-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WRYJMojIySpziiCWWr5ng2sp5xvz6E/pAl8O1EU0fURr5YyDFXfe9uiJXZnMxgUc 0fSeOC1n35E816GsRL+mYw== 0001047469-99-023881.txt : 19990615 0001047469-99-023881.hdr.sgml : 19990615 ACCESSION NUMBER: 0001047469-99-023881 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990611 FILER: COMPANY DATA: COMPANY CONFORMED NAME: STONE CONTAINER CORP CENTRAL INDEX KEY: 0000094610 STANDARD INDUSTRIAL CLASSIFICATION: PAPERBOARD MILLS [2631] IRS NUMBER: 362041256 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 001-03439 FILM NUMBER: 99644774 BUSINESS ADDRESS: STREET 1: 150 N MICHIGAN AVE CITY: CHICAGO STATE: IL ZIP: 60601 BUSINESS PHONE: 3123466600 MAIL ADDRESS: STREET 1: 18TH FL, CORPORATE ACCOUNTING STREET 2: 150 N MICHIGAN AVE CITY: CHICAGO STATE: IL ZIP: 60601 10-K/A 1 10-K/A 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, 1998 ( ) 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 of incorporation or organization) (I.R.S. Employer Identification) 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 Title of each class on which registered ------------------- ----------------------- $1.75 Series E Cumulative Convertible Exchangeable Preferred Stock 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 Series B 10-3/4% Senior Subordinated Debentures due April 1, 2002 and 1-1/2% Supplemental Interest Certificates 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 Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No __ 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. [ ] All outstanding shares of the Registrant's common stock are owned by Smurfit-Stone Container Corporation.
DOCUMENTS INCORPORATED BY REFERENCE: Part of Form 10-K Document Into Which Document is Incorporated - -------- ----------------------------------- Sections of the Registrant's Proxy Statement, to be filed on or before April 30, 1999, for the Annual Meeting of Stockholders to be held on May 17, 1999. Part III
The registrant hereby amends the following items, financial statements, exhibits or other portions of its Annual Report for 1998 on Form 10-K as set forth in the pages attached hereto. PART IV Item 14(a)2. Financial Statement Schedules Financial Statements of Abitibi-Consolidated Inc. Item 14(d). Separate Financial Statements of Affiliates ABITIBI-CONSOLIDATED INC. CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 1998, 1997 and 1996 AUDITORS' REPORT TO THE DIRECTORS OF ABITIBI-CONSOLIDATED INC. We have audited the consolidated balance sheets of ABITIBI-CONSOLIDATED INC. as at December 31, 1998 and 1997 and the consolidated statements of earnings, retained earnings and changes in cash position for each of the three years in the period ended December 31, 1998. These consolidated 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 the company as at December 31, 1998 and 1997 and the results of its operations and the changes in its cash position for each of the three years in the period ended December 31, 1998 in accordance with Canadian generally accepted accounting principles. PricewaterhouseCoopers LLP CHARTERED ACCOUNTANTS February 2, 1999 Montreal, Quebec, Canada ABITIBI-CONSOLIDATED INC. CONSOLIDATED EARNINGS YEAR ENDED DECEMBER 31 (IN MILLIONS OF CANADIAN DOLLARS, EXCEPT PER SHARE AMOUNTS)
1998 1997 1996 ----------------------------------- Gross sales $ 3,657 $ 4,166 $ 4,456 Freight expenses 316 419 374 ----------------------------------- NET SALES 3,341 3,747 4,082 Cost of sales 2,707 3,127 3,072 Depreciation and amortization 351 325 301 Selling, general and administrative expenses 168 176 185 Restructuring and other unusual expenses (NOTE 4) 67 10 28 Non-recurring expenses relating to the amalgamation (NOTE 1(a)) - 77 - ----------------------------------- OPERATING PROFIT FROM CONTINUING OPERATIONS 48 32 496 Interest expense on long-term debt 132 115 113 Debt extinguishment costs and write-off of redundant fixed assets relating to the amalgamation (NOTE 1(a)) - 98 - Unusual items (NOTE 5) 16 - (27) Other expense (income), net (NOTE 6) 6 - (6) ----------------------------------- EARNINGS (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (106) (181) 416 Recovery of (provision for) income taxes (NOTE 7) 25 49 (154) ----------------------------------- EARNINGS (LOSS) FROM CONTINUING OPERATIONS (81) (132) 262 EARNINGS FROM DISCONTINUED OPERATIONS (NOTE 12) 50 11 6 ----------------------------------- NET EARNINGS (LOSS) FOR THE YEAR $ (31) $ (121) $ 268 ----------------------------------- ----------------------------------- PER COMMON SHARE Earnings (loss) from continuing operations $ (0.42) $ (0.68) $ 1.35 Net earnings (loss) for the year Basic (0.16) (0.62) 1.39 Fully diluted (0.16) (0.62) 1.37 WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING (millions) Basic 192.0 194.0 193.4 Fully diluted 196.5 197.5 197.2 FULLY DILUTED NUMBER OF COMMON SHARES OUTSTANDING AT END OF YEAR (millions) 195.1 197.5 197.3 ----------------------------------- -----------------------------------
1
ABITIBI-CONSOLIDATED INC. CONSOLIDATED RETAINED EARNINGS YEAR ENDED DECEMBER 31 (IN MILLIONS OF CANADIAN DOLLARS) 1998 1997 1996 -------------------------------------- RETAINED EARNINGS, BEGINNING OF YEAR $ 589 $ 804 $ 572 Net earnings (loss) for the year (31) (121) 268 Dividends declared (77) (67) (36) Transaction costs of amalgamation, net of deferred income tax recovery of $8 - (27) - Purchase of common shares in excess of average stated capital (Note 14(b)) (25) - - -------------------------------------- RETAINED EARNINGS, END OF YEAR $ 456 $ 589 $ 804 -------------------------------------- --------------------------------------
2 ABITIBI-CONSOLIDATED INC.
CONSOLIDATED BALANCE SHEETS DECEMBER 31 (IN MILLIONS OF CANADIAN DOLLARS) 1998 1997 ------------------------------------ ASSETS CURRENT ASSETS Cash and deposits $ 151 $ 46 Accounts receivable (NOTE 8) 554 481 Inventories (NOTE 9) 423 417 Prepaid expenses 32 28 Current assets of discontinued operations (NOTE 12) - 232 ------------------------------------ 1,160 1,204 FIXED ASSETS (NOTE 10) 4,407 4,104 RESTRICTED CASH (NOTE 17(a)) 230 - OTHER ASSETS (NOTE 11) 156 43 DEFERRED PENSION COST 166 170 GOODWILL 716 733 NON-CURRENT ASSETS OF DISCONTINUED OPERATIONS (NOTE 12) - 41 ------------------------------------ $ 6,835 $ 6,295 ------------------------------------ ------------------------------------ LIABILITIES CURRENT LIABILITIES Accounts payable and accrued liabilities Continuing operations $ 768 $ 663 Discontinued operations - 92 Dividends payable 19 19 Current portion of long-term debt Recourse (NOTE 13(a)) 44 90 Non-recourse (NOTE 13(b)) 18 17 ------------------------------------ 849 881 LONG-TERM DEBT Recourse (NOTE 13(a)) 2,087 1,338 Non-recourse (NOTE 13(b)) 310 294 DEFERRED INCOME TAXES 583 594 ------------------------------------ 3,829 3,107 ------------------------------------ SHAREHOLDERS' EQUITY COMMON SHARES (NOTE 14(b)) 2,550 2,599 RETAINED EARNINGS 456 589 ------------------------------------ 3,006 3,188 ------------------------------------ $ 6,835 $ 6,295 ------------------------------------ ------------------------------------
APPROVED BY THE BOARD - ----------------------- ------------------------ ----------- James Doughan Ronald Y. Oberlander John Tory Director Director Director 3 ABITIBI-CONSOLIDATED INC. CHANGES IN CONSOLIDATED CASH POSITION YEAR ENDED DECEMBER 31 (IN MILLIONS OF CANADIAN DOLLARS)
1998 1997 1996 -------------------------------------- CONTINUING OPERATING ACTIVITIES Earnings (loss) from continuing operations $ (81) $ (132) $ 262 Depreciation 328 304 279 Goodwill amortization 23 21 22 (Recovery of) provision for deferred income taxes (27) (55) 124 Restructuring expenses 40 10 28 Non-recurring expenses relating to the amalgamation - 115 - Other non-cash items 33 5 (6) -------------------------------------- 316 268 709 Changes in non-cash operating working capital components of continuing operations 19 123 (93) -------------------------------------- Cash generated by continuing operating activities 335 391 616 -------------------------------------- FINANCING ACTIVITIES OF CONTINUING OPERATIONS Increase in long-term debt and bank indebtedness 1,713 1,502 483 Repayment of long-term debt and bank indebtedness (1,109) (1,373) (393) Purchase of common shares for cancellation (75) - - Debt issuance costs (8) - - Transaction costs of amalgamation - (35) - Preferred shares redeemed and cancelled - (10) (100) Issuance of common shares on conversion of convertible debentures - - 25 Retirement of convertible debentures - - (24) Other - 7 (1) -------------------------------------- Cash generated by (used in) financing activities of continuing operations 521 91 (10) -------------------------------------- INVESTING ACTIVITIES OF CONTINUING OPERATIONS Additions to fixed assets (250) (437) (670) Acquisition (NOTE 3) (408) - - Restricted cash (NOTE 17(a)) (230) - - (Increase) decrease in other assets (32) 24 12 -------------------------------------- Cash used in investing activities of continuing operations (920) (413) (658) -------------------------------------- DIVIDENDS PAID TO COMMON SHAREHOLDERS (77) (57) (36) -------------------------------------- CASH GENERATED BY (USED IN) CONTINUING OPERATIONS (141) 12 (88) Cash generated by (used in) discontinued operations 246 (42) (24) -------------------------------------- INCREASE (DECREASE) IN CASH DURING THE YEAR 105 (30) (112) CASH AND DEPOSITS, BEGINNING OF YEAR 46 76 188 -------------------------------------- CASH AND DEPOSITS, END OF YEAR $ 151 $ 46 $ 76 -------------------------------------- --------------------------------------
