<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED MARCH 31, 1996
COMMISSION FILE NO.: 0-9409
MERCER INTERNATIONAL INC.
Exact name of Registrant as specified in its charter.
WASHINGTON 91-6087550
State or other jurisdiction IRS Employee Identification
of incorporation or organization number
BRANDSCHENKE STR. 64, ZURICH, SWITZERLAND CH 8002
Address of principal executive office Postal Code
Registrant's telephone number including area code: 41(1) 201 7710
Indicate by check mark whether the registrant [1] has filed all documents and
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 13,315,934 shares of beneficial interest outstanding as at
May 10, 1996.
===============================================================================
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MERCER INTERNATIONAL INC.
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(UNAUDITED)
FORM 10-Q
QUARTERLY REPORT - PAGE 2
<PAGE> 3
MERCER INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
AS AT MARCH 31, 1996 AND DECEMBER 31, 1995
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 12,706 $ 29,230
Investments 72,742 65,311
Receivables 18,384 17,711
Inventories 26,968 27,723
Other 735 643
------------- -------------
131,535 140,618
Long-Term Assets
Net assets of operation to be spun-off 55,391 55,366
Investments 5,881 5,653
Receivables 10,550 12,450
Properties 108,467 104,038
Deferred income tax assets 10,570 10,625
------------- -------------
190,859 188,132
------------- -------------
$ 322,394 $ 328,750
============= =============
</TABLE>
FORM 10-Q
QUARTERLY REPORT - PAGE 3
<PAGE> 4
MERCER INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
AS AT MARCH 31, 1996 AND DECEMBER 31, 1995
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
--------------- --------------
<S> <C> <C>
LIABILITIES
Current Liabilities
Accounts payable and accrued expenses $ 39,258 $ 47,455
Long-Term Liabilities
Debt 27,569 25,220
Due to affiliate 21,429 21,778
Other 7,072 7,282
-------------- --------------
56,070 54,280
-------------- --------------
Total Liabilities 95,328 101,735
SHAREHOLDERS' EQUITY
Shares of beneficial interest 69,978 70,765
Cumulative translation adjustment (7,132) (1,732)
Net unrealized loss on investments valuation (2,626) (2,974)
Retained earnings 166,846 160,956
-------------- --------------
227,066 227,015
-------------- --------------
$ 322,394 $ 328,750
============== ==============
</TABLE>
FORM 10-Q
QUARTERLY REPORT - PAGE 4
<PAGE> 5
MERCER INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT FOR EARNINGS PER SHARE)
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C>
Revenues
Sales $ 48,085 $ 72,833
Investments 1,788 2,392
-------------- --------------
49,873 75,225
Expenses
Cost of sales 36,615 48,583
General and administrative 6,269 6,647
Interest expenses 1,059 1,855
-------------- --------------
43,943 57,085
-------------- --------------
Income from continuing operations before
income taxes and minority interest 5,930 18,140
Income taxes 70 --
-------------- --------------
Income from continuing operations before
minority interest 5,860 18,140
Minority interest -- 5,746
-------------- --------------
Income from continuing operations 5,860 12,394
Income (loss) from operations to be spun-off 30 (375)
-------------- --------------
Net income 5,890 12,019
Retained earnings, beginning of period 160,956 96,773
-------------- --------------
Retained earnings, end of period $ 166,846 $ 108,792
============== ==============
Earnings per share
Income from continuing operations $ 0.43 $ 1.13
Income (loss) from operations to be spun-off -- (0.03)
-------------- --------------
Net income $ 0.43 $ 1.10
============== ==============
</TABLE>
FORM 10-Q
QUARTERLY REPORT - PAGE 5
<PAGE> 6
MERCER INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C>
Cash Flows from Continuing Operating Activities:
Net income from continuing operations $ 5,860 $ 12,394
Adjustments to reconcile net income from
