-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Vg9l3RuV3tUxKLLMKmVtmIDhHAEMLd3n+V3Gb5OpE8Qbjg3DKeWY6ITs7mR6rC56 Q0cqgOI8km+r83eMlxazAQ== 0001012410-98-000052.txt : 19981118 0001012410-98-000052.hdr.sgml : 19981118 ACCESSION NUMBER: 0001012410-98-000052 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MERCER INTERNATIONAL INC CENTRAL INDEX KEY: 0000075659 STANDARD INDUSTRIAL CLASSIFICATION: PAPER MILLS [2621] IRS NUMBER: 916087550 STATE OF INCORPORATION: WA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-09409 FILM NUMBER: 98751846 BUSINESS ADDRESS: STREET 1: BRNDSCHENKE STR 64 CITY: ZURICH SWITZERLAND C STATE: V6 BUSINESS PHONE: 4112017710 MAIL ADDRESS: STREET 1: 400 BURRARD ST STE 1250 STREET 2: VANCOUVER PROVINCE CITY: B C V6C 3A6 10-Q 1 MERCER INTERNATIONAL INC. 3RD QTR 1998 FORM 10-Q 1 ============================================================================== UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1998 [ ] 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 15,395,722 shares of beneficial interest outstanding as at November 10, 1998. ============================================================================== 2 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. PART I. FINANCIAL INFORMATION --------------------- ITEM 1. FINANCIAL STATEMENTS MERCER INTERNATIONAL INC. CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 (Unaudited) FORM 10-Q QUARTERLY REPORT - PAGE 2 3 MERCER INTERNATIONAL INC. CONSOLIDATED BALANCE SHEETS As at September 30, 1998 and December 31, 1997 (Unaudited) (dollars in thousands)
September 30, December 31, 1998 1997 ------------- ------------ ASSETS Current Assets Cash and cash equivalents $ 39,682 $ 4,414 Investments 15,447 56,285 Receivables 41,293 22,329 Inventories 22,559 15,799 Other 2,084 1,557 ----------- ----------- Total current assets 121,065 100,384 Long-Term Assets Properties 136,120 87,806 Investments 11,646 4,118 Notes receivable 10,150 7,000 Deferred income tax assets 11,759 10,986 ----------- ----------- 169,675 109,910 ----------- ----------- $ 290,740 $ 210,294 =========== =========== LIABILITIES Current Liabilities Accounts payable and accrued expenses $ 54,870 $ 50,172 Notes payable 1,568 3,252 Debt 2,064 4,329 ----------- ----------- Total current liabilities 58,502 57,753 Long-Term Liabilities Debt 73,988 15,039 Other 1,998 2,027 ----------- ----------- 75,986 17,066 ----------- ----------- Total liabilities 134,488 74,819 SHAREHOLDERS' EQUITY Shares of beneficial interest 91,648 88,603 Cumulative translation adjustment (29,241) (41,376) Net unrealized loss on investments valuation (10,346) (1,517) Retained earnings 104,191 89,765 ----------- ----------- 156,252 135,475 ----------- ----------- $ 290,740 $ 210,294 =========== ===========
The accompanying notes are an integral part of these financial statements. FORM 10-Q QUARTERLY REPORT - PAGE 3 4 MERCER INTERNATIONAL INC. CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS For Nine Months Ended September 30, 1998 and 1997 (Unaudited) (dollars in thousands, except for earnings per share)
1998 1997 ------------ ------------ Revenues Sales $ 132,036 $ 130,234 Investments 8,470 8,166 ----------- ----------- 140,506 138,400 Expenses Cost of sales 105,141 106,587 General and administrative 17,532 17,574 Interest expense 2,720 2,149 ----------- ----------- 125,393 126,310 ----------- ----------- Income from operations before income taxes 15,113 12,090 Income taxes 77 41 ----------- ----------- Net income 15,036 12,049 Retained earnings, beginning of period 89,765 122,838 Dividend (610) (450) ----------- ----------- Retained earnings, end of period $ 104,191 $ 134,437 =========== =========== Earnings per share Basic $ 0.98 $ 0.80 =========== =========== Diluted $ 0.98 $ 0.80 =========== ===========
