<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
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.: 000-09409
MERCER INTERNATIONAL INC.
(Exact name of Registrant as specified in its charter)
Washington 91-6087550
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
Burglistrasse 6, Zurich, Switzerland CH 8002
(Address of principal executive offices) (Zip Code)
41(1) 201 7710
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES X NO
----- -----
The Registrant had 16,635,399 shares of beneficial interest outstanding as at
November 11, 1999.
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<PAGE> 2
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
MERCER INTERNATIONAL INC.
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(Unaudited)
FORM 10-Q
QUARTERLY REPORT - PAGE 2
<PAGE> 3
MERCER INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
As at September 30, 1999 and December 31, 1998
(Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 1,126 $ 53,250
Investments 9,263 12,891
Receivables 81,101 33,828
Inventories 14,810 19,540
Other 5,099 2,207
---------- ----------
Total current assets 111,399 121,716
Long-Term Assets
Cash restricted 13,604 15,000
Properties 274,851 161,012
Investments 12,400 13,626
Receivables 10,150 10,150
Deferred income tax 10,774 11,780
---------- ----------
321,779 211,568
---------- ----------
$ 433,178 $ 333,284
========== ==========
LIABILITIES
Current Liabilities
Accounts payable and accrued expenses $ 59,388 $ 53,518
Notes payable 867 1,839
Debt 41,284 1,338
---------- ----------
Total current liabilities 101,539 56,695
Long-Term Liabilities
Debt 191,562 121,548
Other 1,834 2,022
---------- ----------
193,396 123,570
---------- ----------
Total liabilities 294,935 180,265
SHAREHOLDERS' EQUITY
Shares of beneficial interest 99,360 91,913
Cumulative translation adjustment (42,891) (28,663)
Net unrealized loss on investments valuation (5,786) (8,398)
Retained earnings 87,560 98,167
---------- ----------
138,243 153,019
---------- ----------
$ 433,178 $ 333,284
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
FORM 10-Q
QUARTERLY REPORT - PAGE 3
<PAGE> 4
MERCER INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
For Nine Months Ended September 30, 1999 and 1998
(Unaudited)
(dollars in thousands, except for earnings per share)
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Revenues
Sales $ 106,711 $ 132,036
Investments and other (116) 8,470
---------- ----------
106,595 140,506
Expenses
Cost of sales 98,665 105,141
General and administrative 15,877 17,532
Interest expense 1,826 2,720
---------- ----------
116,368 125,393
---------- ----------
Income (loss) from operations before
income taxes (9,773) 15,113
Income taxes - 77
---------- ----------
Net income (loss) (9,773) 15,036
Retained earnings, beginning of period 98,167 89,765
Dividend (834) (610)
---------- ----------
Retained earnings, end of period $ 87,560 $ 104,191
========== ==========
Earnings (loss) per share
Basic $ (0.60) $ 0.98
========== ==========
Diluted $ (0.60) $ 0.98
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
FORM 10-Q
QUARTERLY REPORT - PAGE 4
<PAGE> 5
MERCER INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
For Three Months Ended September 30, 1999 and 1998
(Unaudited)
(dollars in thousands, except for earnings per share)
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Revenues
Sales $ 30,212 $ 36,054
Investments and other 304 3,648
---------- ----------
30,516 39,702
Expenses
Cost of sales 30,944 28,971
General and administrative 5,997 5,511
Interest expense 637 947
---------- ----------
37,578 35,429
---------- ----------
Income (loss) from operations before
income taxes (7,062) 4,273
Income taxes - 34
---------- ----------
Net income (loss) (7,062) 4,239
Retained earnings, beginning of period 94,622 99,952
---------- ----------
Retained earnings, end of period $ 87,560 $ 104,191
========== ==========
Earnings (loss) per share
Basic $ (0.42) $ 0.28
========== ==========
Diluted $ (0.42) $ 0.28
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
FORM 10-Q
QUARTERLY REPORT - PAGE 5
<PAGE> 6
MERCER INTERNATIONAL INC.
