-----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, FdL4ajVwvJFv20VxBS7jli+ABeoY5j491CysXT9a2X8F6p4EYLy91tCkC8m9o86Z EhGPtl7yLjnQM8Do7Gw4ww== 0001012410-99-000057.txt : 19991117 0001012410-99-000057.hdr.sgml : 19991117 ACCESSION NUMBER: 0001012410-99-000057 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 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: 99753750 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 1999 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, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ----- ----- Commission File No.: 000-09409 MERCER INTERNATIONAL INC. (Exact name of Registrant as specified in its charter) Washington 91-6087550 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) Burglistrasse 6, Zurich, Switzerland CH 8002 (Address of principal executive offices) (Zip Code) 41(1) 201 7710 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ----- ----- The Registrant had 16,635,399 shares of beneficial interest outstanding as at November 11, 1999. ============================================================================== 2 PART I. FINANCIAL INFORMATION --------------------- ITEM 1. FINANCIAL STATEMENTS MERCER INTERNATIONAL INC. CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 (Unaudited) FORM 10-Q QUARTERLY REPORT - PAGE 2 3 MERCER INTERNATIONAL INC. CONSOLIDATED BALANCE SHEETS As at September 30, 1999 and December 31, 1998 (Unaudited) (dollars in thousands)
September 30, December 31, 1999 1998 ------------- ------------ ASSETS Current Assets Cash and cash equivalents $ 1,126 $ 53,250 Investments 9,263 12,891 Receivables 81,101 33,828 Inventories 14,810 19,540 Other 5,099 2,207 ---------- ---------- Total current assets 111,399 121,716 Long-Term Assets Cash restricted 13,604 15,000 Properties 274,851 161,012 Investments 12,400 13,626 Receivables 10,150 10,150 Deferred income tax 10,774 11,780 ---------- ---------- 321,779 211,568 ---------- ---------- $ 433,178 $ 333,284 ========== ========== LIABILITIES Current Liabilities Accounts payable and accrued expenses $ 59,388 $ 53,518 Notes payable 867 1,839 Debt 41,284 1,338 ---------- ---------- Total current liabilities 101,539 56,695 Long-Term Liabilities Debt 191,562 121,548 Other 1,834 2,022 ---------- ---------- 193,396 123,570 ---------- ---------- Total liabilities 294,935 180,265 SHAREHOLDERS' EQUITY Shares of beneficial interest 99,360 91,913 Cumulative translation adjustment (42,891) (28,663) Net unrealized loss on investments valuation (5,786) (8,398) Retained earnings 87,560 98,167 ---------- ---------- 138,243 153,019 ---------- ---------- $ 433,178 $ 333,284 ========== ==========
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, 1999 and 1998 (Unaudited) (dollars in thousands, except for earnings per share)
1999 1998 ------------ ------------ Revenues Sales $ 106,711 $ 132,036 Investments and other (116) 8,470 ---------- ---------- 106,595 140,506 Expenses Cost of sales 98,665 105,141 General and administrative 15,877 17,532 Interest expense 1,826 2,720 ---------- ---------- 116,368 125,393 ---------- ---------- Income (loss) from operations before income taxes (9,773) 15,113 Income taxes - 77 ---------- ---------- Net income (loss) (9,773) 15,036 Retained earnings, beginning of period 98,167 89,765 Dividend (834) (610) ---------- ---------- Retained earnings, end of period $ 87,560 $ 104,191 ========== ========== Earnings (loss) per share Basic $ (0.60) $ 0.98 ========== ========== Diluted $ (0.60) $ 0.98 ========== ==========
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, 1999 and 1998 (Unaudited) (dollars in thousands, except for earnings per share)
1999 1998 ------------ ------------ Revenues Sales $ 30,212 $ 36,054 Investments and other 304 3,648 ---------- ---------- 30,516 39,702 Expenses Cost of sales 30,944 28,971 General and administrative 5,997 5,511 Interest expense 637 947 ---------- ---------- 37,578 35,429 ---------- ---------- Income (loss) from operations before income taxes (7,062) 4,273 Income taxes - 34 ---------- ---------- Net income (loss) (7,062) 4,239 Retained earnings, beginning of period 94,622 99,952 ---------- ---------- Retained earnings, end of period $ 87,560 $ 104,191 ========== ========== Earnings (loss) per share Basic $ (0.42) $ 0.28 ========== ========== Diluted $ (0.42) $ 0.28 ========== ==========
The accompanying notes are an integral part of these financial statements. FORM 10-Q QUARTERLY REPORT - PAGE 5 6 MERCER INTERNATIONAL INC. STATEMENTS OF COMPREHENSIVE INCOME For Nine Months Ended September 30, 1999 and 1998 (Unaudited) (dollars in thousands)
1999 1998 ------------ ------------ Net income (loss) $ (9,773) $ 15,036 Other comprehensive income (loss): Foreign currency translation adjustments (14,228) 12,135 Unrealised gain (loss) on securities 2,612 (8,829) ---------- ---------- Other comprehensive income (loss) (11,616) 3,306 ---------- ---------- Total comprehensive income (loss) $ (21,389) $ 18,342 ========== ==========
