<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 June 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 16,734,899 shares of beneficial interest outstanding as
at August 10, 2000.
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<PAGE> 2
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
MERCER INTERNATIONAL INC.
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2000
(Unaudited)
FORM 10-Q
QUARTERLY REPORT - PAGE 2
<PAGE> 3
MERCER INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
As at June 30, 2000 and December 31, 1999
(Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
---------- ------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 7,968 $ 1,722
Investments 19,617 5,392
Receivables 47,149 41,448
Inventories 14,619 17,697
Prepaid and other 2,530 2,857
--------- ---------
Total current assets 91,883 69,116
Long-Term Assets
Cash restricted 12,203 12,865
Properties 275,175 351,828
Investments 5,613 6,925
Note receivable 4,869 4,869
Deferred income tax 9,766 10,242
--------- ---------
307,626 386,729
--------- ---------
$ 399,509 $ 455,845
========= =========
LIABILITIES
Current Liabilities
Accounts payable and accrued expenses $ 41,369 $ 40,287
Pulp mill conversion costs payable 4,292 56,195
Note payable 66 553
Debt 11,311 19,121
--------- ---------
Total current liabilities 57,038 116,156
Long-Term Liabilities
Debt 233,402 233,163
Other 2,672 3,506
--------- ---------
236,074 236,669
--------- ---------
Total liabilities 293,112 352,825
SHAREHOLDERS' EQUITY
Shares of beneficial interest 99,038 99,038
Accumulated other comprehensive loss (61,912) (55,242)
Retained earnings 69,271 59,224
--------- ---------
106,397 103,020
--------- ---------
$ 399,509 $ 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 Six Months Ended June 30, 2000 and 1999
(Unaudited)
(dollars in thousands, except for earnings per share)
<TABLE>
<CAPTION>
2000 1999
---------- ----------
<S> <C> <C>
Revenues
Sales $ 114,818 $ 74,730
Other 4,657 1,349
---------- ----------
119,475 76,079
Expenses
Cost of sales 97,076 67,721
General and administrative 5,251 9,880
Interest expense 7,110 1,189
---------- ----------
109,437 78,790
---------- ----------
Income (loss) before income taxes 10,038 (2,711)
Income taxes (recovery) (9) -
---------- ----------
Net income (loss) 10,047 (2,711)
Retained earnings, beginning of period 59,224 98,167
Dividend - (834)
---------- ----------
Retained earnings, end of period $ 69,271 $ 94,622
========== ==========
Earnings (loss) per share
Basic $ 0.60 $ (0.17)
========== ==========
Diluted $ 0.59 $ (0.17)
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
FORM 10-Q
QUARTERLY REPORT - PAGE 4
<PAGE> 5
MERCER INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
For Three Months Ended June 30, 2000 and 1999
(Unaudited)
(dollars in thousands, except for earnings per share)
<TABLE>
<CAPTION>
2000 1999
---------- ----------
<S> <C> <C>
Revenues
Sales $ 59,575 $ 35,854
Other 4,140 (854)
---------- ----------
63,715 35,000
Expenses
Cost of sales 48,184 32,290
General and administrative 3,563 4,892
Interest expense 2,978 661
---------- ----------
54,725 37,843
---------- ----------
Income (loss) before income taxes 8,990 (2,843)
Income taxes 14 -
---------- ----------
Net income (loss) 8,976 (2,843)
Retained earnings, beginning of period 60,295 98,299
Dividend - (834)
---------- ----------
Retained earnings, end of period $ 69,271 $ 94,622
========== ==========
Earnings (loss) per share
Basic $ 0.54 $ (0.17)
========== ==========
Diluted $ 0.52 $ (0.17)
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
FORM 10-Q
QUARTERLY REPORT - PAGE 5
<PAGE> 6
MERCER INTERNATIONAL INC.
