U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14d-1F/A
TENDER OFFER STATEMENT PURSUANT TO RULE 14d-1(b) UNDER THE SECURITIES
EXCHANGE ACT OF 1934
AMENDMENT NO. 1
FORDING INC.
(Name of Subject Company)
N/A
(Translation of Subject Company's name into English (if applicable))
CANADA
(Jurisdiction of Subject Company's Incorporation or Organization)
SHERRITT COAL ACQUISITION INC.
(Bidder)
COMMON SHARES, NO PAR VALUE
(Title of Class of Securities)
345426
(CUSIP Number of Class of Securities (if applicable))
JAMES J. JUNEWICZ, ESQ. GEOFFREY CREIGHTON
MAYER, BROWN, ROWE & MAW TORYS LLP
190 S. LASALLE STREET 79 WELLINGTON STREET WEST, SUITE 3000
CHICAGO, IL 60622 BOX 270, TD CENTRE
(312) 701-7032 TORONTO, ONTARIO, CANADA M5K 1N2
(416) 865-7344
(Name, address (including zip code) and telephone number (including area code
of person(s) authorized to receive notices and communications
on behalf of bidder))
OCTOBER 25, 2002
(Date tender offer first published, sent or given to securityholders)
CALCULATION OF FILING FEE
TRANSACTION VALUATION AMOUNT OF FILING FEE
US$1,062,468,215 (1) US$97,748 (2) (3)
(1) The transaction valuation has been calculated pursuant to the instructions
to Schedule 14D-1F in accordance with Rule 0-11 of the Securities Exchange
Act of 1934, as amended, based on the offer to purchase all of the common
shares of Fording Inc., which had, as an average of their high and low
prices reported on the Toronto Stock Exchange on December 11, 2002, a value
of Cdn.$32.53 (US$20.974) multiplied by 50,656,442 common shares reported
outstanding in Fording Inc.'s Report on Form 6-K dated December 9, 2002.
For purposes of this calculation, US$1.00 = Cdn.$1.5510, the noon buying
rate in New York City as disclosed by the Federal Reserve Bank of New York
on December 17, 2002.
(2) $92 per $1 million of the Transaction Value.
(3) US$35,277 of this fee has been paid pursuant to a filing dated October 28,
2002, as indicated by the offset below. The additional US$62,471 of this
fee is being paid herewith.
[X] Check box if any part of the fee is offset as provided by Rule 0-11(a)(2)
and identify the filing with which the offsetting fee was previously paid.
Identify the previous filing by registration statement number, or the Form or
Schedule and the date of its filing. Schedule 14D-1F filed on October 28, 2002.
PART I
INFORMATION REQUIRED TO BE SENT TO SHAREHOLDERS
ITEM 1. HOME JURISDICTION DOCUMENTS
Document 1: Notice of Variation to Offer to Purchase and
Circular, dated December 16, 2002
Document 2: Offer to Purchase and Circular, dated
December 16, 2002
Document 3: Amended Letter of Transmittal and Election Form
Document 4: Amended Notice of Guaranteed Delivery
ITEM 2. INFORMATIONAL LEGENDS
See "Notice to Shareholders in the United States" in the Offer to
Purchase.
Document 1: Notice of Variation to Offer to Purchase and Circular, dated
December 16, 2002
THIS DOCUMENT IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION. IF YOU ARE IN
DOUBT AS TO HOW TO DEAL WITH IT, YOU SHOULD CONSULT YOUR INVESTMENT DEALER,
STOCKBROKER, LAWYER OR OTHER PROFESSIONAL ADVISOR. NEITHER THE SECURITIES
REGULATORY AUTHORITIES IN CANADA NOR THE UNITED STATES HAVE EXPRESSED AN OPINION
ABOUT THE SECURITIES OFFERED HEREUNDER AND IT IS AN OFFENCE TO CLAIM OTHERWISE.
NOTICE OF VARIATION
by
SHERRITT COAL ACQUISITION INC.,
a corporation wholly-owned by
SHERRITT COAL PARTNERSHIP II
in respect of its
OFFER TO PURCHASE
ALL OF THE OUTSTANDING COMMON SHARES
of
FORDING INC.
for
CDN.$35.00 CASH
(subject to proration)
OR
ONE EXCHANGE RIGHT EXCHANGEABLE INTO A TRUST UNIT
(subject to proration)
OR
A COMBINATION OF CASH AND EXCHANGE RIGHTS
(subject to proration)
Sherritt Coal Acquisition Inc. (the "Offeror" or "SCAI"), a Canadian
corporation wholly-owned by Sherritt Coal Partnership II, hereby gives notice
that on the date hereof it is varying its offer dated October 25, 2002 (the
"Original Offer") pursuant to which it offered to purchase all of the
outstanding common shares (the "Shares") of Fording Inc. ("Fording") for $29.00
per Share. The Original Offer is being varied by, among other things:
(i) increasing the cash consideration offered for each Share from $29.00 to
$35.00 and making the cash consideration subject to proration, (ii) adding, as
options available to Fording Shareholders for the consideration offered for each
Share, one exchange right exchangeable into one unit of the Canadian Coal Trust,
subject to proration, or a combination of cash and exchange rights, subject to
proration, and (iii) adding certain new conditions (the Original Offer as varied
and restated, the "Enhanced Offer").
