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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission File No.: 000-09409
MERCER INTERNATIONAL INC.
(Exact name of Registrant as specified in its charter)
Washington 91-6087550
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
Burglistrasse 6, Zurich, Switzerland CH 8002
(Address of principal executive offices) (Zip Code)
41(1) 201 7710
(Registrant's telephone number, including area code)
Brandschenke Str. 64, Zurich, Switzerland
(Former name, former address and former fiscal year,
if changed since last report)
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 14,924,222 shares of beneficial interest outstanding as at
November 10, 1997.
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<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
other business plans. Investors are cautioned that forward-looking
statements are subject to an inherent risk that actual results may vary
materially from those described herein. Factors that may result in such
variance, in addition to those accompanying the forward-looking statements,
include changes in general economic and business conditions, cyclical changes
in supply and demand for pulp and paper products, government regulations, the
ability of management to execute its business plan, product prices, interest
rates, 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, 1997
(Unaudited)
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MERCER INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
As at September 30, 1997 and December 31, 1996
(Unaudited)
(dollars in thousands)
September 30, December 31,
1997 1996
------------- ------------
ASSETS
Current Assets
Cash and cash equivalents $ 5,109 $ 9,967
Investments 67,292 83,359
Receivables 16,391 18,366
Inventories 14,957 20,668
Other 259 291
----------- -----------
104,008 132,651
Long-Term Assets
Investments 4,245 3,759
Properties 121,095 125,116
Deferred income tax assets 16,059 18,313
----------- -----------
141,399 147,188
----------- -----------
$ 245,407 $ 279,839
=========== ===========
The accompanying notes are an integral part of these financial statements.
FORM 10-Q
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MERCER INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
(Continued)
As at September 30, 1997 and December 31, 1996
(Unaudited)
(dollars in thousands)
September 30, December 31,
1997 1996
------------- ------------
LIABILITIES
Current Liabilities
Accounts payable and accrued expenses $ 36,800 $ 45,324
Notes payable 3,058 6,017
Current portion of long-term debt 6,827 2,647
----------- -----------
46,685 53,988
Long-Term Liabilities
Debt 14,259 28,610
Due to spun-off operations 58 368
Other 2,034 2,334
----------- -----------
16,351 31,312
----------- -----------
Total Liabilities 63,036 85,300
SHAREHOLDERS' EQUITY
Shares of beneficial interest 87,672 85,965
Cumulative translation adjustment (38,220) (12,014)
Net unrealized loss on investments valuation (1,518) (2,250)
Retained earnings 134,437 122,838
----------- -----------
182,371 194,539
----------- -----------
$ 245,407 $ 279,839
=========== ===========
The accompanying notes are an integral part of these financial statements.
FORM 10-Q
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MERCER INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
For Nine Months Ended September 30, 1997 and 1996
(Unaudited)
(dollars in thousands, except for earnings per share)
1997 1996
----------- -----------
Revenues
Sales $ 130,234 $ 136,488
Investments 8,166 9,978
----------- -----------
138,400 146,466
Expenses
Cost of sales 106,587 112,298
General and administrative 17,574 19,286
Interest expense 2,149 2,899
----------- -----------
126,310 134,483
----------- -----------
Income from continuing operations
before income taxes 12,090 11,983
Income taxes 41 110
----------- -----------
Income from continuing operations 12,049 11,873
Income from spun-off operations - 466
----------- -----------
Net income 12,049 12,339
Retained earnings, beginning of period 122,838 160,956
Dividend (450) (54,143)
----------- -----------
Retained earnings, end of period $ 134,437 $ 119,152
=========== ===========
Earnings per share
Income from continuing operations $ 0.80 $ 0.87
Income from spun-off operations - 0.03
----------- -----------
$ 0.80 $ 0.90
=========== ===========
The accompanying notes are an integral part of these financial statements.
FORM 10-Q
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MERCER INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
For Three Months Ended September 30, 1997 and 1996
(Unaudited)
(dollars in thousands, except for earnings per share)
1997 1996
----------- -----------
Revenues
Sales $ 45,515 $ 44,175
Investments 2,791 2,741
----------- -----------
48,306 46,916
Expenses
Cost of sales 37,328 36,304
General and administrative 5,465 6,498
Interest expense 746 945
----------- -----------
43,539 43,747
----------- -----------
Income from continuing operations
before income taxes 4,767 3,169
Income taxes 13 29
----------- -----------
Net income 4,754 3,140
Retained earnings, beginning of period 129,683 116,012
----------- -----------
Retained earnings, end of period $ 134,437 $ 119,152
=========== ===========
Earnings per share $ 0.31 $ 0.23
=========== ===========
The accompanying notes are an integral part of these financial statements.