STATEMENTS OF COMPREHENSIVE INCOME
For Six Months Ended June 30, 2000 and 1999
(Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
2000 1999
---------- ----------
<S> <C> <C>
Net income (loss) $ 10,047 $ (2,711)
Other comprehensive (loss) income:
Foreign currency translation adjustments (6,048) (18,421)
Unrealized (loss) gain on securities (622) 3,080
---------- ----------
Other comprehensive loss (6,670) (15,341)
---------- ----------
Total comprehensive gain (loss) $ 3,377 $ (18,052)
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
FORM 10-Q
QUARTERLY REPORT - PAGE 6
<PAGE> 7
MERCER INTERNATIONAL INC.
STATEMENTS OF COMPREHENSIVE INCOME
For Three Months Ended June 30, 2000 and 1999
(Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
2000 1999
---------- ----------
<S> <C> <C>
Net income (loss) $ 8,976 $ (2,843)
Other comprehensive (loss) income:
Foreign currency translation adjustments (196) (6,307)
Unrealized (loss) gain on securities (607) 1,967
---------- ----------
Other comprehensive loss (803) (4,340)
---------- ----------
Total comprehensive gain (loss) $ 8,173 $ (7,183)
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
FORM 10-Q
QUARTERLY REPORT - PAGE 7
<PAGE> 8
MERCER INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For Six Months Ended June 30, 2000 and 1999
(Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
2000 1999
---------- ----------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) $ 10,047 $ (2,711)
Adjustments to reconcile net income (loss)
from operations to cash
Depreciation and amortization 13,491 6,394
Non-cash asset acquisitions - (265)
---------- ----------
23,538 3,418
Changes in current assets and liabilities
Investments (14,270) 3,917
Inventories 2,180 819
Receivables 1,437 (16,482)
Accounts payable and accrued expenses 2,531 (1,636)
Other 20 (3,002)
---------- ----------
Net cash provided by (used in) operating
activities 15,436 (12,966)
Cash Flows from Investing Activities:
Purchase of fixed assets, net of investment
grants 36,308 (112,970)
Decrease in notes receivable 10 -
---------- ----------
Net cash provided by (used in) investing
activities 36,318 (112,970)
Cash Flows from Financing Activities:
Increase in indebtedness 5,888 72,895
Decrease in indebtedness (1,139) (714)
Payment of dividend - (834)
(Decrease) increase in pulp mill conversion
costs payable (49,264) 9,063
---------- ----------
Net cash (used in) provided by financing
activities (44,515) 80,410
Effect of exchange rate changes on cash and
cash equivalents (993) (4,003)
---------- ----------
Net increase (decrease) in cash and cash
equivalents 6,246 (49,529)
Cash and cash equivalents, beginning of period 1,722 53,250
---------- ----------
Cash and cash equivalents, end of period $ 7,968 $ 3,721
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
FORM 10-Q
QUARTERLY REPORT - PAGE 8
<PAGE> 9
MERCER INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR SIX MONTHS ENDED JUNE 30, 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
16,715,399 and 16,103,017 for the six months ended June 30, 2000 and 1999,
respectively, and 16,715,399 and 16,309,869 for the three months ended
June 30, 2000 and 1999, respectively. The weighted average number of shares
outstanding for the purposes of calculating diluted earnings per share was
17,101,499 and 16,142,561 for the six months ended June 30, 2000 and 1999,
respectively, and 17,210,116 and 16,322,920 for the three months ended
June 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 $9.1
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 six months and three months ended June 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 13.4% against the deutschmark in the six months ended June
30, 2000, compared to the same period of 1999, and by approximately 13.1%
in the three months ended June 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 - Six Months Ended June 30, 2000
The following table sets forth selected sales data for the Company for the
periods indicated:
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------------
2000 1999
---------- ----------
(unaudited)
(in thousands)
<S> <C> <C>
Sales by Product Class
Packaging papers $ 8,758 $ 8,898
Specialty papers 16,860 15,011
Printing papers 19,100 19,149
Pulp 70,100 31,672
---------- ----------
Total(1) $ 114,818 $ 74,730
========== ==========
Sales by Geographic Area
Germany $ 46,952 $ 38,502
European Union(2) 41,295 32,014
Other 26,571 4,214
---------- ----------
Total $ 114,818 $ 74,730
========== ==========
Sales by Volume (tonnes)
Packaging papers 29,111 34,987
Specialty papers 21,056 18,037
Printing papers 27,853 28,464
Pulp 119,252 74,454
---------- ----------
Total 197,272 155,942
========== ==========
--------------------
(1) Excluding intercompany sales.
