<PAGE> 1
==============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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 employer identification no.)
of incorporation or organization)
BRANDSCHENKE STR. 64, ZURICH, SWITZERLAND CH 8002
(Address of principal executive offices) (Postal 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 13,315,934 common shares of beneficial interest outstanding
as at August 9, 1996.
==============================================================================
<PAGE> 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, evaluation of market
conditions, the outcome of legal proceedings, the adequacy of reserves, or
plans for product development. 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, 1996
(UNAUDITED)
<PAGE> 3
MERCER INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
AS AT JUNE 30, 1996 AND DECEMBER 31, 1995
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 12,172 $ 29,230
Investments 80,543 65,311
Receivables 22,158 17,711
Inventories 19,936 27,723
Other 874 643
------------ ------------
135,683 140,618
Long-term Assets
Net assets of spun-off operations - 55,366
Investments 9,595 5,653
Receivables 10,252 12,450
Properties 115,348 104,038
Other 8,680 10,625
------------ ------------
143,875 188,132
------------ ------------
$ 279,558 $ 328,750
============ ============
</TABLE>
<PAGE> 4
MERCER INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
AS AT JUNE 30, 1996 AND DECEMBER 31, 1995
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
LIABILITIES
Current Liabilities
Accounts payable and accrued expenses $ 50,958 $ 47,455
Long-term Liabilities
Debt 27,613 25,220
Due to affiliate 20,118 21,778
Other 6,859 7,282
------------ ------------
54,590 54,280
------------ ------------
Total Liabilities 105,548 101,735
SHAREHOLDERS' EQUITY
Shares of beneficial interest 69,978 70,765
Cumulative translation adjustment (9,390) (1,732)
Net unrealised loss on investments valuation (2,590) (2,974)
Retained earnings 116,012 160,956
------------ ------------
174,010 227,015
------------ ------------
$ 279,558 $ 328,750
============ ============
</TABLE>
<PAGE> 5
MERCER INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT FOR EARNINGS PER SHARE)
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
REVENUES
Sales $ 92,313 $ 151,130
Investments and other 7,237 4,600
------------ ------------
99,550 155,730
EXPENSES
Cost of sales 75,994 104,139
General and administrative 12,788 16,069
Interest expenses 1,954 1,881
------------ ------------
90,736 122,089
------------ ------------
INCOME FROM OPERATIONS 8,814 33,641
INCOME TAXES 81 -
------------ ------------
INCOME FROM CONTINUING OPERATIONS
BEFORE MINORITY INTEREST 8,733 33,641
MINORITY INTEREST - (5,746)
------------ ------------
INCOME FROM CONTINUING OPERATIONS 8,733 27,895
INCOME FROM SPUN-OFF OPERATIONS 466 (259)
------------ ------------
NET INCOME 9,199 27,636
RETAINED EARNINGS, BEGINNING OF PERIOD 160,956 96,773
DIVIDEND (54,143) -
------------ ------------
RETAINED EARNINGS, END OF PERIOD $ 116,012 $ 124,409
============ ============
EARNINGS PER SHARE
Continuing operations $ 0.65 $ 2.33
Spun-off operations 0.03 (0.03)
------------ ------------
$ 0.68 $ 2.30
============ ============
</TABLE>
<PAGE> 6
MERCER INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THREE MONTHS ENDED JUNE 30, 1996 AND 1995
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT FOR EARNINGS PER SHARE)
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
REVENUES
Sales $ 44,228 $ 78,297
Investments and other 5,449 2,208
------------ ------------
49,677 80,505
EXPENSES
Cost of sales 39,379 55,556
General and administrative 6,519 9,422
Interest expenses 895 26
------------ ------------
46,793 65,004
------------ ------------
INCOME FROM OPERATIONS 2,884 15,501
INCOME TAXES 11 -
------------ ------------
INCOME FROM CONTINUING OPERATIONS
BEFORE MINORITY INTEREST 2,873 15,501
MINORITY INTEREST - -
------------ ------------
INCOME FROM CONTINUING OPERATIONS 2,873 15,501
INCOME FROM SPUN-OFF OPERATIONS 436 116
------------ ------------
NET INCOME 3,309 15,617
RETAINED EARNINGS, BEGINNING OF PERIOD 166,846 108,792
DIVIDEND (54,143) -
------------ ------------
RETAINED EARNINGS, END OF PERIOD $ 116,012 $ 124,409
============ ============
EARNINGS PER SHARE
Continuing operations $ 0.21 $ 1.19
Spun-off operations 0.03 0.01
------------ ------------
$ 0.24 $ 1.20
============ ============
</TABLE>
<PAGE> 7