The accompanying notes are an integral part of these financial statements. FORM 10-Q QUARTERLY REPORT - PAGE 6 7 MERCER INTERNATIONAL INC. STATEMENTS OF COMPREHENSIVE INCOME For Three Months Ended September 30, 1999 and 1998 (Unaudited) (dollars in thousands)
1999 1998 ------------ ------------ Net income (loss) $ (7,062) $ 4,239 Other comprehensive income (loss): Foreign currency translation adjustments 4,193 10,841 Unrealised loss on securities (468) (3,758) ---------- ---------- Other comprehensive income 3,725 7,083 ---------- ---------- Total comprehensive income (loss) $ (3,337) $ 11,322 ========== ==========
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, 1999 and 1998 (Unaudited) (dollars in thousands)
1999 1998 ------------ ------------ Cash Flows from Operating Activities: Net income (loss) from continuing operations $ (9,773) $ 15,036 Adjustments to reconcile net income (loss) from continuing operations to cash Depreciation and amortization 11,031 10,054 Non-cash asset acquisitions (383) (7,634) ---------- ---------- 875 17,456 Changes in current assets and liabilities Investments 5,213 23,091 Inventories 2,939 (5,162) Receivables (9,671) (19,153) Accounts payable and accrued expenses 7,384 10,407 Other (2,932) 49 ---------- ---------- Net cash provided by operating activities 3,808 26,688 Cash Flows from Investing Activities: Increase in notes receivable, net - (4,233) Proceeds from sales of available-for-sale investments 2,315 - Purchase of fixed assets (181,182) (40,973) Other 4 6 ---------- ---------- Net cash used in investing activities (178,863) (45,200) Cash Flows from Financing Activities: Increase in indebtedness 130,256 55,554 Decrease in indebtedness (1,995) (5,771) Net proceeds on issuance of shares of beneficial interest - 3,045 Payment of dividend (834) (610) Other - (172) ---------- ---------- Net cash provided by financing activities 127,427 52,046 Effect of exchange rate changes on cash and cash equivalents (4,496) 1,734 ---------- ---------- Net increase (decrease) in cash and cash equivalents (52,124) 35,268 Cash and cash equivalents, beginning of period 53,250 4,414 ---------- ---------- Cash and cash equivalents, end of period $ 1,126 $ 39,682 ========== ==========
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, 1999 (Unaudited) Note 1. Basis of Presentation - ------------------------------ The interim period consolidated financial statements contained herein include the accounts of Mercer International Inc. and its subsidiaries (the "Company"). The interim period consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the "SEC"). Certain information and footnote disclosure normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such SEC rules and regulations. The interim period consolidated financial statements should be read together with the audited consolidated financial statements and accompanying notes included in the Company's latest annual report on Form 10-K for the fiscal year ended December 31, 1998. In the opinion of the Company, the unaudited consolidated financial statements contained herein contain all adjustments necessary to present a fair statement of the results of the interim periods presented. Note 2. Earnings Per Share - --------------------------- Earnings per share is computed on the basis of the weighted average number of shares outstanding during a period after considering convertible securities, warrants and options. The weighted average number of shares outstanding for the purposes of calculating diluted earnings per share was 16,306,628 and 15,338,801 for the nine months ended September 30, 1999 and 1998, respectively, and 16,628,986 and 15,352,602 for the three months ended September 30, 1999 and 1998, respectively. FORM 10-Q QUARTERLY REPORT - PAGE 9 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Mercer International Inc. is a pulp and paper company and its operations are primarily located in Germany. The following discussion and analysis of the results of operations and financial condition of the Company for the nine and three month periods ended September 30, 1999 should be read in conjunction with the consolidated financial statements and related notes included elsewhere herein. In this document: (i) unless the context otherwise requires, the "Company" refers to Mercer International Inc. and its subsidiaries; and (ii) a "tonne" is one metric ton or 2,204.6 pounds. RESULTS OF OPERATIONS - Nine Months Ended September 30, 1999 - ------------------------------------------------------------ The following table sets forth selected sales data for the Company for the periods indicated:
Nine Months Ended September 30, ------------------------------- 1999 1998 -------------- -------------- (in thousands) Sales by Product Class - ---------------------- Packaging papers(1) $ 13,285 $ 20,339 Specialty papers 22,436 23,573 Printing papers 28,634 31,440 Pulp 39,678 54,177 Other 2,678 2,507 ---------- ---------- Total(2) $ 106,711 $ 132,036 ========== ========== Sales by Geographic Area - ------------------------ Germany $ 57,454 $ 71,973 European Union(3) 43,428 51,321 Other 5,829 8,742 ---------- ---------- Total $ 106,711 $ 132,036 ========== ========== Sales by Volume (tonnes) - --------------- Packaging papers(1) 52,360 75,309 Specialty papers 27,118 28,300 Printing papers 43,043 43,482 Pulp 93,040 108,975 ---------- ---------- Total 215,561 256,066 ========== ==========
