<PAGE> 1
Exhibit 99.3
ST. LAURENT PAPERBOARD INC.
AUDITORS' REPORT
To the Directors of
ST. LAURENT PAPERBOARD INC.
We have audited the consolidated balance sheets of St. Laurent Paperboard
Inc. as at December 31, 1999 and 1998 and the consolidated statements of
earnings (loss), retained earnings and cash flows for each of the years in the
three-year period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in Canada. Those standards require that we plan and perform an audit
to obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation.
In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of the Company as at December 31,
1999 and 1998 and the results of its operations and its cash flows for each of
the years in the three-year period ended December 31, 1999 in accordance with
generally accepted accounting principles in Canada.
(Signature)
PricewaterhouseCoopers LLP
Chartered Accountants
Montreal, Canada
January 24, 2000, except as to Note 10 b), which is as of February 25, 2000 and
Note 20, which is as of February 23, 2000.
1
<PAGE> 2
ST. LAURENT PAPERBOARD INC.
CONSOLIDATED STATEMENT OF EARNINGS (LOSS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------
1999 1998 1997
-------- -------- --------
(in thousands of US dollars,
except per share amounts)
<S> <C> <C> <C>
Sales....................................................... $986,819 $860,473 $642,700
Cost of delivery............................................ 71,022 68,566 52,258
-------- -------- --------
Net sales................................................... 915,797 791,907 590,442
-------- -------- --------
Cost of sales............................................... 711,030 665,102 509,162
Amortization................................................ 67,023 63,508 47,621
Selling and administrative expenses......................... 62,651 51,919 42,563
Restructuring charge (Note 17).............................. -- 12,878 --
-------- -------- --------
840,704 793,407 599,346
-------- -------- --------
Operating earnings (loss)................................... 75,093 (1,500) (8,904)
Interest expense, net (Note 12)............................. 28,609 29,397 33,760
Other income, net (Note 12)................................. (13,792) (497) (213)
-------- -------- --------
Earnings (loss) before income taxes......................... 60,276 (30,400) (42,451)
Provision for (recovery of) income taxes (Note 13).......... 21,836 (7,137) (12,010)
-------- -------- --------
Net earnings (loss) before non-controlling interest......... 38,440 (23,263) (30,441)
Non-controlling interests................................... (103) -- --
Increase in equity component of convertible
Debentures, net of income taxes (1997 -- $1,480).......... -- -- (3,094)
-------- -------- --------
Net earnings (loss) attributable to common shares........... $ 38,337 $(23,263) $(33,535)
======== ======== ========
Net earnings (loss) per common share
Basic.................................................. $ 0.78 $ (0.47) $ (0.98)
======== ======== ========
Fully diluted.......................................... $ 0.77 (1) (1)
======== ======== ========
Weighted average number of outstanding common shares (in
thousands)................................................ 49,328 49,124 34,384
======== ======== ========
</TABLE>
---------------
(1) Anti-dilutive
CONSOLIDATED STATEMENT OF RETAINED EARNINGS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------
1999 1998 1997
-------- -------- --------
(in thousands of US dollars)
<S> <C> <C> <C>
Balance at beginning of year................................ $ 1,769 $ 25,032 $ 58,567
Net earnings (loss) attributable to common shares........... 38,337 (23,263) (33,535)
-------- -------- --------
Balance at end of year...................................... $ 40,106 $ 1,769 $ 25,032
======== ======== ========
</TABLE>
See notes to the Consolidated Financial Statements.
2
<PAGE> 3
ST. LAURENT PAPERBOARD INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------
1999 1998 1997
--------- --------- ---------
(in thousands of US dollars)
<S> <C> <C> <C>
CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES
Net earnings (loss)....................................... $ 38,337 $ (23,263) $ (30,441)
Items not involving cash
Amortization of property, plant and equipment, start-up
and deferred costs and goodwill...................... 67,023 63,508 47,621
Amortization and write-off of debt issue costs......... 1,438 1,422 9,538
Future income taxes.................................... 20,379 (8,163) (13,560)
Gain on asset disposals................................ (5,094) (235) (235)
Other.................................................. (927) (758) (2,019)
Start-up and other deferred costs incurred................ (2,199) 414 (2,267)
Pension expense, net of funding........................... 3,242 9,358 1,129
Interest payments, net of expense......................... -- -- (4,795)
Non-controlling interests................................. 103 -- --
--------- --------- ---------
122,302 42,283 4,971
Change in non-cash working capital relating to operations
Accounts receivable.................................... (10,588) 11,913 (8,856)
Inventory.............................................. 9,704 (1,942) (11,846)
Prepaid expenses....................................... 226 (8,153) (2,608)
Accounts payable and accrued liabilities............... 23,854 (8,825) 11,804
Income and other taxes payable......................... (538) 123 1,829
--------- --------- ---------
22,658 (6,884) (9,677)
--------- --------- ---------
Cash provided by (used in) operations..................... 144,960 35,399 (4,706)
--------- --------- ---------
INVESTING ACTIVITIES
Business acquisitions, including bank indebtedness assumed
of $5,678 in 1997 (Note 3)............................. (70,415) -- (506,353)
Additions to property, plant and equipment................ (57,138) (49,235) (44,038)
Proceeds from disposals of property, plant and
equipment.............................................. 9,059 235 312
--------- --------- ---------
Cash used in investing activities......................... (118,494) (49,000) (550,079)
--------- --------- ---------
FINANCING ACTIVITIES
Issuance of common shares, net of expenses................ 1,537 2,144 349,442
Redemption of common shares............................... -- (370) --
Issuance of long-term debt................................ 610 230,256 245,453
Repayment of long-term debt............................... (9,549) (241,892) (12,940)
Debt issue costs.......................................... (1,354) (4,496) (8,487)
Minority interests........................................ 700 -- --
Cash held in escrow....................................... -- 11,000 (11,000)
--------- --------- ---------
Cash provided by (used in) financing activities........... (8,056) (3,358) 562,468
--------- --------- ---------
INCREASE (DECREASE) IN CASH................................. 18,410 (16,959) 7,683
CASH (INDEBTEDNESS) AT BEGINNING OF YEAR.................... (3,519) 13,440 5,757
--------- --------- ---------
CASH (INDEBTEDNESS) AT END OF YEAR.......................... $ 14,891 $ (3,519) $ 13,440
========= ========= =========
CASH (INDEBTEDNESS) CONSISTS OF:
Cash...................................................... $ 9,125 $ -- $ 3,689
Temporary investments..................................... 5,766 2,607 9,751
Bank indebtedness......................................... -- (6,126) --
--------- --------- ---------
$ 14,891 $ (3,519) $ 13,440
========= ========= =========
</TABLE>
See notes to the Consolidated Financial Statements.
3
<PAGE> 4
ST. LAURENT PAPERBOARD INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1999 1998
---------- ----------
(in thousands of US
dollars)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and temporary investments............................ $ 14,891 $ 2,607
Accounts receivable....................................... 124,279 95,895
Income and other taxes recoverable........................ 4,792 4,870
Inventories (Note 4)...................................... 106,481 98,542
Prepaid expenses and other assets......................... 13,984 13,832
---------- ----------
264,427 215,746
PROPERTY, PLANT AND EQUIPMENT (NOTE 5)...................... 816,879 775,960
FUTURE INCOME TAXES (NOTE 13)............................... -- 8,437
DEFERRED CHARGES AND OTHER ASSETS (NOTE 6).................. 33,898 30,347
GOODWILL, NET OF ACCUMULATED AMORTIZATION OF $3,991 (1998 --
$2,777)................................................... 40,339 19,923
---------- ----------
$1,155,543 $1,050,413
========== ==========
LIABILITIES
CURRENT LIABILITIES
Bank indebtedness......................................... $ -- $ 6,126
Accounts payable and accrued liabilities.................. 102,846 72,112
Current portion of long-term debt (Note 7)................ 47,397 5,975
---------- ----------
150,243 84,213
LONG-TERM DEBT (NOTE 7)..................................... 338,206 356,455
OTHER LIABILITIES (NOTE 8).................................. 32,804 27,271
FUTURE INCOME TAXES (NOTE 13)............................... 18,305 6,363
COMMITMENTS AND CONTINGENCIES (NOTE 10)
SHAREHOLDERS' EQUITY
COMMON SHARES (NOTE 9)...................................... 573,471 571,934
CONTRIBUTED SURPLUS......................................... 2,408 2,408
RETAINED EARNINGS........................................... 40,106 1,769
---------- ----------
615,985 576,111
---------- ----------
$1,155,543 $1,050,413
========== ==========
</TABLE>
APPROVED BY THE BOARD OF DIRECTORS,
<TABLE>
<S> <C>
SIGNATURE SIGNATURE
Jay J. Gurandiano Raymond R. Pinard
Director Director
</TABLE>
See notes to the Consolidated Financial Statements.
4
<PAGE> 5
ST. LAURENT PAPERBOARD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS ARE EXPRESSED IN UNITED STATES ("US") DOLLARS EXCEPT WHERE
OTHERWISE INDICATED)
1. SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
The Company is a producer, supplier and converter of paperboard products.
Its principal products are white top linerboard, brown linerboard,
corrugating medium and solid bleached paperboard (foodboard and linerboard).
The Company converts approximately one third of its paperboard capacity into
corrugated boxes, point-of-purchase displays and other products. Its assets
are located in the United States and Canada and the products are sold mostly
in the United States and Canada.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles in Canada. As described in Note 19,
those principles differ in certain material respects from those that the
Company would have followed had its financial statements been prepared in
accordance with generally accepted accounting principles in the United
States.
The consolidated financial statements include the accounts of the Company
and all its subsidiary companies. All significant inter-company transactions
and balances have been eliminated.
