828 22,329
Inventories............................................................................. 19,540 15,799
Other................................................................................... 2,207 1,557
---------- ----------
Total current assets.................................................................. 121,716 100,384
Long-Term Assets
Cash restricted......................................................................... 15,000 --
Properties.............................................................................. 161,012 87,806
Investments............................................................................. 13,626 4,118
Notes receivable........................................................................ 10,150 7,000
Deferred income tax..................................................................... 11,780 10,986
---------- ----------
211,568 109,910
---------- ----------
$ 333,284 $ 210,294
---------- ----------
---------- ----------
LIABILITIES
Current Liabilities
Accounts payable and accrued expenses................................................... $ 53,518 $ 50,172
Notes payable........................................................................... 1,839 3,252
Debt.................................................................................... 1,338 4,329
---------- ----------
Total current liabilities............................................................. 56,695 57,753
Long-Term Liabilities
Debt.................................................................................... 121,548 15,039
Other................................................................................... 2,022 2,027
---------- ----------
123,570 17,066
---------- ----------
Total liabilities..................................................................... 180,265 74,819
---------- ----------
SHAREHOLDERS' EQUITY
Shareholders' Equity
Preferred shares, no par value: 50,000,000 authorized, and issuable in series:
Series A, 500,000 authorized, none issued and outstanding............................. -- --
Series B, 3,500,000 authorized, none issued and outstanding........................... -- --
Shares of beneficial interest, $1 par value:
unlimited authorized, 15,440,122 and 15,033,722 issued and outstanding at December 31,
1998 and 1997....................................................................... 91,913 88,603
Retained earnings....................................................................... 98,167 89,765
Accumulated other comprehensive loss.................................................... (37,061) (42,893)
---------- ----------
153,019 135,475
---------- ----------
$ 333,284 $ 210,294
---------- ----------
---------- ----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
30
<PAGE>
MERCER INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Revenues
Sales...................................................................... $ 169,671 $ 175,337 $ 174,097
Other...................................................................... 5,225 8,770 12,632
---------- ---------- ----------
174,896 184,107 186,729
Expenses
Cost of sales.............................................................. 138,702 141,559 145,432
Special charges............................................................ -- 48,452 --
General and administrative................................................. 23,490 23,600 24,863
Interest expense........................................................... 3,384 3,046 3,978
---------- ---------- ----------
165,576 216,657 174,273
---------- ---------- ----------
Income (loss) from continuing operations before income taxes................. 9,320 (32,550) 12,456
Income tax benefit (provision)............................................... (308) (73) 3,101
---------- ---------- ----------
Income (loss) from continuing operations..................................... 9,012 (32,623) 15,557
Income of spun-off operation, net of applicable income tax provision of $219
in 1996.................................................................... -- -- 466
---------- ---------- ----------
Net income (loss)........................................................ $ 9,012 $ (32,623) $ 16,023
---------- ---------- ----------
---------- ---------- ----------
Basic and diluted earnings (loss) per share
Income (loss) from continuing operations................................... $ 0.59 $ (2.18) $ 1.12
Income of spun-off operation............................................... -- -- 0.03
---------- ---------- ----------
Net income (loss) per share.............................................. $ 0.59 $ (2.18) $ 1.15
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
31
<PAGE>
MERCER INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
1998 1997 1996
--------- ---------- ----------
<S> <C> <C> <C>
Net income (loss).............................................................. $ 9,012 $ (32,623) $ 16,023
Other comprehensive income, net of tax
Foreign currency translation adjustment...................................... 12,713 (29,362) (10,282)
Unrealized gains (losses) on securities
Unrealized holding gains (losses) arising during the period................ (7,679) 733 1,139
Less reclassification adjustment for (gains) losses included in net
income................................................................... 798 -- (415)
--------- ---------- ----------
(6,881) 733 724
--------- ---------- ----------
Other comprehensive income (loss).............................................. 5,832 (28,629) (9,558)
--------- ---------- ----------
Comprehensive income (loss).................................................... $ 14,844 $ (61,252) $ 6,465
--------- ---------- ----------
--------- ---------- ----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
32
<PAGE>
MERCER INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SHARES OF BENEFICIAL INTEREST ACCUMULATED OTHER COMPREHENSIVE INCOME
----------------------------------- ---------------------------------------
AMOUNT PAID FOREIGN
IN EXCESS CURRENCY UNREALIZED
NUMBER OF OF PAR RETAINED TRANSLATION GAINS (LOSSES)
SHARES PAR VALUE VALUE EARNINGS ADJUSTMENTS ON SECURITIES TOTAL
--------- ----------- ----------- ----------- ----------- --------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995...... 13,326,023 $ 13,326 $ 57,439 $ 160,956 $ (1,732) $ (2,974) $ (4,706)
Dividend of shares pursuant to
spin-off transaction............ -- -- -- (54,141) 3,406 -- 3,406
Shares issued for conversion of
debentures...................... 81,515 82 726 -- -- -- --
Shares issued for exercise of
options......................... 152,500 152 1,478 -- -- -- --
Shares issued for the settlement
of debt......................... 1,350,000 1,350 13,831 -- -- -- --
Repurchase of shares.............. (159,400) (159) (2,260) -- -- -- --
Change in other comprehensive
income (loss)................... -- -- -- -- (13,688) 724 (12,964)
Net income........................ -- -- -- 16,023 -- -- --
--------- ----------- ----------- ----------- ----------- ------- ---------
Balance at December 31, 1996...... 14,750,638 14,751 71,214 122,838 (12,014) (2,250) (14,264)
--------- ----------- ----------- ----------- ----------- ------- ---------
Shares issued for conversion of
debentures...................... 6,731 7 62 -- -- -- --
Shares issued for exercise of
options......................... 169,500 169 1,332 -- -- -- --
Shares issued for the settlement
of debt......................... 100,000 100 901 -- -- -- --
Shares issued for the payment of
debenture interest.............. 4,853 5 45 -- -- -- --
Shares issued for cash............ 11,000 11 89 -- -- -- --
Repurchase of shares.............. (9,000) (9) (74) -- -- -- --
Payment of dividends.............. -- -- -- (450) -- -- --
Change in other comprehensive
income (loss)................... -- -- -- -- (29,362) 733 (28,629)
Net loss.......................... -- -- -- (32,623) -- -- --
--------- ----------- ----------- ----------- ----------- ------- ---------
Balance at December 31, 1997...... 15,033,722 15,034 73,569 89,765 (41,376) (1,517) (42,893)
Shares issued for exercise of
options......................... 365,000 365 2,701 -- -- -- --
Shares issued for exercise of
warrants........................ 67,000 67 335 -- -- -- --
Repurchase of shares.............. (25,600) (26) (132) -- -- -- --
Payment of dividends.............. -- -- -- (610) -- -- --
Change in other comprehensive
income (loss)................... -- -- -- -- 12,713 (6,881) 5,832
Net income........................ -- -- -- 9,012 -- -- --
--------- ----------- ----------- ----------- ----------- ------- ---------
Balance at December 31, 1998...... 15,440,122 $ 15,440 $ 76,473 $ 98,167 $ (28,663) $ (8,398) $ (37,061)
