<PAGE> 1
=============================================================================
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 June 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)
<TABLE>
<CAPTION>
Washington 91-6087550
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
<S> <C>
Brandschenke Str. 64, Zurich, Switzerland CH 8002
(Address of principal executive offices) (Zip Code)
</TABLE>
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 14,908,369 shares of beneficial interest outstanding as at
August 11, 1997.
=============================================================================
<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 interest rates, commodity prices, and other economic
conditions; actions by competitors; changing weather conditions and other
natural phenomena; actions by government authorities; uncertainties
associated with legal proceedings; technological development; future
decisions by management in response to changing conditions; and misjudgments
in the course of preparing forward-looking statements.
PART I. FINANCIAL INFORMATION
---------------------
ITEM 1. FINANCIAL STATEMENTS
MERCER INTERNATIONAL INC.
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(Unaudited)
FORM 10-Q
QUARTERLY REPORT - PAGE 2
<PAGE> 3
MERCER INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
As at June 30, 1997 and December 31, 1996
(Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
------------ ------------
ASSETS
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 5,709 $ 9,967
Investments 65,413 83,359
Receivables 14,346 18,366
Inventories 16,748 20,668
Other 105 291
------------ -----------
102,321 132,651
Long-Term Assets
Investments 4,068 3,759
Properties 121,184 125,116
Deferred income tax assets 16,261 18,313
------------ -----------
141,513 147,188
------------ -----------
$ 243,834 $ 279,839
============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
FORM 10-Q
QUARTERLY REPORT - PAGE 3
<PAGE> 4
MERCER INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
As at June 30, 1997 and December 31, 1996
(Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
------------ ------------
LIABILITIES
<S> <C> <C>
Current Liabilities
Accounts payable and accrued expenses $ 35,041 $ 45,324
Notes payable 2,720 6,017
Current portion of long-term debt 10,041 2,647
------------ -----------
47,802 53,988
Long-Term Liabilities
Debt 13,891 28,610
Due to spun-off operations 289 368
Other 2,061 2,334
------------ -----------
16,241 31,312
------------ -----------
Total Liabilities 64,043 85,300
SHAREHOLDERS' EQUITY
Shares of beneficial interest 87,522 85,965
Cumulative translation adjustment (35,704) (12,014)
Net unrealized loss on investments valuation (1,710) (2,250)
Retained earnings 129,683 122,838
------------ -----------
179,791 194,539
------------ -----------
$ 243,834 $ 279,839
============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
FORM 10-Q
QUARTERLY REPORT - PAGE 4
<PAGE> 5
MERCER INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
For Six Months Ended June 30, 1997 and 1996
(Unaudited)
(dollars in thousands, except for earnings per share)
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Revenues
Sales $ 84,719 $ 92,313
Investments 5,375 7,237
------------ ------------
90,094 99,550
Expenses
Cost of sales 69,259 75,994
General and administrative 12,109 12,788
Interest expense 1,403 1,954
------------ ------------
82,771 90,736
------------ ------------
Income from continuing operations
before income taxes 7,323 8,814
Income taxes 28 81
------------ ------------
Income from continuing operations 7,295 8,733
Income from spun-off operations - 466
------------ ------------
Net income 7,295 9,199
Retained earnings, beginning of period 122,838 160,956
Dividend (450) (54,143)
------------ ------------
Retained earnings, end of period $ 129,683 $ 116,012
============ ============
Earnings per share
Income from continuing operations $ 0.49 $ 0.65
Income from spun-off operations - 0.03
------------ ------------
$ 0.49 $ 0.68
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
FORM 10-Q
QUARTERLY REPORT - PAGE 5
<PAGE> 6
MERCER INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
For Three Months Ended June 30, 1997 and 1996
(Unaudited)
(dollars in thousands, except for earnings per share)
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Revenues
Sales $ 42,587 $ 44,228
Investments 3,153 5,449
------------ ------------
45,740 49,677
Expenses
Cost of sales 34,791 39,379
General and administrative 6,305 6,519
Interest expense 519 895
------------ ------------
41,615 46,793
------------ ------------
Income from continuing operations
before income taxes 4,125 2,884
Income taxes 14 11
------------ ------------
Income from continuing operations 4,111 2,873
Income from spun-off operations - 436
------------ ------------
Net income 4,111 3,309
Retained earnings, beginning of period 126,022 166,846
Dividend (450) (54,143)
------------ ------------
Retained earnings, end of period $ 129,683 $ 116,012
============ ============
Earnings per share
Income from continuing operations $ 0.27 $ 0.21
Income from spun-off operations - 0.03
------------ ------------
$ 0.27 $ 0.24
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
FORM 10-Q
QUARTERLY REPORT - PAGE 6
<PAGE> 7
MERCER INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For Six Months Ended June 30, 1997 and 1996
(Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Cash Flows from Continuing Operating Activities:
Net income from continuing operations $ 7,295 $ 8,733
Adjustments to reconcile net income from
continuing operations to cash
from continuing operating activities
Depreciation and amortization (4,015) (4,337)
Gain on investments (3,984) (3,975)
------------ ------------
(704) 421
Changes in current assets and liabilities
Inventories 3,968 6,266
Receivables (1,497) (3,283)
Accounts payable and accrued expenses (5,030) 6,986
Other 170 (237)
------------ ------------
(3,093) 10,153
Proceeds from the sales of trading
securities 20,403 24,821
Purchase of trading securities (7,851) (38,792)
------------ ------------
Net cash provided by (used in)
operating activities of continuing
operations 9,459 (3,818)
Cash Flows from Investing Activities of
Continuing Operations:
Purchase of fixed assets (6,036) (12,844)
Other 16 25
------------ ------------
Net cash used in investing activities
of continuing operations $ (6,020) $ (12,819)
</TABLE>
The accompanying notes are an integral part of these financial statements.
