SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K/A
(X) Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 1996.
or
( ) Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from _______________ to ________________.
Commission file number 1-3439
STONE CONTAINER CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 36-2041256
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
150 North Michigan Avenue, Chicago, Illinois 60601
(Address of principal executive offices) (Zip code)
Registrant's telephone number: 312 346-6600
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
Common Stock New York Stock Exchange
Rights to purchase Series D Preferred Stock New York Stock Exchange
$1.75 Series E Cumulative Convertible
Exchangeable Preferred Stock New York Stock Exchange
10-3/4% Senior Subordinated Notes due
June 15, 1997 New York Stock Exchange
12-5/8% Senior Notes due July 15, 1998 New York Stock Exchange
11-7/8% Senior Notes due December 1, 1998 New York Stock Exchange
11% Senior Subordinated Notes due
August 15, 1999 New York Stock Exchange
9-7/8% Senior Notes due February 1, 2001 New York Stock Exchange
10-3/4% Senior Subordinated Debentures due
April 1, 2002 New York Stock Exchange
10-3/4% First Mortgage Notes due
October 1, 2002 New York Stock Exchange
11-1/2% Senior Notes due October 1, 2004 New York Stock Exchange
6-3/4% Convertible Subordinated Debentures
due February 15, 2007 New York Stock Exchange
Rating Adjustable Senior Notes due
August 1, 2016 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months, and (2) has been subject to
such filing requirements for the past 90 days. YES X NO_____
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the Registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. ( X )
The aggregate market value as of March 20, 1997 of the voting common
stock held by non-affiliates of the Registrant was approximately
$1,094,000,000.
The number of shares of common stock outstanding at March 20, 1997 was
99,319,186.
The Proxy Statement, to be filed on or before April 30, 1997, for the
Annual Meeting of Stockholders scheduled May 13, 1997 is partially
incorporated by reference into Part III, Items 10, 11, 12 and 13; and
Part IV, Item 14, excluding the sections entitled "Compensation Committee
Report on Executive Compensation" and "Performance Graph."
The registrant hereby amends the following items, financial statements,
exhibits or other portions of its Annual Report for 1996 on Form 10-K as
set forth in the pages attached hereto.
PART IV
Item 14(a)2. Financial Statement Schedules
Financial Statements of Stone-Consolidated Corporation
Item 14(d). Separate Financial Statements of Affiliates
STONE-CONSOLIDATED CORPORATION
AUDITED FINANCIAL STATEMENTS
AUDITORS' REPORT
To the Shareholders of
Stone-Consolidated Corporation
We have audited the consolidated balance sheets of Stone-
Consolidated Corporation as at December 31, 1996 and 1995 and the
consolidated statements of operations, changes in financial position and
shareholders' equity for each of the years in the three-year period ended
December 31, 1996. 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. 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 Stone-
Consolidated Corporation as at December 31, 1996 and 1995 and the results
of its operations and the changes in its financial position for each of
the years in the three-year period ended December 31, 1996 in accordance
with generally accepted accounting principles in Canada.
January 24, 1997 (Signed) Price Waterhouse
(except for Note 20 which is as of February 14, 1997) Chartered
Accountants
Montreal, Quebec, Canada
<PAGE>
<TABLE>
STONE-CONSOLIDATED CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands of Canadian dollars)
<CAPTION>
1996 1995
December 31
<S> <C> <C>
ASSETS
Current assets
Cash and short-term deposits.................... $ 27,083 $ 16,251
Accounts receivable
Trade.......................................... 291,606 380,024
Other.......................................... 67,246 34,030
Inventories (Note 4)............................ 317,638 207,753
Other........................................... 13,076 7,394
Total current assets.............................. 716,649 645,452
Property, plant and equipment(Note 5)............. 2,237,325 2,054,283
Timberlands....................................... 24,555 25,039
Goodwill less amortization (Note 2)............... 755,587 752,418
Other assets (Note 6)............................. 156,342 142,663
Total assets...................................... $3,890,458 $3,619,855
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable.................................. $ 249,309 $ 254,639
Income taxes...................................... 14,580 4,955
Accrued and other current liabilities............. 93,489 90,032
Current maturities of long-term debt.............. 84,664 60,000
Redeemable Class A preferred shares (Note 7)...... -- 100,000
Total current liabilities......................... 442,042 509,626
Long-term debt (Note 8).......................... 770,424 712,342
Deferred taxes (Note 9)........................... 351,220 263,442
Total liabilities................................. 1,563,686 1,485,410
Commitments and contingencies (Note 14)
Shareholders' equity
Stated capital (Note 10).......................... 1,956,591 1,956,424
Retained earnings................................. 334,272 169,965
Foreign currency translation adjustment........... 35,909 8,056
Total shareholders'equity......................... 2,326,772 2,134,445
Total liabilities and shareholders'equity......... $3,890,458 $3,619,855
<FN>
Approved by the Board
(Signed) James Doughan
(Signed) Jean Van Neste
See accompanying notes to the consolidated financial statements.
</TABLE>
<TABLE>
STONE-CONSOLIDATED CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands of Canadian dollars, except per share amounts)
<CAPTION>
1996 1995 1994
Year ended December 31
(Restated (Restated
_ Note 2) _Note 2)
<S> <C> <C> <C>
Net sales
Manufactured products............ $1,956,043 $1,661,395 $1,091,316
Brokered products................ 330,395 66,802 --
2,286,438 1,728,197 1,091,316
Cost of products sold
Manufactured products............ 1,438,715 1,156,426 939,507
Brokered products................ 316,763 63,799 --
1,755,478 1,220,225 939,507
Selling, general and
administrative expenses......... 65,758 43,318 31,934
Depreciation and amortization.... 175,564 105,321 93,546
Other operating income(Note 11).. (33,546) (13,651) (11,426)
1,963,254 1,355,213 1,053,561
Income from operations 323,184 372,984 37,755
Redemption expenses (Note 3)..... -- (40,644) --
Other income (expense)........... 5,194 (1,019) 5,882
Interest expense on long-term
debt............................ (71,565) (40,776) (42,449)
Interest income.................. 6,896 8,605 6,852
Income before income taxes....... 263,709 299,150 8,040
Provision for income taxes
Note 9)........................ 99,402 108,380 7,682
Net income....................... $ 164,307 $ 190,770 $ 358
Net income (loss) per common
share (Note 12)................. $ 1.58 $ 2.59 $ (0.12)
<FN>
See accompanying notes to the consolidated financial statements.
