10-Q 1 doc1.txt 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, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______ TO _______ COMMISSION FILE NO.: 000-09409 MERCER INTERNATIONAL INC. (Exact name of Registrant as specified in its charter) WASHINGTON 91-6087550 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) GIESSHUBELSTRASSE 15, ZURICH, SWITZERLAND CH 8045 (Address of principal executive offices) (Zip Code) 41(1) 201 7710 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ----- ----- The Registrant had 16,794,899 shares of beneficial interest outstanding as at August 13, 2001. PART I. FINANCIAL INFORMATION --------------------- ITEM 1. FINANCIAL STATEMENTS MERCER INTERNATIONAL INC. CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 2001 (UNAUDITED) MERCER INTERNATIONAL INC. CONSOLIDATED BALANCE SHEETS AS AT JUNE 30, 2001 AND DECEMBER 31, 2000 (UNAUDITED) (DOLLARS IN THOUSANDS)

JUNE 30, DECEMBER 31, 2001 2000 ---------- -------------- ASSETS Current Assets Cash and cash equivalents . . . . . $ 14,061 $ 18,496 Investments . . . . . . . . . . . . 5,683 5,320 Receivables . . . . . . . . . . . . 38,210 46,088 Inventories . . . . . . . . . . . . 16,378 19,977 Prepaid and other . . . . . . . . . 2,713 3,000 ---------- -------------- Total current assets. . . . . . . 77,045 92,881 Long-Term Assets Cash restricted . . . . . . . . . . 21,394 25,150 Properties. . . . . . . . . . . . . 234,007 265,607 Investments . . . . . . . . . . . . 6,461 6,101 Notes receivable. . . . . . . . . . - 4,296 Deferred income tax . . . . . . . . 8,778 9,624 ---------- -------------- 270,640 310,778 ---------- -------------- $ 347,685 $ 403,659 ========== ============== LIABILITIES Current Liabilities Accounts payable and accrued expenses . . . . . . . . . . . . . $ 31,737 $ 37,058 Pulp mill renovation costs payable. 183 1,146 Note payable. . . . . . . . . . . . 578 839 Debt. . . . . . . . . . . . . . . . 10,397 27,173 ---------- -------------- Total current liabilities . . . . 42,895 66,216 Long-Term Liabilities Debt. . . . . . . . . . . . . . . . 183,101 208,315 Other . . . . . . . . . . . . . . . 3,264 3,721 ---------- -------------- 186,365 212,036 ---------- -------------- Total liabilities . . . . . . . . 229,260 278,252 SHAREHOLDERS' EQUITY Shares of beneficial interest . . . . 99,995 99,995 Retained earnings . . . . . . . . . . 93,202 88,698 Accumulated other comprehensive loss. (74,772) (63,286) ---------- -------------- 118,425 125,407 ---------- -------------- $ 347,685 $ 403,659 ========== ==============

The accompanying notes are an integral part of these financial statements. MERCER INTERNATIONAL INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS FOR SIX MONTHS ENDED JUNE 30, 2001 AND 2000 (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT FOR EARNINGS PER SHARE)

2001 2000 -------- --------- Revenues Sales. . . . . . . . . . . . . . . . . . . . $100,820 $114,818 Other. . . . . . . . . . . . . . . . . . . . 7,486 4,657 -------- --------- 108,306 119,475 Expenses Cost of sales. . . . . . . . . . . . . . . . 85,241 97,076 General and administrative . . . . . . . . . 8,478 5,251 Interest expense . . . . . . . . . . . . . . 7,504 7,110 Loss on foreign currency derivative contracts . . . . . . . . . . . . . . . . . 2,553 - -------- --------- 103,776 109,437 -------- --------- Income before income taxes . . . . . . . . . . 4,530 10,038 Income taxes (recovery). . . . . . . . . . . . 26 (9) -------- --------- Net income . . . . . . . . . . . . . . . . . . 4,504 10,047 Retained earnings, beginning of period . . . . 88,698 59,224 -------- --------- Retained earnings, end of period . . . . . . . $ 93,202 $ 69,271 ======== ========= Earnings per share Basic. . . . . . . . . . . . . . . . . . . . $ 0.27 $ 0.60 ======== ========= Diluted. . . . . . . . . . . . . . . . . . . $ 0.26 $ 0.59 ======== =========