STATEMENTS OF COMPREHENSIVE INCOME
For Nine Months Ended September 30, 1999 and 1998
(Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Net income (loss) $ (9,773) $ 15,036
Other comprehensive income (loss):
Foreign currency translation adjustments (14,228) 12,135
Unrealised gain (loss) on securities 2,612 (8,829)
---------- ----------
Other comprehensive income (loss) (11,616) 3,306
---------- ----------
Total comprehensive income (loss) $ (21,389) $ 18,342
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
FORM 10-Q
QUARTERLY REPORT - PAGE 6
<PAGE> 7
MERCER INTERNATIONAL INC.
STATEMENTS OF COMPREHENSIVE INCOME
For Three Months Ended September 30, 1999 and 1998
(Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Net income (loss) $ (7,062) $ 4,239
Other comprehensive income (loss):
Foreign currency translation adjustments 4,193 10,841
Unrealised loss on securities (468) (3,758)
---------- ----------
Other comprehensive income 3,725 7,083
---------- ----------
Total comprehensive income (loss) $ (3,337) $ 11,322
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
FORM 10-Q
QUARTERLY REPORT - PAGE 7
<PAGE> 8
MERCER INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For Nine Months Ended September 30, 1999 and 1998
(Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) from continuing operations $ (9,773) $ 15,036
Adjustments to reconcile net income (loss)
from continuing operations to cash
Depreciation and amortization 11,031 10,054
Non-cash asset acquisitions (383) (7,634)
---------- ----------
875 17,456
Changes in current assets and liabilities
Investments 5,213 23,091
Inventories 2,939 (5,162)
Receivables (9,671) (19,153)
Accounts payable and accrued expenses 7,384 10,407
Other (2,932) 49
---------- ----------
Net cash provided by operating
activities 3,808 26,688
Cash Flows from Investing Activities:
Increase in notes receivable, net - (4,233)
Proceeds from sales of available-for-sale
investments 2,315 -
Purchase of fixed assets (181,182) (40,973)
Other 4 6
---------- ----------
Net cash used in investing activities (178,863) (45,200)
Cash Flows from Financing Activities:
Increase in indebtedness 130,256 55,554
Decrease in indebtedness (1,995) (5,771)
Net proceeds on issuance of shares
of beneficial interest - 3,045
Payment of dividend (834) (610)
Other - (172)
---------- ----------
Net cash provided by financing
activities 127,427 52,046
Effect of exchange rate changes on cash and
cash equivalents (4,496) 1,734
---------- ----------
Net increase (decrease) in cash and
cash equivalents (52,124) 35,268
Cash and cash equivalents, beginning of period 53,250 4,414
---------- ----------
Cash and cash equivalents, end of period $ 1,126 $ 39,682
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
FORM 10-Q
QUARTERLY REPORT - PAGE 8
<PAGE> 9
MERCER INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR NINE MONTHS ENDED SEPTEMBER 30, 1999
(Unaudited)
Note 1. Basis of Presentation
- ------------------------------
The interim period consolidated financial statements contained herein include
the accounts of Mercer International Inc. and its subsidiaries (the
"Company").
The interim period consolidated financial statements have been prepared by the
Company pursuant to the rules and regulations of the U.S. Securities and
Exchange Commission (the "SEC"). Certain information and footnote disclosure
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to such SEC rules and regulations. The interim period consolidated
financial statements should be read together with the audited consolidated
financial statements and accompanying notes included in the Company's latest
annual report on Form 10-K for the fiscal year ended December 31, 1998. In the
opinion of the Company, the unaudited consolidated financial statements
contained herein contain all adjustments necessary to present a fair statement
of the results of the interim periods presented.