MERCER INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income from continuing operations $ 8,733 $ 27,895
Adjustments to reconcile net income to
cash from operating activities
Depreciation and amortization (4,337) (6,662)
Loss (gain) on sales of investments (3,975) (2,079)
Minority interest - 5,746
Other - 1
------------ ------------
421 24,901
Changes in current assets and liabilities
Inventories 6,266 (3,215)
Receivables (3,283) 11,985
Accounts payable and accrued expenses 6,986 (11,014)
Other (237) (1,208)
------------ ------------
10,153 21,449
Proceeds from the sales of trading securities 24,821 -
Purchase of trading securities (38,792) (43,435)
------------ ------------
(3,818) (21,986)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of available-for-sale securities - (4,004)
Purchase of fixed assets (12,844) (11,033)
Other 25 882
------------ ------------
(12,819) (14,155)
------------ ------------
</TABLE>
<PAGE> 8
MERCER INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
FOR SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in bank indebtedness $ 3,776 $ 22,982
Decrease in bank indebtedness (150) (17,033)
Decrease in notes payable - (553)
Net proceeds on issuance (cost to repurchase)
shares of beneficial interest (1,391) -
Other - (423)
------------ ------------
2,235 4,973
------------ ------------
Effect of exchange rate changes on cash
and cash equivalents (965) 4,052
------------ ------------
Net cash used in continuing operations (15,367) (27,116)
Net cash used in (provided by) spun-off
operations (1,691) 6,118
------------ ------------
Increase (decrease) in cash and
cash equivalents (17,058) (20,998)
Cash and cash equivalents:
Beginning of period 29,230 42,512
------------ ------------
End of period $ 12,172 $ 21,514
============ ============
</TABLE>
<PAGE> 9
MERCER INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTH PERIOD ENDED JUNE 30, 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 consolidated 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 consolidated 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 consolidated financial statements for all periods and
certain amounts in the Company's consolidated 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
consolidated financial statements as "spun-off operations" and are excluded
from amounts for "continuing operations" (see Note 2. Spin-Off of Arbatax and
Dividend). In addition, the Company's consolidated 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 and Dividend
- ------------------------------------------
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 distributed (the "Distribution")
approximately 83% of the issued shares of its 92% owned subsidiary, Arbatax as
a special stock dividend. The Distribution was effected in June 1996 and the
Distribution ratio was one share of Arbatax common stock for every two shares
of beneficial interest of the
<PAGE> 10
Company (the "Mercer Common Stock"). Fractional interests were not
distributed, but were aggregated and sold and the cash proceeds distributed to
the holders of Mercer Common Stock entitled thereto. The Company currently
owns 671,931 shares of Arbatax common stock, representing approximately 7.1%
of the issued shares of Arbatax common stock at June 30, 1996 and 8,848,760
shares of Arbatax common stock are held publicly. For the purposes of
effecting the Distribution and governing certain ongoing relationships, the
Company and Arbatax entered 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
consolidated financial statements as "spun-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 was recorded as a stock dividend and deducted from
shareholders' equity at the carrying amount of the net assets of the spun-off
operations. The net amount of the special stock dividend was approximately
$50.7 million comprised of $54.1 million, representing the Company's
investment in Arbatax and the Company's share of Arbatax's undistributed post-
acquisition profits, less $3.4 million representing the Company's share of the
translation adjustment loss on Arbatax's net assets. The shares of Arbatax
common stock retained by the Company are included in "Investments" under the
"Long-term Assets" section in the balance sheets.
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 13,480,550
and 11,996,015 for the six months ended June 30, 1996 and 1995, and 13,455,810
and 13,047,741 for the three months ended June 30, 1996 and 1995.