continuing operations to cash
from continuing operating activities
Depreciation and amortization (1,835) (3,560)
Loss (gain) on investments 1 (1,391)
Minority interest -- 5,746
--------------- ---------------
4,026 13,189
Changes in current assets and liabilities
Inventories (36) 1,995
Receivables (59) 2,858
Accounts payable and accrued expenses (6,530) 1,023
Other (96) 385
--------------- ---------------
(2,695) 19,450
Proceeds from the sales of trading securities 11,875 --
Purchase of trading securities (21,153) (26,777)
--------------- ---------------
Net cash used in continuing
operating activities (11,973) (7,327)
Cash Flows from Investing Activities of
Continuing Operations:
Purchase of available-for-sale securities -- (3,271)
Purchase of fixed assets (5,366) (5,192)
Other 17 94
--------------- ---------------
Net cash used in investing
activities of continuing operations $ (5,349) $ (8,369)
</TABLE>
FORM 10-Q
QUARTERLY REPORT - PAGE 6
<PAGE> 7
MERCER INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
FOR THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C>
Cash Flows from Financing Activities of Continuing
Operations:
Increase in bank indebtedness $ 3,300 $ 4,722
Decrease in bank indebtedness (149) (155)
Net proceeds on issuance (cost to repurchase)
shares of beneficial interest (1,391) --
--------------- ---------------
Net cash provided by financing
activities of continuing operations 1,760 4,567
Effect of exchange rate changes on cash and
cash equivalents (586) 4,577
--------------- ---------------
Net cash used in continuing operations (16,148) (6,552)
Net cash provided by (used in) operations to be
spun-off (376) 1,230
--------------- ---------------
Net decrease in cash and cash equivalents (16,524) (5,322)
Cash and Cash Equivalents, beginning of period 29,230 42,512
--------------- ---------------
Cash and Cash Equivalents, end of period $ 12,706 $ 37,190
=============== ===============
</TABLE>
FORM 10-Q
QUARTERLY REPORT - PAGE 7
<PAGE> 8
MERCER INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THREE MONTHS ENDED MARCH 31, 1996
(UNAUDITED)
Note 1. Basis of Presentation
The consolidated financial statements 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 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. These interim
period statements should be read together with the audited
financial statements and the accompanying notes included in
the Company's latest annual report on Form 10-K. In the
opinion of the Company, its unaudited interim consolidated
financial statements contain all adjustments necessary, in
order to present a fair statement of the results of the
interim periods presented.
Previously reported financial statements for all periods and
certain amounts in the Company's financial statements and
related notes have been restated to conform to the current
presentation. The Company's interest in the operating results
and net assets of Arbatax International Inc. ("Arbatax") are
classified separately within these financial statements as
"spin-off operations" and are excluded from amounts for
"continuing operations" (see Note 2. Spin-Off of Arbatax). In
addition, the Company's cash flow statements exclude the
activities of Arbatax. Intercompany transactions with
Arbatax, which were eliminated in previous consolidated
financial statements, are now reflected in these financial
statements. Financial information presented for Arbatax in
the Company's consolidated financial statements has been
prepared solely for the purpose of reporting the Company's
results and should not be viewed as a report on the results of
Arbatax itself.
Note 2. Spin-Off of Arbatax
On December 28, 1995, the Company announced plans to spin off
its financial services segment to its shareholders, subject to
regulatory approval. Pursuant to the spin-off, the Company
will distribute (the "Distribution") approximately 83% of the
currently issued shares of its 92% owned subsidiary, Arbatax.