FORM 10-Q
QUARTERLY REPORT - PAGE 7
<PAGE> 8
MERCER INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
For Six Months Ended June 30, 1997 and 1996
(Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
1997 1996
------------ -------------
<S> <C> <C>
Cash Flows from Financing Activities of
Continuing Operations:
Increase in bank indebtedness $ 1,782 $ 3,776
Decrease in bank indebtedness (8,975) (150)
Net proceeds on issuance (cost to repurchase)
of shares of beneficial interest 487 (1,391)
Payment of dividend (450) -
------------ ------------
Net cash (used in) provided by financing
activities of continuing operations (7,156) 2,235
Effect of exchange rate changes on cash and cash
equivalents (541) (965)
------------ ------------
Net cash used in continuing operations (4,258) (15,367)
Net cash used in spun-off operations - (1,691)
------------ ------------
Net decrease in cash and cash equivalents (4,258) (17,058)
Cash and cash equivalents, beginning of period 9,967 29,230
------------ ------------
Cash and cash equivalents, end of period $ 5,709 $ 12,172
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
FORM 10-Q
QUARTERLY REPORT - PAGE 8
<PAGE> 9
MERCER INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR SIX MONTHS ENDED JUNE 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 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
QUARTERLY REPORT - PAGE 9
<PAGE> 10
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 14,961,243
and 13,480,550 for the six months ended June 30, 1997 and 1996, respectively,
and 14,991,237 and 13,455,810 for the three months ended June 30, 1997 and
1996, respectively.
FORM 10-Q
QUARTERLY REPORT - PAGE 10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Mercer International Inc. is a pulp and paper company headquartered in
Zurich, Switzerland 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 six months and quarter ended June
30, 1997 should be read in conjunction with the consolidated financial
statements and related notes included elsewhere herein.
RESULTS OF OPERATIONS - Six Months Ended June 30, 1997
------------------------------
In the first half of 1997, revenues decreased to $90.1 million from $99.6
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 9.4% in the first half of 1997 also contributed to lower
revenues. See "Foreign Currency".
Pulp and paper costs decreased to $69.3 million in the first half of 1997
from $76.0 million in the same period in 1996, primarily as a result of
decreased fibre costs (raw materials). General and administrative expenses
decreased to $12.1 million for the six months ended June 30, 1997 from $12.8
million in the same period in 1996. Interest expense decreased to $1.4
million for the six months ended June 30, 1997 from $2.0 million for the
comparative period of 1996 as a result of reduced indebtedness.
For the six months ended June 30, 1997, net earnings from continuing
operations were $7.3 million or $0.49 per share, compared to $8.7 million or
$0.65 per share for the six months ended June 30, 1996.
FORM 10-Q
QUARTERLY REPORT - PAGE 11
<PAGE> 12
The distribution of the Company's sales by product class, geographic area and
volume is set out in the following table for the periods indicated:
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
June 30, 1997 June 30, 1996
---------------- ----------------
(dollars in thousands)
<S> <C> <C>
SALES BY PRODUCT CLASS
Packaging papers $ 15,014 $ 16,664
Specialty papers 14,330 15,510
Printing papers 17,867 19,447
Pulp 35,782 37,660
Other 1,726 3,032
----------- ----------
Total(1) $ 84,719 $ 92,313
=========== ==========
SALES BY GEOGRAPHIC AREA
Germany $ 48,061 $ 52,781
European Union(2) 30,133 23,568
Other 6,525 15,964
----------- ----------
Total $ 84,719 $ 92,313
=========== ==========
SALES BY VOLUME (tonnes)
Packaging papers 55,600 53,630
Specialty papers 17,732 14,191
Printing papers 26,548 23,310
Pulp 81,968 64,985
----------- ----------
Total 181,848 156,116
=========== ==========
- - -------------------------------
(1) Excluding intercompany sales.
(2) Not including Germany.
</TABLE>
Pulp and paper markets were generally weak in the first half of 1997 and
product prices were lower than in the same period in 1996. Sales volumes were
16% higher in the first half 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 half of 1997 increased by 26% compared to the same period
in 1996. In the first half of 1997, list prices for pulp were, on average,
down approximately 25% from the same period in 1996. Pulp prices stabilized
during the second quarter of 1997 and some pulp producers have announced
price increases for the third quarter of 1997, although there can be no
assurances that such price increases will be achieved.
FORM 10-Q
QUARTERLY REPORT - PAGE 12
<PAGE> 13
The average net selling price for the Company's paper products decreased, on
average, by approximately 17% in the first half of 1997 from the comparative
period in 1996. Paper sales by volume in the first half of 1997 increased by
9.6%, compared to the same period in 1996.