The Enhanced Offer will be open for acceptance until 8:00 p.m. (Toronto
time) on January 6, 2003 unless withdrawn or extended.
IF THE FORDING-TECK COMBINATION IS APPROVED BY FORDING SHAREHOLDERS, THIS
ENHANCED OFFER WILL BE TERMINATED.
Except as otherwise set forth in this Notice of Variation, the information,
terms and conditions contained in the Original Offer continue to be applicable
in all respects. However, given the additional form of the consideration now
available to Shareholders who deposit their Shares under the Enhanced Offer, the
Offeror has restated the Original Offer, as varied, for convenience.
Accordingly, the Enhanced Offer is made pursuant to the varied and restated
offer attached hereto.
DECEMBER 16, 2002
Document 2: Offer to Purchase and Circular, dated December 16, 2002
THIS OFFER DOCUMENT VARIES AND RESTATES THE OFFER BY SHERRITT COAL
ACQUISITION INC., A CORPORATION WHOLLY-OWNED BY SHERRITT COAL PARTNERSHIP II,
DATED OCTOBER 25, 2002.
SHERRITT COAL ACQUISITION INC.,
a corporation wholly-owned by
SHERRITT COAL PARTNERSHIP II
OFFER TO PURCHASE
ALL OF THE OUTSTANDING COMMON SHARES
of
FORDING INC.
for
CDN.$35.00 CASH
(subject to proration)
OR
ONE EXCHANGE RIGHT EXCHANGEABLE INTO A TRUST UNIT
(subject to proration)
OR
A COMBINATION OF CASH AND EXCHANGE RIGHTS
(subject to proration)
Sherritt Coal Acquisition Inc. (the "Offeror" or "SCAI"), a Canadian
corporation wholly-owned by Sherritt Coal Partnership II (the "Partnership"),
hereby gives notice that on the date hereof it is varying its offer dated
October 25, 2002 (the "Original Offer") pursuant to which it offered to purchase
all of the outstanding common shares (the "Shares") of Fording Inc. ("Fording")
for $29.00 per Share. The Original Offer is being varied by, among other things:
(i) increasing the cash consideration offered for each Share from $29.00 to
$35.00 and making the cash consideration subject to proration, (ii) adding, as
options available to shareholders of Fording ("Shareholders") for the
consideration offered for each Share, one exchange right ("Exchange Right")
exchangeable into one unit ("Unit") of the Canadian Coal Trust (the "Trust"),
subject to proration, or a combination of cash and Exchange Rights, subject to
proration, and (iii) adding certain new conditions (the Original Offer as varied
and restated, the "Enhanced Offer").
The Enhanced Offer will be open for acceptance until 8:00 p.m. (Toronto
time) on January 6, 2003, unless withdrawn or extended.
The $35.00 cash offer represents a premium of approximately 50% to the
20 day average closing price for the Shares on the Toronto Stock Exchange (the
"TSX") for the period ending October 18, 2002, the last trading day prior to the
announcement of the Offeror's intention to make the Original Offer. The closing
price for the Shares on October 18, 2002 was Cdn.$25.99 on the TSX and
U.S.$16.50 on the New York Stock Exchange ("NYSE").
The Exchange Rights are designed to allow Shareholders to convert their
interest in Fording into an interest in the Trust. Each Exchange Right will
entitle the holder thereof to receive, for no additional consideration, one Unit
of the Trust on the Date of Exchange (as defined below).
THE AGGREGATE MAXIMUM AMOUNT OF CASH AVAILABLE TO SHAREHOLDERS UNDER THE
ENHANCED OFFER IS $850 MILLION. THE AGGREGATE MAXIMUM NUMBER OF EXCHANGE RIGHTS
AVAILABLE TO SHAREHOLDERS UNDER THE ENHANCED OFFER IS APPROXIMATELY
42,405,000 EXCHANGE RIGHTS. IF EITHER OF THESE LIMITS IS EXCEEDED IN THE
ELECTIONS MADE BY SHAREHOLDERS TENDERING THEIR SHARES UNDER THE ENHANCED OFFER,
THE AMOUNT OF CASH PAID IN THE CASH OPTION OR COMBINATION OPTION AND THE NUMBER
OF EXCHANGE RIGHTS ISSUED AND DISTRIBUTED IN THE EXCHANGE RIGHTS OPTION OR
COMBINATION OPTION WILL BE ADJUSTED ON A PRO RATA BASIS. ONTARIO TEACHERS'
PENSION PLAN BOARD ("OTPP"), WHOSE SUBSIDIARY IS ONE OF THE PARTNERS IN THE
PARTNERSHIP, HAS INDICATED THAT IT WILL ELECT TO RECEIVE EXCHANGE RIGHTS FOR
EACH OF THE 3,150,260 SHARES IT HOLDS. IF ALL SHAREHOLDERS (OTHER THAN OTPP)
ELECT TO RECEIVE CASH, THEN SUCH SHAREHOLDERS WILL RECEIVE APPROXIMATELY $17.63
IN CASH AND 0.496 OF AN EXCHANGE RIGHT PER SHARE. IF ALL SHAREHOLDERS ELECT TO
RECEIVE EXCHANGE RIGHTS, THEN ALL SHAREHOLDERS WILL RECEIVE APPROXIMATELY $6.13
IN CASH AND 0.825 OF AN EXCHANGE RIGHT PER SHARE.