</TABLE>
<TABLE>
STONE-CONSOLIDATED CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION
(in thousands of Canadian dollars)
<CAPTION>
1996 1995 1994
Year ended December 31
(Restated (Restated
_ Note 2) _Note 2)
<S> <C> <C> <C>
Operating activities
Net income........................ $ 164,307 $ 190,770 $ 358
Items not requiring (providing)
cash
Depreciation and amortization..... 175,564 105,321 93,546
Deferred income taxes............. 74,620 96,305 2,780
Other............................. -- (1,432) (3,692)
Changes in non-cash working
capital.......................... (54,935) (63,724) (72,523)
Interest on equity element of
convertible debentures........... -- (10,700) (12,000)
Net cash provided by operations... 359,556 316,540 8,469
Investing activities
Acquisitions of businesses........ (33,409) (746,889) --
Capital expenditures.............. (293,177) (257,243) (95,317)
Other............................. 10,160 17,919 (1,991)
Net cash used in investing
activities...................... (316,426) (986,213) (97,308)
Financing activities
Issuance of common shares........ 167 674,647 --
Issuance of redeemable preferred
shares.......................... -- 500,000 --
Redemption of redeemable preferred
shares.......................... (100,000) (400,000) --
Redemption of convertible
debentures...................... -- (500,288) --
Issuance of debt................. 376,784 391,749 --
Payment of debt.................. (309,249) (85,000) (3,875)
Net cash (used in) provided by
financing activities............ (32,298) 581,108 (3,875)
Net increase (decrease) in cash... 10,832 (88,565) (92,714)
Cash balance, beginning of year... 16,251 104,816 197,530
Cash balance, end of year......... $ 27,083 $ 16,251 $ 104,816
<FN>
Cash includes cash and short-term deposits.
See accompanying notes to the consolidated financial statements.
</TABLE>
<TABLE>
STONE-CONSOLIDATED CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands of Canadian dollars)
<CAPTION>
1996 1995 1994
Year ended December 31
(Restated (Restated
_ Note 2) _Note 2)
<S> <C> <C> <C>
Common shares
Balance at beginning of year....... $1,956,424 $1,281,777 $1,281,777
Issuance of common shares (Note 10) 167 674,647 --
Balance at end of year............. 1,956,591 1,956,424 1,281,777
Retained earnings (deficit)
Balance at beginning of year....... 169,965 (13,505) (5,663)
Net income for the year............ 164,307 190,770 358
Interest on equity element of
convertible debentures, net of
deferred income taxes of
$3,400 in 1995 and $3,800 in 1994. -- (7,300) (8,200)
Balance at end of year............. 334,272 169,965 (13,505)
Foreign currency translation
adjustment
Balance at beginning of year....... 8,056 15,274 (12,907)
Net effect of changes in exchange
rates............................ 27,853 (7,218) 28,181
Balance at end of year............. 35,909 8,056 15,274
Shareholders' equity............... $2,326,772 $2,134,445 $1,283,546
<FN>
See accompanying notes to the consolidated financial statements.
</TABLE>
STONE-CONSOLIDATED CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
(in thousands of Canadian dollars, unless otherwise noted)
1. Nature of operations
Stone-Consolidated Corporation and its subsidiaries (the "Company")
manufacture and market newsprint, uncoated groundwood papers, market pulp
and lumber. The Company has seven fully integrated production facilities
in Quebec, Ontario and Washington (U.S.A.) and one newsprint mill in the
United Kingdom. The Company's principal markets are the United States,
Western Europe, Canada and Asia.
2. Summary of significant accounting policies
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Formation
Stone-Consolidated Corporation was incorporated under the Canada
Business Corporations Act ("CBCA") on June 22, 1993. On December 17,
1993, the Company acquired the assets, principally comprised of the
newsprint and uncoated groundwood papers business, of Stone
Container (Canada) Inc. ("Stone Canada"). These assets are carried
in the accounts of the Company at the historical book value in the
financial records of Stone Canada. On November 1, 1995, the Company
acquired Rainy River Forest Products Inc. ("Rainy River"). Rainy
River and the Company were amalgamated and continued as one
corporation under the CBCA. For further details of the amalgamation,
refer to Note 3.
Principles of consolidation
The consolidated financial statements include the accounts of
Stone-Consolidated Corporation and all of its subsidiaries. All
significant inter-company items are eliminated.
Foreign currency translation
For Canadian operations and integrated foreign subsidiaries, assets
and liabilities denominated in foreign currencies are translated
into Canadian dollars at exchange rates prevailing at the balance
sheet date for monetary items and at exchange rates prevailing at
the transaction dates for non-monetary items. Income and expenses
are translated at average rates prevailing during the year. Exchange
gains or losses are included in income except for unrealized gains
or losses on translation of foreign long-term debt which are
deferred and amortized over the remaining term of the related
obligation.
For self-sustaining foreign subsidiaries, all assets and liabilities
are translated into Canadian dollars at the exchange rates
prevailing at the balance sheet date and all income and expenses are
translated at average exchange rates prevailing during the year.
Foreign currency translation adjustments are deferred in the
shareholders' equity section of the balance sheet.
The US$110,000 senior secured notes are considered to be an
effective hedge of the Company's net investment in a U.S.
subsidiary. Accordingly, the gains or losses arising from the
translation of this foreign currency denominated long-term debt
are deferred in the shareholders' equity section of the balance
sheet.