USE OF ESTIMATES
The preparation of financial statements requires the Company's management to
make estimates and assumptions that affect the reported amounts of assets
and liabilities shown on the balance sheet and disclosure of contingent
assets and liabilities at the date of the financial statements, and the
reported amounts of revenues and expenses on the statement of earnings
during the reporting period. Actual results may differ from those estimates.
FOREIGN EXCHANGE AND HEDGING ACTIVITIES
Non-monetary assets and liabilities of Canadian activities are translated
into US dollars at historical exchange rates. As explained in Note 2, the
historical rate for non-monetary items at December 31, 1996 is the rate in
effect as at that date. Monetary assets and liabilities are translated from
other currencies into US dollars at rates of exchange in effect at the date
of the balance sheet. Exchange gains or losses on Canadian dollar
denominated long-term debt are deferred and amortized over the expected life
of the related debt using the straight-line method.
Revenues and expenses are translated at the average rate during the month in
which the transaction took place, except amortization, which is translated
at historical rates.
The Company currently manages its foreign exchange exposure to future
expenses denominated in Canadian dollars through the use of forward
contracts and options. Resulting gains and losses on contracts designated as
hedges are recognized as part of the related Canadian transactions as they
occur and, therefore, are included in the cost of sales.
The Company also manages its risk exposure to interest rate variations by
entering into swap and option agreements. Payments made or received under
these agreements are accounted for as adjustments to interest expense.
The Company also manages its commodities price exposures by entering into
cash settled-swap agreements. Resulting gains and losses on contracts
designated as hedges are recognized as part of the related transaction as
they occur and, therefore, are included in sales or cost of sales, as
applicable.
TEMPORARY INVESTMENTS
Temporary investments are stated at the lower of cost and market value. They
are composed of debt instruments with maturities of less than three months.
INVENTORIES
Finished products are valued at the lower of average cost and net realizable
value. Fibre, maintenance materials and operating supplies are valued at
average cost. The average cost includes, where applicable, direct labor,
manufacturing overhead expenses and amortization.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost, net of related investment
tax credits. They are amortized over their estimated useful lives, which are
approximately 20 years, using the unit of production method for
manufacturing facilities and the straight-line method for converting
facilities.
Timberlands are stated at cost and are managed on a sustained yield basis.
Major roads are capitalized and amortized over their expected useful life.
Amortization is recorded based on timber harvested.
During the construction period, interest is capitalized on major
improvements and expansion projects. No amortization is charged on major
improvements or expansion projects until construction is completed.
5
<PAGE> 6
ST. LAURENT PAPERBOARD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS ARE EXPRESSED IN UNITED STATES ("US") DOLLARS EXCEPT WHERE
OTHERWISE INDICATED)
ENVIRONMENTAL EXPENDITURES
Environmental expenditures related to current operations are expensed or
capitalized as appropriate. Provisions are made for costs of anticipated
remedial action when they can be reasonably estimated.
OTHER ASSETS
Start-up costs, which include pre-production costs, incurred on significant
construction and modernization projects are deferred until the projects are
ready to commence commercial production and are then amortized over a period
of five years. Debt issue expenses are deferred and amortized over the
expected life of the related debt using the straight-line method.
GOODWILL
Goodwill is recorded at cost less accumulated amortization. It is amortized
over a 20-year period using the straight-line method. The Company assesses
annually whether there has been a permanent impairment in the value of the
unamortized portion of goodwill by determining whether projected
undiscounted future cash flows from the related operations exceed the net
book value of goodwill at the assessment date.
PENSION COSTS AND OTHER POST-RETIREMENT BENEFITS
Pension costs are determined annually in consultation with independent
actuaries and include current service costs, a provision for the
amortization of prior service costs and settlement costs related to special
events. The pension plans' surplus or deficit, after including the
liabilities for past service, is amortized over the estimated average
remaining service lives of the employees. The assets of the pension plans
are invested in listed common stocks, fixed income securities and cash
equivalents.
In addition to pension benefits, the Company provides limited life
insurance, dental and health care benefits to eligible retired employees.
The cost of providing these benefits is recognized on an accrual basis
during the service years of these employees. The costs include also a
provision for the amortization of prior service costs.
LONG-TERM INCENTIVE PLANS
The Company recognizes compensation costs related to awards of restricted
share units and stock options (see Note 9) when the shares are issued. The
costs accounted for on the issuance date are based on the market value of
the shares at that date.
INCOME TAXES
The Company adopted in 1998 the new accounting rules for income taxes
approved by the Canadian Institute of Chartered Accountants in September
1997. Under the new rules, the Company recognizes the amount of taxes
payable or refundable for the current year and recognizes also the future
income tax liabilities and assets related to the other assets and
liabilities recognized in the balance sheet, using the current income tax
rate. The impact of the change on 1998 net earnings was not significant. The
change has not been applied retroactively since the impact was not
significant on financial statements of prior years. The Company does not
make provisions for income taxes on the undistributed earnings of foreign
subsidiaries, part of which may be subject to certain taxes on distribution
to the parent company as such income is reinvested in foreign operations.
The amount of such undistributed earnings is not significant at December 31,
1999.
EARNINGS PER COMMON SHARE
Earnings per common share are calculated using the weighted average number
of common shares outstanding during the year. Fully diluted earnings per
common share are calculated using the weighted average number of common
shares outstanding during the year and assuming that all convertible
debentures were converted to common shares at the beginning of their
respective years, that all outstanding stock options and warrants were
exercised from the beginning of the year, and that all shares, entitled to
be received through the restricted share units, were issued also at the
beginning of the year.
2. CHANGE IN REPORTING CURRENCY IN 1997
The consolidated financial statements of the Company were presented in
Canadian dollars up to December 31, 1996. Until that date, the Canadian
dollar was also considered the functional currency of the Company. With the
major acquisition of U.S. assets made in May 1997 (see Note 3),
substantially all the Company's revenues are received in US dollars and the
Company's Canadian assets and expenses denominated in Canadian dollars
represent less than half of the assets and expenses of the Company. For
these reasons, the US dollar was adopted in 1997 as the Company's reporting
and functional currency. The comparative financial information for 1996 is
presented in US dollars in accordance with a translation of convenience
method using the Closing exchange rate at December 31, 1996 of $0.73 for
CAN$1.00. The translated amount for Canadian non-monetary items at December
31, 1996 became the historical basis for those items in 1997 and
subsequently.
6
<PAGE> 7
ST. LAURENT PAPERBOARD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS ARE EXPRESSED IN UNITED STATES ("US") DOLLARS EXCEPT WHERE
OTHERWISE INDICATED)
3. BUSINESS ACQUISITIONS
The Company completed the following business acquisitions:
On December 22, 1999, the Company acquired for cash consideration of $6.5
million all the assets of The Kimball Companies in East Longmeadow,
Massachusetts. The Kimball Companies manufacture protective packaging
including triplewall, foam, wood and corrugated products.
On January 29, 1999, the Company purchased a 49% interest in Eastern
Container Corporation which operates converting facilities in Massachusetts
and New Hampshire and, on November 30, 1999, the Company acquired the
remaining 51% interest. The total cash consideration paid by the Company for
this acquisition amounted to $25.3 million.
On July 30, 1999, the Company acquired from Chesapeake Corporation all the
assets of the building products business, consisting of two softwood
sawmills located in West Point, Virginia and Princess Anne, Maryland; a
hardwood lumber re-processing facility located in Milford, Virginia; as well
as a chip mill facility located in Pocomoke City, Maryland for cash
consideration of $13.8 million.
On May 28, 1999, the Company acquired all the assets of Castle Rock
Container Company, a custom manufacturer of high-quality corrugated
packaging, point-of-purchase displays and communication kit, from
Consolidated Papers Inc. located in Adams, Wisconsin for cash consideration
of $24.8 million.
In 1998, there were no business acquisitions.
On May 23, 1997, the Company acquired from Chesapeake Corporation certain
assets of its paperboard business consisting of a pulp and paper mill
located in West Point, Virginia, four converting plants located in Richmond
and Roanoke, Virginia, Baltimore, Maryland and North Tonawanda, New York,
and other related assets for $498 million paid in cash. The acquisition was
financed by the issuance of common shares and term loans.
In January 1997, the Company acquired for cash consideration of $2.9 million
(CAN$3.9 million) all of the outstanding shares of Usine Francobec Inc., a
wood chipping facility located near La Tuque, Quebec.
The acquisitions have been accounted for using the purchase method and the
results of operations therefrom are included in the consolidated statement
of earnings of the Company from the respective acquisition dates. The
initial investment in Eastern Container Corporation on January 29, 1999 was
accounted for using the equity method up to December 1, 1999 when the
remaining 51% was acquired.
The net assets acquired, at assigned values, are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
(in thousands of
dollars)
<S> <C> <C>
Current assets.............................................. $ 35,817 $ 79,610
Property, plant and equipment............................... 51,477 457,121
Goodwill.................................................... 21,630 702
Other assets................................................ 2,429 19,626
-------- --------
111,353 557,059
Current liabilities......................................... (7,503) (32,080)
Other liabilities........................................... (33,435) (24,304)
-------- --------
$ 70,415 $500,675
======== ========
</TABLE>
7
<PAGE> 8
ST. LAURENT PAPERBOARD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS ARE EXPRESSED IN UNITED STATES ("US") DOLLARS EXCEPT WHERE
OTHERWISE INDICATED)
4. INVENTORIES
<TABLE>
<CAPTION>
1999 1998
-------- --------
(in thousands of
dollars)
<S> <C> <C>
Primary mills
Fibre..................................................... $ 11,699 $ 11,058
Maintenance materials and operating supplies.............. 29,796 29,910
Finished products......................................... 10,013 24,518
Converting plants
Raw materials............................................. 22,915 14,107
Maintenance materials and operating supplies.............. 3,218 3,639
Finished products......................................... 18,461 10,282
Lumber
Fibre..................................................... 8,500 4,921
Finished products......................................... 1,879 107
-------- --------
$106,481 $ 98,542
======== ========
</TABLE>
5. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
1999
--------------------------------------
ACCUMULATED
COST AMORTIZATION NET
---------- ------------ --------
(in thousands of dollars)
<S> <C> <C> <C>
Land........................................................ $ 12,334 $ -- $ 12,334
Timberlands and roads....................................... 12,986 2,504 10,482
Buildings and equipment..................................... 995,460 201,397 794,063
---------- -------- --------
$1,020,780 $203,901 $816,879
========== ======== ========
</TABLE>
<TABLE>
<CAPTION>
1998
--------------------------------------
ACCUMULATED
COST AMORTIZATION NET
---------- ------------ --------
(in thousands of dollars)
<S> <C> <C> <C>
Land........................................................ $ 6,549 $ -- $ 6,549
Timberlands and roads....................................... 12,990 2,058 10,932
Buildings and equipment..................................... 894,329 135,850 758,479
---------- -------- --------
$ 913,868 $137,908 $775,960
========== ======== ========
</TABLE>
Amortization expense for the year was $63,731 (1998 -- $60,602; 1997 --
$43,837).