4 ABITIBI-CONSOLIDATED INC.
CONSOLIDATED BUSINESS SEGMENTS (5) YEAR ENDED DECEMBER 31 (IN MILLIONS OF CANADIAN DOLLARS) NON- SELLING, RECURRING GENERAL AND DEPRECIATION AND COST OF GROSS ADMINISTRATIVE AND RESTRUCTURING NET SALES SALES PROFIT EXPENSES AMORTIZATION EXPENSES ---------------------------------------------------------------------------- 1998 Newsprint $ 1,595 $ 1,248 $ 347 $ 101 $ 203 $ 40 Value-added groundwood paper 922 687 235 61 135 - ---------------------------------------------------------------------------- Total paper (1) 2,517 1,935 582 162 338 40 Lumber and kraft pulp (3) 208 171 37 10 13 - Newsprint purchased and resold and commissions (1) & (2) 616 601 15 (4) (4) - - Synergy incentive - - - - - - Year 2000 compliance expenses - - - - - - ---------------------------------------------------------------------------- Continuing operations $ 3,341 $ 2,707 $ 634 $ 168 $ 351 $ 40 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- 1997 Newsprint $ 1,830 $ 1,511 $ 319 $ 119 $ 195 $ - Value-added groundwood paper 1,139 904 235 54 118 10 Non-recurring expenses relating to the amalgamation - - - - - 77 ---------------------------------------------------------------------------- Total paper (1) 2,969 2,415 554 173 313 87 Lumber and kraft pulp(3) 243 192 51 10 12 - Newsprint purchased and resold and commissions (1) & (2) 535 520 15 (7) (4) - - ---------------------------------------------------------------------------- Continuing operations $ 3,747 $ 3,127 $ 620 $ 176 $ 325 $ 87 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- 1996 Newsprint $ 1,950 $ 1,394 $ 556 $ 117 $ 182 $ 15 Value-added groundwood paper 1,237 841 396 65 108 13 ---------------------------------------------------------------------------- Total paper (1) 3,187 2,235 952 182 290 28 Lumber and kraft pulp(3) 192 153 39 6 11 - Newsprint purchased and resold and commissions (1) & (2) 703 684 19 (3) (4) - - ---------------------------------------------------------------------------- Continuing operations $ 4,082 $ 3,072 $ 1,010 $ 185 $ 301 $ 28 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- SYNERGY INCENTIVE AND YEAR 2000 COMPLIANCE OPERATING PAPER PAPER FIXED ASSET EXPENSES PROFIT (LOSS) PRODUCTION SALES ADDITIONS TOTAL ASSETS ---------------------------------------------------------------------------- (000s of tonnes) 1998 Newsprint $ - $ 3 2,125 2,129 $ 515 $ 3,842 Value-added groundwood paper - 39 985 1,018 75 2,632 ---------------------------------------------------------------------------- Total paper (1) - 42 3,110 3,147 590 6,474 Lumber and kraft pulp (3) - 14 - - 21 301 Newsprint purchased and resold and commissions (1) & (2) - 19 729 728 - 60 Synergy incentive 20 (20) - - - - Year 2000 compliance expenses 7 (7) - - - - --------------------------------------------------------------------------- Continuing operations $ 27 $ 48 3,839 3,875 $ 611 $ 6,835 --------------------------------------------------------------------------- --------------------------------------------------------------------------- 1997 Newsprint $ - $ 5 2,756 2,825 $ 243 $ 3,386 Value-added groundwood paper - 53 1,306 1,340 168 2,324 Non-recurring expenses relating to the amalgamation - (77) - - - - --------------------------------------------------------------------------- Total paper (1) - (19) 4,062 4,165 411 5,710 Lumber and kraft pulp(3) - 29 - - 26 287 Newsprint purchased and resold and commissions (1) & (2) - 22 726 728 - 25 --------------------------------------------------------------------------- Continuing operations $ - $ 32 4,788 4,893 $ 437 $ 6,022 --------------------------------------------------------------------------- --------------------------------------------------------------------------- 1996 Newsprint $ - $ 242 2,450 2,444 Value-added groundwood paper - 210 1,334 1,211 ---------------------------------------------------- Total paper (1) - 452 3,784 3,655 Lumber and kraft pulp(3) - 22 - - Newsprint purchased and resold and commissions (1) & (2) - 22 688 690 ---------------------------------------------------- Continuing operations $ - $ 496 4,472 4,345 ---------------------------------------------------- ----------------------------------------------------
(1) Prior to October 15, 1998, the Paper Business consisted of the Company's 16 wholly-owned paper mills and 50% of the Company's two newsprint joint venture mills. After October 14, 1998, the Paper Business also included the Company's Snowflake, Arizona mill which was acquired on October 15, 1998 (see Note 3). (2) The Newsprint purchased and resold and commissions business segment relates to sales of the Company's joint venture partners' share of production of the newsprint joint venture mills and the 387,000 tonnes of newsprint from Boise Cascade's DeRidder, Louisiana mill. Also included are commissions received on sales of 42,000 (1997 - 160,000; 1996 - 154,000) tonnes of newsprint sold for Pine Falls Paper Company and until October 15, 1998, 230,000 (1997 - 245,000; 1996 - 260,000) tonnes of newsprint sold for Stone Container Corporation's Snowflake, Arizona mill. The Company's contact to sell for Pine Falls Paper Company ended in February 1998. The business segment also included the Company's lumber and panelboard brokerage operations which were discontinued in the third quarter of 1996. Sales for lumber and panelboard were $373 million in 1996. Operating profit related to lumber and panelboard was $2 million in 1996. (3) In 1998, lumber production was 412 million (1997 - 415 million; 1996 - 322 million) board feet. In 1998, lumber sales were 422 million (1997 - 410 million; 1996 - 327 million) board feet. In 1998, pulp production was 60,000 (1997 - 120,000; 1996 - 87,050) tonnes. In 1998, market kraft pulp sales were 56,000 (1997 - 115,000; 1996 - 100,000) tonnes. (4) Selling, general and administrative expenses include commission income of $10 million (1997 - $12 million; 1996 - $14 million). (5) The operations of the business are managed using these business segments. ANTIBI-CONSOLIDATED INC.
CONSOLIDATED GEOGRAPHIC INFORMATION (1) YEAR ENDED DECEMBER 31 (IN MILLIONS OF CANADIAN DOLLARS) NON- SELLING, RECURRING GENERAL AND DEPRECIATION AND COST OF GROSS ADMINISTRATIVE AND RESTRUCTURING NET SALES SALES PROFIT EXPENSES AMORTIZATION EXPENSES --------------------------------------------------------------------------- 1998 Canada $ 290 $ 226 $ 64 $ 17 $ 35 $ - U.S.A. 2,281 1,866 415 107 227 20 International (2) 770 615 155 44 89 20 Synergy incentive - - - - - - Year 2000 compliance expenses - - - - - - ---------------------------------------------------------------------------- Continuing operations $ 3,341 $ 2,707 $ 634 $ 168 $ 351 $ 40 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- 1997 Canada $ 325 $ 256 $ 69 $ 17 $ 29 $ 1 U.S.A. 2,577 2,164 413 113 215 8 International (2) 845 707 138 46 81 1 Non-recurring expenses relating to the amalgamation - - - - - 77 ---------------------------------------------------------------------------- Continuing operations $ 3,747 $ 3,127 $ 620 $ 176 $ 325 $ 87 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- 1996 Canada $ 361 $ 251 $ 110 $ 18 $ 31 $ 3 U.S.A. 3,043 2,310 733 133 216 20 International (2) 678 511 167 34 54 5 ---------------------------------------------------------------------------- Continuing operations $ 4,082 $ 3,072 $ 1,010 $ 185 $ 301 $ 28 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- SYNERGY INCENTIVE AND YEAR 2000 TOTAL FIXED COMPLIANCE OPERATING PAPER PAPER FIXED ASSET ASSETS AND EXPENSES PROFIT (LOSS) PRODUCTION SALES ADDITIONS GOODWILL ----------------------------------------------------------------------------- (000s of tonnes) 1998 Canada $ - $ 12 2,306 278 $ 22 $ 445 U.S.A. - 61 1,288 2,600 532 3,497 International (2) - 2 245 997 57 1,181 Synergy incentive 20 (20) - - - - Year 2000 compliance expenses 7 (7) - - - - ----------------------------------------------------------------------------- Continuing operations $ 27 $ 48 3,839 3,875 $ 611 $ 5,123 ----------------------------------------------------------------------------- ----------------------------------------------------------------------------- 1997 Canada $ - $ 22 3,438 302 $ 43 $ 441 U.S.A. - 77 1,102 3,339 291 3,203 International (2) - 10 248 1,252 103 1,193 Non-recurring expenses relating to the amalgamation - (77) - - - - ----------------------------------------------------------------------------- Continuing operations $ - $ 32 4,788 4,893 $ 437 $ 4,837 ----------------------------------------------------------------------------- ----------------------------------------------------------------------------- 1996 Canada $ - $ 58 3,188 249 U.S.A. - 364 1,044 2,840 International (2) - 74 240 1,256 ------------------------------------------------ Continuing operations $ - $ 496 4,472 4,345 ------------------------------------------------ ------------------------------------------------
(1) Geographic information reflects the ultimate sales destination for the products. Sales and cost of sales by manufacturing location are as follows: (2) International markets consist of all markets outside Canada and the United States. (3) All of the Company's production of lumber occurs in Canada. In 1998, 70% (1997 - 70%; 1996 - 55%) of lumber was sold in the United States and 30% (1997 - 30%; 1996 - 45%) was sold in Canada.