Note 2. Earnings Per Share
- ---------------------------
Earnings per share is computed on the basis of the weighted average number of
shares outstanding during a period after considering convertible securities,
warrants and options. The weighted average number of shares outstanding for
the purposes of calculating diluted earnings per share was 16,306,628 and
15,338,801 for the nine months ended September 30, 1999 and 1998,
respectively, and 16,628,986 and 15,352,602 for the three months ended
September 30, 1999 and 1998, respectively.
FORM 10-Q
QUARTERLY REPORT - PAGE 9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Mercer International Inc. is a pulp and paper company and its operations are
primarily located in Germany. The following discussion and analysis of the
results of operations and financial condition of the Company for the nine and
three month periods ended September 30, 1999 should be read in conjunction
with the consolidated financial statements and related notes included
elsewhere herein. In this document: (i) unless the context otherwise requires,
the "Company" refers to Mercer International Inc. and its subsidiaries; and
(ii) a "tonne" is one metric ton or 2,204.6 pounds.
RESULTS OF OPERATIONS - Nine Months Ended September 30, 1999
- ------------------------------------------------------------
The following table sets forth selected sales data for the Company for the
periods indicated:
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1999 1998
-------------- --------------
(in thousands)
<S> <C> <C>
Sales by Product Class
- ----------------------
Packaging papers(1) $ 13,285 $ 20,339
Specialty papers 22,436 23,573
Printing papers 28,634 31,440
Pulp 39,678 54,177
Other 2,678 2,507
---------- ----------
Total(2) $ 106,711 $ 132,036
========== ==========
Sales by Geographic Area
- ------------------------
Germany $ 57,454 $ 71,973
European Union(3) 43,428 51,321
Other 5,829 8,742
---------- ----------
Total $ 106,711 $ 132,036
========== ==========
Sales by Volume (tonnes)
- ---------------
Packaging papers(1) 52,360 75,309
Specialty papers 27,118 28,300
Printing papers 43,043 43,482
Pulp 93,040 108,975
---------- ----------
Total 215,561 256,066
========== ==========
</TABLE>
- ------------------
(1) The Company sold its packaging paper mill in Greiz effective July 1998.
Sales from the Greiz mill prior to its sale are included in the Company's
results for the nine months ended September 30, 1998. The Greiz mill
sold approximately 25,490 tonnes of packaging paper for approximately
$7.2 million in revenues in the nine months ended September 30, 1998.
(2) Excluding intercompany sales.
(3) Not including Germany.
FORM 10-Q
QUARTERLY REPORT - PAGE 10
<PAGE> 11
In the nine months ended September 30, 1999, revenues decreased by 24.1% to
$106.6 million from $140.5 million in the comparative period of 1998,
primarily as a result of the shutdown of the Company's pulp mill in late July
1999 to implement the final stages of the project to convert the mill from the
production of sulphite pulp to kraft pulp (the "Conversion Project"). The mill
is expected to start-up in late November 1999. As a result of downtime taken
in connection with the Conversion Project, pulp sales decreased by 26.8% in
the current period from the comparable period of 1998.
In the nine months ended September 30, 1999, markets for sulphite pulp
remained generally weak, with modest price improvements largely offset by the
devaluation of the deutschmark and euro against the U.S. dollar. On average,
sulphite pulp prices realized by the Company in the nine months ended
September 30, 1999 were approximately 14.2% lower than in the same period of
1998. In addition, downtime and other disruptions associated with the
Conversion Project decreased pulp sales to $39.7 million in the nine months
ended September 30, 1999 from $54.2 million in the comparative period of 1998.
Overall, paper sales in the nine months ended September 30, 1999 decreased by
14.6% to $64.4 million from $75.4 million in the same period of 1998,
primarily as a result of a decrease in sales volumes resulting from the sale
of the Greiz mill in the third quarter of 1998. In the nine months ended
September 30, 1999, markets for specialty paper were generally stable, while
markets for packaging and printing papers were weaker than in the comparative
period of 1998. On average, paper prices realized by the Company increased by
approximately 2.5% in the nine months ended September 30, 1999, compared to
the same period in 1998, primarily as a result of the change in the product
mix to produce more premium priced products.