On average, the Company's fibre (wood chips and pulpwood) costs for pulp
operations decreased by approximately 17% in the first half 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 37% in the first half of 1997 compared
to the same period in 1996. Fibre costs remained relatively low in the first
half of 1997, but there can be no assurance that they will not escalate in
the future. During the second quarter of 1997, there were signs of upward
pressure for wastepaper and pulpwood.
The date by which the Company's pulp mill (the "Pulp mill") must reduce its
levels of AOX (adsorbable organic halogen) discharge from 0.6 kilograms per
tonne to 0.4 kilograms per tonne has been deferred from January 1, 1998 to
January 1, 1999. In addition, the Company's requirement to reduce its levels
of COD (chemical oxygen demand) discharge at the Pulp mill to 50 kilograms
per tonne has also been postponed from July 1, 1997 to January 1, 1999. The
Company has and will continue to modify its wastewater and bleaching
facilities at its Pulp mill to meet or exceed these prescribed regulations.
Such modifications are expected to improve the operational efficiency of the
Pulp mill and are part of the Company's overall capital investment program
for the mill. In July 1997, the Company entered into new long-term five year
labour agreements with its unionized pulp workers which provide for, among
other things, pay increases of 1.5% in September 1997, 2.0% in January 1998,
1.5% in August 1998, and 2.5% in January 1999 and 2000; a profit sharing
plan; and the Company to maintain current employment levels. The agreements
establish a wage rate that will be approximately 90% of the union wage rate
for pulp workers in western Germany in the year 2000 and will be at par to
such rate by the year 2002. In the first half of 1997, the Company provided
a 3% pay increase to its unionized paper workers, and subsequently entered
into a new labour agreement pursuant to which the Company will maintain
current employment levels until the end of this year and provide pay
increases of 3% in September 1997 and 2.5% in December 1997.
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. Due to the weak margins for paper products
and competitive pressures resulting from the small size of the Company's
packaging-grade paper machines, the Company is considering various potential
alternatives for its paper operations which may result in the reorganization
of its paper division. Such reorganization may, among other things, involve
changes to the Company's product mix, staffing levels and operations, and
divestiture of certain paper mills.
FORM 10-Q
QUARTERLY REPORT - PAGE 13
<PAGE> 14
RESULTS OF OPERATIONS - Quarter Ended June 30, 1997
---------------------------
Revenues in the second quarter of 1997 decreased to $45.7 million from $49.7
million in the comparative quarter of 1996. The decrease in revenues
reflects lower pulp and paper prices. The devaluation of the deutschmark
against the U.S. dollar in the second quarter of 1997 compared to the second
quarter of 1996 also contributed to lower revenues. On average, the
deutschmark decreased by approximately 12% in the current period of 1997 from
the comparative period of 1996.
Pulp and paper costs and expenses decreased to $34.8 million in the current
quarter from $39.4 million in the same period in 1996, primarily as a result
of lower fibre costs. General and administrative expenses decreased to $6.3
million in the current quarter from $6.5 million in the same quarter of 1996.
Interest expense decreased to $0.5 million in the three months ended June 30,
1997 from $0.9 million in the comparative quarter in 1996 as a result of
reduced indebtedness.
Net earnings from continuing operations in the quarter ending June 30, 1997
increased to $4.1 million or $0.27 per share from $2.9 million or $0.21 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:
<TABLE>
<CAPTION>
Quarter Ended Quarter Ended
June 30, 1997 June 30, 1996(1)
------------- --------------
(dollars in thousands)
<S> <C> <C>
SALES BY PRODUCT CLASS
Packaging papers $ 8,003 $ 6,949
Specialty papers 7,414 7,496
Printing papers 8,966 9,136
Pulp 17,381 19,236
Other 823 1,411
------------ ------------
Total(1) $ 42,587 $ 44,228
============ ============
SALES BY GEOGRAPHIC AREA
Germany $ 22,796 $ 23,617
European Union(2) 17,353 12,324
Other 2,438 8,287
------------ ------------
Total $ 42,587 $ 44,228
============ ============
</TABLE>
FORM 10-Q
QUARTERLY REPORT - PAGE 14
<PAGE> 15
<TABLE>
<CAPTION>
Quarter Ended Quarter Ended
June 30, 1997 June 30, 1996
------------- -------------
(tonnes)
<S> <C> <C>
SALES BY VOLUME
Packaging papers 29,011 24,948
Specialty papers 9,273 7,147
Printing papers 13,697 12,120
Pulp 40,523 38,851
------------- -------------
Total 92,504 83,066
============= =============
- - -------------------------------
(1) Excluding intercompany sales.
(2) Not including Germany.
</TABLE>
While pulp and paper prices in the second quarter of 1997 were lower than the
comparative period of 1996, sales by volume increased by approximately 11%.
During the second quarter of 1997, pulp and paper prices stabilized and there
was some improvement over the first quarter of 1997. Improvements in demand
also resulted in some pulp producers announcing a price increase for the
third quarter of 1997, although there can be no assurance that such an
increase will be successfully implemented.
In the second quarter of 1997, list prices for pulp were, on average, down
approximately 13% from the same period in 1996. On average, the Company's
fibre costs for pulp operations were down approximately 11% in the current
quarter, compared to the same period in 1996. Pulp sales by volume in the
second quarter of 1997 increased by 4.3%, 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 12% in the second quarter of 1997 from the
comparative period in 1996. Although recycled fibre (wastepaper) costs for
paper operations decreased by approximately 28% in the second quarter of 1997
from the same period in 1996, they increased by approximately 11% in the
current quarter of 1997, compared to the first 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 second quarter
of 1997 increased by 17.6%, compared to the same period in 1996.