- ------------------ (1) The Company sold its packaging paper mill in Greiz effective July 1998. Sales from the Greiz mill prior to its sale are included in the Company's results for the nine months ended September 30, 1998. The Greiz mill sold approximately 25,490 tonnes of packaging paper for approximately $7.2 million in revenues in the nine months ended September 30, 1998. (2) Excluding intercompany sales. (3) Not including Germany. FORM 10-Q QUARTERLY REPORT - PAGE 10 11 In the nine months ended September 30, 1999, revenues decreased by 24.1% to $106.6 million from $140.5 million in the comparative period of 1998, primarily as a result of the shutdown of the Company's pulp mill in late July 1999 to implement the final stages of the project to convert the mill from the production of sulphite pulp to kraft pulp (the "Conversion Project"). The mill is expected to start-up in late November 1999. As a result of downtime taken in connection with the Conversion Project, pulp sales decreased by 26.8% in the current period from the comparable period of 1998. In the nine months ended September 30, 1999, markets for sulphite pulp remained generally weak, with modest price improvements largely offset by the devaluation of the deutschmark and euro against the U.S. dollar. On average, sulphite pulp prices realized by the Company in the nine months ended September 30, 1999 were approximately 14.2% lower than in the same period of 1998. In addition, downtime and other disruptions associated with the Conversion Project decreased pulp sales to $39.7 million in the nine months ended September 30, 1999 from $54.2 million in the comparative period of 1998. Overall, paper sales in the nine months ended September 30, 1999 decreased by 14.6% to $64.4 million from $75.4 million in the same period of 1998, primarily as a result of a decrease in sales volumes resulting from the sale of the Greiz mill in the third quarter of 1998. In the nine months ended September 30, 1999, markets for specialty paper were generally stable, while markets for packaging and printing papers were weaker than in the comparative period of 1998. On average, paper prices realized by the Company increased by approximately 2.5% in the nine months ended September 30, 1999, compared to the same period in 1998, primarily as a result of the change in the product mix to produce more premium priced products. Expenses decreased to $116.4 million in the nine months ended September 30, 1999 from $125.4 million in the comparable period of 1998, primarily as a result of lower sales volumes, which were partially offset by an increase in expenses relating to the Conversion Project. On average, the Company's fibre costs for pulp production in the nine months ended September 30, 1999 decreased by approximately 2.3% compared to the same period in 1998. Prices for waste paper, which comprises approximately 80% of the fibre for the Company's paper mills, increased by approximately 45.5% in the nine months ended September 30, 1999, compared to the same period of 1998, due to the change in the product mix to produce more premium priced products and a recovery in waste paper prices. General and administrative expenses were $15.9 million in the nine months ended September 30, 1999, compared to $17.5 million in the comparable period of 1998. Interest expense in the nine months ended September 30, 1999 decreased to $1.8 million from $2.7 million in the comparable period of 1998, primarily as a result of reduced indebtedness during the current period, other than with respect to the Conversion Project. Interest costs in respect of the Conversion Project are being capitalized. For the nine months ended September 30, 1999, the Company reported a net loss of $9.8 million, or $0.60 per share, compared to net earnings of $15.0 million, or $0.98 per share, in the comparable period of 1998. FORM 10-Q QUARTERLY REPORT - PAGE 11 12 RESULTS OF OPERATIONS - Three Months Ended September 30, 1999 - ------------------------------------------------------------- The following table sets forth selected sales data for the Company for the periods indicated:
Quarter Ended September 30, ------------------------------- 1999 1998 -------------- -------------- (in thousands) Sales by Product Class - ---------------------- Packaging papers $ 4,387 $ 4,492 Specialty papers 7,425 7,428 Printing papers 9,485 10,494 Pulp 8,006 13,794 Other 909 (154) ---------- ---------- Total(1) $ 30,212 $ 36,054 ========== ========== Sales by Geographic Area - ------------------------ Germany $ 17,183 $ 19,700 European Union(2) 11,414 12,755 Other 1,615 3,599 ---------- ---------- Total $ 30,212 $ 36,054 ========== ========== Sales by Volume (tonnes) - --------------- Packaging papers 17,373 16,349 Specialty papers 9,081 8,724 Printing papers 14,579 14,420 Pulp 18,586 26,991 ---------- ---------- Total 59,619 66,484 ========== ==========