Fording had proposed to Shareholders that, at a special meeting of
Shareholders originally scheduled to be held on December 20, 2002, approval be
given to a plan of arrangement pursuant to which Fording and certain of its
subsidiaries would be converted into an income trust with the participation of
Teck Cominco Limited and Westshore Terminals Income Fund (the "Fording-Teck
Combination"). On December 12, 2002, Fording announced that it was postponing
the date of this special meeting of Shareholders from December 20, 2002 to
January 3, 2003. IF THE FORDING-TECK COMBINATION IS APPROVED, THE CONDITIONS OF
THE ENHANCED OFFER WILL NOT HAVE BEEN SATISFIED AND THE ENHANCED OFFER WILL BE
TERMINATED.
The Enhanced Offer is subject to the conditions set forth in Section 4 of
the Enhanced Offer, "Conditions of the Enhanced Offer", including: (i) THE
FORDING-TECK COMBINATION SHALL NOT HAVE BEEN APPROVED BY SHAREHOLDERS;
(ii) there being validly deposited under the Enhanced Offer and not withdrawn at
the Expiry Time a number of Shares that, together with the Shares held by the
Offeror, the Partnership and wholly-owned subsidiaries of each of Sherritt
International Corporation ("Sherritt") and OTPP respectively, which are the two
partners (the "Partners") of the Partnership, and their respective affiliates,
represents at least 66 2/3% of the outstanding Shares (calculated on a diluted
basis); (iii) the receipt of customary regulatory approvals, including under the
COMPETITION ACT (Canada); and (iv) the expiration or termination of all waiting
periods imposed by the United States HART-SCOTT-RODINO ANTITRUST IMPROVEMENTS
ACT OF 1976, as amended, and the regulations thereunder (the "HSR Act"). Subject
to the terms and conditions of the Enhanced Offer, the Offeror will take up and
pay for the Shares deposited under the Enhanced Offer as soon as practicable
after January 6, 2003.
As at the date of the Enhanced Offer, OTPP, whose subsidiary is one of the
Partners, beneficially owns 3,150,260 Shares, representing approximately 6.2% of
the outstanding Shares. OTPP has advised the Offeror that it intends to deposit
these Shares under the Enhanced Offer and elect to receive Exchange Rights in
consideration therefor, subject to proration. OTPP has also advised the Offeror
that it intends to vote its Shares against the Fording-Teck Combination.
The Exchange Rights are securities of Sherritt that will be distributed by
the Offeror to Shareholders under the Enhanced Offer. The TSX has conditionally
approved the listing of the Exchange Rights. The listing of the Exchange Rights
is subject to Sherritt fulfilling all the listing requirements of the TSX on or
before March 13, 2003. Sherritt has also applied, on behalf of the Trust, to
list the Units to be distributed upon the exchange of the Exchange Rights
following the completion of the Enhanced Offer, on the TSX. This listing will be
subject to Sherritt fulfilling all the listing requirements of the TSX.
SHAREHOLDERS WHO WISH TO ACCEPT THE ENHANCED OFFER: (I) SHOULD VOTE AGAINST
THE FORDING-TECK COMBINATION, AND (II) MUST PROPERLY COMPLETE AND EXECUTE THE
ACCOMPANYING LETTER OF TRANSMITTAL AND ELECTION FORM (PRINTED ON PINK PAPER), or
a manually signed facsimile thereof, and deposit it, together with certificates
representing their Shares, in accordance with the instructions in the Letter of
Transmittal and Election Form at the offices of CIBC Mellon Trust Company (the
"Depositary") or Mellon Investor Services, LLC (the "U.S. Forwarding Agent") at
or prior to the Expiry Time. Alternatively, Shareholders who wish to accept the
Enhanced Offer and whose certificates are not immediately available may do so by
following the procedures for guaranteed delivery set forth in Section 3 of the
Enhanced Offer, "Manner of Acceptance", using the accompanying Notice of
Guaranteed Delivery (printed on orange paper).
Persons whose Shares are held in an account with an investment dealer,
stockbroker, bank, trust company or other nominee should contact their
representative if they wish to accept the Enhanced Offer.
Goldman, Sachs & Co., National Bank Financial Inc. and BMO Nesbitt
Burns Inc. have been retained to act as financial advisors to the Offeror.