6. DEFERRED CHARGES AND OTHER ASSETS
<TABLE>
<CAPTION>
1999 1998
-------- --------
(in thousands of
dollars)
<S> <C> <C>
Deferred charges, net of accumulated amortization
Start-up costs............................................ $ 5,979 $ 5,626
Debt issue expenses....................................... 6,005 5,016
Foreign exchange loss on long-term debt................... 1,527 1,909
Other..................................................... 3,765 2,107
Prepaid pension costs (Note 11)............................. 15,326 14,279
Advances to officers and managers (Note 9).................. 1,296 1,410
-------- --------
$ 33,898 $ 30,347
======== ========
</TABLE>
8
<PAGE> 9
ST. LAURENT PAPERBOARD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS ARE EXPRESSED IN UNITED STATES ("US") DOLLARS EXCEPT WHERE
OTHERWISE INDICATED)
7. LONG-TERM DEBT
<TABLE>
<CAPTION>
1999 1998
-------- --------
(in thousands of
dollars)
<S> <C> <C>
Secured term loan........................................... $224,250 $230,000
Senior secured notes
-- Series A, 8.80% (1998 -- 8.17%).......................... 30,000 30,000
-- Series B, 9.04% (1998 -- 8.41% )......................... 85,000 85,000
-- Series C, 9.42% (1998 -- 8.79% )......................... 10,000 10,000
Eastern Container Corporation term loan..................... 22,500 --
Industrial development revenue bonds........................ 4,760 4,880
Note payable................................................ 8,000 --
Note payable to Abitibi-Consolidated Inc. (1998 --
CAN$3.7).................................................. -- 2,389
Other....................................................... 1,093 161
-------- --------
385,603 362,430
Less: Long-term debt due within one year.................... 47,397 5,975
-------- --------
$338,206 $356,455
======== ========
</TABLE>
SECURED TERM LOAN
Under a credit agreement, the Company has a 7-year term facility with an
original amount of $230 million, of which $224.3 million were outstanding at
the end of 1999, and a CAN$200 million or $ equivalent 5-year revolving
facility, of which CAN$191 million were available at the end of the year,
subject to meeting certain financial covenants. In the third quarter of
1999, a CAN$70 million or $ equivalent, 7-year term facility available under
this credit agreement was cancelled. The remaining principal amount of the
secured term loan is payable as follows: 10% in 2000 and 2001, 17.5% in
2002, 20% in 2003, 2004 and 2005 on the original amount of $230 million. The
credit facilities bear interest at specified margins over the alternate base
rate or LIBOR. The actual interest rate as of December 31, 1999 is 7.70% on
the term facility (6.29% in 1998). The credit facilities are secured by all
the assets of St. Laurent Paperboard Inc., St. Laurent Paperboard (U.S.)
Inc. and their subsidiaries.
SENIOR SECURED NOTES
The $125 million senior secured notes are secured by all the assets of St.
Laurent Paperboard Inc., St. Laurent Paperboard (U.S.) Inc. and their
subsidiaries and rank pari passu with the lenders under the credit agreement
governing the secured term loan. The Series B senior notes carry the
following principal repayment requirements: $18.3 million in 2000 and 2002
and $12.1 million in each of the years 2003 through 2006. The Series A and C
senior notes are payable in 2002 and 2008 respectively. Subject to a
make-whole provision, the notes are redeemable at any time.
EASTERN CONTAINER CORPORATION ("EASTERN") TERM LOAN
Concurrent with the acquisition of the remaining 51% of Eastern and with the
Company providing a guarantee to the lenders, Eastern's existing credit
agreement was renegotiated in order to have the covenants governing
Eastern's $24 million, 7-year term facility similar to those governing the
Company's secured term loan. The principal amount of Eastern's term loan is
payable as follows: 12.5% in 2000, 2001, 2002 and 2003, 16.7% in 2004 and
27.1% in 2005 on the original amount of $24 million. This credit facility
bears interest at a specified margin over prime rate or LIBOR. The actual
interest rate as of December 31, 1999 is 7.92%. The credit facility is
secured by all the assets of Eastern and is guaranteed by St. Laurent
Paperboard Inc.
INDUSTRIAL DEVELOPMENT REVENUE BONDS
In connection with the construction of a sheet corrugating facility based in
Milwaukee, Wisconsin by Innovative Packaging Corp., a subsidiary, tax-exempt
variable rate industrial development revenue bonds were issued by this
subsidiary in 1997 with a maturity of December 1, 2017. The bonds are
secured by an irrevocable bank letter of credit governed by a credit
facility, imposing certain financial covenants such as working capital and
tangible net worth. The bonds are subject to redemption at the option of
Innovative Packaging Corp., in whole or in part at any time, at par plus
accrued interest. The actual interest rate as of December 31, 1999 is 5.65%
(4.20% in 1998).
NOTE PAYABLE
In connection with the acquisition of Eastern, a $8 million note was issued
as a balance of sale. The principal amount of the note payable will be
repaid as follows: one third in each of the years 2000, 2001 and 2002. This
note bears interest at a fixed rate of 8.25% and a portion of this note
ranks pari passu with the lenders under the Eastern Container Corporation
term loan. This note is guaranteed by St. Laurent Paperboard Inc.
9
<PAGE> 10
ST. LAURENT PAPERBOARD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS ARE EXPRESSED IN UNITED STATES ("US") DOLLARS EXCEPT WHERE
OTHERWISE INDICATED)
COVENANTS
Under the terms of its various debt agreements, the Company must meet
certain financial covenants, including ratios with respect to leverage,
tangible net worth and, under certain circumstances, interest coverage. In
addition, the Company is subject to limitations with regard to the sale or
disposal of assets. Specific rules and restrictions govern mergers and
acquisitions.
The minimum annual installments on long-term debt for the next five years
are as follows:
<TABLE>
<CAPTION>
(in thousands of dollars)
<S> <C>
2000................................ $47,397
2001................................ 29,152
2002................................ 94,654
2003................................ 61,245
2004................................ 62,245
</TABLE>
8. OTHER LIABILITIES
<TABLE>
<CAPTION>
1999 1998
------- -------
(in thousands of
dollars)
<S> <C> <C>
Pension liability (Note 11)................................. $14,529 $10,659
Post-retirement benefit liability (Note 11)................. 16,981 15,312
Non-controlling interest.................................... 921 --
Other....................................................... 373 1,300
------- -------
$32,804 $27,271
======= =======
</TABLE>
9. COMMON SHARES AND CONTRIBUTED SURPLUS
The Company's authorized share capital consists of an unlimited number of
common shares and an unlimited number of preferred shares issuable in
series, in each case without nominal or par value. The number of shares
outstanding as at December 31, 1999 is 49,398,968 common shares (1998 --
49,244,696; 1997 -- 49,034,871).
The changes in the number and stated value of the common shares of the
Company are as follows, in thousands of dollars except the number of shares:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------- --------------------- ---------------------
NUMBER OF STATED NUMBER OF STATED NUMBER OF STATED
SHARES VALUE SHARES VALUE SHARES VALUE
---------- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of year.................... 49,244,696 $571,934 49,034,871 $570,160 13,314,298 $ 90,111
Issued during the year Public offering(i)....... -- -- -- -- 24,420,000 352,894
Conversion of debentures(ii).................. -- -- -- -- 11,190,770 125,638
Managers' Share Purchase Plan(iii)............ -- -- 9,289 107 30,603 445
Employees' Share Purchase Plan(iv)............ 136,925 1,360 202,129 1,647 43,784 520
Directors' Stock Option and Share Purchase
Plan(v)..................................... 10,110 108 8,233 110 6,060 98
Restricted share units matured................ 7,237 69 13,960 144 26,118 416
Options exercised............................. -- -- 14,814 136 3,238 38
Buy-back of shares(vi).......................... -- -- (38,600) (370) -- --
---------- -------- ---------- -------- ---------- --------
Balance at end of year.......................... 49,398,968 $573,471 49,244,696 $571,934 49,034,871 $570,160
========== ======== ========== ======== ========== ========
</TABLE>
---------------
(i) Net of issue costs of $10.2 million, which are net of taxes of $4.9
million.
(ii) Net of amortized issue costs of $1.1 million, which are net of taxes of
$0.5 million. If the convertible debentures had been converted at the
beginning of 1997, the loss per share figure for 1997 would have been
$0.77.
(iii) Shares issued to eligible managers under the Managers' Share Purchase
Plan were financed by interest-free loans provided by the Company. The
Company has reserved a maximum of 300,000 shares for the purpose of
the Plan. At December 31, 1999, there were 82,293 shares held by the
Plan's participants (1998 -- 92,269; 1997 -- 91,201) with a market
value of $1,096,966 (1998 -- $646,806; 1997 -- $1,172,845).
(iv) The Company has reserved a maximum of 500,000 shares for the purpose of
the Employees' Share Purchase Plan. At December 31, 1999, there were
296,997 shares held by the Plan's participants (1998 -- 267,366; 1997
-- 64,853).
