<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, 2000
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.)
Giesshubelstrasse 15, Zurich, Switzerland CH 8045
(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 16,794,899 shares of beneficial interest outstanding as
at November 10, 2000.
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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, 2000
(Unaudited)
FORM 10-Q
QUARTERLY REPORT - PAGE 2
<PAGE> 3
MERCER INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
As at September 30, 2000 and December 31, 1999
(Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 1,885 $ 1,722
Investments 32,500 5,392
Receivables 38,715 41,448
Inventories 14,741 17,697
Other 2,935 2,857
--------- ---------
Total current assets 90,776 69,116
Long-Term Assets
Cash restricted 11,303 12,865
Properties 253,047 351,828
Investments 5,407 6,925
Note receivable 4,869 4,869
Deferred income tax 9,117 10,242
--------- ---------
283,743 386,729
--------- ---------
$ 374,519 $ 455,845
========= =========
LIABILITIES
Current Liabilities
Accounts payable and accrued expenses $ 36,591 $ 40,287
Pulp mill conversion costs payable 3,475 56,195
Note payable 762 553
Debt 10,557 19,121
--------- ---------
Total current liabilities 51,385 116,156
Long-Term Liabilities
Debt 211,399 233,163
Other 3,425 3,506
--------- ---------
214,824 236,669
--------- ---------
Total liabilities 266,209 352,825
SHAREHOLDERS' EQUITY
Shares of beneficial interest 99,995 99,038
Accumulated other comprehensive loss (70,050) (55,242)
Retained earnings 78,365 59,224
--------- ---------
108,310 103,020
--------- ---------
$ 374,519 $ 455,845
========= =========
</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, 2000 and 1999
(Unaudited)
(dollars in thousands, except for earnings per share)
<TABLE>
<CAPTION>
2000 1999
---------- ----------
<S> <C> <C>
Revenues
Sales $ 175,597 $ 104,033
Other 5,572 2,562
---------- ----------
181,169 106,595
Expenses
Cost of sales 142,871 98,665
General and administrative 8,591 15,877
Interest expense 10,560 1,826
---------- ----------
162,022 116,368
---------- ----------
Income (loss) before income taxes 19,147 (9,773)
Income taxes 6 -
---------- ----------
Net income (loss) 19,141 (9,773)
Retained earnings, beginning of period 59,224 98,167
Dividend - (834)
---------- ----------
Retained earnings, end of period $ 78,365 $ 87,560
========== ==========
Earnings (loss) per share
Basic $ 1.14 $ (0.60)
========== ==========
Diluted $ 1.11 $ (0.60)
========== ==========
</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, 2000 and 1999
(Unaudited)
(dollars in thousands, except for earnings per share)
<TABLE>
<CAPTION>
2000 1999
---------- ----------
<S> <C> <C>
Revenues
Sales $ 60,779 $ 29,303
Other 915 1,213
---------- ----------
61,694 30,516
Expenses
Cost of sales 45,795 30,944
General and administrative 3,340 5,997
Interest expense 3,450 637
---------- ----------
52,585 37,578
---------- ----------
Income (loss) before income taxes 9,109 (7,062)
Income taxes 15 -
---------- ----------
Net income (loss) 9,094 (7,062)
Retained earnings, beginning of period 69,271 94,622
---------- ----------
Retained earnings, end of period $ 78,365 $ 87,560
========== ==========
Earnings (loss) per share
Basic $ 0.54 $ (0.42)
========== ==========
Diluted $ 0.52 $ (0.42)
========== ==========
</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, 2000 and 1999
(Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
2000 1999
---------- ----------
<S> <C> <C>
Net income (loss) $ 19,141 $ (9,773)
Other comprehensive loss:
Foreign currency translation adjustments (13,771) (14,228)
Unrealized (loss) gain on securities (1,037) 2,612
---------- ----------
Other comprehensive loss (14,808) (11,616)
---------- ----------
Total comprehensive income (loss) $ 4,333 $ (21,389)
========== ==========
</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, 2000 and 1999
(Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
2000 1999
---------- ----------
<S> <C> <C>
Net income (loss) $ 9,094 $ (7,062)
Other comprehensive (loss) income:
Foreign currency translation adjustments (7,723) 4,193
Unrealized loss on securities (415) (468)
---------- ----------
Other comprehensive (loss) income (8,138) 3,725
---------- ----------
Total comprehensive income (loss) $ 956 $ (3,337)
========== ==========
</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, 2000 and 1999
(Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
2000 1999
---------- ----------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) $ 19,141 $ (9,773)
Adjustments to reconcile net income (loss)
from operations to cash
Depreciation and amortization 19,753 11,031
Non-cash asset acquisitions - (383)
---------- ----------
23,538 3,418
Changes in current assets and liabilities
Investments (28,964) 5,213
Inventories 858 2,939
Receivables (2,195) (9,671)
Accounts payable and accrued expenses 1,456 (4,470)
Other (611) (2,932)
---------- ----------
Net cash provided by (used in) operating
activities 9,438 (8,046)
Cash Flows from Investing Activities:
Decrease in notes receivable, net 11 -
Purchase of available-for-sale investments (859) -
Proceeds from sales of available-for-sale
investments - 2,315
Purchase of fixed assets, net of investment
grants 30,972 (181,182)
Proceeds from sale of fixed assets 8,892 -
Other - 4
---------- ----------
Net cash provided by (used in) investing
activities 39,016 (178,863)
Cash Flows from Financing Activities:
Increase in indebtedness 5,768 130,256
Decrease in indebtedness (5,682) (1,995)
Net proceeds on issuance of shares of beneficial
interest 957 -
Payment of dividend - (834)
(Decrease) increase in pulp mill conversion
costs payable (48,792) 11,854
---------- ----------
Net cash (used in) provided by financing
activities (47,749) 139,281
Effect of exchange rate changes on cash and
cash equivalents (542) (4,496)
---------- ----------
Net increase (decrease) in cash and cash
equivalents 163 (52,124)
Cash and cash equivalents, beginning of period 1,722 53,250
---------- ----------
Cash and cash equivalents, end of period $ 1,885 $ 1,126
========== ==========
</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, 2000
(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, 1999. 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.
Certain reclassifications have been made to the prior period's financial
statements to conform with the current period's presentation.
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 basic earnings per share was
16,763,538 and 16,280,267 for the nine months ended September 30, 2000 and
1999, respectively, and 16,808,769 and 16,628,986 for the three months
ended September 30, 2000 and 1999, respectively. The weighted average
number of shares outstanding for the purposes of calculating diluted
earnings per share was 17,207,610 and 16,306,628 for the nine months ended
September 30, 2000 and 1999, respectively, and 17,368,786 and 16,628,986
for the three months ended September 30, 2000 and 1999, respectively.
Note 3. Disposition of Assets
Effective June 1, 2000, the Company sold its packaging paper mill located
in Trebsen, Germany (the "Trebsen Facility") for approximately $8.9
million plus an amount equal to the net working capital associated with
the Trebsen Facility.
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 months and three months ended September 30, 2000 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.
Based upon period average exchange rates, the U.S. dollar appreciated by
approximately 14% against the deutschmark in the nine months ended
September 30, 2000, compared to the same period of 1999, and by
approximately 16% in the three months ended September 30, 2000, compared
to the same period of 1999.
Effective June 1, 2000, the Company sold its packaging paper mill located
in Trebsen, Germany (the "Trebsen Facility"). The Company's results of
operations include the results of operations of the Trebsen Facility to
June 1, 2000.
RESULTS OF OPERATIONS - Nine Months Ended September 30, 2000
The following table sets forth selected sales data for the Company for the
periods indicated:
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
2000 1999
---------- ----------
(unaudited)
(in thousands)
<S> <C> <C>
Sales by Product Class
Packaging papers $ 8,758 $ 13,285
Specialty papers 25,374 22,436
Printing papers 30,699 28,634
Pulp 110,766 39,678
---------- ----------
Total(1) $ 175,597 $ 104,033
========== ==========
Sales by Geographic Area
Germany $ 71,108 $ 54,776
European Union(2) 61,906 43,428
Other 42,583 5,829
---------- ----------
Total(1) $ 175,597 $ 104,033
========== ==========
Sales by Volume (tonnes)
Packaging papers 29,111 52,360
Specialty papers 31,255 27,118
Printing papers 44,427 43,043
Pulp 183,027 93,040
---------- ----------
Total(1) 287,820 215,561
========== ==========
--------------------
(1) Excluding intercompany sales.