<PAGE> 11
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 business to its shareholders, subject to regulatory
approval. Pursuant to the spin-off which was completed in the second quarter
of 1996, the Company distributed 6,697,716 shares of common stock of its
subsidiary, Arbatax International Inc. ("Arbatax") to its shareholders as a
special stock dividend. The operations of Arbatax have been classified
separately within the Company's consolidated financial statements as "spun-off
operations" and are excluded from the amounts of revenues and expenses of the
Company's continuing operations. Previously reported consolidated financial
statements for all periods and certain amounts in the Company's consolidated
financial statements and related notes have been restated to conform to the
current presentation. See Notes 1 and 2 to the consolidated financial
statements included herein.
The following discussion and analysis of the results of operations and the
financial condition of the Company for the six months and quarter ended June
30, 1996 should be read in conjunction with the consolidated financial
statements and related notes included elsewhere herein.
Results of Operations - Six Months Ended June 30, 1996
- ------------------------------------------------------
In the first half of 1996, revenues decreased to $99.6 million from $155.7
million in the same period in 1995, primarily as a result of lower pulp and
paper prices, decreased paper sales and the divesture of the Company's
corrugated box plant at Heidenau and Raschau paper mill (collectively the
"Divested Plants") which occurred in the second half of 1995. In addition, as
the Company's products are principally sold in deutschmarks, the depreciation
of the deutschmark against the U.S. dollar by approximately 6% in the first
half of 1996 also contributed to lower revenues. See "Foreign Currency".
Costs and expenses decreased to $90.7 million in the first half of 1996,
compared to $122.1 million in the same period in 1995, primarily as a result
of lower revenues and decreased fibre costs. General and administrative
expenses decreased to $12.8 million for the six months ended June 30, 1996,
compared to $16.1 million in the same period in 1995.
For the six months ended June 30, 1996, net earnings from continuing
operations were $8.7 million or $0.65 per share, compared to $27.9 million
or $2.33 per share for the six months ended June 30, 1995.
<PAGE> 12
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>
Six Months Ended Six Months Ended
June 30, 1996 June 30, 1995(1)
---------------- ----------------
(in thousands of dollars except volume amounts)
<S> <C> <C>
Sales by Product Class
- ----------------------
Packaging papers $ 16,664 $ 34,624
Specialty papers 15,510 20,996
Printing papers 19,447 28,996
Pulp 37,660 62,228
Other 3,032 4,286
------------ ------------
Total(2) $ 92,313 $ 151,130
============ ============
Sales by Geographic Area
- ------------------------
Germany $ 52,781 $ 97,599
European Union(3) 23,568 42,859
Other 15,964 10,672
------------ ------------
Total $ 92,313 $ 151,130
============ ============
Sales by Volume
- --------------- (tonnes)
Packaging papers 53,630 61,095
Specialty papers 14,191 18,872
Printing papers 23,310 26,140
Pulp 64,985 69,775
------------ ------------
Total 156,116 175,882
============ ============
- ----------------------------
(1) Including the operations of the Divested Plants which had sales of
$13.3 million or 18,218 tonnes of packaging papers.
(2) Excluding intercompany sales.
(3) Not including Germany.
</TABLE>
Pulp and paper markets were generally weak in the first half of 1996, as a
result of decreased demand for paper and a resulting increase in pulp
producers' inventories. Customers generally reduced purchases to reduce their
excess inventories, which resulted in lower product prices and reduced sales
volumes in the first half of 1996. This price weakness is expected to
continue until the excess inventory situation corrects itself.
In the first half of 1996, list prices for pulp were, on average, down
approximately 31% from the same period in 1995 and approximately 42% 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 half of 1996, the Company's Pulp mill
took 15 days of market related downtime. Pulp sales by volume in the first
half of 1996 decreased by 7% compared to the same period in 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 erosion in pulp prices stabilized in April and there was a slight
<PAGE> 13
improvement in prices in June, 1996. The Company and other pulp producers
have announced a further pulp price increase for the third quarter of 1996,
although there can be no assurances that the same can be maintained.