The accompanying notes are an integral part of these financial statements. FORM 10-Q QUARTERLY REPORT - PAGE 4 5 MERCER INTERNATIONAL INC. CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS For Three Months Ended September 30, 1998 and 1997 (Unaudited) (dollars in thousands, except for earnings per share)
1998 1997 ------------ ------------ Revenues Sales $ 36,054 $ 45,515 Investments 3,648 2,791 ----------- ----------- 39,702 48,306 Expenses Cost of sales 28,971 37,328 General and administrative 5,511 5,465 Interest expense 947 746 ----------- ----------- 35,429 43,539 ----------- ----------- Income from operations before income taxes 4,273 4,767 Income taxes 34 13 ----------- ----------- Net income 4,239 4,754 Retained earnings, beginning of period 99,952 129,683 ----------- ----------- Retained earnings, end of period $ 104,191 $ 134,437 =========== =========== Earnings per share Basic $ 0.28 $ 0.32 =========== =========== Diluted $ 0.28 $ 0.31 =========== ===========
The accompanying notes are an integral part of these financial statements. FORM 10-Q QUARTERLY REPORT - PAGE 5 6 MERCER INTERNATIONAL INC. STATEMENT OF COMPREHENSIVE INCOME For Nine Months Ended September 30, 1998 and 1997 (Unaudited) (dollars in thousands)
1998 1997 ------------ ------------ Net income $ 15,036 $ 12,049 Other comprehensive income (loss): Foreign currency translation adjustments 12,135 (26,206) Unrealised (loss) gain on securities (8,829) 732 ----------- ----------- Other comprehensive income (loss) 3,306 (25,474) ----------- ----------- Total comprehensive income (loss) $ 18,342 $ (13,425) =========== ===========
The accompanying notes are an integral part of these financial statements. FORM 10-Q QUARTERLY REPORT - PAGE 6 7 MERCER INTERNATIONAL INC. STATEMENT OF COMPREHENSIVE INCOME For Three Months Ended September 30, 1998 and 1997 (Unaudited) (dollars in thousands)
1998 1997 ------------ ------------ Net income $ 4,239 $ 4,754 Other comprehensive income (loss): Foreign currency translation adjustments 10,841 (2,516) Unrealised (loss) gain on securities (3,758) 192 ----------- ----------- Other comprehensive income (loss) 7,083 (2,324) ----------- ----------- Total comprehensive income $ 11,322 $ 2,430 =========== ===========
The accompanying notes are an integral part of these financial statements. FORM 10-Q QUARTERLY REPORT - PAGE 7 8 MERCER INTERNATIONAL INC. CONSOLIDATED STATEMENTS OF CASH FLOWS For Nine Months Ended September 30, 1998 and 1997 (Unaudited) (dollars in thousands)
1998 1997 ------------ ------------ Cash Flows from Operating Activities: Net income from continuing operations $ 15,036 $ 12,049 Adjustments to reconcile net income from continuing operations to cash Depreciation and amortization 10,054 8,880 Non-cash asset acquisitions (7,634) (11,670) ----------- ----------- 17,456 9,259 Changes in current assets and liabilities Investments 23,091 2,672 Inventories (5,162) 3,118 Receivables (19,153) (2,319) Accounts payable and accrued expenses 10,407 (6,314) Other 49 112 ----------- ----------- Net cash provided by operating activities 26,688 6,528 Cash Flows from Investing Activities: Increase in notes receivable, net (4,233) - Purchase of fixed assets (40,973) (8,496) Other 6 26 ----------- ----------- Net cash used in investing activities (45,200) (8,470) Cash Flows from Financing Activities: Increase in bank indebtedness 55,554 6,471 Decrease in bank indebtedness (5,771) (8,854) Net proceeds on issuance of shares of beneficial interest 3,045 487 Payment of dividend (610) (450) Other (172) - ----------- ----------- Net cash provided by (used in) financing activities 52,046 (2,346) Effect of exchange rate changes on cash and cash equivalents 1,734 (570) ----------- ----------- Net increase (decrease) in cash and cash equivalents 35,268 (4,858) Cash and cash equivalents, beginning of period 4,414 9,967 ----------- ----------- Cash and cash equivalents, end of period $ 39,682 $ 5,109 =========== ===========