(2) Not including Germany.
</TABLE>
FORM 10-Q
QUARTERLY REPORT - PAGE 10
<PAGE> 11
In the six months ended June 30, 2000, revenues increased by approximately
57.0% to $119.5 million from $76.1 million in the comparative period of
1999, primarily as a result of increased pulp sales resulting from the
ramping-up of production and the conversion of production to kraft pulp at
the Company's pulp mill. In the six months ended June 30, 2000, pulp and
paper revenues increased by approximately 53.6% from the comparable period
of 1999, with pulp sales increasing by approximately 121.3%. 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 half of 2000, the
pulp mill ramped up production of kraft pulp, and by June 30, 2000 was
operating at in excess of 95% of capacity.
In the six months ended June 30, 2000, kraft pulp sales continued to
benefit from 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 $670 per tonne during the second quarter
of 2000 and approximately $710 per tonne effective July 1, 2000. Pulp
sales in the six months ended June 30, 2000 increased to $70.1 million
from $31.7 million in the comparable period of 1999.
In the first half of 2000, sales of specialty papers increased as a result
of increased demand, while sales of packaging and printing papers declined
marginally, compared to the first half of 1999. Overall, paper sales in
the six months ended June 30, 2000 increased to $44.7 million from $43.1
million in the comparable period of 1999. On average, paper prices
realized by the Company in the six months ended June 30, 2000 increased by
approximately 8.5% compared to the same period in 1999.
Expenses increased to $109.4 million in the six months ended June 30, 2000
from $78.8 million in the comparable period of 1999, primarily as a result
of higher sales volumes. On average, the Company's fibre costs for pulp
production in the six months ended June 30, 2000 increased by
approximately 7.9% compared to the same period in 1999. Prices for waste
paper, which comprises approximately 80% of the fibre for the Company's
paper mills, increased by approximately 161.9% in the six months ended
June 30, 2000, compared to the same period of 1999. General and
administrative expenses were $5.3 million in the six months ended June
30, 2000, compared to $9.9 million in the comparable period of 1999.
Interest expense in the six months ended June 30, 2000 increased to $7.1
million from $1.2 million in the comparable period of 1999, primarily as a
result of increased indebtedness during the current period resulting from
the Conversion Project. Interest costs incurred in 1999 in respect of the
Conversion Project were capitalized.
For the six months ended June 30, 2000, the Company reported net income of
$10.0 million, or $0.59 per share on a diluted basis, compared to a net
loss of $2.7 million, or $0.17 per share, in the comparable period of
1999.
FORM 10-Q
QUARTERLY REPORT - PAGE 11
<PAGE> 12
RESULTS OF OPERATIONS - Three Months Ended June 30, 2000
The following table sets forth selected sales data for the Company for the
periods indicated:
<TABLE>
<CAPTION>
Three Months Ended June 30,
---------------------------------
2000 1999
------------ ------------
(unaudited)
(in thousands)
<S> <C> <C>
Sales by Product Class
Packaging papers $ 3,553 $ 4,277
Specialty papers 8,365 6,904
Printing papers 9,843 9,133
Pulp 37,814 15,540
------------ ------------
Total(1) $ 59,575 $ 35,854
============ ============
Sales by Geographic Area
Germany $ 24,153 $ 18,606
European Union(2) 21,828 16,281
Other 13,594 967
------------ ------------
Total $ 59,575 $ 35,854
============ ============
Sales by Volume (tonnes)
Packaging papers 11,394 17,589
Specialty papers 10,398 8,562
Printing papers 14,364 14,289
Pulp 60,941 36,421
------------ ------------
Total 97,097 76,861
============ ============
--------------------
(1) Excluding intercompany sales.