National Bank Financial Inc. and BMO Nesbitt Burns Inc. and their respective
U.S. affiliates have been retained to act as dealer managers (the "Dealer
Managers"). In addition, National Bank Financial Inc. and BMO Nesbitt
Burns Inc. have also been retained to form a soliciting dealer group to solicit
acceptances of the Enhanced Offer in Canada. The Offeror will pay the soliciting
dealers certain fees, as described in Section 24 of the Circular, "Financial
Advisors, Dealer Managers and Soliciting Dealer Group". No fee or commission
will be payable by any Shareholder who transmits his or her Shares directly to
the Depositary or the U.S. Forwarding Agent or who avails himself or herself of
the facilities of a soliciting dealer to accept the Enhanced Offer. The Offeror
has also retained Innisfree M&A Incorporated to act as information agent
(the "Information Agent"), to provide a resource for information for
Shareholders, particularly those resident in the United States. Peters & Co.
Limited has been advising the Partnership and the Offeror in respect of certain
strategic matters related to the Enhanced Offer.
Questions and requests for assistance may be directed to the Dealer
Managers, the Depositary, the U.S. Forwarding Agent or the Information Agent and
additional copies of this document, the Letter of Transmittal and Election Form
and the Notice of Guaranteed Delivery may be obtained, without charge, on
request from those persons at their respective offices and phone numbers shown
on the last page of this document.
THIS DOCUMENT DOES NOT CONSTITUTE AN OFFER OF SECURITIES OR A SOLICITATION
TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS
UNLAWFUL. THE ENHANCED OFFER IS NOT BEING MADE TO, NOR WILL DEPOSITS BE ACCEPTED
FROM OR ON BEHALF OF, SHAREHOLDERS IN ANY JURISDICTION IN WHICH THE MAKING OR
ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE WITH THE LAWS OF SUCH
JURISDICTION. FURTHER, NO SECURITIES WILL BE DELIVERED TO SHAREHOLDERS IN ANY
JURISDICTION IN WHICH DELIVERY THEREOF WOULD NOT BE IN COMPLIANCE WITH THE LAWS
OF THAT JURISDICTION. HOWEVER, THE OFFEROR OR ITS AGENTS MAY, IN THEIR SOLE
DISCRETION, TAKE SUCH ACTION AS THEY MAY DEEM NECESSARY TO EXTEND THE ENHANCED
OFFER OR MAKE DELIVERY OF SECURITIES TO SHAREHOLDERS IN SUCH JURISDICTION. IN
ANY JURISDICTION WHERE U.S. STATE SECURITIES LAWS OR OTHER LAWS REQUIRE THIS
ENHANCED OFFER TO BE MADE BY A LICENSED BROKER OR DEALER, THIS ENHANCED OFFER
SHALL BE DEEMED TO BE MADE ON OUR BEHALF BY ONE OR MORE REGISTERED BROKERS OR
DEALERS LICENSED UNDER THE LAWS OF THE RELEVANT JURISDICTION.
ALL DOLLAR REFERENCES IN THE ENHANCED OFFER AND CIRCULAR ARE IN CANADIAN
DOLLARS, UNLESS OTHERWISE INDICATED. ON DECEMBER 13, 2002, THE INVERSE OF THE
NOON BUYING RATE OF EXCHANGE, AS REPORTED BY THE BANK OF CANADA, WAS
CDN.$1.00 = U.S.$0.6409.
FOR A DISCUSSION OF THE RISK FACTORS YOU SHOULD CONSIDER IN EVALUATING THE
EXCHANGE RIGHTS OFFERED UNDER THE ENHANCED OFFER AND, ULTIMATELY, THE UNITS, SEE
"RISK FACTORS" IN EACH OF APPENDIX A AND APPENDIX B TO THE CIRCULAR.
THE CANADIAN DEALER MANAGERS FOR THE ENHANCED OFFER ARE:
National Bank Financial Inc. BMO Nesbitt Burns Inc.
THE INFORMATION AGENT FOR THE ENHANCED OFFER IS:
Innisfree M&A Incorporated
December 16, 2002
NOTICE TO SHAREHOLDERS
IN THE UNITED STATES
This offering is made for the securities of a Canadian issuer by Canadian
issuers that are permitted, under a multi-jurisdictional disclosure system
adopted by the United States, to prepare this document in accordance with the
disclosure requirements of Canada. Shareholders should be aware that such
requirements are different from those of the United States. The financial
statements included or incorporated herein, have been prepared in accordance
with Canadian generally accepted accounting principles, and Canadian auditing
and auditor independence standards, and, thus, may not be comparable to
financial statements of United States companies.
Shareholders should be aware that the exchange of securities described
herein may have tax consequences both in the United States and in Canada. Such
consequences for Shareholders who are resident in, or citizens of, the United
States may not be described fully herein. See Section 19 and Section 20 of the
Circular, and the sections entitled "Certain Canadian Federal Income Tax
Considerations" and "Certain United States Federal Income Tax Considerations" in
Appendix A to the Circular.