--------- ----------- ----------- ----------- ----------- ------- ---------
--------- ----------- ----------- ----------- ----------- ------- ---------
<CAPTION>
SHAREHOLDERS'
EQUITY
-------------
<S> <C>
Balance at December 31, 1995...... $ 227,015
Dividend of shares pursuant to
spin-off transaction............ (50,735)
Shares issued for conversion of
debentures...................... 808
Shares issued for exercise of
options......................... 1,630
Shares issued for the settlement
of debt......................... 15,181
Repurchase of shares.............. (2,419)
Change in other comprehensive
income (loss)................... (12,964)
Net income........................ 16,023
-------------
Balance at December 31, 1996...... 194,539
-------------
Shares issued for conversion of
debentures...................... 69
Shares issued for exercise of
options......................... 1,501
Shares issued for the settlement
of debt......................... 1,001
Shares issued for the payment of
debenture interest.............. 50
Shares issued for cash............ 100
Repurchase of shares.............. (83)
Payment of dividends.............. (450)
Change in other comprehensive
income (loss)................... (28,629)
Net loss.......................... (32,623)
-------------
Balance at December 31, 1997...... 135,475
Shares issued for exercise of
options......................... 3,066
Shares issued for exercise of
warrants........................ 402
Repurchase of shares.............. (158)
Payment of dividends.............. (610)
Change in other comprehensive
income (loss)................... 5,832
Net income........................ 9,012
-------------
Balance at December 31, 1998...... $ 153,019
-------------
-------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
33
<PAGE>
MERCER INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Cash Flows from Continuing Operating Activities
Income (loss) from continuing operations....................................... $ 9,012 $ (32,623) $ 15,557
Adjustments to reconcile income (loss) from continuing operations to cash flows
from continuing operating activities
Special charges.............................................................. -- 48,452 --
Depreciation................................................................. 11,218 13,252 11,851
Gain on sale of property..................................................... (5,345) (991) (1,572)
Deferred income taxes........................................................ 308 -- (3,101)
Other........................................................................ (184) (512) (55)
Changes in current assets and liabilities
Investment in trading securities............................................. 23,266 9,060 (21,005)
Inventories.................................................................. (2,354) 1,953 5,271
Receivables.................................................................. (15,851) (7,150) 9,442
Accounts payable and accrued expenses........................................ (1,115) (15,561) (22,524)
Other........................................................................ (453) 100 (247)
--------- --------- ---------
Net cash provided by (used in) continuing operating activities............. 18,502 15,980 (6,383)
Cash Flows from Continuing Investing Activities
Proceeds from the sales of available-for-sale securities....................... 2,216 -- 1,946
Sale of property............................................................... 10,615 3,024 --
Purchase of fixed assets, net of investment grants............................. (69,829) (13,068) (18,200)
Increase in notes receivable................................................... (2,967) (7,000) --
Other.......................................................................... -- 33 (81)
--------- --------- ---------
Net cash used in continuing investing activities........................... (59,965) (17,011) (16,335)
Cash Flows from Continuing Financing Activities
Cash restricted................................................................ (15,000) -- --
Increase in debts.............................................................. 107,317 2,010 7,504
Decrease in debts.............................................................. (7,823) (6,676) (959)
Net proceeds on the issuance of (cost to repurchase) shares
of beneficial interest....................................................... 3,310 1,518 (789)
Dividends...................................................................... (610) (450) --
Other.......................................................................... (157) (70) --
--------- --------- ---------
Net cash provided by (used in) continuing financing activities............. 87,037 (3,668) 5,756
Effect of exchange rate changes on cash and cash equivalents..................... 3,262 (854) (1,028)
--------- --------- ---------
Net cash provided by (used in) continuing operations............................. 48,836 (5,553) (17,990)
Net cash flows from spun-off operation........................................... -- -- (1,273)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents............................. 48,836 (5,553) (19,263)
Cash and Cash Equivalents, beginning of year..................................... 4,414 9,967 29,230
--------- --------- ---------
Cash and Cash Equivalents, end of year........................................... $ 53,250 $ 4,414 $ 9,967
--------- --------- ---------
--------- --------- ---------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
34
<PAGE>
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. THE COMPANY AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Mercer International Inc. ("the Company") is a business trust organized
under the laws of the State of Washington, USA. Under Washington law,
shareholders of a business trust have the same limited liability as shareholders
of a corporation. The amounts in the notes are rounded to the nearest thousand
except for the per share amounts.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries. Significant intercompany accounts and transactions of
continuing operations have been eliminated.
The Company has two wholly-owned subsidiaries located in Germany which
operate in the pulp and paper industries. Spezialpapierfabrik Blankenstein GmbH
("SPB") operates primarily in the pulp industry while the other subsidiary,
Dresden Papier AG ("DPAG"), manufactures paper products. These subsidiaries were
originally acquired from the German government.
In 1997, the Company began a renovation of SPB's pulp mill which is expected
to be completed in late 1999. The renovation will convert the mill to the
production of kraft pulp rather than sulphite pulp which has accounted for a
significant amount of pulp production in the past. Management expects the
renovation will increase production capacity and quality while reducing costs.
Management estimates that SPB will incur expenditures of approximately $400
million in renovation costs of which $91 million has been incurred. Further,
consistent with management's strategic planning, the Company may rationalize
SPB's mill as well as DPAG's paper mills; however, this process may not be
completed in the near term.
The amount classified as special charges in the 1997 consolidated statement
of operations of $48,452 includes an estimated unrealized impairment loss of
$41,286. The impairment losses are attributable to the following:
- As a consequence of SPB's renovation, certain equipment will either no
longer be useful or will need significant modification. Therefore, such
equipment was deemed impaired and written down to its estimated fair value
based on engineering estimates and disposal values experienced in the
industry. The impairment loss attributable to SPB's renovation was
estimated at $26,385 during 1997.
- Because the Company is in the process of rationalizing certain of DPAG's
paper mills, some of which have incurred operating losses, management
believed that the carrying value of the mills exceeds their estimated fair
values. Therefore, an impairment loss of $14,901 was recorded in 1997.
Management believes that no change to the 1997 estimates is necessary.
Effective June 3, 1996, the Company completed the spin-off of approximately
83% of the outstanding shares of common stock of its subsidiary, MFC Bancorp
Ltd. ("MFC") as a dividend to the Company's shareholders. Included in the net
assets spun-off was an amount payable by the Company which was settled in
September 1996 with 700,000 shares of the Company's stock valued at $7,787 and a
promissory note amounting to $14,543 due January 1, 1999, with interest at 8%.