The accompanying notes are an integral part of these financial statements. FORM 10-Q QUARTERLY REPORT - PAGE 8 9 MERCER INTERNATIONAL INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR NINE MONTHS ENDED SEPTEMBER 30, 1998 (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, 1997. 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 15,338,801 and 15,086,761 for the nine months ended September 30, 1998 and 1997, respectively, and 15,352,602 and 15,111,084 for the three months ended September 30, 1998 and 1997, respectively. FORM 10-Q QUARTERLY REPORT - PAGE 9 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Mercer International Inc. is a pulp and paper company headquartered in Zurich, Switzerland and its operations are primarily located in Germany. 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. 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, 1998, respectively, should be read in conjunction with the consolidated financial statements and related notes included elsewhere herein. RESULTS OF OPERATIONS - Nine Months Ended September 30, 1998 - ------------------------------------------------------------ In the nine months ended September 30, 1998, revenues increased to $140.5 million from $138.4 million in the same period in 1997, as higher product prices offset a decrease in sales volumes. As the Company's products are principally sold in deutschmarks, the depreciation of the deutschmark against the U.S. dollar by approximately 3.7% in the nine months ended September 30, 1998, compared to the same period in 1997, resulted in lower prices in U.S. dollar terms for the Company's products. Expenses decreased to $125.4 million in the nine months ended September 30, 1998, compared to $126.3 million in the same period of 1997, primarily as a result of a decrease in sales volumes for the Company's products in the current period. General and administrative expenses were $17.5 million in the nine months ended September 30, 1998, compared to $17.6 million in the comparative period of 1997. Interest expense increased to $2.7 million in the nine months ended September 30, 1998 from $2.1 million in the nine months ended September 30, 1997, as a result of increased indebtedness during the current period. In the nine months ended September 30, 1998, net income was $15.0 million or $0.98 per share, compared to $12.0 million or $0.80 per share for the nine months ended September 30, 1997. Selected sales data for the Company for the nine months ended September 30, 1998 and 1997, respectively, is as follows:
Nine Months Ended September 30, ------------------------------- 1998 1997 -------------- -------------- (dollars in thousands) Sales by Product Class - ---------------------- Packaging papers(1) $ 20,339 $ 22,483 Specialty papers 23,573 21,419 Printing papers 31,440 26,744 Pulp 54,177 56,706 Other 2,507 2,882 ------------ ------------ Total(2) $ 132,036 $ 130,234 ============ ============
FORM 10-Q QUARTERLY REPORT - PAGE 10 11
Nine Months Ended September 30, ------------------------------- 1998 1997 -------------- -------------- (dollars in thousands) Sales by Geographic Area - ------------------------ Germany $ 71,973 $ 71,125 European Union(3) 51,321 46,933 Other 8,742 12,176 ------------ ------------ Total $ 132,036 $ 130,234 ============ ============ (tonnes) Sales by Volume - --------------- Packaging papers(1) 75,309 84,099 Specialty papers 28,300 27,092 Printing papers 43,482 40,647 Pulp 108,975 125,571 ------------ ------------ Total 256,066 277,409 ============ ============ - ------------------------- (1) The Company sold its packaging paper mill in Greitz during the nine months ended September 30, 1998. Paper sales from the Greitz paper mill for the third quarter of 1998 were not included in the Company's results of operations for the nine months ended September 30, 1998. The Greitz paper mill sold 6,568 tonnes of packaging paper for $1.9 million in revenues in the third quarter of 1998. (2) Excluding intercompany sales. (3) Not including Germany.