The
FORM 10-Q
QUARTERLY REPORT - PAGE 8
<PAGE> 9
Company expects to effect the Distribution in 1996. The
Distribution ratio will be one share of Arbatax common stock
to every two shares of beneficial interest of the Company (the
"Mercer Common Stock"). Fractional interests will not be
distributed, but will be aggregated and sold and the cash
proceeds will be distributed to the holders of Mercer Common
Stock entitled to fractional interests. Upon completion of
the Distribution, the Company will own 706,150 shares of
Arbatax common stock, representing approximately 8.8% of the
currently issued shares of Arbatax common stock, and 7,272,791
shares of Arbatax common stock will be held publicly. For the
purposes of effecting the Distribution and governing certain
ongoing relationships, the Company and Arbatax will enter
into a separation agreement to provide for the Distribution,
customary indemnities relating to tax, contingent liabilities
and employees, the provision of transitional services and
transfers of certain assets and liabilities.
The operations of Arbatax have been classified separately
within the Company's financial statements as "spin-off
operations" and are excluded from the amounts of revenues and
expenses of the Company's continuing operations. In addition,
Arbatax's assets and liabilities are not consolidated into the
Company's continuing operations. The Distribution will be
recorded as a stock dividend and deducted from retained
earnings at the carrying amount of the net assets of the
spin-off operations. As a result, the Company's total assets
and shareholders' equity will each be reduced by approximately
$50.1 million after the Distribution.
Note 3. Earnings Per Share
Earnings per share is computed on the weighted average number
of shares outstanding during the period after considering
convertible securities, warrants and options. The weighted
average number of shares was 13,505,291 and 10,933,316 for the
three months ended March 31, 1996 and 1995.
FORM 10-Q
QUARTERLY REPORT - PAGE 9
<PAGE> 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. The Company's operations are primarily located in Germany and its
manufacturing plants consist of five paper mills (the "Paper mills") and a
sulphite pulp mill (the "Pulp mill") with aggregate annual production
capacities of approximately 220,000 tonnes and 160,000 tonnes, respectively.
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.
On December 28, 1995, the Company announced that it would spin off its
financial services segment to its shareholders, subject to regulatory approval.
Pursuant to the spin-off, the Company will distribute approximately 83% of the
currently issued shares of its 92% owned subsidiary, Arbatax International Inc.
("Arbatax") to its shareholders as a special dividend. The operations of
Arbatax have been classified separately within the Company's financial
statements as "spin-off operations" and are excluded from the amounts of
revenues and expenses of the Company's continuing operations. Previously
reported financial statements for all periods and certain amounts in the
Company's financial statements and related notes have been restated to conform
to the current presentation. See Notes 1 and 2 to the financial statements
included herein.
The following discussion and analysis of the results of operation and the
financial condition of the Company for the three months ended March 31, 1996
should be read in conjunction with the consolidated financial statements and
related notes included elsewhere herein.
RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 1996
- - ---------------------------------------------------------
In the first quarter of 1996, revenues decreased to $49.9 million from $75.2
million in the same period in 1995, primarily as a result of lower pulp and
paper prices and decreased sales volumes. As the Company's products are
principally sold in deutschmarks, the depreciation of the deutschmark against
the U.S. dollar in the first quarter of 1996 also contributed to lower
revenues. See "Foreign Currency".
Pulp and paper costs decreased to $36.6 million in the first quarter
of 1996, compared to $48.6 million in the same period in 1995, primarily as a
result of lower revenues and decreased fibre costs. General and administrative
expenses decreased marginally to $6.3 million for the three months ended March
31, 1996, compared to $6.6 million in the same period in 1995.
For the three months ended March 31, 1996, net earnings from continuing
operations were $5.9 million or $0.43 per share, compared to $12.4 million or
$1.13 per share for the three months
FORM 10-Q
QUARTERLY REPORT - PAGE 10
<PAGE> 11
ended March 31, 1995. Net earnings in the current period reflected the
acquisition effective April 1, 1995 of the 30% minority interest in the
Company's pulp and paper operations and weakened pulp and paper markets. In
the three months ended March 31, 1996, the spin-off operations resulted in a
profit of $30,000, compared to a loss of $375,000 in the comparative period.