1998 1997 1996 ------------------------------------------------------------------------ COST OF COST OF COST OF NET SALES SALES NET SALES SALES NET SALES SALES ------------------------------------------------------------------------ Canada $ 2,028 $ 1,579 $ 2,656 $ 2,115 $ 2,909 $ 2,074 U.S.A. 1,095 949 875 837 927 821 International 218 179 216 175 246 177 ------------------------------------------------------------------------ $ 3,341 $ 2,707 $ 3,747 $ 3,127 $ 4,082 $ 3,072 ------------------------------------------------------------------------ ------------------------------------------------------------------------
ABITIBI-CONSOLIDATED INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 (TABULAR AMOUNTS IN MILLIONS OF CANADIAN DOLLARS) 1 SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES These financial statements are expressed in Canadian dollars and are prepared in accordance with Canadian generally accepted accounting principles (Canadian GAAP) which, in the case of Abitibi-Consolidated Inc., differ in certain respects from those in the United States as explained in Note 20. (a) BASIS OF PRESENTATION The amalgamation of Abitibi-Price Inc. (Abitibi-Price) and Stone- Consolidated Corporation (Stone-Consolidated) was approved by the shareholders of the companies effective May 30, 1997. On amalgamation, each common share of Abitibi-Price was exchanged for one common share of Abitibi-Consolidated Inc. and each common share of Stone-Consolidated was exchanged for 1.0062 common shares of Abitibi-Consolidated Inc. All common share numbers have been restated to reflect this share exchange ratio. In these financial statements, the amalgamation has been accounted for as a pooling of interests and, as a result, the consolidated balance sheets, statements of earnings, retained earnings and changes in cash position have been prepared as though Abitibi-Price and Stone-Consolidated had been combined since their inception. Under this method, the assets and liabilities have been recorded at historical carrying values and the earnings of Abitibi-Consolidated Inc. are comprised of the earnings of Abitibi-Price and Stone-Consolidated. The net assets of each combining company as at May 30, 1997 were as follows:
ABITIBI- PRICE STONE-CONSOLIDATED ----------------------------------- Total assets $ 2,610 $ 3,924 Total liabilities 1,552 1,685 ----------------------------------- Net assets $ 1,058 $ 2,239 ----------------------------------- -----------------------------------
The net sales and losses of each combining company for the period January 1, 1997 to May 30, 1997 were as follows:
ABITIBI- PRICE STONE-CONSOLIDATED ----------------------------------- Net sales $ 973 $ 781 Net loss $ 30 $ 70 ----------------------------------- -----------------------------------
Upon amalgamation, the issued and then outstanding common shares of Abitibi-Consolidated Inc. totalled 193.9 million of which approximately 46% were held by the former shareholders of Abitibi-Price and approximately 54% were held by the former shareholders of Stone-Consolidated. The quoted market value of these shares, on the first trading day after amalgamation, was $4.8 billion. 7 ABITIBI-CONSOLIDATED INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ...CONTINUED DECEMBER 31, 1998, 1997 AND 1996 (TABULAR AMOUNTS IN MILLIONS OF CANADIAN DOLLARS) 1 SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES ...CONTINUED Charges of $175 million relating to the amalgamation were expensed in 1997 as follows:
Employee severance and related expenses $ 35 Moving expenses 14 Pension plan settlement expense 15 Other 13 ------------------ 77 ------------------ Debt extinguishment costs 59 Write-off of redundant fixed assets 39 ------------------ 98 ------------------ $ 175 ------------------ ------------------
These financial statements consolidate the accounts of Abitibi-Consolidated Inc., its subsidiary companies, the Company's proportionate interest in its U.S. joint venture partnerships comprising Augusta Newsprint Company (Augusta) - 50%, Alabama River Newsprint Company (Alabama) - 50% and Alabama River Recycling Company (Alabama Recycling) - 50%, Voyageur Panel Limited - 21%, Star Lake Hydro Partnership - 51% and the Company's investments in joint venture sawmills in Quebec. (b) USE OF ESTIMATES 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 the disclosure of contingent assets and liabilities at the date of the financial statements and the amounts of revenues and expenses for the reported period. Actual results could differ from those estimates. (c) TRANSLATION OF FOREIGN CURRENCIES Assets and liabilities denominated in foreign currencies are translated at year-end exchange rates. Revenues and expenses are translated at prevailing market rates. The net U.S. dollar assets of self-sustaining joint ventures and subsidiaries hedge a portion of the Company's U.S. dollar debt. Any remaining U.S. dollar debt is generally hedged by future U.S. dollar revenue. Exchange gains or losses on U.S. dollar debt, hedged by future revenue, are deferred and included in earnings in the period that the revenue is earned. Realized gains and losses on option and forward exchange rate contracts that hedge anticipated revenues are included in earnings when the revenue is earned. (d) INVENTORIES Inventories are valued at the lower of average cost and net recoverable amount. Cost is calculated using the absorption cost method including depreciation. 8 ABITIBI-CONSOLIDATED INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ...CONTINUED DECEMBER 31, 1998, 1997 AND 1996 (TABULAR AMOUNTS IN MILLIONS OF CANADIAN DOLLARS) 1 SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES ...CONTINUED (e) FIXED ASSETS AND DEPRECIATION Fixed assets are recorded at cost, including capitalized interest and preproduction costs. Investment tax credits and government capital grants received reduce the cost of the related fixed assets. Depreciation is provided at rates which amortize the fixed asset cost over the productive life of the asset. The principal fixed asset category is production equipment which is generally depreciated over 20 years on a straight-line basis. (f) ENVIRONMENTAL COSTS Environmental expenditures that continue to benefit the Company are recorded at cost and capitalized as part of fixed assets. Depreciation is charged to income over the estimated future benefit period of the asset. Environmental expenditures that do not provide a benefit to the Company in future periods are expensed as incurred. (g) PENSION COSTS Earnings are charged with the cost of pension benefits earned by employees as services are rendered. Pension expense is determined using management's best estimates of expected investment yields, wage and salary escalation, mortality rates, terminations and retirement ages. Adjustments arising from pension plan amendments, experience gains and losses, and assumption changes are amortized to earnings over the average remaining service lives of the members. Any difference between pension expense (determined on an accounting basis) and funding (as required by regulatory authorities) gives rise to deferred pension costs. Employee post-retirement costs are expensed on a "pay-as-you-go" basis. (h) GOODWILL Goodwill is recorded at the lower of book value and net recoverable amount and is amortized over its estimated period of future benefit - generally 40 years. Any impairment in value is recorded in earnings when it is identified based on management's projected undiscounted future cash flows from the related operations. (i) INCOME TAXES Income taxes are recorded by the deferral method of accounting using historical income tax rates. Deferred income taxes result from differences in the timing of income and expense recognition for accounting and tax purposes. 9 ABITIBI-CONSOLIDATED INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ...CONTINUED DECEMBER 31, 1998, 1997 AND 1996 (TABULAR AMOUNTS IN MILLIONS OF CANADIAN DOLLARS) 2 NEWSPRINT JOINT VENTURES The Company's investments in newsprint joint ventures are accounted for using the proportionate consolidation method. The Company's results of operations, changes in cash position and financial position include the impact of the joint ventures as follows:
1998 1997 ------------------------------------ ------------------------------------- PROPOR- PROPO- TIONATE TIONATE EQUITY ACCOUNTING EQUITY ACCOUNTING ACCOUNTING FOR JOINT ACCOUNTING FOR JOINT FOR JOINT INCREASE VENTURES AS FOR JOINT INCREASE VENTURES AS VENTURES (DECREASE) REPORTED VENTURES (DECREASE) REPORTED ------------------------------------ ------------------------------------- CONSOLIDATED EARNINGS STATEMENTS FROM CONTINUING OPERATIONS Net sales $ 3,341 $ - $ 3,341 $ 3,747 $ - $ 3,747 Operating profit (loss) (17) 65 48 (3) 35 32 Income from joint ventures 39 (39) - 9 (9) - Interest expense (105) (27) (132) (89) (26) (115) Amalgamation costs - - - (98) - (98) Unusual items and other income and expense, net 21 1 22 - - - Earnings (loss) before income taxes (106) - (106) (181) - (181) Net earnings (loss) from continuing operations (81) - (81) (132) - (132) ------------------------------------ ------------------------------------- ------------------------------------ ------------------------------------- CHANGES IN CONSOLIDATED CASH POSITION FROM CONTINUING OPERATIONS Operating activities $ 277 $ 58 $ 335 $ 362 $ 29 $ 391 Financing activities 519 2 521 113 (22) 91 Investing activities (873) (47) (920) (406) (7) (413) Dividends paid (77) - (77) (57) - (57) ------------------------------------ ------------------------------------- Cash generated by (used in) continuing operations $ (154) $ 13 $ (141) $ 12 $ - $ 12 ------------------------------------ ------------------------------------- ------------------------------------ ------------------------------------- CONSOLIDATED BALANCE SHEETS Current assets $ 1,122 $ 38 $ 1,160 $ 1,184 $ 20 $ 1,204 Fixed assets 4,034 373 4,407 3,734 370 4,104 Investments in joint ventures 113 (113) - 103 (103) - Deferred pension cost 172 (6) 166 176 (6) 170 Other assets 1,093 9 1,102 807 10 817 ------------------------------------ ------------------------------------ TOTAL ASSETS $ 6,534 $ 301 $ 6,835 $ 6,004 $ 291 $ 6,295 ------------------------------------ ------------------------------------- ------------------------------------ ------------------------------------- Current liabilities $ 823 $ 26 $ 849 $ 863 $ 18 $ 881 Long-term debt Recourse 2,087 - 2,087 1,338 - 1,338 Non-recourse 35 275 310 21 273 294 Deferred income taxes 583 - 583 594 - 594 Shareholders' equity 3,006 - 3,006 3,188 - 3,188 ------------------------------------ ------------------------------------- TOTAL LIABILITIES AND EQUITY $ 6,534 $ 301 $ 6,835 $ 6,004 $ 291 $ 6,295 ------------------------------------ ------------------------------------- ------------------------------------ -------------------------------------