FORM 10-Q
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MERCER INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For Nine Months Ended September 30, 1997 and 1996
(Unaudited)
(dollars in thousands)
1997 1996
----------- -----------
Cash Flows from Continuing Operating Activities:
Net income from continuing operations $ 12,049 $ 11,873
Adjustments to reconcile net income from
continuing operations to cash
Depreciation and amortization (2,790) (6,363)
Gain on investments (6,169) (5,926)
----------- -----------
3,090 (416)
Changes in current assets and liabilities
Inventories 3,118 5,346
Receivables (2,319) 947
Accounts payable and accrued expenses (6,314) 6,844
Other 112 492
----------- -----------
(2,313) 13,213
Proceeds from the sales of trading securities 34,529 24,676
Purchase of trading securities (25,688) (40,091)
----------- -----------
Net cash provided by (used in) operating
activities of continuing operations 6,528 (2,202)
Cash Flows from Investing Activities of Continuing
Operations:
Proceeds from sales of available-for-sale
securities - 1,942
Purchase of fixed assets (8,496) (16,124)
Other 26 32
----------- -----------
Net cash used in investing activities
of continuing operations $ (8,470) $ (14,150)
The accompanying notes are an integral part of these financial statements.
FORM 10-Q
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MERCER INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
For Nine Months Ended September 30, 1997 and 1996
(Unaudited)
(dollars in thousands)
1997 1996
----------- -----------
Cash Flows from Financing Activities of Continuing
Operations:
Increase in bank indebtedness $ 6,471 $ 6,134
Decrease in bank indebtedness (8,854) (150)
Net proceeds on issuance (cost to repurchase)
of shares of beneficial interest 487 (1,070)
Payment of dividend (450) -
----------- -----------
Net cash (used in) provided by financing
activities of continuing operations (2,346) 4,914
Effect of exchange rate changes on cash and cash
equivalents (570) (1,041)
----------- -----------
Net cash used in continuing operations (4,858) (12,479)
Net cash used in (provided by) spun-off operations - (1,472)
----------- -----------
Net decrease in cash and cash equivalents (4,858) (13,951)
Cash and cash equivalents, beginning of period 9,967 29,230
----------- -----------
Cash and cash equivalents, end of period $ 5,109 $ 15,279
=========== ===========
The accompanying notes are an integral part of these financial statements.
FORM 10-Q
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MERCER INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR NINE MONTHS ENDED SEPTEMBER 30, 1997
(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 U.S. Securities and
Exchange Commission (the "SEC"). Certain information and footnote disclosure
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to such SEC rules and regulations. 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 MFC Bancorp Ltd. ("MFC") are classified separately
within these financial statements as "spun-off operations" and are excluded
from amounts for "continuing operations" (see "Note 2. Spun-Off Operations").
In addition, the Company's cash flow statements exclude the activities of
MFC. Intercompany transactions with MFC, which were eliminated in previous
consolidated financial statements, are now reflected in these financial
statements.
Note 2. Spun-Off Operations
-------------------
Effective June 3, 1996, the Company completed the spin-off of its financial
services segment by distributing a stock dividend (the "Distribution") of
shares of MFC as announced on December 28, 1995. The Distribution was
recorded as a stock dividend from shareholders' equity at the carrying amount
of the net assets of the spun-off operations. As a result, the Company's
total assets and shareholders' equity were each reduced by approximately
$50.7 million after the Distribution.
FORM 10-Q
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The operations of MFC have been classified separately within the Company's
financial statements as "spun-off operations" and are excluded from the
amounts of revenues and expenses of the Company's continuing operations.
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 15,069,200
and 13,629,664 for the nine months ended September 30, 1997 and 1996,
respectively, and 15,093,523 and 13,922,180 for the three months ended
September 30, 1997 and 1996, respectively.