FORM 10-Q
QUARTERLY REPORT - PAGE 15
<PAGE> 16
LIQUIDITY AND CAPITAL RESOURCES
The following table is a summary of selected financial information concerning
the Company for the periods indicated:
<TABLE>
<CAPTION>
As at As at
June 30, 1997 December 31, 1996
------------- -----------------
(in thousands)
<S> <C> <C>
FINANCIAL POSITION
Working capital $ 54,519 $ 78,663
Total assets 243,834 279,839
Long-term government debt 8,150 9,184
Long-term debt - other 5,741 19,426
</TABLE>
At June 30, 1997, the Company's cash and cash equivalents decreased to $5.7
million from $12.2 million at June 30, 1996 and from $10.0 million at
December 31, 1996. At June 30, 1997, the Company had short-term trading
securities totalling $65.4 million, compared to $80.5 million at June 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 $3.1 million in the six months ended June 30, 1997, compared to cash
provided of $10.2 million in the same period in 1996. Cash flow from
operations provided cash of $9.5 million in the first half of 1997, compared
to using cash of $3.8 million for the same period in 1996. During the
current period, the reduction of accounts payable and accrued expenses used
cash of $5.0 million, and net sales of trading securities provided cash of
$12.6 million. In the comparative period of 1996, an increase in accounts
payable and accrued expenses provided cash of $7.0 million, and net sales of
trading securities used cash of $14.0 million. A reduction in inventories
provided cash of $4.0 million in the six months ended June 30, 1997, compared
to $6.3 million in the six months ended June 30, 1996. The Company expects
to generate sufficient cash flow from operations to meet its working capital
requirements.
Investing Activities
- - --------------------
Investing activities in the first half of 1997 used cash of $6.0 million,
consisting primarily of capital expenditures for upgrades to the
manufacturing plants, compared to $12.8 million in the same period in 1996.
The Company expects capital investments in 1997 to total approximately $10.7
million. Approximately $6.3 million was expended in the first half of 1997,
compared to $13.9 million in the same period in 1996. These investments are
being partially financed through non-refundable grants
FORM 10-Q
QUARTERLY REPORT - PAGE 16
<PAGE> 17
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 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 expected to be received at the end of 1997 and result in
construction commencing in 1998. The Company estimates that its costs in
respect of the project in 1997 will be approximately $3.3 million. In
addition, the Company is continuing discussions with a strategic investor to
acquire a minority participation in the project.
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 on 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 with Concert to acquire, subject
to conditions, 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.
Financing Activities
- - --------------------
Cash used by financing activities was $7.2 million in the first half of 1997,
compared to cash provided of $2.2 million in the same period in 1996. The
Company decreased its bank indebtedness by $7.2 million in the first half of
1997, compared to a net increase of $3.6 million in the
FORM 10-Q
QUARTERLY REPORT - PAGE 17
<PAGE> 18
comparative period in 1996. During the first half of 1997, the Company
received proceeds on the issuance of shares of $0.5 million, compared to
expending $1.4 million on repurchases of the Company's shares in the same
period in 1996. During the six months ended June 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 half
of 1997 resulted in an unrealized foreign exchange translation loss of $0.5
million on cash and cash equivalents, which is included as shareholders'
equity in the Company's balance sheet and does not affect the Company's net
earnings. See "Foreign Currency".
The Company is continuing discussions with third parties to divest certain
redundant assets and has entered into lease arrangements with respect to some
of the assets whereby the Company has the right to "put" the assets to the
tenant at a prearranged price.
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 remediation
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.
The Company anticipates that there will be additional acquisitions of
businesses or commitments to projects during the second half 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
FORM 10-Q
QUARTERLY REPORT - PAGE 18
PAGE> 19
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 six months ended June 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' 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 six months ended
June 30, 1997, the overall depreciation of the deutschmark against the U.S.
dollar resulted in a net $23.7 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 $35.7 million at June 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
June 30 to August 8, 1997 June 30, 1997 June 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 1.8466 1.7902 1.7438 1.7079 1.5218 1.5262
</TABLE
Based upon the period average exchange rate in the first half of 1997, the
U.S. dollar increased by approximately 9.4% 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. The
Company does not believe that the outcome of such litigation will have a
material adverse effect on its business or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Shareholders on June 27, 1997 (the
"Meeting"). At the Meeting, the following matters were voted upon:
1. Michel Arnulphy was elected a Class III trustee of the Company for a three
year term, as follows:
</TABLE>
<TABLE>
<CAPTION>
Abstentions and
Votes FOR Votes WITHHELD Broker Non-Votes
--------- -------------- ----------------
<S> <C> <C> <C>
Michel Arnulphy 5,836,077 27,970 -
</TABLE>
2. An amendment to the Company's Non-Qualified Stock Option Plan to increase
the number of shares available for issuance thereunder from 1,100,000 to
2,000,000 shares was approved as follows:
<TABLE>
<CAPTION>
Abstentions and
Votes FOR Votes AGAINST Broker Non-Votes
--------- ------------- ----------------
<S> <C> <C> <C>
Amend Non-Qualified
Stock Option Plan 5,131,466 732,581 -
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description
------- -----------
10.1 Amended and Restated Non-Qualified Stock Option Plan.
27 Article 5 - Financial Data Schedule for 2nd Quarter 1997 -
Form 10-Q.