The distribution of the Company's sales by product class, geographic area and
volume is set out in the following table for the periods indicated:
<TABLE>
<CAPTION>
QUARTER ENDED QUARTER ENDED
MARCH 31, 1996 MARCH 31, 1995
-------------- --------------
(IN THOUSANDS)
<S> <C> <C>
SALES BY PRODUCT CLASS
Packaging papers $ 9,715 $ 15,201
Specialty papers 8,014 12,088
Printing papers 10,311 11,357
Pulp 18,424 31,655
Other 1,621 2,532
---------------- ----------------
Total(1) $ 48,085 $ 72,833
================ ================
SALES BY GEOGRAPHIC AREA
Germany $ 29,164 $ 46,990
European Union(2) 11,244 25,843
Other 7,677 --
---------------- ----------------
Total $ 48,085 $ 72,833
================ ================
SALES BY VOLUME (TONNES)
Packaging papers 28,682 26,488
Specialty papers 7,044 11,725
Printing papers 11,190 11,671
Pulp 26,134 36,900
---------------- ----------------
Total 73,050 86,784
================ ================
</TABLE>
- - -----------------------
(1) Excluding intercompany sales.
(2) Not including Germany.
Pulp and paper markets were generally weak in the first quarter of 1996, as a
result of decreased demand and a sharp increase in pulp inventories. Customers
generally reduced purchases to reduce their excess inventories, which resulted
in lower product prices and reduced sales volumes in the first quarter of 1996.
This price weakness is expected to continue until the excess inventory situation
corrects itself. See "Cyclicality; Competitive Position".
FORM 10-Q
QUARTERLY REPORT - PAGE 11
<PAGE> 12
In the first quarter of 1996, list prices for pulp were, on average, down
approximately 18.7% from the same period in 1995 and approximately 14% from
December 31, 1995. Pulp prices were negatively affected by a build up in pulp
inventories which commenced in the latter part of 1995 because of lower demand
and weak paper markets. In the first quarter of 1996, the Company's pulp
inventories increased to 20,015 tonnes from 13,246 tonnes at December 31, 1995
and the Company's Pulp mill took 5 days of market related downtime. Pulp sales
by volume in the first quarter of 1996 decreased by 29.1% compared to the same
period in 1995, but increased by 12.4% from the fourth quarter of 1995. The
overall effect of weaker pulp demand resulting from weaker paper markets was
partially offset by the Company's increased production and sales of dissolving
sulphite pulp.
The average net selling price for the Company's paper products decreased, on
average, by approximately 19.9% in the first quarter of 1996 from the
comparative period in 1995. Prices for printing papers remained relatively
stable, while prices for packaging and specialty papers declined in the first
quarter of 1996 from December 31, 1995. Paper sales by volume in the first
quarter of 1996 decreased by 5.9% compared to the same period in 1995, but
increased by 16.0% from the fourth quarter of 1995. Sales of packaging papers
by volume increased by approximately 8% in the first quarter of 1996, compared
to the same quarter of 1995, whereas sales by volume for specialty and printing
papers declined. Results for the current quarter excluded the operations of the
corrugated box plant at Heidenau and the Raschau paper mill, which were divested
in the second half of 1995.
On average, the Company's fibre (wood chips and pulpwood) costs for pulp
operations decreased by approximately 16% in the first quarter of 1996, compared
to December 31, 1995 and were up approximately 2% in the current quarter,
compared to the same period in 1995. Recycled fibre (wastepaper) costs for
paper operations decreased by approximately 48% in the first quarter of 1996
from the same period in 1995 and were up approximately 10% in the current
quarter of 1996, compared to December 31, 1995. While fibre costs remained
relatively low in the first quarter of 1996, there can be no assurance that they
will not escalate in the future.