- ------------------ (1) Excluding intercompany sales. (2) Not including Germany. In the quarter ended September 30, 1999, revenues decreased by 23.1% to $30.5 million from $39.7 million in the comparative period of 1998, primarily as a result of the shutdown of the Company's pulp mill in late July 1999 to implement the final stages of the Conversion Project. The mill is expected to start-up in late November 1999. As a result of the Conversion Project, in the current quarter pulp sales decreased by 42.0% to $8.0 million from $13.8 million in the comparable period of 1998. Paper sales in the current quarter decreased by 5.0% from the comparable period of 1998. In the quarter ended September 30, 1999, markets for sulphite pulp remained generally weak while markets for kraft pulp improved markedly. While sulphite pulp prices improved marginally during the quarter, they were more than offset by the devaluation of the deutschmark and euro against the U.S. dollar in the same period. On average, sulphite pulp prices realized by the Company in the third quarter of 1999 were approximately 15.7% lower than in the same period of 1998. FORM 10-Q QUARTERLY REPORT - PAGE 12 13 At the end of the third quarter of 1999, inventories for kraft pulp held by North American and Scandinavian producers, commonly referred to as Norscan inventories, were below 1.3 million tonnes. This is a level that historically has supported price increases. Kraft pulp list prices in Europe increased to $600 per tonne effective November 1, 1999. In addition, because of relatively low Norscan inventories currently, certain pulp producers have announced a further price increase in kraft pulp list prices to take effect in January 2000. However, there can be no assurance that such further price increase will be achieved. In the quarter ended September 30, 1999, markets for specialty, packaging and printing papers were relatively stable compared to the same period in 1998, although on average paper prices declined. On average, paper prices realized by the Company decreased by approximately 8.6% in the quarter ended September 30, 1999 compared to the same period in 1998. Overall, paper sales in the quarter ended September 30, 1999 decreased to $21.3 million from $22.4 million in the same period of 1998, primarily as a result of lower prices. Expenses increased to $37.6 million in the quarter ended September 30, 1999 from $35.4 million in the comparable period of 1998, primarily due to an increase in expenses relating to the Conversion Project. On average, the Company's fibre costs for pulp production in the quarter ended September 30, 1999 increased by approximately 6.6% compared to the same period in 1998. Prices for waste paper, which comprises approximately 80% of the fibre for the Company's paper mills, increased by approximately 88.8% in the quarter ended September 30, 1999, compared to the same period of 1998, as a result of the change in the product mix to produce more premium priced products and a recovery in waste paper prices. General and administrative expenses were $6.0 million in the quarter ended September 30, 1999, compared to $5.5 million in the comparable period of 1998. Interest expense in the quarter ended September 30, 1999 decreased to $0.6 million from $0.9 million in the comparable period of 1998, as a result of reduced indebtedness during the current period, other than with respect to the Conversion Project, for which interest costs are being capitalized. For the quarter ended September 30, 1999, the Company reported a net loss of $7.1 million, or $0.42 per share, compared to net earnings of $4.2 million, or $0.28 per share, in the comparable period of 1998. FORM 10-Q QUARTERLY REPORT - PAGE 13 14 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, 1999 December 31, 1998 ------------------ ----------------- (in thousands) Financial Position - ------------------ Working capital $ 9,860 $ 65,021 Total assets 433,178 333,284 Long-term government debt 5,806 7,003 Long-term debt - other 185,756 114,545
At September 30, 1999, the Company's cash and cash equivalents totalled $1.1 million, a net decrease of $52.1 million from $53.3 million at December 31, 1998. At September 30, 1999, the Company had short-term trading securities totalling $9.3 million, compared to $12.9 million at December 31, 1998. Operating Activities - -------------------- Cash flows from operating activities in the nine months ended September 30, 1999 were lower than in the comparative period of 1998 as a result of lower sales and higher expenses associated with the Conversion Project. Operating activities provided cash of $3.8 million in the nine months ended September 30, 1999, compared to $26.7 million in the same period in 1998. An increase in accounts payable and accrued expenses provided cash of $7.4 