FORM 10-Q
QUARTERLY REPORT - PAGE 20
<PAGE> 21
(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.
Dated: August 12, 1997 MERCER INTERNATIONAL INC.
By: /s/ Maarten Reidel
-------------------------------------
Maarten Reidel
Secretary and Chief Financial Officer
FORM 10-Q
QUARTERLY REPORT - PAGE 22
<PAGE> 23
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- - ------- -----------
<S> <C>
10.1 Amended and Restated Non-Qualified Stock Option Plan
27 Article 5 - Financial Data Schedule for 2nd Quarter 1997 - Form 10-Q.
</TABLE>
<PAGE> 1
AMENDED AND RESTATED
MERCER INTERNATIONAL INC.
1992 NON-QUALIFIED STOCK OPTION PLAN
This Amended and Restated 1992 Non-Qualified Stock Option Plan (the "Plan")
provides for the grant of options to acquire shares of beneficial interest
("Shares"), $1.00 par value per share, of Mercer International Inc. (the
"Company"). The non-qualified stock options to acquire Shares granted
pursuant to this Plan are hereinafter referred to as "Options" and any party
to whom an Option is granted under this Plan shall be referred to hereinafter
as an "Optionee".
1. PURPOSE.
The purpose of the Plan is to attract and retain the services of people with
training, experience and ability and to provide additional incentive to such
persons by granting them an opportunity to participate in the ownership of
the Company.
2. SHARES SUBJECT TO THE PLAN.
The Shares subject to this Plan shall be the Company's shares of beneficial
interest, presently authorized but unissued or reacquired by the Company.
Subject to adjustment as provided in Section 8 hereof, the aggregate amount
of Shares to be delivered upon the exercise of all Options granted under this
Plan shall not exceed Two Million (2,000,000) Shares, as such Shares were
constituted on the effective date of this Plan, allocated as follows:
(i) to those non-employee Trustees eligible to receive Options
only under the formula established in Section 5.1 hereof,
the number of Shares covered by Options granted hereunder
shall not exceed a total of One Hundred Thousand (100,000)
Shares, and
(ii) to all other persons eligible to receive Options under
Section 5.2 hereof, the number of Shares covered by Options
granted hereunder shall not exceed a total of One Million
Nine Hundred Thousand (1,900,000) Shares.
If any Option granted under this Plan shall expire, be surrendered, exchanged
for another Option, cancelled or terminated for any reason without having
been exercised in full, the unpurchased Shares subject thereto shall
thereupon again be available for purposes of this Plan, including for
replacement Options which may be granted in exchange for such surrendered,
cancelled or terminated Options.
3. EFFECTIVENESS OF THE PLAN.
The Plan was originally adopted by the Company's Board of Trustees on April
15,1992, and approved by its shareholders at its annual meeting held on July
17,1992. The Plan was amended by the Board of Trustees in October 1994 and
subsequently approved by the shareholders at the following annual meeting of
<PAGE> 2
shareholders of the Company. The Plan was further amended by the Board of
Trustees on May 29, 1997 and approved by the shareholders at the annual
meeting of shareholders held on June 27, 1997. Such amendments to the Plan
are included in this Amended and Restated Plan.
4. ADMINISTRATION
4.1 Appointment of Committee. The authority to award options under
the Plan shall be vested in the Board of Trustees of the Company (the
"Board"). Notwithstanding the foregoing, an independent committee consisting
of two or more non-employed Trustees (the "Committee"), each of whom shall be
a Disinterested Trustee (as defined below) shall make any and all decisions
to award options under the Plan to officers of the Company who are subject to
the reporting requirements under Section 16 of the Securities Exchange Act of
1934, as amended (the "Exchange Act"). The members of the Committee shall be
appointed by the Board for such term as the Board may determine. The Board
may from time to time remove members from, or add members to, the Committee,
and vacancies on the Committee, however caused, may be filled by the Board;
provided, however, that all members of the Committee shall at all times be
Disinterested Trustees. When acting in its capacity authorized hereunder,
the Board or the Committee are referred to herein as the "Plan
Administrator".
For purposes hereof, a Disinterested Trustee is a member of the Board
who meets the definition of "disinterested person" as set forth in the rules
and regulations promulgated under Section 16(b) of the Exchange Act, as
amended from time to time. Currently, a Disinterested Trustee is a non-
employee member of the Board who is not, during the one (1) year prior to
service as an administrator of the Plan, or during such service, granted or
awarded equity securities of the Company pursuant to this Plan (other than
pursuant to Section 5.1 hereof) or any other plan of the Company or any of
its affiliates.
4.2 Power and Authority. The Plan Administrator shall have the
authority, in its discretion, to determine all matters relating to the
Options to be granted under Section 5.2 of this Plan, including selection of
the persons to be granted Options, the number of Shares to be subject to each
Option, the exercise price, the vesting schedule, and all other terms and
conditions of the Options. Grants under Section 5.2 of the Plan need not to
be identical in any respect, even when made simultaneously. The Plan
Administrator may also interpret the Plan; prescribe, amend and rescind rules
and regulations relating to the Plan; amend the Plan from time to time
(subject to the limitations set forth in Section 10); and make all other
determinations necessary or advisable for the administration of the Plan.