Expenses decreased to $116.4 million in the nine months ended September 30,
1999 from $125.4 million in the comparable period of 1998, primarily as a
result of lower sales volumes, which were partially offset by an increase in
expenses relating to the Conversion Project. On average, the Company's fibre
costs for pulp production in the nine months ended September 30, 1999
decreased by approximately 2.3% compared to the same period in 1998. Prices
for waste paper, which comprises approximately 80% of the fibre for the
Company's paper mills, increased by approximately 45.5% in the nine months
ended September 30, 1999, compared to the same period of 1998, due to the
change in the product mix to produce more premium priced products and a
recovery in waste paper prices. General and administrative expenses were $15.9
million in the nine months ended September 30, 1999, compared to $17.5 million
in the comparable period of 1998.
Interest expense in the nine months ended September 30, 1999 decreased to $1.8
million from $2.7 million in the comparable period of 1998, primarily as a
result of reduced indebtedness during the current period, other than with
respect to the Conversion Project. Interest costs in respect of the
Conversion Project are being capitalized.
For the nine months ended September 30, 1999, the Company reported a net loss
of $9.8 million, or $0.60 per share, compared to net earnings of $15.0
million, or $0.98 per share, in the comparable period of 1998.
FORM 10-Q
QUARTERLY REPORT - PAGE 11
<PAGE> 12
RESULTS OF OPERATIONS - Three Months Ended September 30, 1999
- -------------------------------------------------------------
The following table sets forth selected sales data for the Company for the
periods indicated:
<TABLE>
<CAPTION>
Quarter Ended September 30,
-------------------------------
1999 1998
-------------- --------------
(in thousands)
<S> <C> <C>
Sales by Product Class
- ----------------------
Packaging papers $ 4,387 $ 4,492
Specialty papers 7,425 7,428
Printing papers 9,485 10,494
Pulp 8,006 13,794
Other 909 (154)
---------- ----------
Total(1) $ 30,212 $ 36,054
========== ==========
Sales by Geographic Area
- ------------------------
Germany $ 17,183 $ 19,700
European Union(2) 11,414 12,755
Other 1,615 3,599
---------- ----------
Total $ 30,212 $ 36,054
========== ==========
Sales by Volume (tonnes)
- ---------------
Packaging papers 17,373 16,349
Specialty papers 9,081 8,724
Printing papers 14,579 14,420
Pulp 18,586 26,991
---------- ----------
Total 59,619 66,484
========== ==========
</TABLE>
- ------------------
(1) Excluding intercompany sales.
(2) Not including Germany.
In the quarter ended September 30, 1999, revenues decreased by 23.1% to $30.5
million from $39.7 million in the comparative period of 1998, primarily as a
result of the shutdown of the Company's pulp mill in late July 1999 to
implement the final stages of the Conversion Project. The mill is expected to
start-up in late November 1999. As a result of the Conversion Project, in the
current quarter pulp sales decreased by 42.0% to $8.0 million from $13.8
million in the comparable period of 1998. Paper sales in the current quarter
decreased by 5.0% from the comparable period of 1998.
In the quarter ended September 30, 1999, markets for sulphite pulp remained
generally weak while markets for kraft pulp improved markedly. While sulphite
pulp prices improved marginally during the quarter, they were more than offset
by the devaluation of the deutschmark and euro against the U.S. dollar in the
same period. On average, sulphite pulp prices realized by the Company in the
third quarter of 1999 were approximately 15.7% lower than in the same period
of 1998.
FORM 10-Q
QUARTERLY REPORT - PAGE 12
<PAGE> 13
At the end of the third quarter of 1999, inventories for kraft pulp held by
North American and Scandinavian producers, commonly referred to as Norscan
inventories, were below 1.3 million tonnes. This is a level that historically
has supported price increases. Kraft pulp list prices in Europe increased to
$600 per tonne effective November 1, 1999. In addition, because of relatively
low Norscan inventories currently, certain pulp producers have announced a
further price increase in kraft pulp list prices to take effect in January
2000. However, there can be no assurance that such further price increase
will be achieved.