(2) Not including Germany.
</TABLE>
In the three months ended June 30, 2000, revenues increased by
approximately 82.0% to $63.7 million from $35.0 million in the comparative
period of 1999, primarily as a result of increased pulp sales resulting
from the ramping-up of production and the conversion of production to
kraft pulp at the Company's pulp mill. In the three months ended June 30,
2000, pulp and paper revenues increased by approximately 66.2% from the
comparable period of 1999, with pulp sales increasing by approximately
143.3%.
In the three months ended June 30, 2000, kraft pulp sales continued to
benefit from increased demand and low producer inventories. List prices
for kraft pulp in Europe increased from approximately $630 per tonne
during the first quarter of 2000 to approximately $670 per tonne during
the second quarter of 2000 and approximately $710 per tonne effective July
1, 2000. Pulp sales in the three months ended June 30, 2000 increased to
$37.8 million from $15.5 million in the comparable period of 1999.
FORM 10-Q
QUARTERLY REPORT - PAGE 12
<PAGE> 13
In the three months ended June 30, 2000, sales of specialty and printing
papers increased as a result of increased demand, while sales of packaging
papers declined, compared to the three months ended June 30, 1999.
Overall, paper sales in the three months ended June 30, 2000 increased to
$21.8 million from $20.3 million in the comparable period of 1999. On
average, paper prices realized by the Company in the three months ended
June 30, 2000 increased by approximately 19.8% compared to the same period
in 1999.
Expenses increased to $54.7 million in the three months ended June 30,
2000 from $37.8 million in the comparable period of 1999, primarily as a
result of higher sales volumes. On average, the Company's fibre costs for
pulp production in the three months ended June 30, 2000 increased by
approximately 6.7% compared to the same period in 1999. Prices for waste
paper, which comprises approximately 80% of the fibre for the Company's
paper mills, increased by approximately 267.1% in the three months ended
June 30, 2000, compared to the same period of 1999. General and
administrative expenses were $3.6 million in the three months ended
June 30, 2000, compared to $4.9 million in the comparable period of 1999.
Interest expense in the three months ended June 30, 2000 increased to $3.0
million from $0.7 million in the comparable period of 1999, primarily as a
result of increased indebtedness during the current period resulting from
the Conversion Project. Interest costs incurred in 1999 in respect of the
Conversion Project were capitalized.
For the three months ended June 30, 2000, the Company reported net income
of $9.0 million, or $0.52 per share on a diluted basis, compared to a net
loss of $2.8 million, or $0.17 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
June 30, 2000 December 31, 1999
------------- -----------------
(unaudited)
(in thousands)
<S> <C> <C>
Financial Position
Working capital $ 34,845 $ (47,040)
Total assets 399,509 455,845
Long-term government debt - 5,490
Long-term debt - other 233,402 227,673
</TABLE>
At June 30, 2000, the Company's cash and cash equivalents totalled $8.0
million, a net increase of $6.2 million from $1.7 million at December 31,
1999. At June 30, 2000, the Company had short-term trading securities
totalling $19.6 million, compared to $5.4 million at December 31, 1999.
FORM 10-Q
QUARTERLY REPORT - PAGE 13
<PAGE> 14
Operating Activities
Operating activities provided cash of $15.4 million in the six months
ended June 30, 2000, compared to using cash of $13.0 million in the same
period in 1999. An increase in accounts payable and accrued expenses
provided cash of $2.5 million in the six months ended June 30, 2000,
compared to a decrease in accounts payable and accrued expenses using cash
of $1.6 million in the six months ended June 30, 1999. A decrease in
receivables provided cash of $1.4 million in the current period, compared
to an increase in receivables using cash of $16.5 million in the
comparative period of 1999. Lower inventories provided cash of $2.2
million in the six months ended June 30, 2000, compared to $0.8 million in
the six months ended June 30, 1999. Net purchases of investment securities
used cash of $14.3 million in the six months ended June 30, 2000, compared
to net sales of investment securities providing cash of $3.9 million in
the comparative period of 1999.