The enforcement by Shareholders of civil liabilities under the federal
securities laws may be affected adversely by the fact that each of the Offeror
and Sherritt is incorporated, and the Canadian Coal Trust is established, under
the laws of Canada, that some or all of the officers and directors of the
Offeror and Sherritt and the Trustees of the Canadian Coal Trust are residents
of a foreign country, that some or all of the Dealer Managers or experts named
in the registration statement may be residents of a foreign country, and that
all or a substantial portion of the assets of said persons may be located
outside the United States.
NEITHER THE U.S. SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE SECURITIES TO BE ISSUED PURSUANT
TO THE ENHANCED OFFER OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS DOCUMENT.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENCE.
Shareholders should be aware that, while the Enhanced Offer is outstanding,
the Offeror and its affiliates, directly or indirectly, may bid for or make
purchases of the securities to be distributed or exchanged, or certain related
securities, as permitted by applicable laws or regulations of Canada or its
provinces or territories.
THE OFFEROR RESERVES THE RIGHT, IN THE EVENT THAT THE EXCHANGE RIGHTS OR THE
UNITS WHICH WOULD OTHERWISE BE ISSUED TO PERSONS RESIDENT IN CERTAIN STATES OF
THE UNITED STATES OR RESIDENTS IN OTHER JURISDICTIONS, MAY NOT BE LAWFULLY
DELIVERED WITHOUT FURTHER ACTION BY SHERRITT OR THE TRUST, TO MAKE CASH PAYMENT
TO THE DEPOSITARY ON BEHALF OF SUCH PERSONS.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this document, its appendices and the
documents incorporated by reference herein are forward-looking statements,
including within the meaning of such term under the United States PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995. Forward-looking statements often, but
not always, are identified by the use of words such as "seek", "anticipate",
"believe", "plan", "estimate", "expect" and "intend" and statements that an
event or results "may", "will", "should", "could" or "might" occur or be
achieved and other similar expressions. The forward-looking statements that are
contained in the Enhanced Offer and Appendix A to the Circular reflect the
current beliefs of the Offeror and the forward-looking statements contained in
Appendix B to the Circular and the documents incorporated by reference therein
reflect the current beliefs of Sherritt and, in each case, are based on
currently available information. Forward-looking statements involve significant
risks and uncertainties that may cause actual results and events to differ
materially from results forecast or suggested in these forward-looking
statements. Some of these risks and uncertainties are identified under the
heading "Risk Factors" in each of Appendix A and Appendix B to the Circular and
"Risks and Uncertainties" in the Management's Discussion and Analysis on
pages 26 through 28 of Sherritt's 2001 Annual Report. Although the
forward-looking statements contained in the Enhanced Offer and Appendix A
to the Circular are based on what the Offeror believes are reasonable
assumptions and the forward-looking statements in Appendix B to the Circular and
the documents incorporated by reference therein are based upon what Sherritt
believes are reasonable assumptions, no assurance can be given that actual
events or results will be consistent with these forward-looking statements.
Because of this, undue reliance should not be placed on the forward-looking
statements. Neither the Offeror nor Sherritt has any obligation to update or
revise any forward-looking statements, whether to reflect new information,
future events or circumstances or otherwise, except to the extent required by
applicable securities laws, regulations and rules.
ENHANCED OFFER AND CIRCULAR
TABLE OF CONTENTS
Page
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SUMMARY OF ENHANCED OFFER AND CIRCULAR AND
THE CANADIAN COAL TRUST................................... 1
ENHANCED OFFER.............................................. 11
1. THE ENHANCED OFFER...................................... 11
2. TIME FOR ACCEPTANCE..................................... 12
3. MANNER OF ACCEPTANCE.................................... 12
4. CONDITIONS OF THE ENHANCED OFFER........................ 15
5. EXTENSION, VARIATION OR CHANGE OF THE ENHANCED OFFER.... 17
6. PAYMENT FOR DEPOSITED FORDING SHARES.................... 18
7. WITHDRAWAL OF DEPOSITED FORDING SHARES.................. 19
8. RETURN OF FORDING SHARES................................ 19
9. CHANGES IN CAPITALIZATION, DIVIDENDS, DISTRIBUTION,
LIENS..................................................... 20
10. MARKET PURCHASES........................................ 20
11. NOTICES AND DELIVERY.................................... 21