The average net selling price for the Company's paper products decreased, on
average, by approximately 25% in the first half of 1996 from the comparative
period in 1995. Prices for specialty papers remained relatively stable, while
prices for packaging and printing papers declined in the first half of 1996
from December 31, 1995. Sales volumes for all papers declined compared to the
same period in 1995. Results for the current period excluded the operations of
the Divested Plants, 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 20% in the first half of 1996, compared
to December 31, 1995 and were down approximately 10% in the current period
from the comparative period in 1995. Recycled fibre (wastepaper) costs for
paper production decreased by approximately 65% in the first half of 1996 from
the same period in 1995. While fibre costs remained relatively low in the
first half 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
for 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 1996, the
Company gave notice to the employers' association that it was withdrawing
therefrom and wished to negotiate independently with its workers with respect
to wages. The employers' association has not accepted the Company's
withdrawal because of alleged insufficient notice. The Company has commenced
legal action for a declaration that its withdrawal from the employers'
association was valid.
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 independently established a separate wage agreement for its own
workers. Pursuant to the Company's position on wages, its employees will
receive a 4% wage increase retroactive to March 1, 1996. The Company has
taken the position that it is not subject to the additional wage increases
reached under the National Agreement, but instead will negotiate a new
agreement independently with its workers.
Since acquisition, the Company has been implementing operational changes to
its production facilities to improve efficiency, increase export sales to
markets outside of Germany and upgrade its product mix. These changes
continued in the first half of 1996 and resulted in the 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.
<PAGE> 14
Results of Operations - Quarter Ended June 30, 1996
- ---------------------------------------------------
Revenues in the second quarter of 1996 decreased to $49.7 million from $80.5
million in the comparative quarter of 1995. The decrease in revenues reflects
lower pulp and paper prices and the exclusion of the Divested Plants. The
lower value of the deutschmark against the U.S. dollar in the second quarter
of 1996 compared to the second quarter of 1995 also contributed to lower
revenues. On average, the deutschmark decreased by approximately 9% in the
current period of 1996 from the comparative period of 1995.
Costs and expenses decreased to $46.8 million in the current quarter from
$65.0 million in the same period in 1995, primarily as a result of lower
revenues and fibre costs. General and administrative expenses decreased to
$6.5 million in the current quarter from $9.4 million in the same quarter of
1995.
Net earnings from continuing operations in the quarter ending June 30, 1996,
decreased to $2.9 million or $0.21 per share from $15.5 million or $1.19 per
share in the same quarter in 1995.
In the second quarter of 1996, the Company completed the previously announced
spin-off of its financial services business. Pursuant to the spin-off, the
Company distributed (the "Distribution") 6,697,716 shares of common stock of
its subsidiary, Arbatax, as a special stock dividend. The Distribution ratio
was one share of Arbatax common stock for every two shares of beneficial
interest of the Company. The Distribution was recorded as a stock dividend
and reduced shareholders' equity by approximately $50.7 million.
<PAGE> 15
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
June 30, 1996 June 30, 1995(1)
------------- ---------------
(thousands of dollars except volume amounts)
<S> <C> <C>
Sales by Product Class
- ----------------------
Packaging papers $ 6,949 $ 19,423
Specialty papers 7,496 8,908
Printing papers 9,136 17,639
Pulp 19,236 30,573
Other 1,411 1,754
------------ ------------
Total(2) $ 44,228 $ 78,297
============ ============
Sales by Geographic Area
- ------------------------
Germany $ 23,617 $ 50,609
European Union(3) 12,324 17,016
Other 8,287 10,672
------------ ------------
Total $ 44,228 $ 78,297
============ ============
Sales by Volume (tonnes)
- ----------------
Packaging papers 24,948 34,607
Specialty papers 7,147 7,147
Printing papers 12,120 14,469
Pulp 38,851 32,875
------------ ------------
Total 83,066 89,098
============ ============
- -------------------------
(1) Including the operations of the Divested Plants which had sales of
$7.7 million or 10,785 tonnes of packaging papers.
(2) Excluding intercompany sales.
(3) Not including Germany.
</TABLE>
Although world pulp and paper markets remained generally weak in the second
quarter of 1996, the erosion in pulp prices stabilized and there was a slight
improvement in the pulp prices in June 1996. In the current period, pulp
sales volumes improved as a result of improving demand and
<PAGE> 16
the Company reduced its pulp inventories to approximately 7,278 tonnes at June
30, 1996 from 20,015 tonnes at March 31, 1996. World pulp producer
inventories were also reduced during the second quarter of 1996 as a result of
production curtailments and improving demand. Certain pulp producers,
including the Company, have announced price increases for the third quarter of
1996, although there can be no assurance such increases will be maintained.
