-----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, DXtCy7Ke0hHsA4X4P68DNMSpnvuFLKBaJFmvvfsn0E+p/1ILlQA1Q9P/jrv0KjK0 hZAmVnOQSWg0KMzkcfhJHQ== 0001012410-98-000036.txt : 19980817 0001012410-98-000036.hdr.sgml : 19980817 ACCESSION NUMBER: 0001012410-98-000036 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 SROS: NASD 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: 98690712 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. - 2ND QTR 1998 FORM 10-Q 1 ============================================================================== UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1998 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ----- ----- Commission File No.: 000-09409 MERCER INTERNATIONAL INC. (Exact name of Registrant as specified in its charter) Washington 91-6087550 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) Burglistrasse 6, Zurich, Switzerland CH 8002 (Address of principal executive offices) (Zip Code) 41(1) 201 7710 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ----- ----- The Registrant had 15,398,722 shares of beneficial interest outstanding as at August 11, 1998. ============================================================================== 2 FORWARD-LOOKING STATEMENTS Statements in this report, to the extent they are not based on historical events, constitute forward-looking statements. Forward-looking statements include, without limitation, statements regarding the outlook for future operations, forecasts of future costs and expenditures, the evaluation of market conditions, the outcome of legal proceedings, the adequacy of reserves, or other business plans. Investors are cautioned that forward-looking statements are subject to an inherent risk that actual results may vary materially from those described herein. Factors that may result in such variance, in addition to those accompanying the forward-looking statements, include changes in interest rates, commodity prices, and other economic conditions; actions by competitors; changing weather conditions and other natural phenomena; actions by government authorities; uncertainties associated with legal proceedings; technological development; future decisions by management in response to changing conditions; and misjudgments in the course of preparing forward-looking statements. PART I. FINANCIAL INFORMATION --------------------- ITEM 1. FINANCIAL STATEMENTS MERCER INTERNATIONAL INC. CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 1998 (Unaudited) FORM 10-Q QUARTERLY REPORT - PAGE 2 3 MERCER INTERNATIONAL INC. CONSOLIDATED BALANCE SHEETS As at June 30, 1998 and December 31, 1997 (Unaudited) (dollars in thousands)
June 30, December 31, 1998 1997 ------------ ------------ ASSETS Current Assets Cash and cash equivalents $ 4,044 $ 4,414 Investments 37,054 56,285 Receivables 35,136 22,329 Inventories 17,106 15,799 Other 2,753 1,557 ------------ ------------ Total current assets 96,093 100,384 Long-Term Assets Properties 95,669 87,806 Investments 17,029 4,118 Notes receivable 13,876 7,000 Deferred income tax assets 10,961 10,986 ------------ ------------ 137,535 109,910 ------------ ------------ $ 233,628 $ 210,294 ============ ============ LIABILITIES Current Liabilities Accounts payable and accrued expenses $ 51,719 $ 50,172 Notes payable 2,348 3,252 Debt 3,588 4,329 ------------ ------------ Total current liabilities 57,655 57,753 Long-Term Liabilities Debt 30,192 15,039 Other 1,850 2,027 ------------ ------------ 32,042 17,066 ------------ ------------ Total liabilities 89,697 74,819 SHAREHOLDERS' EQUITY Shares of beneficial interest 90,649 88,603 Cumulative translation adjustment (40,082) (41,376) Net unrealized loss on investments valuation (6,588) (1,517) Retained earnings 99,952 89,765 ------------ ------------ 143,931 135,475 ------------ ------------ $ 233,628 $ 210,294 ============ ============
The accompanying notes are an integral part of these financial statements. FORM 10-Q QUARTERLY REPORT - PAGE 3 4 MERCER INTERNATIONAL INC. CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS For Six Months Ended June 30, 1998 and 1997 (Unaudited) (dollars in thousands, except for earnings per share)