1996 ------------------------------------ PROPO- TIONATE EQUITY ACCOUNTING ACCOUNTING FOR JOINT FOR JOINT INCREASE VENTURES AS VENTURES (DECREASE) REPORTED ------------------------------------ CONSOLIDATED EARNINGS STATEMENTS FROM CONTINUING OPERATIONS Net sales $ 4,082 $ - $ 4,082 Operating profit (loss) 433 63 496 Income from joint ventures 38 (38) - Interest expense (88) (25) (113) Amalgamation costs - - - Unusual items and other income and expense, net 33 - 33 Earnings (loss) before income taxes 416 - 416 Net earnings (loss) from continuing operations 262 - 262 ------------------------------------ CHANGES IN CONSOLIDATED CASH POSITION FROM CONTINUING OPERATIONS Operating activities $ 542 $ 74 $ 616 Financing activities 87 (97) (10) Investing activities (651) (7) (658) Dividends paid (36) - (36) ------------------------------------ CASH GENERATED BY (USED IN) CONTINUING OPERATIONS $ (58) $ (30) $ (88) ------------------------------------ ------------------------------------
10 ABITIBI-CONSOLIDATED INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ...CONTINUED DECEMBER 31, 1998, 1997 AND 1996 (TABULAR AMOUNTS IN MILLIONS OF CANADIAN DOLLARS) 3 ACQUISITION SNOWFLAKE, ARIZONA NEWSPRINT MILL On October 15, 1998, the Company acquired Stone Container Inc.'s (parent company of Stone Container (Canada) Inc.) Snowflake, Arizona, newsprint mill. The purchase method was used to account for the acquisition and the results of operations of the Snowflake mill are included from the date of acquisition. The allocation of the purchase price was as follows: Assets acquired Working capital $ 47 Fixed assets 361 ------------------- Net assets acquired at fair value $ 408 ------------------- ------------------- Cash consideration paid $ 408 ------------------- ------------------- 4 RESTRUCTURING AND OTHER UNUSUAL EXPENSES 1998 1997 1996 -------------------------------------- Machine closures and related costs $ 40 $ 10 $ - Remuneration related to synergy incentive 20 - - Year 2000 compliance expenses 7 - - Thermo-mechanical pulping conversions and related costs - - 28 -------------------------------------- $ 67 $ 10 $ 28 -------------------------------------- -------------------------------------- 5 UNUSUAL ITEMS 1998 1997 1996 -------------------------------------- Provision for judgment relating to Alabama River Newsprint Company lawsuit (Note 18(b)) $ 29 $ - $ - Net proceeds from insurance claims relating to assets destroyed by flooding at the Kenogami mill and hydro plant and Port Alfred mill (19) - (27) Unsuccessful acquisition costs 6 - - -------------------------------------- $ 16 $ - $ (27) -------------------------------------- --------------------------------------
11 ABITIBI-CONSOLIDATED INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ...CONTINUED DECEMBER 31, 1998, 1997 AND 1996 (TABULAR AMOUNTS IN MILLIONS OF CANADIAN DOLLARS) 6 OTHER EXPENSE (INCOME), NET
1998 1997 1996 -------------------------------------- Interest income $ (19) $ (13) $ (14) Discounts on sales of accounts receivable (Note 8) 12 6 11 Other 13 7 (3) -------------------------------------- $ 6 $ - $ (6) -------------------------------------- --------------------------------------
7 INCOME TAXES The Company's recovery of (provision for) income taxes and effective income tax rates are as follows:
1998 1997 1996 --------------------------------------- Earnings (loss) from continuing operations before income taxes $ (106) $ (181) $ 416 Recovery of (provision for) income taxes 25 49 (154) Effective income tax rate 24% 27% 37% --------------------------------------- --------------------------------------- Reconciliation to statutory tax rate: Average combined Canadian federal/provincial income tax rate 38% 39% 39% Manufacturing and processing allowances (7) (7) (4) Non-deductible goodwill amortization (8) (5) 2 Canadian large corporations tax (10) (5) 2 Difference in tax rates for foreign subsidiaries 3 2 - Other 8 3 (2) --------------------------------------- Effective income tax rate 24% 27% 37% --------------------------------------- ---------------------------------------
8 ACCOUNTS RECEIVABLE The Company has an ongoing program to sell accounts receivable, with minimal recourse, to major banks pursuant to sale agreements. The Company acts as a service agent and administers the collection of the accounts receivable sold pursuant to these agreements. At December 31, 1998, the banks owned $223 million (1997 - $287 million) of such receivables which are not reflected in accounts receivable. The maximum credit risk exposure to the Company is approximately $16 million (1997 - $17 million). 12 ABITIBI-CONSOLIDATED INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ...CONTINUED DECEMBER 31, 1998, 1997 AND 1996 (TABULAR AMOUNTS IN MILLIONS OF CANADIAN DOLLARS) 9 INVENTORIES
1998 1997 ----------------------------------- Finished goods $ 118 $ 134 Materials and supplies 224 200 Pulpwood 81 83 ----------------------------------- $ 423 $ 417 ----------------------------------- -----------------------------------
10 FIXED ASSETS
1998 1997 --------------------------------- --------------------------------- ACCUMULATED NET BOOK ACCUMULATED NET BOOK COST DEPRECIATION VALUE COST DEPRECIATION VALUE --------------------------------- --------------------------------- Property, plant and equipment $ 6,914 $ 2,554 $ 4,360 $ 6,281 $ 2,226 $ 4,055 Timberlands 74 27 47 74 25 49 --------------------------------- --------------------------------- $ 6,988 $ 2,581 $ 4,407 $ 6,355 $ 2,251 $ 4,104 --------------------------------- --------------------------------- --------------------------------- ---------------------------------
During the year, $2 million (1997 - $7 million; 1996 - $17 million) of interest was capitalized to fixed assets. 11 OTHER ASSETS
1998 1997 ------------------------------------ Deferred financing charges $ 60 $ 14 Exchange loss on long-term debt hedged by future revenue 96 27 Other - 2 ------------------------------------ $ 156 $ 43 ------------------------------------ ------------------------------------
13 ABITIBI-CONSOLIDATED INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ...CONTINUED DECEMBER 31, 1998, 1997 AND 1996 (TABULAR AMOUNTS IN MILLIONS OF CANADIAN DOLLARS) 12 DISCONTINUED OPERATIONS In December 1997, the Company's Office Products Division was reclassified as discontinued operations. The following amounts related to discontinued operations have been included in these financial statements:
1998 1997 ------------------------------------ Cash $ - $ 15 Accounts receivable - 111 Inventories - 104 Prepaid expenses - 2 ------------------------------------ Current assets of discontinued operations $ - $ 232 ------------------------------------ ------------------------------------ Fixed and other assets $ - $ 11 Goodwill - 30 ------------------------------------ Non-current assets of discontinued operations $ - $ 41 ------------------------------------ ------------------------------------ 1998 1997 1996 --------------------------------------- Sales $ 656 $ 817 $ 647 --------------------------------------- --------------------------------------- Earnings from operations, net of income tax expenses of $2 million (1997 - $7 million; 1996 - $4 million) $ 5 $ 11 $ 6 Gain on disposition, net of income tax expense of $18 million, including deferred income tax expense of $15 million 45 - - --------------------------------------- Earnings from discontinued operations $ 50 $ 11 $ 6 --------------------------------------- ---------------------------------------
During 1998 the Company sold its Office Products Division for net proceeds of $246 million. 14 ABITIBI-CONSOLIDATED INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ...CONTINUED DECEMBER 31, 1998, 1997 AND 1996 (TABULAR AMOUNTS IN MILLIONS OF CANADIAN DOLLARS) 13 LONG-TERM DEBT (a) RECOURSE The debt described below has recourse to specific assets or the general credit of Abitibi-Consolidated Inc. and consists of:
1998 1997 ----------------------------------- US$250 million 6.95% notes due April 1, 2008 $ 383 $ - US$100 million 7.40% debentures due April 1, 2018 153 - US$250 million 7.50% debentures due April 1, 2028 383 - US$156 million (1997 - US$178 million) 7.92% notes maturing in 2005 239 255 US$400 million facility bearing interest at prime or LIBOR, maturing in 2003 615 - Multi-currency revolving facility bearing interest at prime or LIBOR, maturing in 2002 (US$50 million; 1997 - nil) 137 107 Multi-currency term loan bearing interest at prime or LIBOR maturing in 2004 (US$89 million; 1997 - US$474 million) 197 1,042 Other 24 24 ----------------------------------- 2,131 1,428 Less: Current portion of long-term debt 44 90 ----------------------------------- $ 2,087 $ 1,338 ----------------------------------- -----------------------------------
In November 1998, the Company obtained a US$400 million floating rate facility, the proceeds from which were used to finance the purchase of the Snowflake, Arizona newsprint mill and to finance most of the Company's equity in the Asian Joint Venture (see Note 17(a)). On April 1, 1998, the Company issued US$600 million in long-term unsecured debt. The proceeds were used to repay floating rate term credit facilities. At December 31, 1998, the Company had approximately $500 million of revolving credit available. The debt agreements contain certain restrictive financial and other covenants. 15 ABITIBI-CONSOLIDATED INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ...CONTINUED DECEMBER 31, 1998, 1997 AND 1996 (TABULAR AMOUNTS IN MILLIONS OF CANADIAN DOLLARS) 13 LONG-TERM DEBT ...CONTINUED (b) NON-RECOURSE The Company's portion of the long-term debt of its U.S. newsprint and other joint ventures is without recourse to the assets of Abitibi-Consolidated Inc. These non-recourse loans are secured by $373 million (1997 - $370 million) of joint venture fixed assets and consist of the following debt:
1998 1997 ------------------------------------ Alabama LIBOR plus 1.875% term loans, rising to LIBOR plus 2% in 1999, maturing in 2002, with quarterly principal repayments of US$2.5 million (US$129 million; 1997 - US$139 million) $ 198 $ 199 Alabama Recycling 10.50% senior notes, maturing in 2008 (US$12 million; 1997 - US$12 million) 18 17 Augusta 10.01% senior notes, maturing in 2007 (US$25 million; 1997 - US$25 million) 38 36 7.7% senior notes, maturing in 2007 (US$25 million; 1997 - US$25 million) 38 36 Other 36 23 ------------------------------------ 328 311 Less: Current portion of long-term debt 18 17 ------------------------------------ $ 310 $ 294 ------------------------------------ ------------------------------------
At December 31, 1998, Alabama had interest rate agreements with major banks, which expire in 1999 and 2000, that provide an effective interest rate of 9.7% (1997 - 9.6%) on $57 million of the $198 million non-recourse debt outstanding (1997 - $71 million of $199 million). In 1998, the effective interest rate on the Alabama debt was 8.9% (1997 - 9.1%). Augusta has a line of credit of US$13 million bearing prevailing market interest rates. This line of credit was undrawn at December 31, 1998 and 1997. Partnership distributions are subject to certain restrictions until these loans are repaid in accordance with the loan agreements. In 1999, Alabama may not be in compliance with certain debt covenants under certain circumstances. The outcome of these matters is not determinable. The assets less the liabilities of Alabama included in the consolidated financial statements were $32 million at December 31, 1998. 16 ABITIBI-CONSOLIDATED INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ...CONTINUED DECEMBER 31, 1998, 1997 AND 1996 (TABULAR AMOUNTS IN MILLIONS OF CANADIAN DOLLARS) 13 LONG-TERM DEBT ...CONTINUED (c) Scheduled long-term debt repayments are as follows:
RECOURSE NON-RECOURSE DEBT DEBT ------------------------------------ 1999 $ 44 $ 18 2000 110 18 2001 106 28 2002 95 158 2003 663 25 Thereafter 1,113 81 ------------------------------------ $ 2,131 $ 328 ------------------------------------ ------------------------------------
(d) The estimated fair value of the long-term debt at the year-end dates is as follows and has been determined based on management's best estimate of the fair value to renegotiate debt with similar terms at the respective year-end dates:
1998 1997 ----------------------------------- Recourse $ 2,112 $ 1,433 Non-recourse 347 324 ----------------------------------- $ 2,459 $ 1,757 ----------------------------------- -----------------------------------
14 CAPITAL STOCK (a) The Company continued under the Canada Business Corporations Act pursuant to the amalgamation referred to in Note 1, and is authorized to issue an unlimited number of preferred shares and common shares. 17 ABITIBI-CONSOLIDATED INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ...CONTINUED DECEMBER 31, 1998, 1997 AND 1996 (TABULAR AMOUNTS IN MILLIONS OF CANADIAN DOLLARS) 14 CAPITAL STOCK ...CONTINUED (b) Common shares
1998 1997 1996 --------------------------------------------------------------- MILLIONS $ MILLIONS $ MILLIONS OF SHARES OF SHARES OF SHARES $ --------------------------------------------------------------- Common shares, beginning of year 194.2 $ 2,599 193.6 $ 2,595 191.8 $ 2,570 Shares issued for: Conversion of convertible subordinated debentures - - - - 1.6 24 Exercise of stock options 0.1 1 0.6 4 0.2 1 Shares purchased and cancelled for $75 million (3.8) (50) - - - - --------------------------------------------------------------- Common shares, end of year 190.5 $ 2,550 194.2 $ 2,599 193.6 $ 2,595 --------------------------------------------------------------- ---------------------------------------------------------------
The $25 million excess of purchase price over the average stated capital of shares purchased and cancelled in 1998 was charged to retained earnings. At December 31, 1998, the Company had 4.6 million (1997 - 3.3 million; 1996 - 3.7 million) management stock options outstanding. These options are exercisable at prices between $14.25 and $22.69 and expire between 1999 and 2008. The payment of a cash dividend on the Company's common stock is restricted under certain debt agreements. The Company satisfied all the conditions of the debt agreements prior to declaring dividends. (c) Preferred shares
1997 1996 ------------------------------------------- MILLIONS MILLIONS OF OF SHARES $ SHARES $ ------------------------------------------- Preferred shares, beginning of year 0.9 $ 10 5.5 $ 110 Shares redeemed and cancelled (0.9) (10) (4.6) (100) ------------------------------------------- Preferred shares, end of year - $ - 0.9 $ 10 ------------------------------------------- -------------------------------------------
18 ABITIBI-CONSOLIDATED INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ...CONTINUED DECEMBER 31, 1998, 1997 AND 1996 (TABULAR AMOUNTS IN MILLIONS OF CANADIAN DOLLARS) 15 PENSION PLANS The Company primarily has contributory, defined benefit pension plans that provide benefits based on length of service and final average earnings. The Company has an obligation to ensure that these plans have sufficient funds to pay the benefits earned. The Company's contributions are made in accordance with the annual regulatory contribution requirements. At December 31, the funded status, on an accounting basis, of the Company pension plans is:
1998 1997 --------------------------- Market value of assets $ 1,977 $ 1,918 Actuarial present value of accumulated plan benefits based on current service and compensation levels: Vested 1,639 1,498 Non-vested 63 56 --------------------------- 1,702 1,554 --------------------------- Excess of market value of assets over accumulated benefit obligations $ 275 $ 364 --------------------------- ---------------------------
In 1998, pension plan assets were increased by Company and employee contributions of $40 million (1997 - $47 million) and pension plan investment gains of $148 million (1997 - $284 million). The plan assets were reduced by benefit payments of $122 million (1997 - $116 million) and $7 million (1997 - $8 million) paid for pension fund expenses. On a going concern basis, using assumptions required by regulatory authorities, the pension plans had an aggregate unfunded liability of $25 million (1997 - $28 million) at the time of the latest actuarial valuation reports. 16 FINANCIAL INSTRUMENTS The Company is subject to foreign exchange exposures which arise from its foreign currency sales and international operations. Of the Company's 1998 net sales, 84% was U.S. dollar denominated; and 69% of its non-North American sales was U.S. dollar denominated, with the remainder in local currencies. The Company partially manages its foreign exchange exposure with a program of foreign exchange forward contracts with major banks as counterparties for periods of up to 5 years. The Company has set a maximum of 20% of its foreign exchange forward contracts which may be outstanding with any one bank. 19 ABITIBI-CONSOLIDATED INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ...CONTINUED DECEMBER 31, 1998, 1997 AND 1996 (TABULAR AMOUNTS IN MILLIONS OF CANADIAN DOLLARS) 16 FINANCIAL INSTRUMENTS ...CONTINUED The Company had the following U.S. dollar foreign exchange forward contracts outstanding at December 31 for the purchase of foreign currencies:
AVERAGE U.S. DOLLAR CONTRACT RATE AMOUNT OF CONTRACT U.S. DOLLARS TO BUY $1 CDN. (MILLIONS) ----------------------------------- ------------------------------------ 1998 1997 1998 1997 1998 - 75.36 CENTS $ - $ 844 1999 73.07 CENTS 75.68 CENTS $ 927 $ 476 2000 73.19 CENTS 76.03 CENTS $ 670 $ 338 2001 72.36 CENTS 76.19 CENTS $ 574 $ 219 2002 71.51 CENTS 74.48 CENTS $ 526 $ 142 2003 68.36 CENTS - $ 449 $ - ----------------------------------- ------------------------------------ ----------------------------------- ------------------------------------
At December 31, 1998, the Company would have had to pay $401 million (1997 - $205 million) to settle its then outstanding U.S. foreign exchange forward contracts and other financial instruments. If the Company settled these contracts in the future, any gain or loss would be recorded in earnings when the hedged revenue is earned. A related tax liability or benefit would be recorded at the time of recognition of any such gains or losses. The unrecorded tax benefit as at December 31, 1998 was $132 million (1997 - $67 million). Fair value has been determined based on quoted rates from financial institutions. 17 COMMITMENTS (a) ASIAN JOINT VENTURE On February 2, 1999, the Company, Norske Skogindustrier ASA and Hansol Paper Co. Ltd. entered into a joint venture to create the largest newsprint company in the Asian Pacific region. The joint venture, equally owned by each venturer, purchased Hansol Paper Co. Ltd.'s Korean and Chinese newsprint mills as well as Norske Skogindustrier ASA's newsprint mills in Korea and Thailand for a price of approximately US$1.3 billion. The Company's equity share of the purchase price was US$200 million, with the remainder to be financed by joint venture non-recourse debt. At year-end, the Company had drawn US$150 million on a credit facility to fund its equity in this venture. As a result, this amount has been presented as restricted cash on the consolidated balance sheet. (b) LEASE COMMITMENTS As at December 31, 1998, the Company has operating lease agreements for the rental of property, equipment and the charter of cargo vessels. The minimum annual rental payments under these leases are as follows: 1999 $ 16 2000 16 2001 14 2002 13 2003 12 Thereafter 32 ------ $ 103 ------ ------
20 ABITIBI-CONSOLIDATED INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ...CONTINUED DECEMBER 31, 1998, 1997 AND 1996 (TABULAR AMOUNTS IN MILLIONS OF CANADIAN DOLLARS) 18 CONTINGENT LIABILITIES AND YEAR 2000 CONTINGENT LIABILITIES (a) The Company and its U.S. subsidiary, Abitibi-Price Corporation, have been named as defendants in several lawsuits, including purported class actions, filed on behalf of homeowners in the United States relating to certain hardboard siding products which were manufactured by Abitibi-Price Corporation prior to October 1992. In each of the lawsuits, the plaintiffs generally allege that Abitibi-Price Corporation's hardboard siding was defective for the purposes for which it was sold. The Company denies this allegation and is vigorously defending the claims made in these actions. (b) The Company and its indirect U.S. subsidiary, Abitibi Consolidated Sales Corporation, were named as defendants in a lawsuit filed in the Federal Court of the State of Alabama. The lawsuit was filed allegedly on behalf of the Company's joint venture partnership, Alabama River Newsprint Company, and the partnership's two corporate partners, including Parsons & Whittemore Alabama Newsprint Corp. In the lawsuit, the plaintiff alleged a breach of the sales agreement with respect to the promotion and volume of sales of the joint venture partnership mill. In December 1998, the plaintiff was awarded US$29.4 million in damages plus interest. The Company continues to deny these allegations and intends to appeal this award. The Company, however, has recorded a provision for its share of the cost relating to the December 1998 judgement. In addition, a lawsuit was filed in the State Court of the State of Alabama against the Company's indirect subsidiary, Abitibi-Price Alabama Corporation, alleging a breach of fiduciary duty to its joint venture partner. This lawsuit appears to seek substantial damages in a trial by jury. It is not possible at this time to quantify meaningfully the amount of, or the range of, damages implicated by plaintiffs' claim. Management cannot at this time assess the likelihood that the Company will incur a further loss or obtain an unfavourable result in connection with these matters. (c) On September 20, 1996, a motion of permission to lodge a class action suit against the Company was filed with the Superior Court of the Chicoutimi District ("Superior Court") with respect to the Saguenay floods of July 1996. On October 20, 1997, the Superior Court granted the motion permitting a class action suit to be filed against the Company. To date no such class action suit has been filed. The Company is insured against such potential claims up to a maximum of $100 million which the Company believes to be sufficient. (d) The Company is subject to a number of other unrelated claims in respect of which either an adequate provision has been made or for which no material liability is expected. 21 ABITIBI-CONSOLIDATED INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ...CONTINUED DECEMBER 31, 1998, 1997 AND 1996 (TABULAR AMOUNTS IN MILLIONS OF CANADIAN DOLLARS) 18 CONTINGENT LIABILITIES AND YEAR 2000 ...CONTINUED YEAR 2000 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 including systems failures or interruptions where manufacturing, processing, communication or transportation facilities are involved. In addition, similar problems may arise in some systems which use certain dates in 1999 to represent something other than a date. The effects of the Year 2000 Issue may be experienced before, on, or after January 1, 2000, and, if not addressed by the Company and its business partners, the impact on operations and financial reporting may range from minor errors to significant systems failure which could affect an entity's ability to conduct normal business operations. It is not 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 RELATED PARTY TRANSACTIONS The Company undertakes a number of transactions with its major shareholder, Stone Container (Canada) Inc. (Stone Container), and its affiliated companies. The following table summarizes the transactions between the Company and related parties which are in the normal course of business at normal trade terms:
1998 1997 1996 -------------------------------------- Newsprint sales to a Stone Container affiliate $ - $ - $ 32 Pulp purchases from Stone Container and affiliates 1 15 15 Newsprint brokerage commissions from a Stone Container affiliate 10 10 11 Expenses charged to Stone Container for services 11 6 4 Expenses charged by a Stone Container affiliate for services - - 2 -------------------------------------- --------------------------------------
20 DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES The Company's consolidated financial statements have been prepared in accordance with generally accepted accounting principles ("GAAP") in Canada which, in the case of the Company, conform in all material respects with U.S. GAAP, with the following material exceptions: (a) The Company includes in earnings gains and losses on U.S. dollar debt hedged by anticipated future revenue when the revenue is earned. Under U.S. GAAP, any unrealized exchange gains or losses on U.S. dollar debt hedged by anticipated future revenue would be recognized in income immediately. 22 ABITIBI-CONSOLIDATED INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ...CONTINUED DECEMBER 31, 1998, 1997 AND 1996 (TABULAR AMOUNTS IN MILLIONS OF CANADIAN DOLLARS) 20 DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES ...CONTINUED (b) The Company has outstanding foreign exchange forward contracts which it designates as a hedge of anticipated future revenue. Under U.S. GAAP, any unrealized gains or losses on such foreign exchange forward contracts would be recognized in income immediately. In 1998, FASB Statement 133 was issued in the United States. This statements addresses accounting and disclosure requirements for derivative instruments and hedging activities. The Company is required to adopt the statement at the latest in fiscal year 2000. Management believes that this new standard, which can only be adopted on a prospective basis, may allow it to designate foreign exchange forward contracts as hedges of anticipated future revenue and effectively record gains or losses on such contracts in earnings when the revenue is earned, consistent with Canadian GAAP. (c) The Company follows the deferral method of accounting for income taxes. Under U.S. GAAP, the asset and liability method of accounting for income taxes would be used. (d) The Company accounts for its joint venture investments using the proportionate consolidation method. Under U.S. GAAP, these joint ventures would be accounted for using the equity method. (e) The amalgamation of Abitibi-Price and Stone-Consolidated was accounted for as a pooling of interests. Under U.S. GAAP, the amalgamation would be accounted for by Stone-Consolidated using the purchase method and the results of Abitibi-Price's operations would be included from the date of amalgamation. As a result, the Company's consolidated financial statements prepared in accordance with U.S. GAAP reflect only the operations of Stone-Consolidated for fiscal year 1996. For fiscal year 1997, the consolidated financial statements reflect only the operations of Stone-Consolidated up to May 30, 1997 and the combined operations of Abitibi-Price and Stone-Consolidated for the remainder of the year. The amalgamation plan required the consolidation of the head offices and sales offices of the two companies. These activities were substantially completed by December 1997. The costs of this consolidation and certain other costs relating to the amalgamation were expensed or charged to retained earnings under Canadian GAAP. Under the purchase method, certain of these costs amounting to $83 million on a pre-tax basis (of which $61 million was expensed and $22 million was charged to retained earnings under Canadian GAAP) would be capitalized and would increase the amount of recorded goodwill which is being amortized over 40 years. In 1998, machine closure and related costs of $40 million (pre-tax) and a gain on disposition of discontinued operations of $45 million (after-tax) were recorded under Canadian GAAP. Under the purchase method, the assets related to these items were recorded at fair value in 1997. As well, included in the $40 million is $11 million of severance accruals which do not meet the requirements for recognition under U.S. GAAP. Therefore, under U.S. GAAP, machine closure and related costs are $49 million (pre-tax) and the loss on disposition of discontinued operations is $5 million (after-tax). 23 ABITIBI-CONSOLIDATED INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ...CONTINUED DECEMBER 31, 1998, 1997 AND 1996 (TABULAR AMOUNTS IN MILLIONS OF CANADIAN DOLLARS) 20 DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES ...CONTINUED The allocation of the purchase price of Abitibi-Price is as follows: Assets acquired Current assets $ 712 Fixed assets 1,354 Goodwill 903 Investments and other assets, including $100 million of fair value increment relating to equity investment 323 ------------- 3,292 Liabilities assumed Current liabilities 434 Long-term debt 633 Deferred income taxes 180 Other 82 ------------- 1,329 ------------- Net assets acquired for fair value consideration of 89.2 million common shares of the Company $ 1,963 ------------- -------------
The following pro forma selected financial information shows the results as though the acquisition of Abitibi-Price had been made as of January 1, 1996. The pro forma 1997 results include non-recurring expenses and write-off of redundant fixed assets on a pre-tax basis of $55 million relating to the amalgamation and an extraordinary item for debt extinguishment costs, net of taxes, of $40 million.
PRO FORMA 1997 1996 ------------------------------------ (unaudited) Net sales $ 3,779 $ 4,080 Operating profit from continuing operations 49 410 Earnings (loss) from continuing operations (157) 228 Net earnings (loss) (205) 234 Per common share (in dollars) Earnings (loss) from continuing operations (0.81) 1.18 Net earnings (loss) (1.06) 1.21 ------------------------------------ ------------------------------------
24 ABITIBI-CONSOLIDATED INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ...CONTINUED DECEMBER 31, 1998, 1997 AND 1996 (TABULAR AMOUNTS IN MILLIONS OF CANADIAN DOLLARS) 20 DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES ...CONTINUED The following financial information is presented in accordance with U.S. GAAP, reflecting the adjustments disclosed above. The Company's operating results are reported in four segments: newsprint, value-added groundwood paper, kraft pulp and lumber, and newsprint purchased and resold and commissions. Newsprint is used to print newspapers and advertising flyers and the demand is determined by circulation and advertising. Value-added groundwood paper is used by commercial printers, converters, advertisers and publishers to produce advertising inserts, books, telephone directories, business forms, magazines and catalogues. Most of the Company's products are marketed globally with a significant concentration in the U.S. 25 ABITIBI-CONSOLIDATED INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ...CONTINUED DECEMBER 31, 1998, 1997 AND 1996 (TABULAR AMOUNTS IN MILLIONS OF CANADIAN DOLLARS) 20 DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES ...CONTINUED CONSOLIDATED EARNINGS YEAR ENDED DECEMBER 31
1998 1997 1996 -------------------------------------- Gross sales $ 3,746 $ 3,466 $ 2,286 Freight expenses 316 320 149 -------------------------------------- NET SALES 3,430 3,146 2,137 Cost of sales 2,801 2,617 1,606 Depreciation and amortization 343 270 176 Selling, general and administrative expenses 167 122 52 Restructuring and other unusual expenses 76 10 - Non-recurring expenses relating to the amalgamation (NOTE (i)) - 42 - -------------------------------------- OPERATING PROFIT FROM CONTINUING OPERATIONS 43 85 303 Interest expense on long-term debt 104 77 72 Write-off of redundant fixed assets relating to the amalgamation (NOTE (i)) - 13 - Unusual items 16 - (22) Other expense (income), net (NOTE (ii)) 364 134 (12) -------------------------------------- EARNINGS (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (441) (139) 265 Recovery of (provision for) income taxes (NOTE (iii)) 98 30 (89) -------------------------------------- EARNINGS (LOSS) FROM CONTINUING OPERATIONS (343) (109) 176 EARNINGS FROM DISCONTINUED OPERATIONS, NET OF INCOME TAX EXPENSE (NOTE (vii)) - 7 - -------------------------------------- EARNINGS (LOSS) BEFORE EXTRAORDINARY ITEMS (343) (102) 176 Extraordinary items Debt extinguishment costs, net of deferred income tax recovery of $19 million in 1997 - 40 - -------------------------------------- NET EARNINGS (LOSS) FOR THE YEAR $ (343) $ (142) $ 176 -------------------------------------- -------------------------------------- PER BASIC COMMON SHARE (in dollars) Earnings (loss) from continuing operations $ (1.79) $ (0.70) $ 1.68 Earnings from discontinued operations - 0.04 - Earnings (loss) before extraordinary items (1.79) (0.66) 1.68 Extraordinary items - (0.25) (0.39) Net earnings (loss) (1.79) (0.91) 1.68 WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING (millions) 192.0 156.8 104.7 -------------------------------------- --------------------------------------
26 ABITIBI-CONSOLIDATED INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ...CONTINUED DECEMBER 31, 1998, 1997 AND 1996 (TABULAR AMOUNTS IN MILLIONS OF CANADIAN DOLLARS) 20 DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES ...CONTINUED CONSOLIDATED RETAINED EARNINGS (DEFICIT) YEAR ENDED DECEMBER 31
1998 1997 1996 -------------------------------------- RETAINED EARNINGS, BEGINNING OF YEAR $ 135 $ 335 $ 159 Net earnings (loss) for the year (343) (142) 176 Dividends declared (77) (58) - -------------------------------------- RETAINED EARNINGS (DEFICIT), END OF YEAR $ (285) $ 135 $ 335 -------------------------------------- -------------------------------------- CONSOLIDATED COMPREHENSIVE INCOME YEAR ENDED DECEMBER 31 1998 1997 1996 -------------------------------------- Net earnings (loss) for the year $ (343) $ (142) $ 176 Other comprehensive income, net of tax Foreign currency translation adjustments 26 - 28 Minimum pension liability adjustment (72) - - -------------------------------------- Consolidated comprehensive income (loss) $ (389) $ (142) $ 204 -------------------------------------- --------------------------------------