FORM 10-Q
QUARTERLY REPORT - PAGE 10
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Mercer International Inc. is a pulp and paper company headquartered in
Zurich, Switzerland and its operations are primarily located in Germany. In
this document: (i) unless the context otherwise requires, the "Company"
refers to Mercer International Inc. and its subsidiaries; and (ii) a "tonne"
is one metric ton or 2,204.6 pounds. In June 1996, the Company completed the
spin-off of its financial services segment, which has been classified
separately within the Company's financial statements as "spun-off operations"
and is excluded from the amounts of revenues and expenses of the Company's
continuing operations.
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, 1997 should be read in conjunction with the consolidated
financial statements and related notes included elsewhere herein.
RESULTS OF OPERATIONS - Nine Months Ended September 30, 1997
------------------------------------
In the first nine months of 1997, revenues decreased to $138.4 million from
$146.5 million in the same period in 1996, primarily as a result of lower
pulp and paper prices. As the Company's products are principally sold in
deutschmarks, the depreciation of the deutschmark against the U.S. dollar by
approximately 12.0% in the first nine months of 1997 also contributed to
lower revenues. See "Foreign Currency".
Pulp and paper costs decreased to $106.6 million in the first nine months of
1997 from $112.3 million in the same period in 1996, primarily as a result of
decreased fibre costs (raw materials). General and administrative expenses
decreased to $17.6 million for the nine months ended September 30, 1997 from
$19.3 million in the same period in 1996. Interest expense decreased to $2.1
million for the nine months ended September 30, 1997 from $2.9 million for
the comparative period of 1996 as a result of reduced indebtedness.
For the nine months ended September 30, 1997, net earnings from continuing
operations were $12.0 million or $0.80 per share, compared to $11.9 million
or $0.87 per share for the nine months ended September 30, 1996.
FORM 10-Q
QUARTERLY REPORT - PAGE 11
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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:
Nine Months Ended Nine Months Ended
September 30, 1997 September 30, 1996
------------------ ------------------
(dollars in thousands)
Sales by Product Class
- ----------------------
Packaging papers $ 22,483 $ 25,672
Specialty papers 21,419 21,638
Printing papers 26,744 27,891
Pulp 56,706 57,152
Other 2,882 4,135
----------- ----------
Total(1) $ 130,234 $ 136,488
=========== ==========
Sales by Geographic Area
- ------------------------
Germany $ 71,125 $ 78,311
European Union(2) 46,933 38,052
Other 12,176 20,125
----------- ----------
Total $ 130,234 $ 136,488
=========== ==========
Sales by Volume (tonnes)
- ---------------
Packaging papers 84,099 83,332
Specialty papers 27,092 20,303
Printing papers 40,647 34,477
Pulp 125,571 101,183
----------- ----------
Total 277,409 239,295
=========== ==========
- -----------------------------------
(1) Excluding intercompany sales.
(2) Not including Germany.
Pulp and paper markets were generally weak in the first nine months of 1997
and product prices were lower than in the same period in 1996. Sales volumes
were 16% higher in the first nine months of 1997, compared to the same period
in 1996, but only partially compensated for the price weakness. See "Cyclical
Nature of Business; Competitive Position".
Demand for market pulp improved during the current period and pulp sales by
volume in the first nine months of 1997 increased by 24% compared to the same
period in 1996. In the first nine months of 1997, list prices for pulp were,
on average, down approximately 20% from the same period in 1996. Pulp prices
stabilized during the third quarter of 1997 and were 12% higher than in the
second quarter of 1997. In addition, some pulp producers have announced
price increases for
FORM 10-Q
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the fourth quarter of 1997, although there can be no assurances that such
price increases will be achieved.
The average net selling price for the Company's paper products decreased, on
average, by approximately 14% in the first nine months of 1997 from the
comparative period in 1996. Paper sales by volume in the first nine months
of 1997 increased by 10%, compared to the same period in 1996. Improvements
in paper markets were primarily for speciality and printing papers. The
markets and prices for packaging papers continued to be generally weak. As a
result, the Company, in conjunction with its plan to convert its pulp mill
(the "Pulp mill") to produce kraft pulp, also intends to review its other
product lines, including commodity grade packaging papers. See "Liquidity
and Capital Resources - Investing Activities".
On average, the Company's fibre (wood chips and pulpwood) costs for pulp
operations decreased by approximately 12% in the first nine months of 1997,
compared to the comparative period in 1996. Overall, reduced fibre prices
were reflected in lower pulp prices. Recycled fibre (wastepaper) costs for
paper operations decreased by approximately 33% in the first nine months of
1997, compared to the same period in 1996. Fibre costs remained relatively
low in the first nine months of 1997, but there can be no assurance that they
will not escalate in the future. During the third quarter of 1997, there
were signs of upward pressure for wastepaper and pulpwood.
