<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 8-K
CURRENT REPORT PURSUANT
TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report: JUNE 3, 1996
MERCER INTERNATIONAL INC.
(Exact name of Registrant as specified in its charter)
WASHINGTON
(State of Incorporation)
0-9409 91-6087550
(Commission File Number) (IRS Employer Identification No.)
BRANDSCHENKE STR. 64, ZURICH, SWITZERLAND, CH 8002
(Address of principal executive offices, including postal code)
011 411 201 7710
(Registrant's telephone number, including area code)
<PAGE> 2
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
- ---------------------------------------------
On June 3, 1996, Mercer International Inc. (the "Company" or "Mercer")
completed the spin-off of its financial services segment. Mercer previously
operated in two business segments, being pulp and paper and financial services.
The Company's financial services business was primarily conducted through
Arbatax International Inc. ("Arbatax"). On June 3, 1996, the shareholders of
record on May 31, 1996 of Mercer shares of beneficial interest ("Mercer Common
Shares") received a distribution (the "Distribution") of one share of Arbatax
common stock (the "Arbatax Common Stock") for every two shares of Mercer Common
Stock owned. Fractional interests were not distributed but were aggregated and
will be sold and the cash proceeds distributed to holders of Mercer Common Stock
entitled to fractional interests. Upon completion of the Distribution, Mercer
owns approximately 706,150 shares of Arbatax Common Stock. Additional
information concerning the Distribution, including the tax effect on
shareholders, is contained in an information statement dated May 22, 1996,
copies of which were mailed to holders of Mercer Common Stock and included as
Exhibit 2.2 hereto.
Mercer recognized that no significant synergies existed between Mercer and
Arbatax in terms of their respective businesses and believed that the
reorganization of the Company into two separate publicly held companies was
desirable. Mercer primarily operates a pulp and paper business in Europe,
whereas Arbatax operates in the financial services business primarily in North
America. Mercer is currently employing a business strategy that involves,
among other things, expanding its pulp and paper operations through
acquisitions in Europe. This strategy and focus on pulp and paper operations
has, in part, lead to Mercer de-emphasizing the financial services business.
As a result, Mercer felt that the separation of the financial services segment
and the pulp and paper segment, which have distinct financial, investment and
operating characteristics, will enable each of the companies to concentrate
their attention and financial resources on its own segment without regard to
the corporate objectives and policies of the other business group. Mercer
believes that the spin-off will allow investors to better evaluate the
performance and investment characteristics of each business, enhancing the
likelihood that each will achieve appropriate market recognition for their own
respective operating results.
The Company initially announced on December 28, 1995 that it would distribute
to its shareholders, by way of a special dividend, approximately 83% of the
issued shares of its 92% owned subsidiary, Arbatax, a Canadian corporation. As
at December 31, 1995, the operations of Arbatax have been classified separately
within the Company's financial statements as "spin-off operations" and have
been excluded from the amounts of revenues and expenses of the Company's
continuing operations. In addition, Arbatax's assets and liabilities have not
been consolidated into the Company's continuing operations. The Distribution
will be recorded as a stock dividend from retained earnings at the carrying
amount of the net assets of the spin-off operations. As a result, the
Company's total assets and shareholders' equity will each be reduced by
$50.1 million after giving effect to the Distribution.
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Arbatax was incorporated in 1951 and its shares of common stock are registered
under Section 12(g) of the Securities Exchange Act of 1934, quoted on the
O.T.C. Bulletin Board under the symbol "ATANF" and listed for trading on the
Vancouver Stock Exchange (the "VSE") under the symbol "AAX". Effective June
5, 1996, Arbatax Common Stock will be quoted on the VSE in U.S. dollars and
will be listed for trading under the symbol "AAX.U".
For the purposes of governing certain ongoing relationships between Mercer and
Arbatax after the spin-off, the parties have entered into a separation
agreement to provide for the Distribution, customary indemnities relating to
tax, contingent liabilities and employees, the provision of transitional
services and transfers of certain assets and liabilities. The separation
agreement sets forth the rights and obligations of the parties, including,
among other things, that:
1. Mercer shall provide to Arbatax general administrative services which
must, by reason of corporate uniformity, continue until September 30,
1996, subject to earlier termination or further extension;
2. Mercer and Arbatax have clearly delineated their rights to pursue, to
the other's exclusion, certain domestic and international corporate
business opportunities for a period of three years after the
Distribution date; and
3. The net amount that may be due from one party to the other, shall be
satisfied and settled in cash and/or securities, within 30 days of the
Distribution date and failing such agreement, the party which owes the
net sum to the other party shall issue to such party a senior note in
the amount of the net sum, with a term of five years, paying interest
at a rate equal to the prime rate for U.S. dollar commercial loans,
calculated daily and paid semi-annually in arrears.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
- ------------------------------------------
(b) Pro Forma Financial Information:
Pro forma consolidated financial statements for the three months ended
March 31, 1996.
The pro forma consolidated financial statements for Mercer listed above
present Arbatax as "operations to be spun-off". The Distribution of
Arbatax Common Stock is being accounted for as a stock dividend. "Net
assets of operations to be spun-off" was eliminated from the Mercer
consolidated balance sheets and "Retained earnings" was reduced.
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(c) Exhibits:
<TABLE>
<CAPTION>
<S> <C>
Exhibit
Number Description
------ -----------
</TABLE>
<TABLE>
<S> <C>
2.1 Separation Agreement between Mercer International Inc.
and Arbatax International Inc. dated for reference
March 29, 1996.
2.2 Information Statement dated May 22, 1996.
</TABLE>
4
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MERCER INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
AS AT MARCH 31, 1996
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
ASSETS $ $ $
<S> <C> <C> <C>
Current Assets
Cash and cash equivalents 12,706 12,706
Investments 72,742 72,742
Receivables 18,384 18,384
Inventories 26,968 26,968
Other 735 735
------- -------
131,535 131,535
Long-Term Assets
Net assets of operation to be spun-off 55,391 (55,391) -
Investments 5,881 5,281 11,162
Receivables 10,550 10,550
Properties 108,467 108,467
Deferred income tax assets 10,570 10,570
------- -------
190,859 140,749
------- -------
322,394 272,284
======= =======
LIABILITIES
Current Liabilities
Accounts payable and accrued expenses 39,258 39,258
Long-Term Liabilities
Debt 27,569 27,569
Due to affiliate 21,429 21,429
Other 7,072 7,072
------- -------
56,070 56,070
------- -------
Total Liabilities 95,328 95,328
SHAREHOLDERS' EQUITY
Shares of beneficial interest 69,978 69,978
Cumulative translation adjustment (7,132) (7,132)
Net unrealised loss on investment valuation (2,626) (2,626)
Retained earnings 166,846 (50,110) 116,736
------- -------
227,066 176,956
------- -------
322,394 272,284
======= =======
</TABLE>
5
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MERCER INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT FOR EARNINGS PER SHARE)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
$ $ $
<S> <C> <C> <C>
Revenues
Sales 48,085 48,085
Investments 1,788 1,788
------ ------
49,873 49,873
Expenses
Cost of sales 36,615 36,615
General and administrative 6,269 6,269
Interest expenses 1,059 1,059
------ ------
43,943 43,943
------ ------
Income from continuing operations before
income taxes 5,930 5,930
Income taxes 70 70
------ ------
Income from continuing operations 5,860 5,860
Income from operations to be spun-off 30 (30) -
------ ------
Net income 5,890 5,860
====== ======
Earnings per share
Income from continuing operations 0.43 0.43
Income from operations to be spun-off - -
------ ------
0.43 0.43
====== ======
</TABLE>
6
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MERCER INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT FOR EARNINGS PER SHARE)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
$ $ $
<S> <C> <C> <C>
Revenues
Sales 275,332 275,332
Investments 15,640 15,640
Other 15,046 15,046
------- -------
306,018 306,018
Expenses
Cost of sales 191,726 191,726
Investments 5,281 5,281
General and administrative 35,217 35,217
Litigation settlement 7,000 7,000
Interest expenses 4,543 4,543
------- -------
243,767 243,767
------- -------
Income from continuing operations before
income taxes and minority interest 62,251 62,251
Income taxes benefit 9,132 9,132
------- -------
Income from continuing operations before
minority interest 71,383 71,383
Minority interest (5,746) (5,746)
------- -------
Income from continuing operations 65,637 65,637
Loss from operations to be spun-off (1,454) 1,454 -
------- -------
Net income 64,183 65,637
======= =======
Earnings per share
Income from continuing operations 5.14 5.14
Loss from operations to be spun-off (0.11) -
------- -------
5.03 5.14
======= =======
</TABLE>
7
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MERCER INTERNATIONAL INC.