The accompanying notes are an integral part of these financial statements. MERCER INTERNATIONAL INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS FOR THREE MONTHS ENDED JUNE 30, 2001 AND 2000 (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT FOR EARNINGS PER SHARE)

2001 2000 -------- ------- Revenues Sales. . . . . . . . . . . . . . . . . . . . $48,454 $59,575 Other. . . . . . . . . . . . . . . . . . . . 3,856 4,140 -------- ------- 52,310 63,715 Expenses Cost of sales. . . . . . . . . . . . . . . . 43,264 48,184 General and administrative . . . . . . . . . 4,918 3,563 Interest expense . . . . . . . . . . . . . . 3,960 2,978 Loss on foreign currency derivative contracts . . . . . . . . . . . . . . . . . 213 - -------- ------- 52,355 54,725 -------- ------- Income (loss) before income taxes. . . . . . . (45) 8,990 Income taxes . . . . . . . . . . . . . . . . . 26 14 -------- ------- Net income (loss). . . . . . . . . . . . . . . (71) 8,976 Retained earnings, beginning of period . . . . 93,273 60,295 -------- ------- Retained earnings, end of period . . . . . . . $93,202 $69,271 ======== ======= Earnings (loss) per share Basic. . . . . . . . . . . . . . . . . . . . $ (0.00) $ 0.54 ======== ======= Diluted. . . . . . . . . . . . . . . . . . . $ (0.00) $ 0.52 ======== =======

The accompanying notes are an integral part of these financial statements. MERCER INTERNATIONAL INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR SIX MONTHS ENDED JUNE 30, 2001 AND 2000 (UNAUDITED) (DOLLARS IN THOUSANDS)

2001 2000 --------- -------- Net income. . . . . . . . . . . . . . . . . $ 4,504 $10,047 Other comprehensive gain (loss): Foreign currency translation adjustments. (13,004) (6,048) Unrealized gain (loss) on securities. . . 1,518 (622) --------- -------- Other comprehensive loss. . . . . . . . . (11,486) (6,670) --------- -------- Total comprehensive gain (loss) . . . . . . $ (6,982) $ 3,377 ========= ========

The accompanying notes are an integral part of these financial statements. MERCER INTERNATIONAL INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THREE MONTHS ENDED JUNE 30, 2001 AND 2000 (UNAUDITED) (DOLLARS IN THOUSANDS)

2001 2000 -------- ------- Net income (loss) . . . . . . . . . . . . . $ (71) $8,976 Other comprehensive gain (loss): Foreign currency translation adjustments. (5,036) (196) Unrealized gain (loss) on securities. . . 475 (607) -------- ------- Other comprehensive loss. . . . . . . . . (4,561) (803) -------- ------- Total comprehensive gain (loss) . . . . . . $(4,632) $8,173 ======== =======

The accompanying notes are an integral part of these financial statements. MERCER INTERNATIONAL INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR SIX MONTHS ENDED JUNE 30, 2001 AND 2000 (UNAUDITED) (DOLLARS IN THOUSANDS)

2001 2000 --------- --------- Cash Flows from Operating Activities: Net income . . . . . . . . . . . . . . . . . . . . $ 4,504 $ 10,047 Adjustments to reconcile net income from operations to cash Depreciation and amortization. . . . . . . . . . 10,398 13,491 Changes in current assets and liabilities Investments. . . . . . . . . . . . . . . . . . . (816) (14,270) Inventories. . . . . . . . . . . . . . . . . . . 1,741 2,180 Receivables. . . . . . . . . . . . . . . . . . . 4,702 1,437 Accounts payable and accrued expenses. . . . . . (1,515) 2,531 Other. . . . . . . . . . . . . . . . . . . . . . (9) 20 --------- --------- Net cash provided by operating activities. . . 19,005 15,436 Cash Flows from Investing Activities: Purchase of fixed assets, net of investment grants (4,416) 36,308 Decrease in notes receivable . . . . . . . . . . . 4,296 10 Other. . . . . . . . . . . . . . . . . . . . . . . 58 - --------- --------- Net cash provided by (used in) investing activities. . . . . . . . . . . . . . . . . . (62) 36,318 Cash Flows from Financing Activities: Cash restricted. . . . . . . . . . . . . . . . . . 1,372 - Increase in indebtedness . . . . . . . . . . . . . - 5,888 Decrease in indebtedness . . . . . . . . . . . . . (21,244) (1,139) Decrease in pulp mill conversion costs payable . . (900) (49,264) --------- --------- Net cash used in financing activities. . . . . (20,772) (44,515) Effect of exchange rate changes on cash and cash equivalents. . . . . . . . . . . . . . . . . . (2,606) (993) --------- --------- Net increase (decrease) in cash and cash equivalents (4,435) 6,246 Cash and cash equivalents, beginning of period . . . 18,496 1,722 --------- --------- Cash and cash equivalents, end of period . . . . . . $ 14,061 $ 7,968 ========= =========