(2) Not including Germany.
</TABLE>
FORM 10-Q
QUARTERLY REPORT - PAGE 10
<PAGE> 11
In the nine months ended September 30, 2000, revenues increased by
approximately 70% to $181.2 million from $106.6 million in the comparative
period of 1999, primarily as a result of higher pulp sales. In the
current period, pulp and paper revenues increased by approximately 69%
from the comparable period of 1999, with pulp sales increasing by
approximately 179%. The Company completed a project in late 1999 to
convert the Company's pulp mill from the production of sulphite pulp to
the production of kraft pulp and increase its annual production capacity
from 160,000 tonnes to 280,000 tonnes (the "Conversion Project"). During
the first nine months of 2000, the pulp mill ramped up production of kraft
pulp, and by September 30, 2000 was operating at in excess of 95% of
capacity.
In the nine months ended September 30, 2000, pulp sales were strong as a
result of increased demand and low producer inventories. List prices for
kraft pulp in Europe increased from approximately $600 per tonne at the
end of 1999 to approximately $710 per tonne during the third quarter of
2000. Pulp sales in the current period increased to $110.8 million from
$39.7 million in the comparable period of 1999. The Company undertook a
planned nine-day maintenance and modification shutdown at its pulp mill
in late-September 2000. The shutdown extended for an additional two days
into October 2000.
In the first nine months of 2000, sales of specialty and printing papers
increased as a result of increased demand, compared to the first nine
months of 1999. Sales of packaging papers were lower as a result of the
sale by the Company of the Trebsen Facility effective June 1, 2000.
Overall, paper sales in the current period increased marginally to $64.8
million from $64.4 million in the comparable period of 1999. On average,
paper prices realized by the Company in the nine months ended September
30, 2000 increased by approximately 18% compared to the same period in
1999.
Expenses increased to $162.0 million in the nine months ended September
30, 2000 from $116.4 million in the comparable period of 1999, primarily
as a result of higher sales volumes and interest expense. On average, the
Company's fibre costs for pulp production in the nine months ended
September 30, 2000 increased by approximately 13% compared to the same
period in 1999. Prices for waste paper, which following the sale of the
Trebsen Facility comprises approximately 37% of the fibre for the
Company's paper mills, increased substantially in the nine months ended
September 30, 2000, compared to the same period of 1999. General and
administrative expenses were $8.6 million in the nine months ended
September 30, 2000, compared to $15.9 million in the comparable period of
1999.
Interest expense in the nine months ended September 30, 2000 increased to
$10.6 million from $1.8 million in the comparable period of 1999,
primarily as a result of indebtedness resulting from the Conversion
Project. Interest costs in respect of the Conversion Project were
capitalized in 1999.
For the nine months ended September 30, 2000, the Company reported net
income of $19.1 million, or $1.11 per share on a diluted basis, compared
to a net loss of $9.8 million, or $0.60 per share, in the comparable
period of 1999.
FORM 10-Q
QUARTERLY REPORT - PAGE 11
<PAGE> 12
RESULTS OF OPERATIONS - Three Months Ended September 30, 2000
The following table sets forth selected sales data for the Company for the
periods indicated:
<TABLE>
<CAPTION>
Three Months Ended September 30,
--------------------------------
2000 1999
------------ -----------
(unaudited)
(in thousands)
<S> <C> <C>
Sales by Product Class
Packaging papers $ - $ 4,387
Specialty papers 8,514 7,425
Printing papers 11,599 9,485
Pulp 40,666 8,006
----------- -----------
Total(1) $ 60,779 $ 29,303
=========== ===========
Sales by Geographic Area
Germany $ 24,156 $ 16,274
European Union(2) 20,611 11,414
Other 16,012 1,615
----------- -----------
Total(1) $ 60,779 $ 29,303
=========== ===========
Sales by Volume (tonnes)
Packaging papers - 17,373
Specialty papers 10,199 9,081
Printing papers 16,574 14,579
Pulp 63,775 18,586
----------- -----------
Total(1) 90,548 59,619
=========== ===========
--------------------
(1) Excluding intercompany sales.