NOTES TO THE PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(UNAUDITED)
1. SPIN-OFF
On December 28, 1995, the Company announced plans to spin-off its financial
services segment to its shareholders. The Company recognized that no
significant synergies existed between the Company and Arbatax in terms of their
respective businesses and believes that the reorganization of the Company into
two separate publicly held companies is desirable. The Company primarily
operates a pulp and paper business in Europe, whereas Arbatax operates in the
financial services business primarily in North America. The Company felt that
the separation of the financial services segment and the pulp and paper
segment, which have distinct financial, investment and operating
characteristics, will enable the management of each business group to
concentrate its attention and financial resources on its own segment without
regard to the corporate objectives and policies of the other business group.
The Company believes that the spin-off will allow investors to better evaluate
the performance and investment characteristics of each business, enhancing the
likelihood that each will achieve appropriate market recognition based upon
their own respective results of operations.
Pursuant to the spin-off, the Company will distribute (the "Distribution")
approximately 83% of the currently issued shares of its 92% owned subsidiary,
Arbatax. The Company expects to effect the Distribution on June 3, 1996.
Arbatax's shares of common stock (the "Arbatax Common Stock") are registered
under Section 12(g) of the Securities Exchange Act of 1934. On March 28, 1996,
shareholders of Arbatax effected, among other things, a change of name to
"Arbatax International Inc." and a share split on a 1 to 1.5 basis (the "Stock
Split"). After giving effect to the Stock Split, there were 7,978,941 issued
shares of Arbatax Common Stock, of which 7,369,674 shares of Arbatax Common
Stock were owned by the Company. The Distribution ratio will be one share of
Arbatax Common Stock to every two shares of beneficial interest of the Company
(the "Mercer Common Stock"). Fractional interests will not be distributed but
will be aggregated and sold and the cash proceeds will be distributed to the
holders of Mercer Common Stock entitled to fractional interests. Upon
completion of the Distribution, the Company will own 706,150 shares of Arbatax
Common Stock.
Arbatax shares of common stock are registered under Section 12(g) of the
Securities Exchange Act of 1934, quoted on the O.T.C. Bulletin Board under the
symbol "ATANF" and listed for trading on the Vancouver Stock Exchange (the
"VSE") under the symbol "AAX". Effective June 5, 1996, Arbatax Common Stock
will be quoted on the VSE in U.S. dollars and will be listed for trading under
the symbol "AAX.U".
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A holder of Mercer Common Stock who receives Arbatax Common Stock pursuant to
the Distribution will be treated as if such shareholder had received a taxable
distribution in an amount equal to the fair market value of the Arbatax Common
Stock received, which will result in: (1) a dividend to the extent of such
shareholder's pro rata share of the Company's current and accumulated earnings
and profits as calculated under U.S. tax laws and regulations (the "Accumulated
Earnings"); (ii) a reduction in such shareholder's cost basis in Mercer Common
Stock to the extent that the fair market value of Arbatax Common Stock received
exceeds such shareholder's pro rata share of Accumulated Earnings; and (iii) a
gain to the extent that the market value of Arbatax Common Stock exceeds both
such shareholder's pro rata share of Accumulated Earnings and such
shareholder's cost basis in Mercer Common Stock.
For the purposes of effecting the Distribution and governing certain ongoing
relationships, the Company and Arbatax will enter 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.
2. PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
Pro forma adjustments related to the pro forma consolidated income statement
are computed assuming the spin-off transaction was consummated and the stock
dividend was paid at the beginning of the fiscal periods commencing from
January 1, 1995 and 1996, respectively.
Pro forma adjustments related to the pro forma consolidated balance sheet are
computed assuming the spin-off transaction was consummated and the stock
dividend was paid at March 31, 1996.
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<PAGE> 10
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
Executive Vice-President
Date: June 3, 1996
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MERCER INTERNATIONAL INC.
FORM 8-K
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
2.1 Separation Agreement between Mercer International Inc. and
Arbatax International Inc. dated for reference March 29, 1996.
2.2 Information Statement dated May 22, 1996.
</TABLE>
11
<PAGE> 1
SEPARATION AGREEMENT
THIS AGREEMENT dated for reference the 29th day of March, 1996.
BETWEEN:
MERCER INTERNATIONAL INC., a business trust organized
under the laws of the state of Washington, U.S.A.
("Mercer")
OF THE FIRST PART
AND:
ARBATAX INTERNATIONAL INC.(formerly called Nalcap
Holdings Inc.) a corporation incorporated under the
laws of Canada
("Arbatax")
OF THE SECOND PART
WHEREAS:
A. Mercer, a publicly held business trust whose stock is traded on the
NASDAQ Stock Market's National Market, owns approximately 92% of the
issued common stock of Arbatax;
B. Mercer has determined that its shareholders will benefit from the
Separation of ownership of Mercer's interest in Arbatax;
C. Mercer has decided to distribute to its shareholders approximately 83%
of the outstanding common stock of Arbatax as a special dividend; and
D. In connection with the Distribution it is necessary and appropriate
that certain rights and obligations of the Parties relating to
employees, contingent liabilities, taxes, administrative services,
assets and liabilities, business opportunities, and other matters
affected by the Separation of the Parties be agreed upon as
hereinafter set forth.
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NOW THEREFORE THIS AGREEMENT WITNESSES that in consideration of the mutual
covenants and agreements herein, the sum of Ten ($10.00) Dollars paid by each
Party to the other and other good and valuable consideration, the receipt of
which is hereby acknowledged, the Parties hereto agree as follows:
ARTICLE 1
INTERPRETATION
1.1 DEFINED TERMS
In this Agreement, the recitals and the schedules hereto, unless there is
something in the subject matter or context inconsistent therewith, the
following terms and expressions will have the following meanings:
(a) "Action" means any litigation or other judicial, regulatory or
administrative proceeding (including audits of taxes other than federal,
provincial, or state income taxes including franchise and capital taxes);
(b) "Acts or Omissions" means significant active and direct participation
by a Party in the conduct that resulted in the Contingent Liability, provided
however, that approvals, non-approvals or rejections of budgets, profit plans,
business plans and other corporate plans shall not constitute Acts or Omissions
with respect to any particular conduct;
(c) "Affiliate" shall have the meaning ascribed thereto in the Canada
Business Corporations Act, R.S.C. 1985, c.44, as amended or replaced from time
to time;
(d) "Agreement" means this separation agreement including all schedules
hereto;
(e) "Assets" means assets, properties and rights, whether real or
personal, tangible or intangible, that are to be assigned or transferred by
Mercer to Arbatax in connection with the Separation;
(f) "Benefit" means a significant, identifiable financial benefit that
directly flows to a Party from the Acts or Omissions that resulted in the
Contingent Liability;
(g) "Contingent Liability" means a liability (to the extent not covered by
insurance) of one or both of the Parties which was not recorded for financial
reporting purposes prior to the Separation Date that is attributable to either:
(i) an event which occurred prior to the Separation Date; (ii) a condition
which existed prior to the Separation Date; or (iii) an event which occurred
after the Separation Date but which was attributable to the Separation;
provided however, that in the case of either (i), (ii) or (iii) above, the
Action that resulted in the uninsured liability must have been filed or
otherwise commenced within two years after the Separation Date;
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(h) "Corporate Business Opportunities" means all investment, purchase or
other opportunities to acquire assets, companies or other entities and any
related merchant banking activities known, made available to, pursued ,
reviewed or investigated by the Parties other than: (i) those related, directly
or indirectly, to the pulp and paper business and related businesses; or (ii)
those having a cost or requiring an investment in excess of $30 million;
(i) "Cost Allocation" means Mercer's methodology for allocating costs to
its Subsidiaries as of December 31, 1995 and as amended from time to time;
(j) "Distribution" means the distribution by Mercer to its shareholders of
approximately 6,662,524 shares, being approximately 83%, of the issued and
outstanding stock of Arbatax by way of a special dividend;
(k) "Information" means information, whether patentable or copyrightable,
and written, oral or other tangible or intangible forms, including, but not
limited to, studies, reports, surveys, discoveries, ideas, concepts, know-how,
techniques, communications by or to counsel (including privileged
communications, memos and other materials) and other technical, financial,
employee or business information;
(l) "Judgment" means any judgment or other determination of liability
entered by a court or regulatory or administrative authority (or a settlement
entered into and/or approved by both of the Parties) in any contested Action
and includes a stipulated judgment or order or dismissal (or equivalent) by
which a court approves the settlement of an Action entered into and/or approved
by both of the Parties;
(m) "Liabilities" means liabilities which have been recorded for financial
accounting purposes on or before the Separation Date and that are to be
transferred from one Party to the other Party but do not include any Contingent
Liabilities as defined herein;
(n) "Mercer Business Opportunities" means all investment, purchase or
other opportunities to acquire assets, companies or other entities other than
Corporate Business Opportunities;
(o) "Named Party" means a Party which is named as a defendant (or
equivalent) in an Action;
(p) "Party" means Mercer or Arbatax as the case may be and "Parties"
means both of them;
(q) "Separation" means the separation of Arbatax as a Subsidiary from
Mercer that will occur upon the Distribution;
(r) "Separation Date" means the date on which the Distribution occurs;
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(s) "Services" means general administrative services, including, but not
limited to, corporate tax, internal auditing, accounting, legal, external
affairs, human resources, treasury, investor relations, risk management,
finance and corporate strategy services and the non-exclusive use of the office
premises and equipment of Mercer; and
(t) "Subsidiary" means any entity that is controlled by the entity in
question. As used herein "control" means the possession, directly or
indirectly, of the power to elect a majority of the board of directors of such
entity through the ownership of voting securities.