12. MAIL SERVICE INTERRUPTION............................... 21
13. SHAREHOLDERS IN CERTAIN JURISDICTIONS................... 21
14. OTHER TERMS OF THE ENHANCED OFFER....................... 22
CIRCULAR.................................................... 23
1. THE OFFEROR............................................. 23
2. SHERRITT COAL PARTNERSHIP II............................ 23
3. ONTARIO TEACHERS' PENSION PLAN BOARD.................... 23
4. SHERRITT INTERNATIONAL CORPORATION...................... 23
5. THE CANADIAN COAL TRUST................................. 24
6. PURPOSE OF THE ENHANCED OFFER........................... 24
7. BENEFITS OF THE ENHANCED OFFER.......................... 24
8. PLANS FOR FORDING....................................... 26
9. THE CANADIAN COAL TRUST, SCAI, THE METCOAL COMPANY, THE
UNITS AND THE EXCHANGE RIGHTS........................... 27
10. OWNERSHIP OF FORDING SHARES............................. 27
11. PRICE RANGE AND TRADING VOLUME OF FORDING SHARES........ 27
12. COMMITMENTS TO ACQUIRE FORDING SHARES................... 28
13. ARRANGEMENTS, AGREEMENTS OR UNDERSTANDINGS.............. 29
14. MATERIAL CHANGES IN THE AFFAIRS OF FORDING AND OTHER
INFORMATION............................................... 29
15. SOURCE OF FUNDS......................................... 29
16. INFORMATION CONCERNING FORDING SHARES................... 30
17. REGULATORY MATTERS...................................... 31
18. ACQUISITION OF FORDING SHARES NOT DEPOSITED UNDER THE
ENHANCED OFFER............................................ 33
19. CANADIAN FEDERAL INCOME TAX CONSIDERATIONS.............. 36
20. UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS......... 40
21. SHAREHOLDER RIGHTS PLAN................................. 41
22. ACCEPTANCE OF THE ENHANCED OFFER........................ 41
23. DEPOSITARY, U.S. FORWARDING AGENT AND INFORMATION
AGENT..................................................... 41
24. FINANCIAL ADVISORS, DEALER MANAGERS AND SOLICITING
DEALER GROUP.............................................. 42
25. STATUTORY RIGHTS........................................ 42
26. RESTRICTIONS ON NON-CANADIANS........................... 42
FORDING, TECK AND WESTSHORE INFORMATION..................... 43
i
Page
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DOCUMENTS FILED AS PART OF THE UNITED STATES REGISTRATION
STATEMENT................................................. 43
COMPARISON OF RIGHTS OF FORDING SHAREHOLDERS, HOLDERS OF
EXCHANGE RIGHTS AND UNITHOLDERS........................... 44
GLOSSARY.................................................... 51
EXCHANGE RATES.............................................. 56
CONSENT OF TORYS LLP........................................ 57
CONSENT OF MAYER, BROWN, ROWE & MAW......................... 58
CONSENT OF NORWEST CORPORATION.............................. 59
APPROVAL AND CERTIFICATE OF SHERRITT COAL
ACQUISITION INC........................................... 60
APPENDIX A -- Information Concerning the Canadian Coal
Trust..................................................... A-1
APPENDIX B -- Information Concerning Sherritt International
Corporation............................................... B-1
APPENDIX C -- Financial Statements.......................... C-1
APPENDIX D -- Independent Opinion of Norwest Corporation
Regarding Line Creek Mine
Plan and Cost Estimates................................... D-1
ii
SUMMARY OF ENHANCED OFFER AND CIRCULAR
AND THE CANADIAN COAL TRUST
THE FOLLOWING IS A SUMMARY ONLY AND IS QUALIFIED IN ITS ENTIRETY BY THE
DETAILED PROVISIONS CONTAINED IN THE ENHANCED OFFER AND CIRCULAR, INCLUDING THE
APPENDICES. SHAREHOLDERS SHOULD READ THE ENHANCED OFFER AND CIRCULAR, INCLUDING
THE APPENDICES, IN THEIR ENTIRETY. CERTAIN CAPITALIZED AND OTHER TERMS USED IN
THIS SUMMARY ARE DEFINED IN THE GLOSSARY. INFORMATION CONCERNING FORDING, TECK
AND WESTSHORE (INCLUDING FORWARD-LOOKING STATEMENTS) CONTAINED IN THE ENHANCED
OFFER AND CIRCULAR HAS BEEN TAKEN FROM OR IS BASED UPON PUBLICLY AVAILABLE
DOCUMENTS OR RECORDS OF FORDING, TECK AND WESTSHORE ON FILE WITH CANADIAN AND
U.S. SECURITIES REGULATORY AUTHORITIES AND OTHER PUBLIC SOURCES. ALTHOUGH THE
OFFEROR HAS NO KNOWLEDGE THAT WOULD INDICATE THAT ANY STATEMENTS CONTAINED
HEREIN THAT ARE TAKEN FROM OR ARE BASED UPON THOSE DOCUMENTS AND RECORDS OR
OTHER PUBLIC SOURCES, ARE UNTRUE OR INCOMPLETE, THE OFFEROR DOES NOT ASSUME AND
EXPRESSLY DISCLAIMS ANY RESPONSIBILITY FOR THE ACCURACY OR COMPLETENESS OF THE
INFORMATION TAKEN FROM OR BASED UPON THOSE DOCUMENTS, RECORDS AND OTHER PUBLIC
SOURCES, OR FOR ANY FAILURE BY FORDING, TECK OR WESTSHORE TO DISCLOSE PUBLICLY
EVENTS OR FACTS WHICH MAY HAVE OCCURRED OR WHICH MAY AFFECT THE SIGNIFICANCE OR
ACCURACY OF ANY SUCH INFORMATION, BUT WHICH ARE UNKNOWN TO THE OFFEROR.
