10-Q 1 0001.txt MERCER INTERNATIONAL INC. - 3RD QTR 00 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, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------- ------- Commission File No.: 000-09409 MERCER INTERNATIONAL INC. (Exact name of Registrant as specified in its charter) Washington 91-6087550 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) Giesshubelstrasse 15, Zurich, Switzerland CH 8045 (Address of principal executive offices) (Zip Code) 41(1) 201 7710 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- The Registrant had 16,794,899 shares of beneficial interest outstanding as at November 10, 2000. ========================================================================== 2 PART I. FINANCIAL INFORMATION --------------------- ITEM 1. FINANCIAL STATEMENTS MERCER INTERNATIONAL INC. CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 (Unaudited) FORM 10-Q QUARTERLY REPORT - PAGE 2 3 MERCER INTERNATIONAL INC. CONSOLIDATED BALANCE SHEETS As at September 30, 2000 and December 31, 1999 (Unaudited) (dollars in thousands)

September 30, December 31, 2000 1999 ------------- ------------ ASSETS Current Assets Cash and cash equivalents $ 1,885 $ 1,722 Investments 32,500 5,392 Receivables 38,715 41,448 Inventories 14,741 17,697 Other 2,935 2,857 --------- --------- Total current assets 90,776 69,116 Long-Term Assets Cash restricted 11,303 12,865 Properties 253,047 351,828 Investments 5,407 6,925 Note receivable 4,869 4,869 Deferred income tax 9,117 10,242 --------- --------- 283,743 386,729 --------- --------- $ 374,519 $ 455,845 ========= ========= LIABILITIES Current Liabilities Accounts payable and accrued expenses $ 36,591 $ 40,287 Pulp mill conversion costs payable 3,475 56,195 Note payable 762 553 Debt 10,557 19,121 --------- --------- Total current liabilities 51,385 116,156 Long-Term Liabilities Debt 211,399 233,163 Other 3,425 3,506 --------- --------- 214,824 236,669 --------- --------- Total liabilities 266,209 352,825 SHAREHOLDERS' EQUITY Shares of beneficial interest 99,995 99,038 Accumulated other comprehensive loss (70,050) (55,242) Retained earnings 78,365 59,224 --------- --------- 108,310 103,020 --------- --------- $ 374,519 $ 455,845 ========= =========

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, 2000 and 1999 (Unaudited) (dollars in thousands, except for earnings per share)

2000 1999 ---------- ---------- Revenues Sales $ 175,597 $ 104,033 Other 5,572 2,562 ---------- ---------- 181,169 106,595 Expenses Cost of sales 142,871 98,665 General and administrative 8,591 15,877 Interest expense 10,560 1,826 ---------- ---------- 162,022 116,368 ---------- ---------- Income (loss) before income taxes 19,147 (9,773) Income taxes 6 - ---------- ---------- Net income (loss) 19,141 (9,773) Retained earnings, beginning of period 59,224 98,167 Dividend - (834) ---------- ---------- Retained earnings, end of period $ 78,365 $ 87,560 ========== ========== Earnings (loss) per share Basic $ 1.14 $ (0.60) ========== ========== Diluted $ 1.11 $ (0.60) ========== ==========

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, 2000 and 1999 (Unaudited) (dollars in thousands, except for earnings per share)

2000 1999 ---------- ---------- Revenues Sales $ 60,779 $ 29,303 Other 915 1,213 ---------- ---------- 61,694 30,516 Expenses Cost of sales 45,795 30,944 General and administrative 3,340 5,997 Interest expense 3,450 637 ---------- ---------- 52,585 37,578 ---------- ---------- Income (loss) before income taxes 9,109 (7,062) Income taxes 15 - ---------- ---------- Net income (loss) 9,094 (7,062) Retained earnings, beginning of period 69,271 94,622 ---------- ---------- Retained earnings, end of period $ 78,365 $ 87,560 ========== ========== Earnings (loss) per share Basic $ 0.54 $ (0.42) ========== ========== Diluted $ 0.52 $ (0.42) ========== ==========