Certain reclassifications have been made to prior year financial statements
to conform with the current year presentation.
35
<PAGE>
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. THE COMPANY AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include highly liquid investments with original
maturities of three months or less and are recorded at cost which approximates
market. The Company maintains cash balances in foreign financial institutions in
excess of insured limits.
INVESTMENTS
The Company's available-for-sale and trading securities are stated at their
fair values. Any unrealized holding gains or losses of available-for-sale
securities are reported as a separate component of shareholders' equity until
realized and, for trading securities, any unrealized gains or losses are
included in the results of operations. If a loss in value in available-for-sale
securities is considered to be other than temporary, it is recognized in the
determination of net income. Cost is based on the specific identification method
to determine realized gains or losses.
The Company incurs liabilities for securities acquisitions where the
security transfer is to occur at a future date. However, the liability amount is
subject to the ultimate market price of the security.
INVENTORIES
Inventories of pulp are stated at the lower of cost (average-cost method) or
market. Paper products are stated at the lower of cost (first-in, first-out
method) or market.
PROPERTIES
Depreciable properties are stated at cost unless the estimated future
undiscounted cash flows expected to result from either the use of an asset or
its eventual disposition is less than its carrying amount in which case an
impairment loss is recognized based on the fair value of the asset.
Depreciation of buildings and production equipment is based on the estimated
useful lives of the assets and is computed using the straight-line method.
Buildings are depreciated over a 10 to 50 year life and production equipment
over 8 to 20 years.
FOREIGN CURRENCY TRANSLATION
The Company translates foreign assets and liabilities of its subsidiaries at
the rate of exchange at the balance sheet date. Revenues and expenses are
translated at the average rate of exchange throughout the year. Unrealized gains
or losses from these translations are reported as a separate component of
shareholders' equity. Realized gains or losses are included in general and
administrative expenses in the income statement. The translation adjustments do
not recognize the effect of income tax because the Company expects to reinvest
the amounts indefinitely in operations.
NEW EUROPEAN CURRENCY
In certain European countries, a new currency unit called the "euro" was
introduced in January 1999. The Company's operations are primarily in countries
which are converting to the euro. While the Company is currently evaluating the
potential effect the euro conversion may have on its operations, it does not
believe that the conversion will have a material effect. However, until the
Company completes its
36
<PAGE>
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. THE COMPANY AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
evaluation, there can be no assurance that the euro conversion will not have a
significant impact on the Company's operations.
ENVIRONMENTAL CONSERVATION
Liabilities for environmental conservation are recorded when it is probable
that obligations have been incurred and the amounts can be reasonably estimated.
Any potential recoveries of such liabilities are recorded when there is an
agreement with the reimbursing entity.
STOCK-BASED COMPENSATION
Compensation cost for stock options is measured as the excess, if any, of
the quoted market price of the Company's stock at the date of the grant over the
amount an employee is required to pay for the stock. There was no stock-based
compensation for either 1998, 1997 or 1996.
TAXES ON INCOME
The Company accounts for income taxes under an asset and liability approach
that requires the recognition of deferred tax assets and liabilities for
expected future tax consequences of events that have been recognized in the
Company's financial statements or tax returns. In estimating future tax
consequences, the Company generally considers all expected future events other
than enactments of changes in the tax laws or rates.
EARNINGS PER SHARE
Basic earnings per share is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding in the
period. Diluted earnings per share takes into consideration common shares
outstanding (computed under basic earnings per share) and potentially dilutive
common shares.
COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" is effective for years beginning after December 15, 1997.
The primary objective of this statement is to report and disclose a measure of
all changes in equity of an entity that result from transactions and other
economic events of the period other than transactions with owners. Of the
various methods allowed to accomplish this objective, the Company has elected to
provide separate statements of comprehensive income.
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
37
<PAGE>
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. THE COMPANY AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
NEW ACCOUNTING STANDARD
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities," is effective for years beginning
after June 15, 1999. This statement requires that entities recognize all
derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value provided certain conditions are met. The Company
does not currently have derivative instruments or engage in hedging activities
so there would be no affect on its consolidated financial statements.
NOTE 2. INVESTMENTS
Trading securities are classified as current investments and summarized as
follows:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------
1998 1997
------------ ------------
<S> <C> <C>
Bonds............................................................. $ 6,159 $ 33,464
Equity securities................................................. 6,732 22,821
------------ ------------
$ 12,891 $ 56,285
------------ ------------
------------ ------------
</TABLE>
Included within trading securities are investments in a fund that
represented 33% and in a fund and another entity that represented 21% of the
total value of trading securities at December 31, 1998 and 1997, respectively.
The change in net unrealized holding gains (losses) on trading securities which
has been included in earnings was $(4,407), $1,067 and $888 during 1998, 1997
and 1996, respectively. Available-for-sale securities consist of bonds and
equity securities and have been classified as long-term investments. The
proceeds from sales of these securities amounted to $2,216, none and $1,946
which resulted in realized gains (losses) of $(798), none and $415 during 1998,
1997 and 1996, respectively. The fair value of available-for-sale securities
included on the balance sheets at December 31, 1998, 1997 and 1996, was $13,626,
$4,118 and $1,015, respectively. The cost of these securities was $22,024,
$5,635 and $3,265 which resulted in unrealized losses being recorded in
shareholders' equity of $(8,398), $(1,517) and $(2,250) at December 31, 1998,
1997 and 1996, respectively. Included within available-for-sale securities are
investments in the common and preferred shares of an entity which represents 53%
of the total value at December 31, 1998. At December 31, 1997, an investment in
preferred shares of one entity represented 64% of the total value of
available-for-sale securities.
NOTE 3. RECEIVABLES
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------
1998 1997
------------ ------------
<S> <C> <C>
Sale of paper and pulp products................................... $ 12,411 $ 10,280
Loan receivable................................................... -- 3,484
Securities trading................................................ 14,400 --
Other............................................................. 7,017 8,565
------------ ------------
$ 33,828 $ 22,329
------------ ------------
------------ ------------
</TABLE>
38
<PAGE>
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3. RECEIVABLES (CONTINUED)
At December 31, 1998, the Company pledged $14,400 in securities receivables
as collateral.