The majority of the Company's employees are represented by a national union,
which represents pulp and paper workers in Germany. The Company was a member
of an employers' association which settled an industry-wide collective
bargaining agreement with workers in 1995 that expired on January 31, 1996. In
the first quarter of 1996, the Company advised the employers' association that
it was withdrawing therefrom and wished to negotiate independently with its
workers with respect to wages. The employers' association advised the Company
that they have not accepted its notice of withdrawal because of alleged
insufficient notice. In April 1996, the employers' association reached an
industry-wide collective agreement with pulp and paper workers in Germany with
respect to wages (the "National Agreement") which provides for a 4% wage
increase retroactive to March 1, 1996 and further wage increases of 3%, 3% and
2.5% on September 1, 1996, January 1, 1997 and March 1, 1997, respectively. In
April 1996, the Company settled a collective bargaining agreement independently
with its own workers. Pursuant to the Company's agreement, which expires at
the end of 1996, its employees will receive a 4% wage increase retroactive to
March 1,
FORM 10-Q
QUARTERLY REPORT - PAGE 12
<PAGE> 13
1996. The Company will not be participating in the additional wage increases
reached under the National Agreement, but will be negotiating with its workers
independently at the end of 1996.
Since acquisition, the Company has been implementing operational changes to its
operations to improve efficiency, increase export sales to markets outside of
Germany and upgrade its product mix. These changes continued in the first
quarter of 1996 and resulted in the further elimination of employee positions
and downtime at some of the Company's mills. These changes and upgrades to the
mills will continue during the balance of 1996 and may result in further
downtime at the Company's operations. In any given future reporting period,
such downtime may affect the Company's results of operations.
LIQUIDITY AND CAPITAL RESOURCES
- - -------------------------------
The following table is a summary of selected financial information concerning
the Company for the periods indicated:
<TABLE>
<CAPTION>
MARCH 31, 1996 DECEMBER 31, 1995
-------------- -----------------
(IN THOUSANDS)
<S> <C> <C>
FINANCIAL POSITION
Working capital $ 92,277 $ 93,163
Total assets(1) 322,394 328,750
Long-term government debt 10,252 10,522
Long-term debt - other 17,317 14,698
Due to affiliate 21,429 21,778
Shareholders' equity(1) 227,066 227,015
<CAPTION>
QUARTER ENDED QUARTER ENDED
MARCH 31, 1996 MARCH 31, 1995(3)
-------------- --------------
(IN THOUSANDS, OTHER THAN PER SHARE AMOUNTS)
<S> <C> <C>
CASH FLOW FROM CONTINUING OPERATIONS(2)
Cash flow $ 4,026 $ 7,443
Cash flow per share $ 0.30 $ 0.68
</TABLE>
- - ----------------
(1) Prior to spin-off of Arbatax.
(2) Before changes in working capital and net purchases of trading securities.
(3) Net of minority interest.
At March 31, 1996, the Company's cash and cash equivalents decreased to $12.7
million from $37.2 million at March 31, 1995 or from $29.2 million at December
31, 1995. At March 31, 1996, the Company had short-term trading securities,
consisting primarily of deutschmark and
FORM 10-Q
QUARTERLY REPORT - PAGE 13
<PAGE> 14
swiss franc denominated investment grade bonds, totalling $72.7 million,
compared to $65.3 million as at December 31, 1995.
Operating Activities
Cash used in operating activities before net purchases of trading securities was
$2.7 million in the three months ended March 31, 1996, as compared to $19.5
million provided by operating activities in the same period in 1995. Cash flow
from operations used cash of $12.0 million in the first quarter of 1996, as
compared to $7.3 million for the same period in 1995. During the current
period, the reduction of accounts payable and accrued expenses used $6.5
million, of which $5.3 million was the final instalment of a one-time payment
for the settlement of a securities class action, and net purchases of trading
securities used $9.3 million. Purchases of trading securities consisted
primarily of interest bearing investment grade deutschmark and swiss franc
bonds. The Company expects to generate sufficient cash flow from operations to
meet its working capital requirements.