1.2 SCHEDULES
Schedules which are attached to this Agreement are incorporated into this
Agreement by reference and are deemed to be part hereof.
1.3 CURRENCY
Unless otherwise indicated, all dollar amounts referred to in this Agreement
are in lawful money of the United States of America.
1.4 NUMBER AND GENDER
In this Agreement, unless there is something in the subject matter or context
inconsistent therewith: (a) words in the singular number include the plural
and such words shall be construed as if the plural had been used; (b) words in
the plural include the singular and such words shall be construed as if the
singular had been used; and (c) words importing the use of any gender shall
include all genders where the context or party referred to so requires, and the
rest of the sentence shall be construed as if the necessary grammatical and
terminological changes had been made.
ARTICLE 2
SEPARATION
2.1 SEPARATION
The Separation shall be accomplished by way of the Distribution on the
Separation Date. The Separation is contingent upon Mercer obtaining all
necessary regulatory and tax reviews and approvals in a form and context
satisfactory to it. If Mercer does not obtain such reviews and approvals as it
deems necessary on or before May 31, 1996 it may, upon written notice to
Arbatax, terminate this Agreement.
2.2 CO-OPERATION
Each of the Parties agrees to co-operate with the other both before and after
the Separation Date to enable the Parties to implement the Separation,
including, but not limited to, performing their obligations hereunder. Such
co-operation will include, but is not limited to, preparing and
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submitting required financial reports after the Separation Date, which may
relate to periods either before or after the Separation Date, executing such
documents and doing such other acts and things as may be necessary to carry out
the full intent and purpose of this Agreement.
2.3 CORPORATE AUTHORITY
Each Party represents, warrants and covenants that it has taken or will take,
as appropriate, all necessary corporate actions to approve all things required
on its part to implement the Separation including, but not limited to: (a)
approval by its board of directors or trustees, as the case may be, of the
terms of this Agreement; (b) the performance of such Parties' obligations
under this Agreement; and (c) the making of all registrations and filings and
the undertaking of any other actions whether before or after the Separation
Date.
2.4 EFFECTIVE DATE
When executed by both Mercer and Arbatax, this Agreement shall be effective and
binding upon the Parties as of December 31, 1995. The Separation shall be
effective upon the Separation Date.
2.5 CONFLICT WITH OTHER AGREEMENTS
Each Party represents and warrants that none of the actions that it has taken
or will take, including, but not limited to, the declaration and payment of
dividends or other actions in connection with the implementation of the
Separation and the performance of its obligations hereunder, will violate
either: (a) the terms, conditions or other provisions of its articles or
certificate of incorporation or by-laws or of any agreement, indenture or other
instrument to which it is a Party, or by which any of its assets are bound; or
(b) the applicable legal requirements of any governmental authority having
jurisdiction over such Party.
ARTICLE 3
INFORMATION
3.1 AGREEMENT FOR EXCHANGE OF INFORMATION
Each Party agrees to provide to the other, at any time, before or after the
Separation Date, on written request and on a reasonable schedule to be agreed
upon by the Parties, any Information in the possession or under control of a
Party which the requesting Party reasonably requires: (a) to comply with
reporting, filing or other requirements imposed upon the requesting Party by
any legal, regulatory, administrative or taxing authority having jurisdiction
over the requesting Party; (b) for use in any judicial, regulatory,
administrative or tax proceeding in which the requesting Party is involved; or
(c) to enable the requesting Party to implement the Separation, including, but
not limited to, performing its obligations under this Agreement.
3.2 Any Information that is owned by the Party that is provided to the
requesting Party pursuant to Section 3.1 hereof shall be deemed to remain the
property of the providing Party.
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3.3 COMPENSATION FOR PROVIDING INFORMATION
The Party requesting such Information agrees to reimburse the other Party for
the reasonable costs of creating, gathering and copying such Information to the
extent that such costs are incurred for the benefit of the requesting Party.
3.4 LIMITATION OF LIABILITY
No Party shall have any liability to the other in the event that any
Information exchanged or provided pursuant to this Agreement which is an
estimate or a forecast, or which is based upon an estimate or a forecast, is
found to be inaccurate in the absence of wilful misconduct by the Party
providing such Information.
3.5 OTHER AGREEMENTS PROVIDING FOR EXCHANGE OF INFORMATION
The rights and obligations provided hereunder are in addition to and do not
supersede, abridge or modify, any rights and obligations relating to the
exchange of Information which are set out elsewhere in this Agreement.
ARTICLE 4
PROVISION OF SERVICES
4.1 SERVICES
The Services which Mercer will provide to Arbatax are the same services which
Mercer is providing to Arbatax as of the date of this Agreement.
4.2 ADDITIONAL SERVICES
The Parties may, by mutual agreement, add services to those Services being
provided by Mercer to Arbatax.
4.3 REDUCTION OF SERVICES
The Parties may, by mutual agreement, delete certain of the Services being
provided by Mercer to Arbatax. The Parties recognize that Services must, by
reason of corporate uniformity, continue until the Separation Date and cannot
be deleted prior to such date.
4.4 DISCONTINUANCE OF SERVICES
Each Party reserves the right, by notice to the other Party, to immediately
discontinue providing or receiving any or all of the Services, if such
discontinuance is deemed by such Party to be reasonably necessary to comply
with the requirements of any regulatory agency or other legal authority having
jurisdiction over the Party. In the event of such discontinuance, the Party
shall co-operate to
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minimize any disruption of the business of either Party during the transition
period.
4.5 ASSISTANCE OF SERVICES
In addition to providing the Services, each Party will, at the request of the
other Party and subject to the availability of necessary resources, assist the
requesting Party in assuming responsibility for some or all of the Services
being performed for the requesting Party.
4.6 STANDARD OF CARE
In performing the Services, Mercer shall observe the same standards of care,
skill and diligence it observes in performing the same or similar Services for
its own account.
4.7 TERM
The term, during which the Parties may provide Services to and receive Services
from each other under this Agreement, shall commence on the effective date of
this Agreement and end on September 30, 1996, provided however, that the
Parties may agree to extend such term to up to 90 days after September 30,
1996, in order to provide for an orderly transition of responsibilities.
4.8 MATERIAL BREACH
In the event of a material breach of this Agreement by a Party, the other Party
may, at its option and by notice to the breaching Party, immediately cancel the
performance or receipt of any Services affected by such material breach.