Since acquisition, the Company has been implementing operational changes to
its operations to improve efficiency, increase export sales and upgrade its
product mix. These changes have continued in 1997 and resulted in the
further elimination of employee positions . In conjunction with its
conversion of the Pulp mill, and due to the weak margins for packaging paper
products and competitive pressures resulting from the small size of the
Company's packaging-grade paper machines, the Company is reviewing various
potential alternatives with respect to its paper operations which may
include, among other things, the divestiture of certain of its paper mills.
See "Liquidity and Capital Resources - Investing Activities".
RESULTS OF OPERATIONS - Quarter Ended September 30, 1997
--------------------------------
Revenues in the third quarter of 1997 increased to $48.3 million from $46.9
million in the comparative quarter of 1996. The increase in revenues
reflects higher pulp and paper sales volumes. The devaluation of the
deutschmark against the U.S. dollar in the third quarter of 1997, compared to
the third quarter of 1996, contributed to lower revenues and expenses during
the period. On average, the deutschmark decreased by approximately 21% in the
current period of 1997 from the comparative period of 1996.
Pulp and paper costs and expenses increased to $37.3 million in the current
quarter from $36.3 million in the same period in 1996. General and
administrative expenses decreased to $5.5 million in the current quarter from
$6.5 million in the same quarter of 1996. Interest expense decreased to
FORM 10-Q
QUARTERLY REPORT - PAGE 13
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$0.7 million in the three months ended September 30, 1997 from $0.9 million
in the comparative quarter in 1996 as a result of reduced indebtedness.
Net earnings in the quarter ended September 30, 1997 increased to $4.8
million or $0.31 per share from $3.1 million or $0.23 per share in the same
quarter in 1996.
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:
Quarter Ended Quarter Ended
September 30, 1997 September 30, 1996
------------------ ------------------
(dollars in thousands)
Sales by Product Class
- ----------------------
Packaging papers $ 7,469 $ 9,008
Specialty papers 7,089 6,128
Printing papers 8,877 8,444
Pulp 20,924 19,492
Other 1,156 1,103
-------------- -------------
Total(1) $ 45,515 $ 44,175
============== =============
Sales by Geographic Area
- ------------------------
Germany $ 23,064 $ 25,530
European Union(2) 16,800 14,484
Other 5,651 4,161
-------------- -------------
Total $ 45,515 $ 44,175
============== =============
Quarter Ended Quarter Ended
September 30, 1997 September 30, 1996
------------------ ------------------
(tonnes)
Sales by Volume
- ---------------
Packaging papers 28,499 29,702
Specialty papers 9,360 6,112
Printing papers 14,099 11,167
Pulp 43,603 36,198
-------------- ------------
Total 95,561 83,179
============== ============
- -----------------------------------
(1) Excluding intercompany sales.
(2) Not including Germany.
While pulp and paper prices in the third quarter of 1997 were lower than the
comparative period of 1996, sales by volume increased by approximately 15%.
During the third quarter of 1997, pulp and paper prices remained stable and
there was some improvement over the second quarter of 1997.
FORM 10-Q
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In the third quarter of 1997, list prices for pulp were, on average, down
approximately 11% from the same period in 1996. On average, the Company's
fibre costs for pulp operations were up approximately 1% in the current
quarter, compared to the same period in 1996. Pulp sales by volume in the
third quarter of 1997 increased by 20%, compared to the same period in 1996.
Dissolving pulp sales were lower during the current period as a result of
weakness in the textile sector and the cessation of operations by one of the
Company's major buyers.
The average net selling price for the Company's paper products decreased, on
average, by approximately 11% in the third quarter of 1997 from the
comparative period in 1996. Although recycled fibre (wastepaper) costs for
paper operations decreased by approximately 25% in the third quarter of 1997
from the same period in 1996, they increased marginally in the current
quarter of 1997, compared to the second quarter of 1997. While paper prices
appear to be improving, margins will continue to be under pressure as a
result of expected increases in fibre costs and the time lag in price
increases to the end purchaser. Paper sales by volume in the third quarter
of 1997 increased by 11%, compared to the same period in 1996. Improvements
in paper markets were primarily for speciality and printing papers, and
prices and markets for packaging papers remained weak. See "Liquidity and
Capital Resources - Investing Activities".