10
<PAGE> 11
ST. LAURENT PAPERBOARD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS ARE EXPRESSED IN UNITED STATES ("US") DOLLARS EXCEPT WHERE
OTHERWISE INDICATED)
(v) The Company has reserved a maximum of 175,000 shares for the purpose of
the Directors' Stock Option and Share Purchase Plan. At December 31,
1999, there were 32,098 shares issued and outstanding under the
provisions of the Plan (1998 -- 21,988; 1997 -- 15,143).
(vi) Shares were purchased according to a normal course issuer bid that was
approved in December 1997. The bid was for approximately 5% of the 49
million common shares issued and outstanding, subject to a maximum
aggregate purchase price of CAN$40 million. The normal course issuer
bid expired in December 1998.
The Company also issued shares to eligible officers under a Long-Term
Incentive Plan which were financed by interest-free loans provided by the
Company. At December 31, 1999, there were 44,004 (1998 -- 44,004; 1997 --
52,234) shares issued and outstanding under this plan with a market value of
$586,573 (1998 -- $308,468; 1997 -- $671,867).
The interest-free loans to eligible officers and managers are secured by the
common shares issued under both plans and are repayable from proceeds on the
sale of any shares purchased, by the application of any dividends declared
and paid on such shares, and from 25% of any bonus paid to the eligible
officer or manager and, as to any remainder, upon termination of employment.
Under the Long-Term Incentive and Managers' Share Purchase plans, at the
time of issuance of common shares, the Company granted to each eligible
officer and manager one restricted share unit ("RSU") for every two shares.
Each RSU entitles the holder to receive one common share, at no cost, three
years after its issuance. During the year, 7,237 RSUs (1998 -- 13,960; 1997
-- 26,118) matured and 1,731 were cancelled (1998 -- 13,569; 1997 -- 1,298).
In addition, the Long-Term Incentive Plan also includes a stock option
component for its participants. The number of shares that may be issued
pursuant to the exercise of options under the plan is limited to 1,031,684
common shares. The options can be exercised between one to five years after
their respective date of grant for a period of ten years, at which time they
expire.
Under the terms of the Directors' Stock Option and Share Purchase Plan, the
options granted to directors can be exercised starting one year after their
respective date of grant for a period of ten years, at which time they
expire.
The changes in the number of stock options and RSUs of the Company are as
follows:
<TABLE>
<CAPTION>
1999 1998
----------------------------- ------------------------------
NUMBER WEIGHTED NUMBER NUMBER WEIGHTED NUMBER
OF EXERCISE OF OF EXERCISE OF
OPTIONS PRICE RSUS OPTIONS PRICE RSUS
------- -------- ------ ------- -------- -------
CAN$ CAN$
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of year.................... 666,340 $19.07 22,710 594,359 $18.88 45,595
Issued.......................................... 333,262 15.71 -- 163,769 19.25 4,644
Cancelled....................................... (67,228) 17.69 (1,731) (76,974) 19.10 (13,569)
Matured or exercised............................ -- -- (7,237) (14,814) 13.50 (13,960)
------- ------ ------ ------- ------ -------
Balance at end of year.......................... 932,374 16.01 13,742 666,340 19.07 22,710
======= ====== ====== ======= ====== =======
</TABLE>
<TABLE>
<CAPTION>
1997
------------------------------
NUMBER WEIGHTED NUMBER
OF EXERCISE OF
OPTIONS PRICE RSUS
------- -------- -------
CAN$
<S> <C> <C> <C>
Balance at beginning of year................................ 448,234 $17.22 58,328
Issued...................................................... 173,396 22.86 15,300
Cancelled................................................... (24,033) 16.12 (1,915)
Matured or exercised........................................ (3,238) 16.70 (26,118)
------- ------ -------
Balance at end of year...................................... 594,359 18.88 45,595
======= ====== =======
</TABLE>
11
<PAGE> 12
ST. LAURENT PAPERBOARD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS ARE EXPRESSED IN UNITED STATES ("US") DOLLARS EXCEPT WHERE
OTHERWISE INDICATED)
The following table summarizes information concerning currently outstanding
and exercisable stock options:
<TABLE>
<CAPTION>
AVERAGE WEIGHTED WEIGHTED
RANGE REMAINING AVERAGE AVERAGE
OF EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
----------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$13.50 --
$17.00 432,947 7.45 years $15.00 134,189 $13.50
$17.00 --
$21.00 313,785 6.52 years $19.09 155,520 $19.09
$21.00 --
$23.73 185,642 6.70 years $22.99 65,464 $22.88
------- -------
932,374 355,173
======= =======
</TABLE>
In addition to the options and the RSUs outstanding, the Company issued
380,000 warrants in the course of the acquisition of Eastern Container
Corporation. The warrants awarded give the right to the owner to buy 380,000
common shares of the Company at CAN$10.95/share and the owner has until
January 2002 to exercise those warrants.
10. COMMITMENTS AND CONTINGENCIES
a) At December 31, 1999, the Company had commitments for major capital
expenditures under purchase orders and contracts amounting to
approximately $13.5 million.
Minimum payments in US and Canadian dollars required under operating
leases are as follows:
<TABLE>
<CAPTION>
US $ CAN $
------ ------
(in thousands of
dollars)
<S> <C> <C>
2000........................................................ 5,285 1,429
2001........................................................ 4,794 897
2002........................................................ 4,436 813
2003........................................................ 3,496 776
2004........................................................ 2,614 715
Subsequent years............................................ 5,282 1,405
</TABLE>
Under the Asset Acquisition Agreement between the Company and Avenor Inc.
in June 1994, Avenor Inc. (now Bowater Canada Inc.) has a right of first
refusal for a period of 99 years regarding disposition of the Company's
private timberlands of approximately 904,020 acres at the rate of 250
acres or more in any one transaction or series of related transactions.
Should Bowater Canada Inc. refuse the transaction, it remains entitled to
receive from the Company any amount in excess of CAN$25 per acre.
The Company is involved in various legal actions during the normal course
of business. Management of the Company is of the opinion that the total
amount of any potential liabilities for which provisions have not already
been recorded is not expected to have a material adverse effect on the
Company's financial position or its results.
b) On April 19, 1999, the U.S. Environmental Protection Agency ("EPA") and
the Virginia Department of Environmental Quality ("DEQ") each issued a
Notice of Violation (the "NOVS") under the Clean Air Act ("CAA") to the
primary mill located in West Point, Virginia (the "Mill"), which was
acquired from Chesapeake Corporation ("Chesapeake") in 1997. The
Company is part of a group of pulp and paper companies that were served
at the same period of time with NOVs by EPA for alleged violations of
the Clean Air Act. In general, the NOVs allege that from 1984 to the
present, the Mill installed certain equipment and modified certain
production processes without obtaining required permits. In the 1997
Purchase Agreement, Chesapeake agreed to indemnify the Company for
remediation work resulting from violations of applicable environmental
laws (including the CAA) that existed at the Mill as of the date of the
Purchase Agreement and as of the May 1997 closing date as to which
Chesapeake had "knowledge" as defined in the Purchase Agreement.
Chesapeake's maximum indemnification obligation to St. Laurent with
respect to such matters is $50 million. While such costs cannot be
estimated with certainty at this time, based on presently available
information, the Company believes that the cost of remediation work,
which represents capital expenditures comprising the engineering,
procurement and construction work of Mill modifications (including the
installation of air emission controls, etc.) associated with the NOVs
may approximate $20 million.
In addition, a civil monetary penalty may be assessed by EPA and DEQ;
however, the costs associated with any such penalty cannot be estimated
at this time as the Company and Chesapeake are continuing discussions
with EPA and DEQ with respect to such matters. Based upon discussions
with EPA and DEQ to date, the Company believes that the total cost of
remediation work associated with the NOVs and fines and penalties that
may be imposed by EPA and DEQ will not exceed the maximum amount of
Chesapeake's obligation. The Company and Chesapeake have agreed to
appoint a third party to decide the scope and timing of future
remediation work that is the subject of indemnification in the Purchase
Agreement. The third party ruled on February 25, 2000 that said extension
of the indemnification period has been extended to May 8, 2000, with the
possibility of a further extension, on terms that may be determined by
12
<PAGE> 13
ST. LAURENT PAPERBOARD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS ARE EXPRESSED IN UNITED STATES ("US") DOLLARS EXCEPT WHERE
OTHERWISE INDICATED)
the third party. In the interim, the Company and Chesapeake, with the
assistance of the third party, under certain conditions, shall work
together in attempting to develop and implement a remediation plan, which
will provide for a cost-effective resolution of the issues raised by the
NOVs. The Company believes that Chesapeake has the financial ability to
honor its indemnification obligation under the 1997 Purchase Agreement.
The Company is cooperating with Chesapeake to analyze, respond to, and
defend against the matters alleged in the NOVs. Based upon an initial
review of the NOVs, the Company believes that it has substantial defenses
against the alleged violations. The Company and Chesapeake are working
with EPA and DEQ to address the matters that are the subject of the NOVs;
however, the Company will vigorously defend itself against these
allegations, if necessary.
11. EMPLOYEE PENSION COSTS AND OTHER POST-RETIREMENT BENEFITS
PENSION COSTS
Canadian operations
Defined Benefit Pension Plans
The Company has a registered pension plan (the "St. Laurent Plan") which
covers substantially all non-unionized employees. The St. Laurent Plan is a
defined benefit plan integrated with the Canada/Quebec Pension Plan, and is
funded through Company contributions.
Most of the unionized employees of the Company are covered by a registered
defined benefit plan integrated with the Canada/Quebec Pension Plan, funded
through Company and employee contributions. Employee contributions and
pension benefits for unionized employees are established pursuant to the
collective bargaining agreements in effect with their respective unions.