NOTE 4. INVENTORIES
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------
1998 1997
------------ ------------
<S> <C> <C>
Pulp and paper
Raw materials................................................... $ 11,299 $ 10,073
Work in process and finished goods.............................. 8,241 5,726
------------ ------------
$ 19,540 $ 15,799
------------ ------------
------------ ------------
</TABLE>
NOTE 5. PROPERTIES
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------
1998 1997
------------ ------------
<S> <C> <C>
Land.............................................................. $ 18,928 $ 14,993
Buildings......................................................... 14,131 18,440
Production and other equipment.................................... 105,262 96,382
------------ ------------
138,321 129,815
Less: Accumulated depreciation.................................... 51,854 47,659
------------ ------------
86,467 82,156
Renovation in progress (net of government grants received of
$16,800 as of December 31, 1998)................................ 74,545 5,650
------------ ------------
$ 161,012 $ 87,806
------------ ------------
------------ ------------
</TABLE>
NOTE 6. NOTES PAYABLE
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------
1998 1997
------------- -------------
<S> <C> <C>
Bank loan, 6.5% interest, payable monthly, callable with four
weeks notice, collateralized by inventory....................... $ 1,839 $ 1,576
Bank loan, 6.5% interest, payable monthly, callable with four
weeks notice, collateralized by inventory....................... -- 1,676
------ ------
$ 1,839 $ 3,252
------ ------
------ ------
</TABLE>
39
<PAGE>
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7. LONG-TERM DEBT
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------
1998 1997
------------ ------------
<S> <C> <C>
Note payable to banks, interest at LIBOR plus .75% during the
renovation of the SPB pulp mill and .7% thereafter (resulting in
an effective rate of 4.5% inclusive of prepaid loan costs at
December 31, 1998), ultimate principal balance up to $305,000 of
which principal plus interest on $288,000 due in semiannual
installments based on percentage of final loan amount beginning
at 2.65% to 5.3% at March 31, 2001, until September 30, 2013
(final payment date), and principal plus interest on $17,000 due
in four annual installments beginning September 30 of the fourth
calendar year after the first borrowing under this part of the
loan (no amounts have yet been drawn down) and each September 30
thereafter, collateralized by receivables, inventory and the
renovated assets with 48% and 32% principal plus interest
guaranteed by the Federal Republic of Germany and the State of
Thuringia, respectively; cash restricted of $15,000............. $ 102,010 $ --
Debenture payable, 8% interest payable semi-annually, due 2003,
unsecured, with attached warrants which allows a debenture
holder to acquire common shares of the Company at the higher of
$6 per share or the average price of the stock for the 10 days
prior to conversion............................................. 11,598 --
Loan from governmental agency, 7% interest payable annually, due
2004, collateralized by fixed assets............................ 5,803 5,559
Loan from governmental agency, non-interest bearing, due in annual
installments of $556, unsecured................................. 1,800 2,779
Bank loan, interest at LIBOR plus 2% (resulting in a rate of 5.5%
at December 31, 1998) interest payable monthly, principal
payments of $116 are due quarterly, collateralized by land and
buildings....................................................... 1,675 1,395
Note payable, 8% interest, due January 1999, unsecured............ -- 4,474
Bank loan, interest at 5.5% payable quarterly, principal payments
of $357 are due semiannually, collateralized by land and
buildings....................................................... -- 2,502
</TABLE>
40
<PAGE>
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7. LONG-TERM DEBT (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------
1998 1997
------------ ------------
<S> <C> <C>
Note payable, interest at a bank's discount rate plus 2% interest
payable quarterly, due on demand, collateralized by land and
buildings....................................................... -- 1,668
Other............................................................. -- 991
------------ ------------
122,886 19,368
Less: Current portion............................................. 1,338 4,329
------------ ------------
$ 121,548 $ 15,039
------------ ------------
------------ ------------
</TABLE>
As part of the financing to renovate the SPB pulp mill, the Company was
awarded three government grants. The cost of renovation will be reduced as grant
monies are received. Two grants are to be received from the State of Thuringia,
Germany, in the total amount of $86,281, of which $16,800 was received during
1998. The remaining grant amounts are to be received as appropriated through
2003. The Federal Republic of Germany awarded a grant of $22,200 which is
expected to be appropriated in years through 2001.
Paid invoices for the renovation are to be submitted to receive the grant
monies and required employment levels are to be maintained for a five-year
period beginning December 31, 2000. No grants receivable have been included in
the December 31, 1998, consolidated financial statements.
As of December 31, 1998, the principal maturities of long-term debt are as
follows:
<TABLE>
<CAPTION>
MATURES AMOUNT
- - ---------------------------------------------------------------------------------- ----------
<S> <C>
1999.............................................................................. $ 1,338
2000.............................................................................. 1,096
2001.............................................................................. 6,191
2002.............................................................................. 5,509
2003.............................................................................. 17,413
Thereafter........................................................................ 91,339
----------
$ 122,886
----------
----------
</TABLE>
Interest paid amounted to $8,108 in 1998, $3,161 in 1997 and $2,693 in 1996.
Interest amounting to $5,332 during 1998 and $246 during 1996 has been
capitalized in property and equipment. There was no interest capitalized in
1997.
41
<PAGE>
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------
1998 1997
------------ ------------
<S> <C> <C>
Trade payables.................................................... $ 23,677 $ 17,925
Accounts payable and accrued expenses............................. 14,154 26,353
Payable for securities............................................ 15,687 5,894
------------ ------------
$ 53,518 $ 50,172
------------ ------------
------------ ------------
</TABLE>
NOTE 9. INCOME TAXES
The deferred recovery of (provision for) income taxes on income consists of
the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------------
1998 1997 1996
------------- ------------ ------------
<S> <C> <C> <C>
U.S................................................. $ -- $ (73) $ (1,456)
Non U.S............................................. (308) (4,992) 4,557
----- ------------ ------------
Deferred recovery of (provision for) income taxes... $ (308) $ (5,065) $ 3,101
----- ------------ ------------
----- ------------ ------------
</TABLE>
The 1997 provision includes $4,992 which was allocated to special charges.
Differences between the U.S. Federal Statutory and the Company's effective
rates are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
U.S. Federal statutory rates on income from
continuing operations............................. $ (3,169) $ 11,091 $ (4,234)
Increase (decrease) in taxes resulting from:
Non U.S. income................................... 3,869 (7,991) 6,805
Valuation allowance............................... (1,008) (8,165) 530
------------ ------------ ------------
$ (308) $ (5,065) $ 3,101
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
Deferred tax assets are composed of the following:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------
1998 1997
------------ ------------
<S> <C> <C>
German tax loss carryforwards..................................... $ 116,203 $ 104,553
Difference in German tax basis of depreciable assets.............. 14,205 22,955
U.S. tax loss carryforward........................................ 2,975 2,114
Foreign tax credits............................................... 2,500 2,500
------------ ------------
135,883 132,122
Valuation allowance............................................... (124,103) (121,136)
------------ ------------
Net deferred tax asset.......................................... $ 11,780 $ 10,986
------------ ------------
------------ ------------
</TABLE>
42
<PAGE>
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9. INCOME TAXES (CONTINUED)
During 1997, the German government modified its tax law to potentially
restrict the utilization of preacquisition tax losses by successor entities.