1998 1997 ------------ ------------ Revenues Sales $ 95,982 $ 84,719 Investments 4,822 5,375 ------------ ------------ 100,804 90,094 Expenses Cost of sales 76,170 69,259 General and administrative 12,021 12,109 Interest expense 1,773 1,403 ------------ ------------ 89,964 82,771 ------------ ------------ Income from operations before income taxes 10,840 7,323 Income taxes 43 28 ------------ ------------ Net income 10,797 7,295 Retained earnings, beginning of period 89,765 122,838 Dividend (610) (450) ------------ ------------ Retained earnings, end of period $ 99,952 $ 129,683 ============ ============ Earnings per share Basic $ 0.71 $ 0.49 ============ ============ Diluted $ 0.71 $ 0.49 ============ ============
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 June 30, 1998 and 1997 (Unaudited) (dollars in thousands, except for earnings per share)
1998 1997 ------------ ------------ Revenues Sales $ 46,889 $ 42,587 Investments 1,406 3,153 ------------ ------------ 48,295 45,740 Expenses Cost of sales 36,590 34,791 General and administrative 6,147 6,305 Interest expense 980 519 ------------ ------------ 43,717 41,615 ------------ ------------ Income from operations before income taxes 4,578 4,125 Income taxes 43 14 ------------ ------------ Net income 4,535 4,111 Retained earnings, beginning of period 96,027 126,022 Dividend (610) (450) ------------ ------------ Retained earnings, end of period $ 99,952 $ 129,683 ============ ============ Earnings per share Basic $ 0.30 $ 0.27 ============ ============ Diluted $ 0.30 $ 0.27 ============ ============
The accompanying notes are an integral part of these financial statements. FORM 10-Q QUARTERLY REPORT - PAGE 5 6 MERCER INTERNATIONAL INC. STATEMENT OF COMPREHENSIVE INCOME For Six Months Ended June 30, 1998 and 1997 (Unaudited) (dollars in thousands)
1998 1997 ------------ ------------ Net income $ 10,797 $ 7,295 Other comprehensive income (loss): Foreign currency translation adjustments 1,294 (23,690) Unrealised (loss) gain on securities (5,071) 540 ------------ ------------ Other comprehensive loss (3,777) (23,150) ------------ ------------ Total comprehensive income (loss) $ 7,020 $ (15,855) ============ ============
The accompanying notes are an integral part of these financial statements. FORM 10-Q QUARTERLY REPORT - PAGE 6 7 MERCER INTERNATIONAL INC. STATEMENT OF COMPREHENSIVE INCOME For Three Months Ended June 30, 1998 and 1997 (Unaudited) (dollars in thousands)
1998 1997 ------------ ------------ Net income $ 4,535 $ 4,111 Other comprehensive income (loss): Foreign currency translation adjustments 3,472 (8,024) Unrealised (loss) gain on securities (5,676) 128 ------------ ------------ Other comprehensive loss (2,204) (7,896) ------------ ------------ Total comprehensive income (loss) $ 2,331 $ (3,785) ============ ============
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 Six Months Ended June 30, 1998 and 1997 (Unaudited) (dollars in thousands)
1998 1997 ------------ ------------ Cash Flows from Operating Activities: Net income from continuing operations $ 10,797 $ 7,295 Adjustments to reconcile net income from operations to cash from operating activities Depreciation and amortization 6,611 5,999 Non-cash asset acquisitions (5,042) (10,014) ------------ ------------ 12,366 3,280 Changes in current assets and liabilities Investments (956) 8,568 Inventories (1,341) 3,968 Receivables (10,104) (1,497) Accounts payable and accrued expenses 4,173 (5,030) Other (538) 170 ------------ ------------ Net cash provided by operating activities 3,600 9,459 Cash Flows from Investing Activities: Purchase of fixed assets, net of investment grants (11,457) (6,036) Increase in notes receivable (11,358) - Other 15 16 ------------ ------------ Net cash used in investing activities (22,800) (6,020) Cash Flows from Financing Activities: Increase in indebtedness 20,041 1,782 Decrease in indebtedness (2,599) (8,975) Net proceeds on issuance of shares of beneficial interest 2,046 487 Payment of dividend (610) (450) Other (172) - ------------ ------------ Net cash provided by (used in) financing activities 18,706 (7,156) Effect of exchange rate changes on cash and cash equivalents 124 (541) ------------ ------------ Net decrease in cash and cash equivalents (370) (4,258) Cash and cash equivalents, beginning of period 4,414 9,967 ------------ ------------ Cash and cash equivalents, end of period $ 4,044 $ 5,709 ============ ============