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, 2000 and 1999 (Unaudited) (dollars in thousands)

2000 1999 ---------- ---------- Net income (loss) $ 19,141 $ (9,773) Other comprehensive loss: Foreign currency translation adjustments (13,771) (14,228) Unrealized (loss) gain on securities (1,037) 2,612 ---------- ---------- Other comprehensive loss (14,808) (11,616) ---------- ---------- Total comprehensive income (loss) $ 4,333 $ (21,389) ========== ==========

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, 2000 and 1999 (Unaudited) (dollars in thousands)

2000 1999 ---------- ---------- Net income (loss) $ 9,094 $ (7,062) Other comprehensive (loss) income: Foreign currency translation adjustments (7,723) 4,193 Unrealized loss on securities (415) (468) ---------- ---------- Other comprehensive (loss) income (8,138) 3,725 ---------- ---------- Total comprehensive income (loss) $ 956 $ (3,337) ========== ==========

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, 2000 and 1999 (Unaudited) (dollars in thousands)

2000 1999 ---------- ---------- Cash Flows from Operating Activities: Net income (loss) $ 19,141 $ (9,773) Adjustments to reconcile net income (loss) from operations to cash Depreciation and amortization 19,753 11,031 Non-cash asset acquisitions - (383) ---------- ---------- 23,538 3,418 Changes in current assets and liabilities Investments (28,964) 5,213 Inventories 858 2,939 Receivables (2,195) (9,671) Accounts payable and accrued expenses 1,456 (4,470) Other (611) (2,932) ---------- ---------- Net cash provided by (used in) operating activities 9,438 (8,046) Cash Flows from Investing Activities: Decrease in notes receivable, net 11 - Purchase of available-for-sale investments (859) - Proceeds from sales of available-for-sale investments - 2,315 Purchase of fixed assets, net of investment grants 30,972 (181,182) Proceeds from sale of fixed assets 8,892 - Other - 4 ---------- ---------- Net cash provided by (used in) investing activities 39,016 (178,863) Cash Flows from Financing Activities: Increase in indebtedness 5,768 130,256 Decrease in indebtedness (5,682) (1,995) Net proceeds on issuance of shares of beneficial interest 957 - Payment of dividend - (834) (Decrease) increase in pulp mill conversion costs payable (48,792) 11,854 ---------- ---------- Net cash (used in) provided by financing activities (47,749) 139,281 Effect of exchange rate changes on cash and cash equivalents (542) (4,496) ---------- ---------- Net increase (decrease) in cash and cash equivalents 163 (52,124) Cash and cash equivalents, beginning of period 1,722 53,250 ---------- ---------- Cash and cash equivalents, end of period $ 1,885 $ 1,126 ========== ==========