In the quarter ended September 30, 1999, markets for specialty, packaging and
printing papers were relatively stable compared to the same period in 1998,
although on average paper prices declined. On average, paper prices realized
by the Company decreased by approximately 8.6% in the quarter ended September
30, 1999 compared to the same period in 1998. Overall, paper sales in the
quarter ended September 30, 1999 decreased to $21.3 million from $22.4 million
in the same period of 1998, primarily as a result of lower prices.
Expenses increased to $37.6 million in the quarter ended September 30, 1999
from $35.4 million in the comparable period of 1998, primarily due to an
increase in expenses relating to the Conversion Project. On average, the
Company's fibre costs for pulp production in the quarter ended September 30,
1999 increased by approximately 6.6% compared to the same period in 1998.
Prices for waste paper, which comprises approximately 80% of the fibre for the
Company's paper mills, increased by approximately 88.8% in the quarter ended
September 30, 1999, compared to the same period of 1998, as a result of the
change in the product mix to produce more premium priced products and a
recovery in waste paper prices. General and administrative expenses were $6.0
million in the quarter ended September 30, 1999, compared to $5.5 million in
the comparable period of 1998.
Interest expense in the quarter ended September 30, 1999 decreased to $0.6
million from $0.9 million in the comparable period of 1998, as a result of
reduced indebtedness during the current period, other than with respect to the
Conversion Project, for which interest costs are being capitalized.
For the quarter ended September 30, 1999, the Company reported a net loss of
$7.1 million, or $0.42 per share, compared to net earnings of $4.2 million, or
$0.28 per share, in the comparable period of 1998.
FORM 10-Q
QUARTERLY REPORT - PAGE 13
<PAGE> 14
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The following table is a summary of selected financial information concerning
the Company for the periods indicated:
<TABLE>
<CAPTION>
As at As at
September 30, 1999 December 31, 1998
------------------ -----------------
(in thousands)
<S> <C> <C>
Financial Position
- ------------------
Working capital $ 9,860 $ 65,021
Total assets 433,178 333,284
Long-term government debt 5,806 7,003
Long-term debt - other 185,756 114,545
</TABLE>
At September 30, 1999, the Company's cash and cash equivalents totalled $1.1
million, a net decrease of $52.1 million from $53.3 million at December 31,
1998. At September 30, 1999, the Company had short-term trading securities
totalling $9.3 million, compared to $12.9 million at December 31, 1998.
Operating Activities
- --------------------
Cash flows from operating activities in the nine months ended September 30,
1999 were lower than in the comparative period of 1998 as a result of lower
sales and higher expenses associated with the Conversion Project. Operating
activities provided cash of $3.8 million in the nine months ended September
30, 1999, compared to $26.7 million in the same period in 1998. An increase
in accounts payable and accrued expenses provided cash of $7.4 million in the
nine months ended September 30, 1999, compared to $10.4 million in the nine
months ended September 30, 1998. Net sales of investment securities provided
cash of $5.2 million in the nine months ended September 30, 1999, compared to
$23.1 million in the comparative period of 1998. Lower inventories provided
cash of $2.9 million in the nine months ended September 30, 1999, compared to
higher inventories using cash of $5.2 million in the nine months ended
September 30, 1998. An increase in receivables used cash of $9.7 million in
the current period, compared to $19.2 million in the comparative period of
1998.
Investing Activities
- --------------------
Investing activities in the nine months ended September 30, 1999 used cash of
$178.9 million, consisting primarily of capital expenditures relating to the
Conversion Project and other upgrades to the Company's paper mills, compared
to $45.2 million in the nine months ended September 30, 1998.