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 SIX MONTHS ENDED JUNE 30, 1998 (Unaudited) NOTE 1. BASIS OF PRESENTATION The interim period consolidated financial statements contained herein include the accounts of Mercer International Inc. and its subsidiaries (the "Company"). The interim period consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the "SEC"). Certain information and footnote disclosure normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such SEC rules and regulations. The interim period consolidated financial statements should be read together with the audited consolidated financial statements and accompanying notes included in the Company's latest annual report on Form 10-K for the fiscal year ended December 31, 1997. In the opinion of the Company, the unaudited consolidated financial statements contained herein contain all adjustments necessary to present a fair statement of the results of the interim periods presented. NOTE 2. EARNINGS PER SHARE Earnings per share is computed on the basis of the weighted average number of shares outstanding during a period after considering convertible securities, warrants and options. The weighted average number of shares outstanding for the purposes of calculating diluted earnings per share was 15,292,315 and 14,978,804 for the six months ended June 30, 1998 and 1997, respectively, and 15,341,796 and 15,008,798 for the three months ended June 30, 1998 and 1997, respectively. FORM 10-Q QUARTERLY REPORT - PAGE 9 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Mercer International Inc. is a pulp and paper company headquartered in Zurich, Switzerland and its operations are primarily located in Germany. In this document: (i) unless the context otherwise requires, the "Company" refers to Mercer International Inc. and its subsidiaries; and (ii) a "tonne" is one metric ton or 2,204.6 pounds. The following discussion and analysis of the results of operations and financial condition of the Company for the six months and three months ended June 30, 1998, respectively, should be read in conjunction with the consolidated financial statements and related notes included elsewhere herein. RESULTS OF OPERATIONS - Six Months Ended June 30, 1998 - ------------------------------------------------------ In the six months ended June 30, 1998, revenues increased to $100.8 million from $90.1 million in the same period in 1997, primarily as a result of improved demand for pulp and paper products. However, as the Company's products are principally sold in deutschmarks, the depreciation of the deutschmark against the U.S. dollar by approximately 7.3% in the six months ended June 30, 1998, compared to the same period in 1997, resulted in lower prices in U.S. dollar terms for the Company's products. Expenses increased to $90.0 million in the six months ended June 30, 1998, compared to $82.8 million in the same period of 1997, primarily as a result of increased sales volumes and fibre costs. General and administrative expenses were $12.0 million in the six months ended June 30, 1998, compared to $12.1 million in the comparative period of 1997. Interest expense increased to $1.8 million in the six months ended June 30, 1998 from $1.4 million in the six months ended June 30, 1997, as a result of increased indebtedness. In the six months ended June 30, 1998, net income was $10.8 million or $0.71 per share, compared to $7.3 million or $0.49 per share for the six months ended June 30, 1997. Selected sales data for the Company for the six months ended June 30, 1998 and 1997, respectively, is as follows:
Six Months Ended June 30, ----------------------------- 1998 1997 ------------ ------------ (in thousands) Sales by Product Class - ---------------------- Packaging papers $ 15,847 $ 15,014 Specialty papers 16,145 14,330 Printing papers 20,946 17,867 Pulp 40,383 35,782 Other 2,661 1,726 ------------ ------------ Total(1) $ 95,982 $ 84,719 ============ ============
FORM 10-Q QUARTERLY REPORT - PAGE 10 11
Six Months Ended June 30, ----------------------------- 1998 1997 ------------ ------------ (dollars in thousands) Sales by Geographic Area - ------------------------ Germany $ 52,273 $ 48,061 European Union(2) 38,566 30,133 Other 5,143 6,525 ------------ ------------ Total $ 95,982 $ 84,719 ============ ============ Sales by Volume (tonnes) - --------------- Packaging papers 58,960 55,600 Specialty papers 19,576 17,732 Printing papers 29,062 26,548 Pulp 81,984 81,968 ------------ ------------ Total 189,582 181,848 ============ ============ - -------------------- (1) Excluding intercompany sales. (2) Not including Germany.