(2) Not including Germany.
</TABLE>
In the three months ended September 30, 2000, revenues increased by
approximately 102% to $61.7 million from $30.5 million in the comparative
period of 1999, primarily as a result of higher pulp sales. In the
current period, pulp and paper revenues increased by approximately 107%
from the comparable period of 1999, with pulp sales increasing by
approximately 408%.
In the three months ended September 30, 2000, kraft pulp sales were strong
as a result of increased demand and low producer inventories. List prices
for kraft pulp in Europe increased from approximately $670 per tonne
during the second quarter of 2000 to approximately $710 per tonne during
the third quarter of 2000. Pulp sales in the current period increased to
$40.7 million from $8.0 million in the comparable period of 1999. The
Company undertook a planned nine-day maintenance and modification shutdown
at its pulp mill in late-September 2000. The shutdown extended for an
additional two days into October 2000.
FORM 10-Q
QUARTERLY REPORT - PAGE 12
<PAGE> 13
In the three months ended September 30, 2000, sales of specialty and
printing papers increased as a result of increased demand, compared to the
three months ended September 30, 1999. Overall, paper sales in the current
period decreased to $20.1 million from $21.3 million in the comparable
period of 1999, as a result of the sale by the Company of the Trebsen
Facility effective June 1, 2000. On average, paper prices realized by the
Company in the three months ended September 30, 2000 increased by
approximately 45% compared to the same period in 1999.
Expenses increased to $52.6 million in the three months ended September
30, 2000 from $37.6 million in the comparable period of 1999, primarily as
a result of higher sales volumes and interest expense. On average, the
Company's fibre costs for pulp production in the three months ended
September 30, 2000 increased by approximately 23% compared to the same
period in 1999. Prices for waste paper, which following the sale of the
Trebsen Facility comprises approximately 37% of the fibre for the
Company's paper mills, increased substantially in the three months ended
September 30, 2000, compared to the same period of 1999. General and
administrative expenses were $3.3 million in the three months ended
September 30, 2000, compared to $6.0 million in the comparable period of
1999.
Interest expense in the three months ended September 30, 2000 increased to
$3.5 million from $0.6 million in the comparable period of 1999, primarily
as a result of indebtedness resulting from the Conversion Project.
Interest costs in respect of the Conversion Project were capitalized in
1999.
For the three months ended September 30, 2000, the Company reported net
income of $9.1 million, or $0.52 per share on a diluted basis, compared to
a net loss of $7.1 million, or $0.42 per share, in the comparable period
of 1999.
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, 2000 December 31, 1999
------------------ -----------------
(unaudited)
(in thousands)
<S> <C> <C>
Financial Position
Working capital $ 39,391 $ (47,040)
Total assets 374,519 455,845
Long-term government debt - 5,490
Long-term debt - other 211,399 227,673
</TABLE>
At September 30, 2000, the Company's cash and cash equivalents totalled
$1.9 million, a net increase of $0.2 million from $1.7 million at December
31, 1999. At September 30, 2000, the Company also had $11.3 million in
restricted cash, consisting of cash on deposit to service payments on
loans related to the Conversion Project, and short-term investments
totalling $32.5 million.
FORM 10-Q
QUARTERLY REPORT - PAGE 13
<PAGE> 14
Operating Activities
Operating activities provided cash of $9.4 million in the nine months
ended September 30, 2000, compared to using cash of $8.0 million in the
same period in 1999. An increase in accounts payable and accrued expenses
provided cash of $1.5 million in the nine months ended September 30, 1999,
compared to a decrease in accounts payable and accrued expenses using cash
of $4.5 million in the nine months ended September 30, 1999. Lower
inventories provided cash of $0.9 million in the nine months ended
September 30, 2000, compared to $2.9 million in the nine months ended
September 30, 1999. An increase in receivables used cash of $2.2 million
in the current period, compared to $9.7 million in the comparative period
of 1999.