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, 2000 (Unaudited) Note 1. Basis of Presentation The interim period consolidated financial statements contained herein include the accounts of Mercer International Inc. and its subsidiaries (the "Company"). The interim period consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the "SEC"). Certain information and footnote disclosure normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such SEC rules and regulations. The interim period consolidated financial statements should be read together with the audited consolidated financial statements and accompanying notes included in the Company's latest annual report on Form 10-K for the fiscal year ended December 31, 1999. In the opinion of the Company, the unaudited consolidated financial statements contained herein contain all adjustments necessary to present a fair statement of the results of the interim periods presented. Certain reclassifications have been made to the prior period's financial statements to conform with the current period's presentation. Note 2. Earnings Per Share Earnings per share is computed on the basis of the weighted average number of shares outstanding during a period after considering convertible securities, warrants and options. The weighted average number of shares outstanding for the purposes of calculating basic earnings per share was 16,763,538 and 16,280,267 for the nine months ended September 30, 2000 and 1999, respectively, and 16,808,769 and 16,628,986 for the three months ended September 30, 2000 and 1999, respectively. The weighted average number of shares outstanding for the purposes of calculating diluted earnings per share was 17,207,610 and 16,306,628 for the nine months ended September 30, 2000 and 1999, respectively, and 17,368,786 and 16,628,986 for the three months ended September 30, 2000 and 1999, respectively. Note 3. Disposition of Assets Effective June 1, 2000, the Company sold its packaging paper mill located in Trebsen, Germany (the "Trebsen Facility") for approximately $8.9 million plus an amount equal to the net working capital associated with the Trebsen Facility. FORM 10-Q QUARTERLY REPORT - PAGE 9 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Mercer International Inc. is a pulp and paper company and its operations are primarily located in Germany. The following discussion and analysis of the results of operations and financial condition of the Company for the nine months and three months ended September 30, 2000 should be read in conjunction with the consolidated financial statements and related notes included elsewhere herein. In this document: (i) unless the context otherwise requires, the "Company" refers to Mercer International Inc. and its subsidiaries; and (ii) a "tonne" is one metric ton or 2,204.6 pounds. Based upon period average exchange rates, the U.S. dollar appreciated by approximately 14% against the deutschmark in the nine months ended September 30, 2000, compared to the same period of 1999, and by approximately 16% in the three months ended September 30, 2000, compared to the same period of 1999. Effective June 1, 2000, the Company sold its packaging paper mill located in Trebsen, Germany (the "Trebsen Facility"). The Company's results of operations include the results of operations of the Trebsen Facility to June 1, 2000. RESULTS OF OPERATIONS - Nine Months Ended September 30, 2000 The following table sets forth selected sales data for the Company for the periods indicated:

Nine Months Ended September 30, ------------------------------- 2000 1999 ---------- ---------- (unaudited) (in thousands) Sales by Product Class Packaging papers $ 8,758 $ 13,285 Specialty papers 25,374 22,436 Printing papers 30,699 28,634 Pulp 110,766 39,678 ---------- ---------- Total(1) $ 175,597 $ 104,033 ========== ========== Sales by Geographic Area Germany $ 71,108 $ 54,776 European Union(2) 61,906 43,428 Other 42,583 5,829 ---------- ---------- Total(1) $ 175,597 $ 104,033 ========== ========== Sales by Volume (tonnes) Packaging papers 29,111 52,360 Specialty papers 31,255 27,118 Printing papers 44,427 43,043 Pulp 183,027 93,040 ---------- ---------- Total(1) 287,820 215,561 ========== ========== -------------------- (1) Excluding intercompany sales. (2) Not including Germany.