Pulp and paper markets were generally stable in the current period with overall product prices slightly higher than in the comparative period of 1997. Sales volumes were 4.3% higher in the six months ended June 30, 1998, compared to the same period in 1997. In the six months ended June 30, 1998, pulp prices increased, on average, by approximately 12.8% compared to the six months ended June 30, 1997 as excess European pulp inventories were reduced. However, weak Asian markets did not allow for a significant price increase. The Company's pulp sales increased by 12.9% to $40.4 million in the six months ended June 30, 1998 from $35.8 million in the comparative period of 1997. Overall paper prices also increased in the six months ended June 30, 1998, compared to the same period of 1997, primarily as a result of increased demand during the period for all paper grades. In addition, particularly strong demand for light weight coated papers resulted in product substitution by certain end users, which led to increased demand for other printing and writing grades. Paper sales in the six months ended June 30, 1998 increased by 12.1% to $52.9 million from $47.2 million in the six months ended June 30, 1997 on a volume increase of 7.7% and an average price increase of 4.1%. Sales volumes for packaging, specialty and printing papers increased in the six months ended June 30, 1998 by 6.0%, 10.4% and 9.5%, respectively, compared to the six months ended June 30, 1997. Increased pulp and paper prices in the six months ended June 30, 1998 were partially offset during the period by increased fibre costs for wood chips and pulp wood used to produce pulp and increased prices for pulp used to produce paper, as compared to the same period in 1997. On average, the Company's fibre costs for pulp production were up approximately 13.6% in the six months ended June 30, 1998, compared to the same period in 1997, but remained among the lowest in Europe. FORM 10-Q QUARTERLY REPORT - PAGE 11 12 Recycled fibre costs were down approximately 5.9% in the six months ended June 30, 1998, compared to the same period in 1997, and were down approximately 7.0% from December 1997. RESULTS OF OPERATIONS - Three Months Ended June 30, 1998 - -------------------------------------------------------- In the three months ended June 30, 1998, revenues increased to $48.3 million from $45.7 million in the same period in 1997, primarily as a result of higher prices. However, as the Company's products are principally sold in deutschmarks, the depreciation of the deutschmark against the U.S. dollar by approximately 4.7% in the three months ended June 30, 1998, compared to the same period in 1997, resulted in lower prices in U.S. dollar terms for the Company's products. The increase in revenues in the current period was partially offset by a decrease in investment revenue to $1.4 million in the second quarter of 1998 from $3.2 million in the comparative period of 1997. Expenses increased to $43.7 million in the three months ended June 30, 1998, compared to $41.6 million in the same period of 1997, primarily as a result of an increase in the cost of sales due to higher fibre costs. General and administrative expenses were $6.1 million in the three months ended June 30, 1998, compared to $6.3 million in the comparative period of 1997. Interest expense increased to $1.0 million in the three months ended June 30, 1998 from $0.5 million in the three months ended June 30, 1997, as a result of increased indebtedness. In the three months ended June 30, 1998, net income was $4.5 million or $0.30 per share, compared to $4.1 million or $0.27 per share for the three months ended June 30, 1997. Selected sales data for the Company for the three months ended June 30, 1998 and 1997, respectively, is as follows:
Quarter Ended June 30, ----------------------------- 1998 1997 ------------ ------------ (in thousands) Sales by Product Class - ---------------------- Packaging papers $ 7,416 $ 8,003 Specialty papers 7,517 7,414 Printing papers 10,274 8,966 Pulp 19,790 17,381 Other 1,892 823 ------------ ------------ Total(1) $ 46,889 $ 42,587 ============ ============ Sales by Geographic Area - ------------------------ Germany $ 24,954 $ 22,796 European Union(2) 19,955 17,353 Other 1,980 2,438 ------------ ------------ Total $ 46,889 $ 42,587 ============ ============
FORM 10-Q QUARTERLY REPORT - PAGE 12 13
Quarter Ended June 30, ----------------------------- 1998 1997 ------------ ------------ (tonnes) Sales by Volume - --------------- Packaging papers 27,067 29,011 Specialty papers 9,033 9,273 Printing papers 14,158 13,697 Pulp 39,695 40,523 ------------ ------------ Total 89,953 92,504 ============ ============ - -------------------- (1) Excluding intercompany sales. (2) Not including Germany.
