<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 September 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 (I.R.S. Employer Identification No.)
of incorporation or organization)
Brandschenke Str. 64, 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 14,797,038 common shares of beneficial interest outstanding
as at November 1, 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 NINE MONTHS ENDED SEPTEMBER 30, 1996
(Unaudited)
FORM 10-Q
QUARTERLY REPORT - PAGE 2
<PAGE> 3
MERCER INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
AS AT SEPTEMBER 30, 1996 AND DECEMBER 31, 1995
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
ASSETS 1996 1995
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 15,279 $ 29,230
Securities 78,332 65,311
Receivables 20,066 17,711
Inventories 20,784 27,723
Other 806 643
----------- -----------
135,267 140,618
Long-term Assets
Net assets of spun-off operations - 55,366
Securities 3,852 5,653
Receivables 14,506 12,450
Properties 120,161 104,038
Other 8,680 10,625
----------- -----------
147,199 188,132
----------- -----------
$ 282,466 $ 328,750
=========== ===========
</TABLE>
FORM 10-Q
QUARTERLY REPORT - PAGE 3
<PAGE> 4
MERCER INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
(Continued)
AS AT SEPTEMBER 30, 1996 AND DECEMBER 31, 1995
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
LIABILITIES 1996 1995
<S> <C> <C>
Current Liabilities
Accounts payable and accrued expenses $ 48,657 $ 47,455
Long-term Liabilities
Debt 32,402 25,220
Due to affiliate - 21,778
Other 6,837 7,282
----------- -----------
39,239 54,280
----------- -----------
Total Liabilities 87,896 101,735
SHAREHOLDERS' EQUITY
Shares of beneficial interest 87,672 70,765
Cumulative translation adjustment (10,072) (1,732)
Net unrealised loss on investments valuation (2,182) (2,974)
Retained earnings 119,152 160,956
----------- -----------
194,570 227,015
----------- -----------
$ 282,466 $ 328,750
=========== ===========
</TABLE>
FORM 10-Q
QUARTERLY REPORT - PAGE 4
<PAGE> 5
MERCER INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(Unaudited)
(Dollars in thousands, except for earnings per share)
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
REVENUES
Sales $ 136,488 $ 225,900
Net investments and other 7,079 2,894
----------- -----------
143,567 228,794
EXPENSES
Cost of sales 112,298 155,808
General and administrative 19,286 23,839
Litigation settlement - 7,000
----------- -----------
131,584 186,647
----------- -----------
INCOME FROM OPERATIONS 11,983 42,147
INCOME TAXES (RECOVERY) 110 (9,180)
----------- -----------
INCOME FROM CONTINUING OPERATIONS
BEFORE MINORITY INTEREST 11,873 51,327
MINORITY INTEREST - 5,746
----------- -----------
INCOME FROM CONTINUING OPERATIONS 11,873 45,581
INCOME (LOSS) FROM SPUN-OFF OPERATIONS 466 (184)
----------- -----------
NET INCOME 12,339 45,397
RETAINED EARNINGS, BEGINNING OF PERIOD 160,956 96,773
DIVIDEND (54,143) -
----------- -----------
RETAINED EARNINGS, END OF PERIOD $ 119,152 $ 142,170
=========== ===========
EARNINGS (LOSS) PER SHARE
Continuing operations $ 0.87 $ 3.67
Spun-off operations 0.03 (0.02)
----------- -----------
$ 0.90 $ 3.65
=========== ===========
</TABLE>
FORM 10-Q
QUARTERLY REPORT - PAGE 5
<PAGE> 6
MERCER INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(Unaudited)
(Dollars in thousands, except for earnings per share)
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
REVENUES
Sales $ 44,175 $ 74,770
Net investments and other 1,796 175
----------- -----------
45,971 74,945
EXPENSES
Cost of sales 36,304 51,669
General and administrative 6,498 7,770
Litigation settlement - 7,000
----------- -----------
42,802 66,439
----------- -----------
INCOME FROM OPERATIONS 3,169 8,506
INCOME TAXES (RECOVERY) 29 (9,180)
----------- -----------
INCOME FROM CONTINUING OPERATIONS 3,140 17,686
INCOME FROM SPUN-OFF OPERATIONS - 75
----------- -----------
NET INCOME 3,140 17,761
RETAINED EARNINGS, BEGINNING OF PERIOD 116,012 124,409
----------- -----------
RETAINED EARNINGS, END OF PERIOD $ 119,152 $ 142,170
=========== ===========
EARNINGS PER SHARE
Continuing operations $ 0.23 $ 1.33
Spun-off operations - 0.01
----------- -----------
$ 0.23 $ 1.34
=========== ===========
</TABLE>
FORM 10-Q
QUARTERLY REPORT - PAGE 6
<PAGE> 7
MERCER INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR NINE MONTHS ENDED SEPTEMBER 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 $ 11,873 $ 45,581
Adjustments to reconcile net income to cash
from operating activities
Depreciation and amortization (6,363) (9,152)
Gain on sales of investments (5,926) (2,684)
Minority interest - 5,746
Deferred income taxes - (9,180)
Other - (412)
----------- -----------