ARTICLE 5
MUTUAL RELEASES
5.1 RELEASE RE SEPARATION LIABILITIES
Each Party does hereby for itself, its Affiliates, successors and assigns,
remise, release and forever discharge the other Party, its affiliates,
successors, and assigns and all persons who at any time prior to the Separation
Date have been shareholders, directors, officers, trustees, agents, advisors or
employees of the other Party or its affiliates, and their heirs, executors,
administrators and assigns, from any and all claims, debts, demands, actions,
causes of action, suits, sum or sums of money, accounts, reckonings,
specialties, indemnities, covenants, contracts, controversies, agreements,
promises, doings, omissions, variances, damages, executions and liabilities
whatsoever (collectively "liability") both at law and in equity, arising from
any events on or before the Separation Date, including the transactions and all
other activities to implement the Separation, provided however, that nothing in
this Section 5.1 shall release any Party from: (a) any liability, contingent
or otherwise, transferred, assigned or allocated in accordance with this
Agreement; (b) any liability provided in or resulting from this Agreement or
any other agreement between the Parties, not terminated pursuant to this
Agreement or any other agreement between the Parties that is specifically
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intended to survive the Separation; (c) any liability for unpaid amounts for
the sale, lease, construction or other receipt of goods, property or services,
purchased, obtained or used by it in the ordinary course of business prior to
the Separation Date; (d) any liability for unpaid amounts for moneys advanced
by or between the Parties as reflected in their audited financial statements
for the year ended 1995; and (e) any liability, the release of which would
result in the release of any person other than a person referred pursuant to
this Section 5.1, provided however, that the Parties agree not to bring suit
against any person with respect to any liability that would be released by this
Section 5.1, but for the provisions of this clause (e).
ARTICLE 6
ASSETS AND LIABILITIES
6.1 TRANSFER OF ASSETS
The Parties will, prior to the Separation Date, agree upon a list of Assets and
Liabilities to be assigned or transferred by Mercer to Arbatax. In general,
assets that are not related to Mercer's pulp and paper operations and used in
the ordinary course of business of Arbatax shall be assigned to Arbatax unless
otherwise agreed upon.
6.2 CONVEYANCE OF ASSETS AND TITLE REPRESENTATIONS
With respect to each Asset that Mercer assigns or transfers to Arbatax under
Section 6.1, Mercer:
(a) represents and warrants to Arbatax that Mercer will (except as
otherwise expressly provided herein), transfer all of Mercer's right,
title and interest in and to such Asset;
(b) assigns to Arbatax all of Mercer's rights, claims and causes of
actions against third parties related to such Asset (with the
exception of any rights, claims and causes of action expressly
reserved to Mercer), including, but not limited to, Mercer's rights,
claims and causes of action arising from:
(i) express warranties or other provisions in the contracts by
which such Asset was acquired by Mercer;
(ii) warranties implied by law; and
(iii) warranties of title and against infringement;
(c) agrees to execute and acknowledge to Arbatax such other instruments,
bills of sale, assignments, conveyances, powers of attorney,
assurances and other documents as shall be required to make effective
and confirm the transfer of such Asset and in aiding and assisting
Arbatax in collecting or reducing to possession and evidencing title
to or an interest in such Asset.
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6.3 GUARANTEE
Mercer agrees to maintain its current guarantee (the "Prada Guarantee") of
certain indebtedness of Arbatax's affiliate, Prada Holdings Ltd., for a period
of up to two years after the Separation Date. Arbatax hereby covenants and
agrees to indemnify and save harmless Mercer from any and all costs, expenses,
liabilities, claims or actions relating to or incurred with respect to the
Prada Guarantee.
6.4 TIMING
All Assets to be assigned or transferred under this Article 6, which have not
been assigned or transferred prior to the Separation Date, shall be assigned
effective on and as of the Effective Date.
6.5 VALUATION
Assets and Liabilities will be assigned or transferred based on the Parties
respective financial accounting records at net book value, except as may be
otherwise provided in another agreement between the Parties.
6.6 PAYMENT
The assignment or transfer of Assets and Liabilities will be settled firstly as
a reduction in any amounts due between the Parties and not in cash (except as
otherwise expressly provided in any other agreement between the Parties).
ARTICLE 7
CORPORATE BUSINESS OPPORTUNITIES
7.1 Arbatax will have the right to pursue, to the exclusion of Mercer, all
domestic and international Corporate Business Opportunities for a period of
three years after the Separation Date.
7.2 Mercer will have the right to pursue, to the exclusion of Arbatax, all
domestic and international Mercer Business Opportunities for a period of three
years after the Separation Date.
7.3 Each Party agrees to use its best efforts to decide whether to pursue
a Corporate Business Opportunity or Mercer Business Opportunity, as the case
may be, as soon as reasonably possible after first learning of the opportunity.
If such Party elects not to pursue a business opportunity that it has the right
to pursue to the exclusion of the other Party (as determined by a majority of
its board of directors or trustees, as the case may be, who are neither
officers, directors, trustees or employees of the other Party), it must
promptly inform the other Party of any such decision. The other Party is then
free to pursue such opportunity.
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7.4 Neither Party nor any officer, director, trustee, shareholder or
affiliate thereof may assert any claim against the other Party or any director,
trustee or officer thereof, for breach of any duty, including, but not limited
to, the duty of loyalty or fair dealing, on account of an alleged diversion of
a Corporate Business Opportunity or Mercer Business Opportunity, as the case
may be, unless such opportunity related solely to an opportunity that such
Party had the right to elect to pursue, to the exclusion of the other Party, as
provided herein. Notwithstanding the foregoing, no such claim may be made in
any event if a Party has disclaimed its right or elected not to pursue such
opportunity as provided in Section 7.3.
ARTICLE 8
ACTIONS AND CONTINGENT LIABILITIES
8.1 DEFENCE OF ACTIONS
The Parties will co-operate and consult with each other in connection with the
defence of any Action in which both Parties are or potentially may be involved
(even if both Parties are not Named Parties in the Action), including, but not
limited to, Actions which may result in a Contingent Liability.
8.2 If only one of the Parties is a Named Party in an Action, such Named
Party shall be responsible for both the defence of the Action (in co-operation
and consultation with the other Party) and all of the costs associated with
such defence until such time as such costs may be subject to allocation as a
Contingent Liability under this Agreement.
8.3 If both Parties are Named Parties in an Action, they shall agree on
the responsibility for both the defence of the Action and the costs associated
with such defence until such time as such costs may be subject to allocation as
a Contingent Liability under this Agreement. Such agreement shall take into
consideration the manner in which any Contingent Liability resulting from the
Action would be allocated under Section 8.6.
8.4 CONTINGENT LIABILITIES
The allocation rules set forth in Section 8.6 shall apply to all Contingent
Liabilities of the Parties which result from Judgments, except those relating
to federal, provincial and state income taxes, which shall be governed by
Article 9. Contingent Liabilities may be based upon contract, tort, tax (other
than federal, provincial and state income tax), environmental, workers'
compensation, securities regulations and other common law and statutory claims.
8.5 Except as the Parties may otherwise agree, any Contingent Liability
which results from a settlement (as opposed to a Judgment), which was only
approved by one Party to the exclusion of the other Party, will not be subject
to allocation under this Agreement.