LIQUIDITY AND CAPITAL RESOURCES
The following table is a summary of selected financial information concerning
the Company for the periods indicated:
As at As at
September 30, 1997 December 31, 1996
------------------ -----------------
(in thousands)
Financial Position
- ------------------
Working capital $ 57,323 $ 78,663
Total assets 245,407 279,839
Long-term government debt 7,997 9,184
Long-term debt - other 6,262 19,426
At September 30, 1997, the Company's cash and cash equivalents decreased to
$5.1 million from $15.3 million at September 30, 1996 and from $10.0 million
at December 31, 1996. At September 30, 1997, the Company had short-term
trading securities totalling $67.3 million, compared to $78.3 million at
September 30, 1996 and $83.4 million as at December 31, 1996.
Operating Activities
- --------------------
Cash used in operating activities before net purchases of trading securities
was $2.3 million in the nine months ended September 30, 1997, compared to
cash provided of $13.2 million in the same period in 1996. Cash flow from
operations provided cash of $6.5 million in the first nine months of 1997,
compared to using cash of $2.2 million for the same period in 1996. During
the current
FORM 10-Q
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period, the reduction of accounts payable and accrued expenses used cash of
$6.3 million, and net sales of trading securities provided cash of $8.8
million. In the comparative period of 1996, an increase in accounts payable
and accrued expenses provided cash of $6.8 million, and net purchases of
trading securities used cash of $15.4 million. A reduction in inventories
provided cash of $3.1 million in the nine months ended September 30, 1997,
compared to $5.3 million in the nine months ended September 30, 1996. In the
current period of 1997, an increase in receivables used cash of $2.3 million,
compared to a decrease in receivables providing cash of $0.9 million in the
comparative period of 1996. 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 1997 used cash of $8.5
million, consisting primarily of capital expenditures for upgrades to the
manufacturing plants, compared to $14.2 million in the same period in 1996.
The Company expects capital investments in 1997 to total approximately $10.7
million. Approximately $8.9 million was expended therefor in the first nine
months of 1997, compared to $18.8 million in the same period in 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. 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. 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.
The Company is proceeding with its plan to convert the production of the Pulp
mill from sulphite pulp to sulphate (kraft) pulp. The conversion is expected
to increase its annual production capacity from 160,000 tonnes to 280,000
tonnes, substantially reduce effluent and sulphur dioxide emissions and
reduce energy costs. The estimated cost for the conversion is approximately
$300 million, which will be financed through a combination of non-refundable
governmental grants, governmental assistance and guarantees for long-term
project financing and cash flow from operations.
In mid-1997, the Company completed its engineering and related studies and
submitted its formal application for project approval and operating permits.
In addition, the State of Thuringia pledged grants and subsidies totalling
approximately $96 million in support of the project and provided commitments
for the additional fibre required by the mill after conversion. The overall
financing package, including bank financing, for the conversion is being
negotiated. Although the Company's conversion project has and continues to
receive favourable support from all applicable governmental agencies, there
can be no assurance that current governmental assistance programs will not be
amended in the future or that financial assistance will be provided to the
Company on terms satisfactory to it, or that all necessary environmental and
operating permits will be received on
FORM 10-Q
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satisfactory terms, or in time to permit the Company to proceed with and
complete the project as currently planned. A final decision to proceed with
the conversion will be made upon receipt of all necessary environmental and
operating permits and approvals, which are now expected to be received in
early 1998. The Company estimates that its costs in respect of the project
in 1997 will be approximately $4.5 million. In addition, the Company is
continuing discussions with a strategic investor to acquire a minority
participation in the project.
In conjunction with the aforesaid conversion of the Pulp mill to produce
kraft pulp, the Company also intends to review its product lines, including
commodity grade packaging papers, in order to streamline operations and focus
upon higher margin grades, options for forward integration, capacity upgrades
and the modernization of its packaging paper mills. The Company's results
for packaging grade commodity papers have been generally weak in 1997 and
performance has been hindered by, among other things, limited demand as a
result of soft economic conditions in Europe, market over-supply and
operational limitations resulting from small capacities and the current trim
width of the Company's packaging paper machines. Such a review could result
in the Company pursuing initiatives with both BVS (as defined below) and the
State of Saxony in Germany to enhance the performance of such mills. There
can be no assurance that, after completing its review and pursuing such
initiatives to enhance the performance of its commodity grade packaging paper
results, the Company may not divest such mills by sale or other disposition
or discontinuance. Any such divestment may result in the Company taking
restructuring charges relating thereto for, among other things, severance
costs, write-downs, the loss from the disposal of fixed assets and other
related charges. The amount of such charges, if any, are not determinable at
this time but may, if incurred or taken, have a material effect on the
Company's financial and other results.