The accompanying notes are an integral part of these financial statements. MERCER INTERNATIONAL INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR SIX MONTHS ENDED JUNE 30, 2001 (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, 2000. 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 Basic earnings per share is computed by dividing income available to common shareholders by the weighted average number of shares outstanding during a period. Diluted earnings per share takes into consideration shares outstanding (computed under basic earnings per share) and potentially dilutive shares. The weighted average number of shares outstanding for the purposes of calculating basic earnings per share was 16,874,899 and 16,715,399 for the six months ended June 30, 2001 and 2000, respectively, and 16,874,899 and 16,715,399 for the three months ended June 30, 2001 and 2000, respectively. The weighted average number of shares outstanding for the purposes of calculating diluted earnings per share was 17,154,277 and 17,101,499 for the six months ended June 30, 2001 and 2000, respectively, and 16,874,899 and 17,210,116 for the three months ended June 30, 2001 and 2000, respectively. NOTE 3. ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities", established accounting and reporting standards for derivative instruments and hedging activities. SFAS No. 133 was amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133", which deferred the implementation date of SFAS 133 to fiscal years beginning after June 15, 2000. Retroactive application is prohibited. The Company adopts SFAS No. 133 effective from January 1, 2001. All derivative instruments are measured at fair value and reported in the balance sheet as assets or liabilities. Accounting for gains and losses depends on the intended use of the derivative instrument. Gains and losses on derivative instruments not designated as hedging instruments are recognized in earnings in the period of the change in fair value. Accounting for gains and losses on derivative instruments designated as hedging instruments depends on the type of hedge, and such gains and losses are recognized in either earnings or other comprehensive income. NOTE 4. BUSINESS SEGMENT INFORMATION The Company operates in two reportable business segments: pulp and paper. The segments are managed separately because each business requires different production and marketing strategies. Summarized financial information concerning the segments is shown in the following table:

PULP PAPER TOTAL -------- ------- -------- SIX MONTHS ENDED JUNE 30, 2001 Sales to external customers. . . . . . . . . . $72,158 $28,662 $100,820 Intersegment net sales . . . . . . . . . . . . 3,236 - 3,236 Segment profit . . . . . . . . . . . . . . . . 6,504 786 7,290 Reconciliation of profit: Total profit for reportable segments. . . . . $ 7,290 Elimination of intersegment profits . . . . . 602 Unallocated amounts, other corporate expenses (3,362) -------- Consolidated income before income taxes . . $ 4,530 ======== SIX MONTHS ENDED JUNE 30, 2000 Sales to external customers. . . . . . . . . . $70,100 $44,718 $114,818 Intersegment net sales . . . . . . . . . . . . 352 - 352 Segment profit . . . . . . . . . . . . . . . . 10,614 1,230 11,844 Reconciliation of profit: Total profit for reportable segments. . . . . $11,844 Elimination of intersegment profits . . . . . - Unallocated amounts, other corporate expenses (1,806) -------- Consolidated income before income taxes . . $10,038 ========