27 ABITIBI-CONSOLIDATED INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ...CONTINUED DECEMBER 31, 1998, 1997 AND 1996 (TABULAR AMOUNTS IN MILLIONS OF CANADIAN DOLLARS) 20 DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES ...CONTINUED CONSOLIDATED BALANCE SHEETS DECEMBER 31
1998 1997 ------------------------------------ ASSETS CURRENT ASSETS Cash and deposits $ 130 $ 38 Accounts receivable 553 484 Inventories (NOTE (iv)) 407 402 Prepaid expenses 32 28 Current assets of discontinued operations (NOTE (vii)) - 232 ------------------------------------ 1,122 1,184 FIXED ASSETS (NOTE (v)) 4,034 3,734 RESTRICTED CASH 230 - INVESTMENTS AND OTHER ASSETS (NOTE (vi)) 386 265 DEFERRED PENSION COST 106 160 GOODWILL 1,473 1,532 NON-CURRENT ASSETS OF DISCONTINUED OPERATIONS (NOTE (vii)) - 91 ------------------------------------ $ 7,351 $ 6,966 ------------------------------------ ------------------------------------ LIABILITIES CURRENT LIABILITIES Accounts payable and accrued liabilities Continuing operations $ 749 $ 662 Discontinued operations - 92 Dividends payable 19 19 Current portion of long-term debt - recourse 44 90 Unrealized loss on foreign exchange forward contracts 140 72 ------------------------------------ 952 935 LONG-TERM DEBT - RECOURSE 2,087 1,338 DEFERRED INCOME TAXES 322 441 UNREALIZED LOSS ON FOREIGN EXCHANGE FORWARD CONTRACTS 261 106 OTHER 193 70 ------------------------------------ 3,815 2,890 ------------------------------------ SHAREHOLDERS' EQUITY COMMON SHARES (NOTE (viii)) 3,849 3,923 RETAINED EARNINGS (DEFICIT) (285) 135 ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) (28) 18 ------------------------------------ 3,536 4,076 ------------------------------------ $ 7,351 $ 6,966 ------------------------------------ ------------------------------------
28 ABITIBI-CONSOLIDATED INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ...CONTINUED DECEMBER 31, 1998, 1997 AND 1996 (TABULAR AMOUNTS IN MILLIONS OF CANADIAN DOLLARS) 20 DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES ...CONTINUED CHANGES IN CONSOLIDATED CASH POSITION YEAR ENDED DECEMBER 31
1998 1997 1996 -------------------------------------- OPERATING ACTIVITIES Net earnings (loss) for the year $ (343) $ (142) $ 176 Depreciation 298 234 155 Goodwill amortization 45 36 21 Unrealized loss on foreign exchange forward contracts 223 117 - Unrealized loss on translation of long-term debt 69 - - Equity earnings from joint ventures (41) (12) - Provision for (recovery of) deferred income taxes (86) (53) 63 Non-recurring expenses relating to the amalgamation - 54 - Restructuring expenses 49 10 - Other non-cash items 37 13 - Changes in non-cash operating working capital components Decrease (increase) in current assets Accounts receivable (25) 152 71 Inventories 18 79 (93) Prepaid expenses (4) 10 (4) (Decrease) increase in accounts payable and accrued liabilities 61 32 29 -------------------------------------- Cash generated by operating activities 301 530 360 -------------------------------------- FINANCING ACTIVITIES Increase in long-term debt and bank indebtedness 1,713 1,246 377 Repayment of long-term debt and bank indebtedness (1,093) (1,373) (309) Purchase of common shares for cancellation (75) - - Debt issuance costs (8) - - Preferred shares redeemed and cancelled - - (100) Dividends paid to common shareholders (77) (39) - Other - 8 - -------------------------------------- Cash generated by (used in) financing activities 460 (158) (32) -------------------------------------- INVESTING ACTIVITIES Additions to fixed assets (245) (354) (327) Proceeds on sale of discontinued operations 246 - - Acquisitions (408) - - Restricted cash (230) - - Decrease (increase) in investments and other assets (32) (7) 10 -------------------------------------- Cash used in investing activities (669) (361) (317) -------------------------------------- INCREASE IN CASH DURING THE YEAR 92 11 11 CASH AND DEPOSITS, BEGINNING OF YEAR 38 27 16 -------------------------------------- CASH AND DEPOSITS, END OF YEAR $ 130 $ 38 $ 27 -------------------------------------- --------------------------------------
29 ABITIBI-CONSOLIDATED INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ...CONTINUED (TABULAR AMOUNTS IN MILLIONS OF CANADIAN DOLLARS) 20 DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES ...CONTINUED NOTES TO FOREGOING CONSOLIDATED FINANCIAL STATEMENTS PREPARED IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (i) AMALGAMATION COSTS Charges relating to the amalgamation were expensed in 1997 as follows: Employee severance and related expenses $ 14 Moving expenses 3 Pension plan settlement expense 15 Other 10 ------------------- Non-recurring expenses 42 Write-off of redundant fixed assets 13 ------------------- $ 55 ------------------- -------------------
(ii) OTHER EXPENSE (INCOME), NET
1998 1997 1996 -------------------------------------- Equity earnings from joint ventures $ (41) $ (12) $ - Interest income (19) (10) - Foreign exchange loss including loss on foreign exchange forward contracts 399 146 - Discounts on sales of accounts receivable 12 3 - Other 13 7 (12) -------------------------------------- $ 364 $ 134 $ (12) -------------------------------------- --------------------------------------
30 ABITIBI-CONSOLIDATED INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ...CONTINUED (TABULAR AMOUNTS IN MILLIONS OF CANADIAN DOLLARS) 20 DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES ...CONTINUED NOTES TO FOREGOING CONSOLIDATED FINANCIAL STATEMENTS PREPARED IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (iii) INCOME TAXES The Company's recovery of (provision for) income taxes and effective income tax rate are:
1998 1997 1996 --------------------------------------- Earnings (loss) from continuing operations before income taxes and extraordinary items $ (441) $ (139) $ 265 Recovery of (provision for) income taxes 98 30 (89) Effective income tax rate 22% 22% 34% --------------------------------------- --------------------------------------- Reconciliation to statutory tax rate Average combined Canadian federal/provincial income tax rate 38% 39% 39% Manufacturing and processing allowances (7) (7) (4) Non-deductible goodwill amortization (5) (10) 2 Canadian large corporations tax (3) (5) 2 Difference in tax rates for foreign subsidiaries 1 2 - Income tax rate adjustment - - (3) Other (2) 3 (2) --------------------------------------- Effective income tax rate 22% 22% 34% --------------------------------------- --------------------------------------- The earnings (loss) from continuing operations before income taxes and extraordinary items consists of the following: 1998 1997 1996 --------------------------------------- Canada $ (480) $ (157) $ 204 U.S. 32 3 13 U.K. 7 15 48 --------------------------------------- Earnings (loss) from continuing operations before income taxes and extraordinary items $ (441) $ (139) $ 265 --------------------------------------- ---------------------------------------
31 ABITIBI-CONSOLIDATED INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ...CONTINUED (TABULAR AMOUNTS IN MILLIONS OF CANADIAN DOLLARS) 20 DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES ...CONTINUED NOTES TO FOREGOING CONSOLIDATED FINANCIAL STATEMENTS PREPARED IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES The provision for (recovery of) income taxes consists of the following:
1998 1997 1996 -------------------------------------- Current Canada $ 11 $ 13 $ 20 U.S. - - 6 U.K. - - - -------------------------------------- 11 13 26 -------------------------------------- Deferred Canada (123) (56) 48 U.S. 12 7 (1) U.K. 2 6 16 -------------------------------------- (109) (43) 63 -------------------------------------- Provision for (recovery of) income taxes $ (98) $ (30) $ 89 -------------------------------------- -------------------------------------- The components of the deferred taxes are: 1998 1997 ------------------------------------ Deferred tax assets Loss carryforwards $ 170 $ 168 Unrealized loss on foreign exchange forward contracts 131 57 Minimum pension liability 36 - Other 113 48 ------------------------------------ 388 265 ------------------------------------ Deferred tax liabilities Depreciation and amortization 638 629 Pension 32 47 ------------------------------------ Total deferred tax liability 670 676 ------------------------------------ Deferred tax liability - net $ 322 $ 441 ------------------------------------ ------------------------------------
32 ABITIBI-CONSOLIDATED INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ...CONTINUED (TABULAR AMOUNTS IN MILLIONS OF CANADIAN DOLLARS) 20 DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES ...CONTINUED NOTES TO FOREGOING CONSOLIDATED FINANCIAL STATEMENTS PREPARED IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (iv) INVENTORIES
1998 1997 ----------------------------------- Finished goods $ 118 $ 133 Materials and supplies 208 186 Pulpwood 81 83 ----------------------------------- $ 407 $ 402 ----------------------------------- -----------------------------------
(v) FIXED ASSETS
1998 1997 --------------------------------- --------------------------------- ACCUMULATED NET BOOK ACCUMULATED NET BOOK COST DEPRECIATION VALUE COST DEPRECIATION VALUE --------------------------------- --------------------------------- Property, plant and equipment $ 4,967 $ 980 $ 3,987 $ 4,383 $ 698 $ 3,685 Timberlands 74 27 47 74 25 49 --------------------------------- -------------------------------- $ 5,041 $ 1,007 $ 4,034 $ 4,457 $ 723 $ 3,734 --------------------------------- --------------------------------- --------------------------------- ---------------------------------
(vi) INVESTMENTS AND OTHER ASSETS
1998 1997 ------------------------------------ Investment in joint ventures $ 213 $ 203 Deferred financing charges 60 14 Other 113 48 ------------------------------------ $ 386 $ 265 ------------------------------------ ------------------------------------
33 ABITIBI-CONSOLIDATED INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ...CONTINUED (TABULAR AMOUNTS IN MILLIONS OF CANADIAN DOLLARS) 20 DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES ...CONTINUED NOTES TO FOREGOING CONSOLIDATED FINANCIAL STATEMENTS PREPARED IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (vii) DISCONTINUED OPERATIONS The net assets of the Office Products Division, previously owned by Abitibi-Price, were recorded at estimated fair market value at May 30, 1997 as part of the business combination of Abitibi-Price and Stone-Consolidated. The following amounts related to discontinued operations have been included in the U.S. GAAP financial statements:
1998 1997 --------------------------------- Cash $ - $ 15 Accounts receivable - 111 Inventories - 104 Prepaid expenses - 2 Goodwill - - ---------------------------------- Current assets of discontinued operations $ - $ 232 ---------------------------------- ---------------------------------- Fixed and other assets $ - $ 11 Goodwill - 80 ---------------------------------- Non-current assets of discontinued operations $ - $ 91 ---------------------------------- ---------------------------------- 1998 1997 ---------------------------------- Sales $ 656 $ 468 ---------------------------------- ---------------------------------- Earnings from operations, net of income tax expenses of $2 million (1997 - $4 million) $ 5 $ 7 Loss on disposition, net of income tax expense of $18 million, including deferred income tax expense of $15 million (5) - ---------------------------------- Earnings from discontinued operations $ - $ 7 ---------------------------------- ----------------------------------