8.6 The Parties agree to allocate and to pay the costs of Contingent
Liabilities which result from Judgments (and any settlements entered into by
only one of the Parties which the Parties may agree
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are subject to allocation under this Agreement) in accordance with the
following allocation rules:
(a) except as expressly provided in paragraphs (b), (c), (d), (e) and (f)
below, if only one of the Parties is a Named Party in an Action, the
Contingent Liability shall be allocated solely to that Party;
(b) if the Contingent Liability is attributable solely to the Acts or
Omissions of Mercer and Arbatax did not receive any Benefit from such
Acts or Omissions, then the Contingent Liability shall be allocated
solely to Mercer;
(c) if the Contingent Liability is attributable solely to the Acts or
Omissions of Arbatax and Mercer did not receive any Benefit from such
Acts or Omissions, then the Contingent Liability shall be allocated
solely to Arbatax;
(d) if either (i) the Contingent Liability is attributable to the Acts or
Omissions of both Mercer and Arbatax, or (ii) the Party not
responsible for the Acts or Omissions resulting in the Contingent
Liability received a Benefit from such Acts or Omissions, the Parties
will use their best efforts to attempt to agree upon an equitable
means of sharing the Contingent Liability which reasonably reflects
both the nature of each Party's Acts or Omissions that resulted in
such Contingent Liability and any Benefit to each Party from the Acts
or Omissions that resulted in such Contingent Liability. If despite
their best efforts the Parties are unable to agree on a means for
sharing the Contingent Liability, then either Party may submit the
dispute to arbitration pursuant to Article 12 of this Agreement;
(e) notwithstanding paragraphs (a), (b), (c) and (d) above, and except as
may otherwise expressly be provided in this Agreement, if any
Contingent Liability results from the claim of an employee or former
employee and is related to such person's employment, the Contingent
Liability shall be allocated solely to Mercer, who shall indemnify and
save harmless Arbatax from any and all costs, expenses, claims and
liabilities relating thereto; and
(f) notwithstanding paragraphs (a), (b), (c), (d), and (e) above, if any
Contingent Liability results from any claim, action or other
proceeding brought against the Parties as a result of Arbatax's
indirect interest and royalty arrangements relating to the Wabush Iron
Ore Mine in Newfoundland, Canada, the Contingent Liability shall be
allocated solely to Arbatax, who shall indemnify and save harmless
Mercer from any and all costs, expenses, claims and liabilities
relating thereto.
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<PAGE> 12
The applicable allocation rules set forth in paragraphs (a), (b), (c), (d), (e)
and (f) above shall apply even if a Party to which all or part of the
Contingent Liability is to be allocated is not a Named Party in the Action and
regardless of whether such Party may have been dismissed from the Action by
virtue of a motion, settlement or otherwise.
8.7 The amount of a Contingent Liability subject to allocation under this
Agreement shall include the costs of any Judgments or the costs of any
settlement entered into by both of the Parties, costs of defending the Action
(including court costs, legal fees, expert fees and all other external
expenses) and the costs of any interest or penalties with respect to such
Judgment.
8.8 The Named Party in an Action in which an adverse Judgment would
reasonably be likely to result in a Contingent Liability to be allocated under
this Agreement, shall use its best efforts to notify, consult with, keep
informed and provide copies of all materials relating to such Action and
consult therewith to the other Party.
8.9 If the Parties do not agree on the allocation rule that applies to any
Contingent Liability, either Party may submit the dispute to arbitration in
accordance with Article 12 of this Agreement.
ARTICLE 9
INCOME TAX
9.1 Each Party will be responsible for paying all of its own respective
federal, state and provincial income taxes including interest and penalties
(collectively "tax liability") and shall indemnify and save harmless the other
Party, its officers, directors, trustees and Affiliates from and against any
and all such tax liability.
9.2 Each Party agrees to co-operate with the other Party by making
available all instructions, work papers, records, data and notes of any kind
for allowing the other Party to complete, file and process all necessary income
and capital tax returns.
9.3 Each Party shall notify the other Party in writing of any audit of any
income or capital tax returns for any period ending before or including the
Separation Date within 10 days after receipt of written notification of such
audit.
9.4 Each Party will co-ordinate its respective efforts with respect to
audits of periods through and including the Separation Date and will furnish
the other Party with all necessary work papers, documents and records as it may
have in its possession to respond to any audit enquires and will make available
each others officers, directors, trustees and accounting and financial staff as
may be required to respond to any audit enquires.
9.5 Each Party shall notify the other Party of any purposed adjustments to
any income or capital tax returns which may, directly or indirectly, affect
such other Party.
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9.6 All costs incurred, whether external or internal, with respect to an
audit, an administrative appeal, litigation, refund claim or other tax
liability shall be born by the Party with respect to which the costs relate.
If the matter involves an issue or issues that concern both Parties, then the
costs shall be allocated between them based upon their respect share of the
dollar amount involved in the matter.
ARTICLE 10
COMPENSATION
10.1 All costs, expenses and administrative charges and expenses incurred
by Mercer for the benefit or on behalf of Arbatax, including costs and expenses
relating to providing the Services up to and including December 31, 1995, shall
be reimbursed by Arbatax to Mercer.
10.2 In consideration of Mercer: (a) providing the Services referred to in
Article 4; (b) providing certain indemnities; and (c) refraining from pursuing
Corporate Business Opportunities, all as set forth herein, Arbatax shall pay to
Mercer an amount equal to Seven Hundred Thousand ($700,000) Dollars.
10.3 Unless otherwise provided elsewhere in this Agreement or by another
written agreement between the Parties, all compensation payable by one Party to
the other Party under this Agreement shall be completed in accordance with the
Cost Allocation.
ARTICLE 11
SETTLEMENT
11.1 Any amounts due from one Party to the other Party will be calculated
based upon the audited financial statements of each Party for the year ended
December 31, 1995 and adjusted for: (a) the transfer of Assets and Liabilities
as provided herein; and (b) all other costs and amounts payable by one Party to
the other Party as provided herein or in any other agreement entered into by
the Parties after December 31, 1995.
11.2 The net amount that may be due from one Party to the other Party as
determined pursuant to Section 11.1 (the "Net Sum") above shall be satisfied
and settled in cash and/or securities, as may be agreed upon by the Parties
(and approved by a majority of the board of directors or trustees of each
Party, as the case may be, who are neither officers, directors, trustees or
employees of the other Party), within 30 days of the Separation Date and
failing such agreement, the Party which owes the Net Sum to the other Party
shall issue to such Party, or its order, a senior note in the amount of the Net
Sum, with a term of five years, paying interest at a rate equal to the prime
rate for U.S. dollar commercial loans charged by the Royal Bank of Canada at
its main branch in Vancouver, calculated daily and paid semi-annually in
arrears.
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ARTICLE 12
ARBITRATION
12.1 AGREEMENT TO ARBITRATE
The Parties will use their respective best efforts to resolve by informal means
any claim or controversy (collectively a "dispute") whether arising before or
after the Separation Date, that relates to the Separation, including, but not
limited, to any dispute concerning the interpretation of this Agreement. If
despite such best efforts the Parties are unable to resolve the dispute by such
informal means, the Parties agree to submit the dispute to arbitration pursuant
to the provisions of this Article 12.
12.2 In the event of a dispute between the Parties with respect to any term
or condition of this Agreement and such dispute or disputes cannot be resolved
by the Parties as provided for in Section 12.1, then in such event the matter
shall be referred to a single arbitrator pursuant to the provisions of the
Commercial Arbitration Act, S.B.C. 1986, c. 3, and amendments and substitutions
thereto, the decision shall be final and binding upon all the Parties hereto.
ARTICLE 13
TRUE-UPS
13.1 POST-SEPARATION TRUE-UPS
The Parties agree that it may be necessary to estimate the value as of the
Separation Date of some Assets or Liabilities being assigned or transferred
under this Agreement. When these amounts become certain, the Parties will make
a true-up of the original assignment or transfer. The Parties also recognize
that errors or omissions may be made in the initial assignment or transfer of
Assets and Liabilities. When such errors are discovered the Parties will make
a true-up of the original assignment or transfer.
13.2 In addition, the Parties agree that after the Separation Date it will
be necessary to settle certain accounts or other financial transactions between
the Parties which relate to periods prior to the Separation Date and which are
not specifically addressed elsewhere in this Agreement. As the amounts of such
settlements become known, the Parties will, at appropriate times, make true-ups
of such accounts or other financial transactions.
13.3 Except as the Parties may otherwise agree, the true-ups described
herein will be limited to items as to which the Party requesting the true-ups
notifies the other Party in writing within one year after the Separation Date.
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13.4 Following one year after the Separation Date, any additional true-ups
may be negotiated by the Parties.
ARTICLE 14
MISCELLANEOUS
14.1 PUBLICITY
Neither Party shall refer to the post-Separation plans or business activities
of the other Party in publicity releases or in any similar external
communications, without first securing the prior written approval of the other
Party. After Separation, neither Party shall express or imply the other
Party's sponsorship or endorsement of a particular position or view in any
external communication without first securing the prior written approval of the
other Party.
14.2 GOVERNING LAW AND VENUE
This Agreement shall be governed by and construed and interpreted in accordance
with the laws of the Province of British Columbia, irrespective of the choice
of laws principles of the Province of British Columbia, and the Parties hereto
irrevocably attorn to the exclusive jurisdiction of the courts of British
Columbia sitting in Vancouver.