Therefore, the Company provided a valuation reserve for much of the
preacquisition losses. Management currently believes that the difference in
German tax basis of depreciable assets, U.S. tax loss carryforwards and U.S.
foreign tax credits are likely not to be utilized under current circumstances
and has fully reserved any resulting potential tax benefit. Management believes
that, while realization of the net deferred tax asset is not assured, it is more
likely than not that it will be realized.
The Company's U.S. net operating losses amount to approximately $8,700 at
December 31, 1998. Losses of $2,400, $2,800 and $3,500 will expire in 2013, 2012
and 2011, respectively, if not used. The remaining German tax losses of
approximately $210,000 at December 31, 1998, may be carried forward
indefinitely.
Income (loss) from foreign source operations amounted to $11,381, $(23,503)
and $20,015 for the years ended December 31, 1998, 1997 and 1996, respectively.
These amounts are intended to be indefinitely reinvested in operations. Since
available-for-sale securities are primarily securities held by foreign
subsidiaries and the proceeds are expected to be reinvested, no tax has been
provided in the determination of other comprehensive income for the years ended
December 31, 1998, 1997 and 1996.
The Company's foreign tax credits are available to be used against U.S.
income tax resulting from general limitation income in the approximate amount of
$2,500. Of these credits, $900 will expire in 1999 and $1,600 in 2000 if they
are not utilized.
NOTE 10. SHAREHOLDERS' EQUITY
In a prior year, the Company issued one attached preferred share purchase
right for each outstanding share of beneficial interest. A total of 11,958,993
rights were issued which allow the holder to acquire from the Company one
one-hundredth of a share of Series A Junior Participating Preferred Stock at a
price of $75 per one one-hundredth of a preferred share. The rights will expire
on December 31, 2003. The Company has the right to repurchase the rights for
$.01 each.
The Company has reserved 110,000 Series A Junior Participating Preferred
Shares in connection with the rights. The preferred shares are entitled to
quarterly dividends of $10 per share and have 100 votes per share. However, the
preferred shares will be entitled to an aggregate dividend of 100 times any
dividends declared on shares of beneficial interest and an aggregate of 100
times any payment to shares of beneficial interest on merger or liquidation.
Also, during a prior year the Company authorized the issuance of 3.5 million
shares of Cumulative Retractable Convertible Preferred Shares, Series B at a
price of $20 per share. These shares have a cumulative dividend rate of up to
4%, a liquidation preference of $20 per share plus unpaid dividends, a
redemption right beginning January 1, 2004, at $20 per share plus unpaid
dividends, and may convert up to 10% of the issued and outstanding shares into
shares of beneficial interest based on dividing the issue price plus unpaid
dividends by $20 per share.
43
<PAGE>
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11. STOCK-BASED COMPENSATION
The Company has a non-qualified stock option plan which provides for options
to be granted to officers and employees to acquire a maximum of 2,000,000 shares
of beneficial interest including options for 100,000 shares to directors who are
not officers or employees.
During 1998, options to acquire 329,500 shares of beneficial interest at $6
per share were granted to officers and employees of the Company which vest
one-third at grant date and one-third each for the next two years. These options
expire in ten years. The weighted fair value of these options was $1.89 each.
During 1997, options to acquire 635,000 shares of beneficial interest at
$8.50 were granted to officers and employees of the Company which vest one-third
at grant date and one-third each year for the next two years. These options
expire in ten years. The weighted fair value of these options was $2.71 each.
During 1996, options to acquire 139,500 shares at $21.50, 35,000 shares at
$13.88 and 60,000 shares at $9.50 were granted to officers and employees of the
Company. The 35,000 options and the 60,000 options were to vest one-third at the
grant date and one-third each year for the next two years. The 139,500 options
vest one-half at the grant date and the rest at the end of one year. All options
expire in ten years. Also, during 1996, directors of the Company were granted
options to acquire 12,000 shares at $20.50.
The Company repriced the 139,500 options granted to employees and the 12,000
granted to directors during August 1996. After consideration of this repricing,
the weighted fair value per option granted in 1996 amounted to $3.33 each.
Following is a summary of the status of the plan during 1998, 1997 and 1996:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
---------- -----------------
<S> <C> <C>
Outstanding at January 1, 1996.................................. 530,500 $ 16.84
Granted......................................................... 246,500 15.58
Exercised....................................................... (152,500) 10.69
Forfeited....................................................... (229,000) 17.33
---------- ------
Outstanding at December 31, 1996................................ 395,500 14.88
Granted......................................................... 635,000 8.50
Exercised....................................................... (169,500) 8.85
Forfeited....................................................... (60,000) 13.88
---------- ------
Outstanding at December 31, 1997................................ 801,000 11.01
Granted......................................................... 329,500 6.00
Exercised....................................................... (365,000) 8.40
---------- ------
Outstanding at December 31, 1998................................ 765,500 $ 10.03
---------- ------
---------- ------
</TABLE>
44
<PAGE>
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11. STOCK-BASED COMPENSATION (CONTINUED)
Following is a summary of the status of options outstanding at December 31,
1998:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
- - -------------------------------------------------------------------------------- EXERCISABLE OPTIONS
WEIGHTED AVERAGE ----------------------------
REMAINING CONTRACTUAL WEIGHTED AVERAGE WEIGHTED AVERAGE
EXERCISE PRICE RANGE NUMBER LIFE EXERCISE PRICE NUMBER EXERCISE PRICE
- - --------------------------- --------- --------------------- ----------------- --------- -----------------
<S> <C> <C> <C> <C> <C>
$ 6.00..................... 329,500 9.8 $ 6.00 109,833 $ 6.00
$ 8.50-11.66............... 231,500 8.1 $ 9.19 56,000 $ 10.79
$16.89-18.47............... 204,500 6.9 $ 17.50 204,500 $ 17.50
</TABLE>
COMPENSATION
Proforma information with respect to fair value accounting for the Company's
stock option plan is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------ ------------
<S> <C> <C> <C>
Net Income (Loss)
As reported....................................... $ 9,012 $ (32,623) $ 16,023
------ ------------ ------------
------ ------------ ------------
Proforma.......................................... $ 7,839 $ (33,484) $ 15,027
------ ------------ ------------
------ ------------ ------------
Basic and Diluted Earnings (Loss) Per Share
As reported....................................... $ .59 $ (2.18) $ 1.15
------ ------------ ------------
------ ------------ ------------
Proforma.......................................... $ .51 $ (2.23) $ 1.08
------ ------------ ------------
------ ------------ ------------
</TABLE>
The fair value of each option granted is estimated on the grant date using
the Black-Scholes Model. The assumptions used in calculating fair value are as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Risk-free interest rate............................. 6.0% 6.0% 5.0%
Expected life of the options........................ 2 years 2 years 2 years
Expected volatility................................. 60.0% 49.80% 49.62%
Expected dividend yield............................. 0.0% 0.0% 0.0%
</TABLE>
NOTE 12. EARNINGS PER SHARE
Earnings per share data for years ended December 31 is summarized as
follows:
<TABLE>
<CAPTION>
INCOME (LOSS)
-----------------------------------------
1998 1997 1996
------------- ------------ ------------
<S> <C> <C> <C>
Income (loss) from continuing operations............ $ 9,012 $ (32,623) $ 15,557
Effect of dilutive securities, interest on
convertible debentures............................ -- -- 11
------ ------------ ------------
$ 9,012 $ (32,623) $ 15,568
------ ------------ ------------
------ ------------ ------------
</TABLE>
45
<PAGE>
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12. EARNINGS PER SHARE (CONTINUED)
<TABLE>
<CAPTION>
SHARES
----------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Basic earnings per share, weighted number of shares
outstanding....................................... 15,352,275 14,994,826 13,829,056
Effect of dilutive securities:
Convertible debentures............................ -- -- 21,756
Warrants.......................................... 4,931 -- 33,900
Options........................................... 26,601 -- 72,393
------------ ------------ ------------
15,383,807 14,994,826 13,957,105
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
For 1997, convertible debentures, warrants and options were not included in
the computation of diluted EPS because they were anti-dilutive. Options to
acquire 192,500 were outstanding at December 31, 1996, but were not included in
the computation of diluted shares because the options' exercise price was
greater than the average market price of the shares.