(416) 29,899
Changes in current assets and liabilities
Inventories 5,346 (5,940)
Receivables 947 23,943
Accounts payable and accrued expenses 6,844 1,092
Other 492 (1,610)
----------- -----------
13,213 47,384
Proceeds from the sales of trading
securities 24,676 5,475
Purchase of trading securities (40,091) (62,599)
----------- -----------
(2,202) (9,740)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of available-for-sale securities - (3,985)
Proceeds from sales of available-for-sale
securities 1,942 -
Purchase of fixed assets, net (16,124) (13,608)
Other 32 848
----------- -----------
(14,150) (16,745)
----------- -----------
</TABLE>
FORM 10-Q
QUARTERLY REPORT - PAGE 7
<PAGE> 8
MERCER INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
FOR NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in bank indebtedness $ 6,134 $ 24,029
Decrease in bank indebtedness (150) (15,971)
Net proceeds on issuance (cost to repurchase)
shares of beneficial interest (1,070) 3,241
Other - (422)
----------- -----------
4,914 10,877
----------- -----------
Effect of exchange rate changes on cash
and cash equivalents (1,041) 3,217
----------- -----------
Net cash used in continuing operations (12,479) (12,391)
Net cash used in (provided by) spun-off
operations (1,472) (133)
----------- -----------
Decrease in cash and
cash equivalents (13,951) (12,524)
Cash and cash equivalents:
Beginning of period 29,230 42,512
----------- -----------
End of period $ 15,279 $ 29,988
=========== ===========
</TABLE>
FORM 10-Q
QUARTERLY REPORT - PAGE 8
<PAGE> 9
MERCER INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 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 6,697,716 shares of common
stock of
FORM 10-Q
QUARTERLY REPORT - PAGE 9
<PAGE> 10
Arbatax (the "Distribution"), being approximately 83% of the issued shares of
its former 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 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. 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. In September 1996, the Company settled its
indebtedness to Arbatax in the amount of $22.3 million through the issuance of
700,000 shares of Mercer Common Stock and a note payable in the amount of
$12.5 million due in January 1998.
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.
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 13,629,664
and 12,428,542 for the nine months ended September 30, 1996 and 1995,
respectively, and 13,922,180 and 13,288,755 for the three months ended
September 30, 1996 and 1995, respectively.
Note 4 Related Party Transactions
--------------------------
In September 1996, the Company settled its indebtedness with Arbatax as set
forth in Note 2 above. Two trustees and officers of the Company are also
officers and directors of Arbatax.
FORM 10-Q
QUARTERLY REPORT - PAGE 10
<PAGE> 11
PART I - FINANCIAL INFORMATION
---------------------
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.
In the second quarter of 1996, the Company completed its previously announced
spin-off of its financial services business by way of a special stock dividend
of shares (the "Distribution") of its former subsidiary, Arbatax International
Inc. ("Arbatax"). 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 nine months and quarter ended
September 30, 1996 should be read in conjunction with the consolidated
financial statements and related notes included elsewhere herein.
Results of Operations - Nine Months Ended September 30, 1996
- ------------------------------------------------------------
In the nine months ended September 30, 1996, revenues decreased to $143.6
million from $228.8 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 the Raschau paper mill
(collectively, the "Divested Plants") which occurred in the second half of
1995. In addition, the depreciation of the deutschmark against the U.S.
dollar during the current period also contributed to lower revenues. See
"Foreign Currency".
Costs and expenses decreased to $131.6 million in the first nine months of
1996, compared to $186.6 million in the same period in 1995, primarily as a
result of lower revenues and decreased fibre costs. During the comparative
period of 1995, cost and expenses included $7.0 million in respect of a
litigation settlement. General and administrative expenses decreased to $19.3
million for the nine months ended September 30, 1996 from $23.8 million in the
same period in 1995.
FORM 10-Q
QUARTERLY REPORT - PAGE 11
<PAGE> 12
For the nine months ended September 30, 1996, net earnings from
continuing operations were $11.9 million or $0.87 per share, compared to
$45.6 million or $3.67 per share for the nine months ended September 30, 1995.