The Conversion Project was commenced in mid-1998 and is designed to convert
the Company's pulp mill to produce kraft pulp, increase its annual production
capacity from 160,000 tonnes to 280,000 tonnes and reduce its emissions of
sulphur dioxides and effluent. The estimated cost for the Conversion Project
is approximately $400 million, which is being financed through a combination
of borrowings under a project loan (the "Project Loan"), non-refundable
governmental
FORM 10-Q
QUARTERLY REPORT - PAGE 14
<PAGE> 15
grants, governmental assistance and guarantees for long-term project
financing and an equity investment by the Company. The pulp mill was shut
down in late July 1999 to implement the final stages of the Conversion
Project and is expected to start-up in late November 1999. Capital
expenditures in respect of the Conversion Project in 1999 are estimated to be
approximately $309.0 million.
Although the Conversion Project has so far experienced only a slight delay,
the Company believes that the project will incur cost overruns as a result of
higher than expected infrastructure costs relating to site development and
piping. Such additional costs have been partially offset by lower than
expected costs for new equipment purchases. Pursuant to the terms of the
Project Loan, such cost overruns will be funded in equal proportions through
borrowings under a cost overrun tranche established under such loan facility
and amounts deposited by the Company into a restricted account with the
lenders under the Project Loan. Currently, the Company does not believe that
such cost overruns will exceed the available facilities under the Project
Loan.
In addition, capital expenditures to upgrade the Company's paper mills used
cash of approximately $5.0 million in the nine months ended September 30,
1999. The Company spent approximately $0.8 million to replace a natural gas
powered turbine and approximately $0.5 million to upgrade a paper machine at
its Fahrbrucke paper mill. The replacement of the natural gas powered turbine
is nearly completed and the upgrade of the paper machine is expected to be
completed in January 2000 at a total cost of approximately $2.5 million. The
Company spent approximately $1.2 million to replace a steam block at its
Trebsen paper mill, which is expected to be completed in January 2000 at a
total cost of approximately $1.9 million. In addition, the Company spent
approximately $1.2 million on constructing a waste water treatment plant at
its Heidenau paper mill, which is expected to be completed in the fourth
quarter of 1999 at a total cost of approximately $1.9 million.
The Company is currently reviewing its paper operations to define a long-term
core competency in respect of products produced in order that future
investment may be directed towards that segment. Currently the investment
required to maintain all four of the Company's paper mills has not enhanced
the competitive position of any one mill and has had a dilutive effect on the
Company's assets.
Financing Activities
- --------------------
Financing activities provided cash of $127.4 million in the nine months ended
September 30, 1999, primarily as a result of increased borrowing under the
Project Loan in respect of the Conversion Project. Financing activities
provided cash of $52.0 million in the nine months ended September 30, 1998.
The depreciation of the deutschmark against the U.S. dollar in the nine months
ended September 30, 1999 resulted in an unrealized foreign exchange
translation loss of $4.5 million on cash and cash equivalents, which is
included as shareholders' equity in the Company's balance sheet and does not
affect the Company's net earnings. See "Foreign Currency."
FORM 10-Q
QUARTERLY REPORT - PAGE 15
<PAGE> 16
Other than the Conversion Project, the Company had no material commitments to
acquire assets or operating businesses as at September 30, 1999. The Company
anticipates that there will be acquisitions of businesses or commitments to
projects in the future. To achieve its long-term goals of expanding its asset
and earnings base through mergers and acquisitions, the Company will require
substantial capital resources. The necessary resources will be generated from
cash flow from operations, cash on hand, borrowing against its assets and/or
the sale of assets.
Foreign Currency
- ----------------
Substantially all of the Company's operations are conducted in international
markets and its consolidated financial results are subject to foreign currency
exchange rate fluctuations, in particular, those in Germany. Approximately
99% of the Company's revenues are denominated in deutschmarks and euros. The
value of the euro is fixed at 1.95583 deutschmarks.
The Company translates foreign assets and liabilities into U.S. dollars at the
rate of exchange on the balance sheet date. Revenues and expenses are
translated at the average rate of exchange prevailing during the period.