NOTE 13. TRANSACTIONS WITH AFFILIATES
The Company has net receivables from one officer and trustee amounting to
$161 as of December 31, 1998, and from two officers and trustees amounting to
$360 as of December 31, 1997. An entity related to one of these trustees was
reimbursed for expenses and fees incurred of $207, $224 and $239 during 1998,
1997 and 1996, respectively, and was due $55 from the Company at December 31,
1997.
In connection with the spin-off discussed in Note 1, the Company assumed the
debt, which it had previously guaranteed, of an affiliate of MFC in the amount
of $2,052. In exchange for the assumption, the Company received shares in a
publicly-traded affiliate having a fair value of $1,496 and a note for $556
which was paid.
During 1996, SPB acquired bonds in a subsidiary of the spun-off entity with
a face amount of $5,922 for $4,548. SPB acquired $6,000 in convertible
debentures of the spun-off entity. The spun-off entity acquired the subsidiary's
bonds for $5,922 and SPB recorded income of $1,374 as a result of this
transaction for the year ended December 31, 1996. Finally, SPB converted the
debentures into 857,143 common shares of the spun-off entity at the market
price.
NOTE 14. SUPPLEMENTAL DISCLOSURES WITH RESPECT TO STATEMENTS OF CASH FLOWS
Significant noncash transactions in 1998 include:
- The Company extinguished a note payable amounting to $4,474 in exchange
for a receivable to another party for the same amount.
- Shares of beneficial interest were issued upon the conversion of
debentures valued at $402.
Significant noncash transactions in 1997 include:
- Bank debt was extinguished with 100,000 of the Company's shares of
beneficial interest which approximated fair value.
46
<PAGE>
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14. SUPPLEMENTAL DISCLOSURES WITH RESPECT TO STATEMENTS OF CASH FLOWS
(CONTINUED)
- Note payable of $5,226 was extinguished with trading securities with the
same market value.
- Shares of beneficial interest with a fair value of $50 were issued as
payment for debenture interest.
Significant noncash transactions in 1996 include:
- The Company received 546,441 shares of common stock and a note in exchange
for assuming debt amounting to $2,052 of an affiliate. The shares had a
fair value of $1,496 and the note amounted to $556.
- The Company settled its amount payable to the spun-off entity with 700,000
shares of its common stock with a fair value of $7,787 and a promissory
note for $14,543.
- The Company paid bank debt of $12,459 with 650,000 of the Company's shares
having a market value of $7,394 and MFC shares remaining after the
spin-off with a fair value of $5,065.
- As discussed in Note 1, the Company spun-off 83% of MFC amounting to
$50,735 net of a foreign currency translation adjustment.
NOTE 15. BUSINESS SEGMENT INFORMATION
The Company operates in two reportable business segments: pulp and paper.
The segments are managed separately because each business requires different
production and marketing strategies.
The pulp segment consists of a single mill located in Germany which has been
producing and marketing sulphite pulp primarily in western European countries.
As discussed in Note 1 above, the Company is presently renovating the pulp mill
to produce kraft pulp to be sold in the same general market area. The paper
segment consists of four mills located in Germany. These mills manufacture
recycled paper products which are sold primarily in western Europe.
Both segments operate in industries which are cyclical in nature and their
markets are affected by fluctuations in supply and demand in each cycle. These
fluctuations have significant effects on the cost of materials and the eventual
sales prices of products.
47
<PAGE>
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15. BUSINESS SEGMENT INFORMATION (CONTINUED)
Summarized financial information concerning the segments is shown in the
following table:
<TABLE>
<CAPTION>
PULP PAPER TOTAL
------------ ------------ ------------
<S> <C> <C> <C>
1998
Sales to external customers......................... $ 71,137 $ 98,534 $ 169,671
Intersegment net sales.............................. 461 -- 461
Segment profit...................................... 2,178 13,455 15,633
Segment assets...................................... 254,038 64,158 318,196
Capital expenditures................................ 82,159 3,795 85,954
RECONCILIATIONS
Profit:
Total profit for reportable segments.............. 15,633
Elimination of intersegment profits............... (255)
Unallocated amounts, other corporate expenses..... (6,058)
------------
Consolidated earnings before income taxes....... $ 9,320
------------
------------
Assets:
Total assets for reportable segments.............. $ 318,196
Intersegment receivable........................... (593)
Other unallocated amounts......................... 15,681
------------
Consolidated total assets....................... $ 333,284
------------
------------
</TABLE>
<TABLE>
<CAPTION>
PULP PAPER TOTAL
------------ ------------ ------------
<S> <C> <C> <C>
1997
Sales to external customers......................... $ 76,488 $ 98,849 $ 175,337
Intersegment net sales.............................. 1,806 -- 1,806
Segment loss........................................ (7,432) (18,552) (25,984)
Segment assets...................................... 137,752 58,557 196,309
Capital expenditures................................ 9,536 5,255 14,791
RECONCILIATIONS
Loss:
Total loss for reportable segments................ (25,984)
Elimination of intersegment profits............... 2,094
Unallocated amounts, other corporate expenses..... (8,660)
------------
Consolidated loss before income taxes........... $ (32,550)
------------
------------
Assets:
Total assets for reportable segments.............. $ 196,309
Intersegment receivable........................... (393)
Other unallocated amounts......................... 14,378
------------
Consolidated total assets....................... $ 210,294
------------
------------
</TABLE>
48
<PAGE>
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15. BUSINESS SEGMENT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
PULP PAPER TOTAL
------------ ------------ ------------
<S> <C> <C> <C>
1996
Sales to external customers......................... $ 73,382 $ 100,715 $ 174,097
Intersegment net sales.............................. 1,872 -- 1,872
Segment profit...................................... 15,355 4,989 20,344
Segment assets...................................... 182,734 96,200 278,934
Capital expenditures................................ 13,956 9,909 23,865
RECONCILIATIONS
Profit:
Total profit for reportable segments.............. 20,344
Elimination of intersegment profits............... --
Unallocated amounts, other corporate expenses..... (7,888)
------------
Consolidated earnings from continuing operations
and before income taxes....................... $ 12,456
------------
------------
Assets:
Total assets for reportable segments.............. $ 278,934
Intersegment receivable........................... (1,405)
Other unallocated amounts......................... 19,451
------------
Consolidated total assets....................... $ 296,980
------------
------------
</TABLE>
The following table presents net sales to external customers by geographic
area based on location of the customer.