In July 1997, the Company purchased a $3.3 million senior secured convertible
debenture from Concert Industries Ltd. ("Concert"), a Canadian manufacturer
of air-laid, non-woven paper products. The debenture is due in July 2000, and
is convertible into common shares of Concert at a price of $1.65 per share.
The Company also entered into an agreement (the "Concert Purchase Agreement")
with Concert to acquire, subject to conditions which were not satisfied,
3,300,000 units of Concert, each unit consisting of one common share and one
share purchase warrant of Concert, for an aggregate purchase price of $5.1
million. The Concert Purchase Agreement expired by its terms.
Financing Activities
- --------------------
Cash used by financing activities was $2.3 million in the first nine months
of 1997, compared to cash provided of $4.9 million in the same period in
1996. The Company decreased its bank indebtedness by $2.4 million in the
first nine months of 1997, compared to a net increase of $6.0 million in the
comparative period in 1996. During the first nine months of 1997, the
Company received proceeds on the issuance of shares of $0.5 million, compared
to expending $1.1 million on repurchases of the Company's shares in the same
period in 1996. During the nine months ended September 30, 1997, the
Company used $0.5 million to pay a cash dividend to its shareholders.
The depreciation of the deutschmark against the U.S. dollar in the first nine
months of 1997 resulted in an unrealized foreign exchange translation loss of
$0.6 million on cash and cash equivalents,
FORM 10-Q
QUARTERLY REPORT - PAGE 17
<PAGE> 18
which is part of the cumulative translation adjustment of $38.2 million
included as shareholders' equity in the Company's balance sheet and does not
affect the Company's net earnings. See "Foreign Currency".
The Company's pulp and paper operations had net operating tax losses of
approximately $242.0 million at December 31, 1996, which under German tax
laws may be carried forward indefinitely. Such 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 German government
has proposed amendments to its tax laws which would limit the amount of tax
losses that may be utilized in any one year. Until such amendments are
finalized and proclaimed effective, the Company cannot determine with
certainty the impact of these proposed changes under FASB Statement No. 109.
The Company is currently in discussions with Bundesanstalt fur
Vereignigungsbedingte Sonderaufgaben ("BVS"), the German privatization
agency, with respect to certain matters arising from the purchase agreement
for the Company's paper operations, including the reversal of accruals
established at the time of acquisition by the paper operation for effluent
costs and potential reimbursement therefor to BVS. The Company does not
believe it is responsible for any such reimbursement obligation under the
purchase agreement but can give no assurance that BVS will not seek to make a
claim for the same. In the event that BVS were to proceed with and
successfully enforce such a claim before the courts, the same could have an
adverse effect on the Company's paper operations. In addition, in the
current period, BVS commenced action to recover approximately $1.0 million in
periodic interest and principal payments due from the Company's paper
operations. The Company has fully provided for the claim and is reviewing
various options for its packaging paper operations, including pursuing
initiatives with BVS to enhance their performance, which may include revising
the terms of the government assistance relating to the Company's Trebsen
mill.
The Company anticipates that there will be additional acquisitions of
businesses or commitments to projects during the remainder of 1997. To
achieve its long-term goal of expanding its asset and earnings base through
mergers and acquisitions, the Company will require substantial capital
resources. The necessary resources will be generated from cash flow from
operations, cash on hand, borrowing against its assets and/or the sale of
assets.
Foreign Currency
- ----------------
Substantially all of the Company's operations are conducted in international
markets and, therefore, its consolidated financial results are subject to
foreign currency exchange rate fluctuations. As primarily all of the
Company's revenues are received in deutschmarks, the financial position of
the Company for any given period, when reported in U.S. dollars, can be
significantly affected by the exchange rate for deutschmarks prevailing
during that period. In the nine months ended September 30, 1997,
approximately 99% of the Company's revenues were recorded 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 period.
Unrealized gains or losses from these translations are recorded as
shareholders'
FORM 10-Q
QUARTERLY REPORT - PAGE 18
<PAGE> 19
equity on the balance sheet and do not affect the net earnings of the Company.