In the second quarter of 1996, the Company completed the Distribution which
was recorded as a stock dividend and reduced shareholders' equity by
approximately $50.7 million.
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>
Nine Months Ended Nine Months Ended
September 30, 1996 September 30, 1995(1)
------------------ ------------------
(in thousands of dollars except volume amounts)
<S> <C> <C>
Sales by Product Class
- ----------------------
Packaging papers $ 25,672 $ 53,876
Specialty papers 21,638 29,742
Printing papers 27,891 41,464
Pulp 57,152 94,653
Other 4,135 6,165
----------- -----------
Total(2) $ 136,488 $ 225,900
=========== ===========
Sales by Geographic Area
- ------------------------
Germany $ 78,311 $ 140,760
European Union(3) 38,052 61,695
Other 20,125 23,445
----------- -----------
Total $ 136,488 $ 225,900
=========== ===========
Sales by Volume
- --------------- (tonnes)
Packaging papers 83,332 94,252
Specialty papers 20,303 26,366
Printing papers 34,477 36,967
Pulp 101,183 103,306
----------- -----------
Total 239,295 260,891
=========== ===========
- ------------------------------
(1) Including the operations of the Divested Plants which had sales of $17.7
million or 25,053 tonnes of packaging papers.
(2) Excluding intercompany sales.
(3) Not including Germany.
</TABLE>
FORM 10-Q
QUARTERLY REPORT - PAGE 12
<PAGE> 13
Pulp and paper markets were generally weak in the first nine months of 1996
and product prices were lower than in the same period of 1995, as a result of
decreased paper demand and resulting increases in pulp inventories. Customers
generally reduced purchases to reduce their excess inventories. This resulted
in lower product prices and reduced paper sales volumes in the current period
in 1996. This price weakness is expected to continue until the excess
inventory situation corrects itself.
In the first nine months of 1996, while pulp sales by volume were only
marginally lower than the same period in 1995, list prices for pulp were, on
average, down approximately 38% from the same period in 1995 and 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 nine months of 1996, the Company's Pulp
mill took 15 days of market related downtime. The overall effect of weaker
pulp markets resulting from weak 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 improvement
in prices in June 1996. Some pulp producers have announced a further pulp
price increase for the fourth quarter of 1996, although there can be no
assurances that the same can be implemented.
The average net selling price for the Company's paper products decreased, on
average, by approximately 31% in the first nine months 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
nine months 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 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 25% in the first nine months of 1996,
compared to December 31, 1995 and were down approximately 19% in the current
period from the comparative period in 1995. Recycled fibre (wastepaper) costs
for paper production decreased by approximately 67% in the first nine months
of 1996 from the same period in 1995. While fibre costs remained relatively
low in the first nine months of 1996, there can be no assurance that they will
not escalate in the future.
In 1996, the Company gave notice to the national employers' association for
the pulp and paper industry in Germany that it was withdrawing 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 and the Company has commenced legal action for a
declaration that its withdrawal was valid.
FORM 10-Q
QUARTERLY REPORT - PAGE 13
<PAGE> 14
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 provided 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 received
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 nine months 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. In
addition, the Company intends to convert the production of the Pulp mill from
sulphite pulp to sulphate (kraft) pulp. See "Liquidity and Capital Resources -
Investing Activities".
Results of Operations - Quarter Ended September 30, 1996
- --------------------------------------------------------
Revenues in the third quarter of 1996 decreased to $46.0 million from $74.9
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 third quarter of
1996 compared to the third quarter of 1995 also contributed to lower revenues.
On average, the deutschmark decreased by approximately 5% in the current
period of 1996 from the comparative period of 1995.
Costs and expenses decreased to $42.8 million in the current quarter from
$66.4 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 $7.8 million in the same quarter of
1995.
Net earnings from continuing operations in the quarter ending September 30,
1996, decreased to $3.1 million or $0.23 per share from $17.7 million or $1.33
per share in the same quarter in 1995.
FORM 10-Q
QUARTERLY REPORT - PAGE 14
<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
Sept. 30, 1996 Sept. 30, 1995(1)
-------------- --------------
Sales by Product Class (thousands of dollars except volume amounts)
- ----------------------
<S> <C> <C>
Packaging papers $ 9,008 $ 19,252
Specialty papers 6,128 8,746
Printing papers 8,444 12,468
Pulp 19,492 32,425
Other 1,103 1,879
----------- -----------
Total(2) $ 44,175 $ 74,770
=========== ===========
Sales by Geographic Area
- ------------------------
Germany $ 25,530 $ 43,161
European Union(3) 14,484 18,836
Other 4,161 12,773
----------- -----------
Total $ 44,175 $ 74,770
=========== ===========
Sales by Volume (tonnes)
- ---------------
Packaging papers 29,702 33,157
Specialty papers 6,112 7,494
Printing papers 11,167 10,827
Pulp 36,198 33,531
----------- ----------
Total 83,179 85,009
=========== ==========
- --------------------------
(1) Including the operations of the Divested Plants which had sales of $4.4
million or 6,835 tonnes of packaging papers.