Net purchases of investment securities used cash of $29.0 million in the
nine months ended September 30, 2000, consisting primarily of funds
intended to be used to service payments on loans related to the Conversion
Project, compared to net sales of investment securities providing cash of
$5.2 million in the comparative period of 1999.
Investing Activities
Investing activities in the nine months ended September 30, 2000 provided
cash of $39.0 million, consisting primarily of governmental grants of
$52.0 million received in connection with the Conversion Project in prior
periods and paid to the Company in the current period, compared to using
cash of $178.9 million in the nine months ended September 30, 1999.
Proceeds from the sale of the Trebsen Facility provided cash of
approximately $8.9 million in the nine months ended September 30, 2000.
The Company completed the Conversion Project in late 1999. In the nine
months ended September 30, 2000, the Company incurred $16.5 million in
expenditures related to the completion of the Conversion Project. The
Conversion Project was financed through a combination of borrowings under
a project loan, non-refundable governmental grants, governmental
assistance and guarantees for long-term project financing and an equity
investment by the Company.
Capital expenditures to upgrade the Company's paper mills used cash of
approximately $3.3 million in the nine months ended September 30, 2000,
including approximately $1.3 million to complete the installation of a new
paper machine drive at the Company's Fahrbrucke paper mill.
In November 2000, the Company agreed to sell its printing paper mill
located in Hainsberg, Germany (the "Hainsberg Facility") for approximately
$4.0 million plus an amount equal to the net working capital associated
with the Hainsberg Facility.
The Company is continuing to review its other 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.
FORM 10-Q
QUARTERLY REPORT - PAGE 14
<PAGE> 15
Financing Activities
Financing activities used cash of $47.7 million in the nine months ended
September 30, 2000, primarily as a result of payments of accounts payable
associated with the Conversion Project. Financing activities provided cash
of $139.3 million in the nine months ended September 30, 1999.
The depreciation of the deutschmark against the U.S. dollar in the nine
months ended September 30, 2000 resulted in an unrealized foreign exchange
translation loss of $0.5 million on cash and cash equivalents, which is
included in the Company's statement of comprehensive income and does not
affect the Company's net earnings. See "Foreign Currency".
The Company applied approximately $5.2 million of the proceeds from the
sale of the Trebsen Facility to repay and discharge in full governmental
loans associated with the Trebsen Facility.
The Company has reached an understanding with its lenders and the federal
and state governments to amend its loan facilities related to the Conversion
Project to provide for facilities to effect currency swaps and hedging lines
for currency futures and pulp futures. New loan documenetation is currently
being prepared.
Effective January 2000, the Company agreed, subject to certain conditions,
to acquire a controlling interest in a "greenfield" project to construct
and operate a 550,000-tonne softwood kraft pulp mill to be located at
Stendal, Germany (the "Stendal Project"). The Company's participation in
the Stendal Project is subject to, among other things, completion of due
diligence and the Stendal Project itself is subject to, among other
things, financing. The Stendal Project is currently estimated to cost
approximately DM 1,600.0 million (or $823.3 million) and to be completed
by the end of 2003. Financing for the Stendal Project is expected to come
from the project partners, government financing, project financing and
outside capital. See "Stendal Pulp Mill Project Uncertainties".
Other than the agreement relating to the Stendal Project, the Company had
no material commitments to acquire assets or operating businesses as at
September 30, 2000. The Company anticipates that there will be
acquisitions of businesses or commitments to projects in the future. To
achieve its long-term goals of expanding its asset and earnings base
through mergers and acquisitions, the Company will require substantial
capital resources. The necessary resources will be generated from cash
flow from operations, cash on hand, borrowing against its assets and/or
the sale of assets.
Foreign Currency
Substantially all of the Company's operations are conducted in
international markets and its consolidated financial results are subject
to foreign currency exchange rate fluctuations, in particular, those in
Germany. Approximately 99% of the Company's revenues are denominated in
deutschmarks and euros. The value of the euro is fixed at 1.95583
deutschmarks.