million in the nine months ended September 30, 1999, compared to $10.4 million in the nine months ended September 30, 1998. Net sales of investment securities provided cash of $5.2 million in the nine months ended September 30, 1999, compared to $23.1 million in the comparative period of 1998. Lower inventories provided cash of $2.9 million in the nine months ended September 30, 1999, compared to higher inventories using cash of $5.2 million in the nine months ended September 30, 1998. An increase in receivables used cash of $9.7 million in the current period, compared to $19.2 million in the comparative period of 1998. Investing Activities - -------------------- Investing activities in the nine months ended September 30, 1999 used cash of $178.9 million, consisting primarily of capital expenditures relating to the Conversion Project and other upgrades to the Company's paper mills, compared to $45.2 million in the nine months ended September 30, 1998. The Conversion Project was commenced in mid-1998 and is designed to convert the Company's pulp mill to produce kraft pulp, increase its annual production capacity from 160,000 tonnes to 280,000 tonnes and reduce its emissions of sulphur dioxides and effluent. The estimated cost for the Conversion Project is approximately $400 million, which is being financed through a combination of borrowings under a project loan (the "Project Loan"), non-refundable governmental FORM 10-Q QUARTERLY REPORT - PAGE 14 15 grants, governmental assistance and guarantees for long-term project financing and an equity investment by the Company. The pulp mill was shut down in late July 1999 to implement the final stages of the Conversion Project and is expected to start-up in late November 1999. Capital expenditures in respect of the Conversion Project in 1999 are estimated to be approximately $309.0 million. Although the Conversion Project has so far experienced only a slight delay, the Company believes that the project will incur cost overruns as a result of higher than expected infrastructure costs relating to site development and piping. Such additional costs have been partially offset by lower than expected costs for new equipment purchases. Pursuant to the terms of the Project Loan, such cost overruns will be funded in equal proportions through borrowings under a cost overrun tranche established under such loan facility and amounts deposited by the Company into a restricted account with the lenders under the Project Loan. Currently, the Company does not believe that such cost overruns will exceed the available facilities under the Project Loan. In addition, capital expenditures to upgrade the Company's paper mills used cash of approximately $5.0 million in the nine months ended September 30, 1999. The Company spent approximately $0.8 million to replace a natural gas powered turbine and approximately $0.5 million to upgrade a paper machine at its Fahrbrucke paper mill. The replacement of the natural gas powered turbine is nearly completed and the upgrade of the paper machine is expected to be completed in January 2000 at a total cost of approximately $2.5 million. The Company spent approximately $1.2 million to replace a steam block at its Trebsen paper mill, which is expected to be completed in January 2000 at a total cost of approximately $1.9 million. In addition, the Company spent approximately $1.2 million on constructing a waste water treatment plant at its Heidenau paper mill, which is expected to be completed in the fourth quarter of 1999 at a total cost of approximately $1.9 million. The Company is currently reviewing its paper operations to define a long-term core competency in respect of products produced in order that future investment may be directed towards that segment. Currently the investment required to maintain all four of the Company's paper mills has not enhanced the competitive position of any one mill and has had a dilutive effect on the Company's assets. Financing Activities - -------------------- Financing activities provided cash of $127.4 million in the nine months ended September 30, 1999, primarily as a result of increased borrowing under the Project Loan in respect of the Conversion Project. Financing activities provided cash of $52.0 million in the nine months ended September 30, 1998. The depreciation of the deutschmark against the U.S. dollar in the nine months ended September 30, 1999 resulted in an unrealized foreign exchange translation loss of $4.5 million on cash and cash equivalents, which is included as shareholders' equity in the Company's balance sheet and does not affect the Company's net earnings. See "Foreign Currency." FORM 10-Q QUARTERLY REPORT - PAGE 15 16 Other than the Conversion Project, the Company had no material commitments to acquire assets or operating businesses as at September 30, 1999. The Company anticipates that there will be acquisitions of businesses or commitments to projects in the future. To achieve its long-term goals of expanding its asset and earnings base through