COMPARISON OF OUR SUPERIOR PROPOSAL
AND THE FORDING-TECK COMBINATION
---------------------------------------------------------------------------------------------------------------------
REASONS SCAI
SCAI PROPOSAL
PROPOSAL IS SUPERIOR: FORDING-TECK COMBINATION
---------------------------------------------------------------------------------------------------------------------
HIGHER CASH CONSIDERATION + $35.00 per Share x $34.00 per Share
+ Maximum cash proration: $17.63 cash x Maximum cash proration: $15.60 cash
plus 0.496 of an Exchange Right plus 0.541 of a trust unit
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EQUIVALENT TARGET + $1.05 in the first quarter of 2003 x $1.05 in the first quarter of 2003
DISTRIBUTABLE CASH FLOW
---------------------------------------------------------------------------------------------------------------------
SUBORDINATION PROVIDES + Subordination of distributions for x None
DOWNSIDE PROTECTION the first four quarters up to
$11.25 million in each quarter
+ Subordination level set at maximum
$1.05 per Unit per quarter
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LESS DEBT + At most approximately $300 million x Approximately $425 million of debt,
of debt, excluding working capital excluding working capital
+ At most approximately 1.1x pro forma x Approximately 2.0x pro forma
annualized EBITDA, no hedging annualized EBITDA
liability
---------------------------------------------------------------------------------------------------------------------
NO HEDGE EXPOSURE + None - hedge eliminated x Mark-to-market hedge liability of
approximately $115 million with
continued potential impact on 2003 to
2006 distributable cash (reduced
distributable cash flow by $1.09 per
unit for the first nine months of
2003 on a pro forma basis)
---------------------------------------------------------------------------------------------------------------------
1
---------------------------------------------------------------------------------------------------------------------
REASONS SCAI
SCAI PROPOSAL
PROPOSAL IS SUPERIOR: FORDING-TECK COMBINATION
---------------------------------------------------------------------------------------------------------------------
MORE SYNERGIES + $50 million of cost synergies alone x $50 million of combined cost AND
marketing synergies
+ Additional marketing and coal
blending synergies
+ Enhanced synergies driven by Neptune
Terminals, closer geographic
proximity of mines and potential
mineral tax savings
---------------------------------------------------------------------------------------------------------------------
LOWER CORPORATE OVERHEAD + Annual corporate overhead is capped x Annual corporate overhead is
COSTS at 2002 levels (excluding unusual and estimated by Fording to increase by
one-time items) $2 million from 2002 levels
+ Management's incentive based on x Potentially dilutive management
ability to cut costs; adds no option plan consisting of
additional costs to Trust 3.6 million units
---------------------------------------------------------------------------------------------------------------------
SUPERIOR GOVERNANCE + All of the Trustees will be x A majority of trustees and board
independent of the Partnership, members are appointed by Teck and
Sherritt and OTPP Westshore
+ A majority of the Board of SCAI will
be independent of the Partnership,
Sherritt and OTPP
---------------------------------------------------------------------------------------------------------------------
NOT SUBJECT TO SIGNIFICANT + None x Teck is able to convert its
DILUTION partnership stake into trust units on
a basis which may result in:
- significant reduction of
distributable cash
- increased indebtedness in the trust
- a change of control of the trust to
Teck
---------------------------------------------------------------------------------------------------------------------
REASONS FOR THE ENHANCED OFFER
The Offeror's objective is to provide Fording Shareholders with the
opportunity to maximize the value of their Fording investment from their
individual perspectives, by providing choices to: (i) obtain an immediate cash
payment of $35.00 per share; or (ii) invest in an enhanced income trust based
upon a new company more closely focused and globally competitive as a
metallurgical coal producer than Fording is today. It is intended that the
Canadian Coal Trust be a superior investment alternative to the Fording-Teck
Combination, by combining metallurgical operations of Fording, Luscar and CONSOL
into one company (the "MetCoal Company") to: (i) improve the productivity and
lower the cost structure of these operations; (ii) reduce the costs of shipping
coal from the mines to customers ("ex-mine costs"); and (iii) enhance product
offerings and increase flexibility to respond to market demand. The Canadian
Coal Trust will hold a significant economic interest in the MetCoal Company
through its ownership of SCAI Shares and all of the SCAI Series A Notes and
SCAI's ownership of all the MetCoal Common Shares and MetCoal Notes. The
Partnership will also indirectly hold a significant economic interest in the
MetCoal Company through its ownership of SCAI Shares and all of the SCAI
Series B Notes. See Appendix A to the Circular for information regarding the
MetCoal Company and the Canadian Coal Trust.