The Company seeks to manage the foreign exchange risks arising from
movements in exchange rates between the Canadian and U.S. dollar
principally on its U.S. dollar denominated revenues. When
appropriate, the Company purchases U.S. dollar put options, at a
cost, to fix specific minimum exchange rates on conversion of U.S.
dollars. The Company records these options at market value and any
gains or losses are included in income.
Inventories
Inventories are stated at the lower of cost and net realizable
value. The average cost method is used for all inventories. Cost of
wood and finished products includes raw materials and supplies,
direct labour and an allocation of overhead. Provision is made for
slow-moving and obsolete inventories.
Property, plant and equipment, timberlands and depreciation
Property, plant and equipment is stated at cost, which includes
capitalized interest. Timberlands are stated at cost less
accumulated cost of timber harvested. Expenditures for maintenance
and repairs are charged to income as incurred. Additions,
improvements and major replacements are capitalized. The cost
and accumulated depreciation related to assets sold or retired are
removed from the accounts and any gain or loss is credited or
charged to income.
Depreciation on plant and equipment is provided for on a
straight-line basis over the expected lives of the assets using the
following annual rates:
Machinery and equipment.................................. 5% - 6 1/4%
Buildings................................................ 2-1/2%
Goodwill and other assets
Goodwill is amortized on a straight-line basis over 40 years.
Goodwill is recorded net of accumulated amortization of $115,469 and
$92,544 at December 31, 1996 and 1995, respectively. Annually, the
Company assesses whether there has been a permanent impairment in
the value of goodwill. This is accomplished by determining whether
projected undiscounted future cash flows from operations exceed the
net book value of assets acquired and goodwill as of the assessment
date. Such projections reflect price, volume and cost assumptions.
Additional factors considered by management in the preparation of
the projections and in assessing the value of goodwill include the
effects of obsolescence, demand, competition and other pertinent
economic factors, and trends and prospects that may have an impact
on the value or remaining useful life of goodwill.
Deferred financing costs are amortized over the expected life of the
related debt using the straight-line method.
Pre-production costs on major projects are deferred and amortized
over a period of five years.
Pensions and other post-retirement and post-employment benefits
The cost of the pension benefits earned by the employees is
determined using for the most part the projected benefit method
prorated on services. The net pension expense reflects the current
service cost, the interest on the actuarial surplus or unfunded
liability and the amortization over the estimated average remaining
service life of the employees of (i) the actuarial surplus or
unfunded liability
and (ii) experience gains or losses. Other post-retirement (health
care, dental care and life insurance) and post-employment (short-
and long-term disability) benefits are accounted for on a
"pay-as-you-go" basis. Coverage is provided to salaried employees
for post-retirement benefits and to all employees for
post-employment benefits.
Income taxes
Income taxes are recorded using the deferral method of accounting.
Deferred income taxes shown in the financial statements result
principally from differences between depreciation and capital cost
allowance claimed for tax purposes.
Environmental remediation and compliance
Environmental expenditures resulting in additions to property, plant
and equipment that increase useful lives are capitalized, while
other environmental expenditures are charged to expense. Liabilities
are recorded when assessments and/or remedial efforts are probable
and the cost can be reasonably estimated.
Change in accounting policy
Effective in 1996, the Company retroactively adopted new accounting
recommendations of the Canadian Institute of Chartered Accountants
on the presentation and disclosure of financial instruments.
The new accounting recommendations require the convertible
debentures issued by the Company in 1993 to be split between a debt
element and an equity element. The debt element was determined using
the present value of the interest payments up to January 1, 1999
(date at which the convertible debentures are redeemable at the
option of the Company without any restrictions), while the remaining
portion of the principal amount of convertible debentures was
presented in shareholders' equity. The interest expense related to
the debt element was charged to income and the interest expense
related to the equity element was charged to retained earnings, net
of income taxes. This change results in an increase in net income
for the years ended December 31, 1995 and 1994 of $7.3 million and
$8.2 million, respectively, with no effect on retained earnings.
There is no effect on net income for the year ended December 31,
1996 or on the balance sheets as at December 31, 1996 and 1995 as on
November 1, 1995, the convertible debentures were converted into
common shares.
3. Acquisitions of businesses
Acquisitions (1996)
During 1996, the Company acquired, for approximately $22 million, an
82% interest in a sawmill near La Tuque, Quebec and a 20% interest
in a sawmill located near Quebec City. The Company has also invested
approximately $11 million as its 21% share of the investment in a
joint venture to construct and operate an oriented strand board mill
located near Fort Frances, Ontario.
Acquisition of Rainy River (1995)
On November 1, 1995, the Company and Rainy River amalgamated and
continued as one corporation under the name "Stone-Consolidated
Corporation".
Rainy River was a manufacturer and seller of newsprint, uncoated
groundwood papers and market pulp. It owned and operated three
integrated pulp and paper mills located in Kenora and Fort Frances,
Ontario and Tacoma, Washington (U.S.A.).
The amalgamation was accounted for as the acquisition of Rainy River
by the Company. The purchase method of accounting was used to
account for the business combination and the results of operations
of Rainy River are included from the date of acquisition.
The non-recurring redemption expenses of $40,644 consist primarily
of $36,960 relating to the payment of $160 per $1,000 principal
amount of debentures of the Company. The impact of these expenses on
net income per common share is $0.37.
Allocation of purchase price
Assets acquired at assigned value
Working capital........................................ $ 93,939
Fixed assets........................................... 843,553
Goodwill............................................... 292,338
Other.................................................. 16,811
1,246,641
Liabilities assumed
Long-term debt......................................... 148,225
Deferred income taxes.................................. 98,413
Convertible debentures................................. 269,288
515,926
Net assets acquired at fair value........................... $ 730,715
Consideration
Issuance of 11,938,165 common shares........................ $ 216,295
Issuance of 23,255,814 redeemable preferred shares.......... 500,000
Cash........................................................ 14,420
$ 730,715
The following pro forma selected financial information shows the
results of the Company as though the acquisition of Rainy River had
been made as of January 1, 1995 and 1994 respectively.