Defined Contribution Pension Plans
Certain unionized and non-unionized employees of the Company are covered by
registered defined contribution pension plan.
Supplementary Executive Retirement Plan (the "SERP")
The Company also has a SERP pursuant to which additional pension benefits in
excess of those that can be provided under St. Laurent Plans may become
payable to certain executive officers qualified for participation under the
SERP based on their position level.
UNITED STATES OPERATIONS
Defined Benefit Pension Plans
The U.S. companies currently maintain two non-contributory defined benefit
retirement plans covering substantially all U.S. employees. The plan
covering represented U.S. employees generally provides benefits of stated
amounts for each year of service or a formula based on years of service and
the employee's salary history. The plan covering U.S. salaried and
non-represented hourly employees provides benefits of stated amounts for
each year of service for most hourly employees and a formula based on years
of service and the employee's salary history for salaried employees and
certain hourly employees. Salaried employees and certain represented
employees are also entitled to supplemental benefits based on service of
more than ten years. The funding policy for the qualified plans is to
contribute amounts to the plans sufficient to meet the minimum funding
requirements set forth in the Employee Retirement Income Security Act and
the Internal Revenue Code. The U.S. companies also maintain certain
non-qualified pension plans for executives which provide benefits that are
based on targeted wage replacement percentages or provide other additional
benefits. These non-qualified plans are unfunded.
401(k) Plans
The U.S. companies also maintain two 401(k) Plans covering substantially all
U.S. employees. Participants are allowed to make voluntary employee
contributions on a pre-tax basis which contributions are matched based on
the employee's status and workplace.
The dates of the most recent actuarial valuations for the plans are December
31, 1997 for the Canadian plans and October 1, 1998 for the U.S. plans.
Contributions to the Company's pension plans are based on the actuarial
recommendation for each plan and meet the funding requirements of the
regulatory authorities.
PENSION EXPENSE
Net pension expense for the defined benefit plans include the following
components:
<TABLE>
<CAPTION>
1999 1998 1997
------- -------- --------
(in thousands of dollars)
<S> <C> <C> <C>
Service costs -- pension benefits earned during the year.... $ 5,647 $ 4,809 $ 3,069
Interest costs on projected benefit obligation.............. 18,754 17,607 15,465
Actual return on pension fund assets........................ (9,757) (21,733) (20,543)
Net amortization, deferrals and others...................... (9,222) 2,756 4,937
------- -------- --------
Net pension expense......................................... $ 5,422 $ 3,439 $ 2,928
======= ======== ========
</TABLE>
13
<PAGE> 14
ST. LAURENT PAPERBOARD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS ARE EXPRESSED IN UNITED STATES ("US") DOLLARS EXCEPT WHERE
OTHERWISE INDICATED)
FUNDED STATUS OF THE PLANS
<TABLE>
<CAPTION>
1999 1998
--------------------------------- ---------------------------------
FOR PLANS IN WHICH FOR PLANS IN WHICH
ASSETS EXCEED BENEFITS EARNED ASSETS EXCEED BENEFITS EARNED
BENEFITS EARNED EXCEED ASSETS BENEFITS EARNED EXCEED ASSETS
--------------- --------------- --------------- ---------------
(in thousands of dollars)
<S> <C> <C> <C> <C>
Plan assets at fair value........................... $63,955 $172,737 $60,187 $161,373
Projected benefit obligation........................ 51,998 195,176 48,990 177,397
------- -------- ------- --------
Plan assets in excess of (less than) projected
benefit obligation................................ $11,957 $(22,439) $11,197 $(16,024)
======= ======== ======= ========
The above excess (deficiency) is comprised of
amounts to be amortized over the expected average
remaining service lives of plan members and to be
reflected in future earnings, namely:
Unamortized net gain (loss)....................... $(2,917) $ 15,736 $(3,082) $ 7,169
Net asset (obligation) as at June 1994, the
implementation date of the current accounting
policy.......................................... -- 480 -- 584
Prior service cost of retroactive benefits
resulting from plan amendments since June
1994............................................ (452) (24,126) -- (13,118)
------- -------- ------- --------
(3,369) (7,910) (3,082) (5,365)
Prepaid pension cost (liability).................... 15,326 (14,529) 14,279 (10,659)
------- -------- ------- --------
$11,957 $(22,439) $11,197 $(16,024)
======= ======== ======= ========
</TABLE>
The following assumptions were used for the Canadian and U.S. plans:
<TABLE>
<CAPTION>
1999 1998
-------------- --------------
AVERAGE RATE CAN US CAN US
------------ ----- ----- ----- -----
<S> <C> <C> <C> <C>
Discount rate........................................... 8.25% 7.50% 8.75% 6.75%
Salary increase......................................... 3.50% 4.75% 3.50% 4.75%
Return on assets........................................ 8.25% 9.25% 8.75% 9.25%
</TABLE>
POST-RETIREMENT BENEFITS OTHER THAN PENSIONS
<TABLE>
<CAPTION>
1999 1998
------- -------
(in thousands of
dollars)
<S> <C> <C>
Costs of post-retirement benefits other than pensions:
Service costs............................................. $ 962 $ 690
Interest costs............................................ 1,350 1,252
Amortization of the transitional balance.................. 131 131
Actuarial loss............................................ 4 --
------- -------
Total....................................................... $ 2,447 $ 2,073
======= =======
Funded status of plans:
Accumulated obligation for post-retirement benefits other
than pensions........................................... $19,444 18,740
======= =======
Unrecognized transitional balance........................... $ 1,622 $ 1,653
Unrecognized net loss....................................... 841 1,775
Accrual for post-retirement benefits other than pensions.... 16,981 15,312
------- -------
$19,444 $18,740
======= =======
</TABLE>
14
<PAGE> 15
ST. LAURENT PAPERBOARD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS ARE EXPRESSED IN UNITED STATES ("US") DOLLARS EXCEPT WHERE
OTHERWISE INDICATED)
The assumptions used to measure the obligation for post-retirement benefits
other than pensions are as follows:
<TABLE>
<S> <C>
Average age discount rate................................... 7.50%
Health care cost trend rate................................. 7.50% in 1999 trending down to a rate of 5% in 2003
Effect of a 1% change in the health care cost trend rate on
post-retirement benefits other than pensions:............. - Cost $0.1 million
- Obligation $0.9 million
</TABLE>
CHANGE IN BENEFITS OBLIGATION
<TABLE>
<CAPTION>
OTHER POST-
RETIREMENT
PENSION BENEFITS BENEFITS
------------------- -----------------
1999 1998 1999 1998
-------- -------- ------- -------
(in thousands of (in thousands of
dollars) dollars)
<S> <C> <C> <C> <C>
Benefits obligation at beginning of year.................... $226,387 $212,045 $18,740 $16,754
Acquisition............................................... 5,811 -- 1,014 --
Unrealized foreign exchange loss (gain)................... 9,111 (9,887) 131 (145)
Service costs............................................. 5,647 4,809 962 690
Interest costs............................................ 18,754 17,607 1,350 1,252
Plan participants' contributions.......................... 1,326 1,159 -- --
Amendments................................................ 12,032 4,140 -- --
Actuarial loss (gain)..................................... (18,258) 5,216 (930) 1,054
Special termination benefits (Note 17).................... -- 8,233 -- --
Benefits paid............................................. (13,636) (16,935) (1,823) (865)
-------- -------- ------- -------
Benefits obligation at end of year.......................... $247,174 $226,387 $19,444 $18,740
======== ======== ======= =======
</TABLE>
CHANGE IN PLAN ASSETS
<TABLE>
<CAPTION>
PENSION BENEFITS
--------------------
1999 1998
-------- --------
(in thousands of
dollars)
<S> <C> <C>
Fair value of plan assets at beginning of year.............. $221,560 $221,460
Acquisition............................................... 5,224 --
Unrealized foreign exchange gain (loss)................... 8,601 (9,683)
Actual return on plan assets.............................. 9,757 21,733
Employer contribution..................................... 3,860 3,826
Plan participants' contributions.......................... 1,326 1,159
Gross benefits paid....................................... (13,636) (16,935)
-------- --------
Fair value of plan assets at end of year.................... $236,692 $221,560
======== ========
</TABLE>
12. INTEREST EXPENSE (INCOME), NET AND OTHER INCOME
Interest expense (income), net
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
(in thousands of dollars)
<S> <C> <C> <C>
Interest on long-term debt.................................. $27,019 $28,252 $25,635
Deferred debt issue expenses written off.................... -- -- 8,426
Interest on debt component of convertible debentures........ -- -- 260
Interest income on temporary investments.................... (943) (1,103) (1,866)
Interest capitalized on major construction projects......... -- -- (200)
Other....................................................... 2,533 2,248 1,505
------- ------- -------
$28,609 $29,397 $33,760
======= ======= =======
</TABLE>
Cash payments of interest totaled $27.6 million in 1999 (1998 -- $27.1
million; 1997 -- $28.4 million).
15
<PAGE> 16
ST. LAURENT PAPERBOARD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS ARE EXPRESSED IN UNITED STATES ("US") DOLLARS EXCEPT WHERE
OTHERWISE INDICATED)
Other income (expense), net
<TABLE>
<CAPTION>
1999 1998 1997
------- -------- --------
(in thousands of dollars)
<S> <C> <C> <C>
Gain resulting from the renegotiation of fibre supply
agreements................................................ $ 9,500 -- --
Gain from asset disposals................................... 5,094 235 235
Other....................................................... (802) 262 (22)
------- -------- --------
$13,792 $ 497 $ 213
======= ======== ========
</TABLE>
13. PROVISION FOR (RECOVERY OF) INCOME TAXES
The composite of the applicable statutory corporate income tax rates in
Canada is 39.7% (1998 -- 39.3%; 1997 -- 41.1%). The following is the
reconciliation of income taxes calculated at the above composite statutory
rate with the income tax provision:
<TABLE>
<CAPTION>
1999 1998 1997
------- -------- --------
(in thousands of dollars)
<S> <C> <C> <C>
Earnings (loss) before income taxes......................... $60,276 $(30,400) $(42,451)
------- -------- --------
Income taxes (recovery) at the composite statutory rate..... 23,943 (11,946) (17,458)
Manufacturing and processing deduction...................... (2,455) 624 2,655
Large corporations tax...................................... 926 714 1,310
Exchange translation items.................................. (515) 3,277 1,054
Other items................................................. (63) 194 429
------- -------- --------
$21,836 $ (7,137) $(12,010)
======= ======== ========
</TABLE>
Payments for income and capital taxes in 1999 amounted to $2.9 million (1998
-- payments of $2.5 million; 1997 -- payments of $2.6 million).