The average net selling price for the Company's paper products decreased, on
average, by approximately 29% in the second quarter of 1996 from the
comparative period in 1995. Weaker market conditions resulted in some price
erosion during the current period. Overall, paper prices stabilized and there
were price improvements for packaging papers. After the normal slow down in
shipments over the summer, business conditions for the remainder of the year
for the Company's paper products should improve. In addition, higher pulp
prices should support further paper price increases.
Fibre costs remained relatively low during the period. Wood costs for pulp
production were approximately 20% lower in the current period of 1996 from the
comparative period of 1995 and wastepaper prices were 76% lower in the current
period compared to the same period in 1995.
Liquidity and Capital Resources
- -------------------------------
The following table is a summary of selected financial information concerning
the Company for the periods indicated:
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995
------------- -----------------
(In thousands)
<S> <C> <C>
Financial Position
- ------------------
Working capital $ 84,725 $ 93,163
Total assets 279,558 328,750(1)
Long-term government debt 9,944 10,522
Long-term debt - other 17,669 14,698
Due to affiliate 20,118 21,778
Shareholders' equity 174,010 227,015(1)
- ----------------------------
(1) Prior to the Distribution
</TABLE>
At June 30, 1996, the Company's cash and cash equivalents were $12.2 million
compared to $29.2 million at December 31, 1995. At June 30, 1996, the
Company had short-term trading securities, consisting primarily of deutschmark
and swiss franc denominated investment grade bonds, totalling $80.5 million,
compared to $65.3 million as at December 31, 1995.
<PAGE> 17
Operating Activities
- --------------------
Cash provided by operating activities before net purchases of trading
securities was $10.1 million in the six months ended June 30, 1996, as
compared to $21.4 million in the same period in 1995. Cash flow from
operations used cash of $3.8 million in the first half of 1996, as compared
to $22.0 million for the same period in 1995, primarily as a result of an
increase in accounts payable and accrued expenses and a decrease in
inventories. The accounts payable and accrued expenses are net of $5.3
million which was the final instalment of a one-time payment for the
settlement of a securities class action. Net purchases of trading securities
used $14.0 million in the current period as compared to $43.4 million in the
same period of 1995. Purchases of trading securities consisted primarily of
interest bearing investment grade deutschmark and swiss franc denominated
bonds. The Company expects to generate sufficient cash flow from operations to
meet its working capital requirements.
Investing Activities
- --------------------
Investing activities in the first half of 1996 used cash of approximately
$12.8 million, consisting primarily of capital expenditures for upgrades to
the Company's manufacturing plants, compared to $14.1 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 of which approximately $12.8 million was expended in the first half
of 1996. 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 June 30, 1996, the Company had
obtained approval for $10.4 million of such non-refundable government grants
which will be received periodically during 1996 and 1997. These non-
refundable grants are not recorded in the income of the Company, but instead
will reduce the cost base of the assets purchased with the proceeds thereof.
At June 30, 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 $15.1 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.
Financing Activities
- --------------------
Cash provided by financing activities was $2.2 million in the first half of
1996, compared to $5.0 million in the same period in 1995.
<PAGE> 18
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
$0.9 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. In addition, the Company's pulp and paper
operations have net operating tax losses, which aggregated approximately
$246.6 million at December 31, 1995, that, under German laws, may be carried
forward indefinitely. If the Company utilizes the pre-acquisition tax losses
of its pulp operations of approximately $105 million, it must pay to BVS
either 35% of any reduction in taxes or a fixed amount of approximately $6.3
million. If the Company elects to make such one-time payment to BVS, it will
be deducted from the long-term portion of government receivables due to the
Company from BVS. As the pulp operations had taxable earnings in 1995, 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.
Although the Company had no material commitments to acquire assets or
operating businesses at June 30, 1996, it anticipates that there will be
acquisitions of businesses or commitments to projects during 1996. To achieve
its long-term goals of expanding its 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.