The interpretation and construction by the Plan Administrator of any terms or
provisions of this Plan or any Option issued under Section 5.2 hereof, or of
any rule or regulation promulgated in connection herewith, shall be
conclusive and binding on all interested parties. Notwithstanding anything
in this Plan to the contrary, the Plan Administrator shall exercise no
discretion with respect to the terms or conditions of Options granted under
Section 5.1 hereof.
<PAGE> 3
5. GRANTS OF OPTIONS
5.1 Grants to Committee Members.
(a) Eligibility. Options shall be granted under this
Section 5.1 of the Plan to each non-employee Trustee on the last
day of each of the Company's fiscal years ("Eligibility Date"),
commencing December 31, 1992, while this Plan is in effect;
provided, however, that only non-employee Trustees who have
served on the Board at least three months prior to the last day
of the applicable fiscal year shall be eligible to receive a
grant of Options under this Section 5.1.
(b) Number of Shares; Exercise Price. Subject to the
overall limit on Shares covered by Options to be granted to non-
employee Trustees set forth in Section 2(i), on each Eligibility
Date, each non-employee Trustee shall be granted Options to
acquire Six-Thousand (6,000) Shares. The exercise price
("Exercise Price") of such Options shall be the last sale price
of the Company's Shares on the Eligibility Date on the NASDAQ
National Market System or on such other national exchange or
association which at the date of grant is the primary market for
trading of the Company's Shares. If the Eligibility Date is a
day when the primary market for trading of the Company's Shares
is not open, the Eligibility Date shall be the nearest previous
day of trading in the Company's Shares.
(c) Duration of Options. Except as provided in
Section 7 below, each Option granted under this Section 5.1 shall
continue in effect for a period of fifteen (15) years following
the date of grant.
(d) Limits on Amendments. The provisions of this
Section 5.1 shall not be amended more than once every six months,
other than to comport with changes in the Internal Revenue Code
of 1986, as amended, the Employee Retirement Income Security Act
of 1974, as amended, or the rules thereunder.
5.2 Grants to Other Persons.
(a) Eligibility. Options may be granted under this
Section 5.2 only to persons who, at the time the Option is
granted, are employees, officers, and trustees or directors who
are employees of the Company or any of its subsidiary
corporations as determined in the discretion of the Plan
Administrator. Options granted hereunder shall be in such amount
annually without restriction as determined by the Plan
Administrator.
(b) Exercise Price. The Exercise Price per Share
of each Option granted under this Section 5.2 shall be determined
<PAGE> 4
without restriction by the Plan Administrator, and may be greater
or less than the fair market value per share of the Company's
shares of beneficial interest at the time the Option is granted.
(c) Duration of Options. Except as provided in
Section 7 below, the term of each Option granted under this
Section 5.2 shall be as established by the Plan Administrator,
and if not so established, shall be fifteen (15) years.
(d) Other Terms. The Plan Administrator in its
sole discretion may establish other terms and conditions for the
exercise of the granted Options. The terms of the grant of an
Option may be set forth in a written stock option agreement
between the grantee and the Company.
6. EXERCISE OF OPTION
6.1 Exercise. Each Option granted pursuant to Section 5.1
shall be exercisable in whole or in part immediately upon the
grant thereof. Each Option granted pursuant to Section 5.2
shall prescribe the terms and conditions, if any, on which such
Option or portions thereof shall become exercisable, as
determined by the Plan Administrator. The Plan Administrator, in
it absolute discretion, may waive or accelerate any vesting
requirement contained in outstanding Options granted pursuant to
Section 5.2. Notwithstanding the foregoing, no fewer that one
hundred (100) Shares (or the remaining Shares then purchasable
under the Option, if less than 100 Shares) may be purchased upon
any exercise of any Option rights hereunder and only whole Shares
will be issued pursuant to the exercise of any Option. Options
shall be exercised by delivery to the Company of written notice
from the Optionee, specifying the number of Shares as to which
the Optionee desires to exercise the Option, and the date on
which the Optionee desires to complete the transaction. In
addition, unless in the opinion of counsel for the Company such a
representation is not required in order to comply with the Securities
Act of 1933, as amended, such notice shall contain a
representation that it is the Optionee's intention to acquire the
Shares for investment and not with a view to, or in connection
with, any distribution thereof.
6.2 Payment of Exercise Price. On or before the date
specified for completion of the purchase of Shares pursuant to an
Option, the Optionee must have paid the Company therefor the full
Exercise Price of said Shares (i) in cash, (ii) in previously
acquired Shares of the Company having a fair market value on the
date of exercise equal to the Exercise Price, or (iii) a
combination of cash and previously acquired Shares; provided,
however, that payment in Shares held by an Optionee subject to
Section 16(b) of the Exchange Act shall not be made unless the
Shares shall have been owned by the Optionee for a period of at
<PAGE> 5
least six (6) months. At the election of the Optionee, the
exercise of an Option may be made by simultaneous and successive
exercise of the Option (referred to as "pyramiding") and in such
event, actual delivery and issuance of Shares shall not be
required but may be effected through bookkeeping entries in the
Company's records and the Optionee shall be issued new
certificates for the net Shares obtained. No Shares shall be
issued until full payment therefor has been made and an Optionee
shall have none of the rights of a shareholder until Shares are
issued to such Optionee.