The following summarizes the Company's income taxes on earnings of its
Canadian and foreign operations:
<TABLE>
<CAPTION>
1999 1998 1997
------- -------- --------
(in thousands of dollars)
<S> <C> <C> <C>
Canada
Earnings (loss) before income taxes....................... $33,678 $(16,063) $(35,854)
Income taxes (recovery)
Current................................................. 913 921 1,550
Future.................................................. 10,352 (2,760) (11,067)
------- -------- --------
11,265 (1,839) (9,517)
------- -------- --------
Net earnings (loss) before non-controlling interest....... $22,413 $(14,224) $(26,337)
======= ======== ========
Foreign
Earnings (loss) before income taxes....................... $26,598 $(14,337) $ (6,597)
Income taxes (recovery)
Current................................................. 544 104 --
Future.................................................. 10,027 (5,402) (2,493)
------- -------- --------
10,571 (5,298) (2,493)
------- -------- --------
Net earnings (loss) before non-controlling interest....... $16,027 $ (9,039) $ (4,104)
======= ======== ========
Total
Earnings (loss) before income taxes....................... $60,276 $(30,400) $(42,451)
Income taxes (recovery)
Current................................................. 1,457 1,026 1,550
Future.................................................. 20,379 (8,163) (13,560)
------- -------- --------
21,836 (7,137) (12,010)
------- -------- --------
Net earnings (loss) before non-controlling interest....... $38,440 $(23,263) $(30,441)
======= ======== ========
</TABLE>
16
<PAGE> 17
ST. LAURENT PAPERBOARD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS ARE EXPRESSED IN UNITED STATES ("US") DOLLARS EXCEPT WHERE
OTHERWISE INDICATED)
Principal components of future income taxes are as follows:
<TABLE>
<CAPTION>
1999 1998
------------------------- ------------------------
CANADA UNITED STATES CANADA UNITED STATES
-------- ------------- ------- -------------
(in thousands of dollars) (in thousands of
dollars)
<S> <C> <C> <C> <C>
Future income tax assets
Operating loss carryforwards.............................. $ 5,031 $48,004 $10,423 $37,870
Post retirement benefits.................................. -- 7,107 -- 6,958
Shares issuance costs..................................... 2,864 -- 4,170 --
Other deductible timing differences....................... 3,426 4,302 2,128 4,467
-------- ------- ------- -------
11,321 59,413 16,721 49,295
-------- ------- ------- -------
Future income tax liabilities
Differences between tax bases and reported amounts of
depreciable assets...................................... 26,648 56,617 21,174 36,548
Post retirement liabilities............................... -- 4,318 -- 4,246
Other taxable timing differences.......................... 1,388 68 1,910 64
-------- ------- ------- -------
28,036 61,003 23,084 40,858
-------- ------- ------- -------
Net future income tax assets (liabilities).................. $(16,715) $(1,590) $(6,363) $ 8,437
======== ======= ======= =======
</TABLE>
The tax loss carryforwards expire as follows:
<TABLE>
<CAPTION>
(in thousands of dollars)
<S> <C>
2003................................ $ 6,800
2004................................ 7,400
2010................................ 900
2011................................ 2,300
2012................................ 23,500
2018................................ 71,800
2019................................ 21,800
--------
$134,500
========
</TABLE>
14. SHAREHOLDER RIGHTS PLAN
The Company has a Shareholder Rights Plan which is designed to encourage the
fair treatment of all shareholders in connection with any takeover bid for
the Company. The Shareholder Rights Plan adopted in 1995 and subject to
reconfirmation by the shareholders at every third annual meeting, has been
renewed in 1998 and will expire on February 1, 2005.
The rights issued under the Shareholder Rights Plan become exercisable under
certain specific events related to a potential takeover other than a
permitted bid. Similar to most of the rights plans implemented in Canada,
the Shareholder Rights Plan contemplates a permitted bid concept whereby a
takeover bid will not trigger the rights if it meets specified conditions.
Should a bid other than a permitted bid be carried out, each right would
entitle a rights holder to purchase common shares of the Company at a 50%
discount of the market price at the time.
15. SEGMENTED INFORMATION
The Company's primary activity is the production and marketing of paperboard
and packaging products. The Company's manufacturing and converting
facilities are located in Quebec and Ontario, Canada, and in New York,
Maryland, Massachusetts, Ohio, North Carolina, Virginia, Wisconsin, South
Carolina and New Hampshire, U.S.A. The operating activities are split into
two major segments which are the paperboard production and marketing, and
the converting operations.
Primary production includes white top and mottled white linerboard, solid
bleached foodboard and linerboard, unbleached kraftliner board, and
corrugating medium. Containerboard, consisting of linerboard and corrugating
medium, is the principal raw material used in the manufacturing of
corrugated containers. Integrated containerboard manufacturers exchange
containerboard with other manufacturers to take advantage of freight costs,
manufacturing efficiencies and to obtain grade they do not produce.
The Company owns and operates seventeen converting plants. The converting
production consists mainly of corrugated containers, litho-labeled and
direct-printed retail packaging, point-of-purchase displays, post-print,
specialty packaging products, cupstock, baconboard and liquid packaging. The
Company's converting plants consume the equivalent of approximately 37% of
the Company's production. Accounting for segment profitability involves use
of transfer prices that attempt to approximate current market value. Segment
profit and assets have been measured in accordance with the Company's
accounting policies.
17
<PAGE> 18
ST. LAURENT PAPERBOARD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS ARE EXPRESSED IN UNITED STATES ("US") DOLLARS EXCEPT WHERE
OTHERWISE INDICATED)
<TABLE>
<CAPTION>
WOODLANDS,
SOLID
WOOD
AND
PRIMARY UNALLOCATED
1999 MILLS CONVERTING AMOUNTS TOTAL
---- -------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Net sales to third parties.................................. $523,532 $363,178 $29,087 $ 915,797
Inter-segment sales......................................... 90,240 -- -- 90,240
-------- -------- ------- ----------
Total....................................................... 613,772 363,178 29,087 1,006,037
EBITDA(i)................................................. 117,476 21,845 2,795 142,116
Amortization.............................................. 56,064 8,741 2,218 67,023
Operating earnings........................................ 61,412 13,104 577 75,093
Total assets................................................ 766,288 310,233 79,022 1,155,543
Additions to property, plant and equipment................ 37,251 18,556 1,331 57,138
Addition to goodwill...................................... -- 21,630 -- 21,630
</TABLE>
<TABLE>
<CAPTION>
WOODLANDS,
SOLID
WOOD
AND
PRIMARY UNALLOCATED
1998 MILLS CONVERTING AMOUNTS TOTAL
---- -------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Net sales to third parties.................................. $478,104 $296,038 $17,765 $ 791,907
Inter-segment sales....................................... 80,354 -- -- 80,354
-------- -------- ------- ----------
Total....................................................... 558,458 296,038 17,765 872,261
EBITDA before restructuring charge(i)..................... 61,300 15,206 (1,620) 74,886
Amortization.............................................. 54,329 7,391 1,788 63,508
Operating earnings (loss) before restructuring charge..... 6,971 7,815 (3,408) 11,378
Total assets................................................ 809,947 181,532 58,934 1,050,413
Additions to property, plant and equipment................ 33,913 13,129 2,193 49,235
Addition to goodwill...................................... -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
WOODLANDS,
SOLID WOOD
AND
PRIMARY UNALLOCATED
1997 MILLS CONVERTING AMOUNTS TOTAL
---- -------- ---------- ----------- --------
<S> <C> <C> <C> <C>
Net sales to third parties.................................. $363,436 $220,125 $ 6,881 $590,442
Inter-segment sales....................................... 64,727 -- -- 64,727
-------- -------- -------- --------
Total....................................................... 428,163 220,125 6,881 655,169
EBITDA(i)................................................... 29,812 14,432 (5,527) 38,717
Amortization................................................ 39,696 6,466 1,459 47,621
Operating earnings (loss)................................... (9,884) 7,966 (6,986) (8,904)
Total assets................................................ 844,388 176,792 59,741 1,080,921
Additions to property, plant and equipment.................. 21,388 19,113 3,537 44,038
Addition to goodwill........................................ -- -- 702 702
</TABLE>
Starting in July 1998, corporate expenses were allocated to the primary
mills and converting segments.
---------------
(i) EBITDA: earnings before interest, income taxes, depreciation and
amortization.