Investing Activities
Investing activities in the six months ended June 30, 2000 provided cash
of $36.3 million, consisting primarily of the receipt of governmental
grants of $52.6 million in connection with the Conversion Project, compared
to using cash of $113.0 million in the six months ended June 30, 1999.
The Company completed the Conversion Project in late 1999. In the six
months ended June 30, 2000, the Company incurred $14.0 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.
Effective June 1, 2000, the Company sold its Trebsen Facility for
approximately $9.1 million plus an amount equal to the net working capital
associated with the Trebsen Facility. For further details regarding the
sale of the Trebsen Facility, see the Company's Form 8-K dated June 21,
2000.
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. Currently the
investment required to maintain the Company's other three paper mills has
not enhanced the competitive position of any one mill and has had a
dilutive effect on the Company's assets.
Capital expenditures to upgrade the Company's paper mills used cash of
approximately $2.5 million in the six months ended June 30, 2000,
including approximately $1.3 million to complete the installation of a new
paper machine drive at the Company's Fahrbrucke paper mill.
Financing Activities
Financing activities used cash of $44.5 million in the six months ended
June 30, 2000, primarily as a result of payments of accounts payable
associated with the Conversion Project. Financing activities provided cash
of $80.4 million in the six months ended June 30, 1999.
FORM 10-Q
QUARTERLY REPORT - PAGE 14
<PAGE> 15
The depreciation of the deutschmark against the U.S. dollar in the six
months ended June 30, 2000 resulted in an unrealized foreign exchange
translation loss of $1.0 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 will apply approximately $5.2 million of the proceeds from the
sale of the Trebsen Facility to repay and discharge two governmental loans
associated with the Trebsen Facility.
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
June 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.
The Company translates foreign assets and liabilities into U.S. dollars at
the rate of exchange on the balance sheet date. Revenues and expenses are
translated at the average rate of exchange prevailing during the period.
Unrealized gains or losses from these translations are recorded as
shareholders' equity on the Company's balance sheet and do not affect the
net earnings of the Company.
Since substantially all of the Company's revenues are received in
deutschmarks and euros, the financial position of the Company for any
given period, when reported in U.S. dollars, can be significantly affected
by the exchange rates prevailing during that period. In the six months
ended June 30, 2000, the depreciation of the deutschmark against the U.S.
dollar resulted in a net $6.0 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 $56.0 million at June
30, 2000.
FORM 10-Q
QUARTERLY REPORT - PAGE 15
<PAGE> 16
As both the Company's principal sources of revenues and expenses are in
deutschmarks or euros, the Company does not currently enter into any
currency hedging arrangements for exchange rate fluctuations.
The average and period ending exchange rates for the deutschmark to the
U.S. dollar for the periods indicated are as follows:
<TABLE>
<CAPTION>
Quarter Ended Quarter Ended
June 30, 2000 June 30, 1999
-------------------------- --------------------------
Period End Period Average Period End Period Average
---------- -------------- ---------- --------------
<S> <C> <C> <C> <C>
Rate of Exchange
Deutschmark 2.0486 2.0941 1.8989 1.8513
</TABLE>
Based upon the period average exchange rate in the six months ended June
30, 2000, the U.S. dollar increased by approximately 4.9% 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.
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 at the end of 2000 or 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.
FORM 10-Q
QUARTERLY REPORT - PAGE 16
<PAGE> 17
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 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description
------- -----------
27 Article 5 - Financial Data Schedule for the 2nd Quarter
2000 Form 10-Q.
(b) Reports on Form 8-K
The Company filed the following report on Form 8-K with respect to the
indicated items during the three months ended June 30, 2000:
Form 8-K dated June 21, 2000:
Item 5. Other Events
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: August 11, 2000
FORM 10-Q
QUARTERLY REPORT - PAGE 19
<PAGE> 20
EXHIBIT INDEX
Exhibit
Number Description
------- -----------
27 Article 5 - Financial Data Schedule for the 2nd Quarter 2000
Form 10-Q.