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Germany............................................. $ 93,267 $ 97,525 $ 101,351
European Union...................................... 65,806 59,794 48,795
Other............................................... 10,598 18,018 23,951
------------ ------------ ------------
$ 169,671 $ 175,337 $ 174,097
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The following table presents total assets by geographic area based on
location of the asset.
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Germany............................................. $ 317,603 $ 195,916 $ 277,529
Other............................................... 15,681 14,378 18,046
------------ ------------ ------------
$ 333,284 $ 210,294 $ 295,575
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
SPB has a fiber supply contract with two companies which expire in 2002 and
2003 at prices agreed to periodically. SPB and DPAG have labor agreements which
expire in the year 2002 and 1999, respectively.
49
<PAGE>
MERCER INTERNATIONAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of other financial instruments at December 31 is summarized
as follows:
<TABLE>
<CAPTION>
1998 1997
---------------------- --------------------
CARRYING CARRYING FAIR
AMOUNT FAIR VALUE AMOUNT VALUE
---------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Cash and cash equivalents...................... $ 53,250 $ 53,250 $ 4,414 $ 4,414
Loan receivable................................ -- -- 3,484 3,484
Cash restricted................................ 15,000 15,000 -- --
Notes receivable............................... 10,150 10,150 7,000 7,000
Notes payable.................................. 1,839 1,839 3,252 3,252
Long-term debt................................. 122,886 122,604 19,368 18,543
</TABLE>
None of the Company's financial instruments are derivatives. The fair value
of cash and cash equivalents is based on reported market value. The loan
receivable of $3,484 at December 31, 1997, had interest at 8%, was
collateralized by inventory, accounts receivable and property, and was collected
in 1998. The value of the loan receivable at December 31, 1997, was estimated at
its face amount due to its terms. The fair value of cash restricted is equal to
its carrying amount because it is in an account which bears a market rate of
interest. The notes receivable at December 31, 1998 and 1997, were from one
company with interest at 8% and 7%, respectively, and were unsecured. The
December 31, 1997, note was collected during 1998. Their values are based on the
value of similar long-term receivables. The fair value of notes payable was
based on the value of similar debt incurred in the pulp and paper industry. The
fair value of long-term debt was determined using discounted cash flows at
prevailing market rates. The other long-term liabilities which have a carrying
value of $2,022 and $2,027 at December 31, 1998 and 1997, respectively, are
primarily an accrued environmental liability at SPB and a pension liability at
DPAG. These liabilities may be partially reimbursable. Further, the Company
cannot estimate at this time when these amounts will be paid. Therefore, the
fair value of other long-term liabilities cannot be determined.
NOTE 17. COMMITMENTS AND CONTINGENCIES
At December 31, 1998 and 1997, SPB has recorded a liability for
environmental conservation expenditures of $1,800 and $1,668, respectively.
Management believes the liability amount recorded is sufficient, however, future
regulations in Germany may result in additional liability.
SPB and DPAG are required to pay certain charges based on water pollution
levels at their manufacturing facilities. Unpaid charges can be reduced by
investing in qualifying equipment that results in less water pollution. SPB and
DPAG believe equipment investments already made will offset most of these
charges, but they have not received final determination from the appropriate
authorities. Accordingly, a liability for these water charges has only been
recognized to the extent that equipment investments have not been made.
During 1998, the Company and the German government amended DPAG's original
acquisition contract. As a result, DPAG is required to make additional capital
investments of at least $7,200 during the period May 1, 1998 through April 30,
2000. As of December 31, 1998, DPAG had made investments of $1,315 towards this
requirement.
The Company is involved in various matters of litigation arising in the
ordinary course of business. In the opinion of management, the estimated outcome
of such issues will not have a material effect on the Company's financial
statements.
50
<PAGE>
MERCER INTERNATIONAL INC.
SUPPLEMENTARY FINANCIAL INFORMATION (UNAUDITED)
QUARTERLY FINANCIAL DATA
(THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
----------- --------- ------------- ------------
<S> <C> <C> <C> <C>
1998
Net Sales....................................................... 52,509 48,295 39,702 34,390
Gross profit.................................................... 12,929 11,705 10,731 829
Income before extraordinary items and cumulative effect of a
change in accounting.......................................... 6,262 4,535 4,239 (6,024)
Income before extraordinary items and cumulative effect of a
change in accounting, per share*.............................. 0.41 0.30 0.28 (0.39)
Net income...................................................... 6,262 4,535 4,239 (6,024)
1997
Net Sales....................................................... 44,354 45,740 48,306 45,707
Gross profit.................................................... 9,886 10,949 10,978 10,735
Income before extraordinary items and cumulative effect of a
change in accounting.......................................... 3,184 4,111 4,754 (44,672)
Income before extraordinary items and cumulative effect of a
change in accounting, per share*.............................. 0.21 0.27 0.31 (2.97)
Net income...................................................... 3,184 4,111 4,754 (44,672)
</TABLE>
- - ------------------------
* on a diluted basis
51
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
<TABLE>
<S> <C> <C>
MERCER INTERNATIONAL INC.
Dated: March 26, 1999 By: /s/ JIMMY S.H. LEE
-----------------------------------------
Jimmy S.H. Lee
CHAIRMAN
</TABLE>
Pursuant to the requirements of the SECURITIES EXCHANGE ACT OF 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C>
/s/ JIMMY S.H. LEE Date: March 26, 1999
- - ------------------------------------------------
Jimmy S.H. Lee
CHAIRMAN, CHIEF EXECUTIVE OFFICER AND TRUSTEE
/s/ MICHEL ARNULPHY Date: March 26, 1999
- - ------------------------------------------------
Michel Arnulphy
TRUSTEE
/s/ C.S. MOON Date: March 26, 1999
- - ------------------------------------------------
C.S. Moon
TRUSTEE
/s/ M. REIDEL Date: March 26, 1999
- - ------------------------------------------------
M. Reidel
CHIEF FINANCIAL OFFICER AND TRUSTEE
</TABLE>
52
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders
Mercer International Inc.