(2) Excluding intercompany sales.
(3) Not including Germany.
</TABLE>
FORM 10-Q
QUARTERLY REPORT - PAGE 15
<PAGE> 16
Although pulp and paper markets were generally weak, the erosion in pulp
prices stabilized in the current quarter and pulp prices improved by
approximately 9% over the period. In the current period, pulp sales by volume
increased by 8% over the comparative period of 1995. Certain pulp producers
have announced price increases for the fourth quarter of 1996, although there
can be no assurance such increases will be implemented.
The average net selling price for the Company's paper products decreased, on
average, by approximately 36% in the third quarter of 1996 from the
comparative period in 1995. Weaker market conditions also resulted in some
price erosion for some papers during the current period. Overall, paper
prices started stabilizing in the current period 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 are expected to 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 34% lower in the current period of 1996 from the
comparative period of 1995 and wastepaper prices were 74% 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>
September 30, 1996 December 31, 1995
------------------ -----------------
(in thousands)
<S> <C> <C>
Financial Position
- ------------------
Working capital $ 86,610 $ 93,163
Total assets 282,466 328,750(1)
Long-term government debt 9,911 10,522
Total liabilities 87,896 101,735
Shareholders' equity 194,570 227,015(1)
- ---------------------------
(1) Prior to the Distribution
</TABLE>
At September 30, 1996, the Company's cash and cash equivalents were $15.3
million compared to $29.2 million at December 31, 1995. At September 30,
1996, the Company had short-term trading securities, consisting primarily of
deutschmark and swiss franc denominated investment grade bonds, totalling
$78.3 million, compared to $65.3 million as at December 31, 1995.
FORM 10-Q
QUARTERLY REPORT - PAGE 16
<PAGE> 17
Operating Activities
- --------------------
Cash provided by operating activities before net purchases of trading
securities was $13.2 million in the nine months ended September 30, 1996, as
compared to $47.4 million in the same period in 1995. Cash flow from
operations used cash of $2.2 million in the first nine months of 1996, as
compared to $9.7 million for the same period in 1995, primarily as a result of
a reduction in the net purchases of trading securities, a decrease in
inventories and an increase in accounts payable and accrued expenses. Net
purchases of trading securities used $15.4 million in the current period as
compared to $57.1 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 accounts payable and
accrued expenses are net of $7.0 million which was a one-time payment for the
settlement of a securities class action. Receivables provided cash of $0.9
million in the current period, compared to $23.9 million in the same period of
1995. The Company expects to generate sufficient cash flow from operations to
meet its working capital requirements.
Investing Activities
- --------------------
Investing activities in the first nine months of 1996 used cash of
approximately $14.1 million, consisting primarily of capital expenditures for
upgrades to the Company's manufacturing plants, compared to $16.7 million in
the same period of 1995.
The Company is currently undertaking a capital investment program estimated to
cost approximately $37.2 million in the three year period ending December 31,
1998 of which approximately $18.8 million was expended in the first nine
months of 1996. As a result of its plans to convert the production of the
Pulp mill from sulphite to sulphate (kraft) pulp, the Company's current
capital investment program will be modified to reflect the conversion project.
The Company's capital investments are being partially financed through non-
refundable grants made available by German federal and state governments to
qualifying businesses operating in Germany. At September 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 September 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 $11.9 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 17
<PAGE> 18
The Company plans to convert the Pulp mill from the production of sulphite
pulp to sulphate (kraft) pulp. The conversion is expected to increase the
capacity of the Pulp mill from 160,000 tonnes per year to 280,000 tonnes and
reduce the mill's emissions of sulphur dioxides and effluent substantially.
The estimated cost for the conversion is approximately $330 million, which
will be financed through a combination of forgivable governmental grants of
approximately $110,000 and governmental assistance and guarantees for long-
term project financing. The conversion will be subject to, inter alia, the
Company settling all financing and governmental grants and obtaining all
necessary governmental permits and approvals for the conversion. The
conversion project is expected to commence in 1998 and to be completed at the
end of 1999. The conversion of the Pulp mill will result in its ceasing
production for approximately three months prior to the switch over from
sulphite to sulphate pulp production. The Finnish engineering firm Jaakko
Poyry has been appointed as the project engineers for the conversion.