mergers and acquisitions, the Company will require substantial capital resources. The necessary resources will be generated from cash flow from operations, cash on hand, borrowing against its assets and/or the sale of assets. Foreign Currency - ---------------- Substantially all of the Company's operations are conducted in international markets and its consolidated financial results are subject to foreign currency exchange rate fluctuations, in particular, those in Germany. Approximately 99% of the Company's revenues are denominated in deutschmarks and euros. The value of the euro is fixed at 1.95583 deutschmarks. The Company translates foreign assets and liabilities into U.S. dollars at the rate of exchange on the balance sheet date. Revenues and expenses are translated at the average rate of exchange prevailing during the period. Unrealized gains or losses from these translations are recorded as shareholders' equity on the Company's balance sheet and do not affect the net earnings of the Company. Since substantially all of the Company's revenues are received in deutschmarks and euros, the financial position of the Company for any given period, when reported in U.S. dollars, can be significantly affected by the exchange rates prevailing during that period. In the nine months ended September 30, 1999, the depreciation of the deutschmark against the U.S. dollar resulted in a net $14.2 million foreign exchange translation loss and, as a result, the cumulative foreign exchange translation loss increased from $28.7 million at December 31, 1998 to $42.9 million at September 30, 1999. As both the Company's principal sources of revenues and expenses are in deutschmarks or euros, the Company does not currently enter into any currency hedging arrangements for exchange rate fluctuations. The average and period ending exchange rates for the deutschmark to the U.S. dollar for the periods indicated are as follows:
Quarter Ended Quarter Ended September 30, 1999 September 30, 1998 -------------------------- -------------------------- Period End Period Average Period End Period Average ---------- -------------- ---------- -------------- RATE OF EXCHANGE Deutschmark 1.8377 1.8642 1.6698 1.7606
Based upon the period average exchange rate in the nine months ended September 30, 1999, the U.S. dollar increased by approximately 9.2% in value against the deutschmark since December 31, 1998. FORM 10-Q QUARTERLY REPORT - PAGE 16 17 Year 2000 - --------- Many of the world's computer systems currently record years in a two-digit format. These computer systems will be unable to properly interpret dates beyond the year 1999, which could lead to business disruptions and is commonly referred to as the "Year 2000" issue. The Company is conducting a comprehensive review of all significant applications that may require modification to ensure Year 2000 compliance. The Company is utilizing both internal and external resources to make any required modifications and to test for Year 2000 compliance. The modification and testing process of all significant applications is expected to be completed in the fourth quarter of 1999. In addition, the Company has initiated communications with its significant suppliers and largest customers to ascertain their Year 2000 readiness and develop contingency plans as required. Based upon its current information, management of the Company has determined that the Year 2000 issue will not pose significant operational problems for its computers. The total cost to the Company of Year 2000 compliance activities has not been and is not currently anticipated to be material to its financial position or results of operations in any given year. The costs and the dates on which the Company plans to complete Year 2000 modification and testing are based on management's best estimates, which were derived utilizing numerous assumptions of future events. However, there can be no assurance that these estimates will be achieved and actual results could differ materially from those anticipated. Conversion Project Uncertainties - -------------------------------- The Company is subject to various uncertainties in connection with the Conversion Project, such as availability and cost of materials and labour, construction delays, cost overruns, weather conditions, governmental regulations, increases in long-term interest rates and increases in taxes and other governmental fees, which may cause fluctuations in its operating results. The Conversion Project is also subject to extensive and complex regulations and environmental compliance, which may result in delays or the Company incurring substantial costs in relation thereto. The pulp mill was shut down in late July 1999 to implement the final stages of the Conversion Project and is expected to start-up in late November 1999. The pulp mill will then go through a "ramp-up" period and the Company expects that the pulp mill will operate at approximately 80% of capacity by mid-2000 and at or near full capacity by the end of 2000. While the