14.3 ASSIGNABILITY
Neither Party shall assign its rights or delegate such duties under this
Agreement without the written consent of the other Party. Any attempt at
assignment or delegation in contravention of this Section 14.3 shall be void.
14.4 THIRD PARTY BENEFICIARIES
Except as otherwise expressly provided in this Agreement, the provisions of
this Agreement are for the benefit of the Parties and not for any other person.
This Agreement shall not provide any third person with any remedy, claim,
liability, reimbursement, claim or action or other right in excess of those
existing without reference to this Agreement.
14.5 NOTICES
Any demand, notice or communication to be made or given hereunder shall be in
writing and may be made or given by personal delivery or by transmittal by
telecopy addressed to the respective Parties as follows:
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To Mercer: Mercer International Inc.
Brandschenke Str. 64
8002 Zurich
Switzerland
Fax: 011-41-1-201-7717
To Arbatax: Arbatax International Inc.
c/o 1900 - 700 West Georgia Street
Vancouver, B.C.
Canada
V7Y 1G5
Fax: (604) 669-8803
or to such other address or to either Party by facsimile to such facsimile
number as either Party may from time to time notify the other in accordance
with this Section 14.5. Any demand, notice or communication, if made or given
by personal delivery, shall be conclusively deemed to have been given on the
day of actual delivery thereof, or if made or given by telecopy shall be
conclusively deemed to have been given on the first business day following the
transmittal thereof.
14.6 SEVERABILITY
Any provision of this Agreement which is invalid or unenforceable in any
jurisdiction shall, as to that jurisdiction, be ineffective to the extent of
such invalidity or unenforceability without rendering invalid or unenforceable
the remaining provisions of this Agreement or affecting the validity or
enforceability of any of the provisions of this Agreement in any other
jurisdiction. If any provision of this Agreement is so broad as to be
unenforceable, the provisions shall be interpreted to be only so broad as is
enforceable.
14.7 FORCE MAJEURE
Neither Party shall be deemed in default of this Agreement to the extent that
any delay or failure in the performance of its obligations under this Agreement
results from any cause beyond its reasonable control and without its fault or
negligence, such as acts of God, acts of civil or military authority,
embargoes, epidemics, war, riots, insurrections, fires, explosions,
earthquakes, floods, unusually severe weather conditions or labour problems.
In the event of such excused delay, the time for performance shall be extended
for a period equal to the time lost by reason of the delay.
14.8 HEADINGS
The article, section and paragraph headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
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14.9 SURVIVAL OF COVENANTS
The covenants and representations contained in this Agreement and liability for
the breach of any obligations contained herein shall survive the Separation.
14.10 WAIVER OF DEFAULT
Waiver by any Party of any default by the other Party shall not be deemed to be
a waiver by the waiving Party of any default, nor shall have prejudiced the
rights of the other Party.
14.11 BINDING NATURE
This Agreement shall be binding upon, and enure to the benefit of the Parties
and their respective Affiliates, successors and assigns.
14.12 AUTHORITY
Each Party represents and warrants that the officer executing this Agreement on
its behalf is duly authorized to so execute this Agreement.
14.13 RIGHT OF SET-OFF
Each Party shall have the right to satisfy any amount from time to time owing
to it by the other Party by way of set-off against any amount from time to time
owing by the first Party to the other Party.
14.14 FURTHER ASSURANCES
Each of the Parties hereto hereby covenant and agree that at any time and from
time to time before and after the Separation Date, upon the request of the
other Party, do, execute, acknowledge and deliver and cause to be done,
executed, acknowledged and delivered all such further acts, deeds, assignments,
documents and assurances as may be required for the better carrying out and
performance of the terms of this Agreement.
14.15 AMENDMENTS
No provisions of this Agreement shall be deemed waived, amended, supplemented
or modified by the other Party, unless such waiver, amendment, supplement or
modification is in writing and signed by the authorized representative of the
Party against whom it has sought to enforce such waiver, amendment supplement
or modification.
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14.16 ENTIRE AGREEMENT
This Agreement sets forth the entire agreement of the Parties with respect to
the subject matter thereof and supersedes all prior agreements, writings,
communications, negotiations, discussions and understandings.
IN WITNESS WHEREOF the Parties have caused this Agreement to be executed by
their duly authorized representatives.
MERCER INTERNATIONAL INC.
By: /s/ JIMMY S.H. LEE
-----------------------------------
Name: Jimmy S.H. Lee
---------------------------------
Title: President
--------------------------------
ARBATAX INTERNATIONAL INC.
By: /s/ MICHAEL J. SMITH
-----------------------------------
Name: Michael J. Smith
---------------------------------
Title: President
--------------------------------
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MAY 22, 1996
MERCER INTERNATIONAL INC.
BRANDSCHENKE STR. 64
8002 ZURICH, SWITZERLAND
INFORMATION STATEMENT
THIS INFORMATION STATEMENT IS BEING FURNISHED SOLELY TO PROVIDE INFORMATION TO
SHAREHOLDERS OF MERCER INTERNATIONAL INC. WHO WILL RECEIVE SHARES OF ARBATAX
INTERNATIONAL INC. IN THE DISTRIBUTION BY WAY OF A SPECIAL DIVIDEND. IT IS NOT
INTENDED TO BE, NOR SHOULD IT BE CONSTRUED TO BE, AN INDUCEMENT OR
ENCOURAGEMENT TO BUY OR SELL ANY SECURITIES OF MERCER INTERNATIONAL INC. OR
ARBATAX INTERNATIONAL INC. INFORMATION CONTAINED HEREIN IS GIVEN AS OF THE
DATE OF THIS INFORMATION STATEMENT UNLESS OTHERWISE INDICATED. CHANGES MAY
OCCUR AFTER THAT DATE AND NEITHER MERCER INTERNATIONAL INC. NOR ARBATAX
INTERNATIONAL INC. WILL UPDATE ANY INFORMATION EXCEPT IN THE NORMAL COURSE OF
THEIR RESPECTIVE PUBLIC DISCLOSURE PRACTICES OR AS OTHERWISE REQUIRED BY LAW.
DISTRIBUTION
On December 28, 1995, Mercer International Inc. ("Mercer" or the "Company"), a
Massachusetts trust organized under the laws of the State of Washington,
announced that it would distribute to its shareholders approximately 83% of the
issued shares of its 92% owned subsidiary, Arbatax International Inc., formerly
called "Nalcap Holdings Inc.", a Canadian corporation ("Arbatax").
Arbatax was incorporated in 1951 and its shares of common stock (the "Arbatax
Common Stock") are registered under Section 12(g) of the Securities Exchange
Act of 1934 (the "Exchange Act"). On March 28, 1996, Arbatax effected, among
other things, a change of name to "Arbatax International Inc." and a share
split on a 1 to 1.5 basis (the "Stock Split"). After giving effect to the
Stock Split, there were 7,978,941 issued shares of Arbatax Common Stock, of
which 7,369,674 shares of Arbatax Common Stock were owned by Mercer.
At the close of business on May 29, 1996, Mercer will deliver certificates
representing approximately 6,663,524 shares of Arbatax Common Stock to Montreal
Trust Company of Canada (the "Distribution Agent") for distribution (the
"Distribution") to holders of record of Mercer shares of beneficial interest
("Mercer Common Stock") as of May 31, 1996 (the "Record Date"). The
Distribution Agent is expected to mail certificates representing the
distributed Arbatax Common Stock to holders of Mercer Common Stock on or about
June 3, 1996 (the "Distribution Date"). The Distribution ratio is one share of
Arbatax Common Stock to every two shares of Mercer Common
<PAGE> 2
Stock. Fractional interests will not be distributed but will be aggregated and
sold by the Distribution Agent and the cash proceeds will be distributed to
holders of Mercer Common Stock entitled to fractional interests. Upon
completion of the Distribution, Mercer will own approximately 706,150 shares of
Arbatax Common Stock.
The spin-off will involve the distribution of approximately 6,663,524 shares of
Arbatax Common Stock to the shareholders of Mercer. Substantially all of such
shares will be eligible for immediate resale in the public market. The Company
is unable to predict whether substantial amounts of Arbatax Common Stock will
be sold in the open market in anticipation of, or following, the spin-off.