Pro forma Pro forma
1995 1994
(unaudited)
Net sales.............................. $2,690,460 $1,900,520
Income from operations................. $ 520,784 $ 1,033
Net income (loss)*..................... $ 258,126 $ (86,961)
Net income (loss) per common share
(in dollars).......................... $ 2.41 $ (0.92)
* Includes non-recurring redemption expenses of $40,644 before provision
for income taxes.
The above pro forma financial information is not necessarily
indicative of the actual results of operations that would have
occurred had the purchase actually been made at the beginning of
1995 and 1994.
Acquisition of Stirling Fibre (Holdings) Limited (1995)
In July 1995, the U.K. subsidiary purchased all of the shares of
Stirling Fibre (Holdings) Limited for approximately $16 million.
Located in central Scotland, Stirling Fibre is one of the largest
independent waste paper merchants and processors in the U.K.
4. Inventories
1996 1995
Wood.................................... $ 43,257 $ 45,761
Raw materials and supplies.............. 115,235 111,264
Finished products...................... 159,146 50,728
$317,638 $207,753
5. Property, plant and equipment
Cost Accumulated Net
depreciation
1996
Land and land improvements. $ 21,427 $ -- $ 21,427
Building and leasehold
improvements.............. 407,472 57,495 349,977
Machinery and equipment.... 2,308,533 580,121 1,728,412
Construction in progress... 137,509 -- 137,509
$2,874,941 $637,616 $2,237,325
Cost Accumulated Net
depreciation
1995
Land and land
improvements......... $ 16,526 $ -- $ 16,526
Building and leasehold
improvements......... 371,895 38,662 333,233
Machinery and
equipment........... 1,862,956 431,140 1,431,816
Construction in
progress............. 272,708 -- 272,708
$2,524,085 $469,802 $2,054,283
Environmental capital expenditures for the years ended December 31,
1996 and 1995 were $16 million and $85 million respectively.
Interest capitalized on major additions for the years ended
December 31, 1996, 1995 and 1994 was $5,828, $9,435 and $700
respectively.
6. Other assets
1996 1995
Deferred pension costs..................... $ 90,558 $ 73,938
Pre-production costs....................... 10,916 8,972
Non-current receivables.................... 15,509 15,450
Deferred financing costs................... 16,167 20,342
Deferred exchange losses................... 4,299 4,130
Other...................................... 18,893 19,831
$156,342 $142,663
7. Redeemable Class A preferred shares
The redeemable Class A preferred shares were issuable in series. On
November 1, 1995, 23,255,814 Series 1 redeemable Class A preferred
shares were issued. These shares were entitled to cumulative cash
dividends accruing from day to day at a rate of 8% per annum,
calculated daily at $21.50 per share. Dividends are recorded as
interest expense. The market value of these shares as at December 31,
1995 was not materially different from book value.
Number of Stated Number of Stated
shares value shares value
1996 1995
Outstanding _
beginning of year.. 4,651,178 $ 100,000 -- $ --
Issuance of shares
to acquire Rainy
River............. -- -- 23,255,814 500,000
Redeemed and
cancelled......... 4,651,178 100,000 18,604,636 400,000
Outstanding _ end of
year.............. -- -- $ 4,651,178 $ 100,000
8. Long-term debt
1996 1995
Senior secured notes
US$225 million due 2000........................ $308,160 $307,170
US$110 million due 2001........................ 150,656 150,172
Term facility due 2000........................... 239,979 300,000
Revolving credit facility due 2000............... 98,000 15,000
Reducing credit facility due 2000................ 29,750 --
Others........................................... 28,543 --
855,088 772,342
Less: Current maturities......................... 84,664 60,000
$770,424 $712,342
Senior secured notes
The senior secured notes due 2000 are secured by a first ranking
lien on the Company's mills located in Shawinigan, Grand-Mere and La
Baie, Quebec. These notes bear interest at 10.25% per annum and are
not redeemable at the option of the Company prior to December 15,
1998.
The senior secured notes due 2001 are secured by a first ranking
lien on the Company's mill at Fort Frances, Ontario. These notes
bear interest at 10.75% per annum and are not redeemable at the
option of the Company prior to October 15, 1999.
Both senior notes may be redeemed in whole or in part during
specific periods and under specific circumstances. The Company may
be obligated to repurchase the senior notes if certain specific
events occur under the indentures. The indentures governing the
notes contain certain covenants that, among other things, limit the
type and amount of additional indebtedness that may be incurred by
the Company and certain of its subsidiaries and impose limitations
on investments, sales or transfers of assets, dividends and other
payments, the creation of liens, sale-leaseback transactions,
transactions with affiliates, and mergers.
Term facility
The term facility of $300 million is unsecured and is repayable in
quarterly payments of $15 million. In addition, the term facility
has mandatory and voluntary prepayment provisions, including the
mandatory prepayment of 50% of "excess cash flow" up to a maximum of
$50 million per year. Interest rates or stamping fees, as the case
may be, on the term facility are as follows: (i) during the first
year, at the prime or base rate, plus 1.125% per year and, in
respect of London Interbank Offer Rate (LIBOR) loans or bankers'
acceptances, plus 1.75% per year; and (ii) from the second to the
fifth years, subject to credit ratings, at the prime or base rate,
plus 0.125% to 1.375% per year and, in respect of LIBOR loans or
bankers' acceptances, plus 0.625% to 2.125% per year.
Revolving credit facility
The revolving credit facility is a $300-million five-year credit
facility secured by eligible accounts receivable and eligible
inventories. Interest rates or stamping fees, as the case may be, on
the revolving facility are as follows: (i) during the first year,
subject to credit ratings, at the prime or base rate, as the case
may be, plus 0.875% per year and, in respect of LIBOR loans or
bankers' acceptances, plus 1.50% per year; and (ii) from the second
to the fifth years, subject to credit ratings, at the prime or base
rate, plus 0% to 1.125% per year and, in respect of LIBOR loans or
bankers' acceptances, plus 0.50% to 1.875% per year.