Pulp and paper markets were generally stable in the current period with overall product prices 10.2% higher than in the comparative period of 1997. Sales volumes were 7.7% lower in the first nine months of 1998, compared to the same period in 1997. In the nine months ended September 30, 1998, pulp prices, on average, were up approximately 10.1% compared to the same period of 1997, as European pulp inventories were reduced. Pulp sales decreased by 4.5% to $54.2 million in the nine months ended September 30, 1998 from $56.7 million in the comparative period of 1997, primarily as a result of a sales volume decrease of 13.2%. Paper prices, on average, were up approximately 10.1% in the nine months ended September 30, 1998, compared to the same period of 1997, primarily as a result of increased demand for specialty and printing papers. Paper sales in the nine months ended September 30, 1998 increased by 6.7% to $75.4 million from $70.6 million in the nine months ended September 30, 1997, on a volume decrease of 3.1% and an average price increase of 10.1%. In the nine months ended September 30, 1998, sales volumes for packaging papers decreased by 10.5% and sales volumes for specialty and printing papers increased by 4.5% and 7.0%, respectively, compared to the nine months ended September 30, 1997. Improved pulp and paper prices in the nine months ended September 30, 1998 were partially offset during the period by increased fibre costs for wood chips and pulp wood used to produce pulp and increased prices for pulp used to produce paper, as compared to the same period in 1997. As a result, during the current period the Company changed its fibre input mix to use more lower- grade materials, which partially reduced the effect of higher fibre costs. On average, the Company's fibre FORM 10-Q QUARTERLY REPORT - PAGE 11 12 costs for pulp production were up approximately 13.8% in the nine months ended September 30, 1998, compared to the same period in 1997, but remained among the lowest in Europe. Recycled fibre costs were down approximately 5.8% in the nine months ended September 30, 1998, compared to the same period in 1997. RESULTS OF OPERATIONS - Three Months Ended September 30, 1998 - ------------------------------------------------------------- In the three months ended September 30, 1998, revenues decreased to $39.7 million from $48.3 million in the same period in 1997, primarily as a result of a decrease in sales volumes for the Company's products in the current period. However, as the Company's products are principally sold in deutschmarks, the appreciation of the deutschmark against the U.S. dollar by approximately 2.6% in the three months ended September 30, 1998, compared to the same period in 1997, resulted in higher prices in U.S. dollar terms for the Company's products. Expenses decreased to $35.4 million in the three months ended September 30, 1998, compared to $43.5 million in the same period of 1997, primarily as a result of lower sales volumes. General and administrative expenses were $5.5 million in the three months ended September 30, 1998 and 1997, respectively. Interest expense increased to $0.9 million in the three months ended September 30, 1998 from $0.7 million in the three months ended September 30, 1997, as a result of increased indebtedness during the current period. In the three months ended September 30, 1998, net income was $4.2 million or $0.28 per share, compared to $4.8 million or $0.32 per share on a basic basis for the three months ended September 30, 1997. Selected sales data for the Company for the three months ended September 30, 1998 and 1997, respectively, is as follows:
Quarter Ended September 30, --------------------------- 1998 1997 ------------ ------------ (dollars in thousands) Sales by Product Class - ---------------------- Packaging papers(1) $ 4,492 $ 7,469 Specialty papers 7,428 7,089 Printing papers 10,494 8,877 Pulp 13,794 20,924 Other (154) 1,156 ---------- ---------- Total(2) $ 36,054 $ 45,515 ========== ==========
FORM 10-Q QUARTERLY REPORT - PAGE 12 13
Quarter Ended September 30, --------------------------- 1998 1997 ------------ ------------ (dollars in thousands) Sales by Geographic Area - ------------------------ Germany $ 19,700 $ 23,064 European Union(3) 12,755 16,800 Other 3,599 5,651 ---------- ---------- Total $ 36,054 $ 45,515 ========== ========== (tonnes) Sales by Volume - --------------- Packaging papers(1) 16,349 28,499 Specialty papers 8,724 9,360 Printing papers 14,420 14,099 Pulp 26,991 43,603 ---------- ---------- Total 66,484 95,561 ========== ========== - ------------------------- (1) The Company sold its packaging paper mill in Greitz during the nine months ended September 30, 1998. Paper sales from the Greitz paper mill for the third quarter of 1998 were not included in the Company's results of operations for the three months ended September 30, 1998. The Greitz paper mill sold 6,568 tonnes of packaging paper for $1.9 million in revenues in the third quarter of 1998. (2) Excluding intercompany sales. (3) Not including Germany.