Foreign Currency
- ----------------
As substantially all of the Company's operations are conducted in
international markets, its consolidated financial results are subject to
foreign currency exchange rate fluctuations and in particular those in
Germany. In the current period 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 six months ended June 30, 1996, the overall depreciation of the
deutschmark against the U.S. dollar and the Distribution resulted in a net
$7.7 million foreign exchange translation loss and as a result
<PAGE> 19
the cumulative foreign exchange translation loss increased from $1.7 million
at December 31, 1995 to $9.4 million at June 30, 1996.
Since 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
June 30, 1996 to Quarter Ended Quarter Ended
August 9, 1996 June 30, 1996 June 30, 1995
---------------- ------------- -------------
End Average End Average End Average
--- ------- --- ------- --- -------
<S> <C> <C> <C> <C> <C> <C>
Rates of Exchange
- -----------------
Deutschmark 1.4788 1.5003 1.5218 1.5262 1.3827 1.3827
</TABLE>
Based upon the period average exchange rate in the first half of 1996, the
deutschmark depreciated by approximately 6% against the U.S. dollar since
December 31, 1995.
Cyclical Nature of Business; 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.
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.
<PAGE> 20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Shareholders on June 24, 1996. At the
meeting, Mr. J.S.H. Lee was re-elected for a three year term to the Board of
Trustees of the Company. Mr. Lee joins Mr. Arnulphy whose term does not
expire until 1997 and Messrs. Smith and Moon whose terms do not expire until
1998.
The election of a trustee was submitted and voted upon at the meeting as
follows:
<TABLE>
<CAPTION>
Abstentions and
Votes FOR Votes WITHHELD Broker Non-Votes
--------- -------------- -----------------
<S> <C> <C> <C>
J.S.H. Lee 4,837,970 0 -
</TABLE>
ITEM 5. OTHER INFORMATION
NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description
------- -----------
2.1 Separation Agreement between Mercer International Inc.
and Arbatax International Inc. dated for reference
March 29, 1996. Incorporated by reference from
Form 8-K dated June 3, 1996.
2.2 Information Statement dated May 22, 1996. Incorporated
by reference from Form 8-K dated June 3, 1996.
27 Article 5 - Financial Data Schedule for 2nd Quarter
1996 - Form 10-Q.
<PAGE> 21
(b) Reports on Form 8-K
A report on Form 8-K dated June 3, 1996 was filed reporting under:
Item 2. Acquisition or Disposition of Assets.
Item 7. Financial Statements and Exhibits.
(b) Pro forma consolidated financial statements for the
three months ended March 31, 1996.
<PAGE> 22
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/ Michael J. Smith
--------------------------
Michael J. Smith
(Chief Financial Officer)
Date: August 9, 1996
<PAGE> 23
EXHIBIT INDEX
Exhibit
Number Description
------- -----------
2.1 Separation Agreement between Mercer International Inc.
and Arbatax International Inc. dated for reference
March 29, 1996. Incorporated by reference from
Form 8-K dated June 3, 1996.
2.2 Information Statement dated May 22, 1996. Incorporated
by reference from Form 8-K dated June 3, 1996.
27 Article 5 - Financial Data Schedule for 2nd Quarter
1996 - Form 10-Q.
<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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 12,172
<SECURITIES> 80,543
<RECEIVABLES> 23,488
<ALLOWANCES> 1,330
<INVENTORY> 19,936
<CURRENT-ASSETS> 135,683
<PP&E> 145,787
<DEPRECIATION> 30,439
<TOTAL-ASSETS> 279,558
<CURRENT-LIABILITIES> 50,958
<BONDS> 27,613
0
0
<COMMON> 69,978
<OTHER-SE> 104,032
<TOTAL-LIABILITY-AND-EQUITY> 279,558
<SALES> 92,313
<TOTAL-REVENUES> 99,550
<CGS> 75,994
<TOTAL-COSTS> 90,736
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,954
<INCOME-PRETAX> 8,814
<INCOME-TAX> 81
<INCOME-CONTINUING> 8,733
<DISCONTINUED> 466
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,199
<EPS-PRIMARY> 0.68
<EPS-DILUTED> 0.68
</TABLE>