Sales of substantial amounts of Arbatax Common Stock in the public market, or
the perception that such sales might occur, whether as a result of the spin-off
or otherwise, could adversely affect the market price of Arbatax Common Stock.
Arbatax Common Stock is currently quoted on the O.T.C. Bulletin Board under the
symbol "ATANF" and listed on the Vancouver Stock Exchange (the "VSE") under the
symbol "AAX". Effective June 5, 1996, Arbatax Common Stock will be quoted on
the VSE in U.S. dollars and will be listed under the symbol "AAX.U". As part
of the Distribution, Arbatax is seeking a quotation for its shares on the
NASDAQ National Market.
REASONS FOR DISTRIBUTION
Mercer recognized that no significant synergies existed between Mercer and
Arbatax in terms of their respective businesses and believed that the
reorganization of the Company into two separate publicly held companies was
desirable. Mercer primarily operates a pulp and paper business in Europe,
whereas Arbatax operates in the financial services business primarily in North
America. Mercer is currently employing a business strategy that involves,
among other things, expanding its pulp and paper operations through
acquisitions in Europe. This strategy and focus on pulp and paper operations
has, in part, lead to Mercer de-emphasizing the financial services business.
As a result, Mercer felt that the separation of the financial services segment
and the pulp and paper segment, which have distinct financial, investment and
operating characteristics, will enable each of the companies to concentrate
their attention and financial resources on its own segment without regard to
the corporate objectives and policies of the other business group. Finally,
Mercer believes that, since the acquisition and integration of its pulp and
paper operations, the financial markets have focused on the operating income
generated by the pulp and paper business in valuing Mercer and have discounted
the value of the financial services business operated by Arbatax. Mercer
believes that the spin-off will allow investors to better evaluate the
performance and investment characteristics of each business, enhancing the
likelihood that each will achieve appropriate market recognition for their own
respective operating results.
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SEPARATION AGREEMENT
For the purposes of governing certain ongoing relationships between Mercer and
Arbatax after the spin-off, the parties will enter into a Separation Agreement
to provide for the Distribution, customary indemnities relating to tax,
contingent liabilities and employees, the provision of transitional services
and transfers of certain assets and liabilities. The Separation Agreement sets
forth the rights and obligations of the parties, including, among other things,
that:
Mercer shall provide to Arbatax general administrative services which must,
by reason of corporate uniformity, continue until September 30, 1996, subject
to earlier termination or further extension;
Mercer and Arbatax have clearly delineated their rights to pursue, to the
other's exclusion, certain domestic and international corporate business
opportunities for a period of three years after the Distribution Date; and
The net amount that may be due from one party to the other shall be satisfied
and settled in cash and/or securities, within 30 days of the Distribution Date
and failing such agreement, the party which owes the net sum to the other party
shall issue to such party a senior note in the amount of the net sum, with a
term of five years, paying interest at a rate equal to the prime rate for U.S.
dollar commercial loans, calculated daily and paid semi-annually in arrears.
CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of certain possible United States federal
income tax applicable to a "U.S. Holder" (as defined below) of Mercer Common
Stock who holds such shares as capital assets and receives shares of Arbatax
Common Stock pursuant to the Distribution. This discussion does not address
all relevant federal income tax matters and it does not address consequences
peculiar to persons subject to special provisions of federal income tax law,
such as those described below as excluded from the definition of a U.S. Holder.
In addition, this discussion does not cover any state, local or foreign tax
consequences.
The following discussion is based upon sections of the Internal Revenue Code of
1986, as amended (the "Code"), treasury regulations, published Internal Revenue
Service ("IRS") rulings, published administrative positions of the IRS and
court decisions that are currently applicable, any or all of which could be
materially and adversely changed, possibly on a retroactive basis, at any time.
In addition, this discussion does not consider the potential effects, both
adverse and beneficial, of any recently proposed legislation which, if enacted,
could be applied, possibly on a retroactive basis, at any time.
3
<PAGE> 4
THE FOLLOWING DISCUSSION IS FOR GENERAL INFORMATION AND IS NOT INTENDED TO BE,
NOR SHOULD IT BE CONSTRUED TO BE, LEGAL OR TAX ADVICE TO ANY HOLDER OR
PROSPECTIVE HOLDER OF MERCER COMMON STOCK, AND NO OPINION OR REPRESENTATION
WITH RESPECT TO THE U.S. FEDERAL INCOME TAX CONSEQUENCES TO ANY SUCH HOLDER OR
PROSPECTIVE HOLDER IS MADE. ACCORDINGLY, HOLDERS AND PROSPECTIVE HOLDERS OF
MERCER COMMON STOCK SHOULD CONSULT THEIR OWN TAX ADVISORS ABOUT FEDERAL, STATE,
LOCAL AND FOREIGN TAX CONSEQUENCES OF RECEIVING ARBATAX COMMON STOCK PURSUANT
TO THE DISTRIBUTION.
As used herein, a U.S. Holder includes a holder of Mercer Common Stock who is a
citizen and resident of the United States, an incorporation created or
organized in or under the laws of the United States or of any political
subdivision thereof, any entity which is taxable as a corporation for U.S. tax
purposes and any other person or entity whose ownership of Mercer Common Stock
is effectively connected with the conduct of a trade or business in the United
States. A U.S. Holder does not include persons subject to special provisions
of federal income tax law, such as tax exempt organizations, qualified
retirement plans, financial institutions, insurance companies, real estate
investment trust, regulated investment companies, broker-dealers, non-resident
alien individuals of foreign corporations whose ownership of Mercer Common
Stock is not effectively connected with the conduct of a trade or business in
the United States and shareholders who acquired their stock through the
exercise of employee stock options or otherwise as compensation.
The Distribution will not qualify as a tax-free spin-off under the Code. A
U.S. Holder of Mercer Common Stock who receives Arbatax Common Stock pursuant
to the Distribution will be treated as if such shareholder had received a
taxable distribution in an amount equal to the fair market value of the Arbatax
Common Stock received, which will result in:
1. A dividend to the extent of such shareholder's pro rata share of the
Company's current and accumulated earnings and profits as calculated
under U.S. tax laws and regulations (the "Accumulated Earnings").
Each shareholder will include that portion of the Distribution which
is a dividend in gross income, taxable as ordinary income. Although
Mercer cannot determine with any certainty whether it will have
Accumulated Earnings in the year of the Distribution, Mercer expects
that no part of the Distribution will be treated as a dividend;
2. A reduction in such shareholder's cost basis in Mercer Common Stock to
the extent that the fair market value of Arbatax Common Stock received
exceeds such shareholder's pro rata share of Accumulated Earnings.
Generally, a shareholder's adjusted cost base for Mercer Common Stock
will be equal to the shareholder's purchase cost of such shares; and
3. A gain to the extent that the market value of Arbatax Common Stock
exceeds both such shareholder's pro rata share of Accumulated Earnings
and such shareholder's cost basis in Mercer Common Stock.
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Distributions paid or deemed to be paid to shareholders who are non-residents
of the United States for purposes of the Code will be subject to U.S.
withholding tax. The U.S. withholding rates on dividends paid by Mercer to
residents of certain tax treaty countries are as follows:
<TABLE>
<CAPTION>
INTERCORPORATE
DIVIDEND DIVIDEND
WITHHOLDING WITHHOLDING
COUNTRY TAX RATE TAX RATE
<S> <C> <C>
Canada 15% 6%(1)(2)
United Kingdom 15% 5%(3)
Switzerland 15% 5%(4)
</TABLE>
_______________________________________
(1) After December 31, 1996, the intercorporate dividend
withholding tax rate will be further reduced to 5%.
(2) This reduced rate applies where the shareholder is a company
which owns at least 10% of the voting stock of the company
paying the dividend.
(3) This reduced rate applies where the shareholder is a company
which controls (directly or indirectly) at least 10% of the
voting stock of the company paying the dividend.
(4) This reduced rate applies where the shareholder is a company
which controls (directly or indirectly) at least 95% of the
entire voting stock of the company paying the dividend and if
not more than 25% of the gross income of such paying company
is derived from interest or dividends received from
non-subsidiary companies.
Residents of countries that do not have a tax treaty with the U.S. will
generally be subject to a dividend withholding tax rate of 30%. Accordingly,
the Company will liquidate the necessary number of Arbatax Common Stock to
satisfy the withholding tax payable on the Distribution.