Reducing credit facility
The reducing credit facility is a $35 -million five-year credit
facility secured by a first ranking lien on property, plant and
equipment of the Company's sawmills. The credit facility is payable
in quarterly instalments and bears interest at either prime rate,
LIBOR advance rate or bankers' acceptance rate.
Minimum payments
Minimum payments on long-term debt for each of the next five years
are as follows:
1997 $ 84,914
1998 $ 69,213
1999 $ 69,334
2000 $478,324
2001 $151,276
9. Income taxes
The provision for income taxes consists of the following:
1996 1995 1994
Current _ Canada................. $ 19,191 $ 4,491 $ 3,436
_ U.S.A ................. 5,556 7,351 1,416
_ U.K. .................. 35 233 50
24,782 12,075 4,902
Deferred _ Canada................ 58,769 93,125 3,178
_ U.S.A. ............... (670) -- --
_ U.K. ................. 16,521 3,180 (398)
74,620 96,305 2,780
Total provision for income taxes.. $ 99,402 $108,380 $ 7,682
The income tax at the combined Canadian federal and provincial
income tax rate is reconciled to the provision for income taxes as
follows:
1996 1995 1994
Income tax at combined Canadian
federal and provincial income
tax rate............................ $102,055 $115,053 $ 3,055
Manufacturing and processing profits
deduction........................... (12,138) (16,127) (482)
Non-deductible amortization of
goodwill............................ 7,545 4,363 4,292
Large corporations tax............... 6,705 4,489 3,436
Difference in tax rates for foreign
subsidiaries........................ (2,108) (371) 129
Non-taxable income................... (3,809) (557) (2,465)
Other-net............................ 1,152 1,530 (283)
Provision for income taxes........... $ 99,402 $108,380 $ 7,682
The components of the deferred taxes are:
1996 1995
Deferred tax assets
Loss carryforwards............................... $ 22,621 $ 38,160
Deferred tax liabilities
Depreciation and amortization.................... 343,958 272,496
Pre-production costs.............................. 2,513 2,872
Pension........................................... 31,028 25,273
Other............................................. (3,658) 961
Total deferred tax liability...................... 373,841 301,602
Deferred tax liability-net........................ $351,220 $263,442
The loss carryforwards relate to approximately $68.5 million of net
operating losses of the U.K. subsidiary and are available
indefinitely for U.K. income tax purposes.
The income before income taxes consists of the following:
1996 1995 1994
Canada........................... $202,878 $271,041 $6,520
U.S.A. .......................... 12,594 18,534 3,987
U.K. ............................ 48,237 9,575 (2,467)
Income before income taxes....... $263,709 $299,150 $8,040
10. Stated capital
The amalgamated company created on November 1, 1995 under the plan
of arrangement as described in Note 3 has the same authorized share
capital as Stone-Consolidated Corporation prior to the amalgamation.
Authorized
The authorized share capital of the Company 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. For
preferred shares issued and outstanding, refer to Note 7.
Issued
Common shares
Number of Stated Number of Stated
shares value shares value
1996 1995
Outstanding_
beginning of year.. 103,996,769 $1,956,424 65,000,100 $1,281,777
Conversion of
debentures.......... -- -- 27,044,693 458,142
Issuance of shares to
acquire Rainy River. -- -- 11,938,165 216,295
Exercise of options.. 11,151 167 13,811 210
Outstanding _ end of
year............... 104,007,920 $1,956,591 103,996,769 $1,956,424
The Company has an employee share option plan for its key employees.
Options may be granted for the purchase of up to 10% of the issued
and outstanding common shares. A total of 6,500,100 common shares
have initially been reserved for issuance under the option plan. The
options granted in 1994 vested on the first anniversary date of the
date of grant. One-quarter of the options granted in 1995 and 1996
vest on each of the first, second, third and fourth anniversary
dates of the date of grant. At December 31, 1996, 271,761 options
are exercisable (1995 _ 128,791; 1994 _ nil). These options expire
at various dates during the next 10 years. The weighted average
remaining contractual life of all options outstanding at
December 31, 1996 is approximately 8.5 years. Options are
exercisable at prices ranging from $14.42 to $17.94 per common
share. Changes in the number of common shares under option are
summarized below:
1996 Weighted 1995 Weighted 1994 Weighted
average average average
exercise exercise exercise
price price price
Outstanding
_ beginning
of year.... 741,718 $16.47 85,000 $16.18 -- $ --
Granted..... 528,000 17.78 390,250 17.38 85,000 16.18
Exercised... (11,151) 15.15 (13,811) 15.20 -- --
Cancelled... (69,961) 15.30 (105,781) 15.15 -- --
Conversion.. -- -- 386,060 15.20 -- --
Outstanding _
end of
year..... 1,188,606 $17.13 741,718 $16.47 85,000 $16.18
* Under the amalgamation in 1995, outstanding options for 371,211
common shares of Rainy River were converted into options for
386,060 of the Company's common shares. Of the 386,060 options,
195,220 were granted in 1994 and 190,840 in 1995. One-third of
these options vest on each of the first, second and third
anniversary dates of the date of grant.
11. Other operating income
In July 1996, the Company suffered major damage to the water
infrastructure at its Port Alfred mill. Other operating income
includes an amount of $22.3 million reflecting the difference
between the proceeds from insurance versus the historical net book
value of the damaged assets.
12. Net income (loss) per common share
Net income (loss) per common share is calculated based on the
monthly average number of common shares outstanding during the year
which was 104.0 million, 71.5 million and 65.0 million for 1996,
1995 and 1994, respectively. The potential exercise of employee
stock options would not have a significant dilutive impact on
the net income per common share for 1996 and 1995. For 1994, the
fully diluted loss per common share has not been reported as it
would result in a decrease of the loss per share.
Income available to the common shareholders is calculated based on
net income for the year less the interest on equity element of
convertible debentures.