FORM 10-Q
QUARTERLY REPORT - PAGE 15
<PAGE> 16
The Company translates foreign assets and liabilities into U.S. dollars at
the rate of exchange on the balance sheet date. Revenues and expenses are
translated at the average rate of exchange prevailing during the period.
Unrealized gains or losses from these translations are recorded as
shareholders' equity on the Company's balance sheet and do not affect the
net earnings of the Company.
Since substantially all of the Company's revenues are received in
deutschmarks and euros, the financial position of the Company for any
given period, when reported in U.S. dollars, can be significantly affected
by the exchange rates prevailing during that period. In the nine months
ended September 30, 2000, the depreciation of the deutschmark against the
U.S. dollar resulted in a net $13.8 million foreign exchange translation
loss and, as a result, the cumulative foreign exchange translation loss
increased from $49.9 million at December 31, 1999 to $63.7 million at
September 30, 2000.
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, 2000 September 30, 1999
-------------------------- --------------------------
Period End Period Average Period End Period Average
---------- -------------- ---------- --------------
<S> <C> <C> <C> <C>
Rate of Exchange
Deutschmark 2.2119 2.1653 1.8377 1.8642
</TABLE>
Based upon the period average exchange rate in the nine months ended
September 30, 2000, the U.S. dollar increased by approximately 7% in value
against the deutschmark since December 31, 1999.
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, transportation, labour
costs and productivity.
FORM 10-Q
QUARTERLY REPORT - PAGE 16
<PAGE> 17
Stendal Pulp Mill Project Uncertainties
The Company's participation in the Stendal Project is subject to certain
conditions, including completion of its due diligence and entering into a
shareholders' agreement. In addition, the Stendal Project itself is
subject to various risks and uncertainties customary to large "greenfield"
projects of this nature which may result in the Stendal Project not
proceeding as currently planned, or at all, 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 Stendal Project will also be subject to extensive
and complex regulations and environmental compliance which may result in
delays, in the project company and/or its shareholders, including the
Company, incurring substantial costs in relation thereto or in the Stendal
Project being amended or not proceeding at all.
The implementation of the Stendal Project is currently expected to
commence during the first half of 2001 and be completed by the end of
2003. However, there can be no assurance that the Stendal Project will
proceed as currently planned, or at all.
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
Reference is made to the Company's annual report on Form 10-K for the year
ended December 31, 1999 for information concerning market risk.
FORM 10-Q
QUARTERLY REPORT - PAGE 17
<PAGE> 18
PART II. OTHER INFORMATION
-----------------
ITEM 1. LEGAL PROCEEDINGS
The Company is subject to routine litigation incidental to its business.
The Company does not believe that the outcome of such litigation will have
a material adverse effect on its business or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of shareholders on July 11, 2000. At
the meeting, Michel Arnulphy was elected a Class III Trustee of the
Company for a three year term as follows:
<TABLE>
<CAPTION>
ABSTENTIONS AND
VOTES FOR VOTES WITHHELD BROKER NON-VOTES
--------- -------------- ----------------
<S> <C> <C> <C>
Michel Arnulphy 13,061,232 30,095 -
</TABLE>
Jimmy S.H. Lee, C.S. Moon, Maarten Reidel and R. Ian Rigg continued their
respective terms as Trustees of the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description
------- -----------
27 Article 5 - Financial Data Schedule for the 3rd Quarter
2000 Form 10-Q.
(b) Reports on Form 8-K
None.
FORM 10-Q
QUARTERLY REPORT - PAGE 18
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MERCER INTERNATIONAL INC.
By: /s/ R. Ian Rigg
-----------------------------
R. Ian Rigg
Vice President and Chief Financial Officer
Date: November 13, 2000
FORM 10-Q
QUARTERLY REPORT - PAGE 19
<PAGE> 20
EXHIBIT INDEX
Exhibit
Number Description
------- -----------
27 Article 5 - Financial Data Schedule for the 3rd Quarter 2000
Form 10-Q.