Unrealized gains or losses from these translations are recorded as
shareholders' equity on the Company's balance sheet and do not affect the net
earnings of the Company.
Since substantially all of the Company's revenues are received in deutschmarks
and euros, the financial position of the Company for any given period, when
reported in U.S. dollars, can be significantly affected by the exchange rates
prevailing during that period. In the nine months ended September 30, 1999,
the depreciation of the deutschmark against the U.S. dollar resulted in a net
$14.2 million foreign exchange translation loss and, as a result, the
cumulative foreign exchange translation loss increased from $28.7 million at
December 31, 1998 to $42.9 million at September 30, 1999.
As both the Company's principal sources of revenues and expenses are in
deutschmarks or euros, the Company does not currently enter into any currency
hedging arrangements for exchange rate fluctuations.
The average and period ending exchange rates for the deutschmark to the U.S.
dollar for the periods indicated are as follows:
<TABLE>
<CAPTION>
Quarter Ended Quarter Ended
September 30, 1999 September 30, 1998
-------------------------- --------------------------
Period End Period Average Period End Period Average
---------- -------------- ---------- --------------
<S> <C> <C> <C> <C>
RATE OF EXCHANGE
Deutschmark 1.8377 1.8642 1.6698 1.7606
</TABLE>
Based upon the period average exchange rate in the nine months ended September
30, 1999, the U.S. dollar increased by approximately 9.2% in value against the
deutschmark since December 31, 1998.
FORM 10-Q
QUARTERLY REPORT - PAGE 16
<PAGE> 17
Year 2000
- ---------
Many of the world's computer systems currently record years in a two-digit
format. These computer systems will be unable to properly interpret dates
beyond the year 1999, which could lead to business disruptions and is commonly
referred to as the "Year 2000" issue. The Company is conducting a
comprehensive review of all significant applications that may require
modification to ensure Year 2000 compliance. The Company is utilizing both
internal and external resources to make any required modifications and to test
for Year 2000 compliance. The modification and testing process of all
significant applications is expected to be completed in the fourth quarter of
1999. In addition, the Company has initiated communications with its
significant suppliers and largest customers to ascertain their Year 2000
readiness and develop contingency plans as required.
Based upon its current information, management of the Company has determined
that the Year 2000 issue will not pose significant operational problems for
its computers. The total cost to the Company of Year 2000 compliance
activities has not been and is not currently anticipated to be material to its
financial position or results of operations in any given year. The costs and
the dates on which the Company plans to complete Year 2000 modification and
testing are based on management's best estimates, which were derived utilizing
numerous assumptions of future events. However, there can be no assurance
that these estimates will be achieved and actual results could differ
materially from those anticipated.
Conversion Project Uncertainties
- --------------------------------
The Company is subject to various uncertainties in connection with the
Conversion Project, such as availability and cost of materials and labour,
construction delays, cost overruns, weather conditions, governmental
regulations, increases in long-term interest rates and increases in taxes and
other governmental fees, which may cause fluctuations in its operating
results. The Conversion Project is also subject to extensive and complex
regulations and environmental compliance, which may result in delays or the
Company incurring substantial costs in relation thereto.
The pulp mill was shut down in late July 1999 to implement the final stages of
the Conversion Project and is expected to start-up in late November 1999. The
pulp mill will then go through a "ramp-up" period and 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 has so far experienced only a slight delay, there
can be no assurance that the project will not suffer other 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.
FORM 10-Q
QUARTERLY REPORT - PAGE 17
<PAGE> 18
Cyclical Nature of Business; Competitive Position
- -------------------------------------------------
The pulp and paper business is cyclical in nature and markets for the
Company's principal products are characterized by periods of supply and demand
imbalance, which in turn affects product prices. The markets for pulp and
paper are highly competitive and sensitive to cyclical changes in industry
capacity and in the economy, both of which can have a significant influence on
selling prices and the earnings of the Company. Demand for pulp and paper
products has historically been determined by the level of economic growth and
has been closely tied to overall business activity. The competitive position
of the Company is influenced by the availability and quality of raw materials
(fibre) and its experience in relation to other producers with respect to
inflation, energy, labour costs and productivity.