While product prices were higher in the current period compared to the same period of 1997, product demand was materially weaker. As a result, sales volumes were 30.4% lower in the three months ended September 30, 1998, compared to the same period of 1997. Paper prices remained relatively stable during the current period, but the weakness in demand eroded pulp prices towards the end of the current period. In the three months ended September 30, 1998, pulp prices increased, on average, by approximately 6.5% compared to the three months ended September 30, 1997, as European pulp inventories were reduced. The Company's pulp sales decreased by 34.1% to $13.8 million in the three months ended September 30, 1998 from $20.9 million in the comparative period of 1997, on a volume decrease of 38.1% and an average price increase of 6.5%. Paper sales in the three months ended September 30, 1998 decreased by 4.4% to $22.4 million from $23.4 million in the three months ended September 30, 1997, on a volume decrease of 24.0% and an average price increase of 25.8%. In the three months ended September 30, 1998, sales volume for packaging and specialty papers decreased by 42.6% and 6.8%, respectively, and sales volume for printing papers increased by 2.3%, compared to the three months ended September 30, 1997. Improvements in prices in the current period were partially offset by increased fibre costs, as compared to the same period in 1997. During the current period, the Company changed its fibre input mix to use more lower- grade materials. On average, the Company's pulp fibre costs were up approximately 14.2% in the three months ended September 30, 1998, compared to the same period FORM 10-Q QUARTERLY REPORT - PAGE 13 14 in 1997. Recycled fibre costs were down approximately 5.5% in the three months ended September 30, 1998, compared to the same period in 1997. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- The following table is a summary of selected financial information concerning the Company for the periods indicated:
As at As at September 30, 1998 December 31, 1997 ------------------ ----------------- (in thousands) Financial Position - ------------------ Working capital $ 62,563 $ 42,631 Total assets 290,740 210,294 Long-term government debt 7,588 8,338 Long-term debt - other 66,400 6,701
At September 30, 1998, the Company's cash and cash equivalents totalled $39.7 million, a net increase of $35.3 million from $4.4 million at December 31, 1997. At September 30, 1998, the Company had short-term trading securities totalling $15.4 million, compared to $56.3 million at December 31, 1997. Operating Activities - -------------------- Cash provided by operating activities was $26.7 million in the nine months ended September 30, 1998, compared to $6.5 million in the nine months ended September 30, 1997. A decrease in investments provided cash of $23.1 million in the nine months ended September 30, 1998, compared to $2.7 million in the nine months ended September 30, 1997. An increase in accounts payable and accrued liabilities provided cash of $10.4 million in the nine months ended September 30, 1998, compared to a decrease in same using cash of $6.3 million in the nine months ended September 30, 1997. An increase in receivables and inventories used cash of $19.2 million and $5.2 million, respectively, in the current period. The Company expects to generate sufficient cash flow from operations to meet its working capital requirements. Investing Activities - -------------------- Investing activities in the nine months ended September 30, 1998 used cash of $45.2 million, consisting primarily of capital expenditures for upgrades to the Company's manufacturing plants, compared to $8.5 million in the nine months ended September 30, 1997. The Company expects gross capital expenditures in 1998, excluding the conversion of its pulp mill from the production of sulphite to kraft pulp, to be approximately $5.5 million, which will be funded from cash, cash flow from operations and non-refundable government grants. In the first nine months of 1998, gross capital expenditures (excluding costs in respect of the pulp mill conversion project) were $2.2 million, compared to approximately $8.9 million in the same period of 1997. FORM 10-Q QUARTERLY REPORT - PAGE 14 15 The Company commenced the conversion of its pulp mill from the production of