-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, C0DV2+UEE8xAR45yJr03NY2id7r1TH6dSt6TanD2Yr32Yz5rZZHHY1bGCTo0AEE7 HAkHhS29bZuGT2lY41ZwZQ== 0001012410-96-000006.txt : 19961118 0001012410-96-000006.hdr.sgml : 19961118 ACCESSION NUMBER: 0001012410-96-000006 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961114 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MERCER INTERNATIONAL INC CENTRAL INDEX KEY: 0000075659 STANDARD INDUSTRIAL CLASSIFICATION: PAPER MILLS [2621] IRS NUMBER: 916087550 STATE OF INCORPORATION: WA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-09409 FILM NUMBER: 96666350 BUSINESS ADDRESS: STREET 1: BRNDSCHENKE STR 64 CITY: ZURICH SWITZERLAND C STATE: V6 BUSINESS PHONE: 4112017710 10-Q 1 MERCER INTERNATIONAL INC. 3RD QTR 1996 FORM 10-Q 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. ============================================================================== 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 3 MERCER INTERNATIONAL INC. CONSOLIDATED BALANCE SHEETS AS AT SEPTEMBER 30, 1996 AND DECEMBER 31, 1995 (Unaudited) (Dollars in thousands)
ASSETS 1996 1995 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 =========== ===========
FORM 10-Q QUARTERLY REPORT - PAGE 3 4 MERCER INTERNATIONAL INC. CONSOLIDATED BALANCE SHEETS (Continued) AS AT SEPTEMBER 30, 1996 AND DECEMBER 31, 1995 (Unaudited) (Dollars in thousands)
LIABILITIES 1996 1995 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 =========== ===========
FORM 10-Q QUARTERLY REPORT - PAGE 4 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)
1996 1995 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 =========== ===========
FORM 10-Q QUARTERLY REPORT - PAGE 5 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)
1996 1995 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 =========== ===========
FORM 10-Q QUARTERLY REPORT - PAGE 6 7 MERCER INTERNATIONAL INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 (Unaudited) (Dollars in thousands)
1996 1995 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) ----------- -----------
FORM 10-Q QUARTERLY REPORT - PAGE 7 8 MERCER INTERNATIONAL INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) FOR NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 (Unaudited) (Dollars in thousands)
1996 1995 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 =========== ===========
FORM 10-Q QUARTERLY REPORT - PAGE 8 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 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 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 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:
Nine Months Ended Nine Months Ended September 30, 1996 September 30, 1995(1) ------------------ ------------------ (in thousands of dollars except volume amounts) 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.
FORM 10-Q QUARTERLY REPORT - PAGE 12 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 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 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:
Quarter Ended Quarter Ended Sept. 30, 1996 Sept. 30, 1995(1) -------------- -------------- Sales by Product Class (thousands of dollars except volume amounts) - ---------------------- 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.
FORM 10-Q QUARTERLY REPORT - PAGE 15 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:
September 30, 1996 December 31, 1995 ------------------ ----------------- (in thousands) 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
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 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 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 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 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:
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 --- ------- --- ------- --- ------- Currency - -------- Deutschmark 1.5002 1.5000 1.5268 1.4999 1.4290 1.4249
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 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 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 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 EX-27 2 EXHIBIT 27 - ARTICLE 5 FDS FOR 3RD QTR 1996
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES INCLUDED IN THIS FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1996 JAN-01-1996 SEP-30-1996 15,279 78,332 21,362 1,296 20,784 135,267 154,573 34,412 282,466 48,657 32,402 0 0 87,672 106,898 282,466 136,488 143,567 112,298 131,584 0 (41) 2,147 11,983 110 11,873 466 0 0 12,399 0.90 0.90
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