FOREIGN TAX CREDIT
The following is a general discussion of certain possible United States federal
foreign income tax credits under current law, generally applicable to a U.S.
Holder of Arbatax Common Stock who holds such shares as capital assets. This
discussion does not address all relevant federal income tax matters and it does
not address consequences peculiar to persons subject to special provisions of
federal income tax law, such as those described below as excluded from the
definition of a U.S. Holder. In addition, this discussion does not cover any
state, local or foreign tax consequences.
A U.S. Holder who pays (or has withheld from distributions) Canadian income tax
with respect to the ownership of Arbatax Common Stock may be entitled, at the
option of the U.S. Holder, to either a deduction or a tax credit for such
foreign tax paid or withheld. Generally, it will be more advantageous to claim
a credit because a credit reduces United States federal income taxes on a
dollar-for-dollar basis, while a deduction merely reduces the taxpayer's income
subject to tax. This election is made on a year-by-year basis and generally
applies to all foreign income taxes paid by (or withheld from) the U.S. Holder
during that year. There are significant and complex limitations which apply to
the credit, among which is the general limitation that the credit cannot exceed
the proportionate share of the U.S. Holder's United States income tax liability
that the U.S. Holder's foreign source income bears to his or its worldwide
taxable
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income. In determining the application of this limitation, the various items
of income and deduction must be classified into foreign and domestic sources.
Complex rules govern this classification process. There are further
limitations on the foreign tax credit for certain types of income such as
"passive income", "high withholding tax interest", "financial services income",
"shipping income", and certain other classifications of income. The
availability of the foreign tax credit and the application of the limitations
on the credit are fact specific and holders and prospective holders of Arbatax
Common Stock should consult their own tax advisors regarding their individual
circumstances.
PASSIVE FOREIGN INVESTMENT CORPORATION
If a U.S. Holder disposes of Arbatax Common Stock, any resultant gain will be
subject to a tax that is determined by apportioning the gain pro rata over the
entire holding period of the shares. The amount of gain that is apportioned to
the current year, and to any pre-1987 holding period, is included in the U.S.
Holder's current income.
The tax on the amount apportioned to any prior years beginning with 1987 is
calculated using the highest tax rate in each applicable year. In addition,
interest compounded daily is charged on the tax due for each prior year from
the due date of the return for the respective year to the due date for the
current year. The interest rate is set quarterly. The U.S. Holder's current
year tax is increased by the special tax and interest on amounts apportioned to
prior years.
A U.S. Holder can avoid this special tax and interest charge by making a
permanent election to treat Arbatax as a "qualified electing fund" and to
report in each year thereafter such shareholder's pro rata share of the
ordinary earnings and net capital gains of Arbatax. If the election is not
made in the first year that the U.S. Holder owns the shares, a special election
would have to be made to cleanse the effect of the prior year's holding
periods.
These rules apply similarly to distributions from Arbatax that would be
considered excess distributions. Complex rules govern the determination of
applicable gains and excess distributions, the calculation of the amounts
allocated pro rata to prior years, the resultant tax and applicable interest,
and the qualified electing fund elections whether as pedigreed or
non-pedigreed. Holders and prospective holders of Arbatax Common Stock should
consult their own tax advisors regarding their individual circumstances.
CERTAIN CANADIAN FEDERAL INCOME TAX CONSEQUENCES
Arbatax considers that the following general summary fairly describes the
principal Canadian federal income tax consequences applicable to a holder of
Arbatax Common Stock who is a resident of the United States, who is not a
resident of Canada and who does not use or hold, and is not deemed to use or
hold, his shares of Arbatax Common Stock in connection with carrying on a
business in Canada (a "non-resident holder").
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This summary is based upon the current provisions of the Income Tax Act
(Canada) (the "ITA"), the regulations thereunder (the "Regulations") and the
current publicly announced administrative and assessing policies of Revenue
Canada, Taxation. This description is not exhaustive of all possible Canadian
federal income tax consequences and does not take into account or anticipate
any changes in law, whether by legislative, governmental or judicial action.
THIS SUMMARY IS OF A GENERAL NATURE ONLY AND IT IS NOT INTENDED TO BE, AND
SHOULD NOT BE CONSTRUED TO BE, LEGAL OR TAX ADVICE TO ANY HOLDER OR PROSPECTIVE
HOLDER OF ARBATAX COMMON STOCK, AND NO OPINION OR REPRESENTATION WITH RESPECT
TO THE TAX CONSEQUENCES TO ANY HOLDER OR PROSPECTIVE HOLDER OF ARBATAX COMMON
STOCK IS MADE. ACCORDINGLY, HOLDERS AND PROSPECTIVE HOLDERS OF ARBATAX COMMON
STOCK SHOULD CONSULT WITH THEIR OWN TAX ADVISORS WITH RESPECT TO THE INCOME TAX
CONSEQUENCES TO THEM OF PURCHASING, OWNING AND DISPOSING OF ARBATAX COMMON
STOCK.
Dividends paid on Arbatax Common Stock to a non-resident holder will be subject
to withholding tax. The Treaty provides that the standard 25% withholding tax
rate is reduced to 15% on dividends paid on shares of a corporation resident in
Canada (such as Arbatax) to residents of the United States, and also provides
for a further reduction of this rate to 6% (5% after 1996) where the beneficial
owner of the dividends is a corporation which is a resident of the United
States that owns at least 10% of the voting shares of the corporation paying
the dividend.
A non-resident holder is not subject to tax under the ITA in respect of a
capital gain realized upon the disposition of a share of Arbatax unless the
share represents "taxable Canadian property" to the holder thereof. Shares of
Arbatax Common Stock will be considered taxable Canadian property to a
non-resident holder if, at any time in the five years before it is disposed of,
the non-resident and any persons with whom the non-resident did not deal at
arm's length owned 25% or more of the issued shares of any class of Arbatax.
In the case of a non- resident holder to whom shares of Arbatax represent
taxable Canadian property and who is resident in the United States, no Canadian
taxes will generally be payable on a capital gain realized on such shares by
reason of the Treaty unless the value of such shares is derived principally
from real property situated in Canada.
EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS
There are presently no governmental laws, decrees or regulations in Canada
restricting the export or import of capital, or which impose exchange controls
or affect the remittance of interest, dividends or other payments to
non-resident holders of Arbatax's Common Stock. Any remittances of dividends
to United States residents are, however, subject to a 15% withholding tax (6%
in 1996 and 5% after 1996, if the shareholder is a corporation owning at least
10% of the outstanding common shares of Arbatax) pursuant to Article X of the
Canada-U.S. Income Tax Convention, as amended (the "Treaty").
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Except as provided in the Investment Canada Act (the "Act"), there are no
limitations specific to the rights of non-Canadians to hold or vote the Arbatax
Common Stock under the laws of Canada or in the charter documents of Arbatax.
The Act requires non-Canadian persons or entities acquiring "control" (as
defined in the Act) of a corporation carrying on business in Canada to either
notify, or file an application for review with Investment Canada, the federal
agency created by the Act. The Act is applicable and the agency will review
transactions which result in the direct or indirect acquisition of control of a
Canadian business where the gross value of corporate assets exceed certain
threshold levels (such thresholds being favourably varied for U.S. citizens by
legislation relating to the Canada-U.S. Free Trade Agreement) or where the
business activity of the business is related to Canada's cultural heritage or
national identity. No change of voting control will be deemed to have
occurred, for purposes of the Act, if less than one-third of the voting control
of a Canadian corporation is acquired by an investor.
If an investment is reviewable under the Act, an application for review in the
form prescribed is normally required to be filed with Investment Canada prior
to the investment taking place and the investment may not be implemented until
the review has been completed and the Minister responsible for Investment
Canada is satisfied that the investment is likely to be of net benefit to
Canada. If the Minister is not satisfied that the investment is likely to be
of net benefit to Canada, the non-Canadian must not implement the investment,
or if the investment has been implemented, may be required to divest himself of
control of the business that is the subject of the investment.
ARBATAX
A copy of Arbatax's most current annual report on Form 20-F is available upon
written request to: Arbatax International Inc., c/o Brandschenke Strasse 64,
8002 Zurich, Switzerland, Attention: Secretary.
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