34 ABITIBI-CONSOLIDATED INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ...CONTINUED (TABULAR AMOUNTS IN MILLIONS OF CANADIAN DOLLARS) 20 DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES ...CONTINUED NOTES TO FOREGOING CONSOLIDATED FINANCIAL STATEMENTS PREPARED IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (viii) CAPITAL STOCK (a) Common shares
1998 1997 1996 --------------------------------------------------------------- MILLIONS $ MILLIONS $ MILLIONS OF SHARES OF SHARES OF SHARES $ --------------------------------------------------------------- Common shares, beginning of year 194.2 $ 3,923 104.0 $ 1,957 104.0 $ 1,957 Shares issued for: Acquisition of Abitibi-Price 89.6 1,962 - - Exercise of stock options 0.1 1 0.6 4 - - Shares purchased and cancelled at book value for $75 million (3.8) (75) - - - - --------------------------------------------------------------- Common shares, end of year 190.5 $ 3,849 194.2 $ 3,923 104.0 $ 1,957 --------------------------------------------------------------- ---------------------------------------------------------------
35 ABITIBI-CONSOLIDATED INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ...CONTINUED (TABULAR AMOUNTS IN MILLIONS OF CANADIAN DOLLARS) 20 DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES ...CONTINUED NOTES TO FOREGOING CONSOLIDATED FINANCIAL STATEMENTS PREPARED IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (b) Preferred shares
1996 ------------------------------------ Millions of shares $ ------------------------------------ Preferred shares, beginning of year 4.6 $ 100 Shares redeemed and cancelled (4.6) (100) ------------------------------------ Preferred shares, end of year - $ - ------------------------------------ ------------------------------------
(c) Share option plan The Company has an employee share option plan for its key employees. Options may be granted for the purchase of up to 7.9% of the issued and outstanding common shares. A total of 15,241,125 common shares have been reserved initially for issuance under the option plan. Prior to the amalgamation, each of Stone-Consolidated and Abitibi-Price maintained respective stock option plans as well. The Stone-Consolidated options granted in 1994 vested on the first anniversary of the date of grant. One-quarter of the Stone-Consolidated options granted in 1995, 1996 and 1997 vest on each of the first, second, third and fourth anniversary dates of the date of grant. These options expire at various dates during the next 10 years. Options granted under the Abitibi-Price plan expire after five years and vest as follows: 30% on each of the first and second anniversaries of the date of grant and 40% on the third anniversary. Prior to 1995, options have been granted under the Abitibi-Price plan that expire after 10 years and vest as follows: 50% on the date of grant and 50% on the first anniversary of the date of grant. No new options under the former plans will be issued. Options granted in 1998 under the Company plan expire after 10 years and vest as follows: one-quarter on each of the first, second, third and fourth anniversaries of the date of grant. At December 31, 1998, 2,470,761 options are exercisable (1997 - 1,705,341; 1996 - 271,761). The weighted average remaining contractual life of all options outstanding at December 31, 1998 is approximately 6.4 years. Options are exercisable at prices ranging from $14.25 to $22.69 per common share. Changes in the number of common shares under option are summarized below. 36 ABITIBI-CONSOLIDATED INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ...CONTINUED (TABULAR AMOUNTS IN MILLIONS OF CANADIAN DOLLARS) 20 DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES ...CONTINUED NOTES TO FOREGOING CONSOLIDATED FINANCIAL STATEMENTS PREPARED IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE 1998 PRICE 1997 PRICE 1996 PRICE ----------------------- ---------------------- ------------------------ Outstanding, beginning of year 3,320,947 $ 18.25 1,188,606 $ 17.13 741,718 $ 16.47 Granted 1,367,200 18.52 463,500 21.53 528,000 17.78 Exercised (67,698) 12.76 (293,892) 21.22 (11,151) 15.15 Cancelled (22,363) 15.16 (168,590) 18.09 (69,961) 15.30 Conversion * - - 2,131,323 18.64 - - ----------------------- --------------------- ------------------------- Outstanding, end of year 4,598,086 18.43 3,320,947 $ 18.25 1,188,606 $ 17.13 ------------------------ --------------------- ------------------------- ------------------------ --------------------- -------------------------
* 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. Under the amalgamation in 1997, outstanding options for 2,144,537 common shares of Abitibi-Price were converted into options for 2,131,323 of the Company's common shares.
OPTIONS OUTSTANDING OPTIONS EXERCISABLE DECEMBER 31, 1998 DECEMBER 31, 1998 ---------------------------------------------- -------------------- WEIGHTED AVERAGE WEIGHTED REMAINING WEIGHTED AVERAGE RANGE OF NUMBER CONTRACTUAL AVERAGE NUMBER EXERCISE EXERCISE PRICES OUTSTANDING LIFE EXERCISE PRICE EXERCISABLE PRICE - ---------------------------------------------------------------------------------------------------- $14.25 to $18.50 1,908,942 5.6 years $17.12 1,443,142 $16.83 $18.51 to $22.69 2,689,144 7.0 years $19.36 1,027,619 $20.52 - ---------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------
(d) Diluted earnings per share Diluted earnings per share reflects the most dilutive effect which would have resulted if the share options had been exercised at the beginning of the year. This would be anti-dilutive therefore no diluted earnings per share is disclosed. 37 ABITIBI-CONSOLIDATED INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ...CONTINUED (TABULAR AMOUNTS IN MILLIONS OF CANADIAN DOLLARS) 20 DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES ...CONTINUED NOTES TO FOREGOING CONSOLIDATED FINANCIAL STATEMENTS PREPARED IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (ix) PENSION PLANS
1998 1997 ------------------------------------ Change in benefit obligation Benefit obligation at beginning of year $ 2,062 $ 744 Acquisition of Abitibi-Price Inc. - 881 Service cost 49 27 Interest cost 131 127 Past service cost (plan amendment) 53 5 Plan participants' contributions 15 18 Changes in assumptions 44 356 Actuarial loss attributable to experience - 24 Foreign exchange loss 10 2 Benefits paid (122) (122) ------------------------------------ Benefit obligation at end of year 2,242 2,062 ------------------------------------ Change in plan assets Fair value of plan assets at beginning of year 1,884 788 Acquisition of Abitibi-Price Inc. - 905 Return on plan assets 141 268 Foreign exchange loss 8 2 Employer contributions 23 25 Plan participants' contributions 15 18 Benefits paid (122) (122) ------------------------------------ Fair value of plan assets at end of year 1,949 1,884 ------------------------------------ Funded status of the plans (293) (178) Unrecognized prior service cost 96 52 Unrecognized actuarial loss 394 342 Unrecognized transition asset (16) (20) ------------------------------------ Net amount recognized $ 181 $ 196 ------------------------------------ ------------------------------------ Amount recognized in the balance sheet consists of: Prepaid benefit cost $ 106 $ 160 Accrued benefit liability (109) - Intangible asset 52 12 Accumulated other comprehensive income (pre-tax) 132 24 ------------------------------------ Net amount recognized $ 181 $ 196 ------------------------------------ ------------------------------------
The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for pension plans with accumulated benefit obligations in excess of plan assets were $1,152 million, $1,015 million and $917 million, respectively as of December 31, 1998, and $490 million, $418 million and $372 million, respectively as of December 31, 1997. 38 ABITIBI-CONSOLIDATED INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ...CONTINUED (TABULAR AMOUNTS IN MILLIONS OF CANADIAN DOLLARS) 20 DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES ...CONTINUED NOTES TO FOREGOING CONSOLIDATED FINANCIAL STATEMENTS PREPARED IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES Net pension expense includes the following components:
1998 1997 1996 ------------------------------------- Service cost $ 49 $ 27 $ 15 Interest cost 130 127 54 Expected return on plan assets (161) (144) (73) Amortization of prior service cost 9 7 2 Recognized net actuarial loss 13 5 4 Amortization of the unrecognized transition obligation (3) (4) - ------------------------------------- Net pension expense $ 37 $ 18 $ 2 ------------------------------------- ------------------------------------- Weighted-average assumptions as of December 31: 1998 1997 ------------------------------------ Discount rate 6.00% 6.25% Expected return on plan assets 8.75% 8.75% Rate of compensation increase 3.50% 4.00% ------------------------------------ ------------------------------------
39 ABITIBI-CONSOLIDATED INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ...CONTINUED (TABULAR AMOUNTS IN MILLIONS OF CANADIAN DOLLARS) 20 DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES ...CONTINUED NOTES TO FOREGOING CONSOLIDATED FINANCIAL STATEMENTS PREPARED IN ACCORDANCE WITH UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (x) ADDITIONAL DISCLOSURES CHANGES IN CONSOLIDATED CASH POSITION
1998 1997 1996 -------------------------------------- Cash paid during the year for: Interest (net of capitalization) $ 117 $ 81 $ 72 Income taxes 10 9 9 -------------------------------------- -------------------------------------- CASH AND DEPOSITS Cash and deposits consist of cash on hand and balances with banks, and investments in short-term deposits with an original maturity of less than three months. ACCOUNTS RECEIVABLE The major components of accounts receivable are as follows: 1998 1997 ------------------------------------ Trade $ 353 $$ 390 Allowance for doubtful accounts (10) (13) Other 210 107 ------------------------------------ $ 553 $ 484 ------------------------------------ ------------------------------------
Financial instruments which potentially subject the Company to concentrations of credit risk are trade receivables which are derived from a diverse group of customers worldwide with a concentration in the U.S. The Company maintains an allowance based on the expected collectibility of the amounts. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES The major components of accounts payable and accrued liabilities are as follows:
1998 1997 ------------------------------------ Trade $ 506 $ 434 Accrued vacation pay 81 64 Other 162 164 ------------------------------------ $ 749 $ 662 ------------------------------------ ------------------------------------
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