Pulp and paper markets were generally stable in the second quarter of 1998 with overall product price increases in the three months ended June 30, 1998, compared to the same period of 1997. Sales volumes were 2.8% lower in the three months ended June 30, 1998 compared to the same period in 1997. In the three months ended June 30, 1998, pulp prices increased, on average, by approximately 16.2% compared to the three months ended June 30, 1997 as excess European pulp inventories were reduced. However, weak Asian markets did not allow for a significant price increase. The Company's pulp sales increased by 13.9% to $19.8 million in the three months ended June 30, 1998 from $17.4 million in the comparative period of 1997 on a volume decrease of 2.0% and an average price increase of 16.2%. Overall paper prices also increased in the three months ended June 30, 1998, compared to the same period of 1997. In addition, particularly strong demand for light weight coated papers resulted in product substitution by certain end users, which led to increased prices for other printing and writing grades. Paper sales in the three months ended June 30, 1998 increased by 3.4% to $25.2 million from $24.4 million in the three months ended June 30, 1997 on a volume decrease of 3.3% and an average price increase of 6.9%. Sales volume for packaging and specialty papers decreased in the three months ended June 30, 1998 by 6.7% and 2.6%, respectively, and sales volume for printing papers increased by 3.4%, compared to the three months ended June 30, 1997. Increased pulp and paper prices in the three months ended June 30, 1998 were partially offset during the period by increased fibre costs from prices for wood chips and pulp wood used to produce pulp and increased prices for pulp used to produce paper, as compared to the same period in 1997. On average, the Company's fibre costs for pulp production were up approximately 12.7% in the three months ended June 30, 1998, compared to the same period in 1997, but remained among the lowest in Europe. Recycled fibre costs were down approximately 12.4% in the three months ended June 30, 1998, compared to the same period in 1997. 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 June 30, 1998 December 31, 1997 ------------- ----------------- (in thousands) Financial Position - ------------------ Working capital $ 38,438 $ 42,631 Total assets 233,628 210,294 Long-term government debt 6,472 8,338 Long-term debt - other 23,720 6,701
At June 30, 1998, the Company's cash and cash equivalents totalled $4.0 million, a net decrease of $0.4 million from $4.4 million at December 31, 1997. At June 30, 1998, the Company had short-term trading securities totalling $37.1 million, compared to $56.3 million at December 31, 1997. Operating Activities - -------------------- Cash provided by operating activities was $3.6 million in the six months ended June 30, 1998, compared to $9.5 million in the six months ended June 30, 1997. An increase in accounts payable and accrued liabilities provided cash of $4.2 million in the six months ended June 30, 1998, compared to a decrease in same using cash of $5.0 million in the six months ended June 30, 1997. An increase in investments used cash of $1.0 million in the six months ended June 30, 1998, compared to a decrease in investments providing cash of $8.6 million in the six months ended June 30, 1997. An increase in inventories used cash of $1.3 million in the six months ended June 30, 1998, compared to a decrease in inventories providing cash of $4.0 million in the six months ended June 30, 1997. An increase in receivables used cash of $10.1 million in the six months ended June 30, 1998, compared to $1.5 million in the six months ended June 30, 1997. The Company expects to generate sufficient cash flow from operations to meet its working capital requirements. Investing Activities - -------------------- Investing activities in the six months ended June 30, 1998 used cash of $22.8 million, consisting primarily of capital expenditures for upgrades to the Company's manufacturing plants and an increase in notes receivable, compared to $6.0 million in the six months ended June 30, 1997. The Company expects gross capital expenditures in 1998, excluding the conversion of its pulp mill from sulphite to kraft pulp, to be approximately $5.5 million, which will be funded from cash, cash flow from operations and non-refundable government grants. In the first half of 1998, gross capital expenditures were $1.5 million, compared to approximately $5.4 million in the same period of 1997. The Company commenced the conversion of its pulp mill from the production of sulphite pulp to kraft pulp in the second quarter of 1998. Gross capital expenditures on the conversion project were FORM 10-Q QUARTERLY REPORT - PAGE 14 15 $11.7 million in the first half of 1998, compared to $0.9 million in the same period of 1997. The conversion is, among other things, expected to increase the capacity of the pulp mill from 160,000 tonnes to 280,000 tonnes per annum and