6.3 Withholding Tax Requirements. The Company shall have the
right to retain and withhold from any payment of cash or Shares
under the Plan the amount of taxes required by any government to
be withheld or otherwise deducted and paid with respect to such
payment. At its discretion, the Company may require an Optionee
receiving Shares to reimburse the Company for any such taxes
required to be withheld by the Company and withhold any
distribution in whole or in part until the Company is so
reimbursed. In lieu thereof, the Company shall have the right to
withhold a number of Shares having a market value not less than
the amount of such taxes required to be withheld by the Company
to reimburse the Company for any such taxes and cancel (in whole
or in part) any such Shares so withheld. If required by Section
16(b) of the Exchange Act, the election to pay withholding taxes
by delivery of Shares held by any person who at the time of
exercise is subject to Section 16(b) of the Exchange Act, shall
be made within six (6) months prior to the date the Option
exercise becomes taxable or during the quarterly 10-day window
period required under Section 16(b) of the Exchange Act for
exercises of stock appreciation rights.
6.4 Payment of Taxes by Company. Notwithstanding the
provisions of Section 6.3 above, the Plan Administrator may agree
to require the Company to pay any issuance or transfer taxes on
Shares issued pursuant to the exercise of an Option under this
Plan.
6.5 Nonassignability. Options granted under this Plan and the
rights and privileges conferred hereby may not be transferred,
assigned, pledged or hypothecated in any manner (whether by
operation of law or otherwise) other than by the applicable laws
of descent and distribution, and shall not be subject to
execution, attachment or similar process. Any attempt to
transfer, assign, pledge, hypothecate or otherwise dispose of any
Option under this Plan or of any right or privilege conferred
hereby, contrary to the provisions of this Plan, or the sale or
levy or any attachment or similar process upon the rights and
privileges conferred hereby shall be null and void.
Notwithstanding the foregoing, an Optionee may during the
Optionee's lifetime, designate a person who may exercise the
<PAGE> 6
Option after the Optionee's death by giving written notice of
such designation to the Plan Administrator. Such designation may
be changed from time to time by the Optionee by giving written
notice to the Plan Administrator revoking any earlier designation
and making a new designation.
7. TERMINATION OF SERVICE, DISABILITY AND DEATH.
7.1 General. If the employment or service of an Optionee by
the Company or its subsidiaries shall terminate by reason of
retirement, disability or failure to be re-elected (collectively,
"termination"), the Option may be exercised by the Optionee at
any time prior to the expiration of ninety (90) days after the
date of such termination (unless by its terms the Option sooner
terminates or expires), but only if and to the extent the
Optionee was entitled to exercise the Option at the date of such
termination. For the purposes of this Plan, an Optionee will be
considered to be disabled if the Optionee is unable to engage in
any substantial gainful activity by reason of any medically
determinable mental or physical impairment which can be expected
to result in death or which has lasted or can be expected to last
a continuous period of not less than twelve (12) months.
7.2 Death. In the event of the death of an Optionee while in
the employ or service of the Company or a subsidiary, the Option
may be exercised at any time prior to the expiration of one (1)
year after the date of such death (unless by its terms the Option
sooner terminates and expires), but only if and to the extent the
Optionee was entitled to exercise the Option at the date of such
death and only by the person or persons to whom such Optionee's
rights under the Option shall pass by the Optionee's will or by
the laws of descent and distribution of the state or country of
the Optionee's domicile at the time of death.
7.3 Termination for Cause. If the Optionee's employment or
service with the Company is terminated for cause, any Option
granted hereunder shall automatically terminate as of the first
advice or discussion thereof, and such Optionee shall thereupon
have no right to purchase any Shares pursuant to such Option.
"Termination for Cause" shall mean dismissal for dishonesty,
conviction or confession of a crime punishable by law (except
minor violations), intoxication while at work, fraud, misconduct
or disclosure of confidential information.
7.4 Waiver or Extension of Time Periods. The Plan
Administrator shall have the authority, prior to or within the
time periods specified in this Section 7 for the exercise of any
Option granted under Section 5.2 hereof, to extend or waive any
such time period (but not beyond the expiration of the term of
such Option) or to accelerate or remove any vesting conditions.
In addition, the Plan Administrator may extend, reduce or
<PAGE> 7
eliminate the time periods specified in this Section 7. The
foregoing discretionary authority shall not apply to any Option
granted under the formula set forth in Section 5.1 hereof.
7.5 Termination of Options. To the extent that the Option of
any deceased employee, officer, trustee or director whose
employment or service is terminated shall not have been exercised
within the limited periods prescribed in this Section 7, all
further rights to purchase Shares pursuant to such Option shall
cease and terminate at the expiration of such period.
8. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION.