18
<PAGE> 19
ST. LAURENT PAPERBOARD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS ARE EXPRESSED IN UNITED STATES ("US") DOLLARS EXCEPT WHERE
OTHERWISE INDICATED)
The operations and assets of the Company by geographic area are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
(in thousands of dollars)
<S> <C> <C> <C>
Sales to third parties
From Canada
Within Canada........................................... $ 137,174 $ 120,620 $ 130,367
To the United States.................................... 208,086 151,903 125,206
Other................................................... 29,222 45,583 45,296
---------- ---------- ----------
374,482 318,106 300,869
From the United States.................................... 541,315 473,801 289,573
---------- ---------- ----------
$ 915,797 $ 791,907 $ 590,442
========== ========== ==========
Intercompany sales between geographic areas(A)
From Canada............................................... $ 19,582 $ 9,723 $ 4,845
From the United States.................................... 1,215 2,078 1,092
---------- ---------- ----------
$ 20,797 $ 11,801 $ 5,937
========== ========== ==========
Operating earnings (loss)
Canada.................................................... $ 40,967 $ (4,213) $ (22,975)
United States............................................. 34,126 2,713 14,071
---------- ---------- ----------
$ 75,093 $ (1,500) $ (8,904)
========== ========== ==========
Total assets(B)
Canada.................................................... $ 438,551 $ 441,710 $ 468,865
United States............................................. 716,992 608,703 612,056
---------- ---------- ----------
$1,155,543 $1,050,413 $1,080,921
========== ========== ==========
Property, plant, equipment and goodwill
Canada.................................................... $ 325,249 $ 320,371 $ 316,170
United States............................................. 531,969 475,512 491,901
---------- ---------- ----------
$ 857,218 $ 795,883 $ 808,071
========== ========== ==========
</TABLE>
---------------
(A) Intercompany sales reflect transfer prices at market value.
(B) Total assets are those which are directly used in geographic areas.
16. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
Since substantially all of the Company's revenues are denominated in US
dollars and a portion of the operating costs are incurred in Canadian
dollars, the Company has a hedging program to manage its foreign exchange
exposure on future purchases of services and products denominated in
Canadian dollars. The Company does not use derivative financial instruments
for trading or speculative purposes. At December 31, the Company had entered
into various forward contracts and options for the purchase of Canadian
dollars as follows (amounts in parentheses represent losses):
<TABLE>
<CAPTION>
1999 1998
------------------------------ --------------------------------
AVERAGE AVERAGE
EXCHANGE EXCHANGE
NOMINAL RATE FAIR NOMINAL RATE FAIR
AMOUNT $/CAN$ VALUE AMOUNT $/CAN$ VALUE
-------- -------- ------ -------- -------- --------
(in thousands of dollars)
<S> <C> <C> <C> <C> <C> <C>
1999............................................... $ -- $ -- $ -- $ 77,000 $0.7125 $ (7,422)
2000............................................... 108,000 0.6950 150 84,000 0.7001 (5,493)
2001............................................... 76,000 0.6920 919 56,000 0.7027 (3,776)
2002............................................... 21,000 0.6972 208 15,000 0.7068 (1,074)
-------- ------ -------- --------
$205,000 $1,277 $232,000 $(17,765)
======== ====== ======== ========
</TABLE>
The fair value of these forward contracts and options reflects the estimated
amounts that the Company would receive or (pay) to terminate the contracts
at the year-end date. The unrealized gains and losses on open contracts are
equal to the fair value as indicated above.
19
<PAGE> 20
ST. LAURENT PAPERBOARD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS ARE EXPRESSED IN UNITED STATES ("US") DOLLARS EXCEPT WHERE
OTHERWISE INDICATED)
INTEREST RATE RISK MANAGEMENT
Cash and temporary investments bear interest at floating rates. Accounts
receivable, accounts payable and accrued liabilities are non-interest
bearing.
The Company enters into interest rate swap agreements to reduce exposure to
interest rate fluctuations on its long-term debt. Payments made under these
agreements are accounted for as adjustments to interest expense.
At December 31, 1999, the Company has entered into interest rate swap
agreements with financial institutions to pay fixed rates on a notional
amount of $55 million at a rate of 5.97%. These agreements expire in 2003.
The fair value of these financial instruments as of December 31, 1999
represents an unrealized gain of $1.5 million.
SELLING PRICES RISK MANAGEMENT
The Company enters into cash-settled swap agreements with financial
institutions to receive fixed prices on notional amounts of 26 lb.
semichemical corrugating medium and 42 lb. unbleached kraftliner. At
December 31, 1999, the Company had entered into swap agreements for 37,500
tons of corrugating medium and 18,000 tons of unbleached kraftliner. These
agreements expire in 2000 and 2001. The fair value of these financial
instruments as of December 31, 1999 represents an unrealized loss of $1.6
million.
RECYCLED FIBRE RISK MANAGEMENT
The Company enters into cash-settled swap agreements with financial
institutions to pay fixed prices on notional amounts of old corrugated
container. At December 31, 1999, the Company had entered into swap
agreements for 48,000 tons of old corrugated container. These agreements
expire in 2001. The fair market value of these instruments as of December
31, 1999 represents an unrealized loss of $0.3 million.
CREDIT RISK MANAGEMENT
The Company is exposed to credit risk on the accounts receivable from its
customers. In order to reduce this risk, the Company's credit policies
include the analysis of the financial position of its customers and the
regular review of their credit limits. In some cases, the Company requires
bank letters of credit or subscribes to credit insurance. The Company does
not have significant exposure to any individual customer or counterpart and
has not incurred significant bad debt expenses in the last three years.
The Company minimizes its credit exposure to counterparties in the
derivative financial instrument transactions by entering into contracts only
with highly rated financial institutions and by distributing the
transactions among several selected financial institutions. Although the
Company's credit risk is the replacement cost at the then-estimated fair
value of the instrument, management believes that the risk of incurring
losses is remote and that such losses, if any, would not be material. The
market risk related to the derivative instruments should be offset by
changes in the valuation of the underlying items being hedged.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Rates currently available to the Company for long-term debt with similar
terms and remaining maturities are used to estimate the fair value of
existing borrowings using the present value of expected cash flows.
Short-term financial instruments included in the consolidated balance sheet
are valued at their carrying amounts which are reasonable estimates of fair
value due to the relatively short period to maturity of the instruments;
these include cash and temporary investments, accounts receivable, bank
indebtedness and accounts payable and accrued liabilities.
The fair value of the Company's other financial instruments and their
carrying amount are as follows:
<TABLE>
<CAPTION>
1999 1998
-------------------- --------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
(in thousands of dollars)
<S> <C> <C> <C> <C>
Secured term loan........................................... $224,250 $224,250 $230,000 $230,000
Senior secured notes........................................ 125,000 130,845 125,000 135,588
Eastern Container Corporation term loan..................... 22,500 22,500 -- --
Industrial development revenue bonds........................ 4,760 4,760 4,880 4,880
Note payable................................................ 8,000 8,000 -- --
Note payable to Abitibi-Consolidated Inc.................... -- -- 2,389 2,389
</TABLE>
17. RESTRUCTURING CHARGE
In 1998, the Company completed a major restructuring of its West Point mill.
As a result, the market pulp machine was permanently shut down as well as a
chip mill. With this process, the Company has offered an enhanced early
retirement package to a certain number of eligible
20
<PAGE> 21
ST. LAURENT PAPERBOARD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS ARE EXPRESSED IN UNITED STATES ("US") DOLLARS EXCEPT WHERE
OTHERWISE INDICATED)
employees, including severance payments and extended health benefits. The
Company has renegotiated the expiry date of the collective agreement
extending it from 2001 to 2008. The cost related to the restructuring was
incurred in 1998.
18. UNCERTAINTY DUE TO THE YEAR 2000 ISSUE
The Year 2000 Issue arises because many computerized systems use two digits
rather than four to identify a year. Date-sensitive systems may recognize
the year 2000 as 1900 or some other date, resulting in errors when
information using year 2000 dates is processed. In addition, similar
problems may arise in some systems which use certain dates in 1999 to
represent something other than a date. Although the change in date has
occurred, it is not yet possible to be certain that all aspects of the Year
2000 Issue affecting the Company, including those related to the efforts of
customers, suppliers, or other third parties, will be fully resolved.
19. RECONCILIATION TO UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(U.S. GAAP)
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles in Canada (Canadian GAAP) which
conform in all material respects with generally accepted accounting
principles in the United States, except as set forth below.
A) RECONCILIATION OF EARNINGS AND BALANCE SHEET TO U.S. GAAP
EARNINGS ADJUSTMENTS
<TABLE>
<CAPTION>
1999 1998 1997
------- -------- --------
(in thousands of dollars)
<S> <C> <C> <C>
Net earnings (loss) in accordance with Canadian GAAP........ 38,337 (23,263) (30,441)
======= ======== ========
Adjustments:
Pension expense(1).......................................... $ (933) $ (722) $ (414)
Unrealized exchange loss on long-term debt(2)............... 381 237 527
Interest on equity component of convertible debentures(3)... -- -- (4,790)
RSU/stock options(4)........................................ (804) (798) (785)
Future income taxes(5)...................................... -- (394) 394
Deferred start-up costs(6).................................. (455) 2,180 (75)
Change in reporting currency(7)............................. -- -- (508)
Write-off of debt issue expenses(9)......................... -- -- 8,426
Income tax impact of the above adjustments.................. 458 (481) (1,444)
------- -------- --------
$(1,353) $ 22 $ 1,331
------- -------- --------
Net earnings (loss) in accordance with U.S. GAAP before
extraordinary item........................................ $36,984 $(23,241) $(29,110)
Extraordinary item (net of tax) write-off of debt issue
expenses(9)............................................... -- (5,645) --
------- -------- --------
Net earnings (loss)......................................... $36,984 $(28,886) $(29,110)
======= ======== ========
Net earnings (loss) per common share in accordance with U.S.