reduce the mill's emissions of sulphur dioxides and effluent substantially. The estimated cost for the conversion is approximately $385 million, which is being financed by a 15 year term loan in the aggregate amount of up to approximately $282 million from two merging German banks, non- refundable governmental grants of up to approximately $97.5 million, governmental assistance and guarantees for long-term project financing, and an additional equity investment by the Company (the "Financing"). See the Company's Form 8-K dated July 6, 1998 for further details with respect to the Financing. The Company estimates that, subject to receipt of all necessary permits and consents in the anticipated time frame, capital expenditures in respect of the conversion project in 1998 will be approximately $100 million. The conversion project is expected to be completed at or about the end of 1999. As part of the restructuring of the Company's paper operations, the Company has completed the sale of its Raschau packaging paper facility and entered into an agreement to sell its Greiz paper mill, which is expected to complete in the second half of 1998. Financing Activities - -------------------- Cash provided by financing activities was $18.7 million in the six months ended June 30, 1998, compared to cash used by financing activities of $7.2 million in the six months ended June 30, 1997. A net increase in indebtedness provided cash of $17.4 million in the six months ended June 30, 1998, compared to a net decrease of $7.2 million in the same period of 1997. The Company issued shares for net proceeds of $2.0 million in the six months ended June 30, 1998, compared to $0.5 million in the six months ended June 30, 1997. The Company paid a cash dividend of $0.6 million, or $0.04 per share, in the current period of 1998. In the first half of 1998, the Company reported an unrealized foreign exchange translation gain of $0.1 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. Other than the Company's plan to convert the production of its pulp mill from sulphite to kraft pulp, the Company had no material commitments to acquire assets or operating businesses as at June 30, 1998. The Company anticipates that there will be acquisitions of businesses or commitments to projects in the future. To achieve its long-term goals of expanding its asset and earnings base through mergers and acquisitions, the Company will require substantial capital resources. The necessary resources will be generated from cash flow from operations, cash on hand, borrowing against its assets and/or the sale of assets. FOREIGN CURRENCY - ---------------- Substantially all of the Company's operations are conducted in international markets and its consolidated financial results are subject to foreign currency exchange rate fluctuations, in particular, those in Germany. The Company's pulp and paper products are principally sold in deutschmarks and approximately 99% of the Company revenues are denominated in deutschmarks. 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 balance sheet and do not affect the net earnings of the Company. Since substantially all of the Company's revenues are received in deutschmarks, the financial position of the Company for any given period, when reported in U.S. dollars, can be significantly affected by the exchange rate for deutschmarks prevailing during that period. In the six months ended June 30, 1998, the Company reported a net $0.1 million foreign exchange translation gain and, as a result, the cumulative foreign exchange translation loss decreased to $40.1 million at June 30, 1998 from $41.4 million at December 31, 1997. As both the Company's principal sources of revenues and expenses are in deutschmarks, the Company does not currently enter into any currency hedging arrangements for exchange rate fluctuations. The average and period end exchange rates for the deutschmark to the U.S. dollar for the periods indicated are as follows:
Period From Quarter Ended Quarter Ended June 30 to August 12, 1998 June 30, 1998 June 30, 1997 -------------------------- -------------------------- -------------------------- Period End Period Average Period End Period Average Period End Period Average ---------- -------------- ---------- -------------- ---------- -------------- Rate of Exchange Deutschmark 1.7746 1.7855 1.8032 1.7930 1.7438 1.7079