Conversion Project has so far experienced only a slight delay, there can be no assurance that the project will not suffer other delays during the construction phase as a result of, among other things, delays in the shipment and installation of equipment, materials or labour shortages, delays in the receipt of permits, weather conditions, or governmental actions. In addition, there are a number of risks and uncertainties inherent in the start-up of the pulp mill after the completion of construction. There can be no assurance that the pulp mill will not experience any operating difficulties or delays during the start-up period, any of which could have a material adverse effect on the Company's operations. FORM 10-Q QUARTERLY REPORT - PAGE 17 18 Cyclical Nature of Business; Competitive Position - ------------------------------------------------- The pulp and paper business is cyclical in nature and markets for the Company's principal products are characterized by periods of supply and demand imbalance, which in turn affects product prices. The markets for pulp and paper are highly competitive and sensitive to cyclical changes in industry capacity and in the economy, both of which can have a significant influence on selling prices and the earnings of the Company. Demand for pulp and paper products has historically been determined by the level of economic growth and has been closely tied to overall business activity. The competitive position of the Company is influenced by the availability and quality of raw materials (fibre) and its experience in relation to other producers with respect to inflation, energy, labour costs and productivity. Forward-Looking Statements - -------------------------- Statements in this report, to the extent they are not based on historical events, constitute forward-looking statements. Forward-looking statements include, without limitation, statements regarding the outlook for future operations, forecasts of future costs and expenditures, the evaluation of market conditions, the outcome of legal proceedings, the adequacy of reserves, or other business plans. Investors are cautioned that forward-looking statements are subject to an inherent risk that actual results may vary materially from those described herein. Factors that may result in such variance, in addition to those accompanying the forward-looking statements, include changes in interest rates, commodity prices, and other economic conditions; actions by competitors; changing weather conditions and other natural phenomena; actions by government authorities; uncertainties associated with legal proceedings; technological development; future decisions by management in response to changing conditions; and misjudgments in the course of preparing forward-looking statements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. FORM 10-Q QUARTERLY REPORT - PAGE 18 19 PART II. OTHER INFORMATION ----------------- ITEM 1. LEGAL PROCEEDINGS The Company is subject to routine litigation incidental to its business. The Company does not believe that the outcome of such litigation will have a material adverse effect on its business or financial condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company held its annual meeting of shareholders on July 13, 1999. At the meeting, Jimmy S.H. Lee and R. Ian Rigg were elected Class II Trustees of the Company, each for a three year term, as follows:
ABSTENTIONS AND VOTES FOR VOTES WITHHELD BROKER NON-VOTES ----------- -------------- ---------------- Jimmy S.H. Lee 11,341,917 65,379 - R. Ian Rigg 11,341,917 65,379 -
C.S. Moon, Michel Arnulphy and Maarten Reidel continued their respective terms as Trustees of the Company. In addition, at the meeting, an amendment to the Company's Non-Qualified Stock Option Plan to increase the number of shares of common stock of the Company that may be issued pursuant to stock options granted under the plan from 2.0 million to 3.6 million was approved by a vote of 4,542,194 for, 3,150,274 against and 35,762 votes withheld in respect of the resolution to amend the plan. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit Number Description ------- ----------- 27 Article 5 - Financial Data Schedule for the 3rd Quarter 1999 Form 10-Q. (b) Reports on Form 8-K None. FORM 10-Q QUARTERLY REPORT - PAGE 19 20 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MERCER INTERNATIONAL INC. By: /s/ R. Ian Rigg ------------------------------------------ R. Ian Rigg Vice President and Chief Financial Officer Date: November 11, 1999 FORM 10-Q QUARTERLY REPORT - PAGE 20 21 EXHIBIT INDEX Exhibit Number Description - ------- ----------- 27 Article 5 - Financial Data Schedule for the 3rd Quarter 1999 Form 10-Q. EX-27 2 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-31-1999 JAN-01-1999 SEP-30-1999 1,126 9,263 81,101 0 14,810 111,399 274,851 0 433,178 101,539 191,562 0 0 99,360 38,883 433,178 106,711 106,595 98,665 116,368 0 0 1,826 (9,773) 0 (9,773) 0 0 0 (9,773) (0.60) (0.60)
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