Our report on the consolidated financial statements of Mercer International
Inc. is included on page 29 of this Form 10-K. In connection with our audits of
such financial statements, we have also audited the related financial statement
schedule listed in Item 14 of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
/s/ PETERSON SULLIVAN P.L.L.C.
March 12, 1999
Seattle, Washington
53
<PAGE>
MERCER INTERNATIONAL INC.
SCHEDULE 1--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
---------- ----------
<S> <C> <C> <C>
ASSETS
Cash....................................................................... $ 53,250 $ 4,414
Receivables................................................................ 43,978 29,329
Inventories................................................................ 19,540 15,799
Investments................................................................ 26,517 60,403
Properties................................................................. 161,012 87,806
Deferred income tax assets................................................. 11,780 10,986
Other...................................................................... 17,207 1,557
---------- ----------
$ 333,284 $ 210,294
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses...................................... $ 55,540 $ 52,199
Debt....................................................................... 124,725 22,620
Shareholders' equity....................................................... 153,019 135,475
---------- ----------
$ 333,284 $ 210,294
---------- ----------
---------- ----------
</TABLE>
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Revenues
Pulp and paper and related sales........................................... $ 169,671 $ 175,337 $ 174,097
Other...................................................................... 5,225 8,770 12,632
---------- ---------- ----------
174,896 184,107 186,729
Expenses
Cost of sales.............................................................. 138,702 141,559 145,432
General and administrative................................................. 23,490 23,600 24,863
Interest................................................................... 3,384 3,046 3,978
Special charges............................................................ -- 48,452 --
Income tax (recovery)...................................................... 308 73 (3,101)
Minority interest.......................................................... -- -- --
---------- ---------- ----------
165,884 216,730 171,172
---------- ---------- ----------
Income (loss) from continuing operations..................................... $ 9,012 $ (32,623) $ 15,557
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
54
<PAGE>
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net cash provided by (used in) operating activities........................... $ 18,502 $ 15,980 $ (6,383)
Net cash used in investing activities, purchase of fixed assets............... (59,965) (17,011) (16,335)
Net cash provided by (used in) financing activities........................... 90,299 (4,522) 4,728
Net cash provided by (used in) spun-off operation............................. -- -- (1,273)
---------- ---------- ----------
Net change in cash............................................................ 48,836 (5,553) (19,263)
Cash and cash equivalent, beginning of year................................... 4,414 9,967 29,230
---------- ---------- ----------
Cash and cash equivalent, end of year......................................... $ 53,250 $ 4,414 $ 9,967
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
55
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- - ----------- ----------------------------------------------------------------
<S> <C>
3.1 (a)* Restated Declaration of Trust of the Company as filed with
the Secretary of State of Washington on June 11, 1990
together with an Amendment to Declaration of Trust dated
December 12, 1991.
(b)* Amendments to Declaration of Trust dated July 8, 1993;
August 17, 1993; and September 9, 1993.
3.2* Trustees' Regulations dated September 24, 1973.
4.1 Shareholder Rights Plan. Incorporated by reference from Form
8-A dated August 17, 1993.
10.1 Acquisition Agreement among Treuhandanstalt, Dresden Papier AG,
Dresden Papier Holding GmbH, Mercer International Inc., and
Shin Ho Paper Mfg. Co., Ltd. Incorporated by reference from
Form 8-K dated September 20, 1993.
10.2 Acquisition Agreement among Treuhandanstalt, Zellstoff-und
Papierfabrik Rosenthal GmbH, Raboisen
Einhundertsechsundfunfzigste Vermogensverwaltungsgesellschaft
GmbH, to be renamed ZPR Zellstoff-und Papierfabrik
Rosenthal Holding GmbH, Mercer International Inc. and 448380
B.C. Ltd. dated July 3, 1994. Incorporated by reference from
Form 8-K dated July 3, 1994.
10.3* Amended and Restated 1992 Stock Option Plan.
10.4* 1994 Employee Incentive Bonus Plan.
10.5* Form of Separation Agreement between Mercer International Inc.
and Arbatax International Inc.
10.6 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 Form
8-K dated July 16, 1998.
21 List of Subsidiaries of Registrant.
23 Independent Auditors Consent.
27 Article 5--Financial Data Schedule for the Year Ended December
31, 1997.
</TABLE>
_________
* Filed in Form 10-K for prior years.
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF MERCER INTERNATIONAL INC.
<TABLE>
<CAPTION>
SHAREHOLDING
AT END OF YEAR
JURISDICTION -----------------
NAME OF SUBSIDIARY(1) OF INCORPORATION DIRECT INDIRECT
- - -------------------------------------------- ---------------- ------ --------
<S> <C> <C> <C>
Dresden Papier AG........................... Germany -- 100%
Spezialpapierfabrik Blankenstein GmbH....... Germany -- 100%
</TABLE>
- - ----------
(1) All the subsidiaries are conducting business under their own names.
<PAGE>
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We hereby consent to the incorporation by reference in the registration
statement (No. 33-90026) on Form S-8 of Mercer International Inc. of our
report dated March 12, 1999, relating to the balance sheets of Mercer
International Inc. as of December 31, 1998 and 1997, and the related
statements of operations, shareholders' equity and cash flows for the years
ended December 31, 1998, 1997 and 1996, which report appears in the Annual
Report of Form 10-K for the year ended December 31, 1998, of Mercer
International Inc.
/s/ PETERSON SULLIVAN P.L.L.C.
March 26, 1999
Seattle, Washington
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES INCLUDED IN THIS FORM 10-K AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 53,250
<SECURITIES> 12,891
<RECEIVABLES> 33,828
<ALLOWANCES> 0
<INVENTORY> 19,540
<CURRENT-ASSETS> 121,716
<PP&E> 161,012
<DEPRECIATION> 0
<TOTAL-ASSETS> 333,284
<CURRENT-LIABILITIES> 56,695
<BONDS> 121,548
0
0
<COMMON> 91,913
<OTHER-SE> 61,106
<TOTAL-LIABILITY-AND-EQUITY> 333,284
<SALES> 169,671
<TOTAL-REVENUES> 174,896
<CGS> 138,702
<TOTAL-COSTS> 165,576
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,384
<INCOME-PRETAX> 9,320
<INCOME-TAX> 308
<INCOME-CONTINUING> 9,012
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,012
<EPS-PRIMARY> 0.59
<EPS-DILUTED> 0.59
</TABLE>