Investing Activities
Investing activities in the first quarter of 1996 used cash of approximately
$5.3 million, consisting primarily of capital expenditures for upgrades to the
Pulp and Paper mills, compared to $8.4 million in the same period in 1995.
The Company is undertaking significant capital investments and expects to spend
approximately $37.2 million in the three year period ending December 31, 1998.
Approximately $5.4 million was expended in the first quarter of 1996, compared
to $5.2 million in the same period in 1995. These investments are being
partially financed through non-refundable grants made available by German
federal and state governments to qualifying businesses operating in Germany.
At March 31, 1996, the Company had obtained approval for $10.4 million of such
non-refundable government grants. These non-refundable grants are not recorded
in the income of the Company, but instead reduce the cost base of the assets
purchased with the proceeds thereof. At March 31, 1996, pursuant to the terms
of the acquisition of the Company's pulp and paper operations from
Bundesanstalt fur Vereinigungsbedingte Sonderaufgaben ("BVS"), the German
government privatization agency, receivables from BVS totalled $13.6 million.
Loan guarantees are also available from state governments in Germany for up to
80% of the cost of qualified investments. Such guarantees permit businesses to
obtain term loans at below market interest rates. The Company has not yet
utilized any such state guarantees.
FORM 10-Q
QUARTERLY REPORT - PAGE 14
<PAGE> 15
Financing Activities
Cash provided by financing activities was $1.8 million in the first quarter of
1996, compared to $4.6 million in the same period in 1995. During the first
quarter of 1996, the Company expended $1.4 million on repurchases of 70,500 of
the Company's shares of beneficial interest, compared to nil in the same period
in 1995.
The depreciation of the deutschmark against the U.S. dollar in the first
quarter of 1996 resulted in an unrealized foreign exchange translation loss of
$0.6 million from cash and cash equivalents and is shown in the consolidated
statements of cash flows included herein. See "Foreign Currency".
The Company owns a substantial amount of real estate which is excess to its
requirements and may be divested. If such real estate is sold prior to
December 31, 1996, then 80% of the proceeds received in excess of the cost of
the real estate as recorded in the financial statements of the Company's paper
operations will be payable to BVS. Any proceeds received up to the amount of
such costs are not subject to any payments to BVS. The Company does not expect
that any material amounts will be payable to BVS upon the disposition of excess
real estate.
The Company's pulp and paper operations had net operating tax losses of
approximately $246.6 million at December 31, 1995. Under German tax laws,
these losses may be carried forward indefinitely. If the Company uses the
pre-acquisition tax losses of its pulp operations of $105 million to reduce
future taxable income, it must pay to BVS either 35% of the reduction in taxes
or a fixed amount of approximately $6.3 million. If the Company elects to make
such one-time payment to BVS, the same will be deducted from the long-term
portion of government receivables due to the Company from BVS. In 1995, the
pulp operations earned a taxable profit and the Company expects that it may,
prior to the end of 1996, acquire the said tax losses for $6.3 million as
aforesaid. No payment to BVS is required if the Company utilizes the net
operating tax losses of its paper operations. The Company's tax losses may
result in a substantial deferred tax benefit being recognized, which under FASB
Statement No. 109, may be reflected as an increase to earnings. The Company is
continuing discussions with third parties to divest certain redundant assets
and thereby realize the tax benefits of its paper operations. Any such
transaction may result in changes of the corporate structure of the Company's
paper operations.
At March 31, 1996, the Company had no material commitments to acquire assets or
operating businesses. The Company anticipates that there will be acquisitions
of businesses or commitments to projects during 1996. To achieve its long-term
goals of expanding the asset and earnings base by 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 or the sale of assets.
FORM 10-Q
QUARTERLY REPORT - PAGE 15
<PAGE> 16
Foreign Currency
Substantially all of the Company's operations are conducted in international
markets and therefore its consolidated financial results are subject to
foreign currency exchange rate fluctuations and in particular those in Germany.
The Company's pulp and paper products are principally sold in deutschmarks.