Forward-Looking Statements
- --------------------------
Statements in this report, to the extent they are not based on historical
events, constitute forward-looking statements. Forward-looking statements
include, without limitation, statements regarding the outlook for future
operations, forecasts of future costs and expenditures, the evaluation of
market conditions, the outcome of legal proceedings, the adequacy of reserves,
or other business plans. Investors are cautioned that forward-looking
statements are subject to an inherent risk that actual results may vary
materially from those described herein. Factors that may result in such
variance, in addition to those accompanying the forward-looking statements,
include changes in interest rates, commodity prices, and other economic
conditions; actions by competitors; changing weather conditions and other
natural phenomena; actions by government authorities; uncertainties associated
with legal proceedings; technological development; future decisions by
management in response to changing conditions; and misjudgments in the course
of preparing forward-looking statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
Not applicable.
FORM 10-Q
QUARTERLY REPORT - PAGE 18
<PAGE> 19
PART II. OTHER INFORMATION
-----------------
ITEM 1. LEGAL PROCEEDINGS
The Company is subject to routine litigation incidental to its business. The
Company does not believe that the outcome of such litigation will have a
material adverse effect on its business or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of shareholders on July 13, 1999. At the
meeting, Jimmy S.H. Lee and R. Ian Rigg were elected Class II Trustees of the
Company, each for a three year term, as follows:
<TABLE>
<CAPTION>
ABSTENTIONS AND
VOTES FOR VOTES WITHHELD BROKER NON-VOTES
----------- -------------- ----------------
<S> <C> <C> <C>
Jimmy S.H. Lee 11,341,917 65,379 -
R. Ian Rigg 11,341,917 65,379 -
</TABLE>
C.S. Moon, Michel Arnulphy and Maarten Reidel continued their respective terms
as Trustees of the Company.
In addition, at the meeting, an amendment to the Company's Non-Qualified Stock
Option Plan to increase the number of shares of common stock of the Company
that may be issued pursuant to stock options granted under the plan from 2.0
million to 3.6 million was approved by a vote of 4,542,194 for, 3,150,274
against and 35,762 votes withheld in respect of the resolution to amend the
plan.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description
------- -----------
27 Article 5 - Financial Data Schedule for the 3rd Quarter
1999 Form 10-Q.
(b) Reports on Form 8-K
None.
FORM 10-Q
QUARTERLY REPORT - PAGE 19
<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MERCER INTERNATIONAL INC.
By: /s/ R. Ian Rigg
------------------------------------------
R. Ian Rigg
Vice President and Chief Financial Officer
Date: November 11, 1999
FORM 10-Q
QUARTERLY REPORT - PAGE 20
<PAGE> 21
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
27 Article 5 - Financial Data Schedule for the 3rd Quarter 1999
Form 10-Q.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES INCLUDED IN THIS FORM 10-Q AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,126
<SECURITIES> 9,263
<RECEIVABLES> 81,101
<ALLOWANCES> 0
<INVENTORY> 14,810
<CURRENT-ASSETS> 111,399
<PP&E> 274,851
<DEPRECIATION> 0
<TOTAL-ASSETS> 433,178
<CURRENT-LIABILITIES> 101,539
<BONDS> 191,562
0
0
<COMMON> 99,360
<OTHER-SE> 38,883
<TOTAL-LIABILITY-AND-EQUITY> 433,178
<SALES> 106,711
<TOTAL-REVENUES> 106,595
<CGS> 98,665
<TOTAL-COSTS> 116,368
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,826
<INCOME-PRETAX> (9,773)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,773)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,773)
<EPS-BASIC> (0.60)
<EPS-DILUTED> (0.60)
</TABLE>