Germany is one of Europe's most important pulp markets and the Company is the
only non-integrated pulp producer in Germany. As a result, most of its kraft
pulp production will be sold on the domestic German market. The fibre supply
for the converted mill will primarily come from the abundant supply of long
fibre spruce wood located in the region surrounding the mill.
Financing Activities
- --------------------
Cash provided by financing activities was $4.9 million in the first nine
months of 1996, compared to $10.9 million in the same period of 1995,
primarily as the result of a reduction in borrowing. In the current quarter,
the Company settled bank debt of $13.4 million through a partial repayment,
the issuance of 650,000 shares of beneficial interest and a promissory note in
the amount of $0.9 million due in July 1997.
The depreciation of the deutschmark against the U.S. dollar in the first nine
months of 1996 resulted in an unrealized foreign exchange translation loss of
$1.0 million from cash and cash equivalents and is shown in the consolidated
statements of cash flows included herein. See "Foreign Currency".
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 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 including a substantial
FORM 10-Q
QUARTERLY REPORT - PAGE 18
<PAGE> 19
amount of real property which is excess to its requirements. The Company has
entered into certain lease arrangements with respect to some of the redundant
assets whereby the Company has the right to "put" the assets to the tenant at
a prearranged price commencing in 1997.
In the current quarter, the Company settled its indebtedness to Arbatax of
$22.3 million through the issuance of 700,000 shares of beneficial interest
and a note in the amount of $12.5 million due in January 1998.
Although the Company had no material commitments to acquire assets or
operating businesses at September 30, 1996, it anticipates that there will be
acquisitions of businesses or commitments to projects during 1996. In
addition, the Company intends to convert the production of the Pulp mill from
sulphite to sulphate (kraft) pulp. To achieve its long-term goal 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, the issue of
securities, borrowing against its assets and/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 relevant
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. At December 31, 1995, the
cumulative foreign exchange translation resulted in a loss of $1.7 million.
In the nine months ended September 30, 1996, the overall depreciation of the
deutschmark against the U.S. dollar and the Distribution resulted in a net
$8.3 million foreign exchange translation loss and as a result the cumulative
foreign exchange translation loss increased from $1.7 million at December 31,
1995 to $10.0 million at September 30, 1996.
FORM 10-Q
QUARTERLY REPORT - PAGE 19
<PAGE> 20
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
Sept. 30, 1996 to Quarter Ended Quarter Ended
Nov. 12, 1996 Sept. 30, 1996 Sept. 30, 1995
----------------- -------------- --------------
End Average End Average End Average
--- ------- --- ------- --- -------
<S> <C> <C> <C> <C> <C> <C>
Currency
- --------
Deutschmark 1.5002 1.5000 1.5268 1.4999 1.4290 1.4249
</TABLE>
Based upon the period average exchange rate in the first nine months 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.
FORM 10-Q
QUARTERLY REPORT - PAGE 20
<PAGE> 21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
ITEM 5. OTHER INFORMATION
NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description
------- -----------
27 Article 5 - Financial Data Schedule for 3rd Quarter
1996 Form 10-Q.
(b) Reports on Form 8-K
NONE
FORM 10-Q
QUARTERLY REPORT - PAGE 21
<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
and Trustee
Date: November 12, 1996
FORM 10-Q
QUARTERLY REPORT - PAGE 22
<PAGE> 23
EXHIBIT INDEX
Exhibit
Number Description
------- -----------
27 Article 5 - Financial Data Schedule for 3rd Quarter
1996 Form 10-Q.
FORM 10-Q
QUARTERLY REPORT - PAGE 23
<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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 15,279
<SECURITIES> 78,332
<RECEIVABLES> 21,362
<ALLOWANCES> 1,296
<INVENTORY> 20,784
<CURRENT-ASSETS> 135,267
<PP&E> 154,573
<DEPRECIATION> 34,412
<TOTAL-ASSETS> 282,466
<CURRENT-LIABILITIES> 48,657
<BONDS> 32,402
0
0
<COMMON> 87,672
<OTHER-SE> 106,898
<TOTAL-LIABILITY-AND-EQUITY> 282,466
<SALES> 136,488
<TOTAL-REVENUES> 143,567
<CGS> 112,298
<TOTAL-COSTS> 131,584
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (41)
<INTEREST-EXPENSE> 2,147
<INCOME-PRETAX> 11,983
<INCOME-TAX> 110
<INCOME-CONTINUING> 11,873
<DISCONTINUED> 466
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,399
<EPS-PRIMARY> 0.90
<EPS-DILUTED> 0.90
</TABLE>