PULP PAPER TOTAL -------- ------- -------- THREE MONTHS ENDED JUNE 30, 2001 Sales to external customers. . . . . . . . . . $35,567 $12,887 $ 48,454 Intersegment net sales . . . . . . . . . . . . 1,534 - 1,534 Segment profit . . . . . . . . . . . . . . . . 991 717 1,708 Reconciliation of profit: Total profit for reportable segments. . . . . $ 1,708 Elimination of intersegment profits . . . . . 333 Unallocated amounts, other corporate expenses (2,086) -------- Consolidated loss before income taxes . . . $ (45) ======== THREE MONTHS ENDED JUNE 30, 2000 Sales to external customers. . . . . . . . . . $37,814 $21,761 $ 59,575 Intersegment net sales . . . . . . . . . . . . 219 - 219 Segment profit . . . . . . . . . . . . . . . . 9,716 65 9,781 Reconciliation of profit: Total profit for reportable segments. . . . . $ 9,781 Elimination of intersegment profits . . . . . - Unallocated amounts, other corporate expenses (791) -------- Consolidated income before income taxes . . $ 8,990 ========

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, 2001 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 7.0% against the deutschmark in the six months and three months ended June 30, 2001, respectively, compared to the same periods of 2000. RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 2001 The following table sets forth selected sales data for the Company for the periods indicated:

SIX MONTHS ENDED JUNE 30, ------------------ 2001 2000 -------- -------- (UNAUDITED) (IN THOUSANDS) SALES BY PRODUCT CLASS Packaging papers(1) . . . $ - $ 8,758 Specialty papers. . . . . 17,579 16,860 Printing papers(2). . . . 11,083 19,100 Pulp. . . . . . . . . . . 72,158 70,100 -------- -------- Total(3). . . . . . . . . $100,820 $114,818 ======== ======== SALES BY GEOGRAPHIC AREA Germany . . . . . . . . . $ 47,557 $ 46,952 European Union(4) . . . . 35,600 41,295 Eastern Europe and other. 17,663 26,571 -------- -------- Total(3). . . . . . . . . $100,820 $114,818 ======== ======== (TONNES) SALES BY VOLUME Packaging papers(1) . . . - 29,111 Specialty papers. . . . . 20,909 21,056 Printing papers(2). . . . 13,848 27,853 Pulp. . . . . . . . . . . 142,082 119,252 -------- -------- Total(3). . . . . . . . . 176,839 197,272 ======== ========

(1) The Company sold its packaging paper mill in Trebsen, Germany effective June 2000. (2) The Company sold its printing paper mill in Hainsberg, Germany effective November 2000. (3) Excluding intercompany sales. (4) Not including Germany. In the six months ended June 30, 2001, revenues decreased by approximately 9.3% to $108.3 million from $119.5 million in the six months ended June 30, 2000, primarily as a result of lower paper sales and lower pulp prices in the current period. The decrease in revenues in the current period was partially offset by higher pulp volumes. In the six months ended June 30, 2001, pulp and paper revenues decreased by approximately 12.2% from the comparable period of 2000, on a 2.9% increase in pulp sales and a 35.9% decrease in paper sales. Pulp sales in the six months ended June 30, 2001 increased to $72.2 million from $70.1 million in the comparable period of 2000. In late 1999, the Company completed the conversion of the Company's pulp mill to the production of kraft pulp and the increase of the pulp mill's annual production capacity to 280,000 tonnes (the "Conversion Project"). The pulp mill ramped up production in early 2000 and has operated in excess of 90% of capacity since the beginning of the second quarter of 2000. List prices for kraft pulp in Europe decreased from approximately $710 per tonne at the end of 2000 to approximately $650 per tonne during the first quarter of 2001 and approximately $530 per tonne during the second quarter of 2001. Paper sales in the six months ended June 30, 2001 decreased to $28.7 million from $44.7 million in the comparable period of 2000. Sales of specialty papers increased in the six months ended June 30, 2001 compared to the six months ended June 30, 2000 as a result of higher sales prices, while sales of printing papers declined primarily as a result of the sale of one of the Company's printing paper mills effective November 2000. The Company did not sell any packaging papers during the six months ended June 30, 2001 as a result of the divestiture of its packaging paper mill effective June 2000. On average, prices for specialty and printing papers realized by the Company in the six months ended June 30, 2001 increased by approximately 5.0% and 16.7%, respectively, compared to the same period in 2000. Expenses decreased to $103.8 million in the six months ended June 30, 2001 from $109.4 million in the comparable period of 2000, primarily as a result of an improvement in pulp production efficiency due to the ramping-up of pulp production in early 2000 and a decrease in the production of paper products. On average, the Company's unit fibre costs for pulp production in the six months ended June 30, 2001 increased by approximately 12.9% compared to the same period in 2000. Prices for waste paper, which currently comprises approximately 25% of the fibre for the Company's paper mills, also increased in the six months ended June 30, 2001, compared to the same period of 2000. General and administrative expenses were $8.5 million in the six months ended June 30, 2001, compared to $5.3 million in the six months ended June 30, 2000. Interest expense in the six months ended June 30, 2001 increased to $7.5 million from $7.1 million in the comparable period of 2000, primarily as a result of the payment of government guarantee fees and higher interest rates in connection with the entering into of foreign currency forward rate swaps relating to the Company's bank loans. The Company recorded a loss of $2.6 million on its foreign currency derivative contracts in the six months ended June 30, 2001. See "Item 3. Quantitative and Qualitative Disclosures About Market Risk" for information with respect to foreign currency derivatives. For the six months ended June 30, 2001, the Company reported net income of $4.5 million, or $0.26 per share on a diluted basis, compared to $10.0 million, or $0.59 per share, in the comparable period of 2000. RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 2001 The following table sets forth selected sales data for the Company for the periods indicated:

THREE MONTHS ENDED JUNE 30, ------------------ 2001 2000 --------- ------- (UNAUDITED) (IN THOUSANDS) SALES BY PRODUCT CLASS Packaging papers(1) . . . . . $ - $ 3,553 Specialty papers. . . . . . . 7,782 8,365 Printing papers(2). . . . . . 5,105 9,843 Pulp. . . . . . . . . . . . . 35,567 37,814 --------- ------- Total(3). . . . . . . . . . . $ 48,454 $59,575 ========= ======= SALES BY GEOGRAPHIC AREA Germany . . . . . . . . . . . $ 21,229 $24,153 European Union(4) . . . . . . 18,661 21,828 Eastern Europe and other. . . 8,564 13,594 --------- ------- Total(3). . . . . . . . . . . $ 48,454 $59,575 ========= ======= (TONNES) SALES BY VOLUME Packaging papers(1) . . . . . - 11,394 Specialty papers. . . . . . . 9,865 10,398 Printing papers(2). . . . . . 6,799 14,364 Pulp. . . . . . . . . . . . . 80,340 60,941 --------- ------- Total(3). . . . . . . . . . . 97,004 97,097 ========= =======

(1) The Company sold its packaging paper mill in Trebsen, Germany effective June 2000. (2) The Company sold its printing paper mill in Hainsberg, Germany effective November 2000. (3) Excluding intercompany sales. (4) Not including Germany. In the three months ended June 30, 2001, revenues decreased by approximately 17.9% to $52.3 million from $63.7 million in the three months ended June 30, 2000, primarily as a result of lower paper sales and lower pulp prices in the current period. The decrease in revenues in the current period was partially offset by higher pulp volumes. In the three months ended June 30, 2001, pulp and paper revenues decreased by approximately 18.7% from the comparable period of 2000, on a 5.9% decrease in pulp sales and a 40.8% decrease in paper sales. Pulp sales in the three months ended June 30, 2001 decreased to $35.6 million from $37.8 million in the comparable period of 2000 as a result of lower sales prices. In late 1999, the Company completed the Conversion Project to convert the Company's pulp mill to the production of kraft pulp and increase its annual production capacity to 280,000 tonnes. The pulp mill ramped up production in early 2000 and has operated in excess of 90% of capacity since the beginning of the second quarter of 2000. A decrease in pulp demand and high pulp inventories resulted in list prices for kraft pulp in Europe decreasing from approximately $620 per tonne at March 31, 2001 to approximately $500 per tonne at June 30, 2001. List prices continued to deteriorate into the third quarter of 2001. In order to balance pulp inventory levels, many pulp producers have announced market downtime in the third quarter of 2001. Paper sales in the three months ended June 30, 2001 decreased to $12.9 million from $21.8 million in the comparable period of 2000. Sales of specialty papers declined in the three months ended June 30, 2001 compared to the three months ended June 30, 2000 as a result of lower sales prices and volumes, while sales of printing papers declined primarily as a result of the sale of one of the Company's printing paper mills effective November 2000. The Company did not sell any packaging papers during the second quarter of 2001 as a result of the divestiture of its packaging paper mill effective June 2000. On average, prices for specialty papers realized by the Company in the three months ended June 30, 2001 decreased by approximately 1.9% compared to the same period in 2000, while prices for printing papers increased by approximately 9.6%. Expenses decreased to $52.4 million in the three months ended June 30, 2001 from $54.7 million in the comparable period of 2000, primarily as a result of an improvement in pulp production efficiency due to the ramping-up of pulp production in early 2000 and a decrease in the production of paper products. On average, the Company's unit fibre costs for pulp production in the three months ended June 30, 2001 increased by approximately 11.6% compared to the same period in 2000. Prices for waste paper, which currently comprises approximately 25% of the fibre for the Company's paper mills, also increased in the three months ended June 30, 2001, compared to the same period of 2000. General and administrative expenses were $4.9 million in the three months ended June 30, 2001, compared to $3.6 million in the three months ended June 30, 2000. Interest expense in the three months ended June 30, 2001 increased to $4.0 million from $3.0 million in the comparable period of 2000, primarily as a result of the payment of government guarantee fees and higher interest rates in connection with the entering into of foreign currency forward rate swaps relating to the Company's bank loans. The Company recorded a loss of $0.2 million on its foreign currency derivative contracts in the three months ended June 30, 2001. See "Item 3. Quantitative and Qualitative Disclosures About Market Risk" for information with respect to foreign currency derivatives. For the three months ended June 30, 2001, the Company reported a net loss of $71,000, or $0.00 per share on a diluted basis, compared to net income of $9.0 million, or $0.52 per share, in the comparable period of 2000. 