13. Related party transactions
Stone Canada is the major shareholder (currently 46.6% and 74.6%
prior to November 1, 1995) of the Company. The Company had
transactions with Stone Canada with respect to purchases of pulp and
transactions with Stone Canada's parent, Stone Container
Corporation, with respect to certain sales of newsprint tonnage.
The following table summarizes the transactions between the Company
and related parties, which are in the normal course of business at
normal trade terms:
1996 1995 1994
Sales to Stone Container Corporation
and affiliates................. $32,227 $31,951 $82,363
Purchases from Stone Canada and
affiliates..................... $14,513 $19,826 $14,707
Commissions from Stone Container
Corporation.................... $10,829 $12,199 $7,700
Expenses charged to Stone Canada $4,200 $4,835 $8,181
Expenses charged by Stone
Container Corporation......... $1,549 $3,672 $4,728
Included in net sales _ manufactured products
Included in cost of products sold _ manufactured products
Included in other operating income
Included in selling, general and administrative expenses
14. Commitments and contingencies
(a) At December 31, 1996, the future minimum rental commitments
under operating leases having initial or remaining
non-cancellable terms in excess of one year are reflected
below:
Operating leases
1997......................................... $ 9,525
1998......................................... 10,456
1999......................................... 4,587
2000......................................... 3,608
2001......................................... 2,807
Thereafter................................... 6,667
$37,650
(b) At December 31, 1996, outstanding commitments for capital
expenditures under purchase orders and contracts amounted to
approximately $58 million.
(c) The Company currently estimates that capital expenditures of
approximately $45 million will be required for environmental
compliance during the two-year period ending December 31, 1998.
Various lawsuits and claims are pending by and against the
Company. It is the opinion of management supported by counsel
that final determination of these claims will not have a
material adverse effect on the financial position or the
results of the Company.
15. Financial instruments
Financial derivatives
At December 31, 1996, the amount of U.S. dollar put options
outstanding was US$8 million.
Credit risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash, short-term
deposits and accounts receivable. The Company does not believe it is
subject to any significant concentration of credit risk. Cash and
short-term deposits are held by major financial institutions.
Accounts receivable are due from a large number of customers who are
geographically dispersed. For accounts receivable, the Company
performs periodic credit evaluations and typically does not charge
interest or require collateral. Allowances are maintained for
potential credit losses consistent with the credit risk, historical
trends and other information.
Fair value
Carrying value Fair value Carrying value Fair value
1996 1995
Cash and
short-term
deposits... $27,083 $27,083 $16,251 $16,251
Long-term
debt....... $855,088 $894,806 $772,342 $809,297
Redeemable
Class A
preferred
shares.... $ -- -- $100,000 $100,000
Off-balance
sheet U.S.
dollar put
options.... $300 $300 $451 $451
Due to their short-term maturity, the carrying values of cash and
short-term deposits, accounts receivable and accounts payable are
reasonable estimates of their fair values. The fair value of the
redeemable Class A preferred shares is based on their quoted market
value. The fair values of long-term debt are estimated based on
rates currently available to the Company for long-term debt with
similar terms. The fair value of financial derivatives reflects the
estimated amounts that the Company would receive or pay to settle
the contracts at the reporting date.
Interest rate risk
The Company's exposure to interest rate risk as at December 31, 1996
is as follows:
Cash.........................Non-interest bearing
Short-term deposits......... Floating interest rate
Accounts receivable......... Non-interest bearing
Accounts payable............ Non-interest bearing
Long-term debt
Senior notes ($458,816)... Fixed interest rate maturing in 2 to 5 years
Other facilities ($396,272)Floating interest rate
16. Pension plans
The Company either participates in or has defined benefit pension
plans available to substantially all employees, which are funded,
trusteed and principally contributory. The funding policy for the
pension plans is to contribute annually the statutory required
minimum. The pension plans provide reduced benefits for early
retirement and take into account offsets for government pension
benefits.
Net pension expense includes the following components:
1996 1995 1994
Service cost-benefits earned during
the year............................. $14,535 $6,321 $7,282
Interest cost on projected benefit
obligations.......................... 54,483 40,607 36,579
Actual return on plan assets........... (122,945) (68,645) (11,676)
Net amortization and deferral.......... 59,803 29,386 (25,440)
Net pension expense.................... $5,876 $7,669 $6,745
The following table sets forth the funded status of the pension
plans and the amount recorded in the balance sheet:
1996 1995
Actuarial present value of benefit obligations
Vested benefits................................ $(612,687) $(606,849)
Non-vested benefits............................ (61,067) (48,915)
Accumulated benefit obligations................ (673,754) (655,764)
Effect of increase in compensation levels...... (69,906) (80,864)
Projected benefit obligations for services
rendered...................................... (743,660) (736,628)
Plan assets at fair value, primarily stocks,
bonds and real estate........................ 787,601 670,904
Plan assets greater (less) than projected
benefit obligations........................... 43,941 (65,724)
Unrecognized net loss from actual experience
different from that assumed and changes in
assumptions................................... 46,617 139,662
Deferred pension costs......................... $90,558 $73,938
The weighted average discount rate used in determining the actuarial
present value of the projected benefit obligations was 7.75% and
7.5% respectively for 1996 and 1995. The expected long-term rate of
return on assets and the rate of increase in future compensation
levels were 11% and 4% respectively for all years. The change in the
weighted average discount rate had the effect of decreasing the
total projected benefit obligations at December 31, 1996 by
approximately $24.1 million.
17. Segment information
(a) The Company's primary activity is the production and marketing
of newsprint and uncoated groundwood papers.
(b) The Company's manufacturing facilities are located in Canada,
the United States and the United Kingdom. Canadian export sales
were $1,372 million for 1996, $1,222 million for 1995 and
$800 million for 1994. United Kingdom export sales were
$63 million for 1996, $60 million for 1995 and $46 milion
for 1994. United States export sales were $53 million for
1996 and $13 million for 1995.
The table below provides information on the Company's operations
based on the region in which the operations are located.