sulphite pulp to kraft pulp in the second quarter of 1998. The Company's gross capital expenditures in respect of the conversion project to September 30, 1998 were $61.1 million. The conversion is, among other things, expected to increase the capacity of the pulp mill from 160,000 tonnes to 280,000 tonnes per annum and reduce the mill's emissions of sulphur dioxides and effluent substantially. The estimated cost for the conversion is approximately $385 million, which is being financed by a 15 year term loan in the aggregate amount of up to approximately $282 million from two merging German banks, non-refundable governmental grants of up to approximately $97.5 million, governmental assistance and guarantees for long-term project financing, and an additional equity investment by the Company (the "Financing"). See the Company's Form 8-K dated July 16, 1998 for further details with respect to the Financing. The Company estimates that, subject to receipt of all necessary permits and consents in the anticipated time frame, capital expenditures in respect of the conversion project in 1998 will be approximately $100 million. The conversion project is expected to be completed at or about the end of 1999. In the nine months ended September 30, 1998, the conversion project was on plan. The Company received its initial financing advance on time and has entered into contracts for the purchase of equipment to be utilized upon the conversion. Currently, the Company has entered into contracts in excess of 60% of the capital budget for the conversion and the Company does not currently anticipate any significant delays or cost overruns with respect to the conversion project. In addition, the Company has commenced preparations for the installation of certain vital equipment at the pulp mill relating to the conversion. Much of the basic civil engineering work with respect to the conversion, such as the laying of foundations, is expected to be completed by the end of November 1998. It is currently anticipated that the conversion will be completed by the third quarter of 1999. As part of the restructuring of the Company's paper operations, the Company completed the sale of its Raschau packaging paper facility during the period and completed the sale of its Greitz paper mill in early September 1998. Financing Activities - -------------------- Cash provided by financing activities was $52.0 million in the nine months ended September 30, 1998, compared to cash used by financing activities of $2.3 million in the nine months ended September 30, 1997. A net increase in bank indebtedness, including the borrowings in connection with the Company's pulp mill conversion project, provided cash of $49.8 million in the nine months ended September 30, 1998, compared to a net decrease in bank indebtedness using cash of $2.4 million in the same period of 1997. The Company issued shares for net proceeds of $3.0 million in the nine months ended September 30, 1998, compared to $0.5 million in the nine months ended September 30, 1997. The Company paid a cash dividend of $0.6 million, or $0.04 per share, in the current period of 1998. In the nine months ended September 30, 1998, the Company reported an unrealized foreign exchange translation gain of $1.7 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. FORM 10-Q QUARTERLY REPORT - PAGE 15 16 Other than the Company's plan to convert the production of its pulp mill from sulphite to kraft pulp, the Company had no material commitments to acquire assets or operating businesses as at September 30, 1998. The Company anticipates that there will be acquisitions of businesses or commitments to projects in the future. To achieve its long-term goals of expanding 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. The Company's pulp and paper products are principally sold in deutschmarks and approximately 99% of the Company revenues are denominated in 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 balance sheet and do not affect the net earnings of the Company. Since substantially all of the Company's revenues are received in deutschmarks, the financial position of the Company for any given period, when reported in U.S. dollars, can be significantly affected by the exchange rate for deutschmarks prevailing during that period. In the nine months ended September 30, 1998, the Company reported a net $12.1 million foreign exchange translation gain and, as a result, the cumulative foreign exchange translation loss decreased to $29.2 million at September 30, 1998 from $41.4 million at December 31, 1997. As both the Company's principal sources of revenues and expenses are in deutschmarks, the Company does not currently enter into any currency hedging arrangements for exchange rate fluctuations. The average and period end exchange rates for the deutschmark to the U.S. dollar for the periods indicated are as follows:
Period from Quarter Ended Quarter Ended September 30 to November 10, 1998 September 30, 1998 September 30, 1997 --------------------------------- -------------------------- -------------------------- Period End Period Average Period End Period Average Period End Period Average ---------- -------------- ---------- -------------- ---------- -------------- Rate of Exchange Deutschmark 1.6873 1.6719 1.6698 1.7606 1.7670 1.8059
Based upon the period average exchange rate in the first nine months of 1998, the U.S. dollar decreased by approximately 0.5% in value against the deutschmark since December 31, 1997. FORM 10-Q QUARTERLY REPORT - PAGE 16 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 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. CYCLICAL NATURE OF BUSINESS; COMPETITIVE POSITION - ------------------------------------------------- The pulp and paper business is cyclical in nature and markets for the Company's principal products are characterized by periods of supply and demand imbalance, which in turn affects product prices. The markets for pulp and paper are highly competitive and sensitive to cyclical changes in industry capacity and in the economy, both of which can have a significant influence on selling prices and the earnings of the Company. Demand for pulp and paper products has historically been determined by the level of economic growth and has been closely tied to overall business activity. The competitive position of the Company is influenced by the availability and quality of raw materials (fibre) and its experience in relation to other producers with respect to inflation, energy, labour costs and productivity. FORM 10-Q QUARTERLY REPORT - PAGE 17 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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS As reported in the Company's Form 10-Q for the period ended June 30, 1998, in May 1998 the Company issued $12.0 million of 8% subordinated debentures maturing 2003 with non-detachable warrants entitling the holders to subscribe for up to an aggregate of 2.0 million ordinary shares, subject to a minimum, at the market price for the shares at the time of exercise. The debentures are convertible at any time prior to maturity into shares of common stock in the capital of the Company at a conversion price equal to the greater of: (i) $6.00 per share, or (ii) the average trading closing price of the shares on the NASDAQ National Market over the 10 day trading period immediately prior to the date of conversion of the debentures. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company held its annual meeting of shareholders on July 10, 1998. At the meeting, C.S. Moon and Maarten Reidel were re-elected as Class I Trustees of the Company, each for a three year term, as follows: ABSTENTIONS AND VOTES FOR VOTES WITHHELD BROKER NON-VOTES ---------- -------------- ---------------- C.S. Moon 10,546,363 35,063 - Maarten Reidel 10,546,363 35,063 - Jimmy S.H. Lee and Michel Arnulphy 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 1998 Form 10-Q. (b) Reports on Form 8-K None. FORM 10-Q QUARTERLY REPORT - PAGE 18 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/ Maarten Reidel ------------------------------------- Maarten Reidel Secretary and Chief Financial Officer Date: November 13, 1998 FORM 10-Q QUARTERLY REPORT - PAGE 19 20 EXHIBIT INDEX Exhibit Number Description - ------- ----------- 27 Article 5 - Financial Data Schedule for the 3rd Quarter 1998 Form 10-Q. EX-27 2 EXHIBIT 27 - ARTICLE 5 FINANCIAL DATA SCHEDULE
5 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. 1,000 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 39,682 15,447 41,293 0 22,559 121,065 136,120 0 290,740 58,502 73,988 0 0 91,648 64,604 290,740 132,036 140,506 105,141 125,393 0 0 2,720 15,113 77 15,036 0 0 0 15,036 0.98 0.98
-----END PRIVACY-ENHANCED MESSAGE-----