FORM 10-Q QUARTERLY REPORT - PAGE 10 11 In the nine months ended September 30, 2000, revenues increased by approximately 70% to $181.2 million from $106.6 million in the comparative period of 1999, primarily as a result of higher pulp sales. In the current period, pulp and paper revenues increased by approximately 69% from the comparable period of 1999, with pulp sales increasing by approximately 179%. The Company completed a project in late 1999 to convert the Company's pulp mill from the production of sulphite pulp to the production of kraft pulp and increase its annual production capacity from 160,000 tonnes to 280,000 tonnes (the "Conversion Project"). During the first nine months of 2000, the pulp mill ramped up production of kraft pulp, and by September 30, 2000 was operating at in excess of 95% of capacity. In the nine months ended September 30, 2000, pulp sales were strong as a result of increased demand and low producer inventories. List prices for kraft pulp in Europe increased from approximately $600 per tonne at the end of 1999 to approximately $710 per tonne during the third quarter of 2000. Pulp sales in the current period increased to $110.8 million from $39.7 million in the comparable period of 1999. The Company undertook a planned nine-day maintenance and modification shutdown at its pulp mill in late-September 2000. The shutdown extended for an additional two days into October 2000. In the first nine months of 2000, sales of specialty and printing papers increased as a result of increased demand, compared to the first nine months of 1999. Sales of packaging papers were lower as a result of the sale by the Company of the Trebsen Facility effective June 1, 2000. Overall, paper sales in the current period increased marginally to $64.8 million from $64.4 million in the comparable period of 1999. On average, paper prices realized by the Company in the nine months ended September 30, 2000 increased by approximately 18% compared to the same period in 1999. Expenses increased to $162.0 million in the nine months ended September 30, 2000 from $116.4 million in the comparable period of 1999, primarily as a result of higher sales volumes and interest expense. On average, the Company's fibre costs for pulp production in the nine months ended September 30, 2000 increased by approximately 13% compared to the same period in 1999. Prices for waste paper, which following the sale of the Trebsen Facility comprises approximately 37% of the fibre for the Company's paper mills, increased substantially in the nine months ended September 30, 2000, compared to the same period of 1999. General and administrative expenses were $8.6 million in the nine months ended September 30, 2000, compared to $15.9 million in the comparable period of 1999. Interest expense in the nine months ended September 30, 2000 increased to $10.6 million from $1.8 million in the comparable period of 1999, primarily as a result of indebtedness resulting from the Conversion Project. Interest costs in respect of the Conversion Project were capitalized in 1999. For the nine months ended September 30, 2000, the Company reported net income of $19.1 million, or $1.11 per share on a diluted basis, compared to a net loss of $9.8 million, or $0.60 per share, in the comparable period of 1999. FORM 10-Q QUARTERLY REPORT - PAGE 11 12 RESULTS OF OPERATIONS - Three Months Ended September 30, 2000 The following table sets forth selected sales data for the Company for the periods indicated:

Three Months Ended September 30, -------------------------------- 2000 1999 ------------ ----------- (unaudited) (in thousands) Sales by Product Class Packaging papers $ - $ 4,387 Specialty papers 8,514 7,425 Printing papers 11,599 9,485 Pulp 40,666 8,006 ----------- ----------- Total(1) $ 60,779 $ 29,303 =========== =========== Sales by Geographic Area Germany $ 24,156 $ 16,274 European Union(2) 20,611 11,414 Other 16,012 1,615 ----------- ----------- Total(1) $ 60,779 $ 29,303 =========== =========== Sales by Volume (tonnes) Packaging papers - 17,373 Specialty papers 10,199 9,081 Printing papers 16,574 14,579 Pulp 63,775 18,586 ----------- ----------- Total(1) 90,548 59,619 =========== =========== -------------------- (1) Excluding intercompany sales. (2) Not including Germany.

In the three months ended September 30, 2000, revenues increased by approximately 102% to $61.7 million from $30.5 million in the comparative period of 1999, primarily as a result of higher pulp sales. In the current period, pulp and paper revenues increased by approximately 107% from the comparable period of 1999, with pulp sales increasing by approximately 408%. In the three months ended September 30, 2000, kraft pulp sales were strong as a result of increased demand and low producer inventories. List prices for kraft pulp in Europe increased from approximately $670 per tonne during the second quarter of 2000 to approximately $710 per tonne during the third quarter of 2000. Pulp sales in the current period increased to $40.7 million from $8.0 million in the comparable period of 1999. The Company undertook a planned nine-day maintenance and modification shutdown at its pulp mill in late-September 2000. The shutdown extended for an additional two days into October 2000. FORM 10-Q QUARTERLY REPORT - PAGE 12 13 In the three months ended September 30, 2000, sales of specialty and printing papers increased as a result of increased demand, compared to the three months ended September 30, 1999. Overall, paper sales in the current period decreased to $20.1 million from $21.3 million in the comparable period of 1999, as a result of the sale by the Company of the Trebsen Facility effective June 1, 2000. On average, paper prices realized by the Company in the three months ended September 30, 2000 increased by approximately 45% compared to the same period in 1999. Expenses increased to $52.6 million in the three months ended September 30, 2000 from $37.6 million in the comparable period of 1999, primarily as a result of higher sales volumes and interest expense. On average, the Company's fibre costs for pulp production in the three months ended September 30, 2000 increased by approximately 23% compared to the same period in 1999. Prices for waste paper, which following the sale of the Trebsen Facility comprises approximately 37% of the fibre for the Company's paper mills, increased substantially in the three months ended September 30, 2000, compared to the same period of 1999. General and administrative expenses were $3.3 million in the three months ended September 30, 2000, compared to $6.0 million in the comparable period of 1999. Interest expense in the three months ended September 30, 2000 increased to $3.5 million from $0.6 million in the comparable period of 1999, primarily as a result of indebtedness resulting from the Conversion Project. Interest costs in respect of the Conversion Project were capitalized in 1999. For the three months ended September 30, 2000, the Company reported net income of $9.1 million, or $0.52 per share on a diluted basis, compared to a net loss of $7.1 million, or $0.42 per share, in the comparable period of 1999. LIQUIDITY AND CAPITAL RESOURCES The following table is a summary of selected financial information concerning the Company for the periods indicated:

As at As at September 30, 2000 December 31, 1999 ------------------ ----------------- (unaudited) (in thousands) Financial Position Working capital $ 39,391 $ (47,040) Total assets 374,519 455,845 Long-term government debt - 5,490 Long-term debt - other 211,399 227,673

At September 30, 2000, the Company's cash and cash equivalents totalled $1.9 million, a net increase of $0.2 million from $1.7 million at December 31, 1999. At September 30, 2000, the Company also had $11.3 million in restricted cash, consisting of cash on deposit to service payments on loans related to the Conversion Project, and short-term investments totalling $32.5 million. FORM 10-Q QUARTERLY REPORT - PAGE 13 14 Operating Activities Operating activities provided cash of $9.4 million in the nine months ended September 30, 2000, compared to using cash of $8.0 million in the same period in 1999. An increase in accounts payable and accrued expenses provided cash of $1.5 million in the nine months ended September 30, 1999, compared to a decrease in accounts payable and accrued expenses using cash of $4.5 million in the nine months ended September 30, 1999. Lower inventories provided cash of $0.9 million in the nine months ended September 30, 2000, compared to $2.9 million in the nine months ended September 30, 1999. An increase in receivables used cash of $2.2 million in the current period, compared to $9.7 million in the comparative period of 1999. Net purchases of investment securities used cash of $29.0 million in the nine months ended September 30, 2000, consisting primarily of funds intended to be used to service payments on loans related to the Conversion Project, compared to net sales of investment securities providing cash of $5.2 million in the comparative period of 1999. Investing Activities Investing activities in the nine months ended September 30, 2000 provided cash of $39.0 million, consisting primarily of governmental grants of $52.0 million received in connection with the Conversion Project in prior periods and paid to the Company in the current period, compared to using cash of $178.9 million in the nine months ended September 30, 1999. Proceeds from the sale of the Trebsen Facility provided cash of approximately $8.9 million in the nine months ended September 30, 2000. The Company completed the Conversion Project in late 1999. In the nine months ended September 30, 2000, the Company incurred $16.5 million in expenditures related to the completion of the Conversion Project. The Conversion Project was financed through a combination of borrowings under a project loan, non-refundable governmental grants, governmental assistance and guarantees for long-term project financing and an equity investment by the Company. Capital expenditures to upgrade the Company's paper mills used cash of approximately $3.3 million in the nine months ended September 30, 2000, including approximately $1.3 million to complete the installation of a new paper machine drive at the Company's Fahrbrucke paper mill. In November 2000, the Company agreed to sell its printing paper mill located in Hainsberg, Germany (the "Hainsberg Facility") for approximately $4.0 million plus an amount equal to the net working capital associated with the Hainsberg Facility. The Company is continuing to review its other paper operations to define a long-term core competency in respect of products produced in order that future investment may be directed towards that segment. FORM 10-Q QUARTERLY REPORT - PAGE 14 15 Financing Activities Financing activities used cash of $47.7 million in the nine months ended September 30, 2000, primarily as a result of payments of accounts payable associated with the Conversion Project. Financing activities provided cash of $139.3 million in the nine months ended September 30, 1999. The depreciation of the deutschmark against the U.S. dollar in the nine months ended September 30, 2000 resulted