1996 1995 1994
Net sales from
Canada......................... $1,586,581 $1,389,939 $921,501
United Kingdom................. 255,679 241,954 169,815
United States.................. 444,178 96,304 --
$2,286,438 $1,728,197 $1,091,316
Income before taxes
Canada......................... $266,894 $331,557 $64,956
United Kingdom................. 48,319 7,752 (2,467)
United States.................. 20,061 11,318 --
Interest expense............... (71,565) (51,477) (54,449)
$263,709 $299,150 $8,040
Depreciation and amortization
Canada......................... $144,609 $87,918 $79,009
United Kingdom................. 18,332 15,043 14,537
United States.................. 12,623 2,360 --
$175,564 $105,321 $93,546
Capital expenditures
Canada......................... $243,338 $188,554 $87,498
United Kingdom................. 21,504 61,920 7,819
United States.................. 28,335 6,769 --
$293,177 $257,243 $95,317
Assets
Canada......................... $3,175,158 $3,051,407 $1,807,707
United Kingdom................. 430,434 362,254 291,964
United States.................. 284,866 206,194 --
$3,890,458 $3,619,855 $2,099,671
18. Differences between Canadian and United States generally accepted
accounting principles (GAAP)
These consolidated financial statements have been prepared in
accordance with generally accepted accounting principles in Canada
(Canadian GAAP). In certain respects, Canadian GAAP differs from
generally accepted accounting principles in the United States (U.S.
GAAP).
The following summary sets out the material adjustments to the
Company's reported net earnings which would be made in order to
conform with U.S. GAAP:
1996 1995 1994
Earnings adjustments
Income before income taxes in accordance
with Canadian GAAP.................... $263,709 $299,150 $8,040
Add (deduct)
Currency translation (a)............... (237) 9,365 (16,734)
Post-retirement benefits other than
pensions and post-employment
benefits (b).......................... (1,373) -- (1,480)
Pension cost (c)....................... 3,739 2,909 3,023
Goodwill (e)........................... 312 -- --
Interest on equity element of
convertible debentures (f)............ -- (10,700) (12,000)
Income (loss) before income taxes in
accordance with U.S. GAAP............. 266,150 300,724 (19,151)
Provision for income taxes in
accordance with Canadian GAAP......... 99,402 108,380 7,682
Add (deduct)
Income tax on above adjustments........ 775 366 (8,661)
Income tax rate adjustment............. (10,489) -- --
Provision (credit) for income taxes in
accordance with U.S. GAAP............. 89,688 108,746 (979)
Net income (loss) in accordance with
U.S. GAAP............................. $176,462 $191,978 $(18,172)
Net income (loss) per common share in
accordance with U.S. GAAP (in dollars) $1.70 $2.68 $(0.28)
The following summary sets out the material differences in the
Company's balance sheet between accounting principles generally
accepted in Canada and the United States:
Canadian Adjustment U.S. Canadian Adjustment U.S.
GAAP GAAP GAAP GAAP GAAP GAAP
1996 1995
Balance sheet
components
Goodwill (b,
d, e).. $755,587 $(10,379) $745,208 $752,418 $(10,691) $741,727
Other assets
(a, c). $156,342 $(18,725) $137,617 $142,663 $(38,688) $103,975
Deferred tax
liability
(a, b, c,
d, e). $351,220 $(42,202) $309,018 $263,442 $(37,878) $225,564
Other long-
term
liability
(b,
c)....$ -- $ 28,070 $ 28,070 $ -- $ 26,697 $ 26,697
Shareholders'
equity
(a, b,
c).. $2,326,772 $(14,973) $2,311,799 $2,134,445 $(38,198) $2,096,247
(a) Currency translation
Under Canadian GAAP, unrealized exchange gains and losses on
translation of long-term debt are deferred and amortized over
the term of the debt. Under U.S. GAAP, such gains or losses are
credited or charged to income.
(b) Post-retirement benefits other than pensions and
post-employment benefits
Under Canadian GAAP, post-retirement benefits other than
pensions are accounted for on a "pay-as-you-go" basis. Under
U.S. GAAP, in accordance with Statement of Financial Accounting
Standards No. 106, "Employer's Accounting for Post-retirement
Benefits other than Pension", post-retirement benefits
are accounted for on an accrual basis.
The net post-retirement benefit cost would include the
following components:
1996 1995 1994
Service cost-benefits attributed to service
during the year......................... $ 575 $ 279 $ 309
Interest cost on accumulated post-retirement
benefit obligation...................... 2,329 1,995 1,925
Net amortization and deferral............. 470 226 448
Net post-retirement benefit cost.......... $3,374 $2,500 $2,682
The discount rate used in determining the accumulated
post-retirement benefit cost was 7.5% for 1996. The assumed health
care cost trend rates for substantially all employees used in
measuring the accumulated post-retirement benefit obligation range
from 11% in 1996 decreasing by 1% per year to an ultimate rate of 8%
per annum starting in 1999. If the health care cost trend rate
assumptions were increased by 1%, the accumulated post-retirement
benefit obligation at December 31, 1996 and 1995 would not be
significantly different.
The details of the accumulated post-retirement benefit obligation
other than pensions are as follows:
1996 1995
Retirees.......................................... $20,691 $21,752
Active employees - fully eligible................. 3,020 2,868
Other active employees............................ 10,222 8,996
33,933 33,616
Unrecognized loss................................. (6,606) (7,662)
Accumulated post-retirement benefit obligation.... $27,327 $25,954
The Company is not required to fund and has not funded any of
its accumulated post-retirement benefit obligations.
Under Canadian GAAP, post-employment benefits are accounted for
on a "pay-as-you-go" basis. Under U.S. GAAP, Statement of
Financial Accounting Standards No. 112, "Employer's Accounting
for Post-employment Benefits", requires accrual accounting for
the estimated cost of providing certain benefits to former or
inactive employees, and the employees' beneficiaries and
dependents after employment but before retirement.