GAAP before extraordinary item -- basic................... $ 0.75 $ (0.47) $ (0.85)
Extraordinary item (net of tax)............................. -- (0.12) --
------- -------- --------
Net earnings (loss) per common share -- basic............... $ 0.75 $ (0.59) $ (0.85)
======= ======== ========
Net earnings (loss) per common share -- fully diluted(10)... $ 0.75 $ (0.59) $ (0.85)
======= ======== ========
</TABLE>
STATEMENT OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
1999 1998 1997
------- -------- --------
(in thousands of dollars)
<S> <C> <C> <C>
Net earning (loss).......................................... $36,984 $(28,886) $(29,110)
Other comprehensive income, net of tax
Minimum pension liability................................... 1,882 (1,995) 3,131
------- -------- --------
Comprehensive income (loss)................................. $38,866 $(30,881) $(25,979)
======= ======== ========
</TABLE>
21
<PAGE> 22
ST. LAURENT PAPERBOARD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS ARE EXPRESSED IN UNITED STATES ("US") DOLLARS EXCEPT WHERE
OTHERWISE INDICATED)
CONSOLIDATED BALANCE SHEET ADJUSTMENTS
<TABLE>
<CAPTION>
1999 1998
----------------------- -----------------------
CAN. GAAP U.S. GAAP CAN. GAAP U.S. GAAP
---------- ---------- ---------- ----------
(in thousands of dollars)
<S> <C> <C> <C> <C>
Working capital........................................... $ 114,184 $ 114,184 $ 131,533 $ 131,533
Property, plant and equipment............................. 816,879 816,879 775,960 775,960
Future income taxes(1,6).................................. -- -- 8,437 8,437
Other assets(1,2,6,8)..................................... 74,237 77,051 50,270 57,483
---------- ---------- ---------- ----------
$1,005,300 $1,008,114 $ 966,200 $ 973,413
========== ========== ========== ==========
Long-term debt............................................ $ 338,206 $ 338,206 $ 356,455 $ 356,455
Future income taxes(1,6).................................. 18,305 16,018 6,363 3,607
Other liabilities(1)...................................... 32,804 46,528 27,271 47,310
Shareholders' equity(1,2,4,6,8)........................... 615,985 607,362 576,111 566,041
---------- ---------- ---------- ----------
$1,005,300 $1,008,114 $ 966,200 $ 973,413
========== ========== ========== ==========
</TABLE>
---------------
(1) Accounting for pension costs under U.S. GAAP differs from Canadian
GAAP principally with respect to the choice of the discount rate
used to calculate the projected benefit obligation and to the
valuation of assets and related effects on pension expense. In
addition, under U.S. GAAP, the Company would have recorded an
additional minimum liability for underfunded plans representing the
excess of the accumulated benefit obligation over the pension plan
assets, less the pension liability already recognized and the net
unamortized prior service cost. Under U.S. GAAP, the additional
minimum liability at December 31, 1999 of $12.1 million (1998 --
$19.3 million) would be accounted for and offset by an intangible
asset of $11.4 million (1998 -- $15.9 million) and a component of
accumulated other comprehensive income of $0.5 million (1998 -- $2.3
million), net of a tax benefit of $0.2 million (1998 -- $1.1
million).
(2) Unrealized exchange gains and losses arising on the translation, at
exchange rates prevailing on the balance sheet date, of long-term
debt repayable in a foreign currency are deferred and amortized over
the remaining life of the related debt. Under U.S. GAAP, such
exchange gains and losses are included in earnings.
(3) Under Canadian GAAP, the interest expense related to the debt
component of the convertible debenture is charged to net earnings
and the interest expense related to the equity component of the
convertible debentures, net of income taxes, is charged to retained
earnings. Under U.S. GAAP, the interest related to the principal
amount of the convertible debentures is charged to earnings.
(4) Under U.S. GAAP, the Company had elected in 1995 to measure
compensation costs related to awards of RSUs and stock options using
the fair value based method of accounting as recommended under FASB
Statement 123. The recognition provision has not been applied to
awards granted in 1994. The fair value of options granted was
estimated using the Black-Scholes options pricing model, taking into
account an interest risk-free rate of 6% in 1999 (6% in 1998; 7% in
1997), an expected volatility of 25% and an expected life of four
years. The weighted average grant date fair value of options granted
during the year was $3.39: (1998 -- $3.42 and 1997 -- $5.28). The
expected rate of cancellation of options and RSUs is estimated at 5%
and 6.5% respectively per year. The cost related to the RSUs, which
is amortized over a period of three years, is based on the market
value of the Company's shares as of the grant date, which was $12.30
in 1998 (1997 -- $15.08). The program was terminated in 1998. No
RSUs were granted in 1999.
(5) Under Canadian GAAP, future income taxes were, until 1997,
considered as non-monetary elements and were therefore translated
into US dollars using historical exchange rates. Under U.S. GAAP,
future income taxes were considered as monetary elements and were,
therefore, translated into US dollars using the exchange rate in
effect at the end of the year. In 1998, the Company adopted the new
Canadian accounting for income taxes approved by CICA, which had the
effect of considering future income taxes as monetary items;
therefore, there is no difference in the measurement of future
income taxes at the end of December 1998 and 1999.
(6) Under Canadian GAAP, start-up costs can be deferred and amortized.
Under U.S. GAAP, such costs are charged to earnings as incurred.
(7) As mentioned in Note 2, the Company has adopted, in 1997, the US
dollar as its reporting and functional currency. Under Canadian
GAAP, prior years' financial statements are presented in US dollars
in accordance with a translation of convenience method using the
closing exchange rate at December 31, 1996 of $0.73 per CAN$1.00.
Under U.S. GAAP, prior years' financial statements are translated
according to the current rate method using the year-end rate or the
rate in effect at the transaction dates, as appropriate.
(8) Under U.S. GAAP, advances to officers and managers for the purchase
of shares of the Company must be deducted from shareholders' equity.
(9) Under U.S. GAAP, the write-off (Note 12) of unamortized debt issue
expense was recognized when the debt was extinguished in 1998.
22
<PAGE> 23
ST. LAURENT PAPERBOARD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS ARE EXPRESSED IN UNITED STATES ("US") DOLLARS EXCEPT WHERE
OTHERWISE INDICATED)
(10) Under U.S. GAAP, the effect of potential conversion is calculated
using the treasury stock method for options and warrants. Under the
treasury stock method, earnings per share are calculated as if
options and warrants were exercised at the beginning of the year and
as if the funds were used to purchase the Company's stock in the
market. Under Canadian GAAP, the funds theoretically received on
conversion are assumed to earn an appropriate rate of return.
(B) SUPPLEMENTARY DISCLOSURES UNDER U.S. GAAP
1. ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
1999 1998
-------- -------
(in thousands of
dollars)
<S> <C> <C>
Trade receivable............................................ $112,380 $94,189
Other....................................................... 13,038 2,856
-------- -------
125,418 97,045
Less: Allowance for doubtful accounts....................... (1,139) (1,150)
-------- -------
$124,279 $95,895
======== =======
</TABLE>
2. ACCOUNTS PAYABLE AND ACCRUED CHARGES
<TABLE>
<CAPTION>
1999 1998
-------- -------
(in thousands of
dollars)
<S> <C> <C>
Trade payable............................................... $ 67,781 $41,136
Accrued vacation pay and payroll deduction.................. 13,387 9,068
Other....................................................... 21,678 21,908
-------- -------
$102,846 $72,112
======== =======
</TABLE>
3. OPERATING LEASES
Operating lease expenses amounted to $7.4 million in 1999 (1998 --
$6.6 million; 1997 -- $4.7 million).
4. SUPPLEMENTARY INFORMATION TO CONSOLIDATED STATEMENT OF CASH FLOWS
Under US GAAP, bank indebtedness is considered as a financing activity
and is reported as such in the statement of cash flows.
5. PRO FORMA STATEMENT OF EARNINGS DATA (UNAUDITED)
The following unaudited pro forma statement of earnings data assume
that the acquisitions discussed in Note 3 occurred as at January 1,
1998. The unaudited pro forma statement of earnings data were prepared
based upon the historical consolidated statements of earnings of the
Company for the years ended December 31, 1999 and 1998, on the
statements of earnings of the businesses acquired for the year ended
December 31, 1998 and for the period from January 1, 1999 to the date
of their respective acquisition. The statements of earnings of the
businesses acquired have been adjusted to bring accounting policies
for amortization of property, plant and equipment and inventory
valuation in line with those of the Company. The unaudited pro forma
data are not necessarily indicative of the combined results of
operations of the Company and the businesses acquired that would have
resulted had the transactions occurred on the date previously
indicated, nor is it necessarily indicative of future operating
results of the Company.
Pro forma statement of earnings data
<TABLE>
<CAPTION>
1999 1998
----------- ---------
(in thousands of dollar,
except per share
amounts)
<S> <C> <C>
Net sales................................................... $1,049,161 $950,830
Net earnings (loss)......................................... 39,475 (26,213)
Net earnings (loss) per share............................... 0.80 (0.53)
</TABLE>
23
<PAGE> 24
ST. LAURENT PAPERBOARD INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(ALL AMOUNTS ARE EXPRESSED IN UNITED STATES ("US") DOLLARS EXCEPT WHERE
OTHERWISE INDICATED)
6. PENDING ACCOUNTING STANDARD
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities", which standardized the
accounting for all derivatives. This standard will be effective for
fiscal years beginning after June 15, 2000. Management has not yet
determined the impact of this new Standard.
In March 1999, the Canadian Institute of Chartered Accountants
("CICA") released new accounting rules regarding employee future
benefits under section 3461 of the CICA Handbook. The new accounting
standards will be applicable in fiscal year 2000. Management has not
yet determined if the new rules will be applied retroactively or
prospectively as permitted under section 3461. If the new rules are
applied retroactively, the benefit liability will increase by
approximately $31 million and retained earnings will decrease by
approximately $21 million net of income taxes.
20. SUBSEQUENT EVENT
On February 23, 2000, Smurfit-Stone Container Corporation ("SSCC") and the
Company entered into a pre-merger agreement pursuant to which SSCC has
agreed to acquire all of the issued and outstanding shares of the Company
for a per share consideration of $12.50 and one-half share of SSCC. In
certain circumstances, including in the event that the Company receives a
superior proposal and the Board of Directors of the Company withdraws its
support for the SSCC offer, SSCC will be entitled to a $30 million break
fee. Subject to obtaining shareholders and regulatory approvals, the SSCC
transaction is scheduled to close towards the end of the second quarter.
21. COMPARATIVE AMOUNTS
Certain comparative amounts have been restated to comply with the current
year's presentation.
24