In the three months ended March 31, 1996, approximately 99% of the Company's
revenues were denominated in deutschmarks.
The Company translates foreign assets and liabilities into U.S. dollars at the
rate of exchange on the balance sheet date. Revenues and expenses are
translated at the average rate of exchange prevailing during the year.
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. At December 31, 1995, the
cumulative foreign exchange translation resulted in a loss of $1.7 million. In
the three months ended March 31, 1996, the overall depreciation of the
deutschmark against the U.S. dollar resulted in a net $5.4 million foreign
exchange translation loss and as a result the cumulative foreign exchange
translation loss was increased from $1.7 million to $7.1 million at March 31,
1996.
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 period average and period ending exchange rates for the deutschmark to the
U.S. dollar for the periods indicated are as follows:
<TABLE>
<CAPTION>
PERIOD FROM QUARTER ENDED QUARTER ENDED
MARCH 31 TO MAY 10, 1996 MARCH 31, 1996 MARCH 31, 1995
---------------------------- --------------------------- ---------------------------
PERIOD END PERIOD AVERAGE PERIOD END PERIOD AVERAGE PERIOD END PERIOD AVERAGE
---------- -------------- ---------- -------------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
RATE OF EXCHANGE
Deutschmark 1.5274 1.4987 1.4760 1.4785 1.3767 1.4497
</TABLE>
Based upon the period average exchange rate in the first quarter of 1996, the
U.S. dollar increased by approximately 3% in value against the deutschmark
since December 31, 1995.
FORM 10-Q
QUARTERLY REPORT - PAGE 16
<PAGE> 17
Cyclicality; Competitive Position
The pulp and paper business is cyclical in nature and markets for its principal
products are affected by fluctuations in supply and demand in each cycle, which
in turn affects product prices. 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. The earnings of the Company are
sensitive to price changes to its principal products of pulp and paper.
FORM 10-Q
QUARTERLY REPORT - PAGE 17
<PAGE> 18
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the first quarter of 1996, the Company received court approval for the
settlement of a class action securities litigation, which was originally filed
against the Company and its senior management in April 1994, without any
admission of liability. Reference is made to the Company's Form 10-K for the
year ended December 31, 1995 for information concerning such legal proceeding.
The Company is also 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 2-5. Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description
27 Article 5 - Financial Data Schedule for 1st
Quarter 1996 - Form 10-Q.
(b) Reports on Form 8-K
None.
FORM 10-Q
QUARTERLY REPORT - PAGE 18
<PAGE> 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.
/s/ Michael J. Smith
--------------------------------------
Michael J. Smith
Chief Financial Officer
Date: May 10, 1996
FORM 10-Q
QUARTERLY REPORT - PAGE 19
<PAGE> 20
EXHIBIT INDEX
Exhibit
Number Description
27 Article 5 - Financial Data Schedule for 1st Quarter
1996 - Form 10-Q.
FORM 10-Q
QUARTERLY REPORT - PAGE 20
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
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.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 12,706
<SECURITIES> 72,742
<RECEIVABLES> 19,754
<ALLOWANCES> 1,370
<INVENTORY> 26,968
<CURRENT-ASSETS> 131,535
<PP&E> 136,139
<DEPRECIATION> 27,672
<TOTAL-ASSETS> 322,394
<CURRENT-LIABILITIES> 39,258
<BONDS> 27,569
0
0
<COMMON> 69,978
<OTHER-SE> 157,088
<TOTAL-LIABILITY-AND-EQUITY> 322,394
<SALES> 48,085
<TOTAL-REVENUES> 49,873
<CGS> 36,615
<TOTAL-COSTS> 43,943
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,059
<INCOME-PRETAX> 5,930
<INCOME-TAX> 70
<INCOME-CONTINUING> 5,860
<DISCONTINUED> 30
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,890
<EPS-PRIMARY> 0.43
<EPS-DILUTED> 0.43
</TABLE>