Based upon the period average exchange rate in the first half of 1998, the U.S. dollar increased by approximately 0.4% in value against the deutschmark since December 31, 1997. YEAR 2000 - --------- Many of the world's computer systems currently record years in a two-digit format. These computer systems will be unable to properly interpret dates beyond the year 1999, which could lead to business disruptions and is commonly referred to as the "Year 2000 issue". The Company is conducting a comprehensive review of all significant applications that may require modification to ensure Year 2000 compliance. The Company is utilizing both internal and external resources to make any required modifications and to test for Year 2000 compliance. The modification and testing process of all significant applications is expected to be completed in 1999. In addition, the Company has initiated communications with its significant suppliers and largest customers to ascertain their Year 2000 readiness and develop contingency plans as required. Based upon its current information, management of the Company has determined that the Year 2000 issue will not pose significant operational problems for its computers. The total cost to the Company of Year 2000 compliance activities has not been and is not currently anticipated to be material to its financial position or results of operations in any given year. The costs and the dates on which the FORM 10-Q QUARTERLY REPORT - PAGE 16 17 Company plans to complete Year 2000 modification and testing are based on management's best estimates, which were derived utilizing numerous assumptions of future events. However, there can be no assurance that these estimates will be achieved and actual results could differ materially from those anticipated. CYCLICAL NATURE OF BUSINESS; COMPETITIVE POSITION - ------------------------------------------------- The pulp and paper business is cyclical in nature and markets for the Company's principal products are characterized by periods of supply and demand imbalance, which in turn affects product prices. The markets for pulp and paper are highly competitive and sensitive to cyclical changes in industry capacity and in the economy, both of which can have a significant influence on selling prices and the earnings of the Company. Demand for pulp and paper products has historically been determined by the level of economic growth and has been closely tied to overall business activity. The competitive position of the Company is influenced by the availability and quality of raw materials (fibre) and its experience in relation to other producers with respect to inflation, energy, labour costs and productivity. PART II. OTHER INFORMATION ----------------- ITEM 1. LEGAL PROCEEDINGS The Company is subject to routine litigation incidental to its business. The Company does not believe that the outcome of such litigation will have a material adverse effect on its business or financial condition. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS In May 1998, in reliance on an exemption from registration under the Securities Act of 1933, as amended (the "Securities Act") and the rules promulgated thereunder, as a transaction not involving a public offering under Section 4(2) of the Securities Act, the Company issued, pursuant to an underwriting agreement with Volendam Securities C.V. (the "Agent"), $12.0 million of 8% subordinated debentures maturing 2003 (as amended) with non-detachable warrants entitling the holders to subscribe for up to an aggregate of 2.0 million ordinary shares at, subject to a minimum, the market price of the shares at the time of exercise. The Agent received a fee of $0.7 million and reimbursement of certain expenses. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit Number Description ------- ----------- 10 English Translation of a Loan Agreement in the amount of DM 508,000,000 between Zellstoff- und Papierfabrik Rosenthal GmbH & Co. KG, FORM 10-Q QUARTERLY REPORT - PAGE 17 18 Blankenstein on the one hand and Bayerische Hypotheken- und Wechsel-Bank Aktiengesellschaft, Munich and Bayerische Vereinsbank Aktiengesellschaft, Munich on the other hand dated July 6, 1998. Incorporated by reference from the Company's Form 8-K dated July 6, 1998. 27 Article 5 - Financial Data Schedule for the 2nd Quarter 1998 - Form 10-Q. (b) Reports on Form 8-K A report on Form 8-K dated July 6, 1998 was filed reporting under: Item 5. Other Events. Item 7. Financial Statements and Exhibits. FORM 10-Q QUARTERLY REPORT - PAGE 18 19 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MERCER INTERNATIONAL INC. By: /s/ Maarten Reidel --------------------------------- Maarten Reidel Secretary and Chief Financial Officer Date: August 12, 1998 FORM 10-Q QUARTERLY REPORT - PAGE 19 20 EXHIBIT INDEX Exhibit Number Description - ------- ----------- 10 English Translation of a Loan Agreement in the amount of DM 508,000,000 between Zellstoff- und Papierfabrik Rosenthal GmbH & Co. KG, Blankenstein on the one hand and Bayerische Hypotheken- und Wechsel-Bank Aktiengesellschaft, Munich and Bayerische Vereinsbank Aktiengesellschaft, Munich on the other hand dated July 6, 1998. Incorporated by reference from the Company's Form 8-K dated July 6, 1998. 27 Article 5 - Financial Data Schedule for the 2nd Quarter 1998 - Form 10-Q. EX-27 2 EX 27 - ARTICLE 5 - FDS 2ND QTR 1998 FORM 10-Q
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 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 4,044 37,054 35,136 0 17,106 96,093 95,669 0 233,628 57,655 30,192 0 0 90,649 53,282 233,628 95,982 100,804 76,170 89,964 0 0 1,773 10,840 43 10,797 0 0 0 10,797 0.71 0.71
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