8.1 Adjustments. The number of Shares subject to options
granted under the Plan shall be adjusted as follows:
(a) in the event that the outstanding Shares are changed
by any stock dividend, stock split or combination of shares, the
number of Shares subject to the Plan and to Options granted under
the Plan shall be proportionately adjusted;
(b) except as provided in subsection (d), in the event of
any merger, consolidation or reorganization of the Company with
any other corporation or corporations, there may be substituted
on an equitable basis as determined by the Plan Administrator,
for each Share then subject to the Plan, whether or not at the
time subject to outstanding options, the number and kind of
shares of stock or other securities or other property (including
cash) to which the holders of Shares of the Company will be
entitled pursuant to such transaction;
(c) in the event of any other relevant change in the
capitalization of the Company, the Plan Administrator shall
provide for an equitable adjustment in the number of shares then
subject to the Plan, whether or not then subject to outstanding
options. In the event of any such adjustment, the purchase price
per share shall be proportionately adjusted; and
(d) notwithstanding the foregoing provisions of this
Section 8, upon the dissolution of the Company, or upon any
merger or consolidation of the Company:
(i) the surviving corporation (whether the Company
or otherwise) shall agree to exchange options to purchase
its shares of stock for options granted under the Plan, on
terms fairly reflecting the terms of the merger or
consolidation; or
(ii) all vesting schedules, repurchase rights and
obligations, and other terms and conditions applicable to
Shares granted under this Plan shall be eliminated, and all
<PAGE> 8
options granted under the Plan shall terminate and
thereupon become null and void; provided, however, that the
Optionee shall have the right, immediately prior to such
dissolution, merger or consolidation, to exercise any such
option without regard to any otherwise applicable
restriction as to time of exercise, other than expiration
of the Option Period; or
(iii) the Plan Administrator shall make such other
arrangements, which may include termination of outstanding
options against payment therefor, as the Plan Administrator
may at the time deem fair and equitable in its discretion.
9. SECURITIES REGULATION.
Shares shall not be issued with respect to an Option granted under this
Plan unless the exercise of such Option and the issuance and delivery of such
Shares pursuant thereto shall comply with all relevant provisions of law,
including, without limitation, any applicable state securities laws, the
Securities Act of 1933, as amended, the Exchange Act, the rules and
regulations promulgated thereunder, and the requirements of any stock
exchange upon which the Shares may then be listed, and shall be further
subject to the approval of counsel for the Company with respect to such
compliance, including the availability of an exemption from registration for
the issuance and sale of any Shares hereunder. Inability of the Company to
obtain from any regulatory body having jurisdiction, the authority deemed by
the Company 's counsel to be necessary for the lawful issuance and sale of
any Shares hereunder or the unavailability of an exemption from registration
for the issuance and sale of any Shares hereunder shall relieve the Company
of any liability in respect of the nonissuance or sale of such Shares as to
which such requisite authority shall not have been obtained.
As a condition to the exercise of an Option, the Company may require
the Optionee to represent and warrant at the time of any such exercise that
the Shares are being purchased only for investment and without any present
intention to sell or distribute such Shares if, in the opinion of counsel for
the Company, such a representation is required by any relevant provision of
the aforementioned laws. At the option of the Company, a stop-transfer order
against any Shares may be placed on the official stock books and records of
the Company, and a legend indicating that the Shares may not be pledged, sold
or otherwise transferred unless an opinion of counsel is provided (concurred
in by counsel for the Company) stating that such transfer is not in violation
of any applicable law or regulation, may be stamped on certificates
representing the Shares in order to assure exemption from registration. The
Plan Administrator may also require such other action or agreement by the
Optionee as may from time to time be necessary to comply with the federal and
state securities laws. THIS PROVISION SHALL NOT OBLIGATE THE COMPANY TO
UNDERTAKE REGISTRATION OF THE OPTIONS OR SHARES HEREUNDER.
<PAGE> 9
10 AMENDMENT AND TERMINATION.
10.1 Board Action. Except as provided in Section 5.1(d), the
Board may at any time suspend, amend or terminate this Plan;
provided, however, that except as set forth in Section 8, the
approval of the holders of a majority of the Company's
outstanding Shares is necessary within twelve (12) months before
or after the adoption by the Board of any amendment which will:
(a) increase the number of Shares which are to be
reserved for the issuance of Options under this Plan;
(b) permit the granting of Options to a class of
persons other than those presently permitted to receive
Options under this Plan; or
(c) require shareholder approval under applicable law,
including Section 16(b) of the Exchange Act.
10.2 Automatic Termination. The Plan shall continue in effect
until the earlier of (a) fifteen (15) years from the date of the
first grant of Options hereunder or (b) the termination of the
Plan by Action of the Board. No Option may be granted after such
termination or during any suspension of this Plan. The amendment
or termination of this Plan shall not, without the consent of the
Option holder, alter or impair any rights or obligations under
any Option theretofore granted under this Plan.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES INCLUDED IN THIS FORM 10-Q AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 5,709
<SECURITIES> 65,413
<RECEIVABLES> 15,195
<ALLOWANCES> 849
<INVENTORY> 16,748
<CURRENT-ASSETS> 102,321
<PP&E> 158,764
<DEPRECIATION> 37,580
<TOTAL-ASSETS> 243,834
<CURRENT-LIABILITIES> 47,802
<BONDS> 13,891
0
0
<COMMON> 87,552
<OTHER-SE> 92,269
<TOTAL-LIABILITY-AND-EQUITY> 243,834
<SALES> 84,719
<TOTAL-REVENUES> 90,094
<CGS> 69,259
<TOTAL-COSTS> 82,771
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,403
<INCOME-PRETAX> 7,323
<INCOME-TAX> 28
<INCOME-CONTINUING> 7,295
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,295
<EPS-PRIMARY> 0.49
<EPS-DILUTED> 0.49
</TABLE>