(c) Employer's Accounting for Pensions
Under U.S. GAAP, in accordance with Statement of Financial
Accounting Standards No. 87, "Employer's Accounting for
Pensions", the Company would have recorded an additional
minimum liability for underfunded plans representing the excess
of the unfunded accumulated benefit obligation over the pension
plan assets. At December 31, 1996 and 1995, the additional
minimum liability would be $36.1 million and $53.6 million
respectively, and would be recorded as a reduction of the
deferred pension costs with an offsetting intangible asset of
$12.0 million and $13.1 million respectively, and a charge to
shareholders' equity of $16.2 million and $26.3 million
respectively, net of a tax benefit of $7.9 million and
$14.2 million respectively.
In addition, amortization of experience gains and losses is
included as a component of net pension cost only to the extent
that the experience gains and losses exceed 10% of the greater
of the projected benefit obligation or the market-related value
of plan assets at the beginning of the year.
(d) Accounting for income taxes
Under U.S. GAAP, Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes", requires use of the
liability method versus the deferred method prescribed under
Canadian GAAP. The liability method requires the recognition of
changes in statutory tax rates.
Refer to (e) below for differences resulting from acquisition
of Rainy River.
(e) Purchase accounting
The application of purchase accounting under Canadian and U.S.
GAAP as it relates to the acquisition of Rainy River is not
materially different except for (i) the recognition of a
liability for post-retirement benefits other than pensions at
the date of acquisition under U.S. GAAP and (ii) differences
in accounting for income taxes.
In 1995, the net effect of these two differences was to
decrease goodwill recorded relating to the acquisition of Rainy
River in the amount of $10,691, increase other long-term
liabilities in the amount of $6,628, and decrease deferred tax
liability in the amount of $17,319.
(f) Under U.S. GAAP, the interest expense related to the principal
amount of the convertible debentures is charged to income.
Under Canadian GAAP, the interest expense, net of income taxes,
related to the equity element of the convertible debentures is
charged to retained earnings.
Statement of changes in financial position
Under U.S. GAAP, certain items included as financing and
investing activities in the statement of changes in financial
position do not result in cash flows and therefore should be
excluded. For the year ended December 31, 1995, these items
relate primarily to the acquisition of Rainy River. Under U.S.
GAAP, these sections are presented as follows:
1995
Investing activities
Acquisitions........................................... $(72,740)
Capital expenditures................................... (257,243)
Other-net.............................................. 17,919
Net cash used in investing activities.................. $(312,064)
Financing activities
Issuance of common shares-net.......................... $210
Redemption of redeemable preferred shares.............. (400,000)
Issuance of debt, net of financing costs............... 391,749
Payment of debt........................................ (85,000)
Net cash used in financing activities.................. $(93,041)
19. Additional disclosures required by U.S. GAAP
Cash flows
1996 1995 1994
Cash paid during the year for
Interest (net of capitalization). $71,565 $52,718 $40,742
Income taxes.................... $8,941 $11,494 $4,902
The net changes in non-cash working capital are as follows:
1996 1995 1994
(Increase) decrease in accounts receivable. $70,728 $(48,141) $(120,774)
(Increase) decrease in inventories......... (93,596) (44,216) 39,668
Increase in other current assets........... (3,834) (626) (309)
Increase (decrease) in accounts payable and
other current liabilities................ (14,518) 28,714 6,166
Other-net.................................. (13,715) 545 2,726
$(54,935) $(63,724) $(72,523)
Allowance for doubtful accounts
The allowance for doubtful accounts is $4,673 and $4,618 at
December 31, 1996 and 1995, respectively.
Depreciation and amortization
The components of depreciation and amortization are as follows:
1996 1995 1994
Property, plant and equipment........... $152,139 $88,681 $78,532
Goodwill................................ 21,609 14,756 13,412
Pre-production costs.................... 1,816 1,884 1,602
$175,564 $105,321 $93,546
Rental expense
Rental expense under the Company's operating leases totalled
$11,161, $8,975 and $7,846 for the years ended December 31, 1996,
1995 and 1994 respectively.
Accrued and other current liabilities
The major components of accrued and other current liabilities are as
follows:
1996 1995
Accrued wages................................. $7,395 $8,658
Accrued interest.............................. 5,081 7,158
Accrued vacation pay.......................... 28,867 31,509
Taxes and stumpage dues....................... 23,176 10,259
Other......................................... 28,970 32,448
$93,489 $90,032
Selected pro forma financial information in accordance with U.S.
GAAP
The following is selected pro forma financial information of the
Company as though the acquisition of Rainy River had been made as of
January 1, 1995 and 1994, respectively. Refer to Note 3 for further
details.
Pro forma Pro forma
1995 1994
(unaudited)
Net sales.......................... $2,690,460 $1,900,520
Net income (loss).................. $259,334 $(105,491)
Net income (loss) per common
share (in dollars)................ $2.49 $(1.01)
The above pro forma financial information is not necessarily
indicative of the actual results of operations that would have
occurred had the purchase actually been made at the beginning of
1995 and 1994.
20. Subsequent event
On February 14, 1997, the Boards of Directors of Abitibi-Price Inc.
and the Company approved a merger arrangement to amalgamate
Abitibi-Price Inc. and the Company. The new name of the combined
Company is expected to be Abitibi-Consolidated Inc.
Under the arrangement, each common share of Abitibi-Price Inc. will
be exchanged for one common share of Abitibi-Consolidated Inc. and
each common share of the Company will be exchanged for 1.0062 common
shares of Abitibi-Consolidated Inc.
The transaction is expected to close in the second quarter of 1997
subject to, among other things, necessary approvals from Canadian
and U.S. regulatory authorities and from each company's
shareholders. In addition, the Company's debt instruments contain
restrictions and/or covenants that would be breached upon
amalgamation. The Company intends to launch a tender offer bid to
redeem both senior notes and remove all restrictions and covenants
attached thereto. The term, revolving and reducing credit facilities
will be replaced upon closing of the amalgamation.