At December 31, 1996, the cumulative foreign exchange translation resulted in a
loss of $12.0 million. In the nine months ended September 30, 1997, the
overall depreciation of the deutschmark against the U.S. dollar resulted in a
net $26.2 million foreign exchange translation loss, and as a result, the
cumulative foreign exchange translation loss was increased from $12.0 million
at December 31, 1996 to $38.2 million at September 30, 1997.
As both the Company's principal sources of revenues and expenses are in
deutschmarks, the Company does not currently enter into any currency hedging
arrangements for exchange rate fluctuations. The 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
Sept. 30 to Nov. 10 , 1997 September 30, 1997 September 30, 1996
Period End Period Average Period End Period Average Period End Period Average
---------- -------------- ---------- -------------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
Rate of Exchange
Deutschmark 1.7077 1.7160 1.7670 1.7241 1.5268 1.4999
</TABLE
Based upon the period average exchange rate in the first nine months of 1997,
the U.S. dollar increased by approximately 12.0% in value against the
deutschmark since December 31, 1996.
Cyclical Nature of Business; Competitive Position
- -------------------------------------------------
The pulp and paper business is cyclical in nature and markets for the
Company's principal products are affected by fluctuations in supply and
demand in each cycle, which in turn affects product prices. The markets for
pulp and paper are highly competitive and sensitive to cyclical changes in
industry capacity and in the economy, both of which can have a significant
influence on selling prices and the earnings of the Company. Demand for pulp
and paper products has historically been determined by the level of economic
growth and has been closely tied to overall business activity. The
competitive position of the Company is influenced by the availability and
quality of raw materials (fibre) and its experience in relation to other
producers with respect to inflation, energy, labour costs and productivity.
FORM 10-Q
QUARTERLY REPORT - PAGE 19
<PAGE> 20
PART II. OTHER INFORMATION
-----------------
ITEM 1. LEGAL PROCEEDINGS
The Company is subject to routine litigation incidental to its business,
including a claim by BVS. See "Liquidity and Capital Resources - Financing
Activities". The Company does not believe that the outcome of such
litigation will have a material adverse effect on its business or financial
condition.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In July 1997, the Company issued, in reliance on exemptions from registration
under the Securities Act of 1933, as amended (the "Securities Act") and the
rules promulgated thereunder, as transactions not involving a public offering
under section 3(a)(9) of the Securities Act, 4,853 shares of beneficial
interest as payment in kind for interest obligations due on September 30, 1997
under the Corporation's bonds, and under section 4(2) of the Securities Act,
11,000 shares of beneficial interest as payment in kind for investment banking
fees owing by the Company to MFC Merchant Bank S.A. in connection with the
Company's transactions with Concert.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description
------- -----------
27 Article 5 - Financial Data Schedule for the 3rd Quarter 1997
Form 10-Q.
(b) Reports on Form 8-K
None.
FORM 10-Q
QUARTERLY REPORT - PAGE 20
<PAGE> 21
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.
Dated: November 13, 1997 MERCER INTERNATIONAL INC.
By: /s/ Maarten Reidel
----------------------------
Maarten Reidel
Secretary and Chief Financial Officer
FORM 10-Q
QUARTERLY REPORT - PAGE 21
<PAGE> 22
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
27 Article 5 - Financial Data Schedule for the 3rd Quarter 1997 Form
10-Q.
</TABLE>
<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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 5,109
<SECURITIES> 67,292
<RECEIVABLES> 17,229
<ALLOWANCES> 838
<INVENTORY> 14,957
<CURRENT-ASSETS> 104,008
<PP&E> 162,979
<DEPRECIATION> 41,884
<TOTAL-ASSETS> 245,407
<CURRENT-LIABILITIES> 46,685
<BONDS> 14,259
0
0
<COMMON> 87,672
<OTHER-SE> 94,699
<TOTAL-LIABILITY-AND-EQUITY> 245,407
<SALES> 130,234
<TOTAL-REVENUES> 138,400
<CGS> 106,587
<TOTAL-COSTS> 126,310
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,149
<INCOME-PRETAX> 12,090
<INCOME-TAX> 41
<INCOME-CONTINUING> 12,049
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,049
<EPS-PRIMARY> 0.80
<EPS-DILUTED> 0.80
</TABLE>