in an unrealized foreign exchange translation loss of $0.5 million on cash and cash equivalents, which is included in the Company's statement of comprehensive income and does not affect the Company's net earnings. See "Foreign Currency". The Company applied approximately $5.2 million of the proceeds from the sale of the Trebsen Facility to repay and discharge in full governmental loans associated with the Trebsen Facility. The Company has reached an understanding with its lenders and the federal and state governments to amend its loan facilities related to the Conversion Project to provide for facilities to effect currency swaps and hedging lines for currency futures and pulp futures. New loan documenetation is currently being prepared. Effective January 2000, the Company agreed, subject to certain conditions, to acquire a controlling interest in a "greenfield" project to construct and operate a 550,000-tonne softwood kraft pulp mill to be located at Stendal, Germany (the "Stendal Project"). The Company's participation in the Stendal Project is subject to, among other things, completion of due diligence and the Stendal Project itself is subject to, among other things, financing. The Stendal Project is currently estimated to cost approximately DM 1,600.0 million (or $823.3 million) and to be completed by the end of 2003. Financing for the Stendal Project is expected to come from the project partners, government financing, project financing and outside capital. See "Stendal Pulp Mill Project Uncertainties". Other than the agreement relating to the Stendal Project, the Company had no material commitments to acquire assets or operating businesses as at September 30, 2000. The Company anticipates that there will be acquisitions of businesses or commitments to projects in the future. To achieve its long-term goals of expanding its asset and earnings base through mergers and acquisitions, the Company will require substantial capital resources. The necessary resources will be generated from cash flow from operations, cash on hand, borrowing against its assets and/or the sale of assets. Foreign Currency Substantially all of the Company's operations are conducted in international markets and its consolidated financial results are subject to foreign currency exchange rate fluctuations, in particular, those in Germany. Approximately 99% of the Company's revenues are denominated in deutschmarks and euros. The value of the euro is fixed at 1.95583 deutschmarks. FORM 10-Q QUARTERLY REPORT - PAGE 15 16 The Company translates foreign assets and liabilities into U.S. dollars at the rate of exchange on the balance sheet date. Revenues and expenses are translated at the average rate of exchange prevailing during the period. Unrealized gains or losses from these translations are recorded as shareholders' equity on the Company's balance sheet and do not affect the net earnings of the Company. Since substantially all of the Company's revenues are received in deutschmarks and euros, the financial position of the Company for any given period, when reported in U.S. dollars, can be significantly affected by the exchange rates prevailing during that period. In the nine months ended September 30, 2000, the depreciation of the deutschmark against the U.S. dollar resulted in a net $13.8 million foreign exchange translation loss and, as a result, the cumulative foreign exchange translation loss increased from $49.9 million at December 31, 1999 to $63.7 million at September 30, 2000. The average and period ending exchange rates for the deutschmark to the U.S. dollar for the periods indicated are as follows:

Quarter Ended Quarter Ended September 30, 2000 September 30, 1999 -------------------------- -------------------------- Period End Period Average Period End Period Average ---------- -------------- ---------- -------------- Rate of Exchange Deutschmark 2.2119 2.1653 1.8377 1.8642