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 JUNE 30, 2001 DECEMBER 31, 2000 --------------- ------------------ (UNAUDITED) (IN THOUSANDS) FINANCIAL POSITION Working capital . . . . . . . . . . $ 34,150 $ 26,665 Property, plant and equipment (net) 234,007 265,607 Total assets. . . . . . . . . . . . 347,685 403,659 Long-term debt. . . . . . . . . . . 183,101 208,315 Shareholders' equity. . . . . . . . 118,425 125,407

At June 30, 2001, the Company's cash and cash equivalents totalled $14.1 million, a net decrease of $4.4 million from $18.5 million at December 31, 2000. At June 30, 2001, the Company had short-term trading securities totalling $5.7 million, compared to $5.3 million at December 31, 2000. OPERATING ACTIVITIES Operating activities provided cash of $19.0 million in the six months ended June 30, 2001, compared to $15.4 million in the same period in 2000. A decrease in receivables provided cash of $4.7 million in the current period, compared to $1.4 million in the comparative period of 2000. A decrease in accounts payable and accrued expenses used cash of $1.5 million in the six months ended June 30, 2001, compared to an increase in accounts payable and accrued expenses providing cash of $2.5 million in the six months ended June 30, 2000. Lower inventories provided cash of $1.7 million in the six months ended June 30, 2001, compared to $2.2 million in the six months ended June 30, 2000. Net purchases of investment securities used cash of $0.8 million in the six months ended June 30, 2001, compared to $14.3 million in the comparative period of 2000. INVESTING ACTIVITIES Investing activities in the six months ended June 30, 2001 used cash of $62,000, consisting primarily of capital expenditures on properties and partially offset by a reduction in notes receivable, compared to providing cash of $36.3 million in the six months ended June 30, 2000. The Company completed the Conversion Project in late 1999. 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. The Company is continuing to review 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. FINANCING ACTIVITIES Financing activities used cash of $20.8 million in the six months ended June 30, 2001, primarily as a result of the repayment of $21.2 million in indebtedness relating to the Conversion Project. Financing activities used cash of $44.5 million in the six months ended June 30, 2000. The depreciation of the deutschmark against the U.S. dollar in the six months ended June 30, 2001 resulted in an unrealized foreign exchange translation loss of $2.6 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". 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"). In 2001, the Company agreed to increase its ultimate ownership position in the Stendal Project to 57.5%. The Company's participation in the Stendal Project is subject to, among other things, completion of due diligence and the entering into of a shareholders' agreement and the Stendal Project itself is subject to, among other things, financing, final permit amendments and approval of government investment incentives. The Stendal Project is currently estimated to cost approximately euro 1.0 billion (or $847.5 million) and to be completed in 2005. Financing for the Stendal Project is expected to come from the project partners, long-term bank credit facilities and government investment incentives. In July 2001, the Company announced that Bayerische Hypo- und Vereinsbank AG has agreed to act as the lead financial arranger and underwriter on the credit facilities for the Stendal Project. The aggregate amount of the facilities to be arranged is up to euro 891.4 million (or $755.4 million). 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, 2001. 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 euros and 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 for deutschmarks prevailing during that period. In the six months ended June 30, 2001, the depreciation of the deutschmark against the U.S. dollar resulted in a net $13.0 million foreign exchange translation loss and, as a result, the cumulative foreign exchange translation loss increased from $56.3 million at December 31, 2000 to $69.3 million at June 30, 2001. See "Item 3. Quantitative and Qualitative Disclosures About Market Risk" for information with respect to foreign currency derivatives. The average and period end exchange rates for the deutschmark to the U.S. dollar for the periods indicated are as follows:

QUARTER ENDED QUARTER ENDED JUNE 30, 2001 JUNE 30, 2000 ----------------------------- -------------------------- PERIOD END PERIOD AVERAGE PERIOD END PERIOD AVERAGE ------------- -------------- ---------- -------------- RATE OF EXCHANGE Deutschmark. . . 2.3079 2.2399 2.0486 2.0941

Based upon the period average exchange rate in the six months ended June 30, 2001, the U.S. dollar increased by approximately 4.7% in value against the deutschmark since December 31, 2000. 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 in the first quarter of 2002 and be completed in 2005. However, there can be no assurance that the Stendal Project will proceed as currently planned, or at all. FORWARD-LOOKING STATEMENTS Statements in this report, to the extent they are not based on historical events, constitute forward-looking statements. Forward-looking statements include, without limitation, statements regarding the outlook for future operations, forecasts of future costs and expenditures, the evaluation of market conditions, the outcome of legal proceedings, the adequacy of reserves, or other business plans. Investors are cautioned that forward-looking statements are subject to an inherent risk that actual results may vary materially from those described herein. Factors that may result in such variance, in addition to those accompanying the forward-looking statements, include changes in interest rates, commodity prices, and other economic conditions; actions by competitors; changing weather conditions and other natural phenomena; actions by government authorities; uncertainties associated with legal proceedings; technological development; future decisions by management in response to changing conditions; and misjudgments in the course of preparing forward-looking statements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risks from changes in interest rates, foreign currency exchange rates and equity prices which may affect its results of operations and financial condition. The Company manages these risks through internal risk management policies. The Company also uses derivative instruments in regard to its exposure to interest rate, currency and pulp price risks. The derivative instruments are not designated as hedging instruments and the purpose of the derivative activity is speculative in nature, as management uses such tools either to augment the Company's potential gains or to reduce the Company's potential losses, depending on management's perception of future economic events and developments. If any of the variety of instruments and strategies the Company utilizes are not effective, the Company may incur losses. Many of the Company's strategies are based on historical trading patterns and correlations. However, these strategies may not be fully effective in all market environments or against all types of risks. Unexpected market developments may affect the Company's risk management strategies during this time, and unanticipated developments could impact the Company's risk management strategies in the future. In December 2000, the Company entered into U.S. dollar/euro foreign currency forward rate swaps to manage its risk exposure with respect to in aggregate approximately euro 223.3 million of the principal amount of its long-term indebtedness. A fair value gain of $0.9 million on these contracts was recognized in the six months ended June 30, 2001. During the first quarter of 2001, the Company entered into a U.S. dollar/euro forward contract in the amount of approximately euro 35.0 million, which was settled in March 2001. The contract resulted in a $2.3 million loss. During the second quarter of 2001, the Company entered into two U.S. dollar/euro forward contracts in the aggregate amount of approximately euro 22.4 million, maturing in the second quarter of 2002. A fair value loss of $1.1 million on these contracts was recognized in the six months ended June 30, 2001. As at June 30, 2001, no derivative contract had been executed with respect to pulp prices. Any change in the fair value of derivative instruments is included in the determination of earnings. Reference is made to the Company's annual report on Form 10-K for the year ended December 31, 2000 for additional information concerning market risk. 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 None. (b) REPORTS ON FORM 8-K None. 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 13, 2001