Based upon the period average exchange rate in the nine months ended September 30, 2000, the U.S. dollar increased by approximately 7% in value against the deutschmark since December 31, 1999. Cyclical Nature of Business; Competitive Position The pulp and paper business is cyclical in nature and markets for the Company's principal products are characterized by periods of supply and demand imbalance, which in turn affects product prices. The markets for pulp and paper are highly competitive and sensitive to cyclical changes in industry capacity and in the economy, both of which can have a significant influence on selling prices and the earnings of the Company. Demand for pulp and paper products has historically been determined by the level of economic growth and has been closely tied to overall business activity. The competitive position of the Company is influenced by the availability and quality of raw materials (fibre) and its experience in relation to other producers with respect to inflation, energy, transportation, labour costs and productivity. FORM 10-Q QUARTERLY REPORT - PAGE 16 17 Stendal Pulp Mill Project Uncertainties The Company's participation in the Stendal Project is subject to certain conditions, including completion of its due diligence and entering into a shareholders' agreement. In addition, the Stendal Project itself is subject to various risks and uncertainties customary to large "greenfield" projects of this nature which may result in the Stendal Project not proceeding as currently planned, or at all, such as availability and cost of materials and labour, construction delays, cost overruns, weather conditions, governmental regulations, availability of adequate financing, increases in long-term interest rates and increases in taxes and other governmental fees. The Stendal Project will also be subject to extensive and complex regulations and environmental compliance which may result in delays, in the project company and/or its shareholders, including the Company, incurring substantial costs in relation thereto or in the Stendal Project being amended or not proceeding at all. The implementation of the Stendal Project is currently expected to commence during the first half of 2001 and be completed by the end of 2003. However, there can be no assurance that the Stendal Project will proceed as currently planned, or at all. Forward-Looking Statements Statements in this report, to the extent they are not based on historical events, constitute forward-looking statements. Forward-looking statements include, without limitation, statements regarding the outlook for future operations, forecasts of future costs and expenditures, the evaluation of market conditions, the outcome of legal proceedings, the adequacy of reserves, or other business plans. Investors are cautioned that forward- looking statements are subject to an inherent risk that actual results may vary materially from those described herein. Factors that may result in such variance, in addition to those accompanying the forward-looking statements, include changes in interest rates, commodity prices, and other economic conditions; actions by competitors; changing weather conditions and other natural phenomena; actions by government authorities; uncertainties associated with legal proceedings; technological development; future decisions by management in response to changing conditions; and misjudgments in the course of preparing forward-looking statements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Reference is made to the Company's annual report on Form 10-K for the year ended December 31, 1999 for information concerning market risk. FORM 10-Q QUARTERLY REPORT - PAGE 17 18 PART II. OTHER INFORMATION ----------------- ITEM 1. LEGAL PROCEEDINGS The Company is subject to routine litigation incidental to its business. The Company does not believe that the outcome of such litigation will have a material adverse effect on its business or financial condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company held its annual meeting of shareholders on July 11, 2000. At the meeting, Michel Arnulphy was elected a Class III Trustee of the Company for a three year term as follows:

ABSTENTIONS AND VOTES FOR VOTES WITHHELD BROKER NON-VOTES --------- -------------- ---------------- Michel Arnulphy 13,061,232 30,095 -

Jimmy S.H. Lee, C.S. Moon, Maarten Reidel and R. Ian Rigg continued their respective terms as Trustees of the Company. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit Number Description ------- ----------- 27 Article 5 - Financial Data Schedule for the 3rd Quarter 2000 Form 10-Q. (b) Reports on Form 8-K None. FORM 10-Q QUARTERLY REPORT - PAGE 18 19 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MERCER INTERNATIONAL INC. By: /s/ R. Ian Rigg ----------------------------- R. Ian Rigg Vice President and Chief Financial Officer Date: November 13, 2000 FORM 10-Q QUARTERLY REPORT - PAGE 19 20 EXHIBIT INDEX Exhibit Number Description ------- ----------- 27 Article 5 - Financial Data Schedule for the 3rd Quarter 2000 Form 10-Q.