2
GREATER POTENTIAL FOR THE METCOAL COMPANY
The Offeror believes that the metallurgical coal assets and associated
operations of Fording and the Met Coal Assets are complementary and that the
combination thereof will provide the MetCoal Company with capabilities and
resources that are better positioned to succeed in a highly competitive global
metallurgical coal market. The combination is expected to enhance the
profitability and growth prospects of the MetCoal Company by generating
significant operating efficiencies from a larger base of mining operations and
port facilities. The Offeror expects the combination of Fording and the
Met Coal Assets to generate cost savings of approximately $50 million annually
plus additional marketing and coal blending synergies. The Offeror believes the
most significant benefits of the combination of the metallurgical coal assets
and operations of Fording and the Met Coal Assets are as follows:
INCREASED EFFICIENCY OF EXISTING MINE OPERATIONS. The Fording metallurgical
coal assets and the Line Creek mine included in the Met Coal Assets are in close
proximity to each other in the Elk Valley region in southeastern British
Columbia. The combination of these metallurgical coal assets will allow the
MetCoal Company to: (i) share contiguous production, management and
infrastructure; (ii) optimize production from lower cost reserves;
(iii) provide superior coal blending capability; (iv) enhance the production of
higher quality reserves; and (v) achieve lower costs on certain goods, services
and equipment through purchasing efficiencies. The Line Creek mine is contiguous
with the Greenhills mine and the Fording River mine, whereas Teck's Elkview mine
is not. By combining the metallurgical coal reserves held by Fording and the
Line Creek mine, the MetCoal Company may be able to extend the life of Fording's
existing mines beyond their current planned closure dates.
MORE EFFICIENT USE OF TERMINAL HANDLING FACILITIES. The MetCoal Company
expects to sell a greater proportion of its coal through bulk handling
facilities on the Canadian west coast at Neptune Terminals, in which the MetCoal
Company will own a 46.4% interest. In addition, the MetCoal Company intends to
continue shipping a significant amount of its coal through Westshore, which
shall remain an important bulk handling facility for the MetCoal Company. By
agreement with the other shareholders of Neptune Terminals, rates charged for
the handling of coal and other products are based on the actual costs allocated
to the handling of each product. As a result, it is anticipated that the port
costs allocated to the MetCoal Company's shipments through Neptune Terminals
will be significantly lower than commercial rates charged by Westshore. Fording
currently ships to all of its overseas customers through Westshore under three
contracts, two of which have expired or will expire before the end of 2002. The
incremental cost of throughput at Neptune Terminals, including ancillary rail
charges, is approximately $2.50 per tonne, which is less than half of the
average coal loading revenue of $5.75 per tonne realized by Westshore during the
first nine months of 2002. During 2002, the Line Creek mine has reduced its port
costs by increasing shipments through Neptune Terminals. Neptune Terminals
currently has the capacity to handle an additional 4.0 million tonnes of coal in
2003 and, with modest capital expenditures, increase its capacity by a further
4.0 million tonnes. The MetCoal Company will also continue to have access to
Westshore under existing contracts. Having access to both terminals will provide
the MetCoal Company with significant flexibility including the ability to
continue shipping coal in the event of disruptions at either terminal facility.
MORE EFFICIENT USE OF RAIL TRANSPORTATION AND REDUCED VESSEL DEMURRAGE
CHARGES. Rail transportation is one of the largest costs incurred in the
delivery of coal to customers. It is expected that the combination of the Met
Coal Assets and Fording will allow for more efficient scheduling of rail cars
and will optimize the movement of coal and deliveries to customers. It is also
expected that the increased use of Neptune Terminals will allow the MetCoal
Company to reduce vessel demurrage charges that result from port congestion.
SUPERIOR PRODUCT OFFERING. Steel makers blend a wide range of metallurgical
coals to provide the optimum chemical and physical characteristics of coke for
their specific circumstances while minimizing their costs. Coals within a mine
site and between differing mines can have significantly varying characteristics.
The MetCoal Company will have a greater degree of flexibility in blending coals
to better meet a broader range of customer specifications and, accordingly, will
have greater opportunities to broaden its customer base and increase revenues.
3
POTENTIAL TAX SAVINGS. As at December 31, 2001, the Line Creek mine had a
$307.2 million cumulative provincial mineral tax cost pool which could be used
to reduce the amount of provincial mineral taxes currently paid at Fording's
mines, which amounted to $18.4 million in 2001 and $15.5 million through the
nine months ending September 30, 2002.
THE ENHANCED OFFER
CONSIDERATION OPTIONS. The Offeror has varied its Original Offer by
offering to purchase, on and subject to the terms and conditions set forth in
the Enhanced Offer, Circular, Letter of Transmittal and Election Form and Notice
of Guaranteed Delivery, all of the outstanding common shares of Fording,
including Shares that may become outstanding on the exercise of options, in
exchange for each Share deposited under the Enhanced Offer, at the election of
the Shareholder tendering to the Enhanced Offer:
- $35.00 cash per Share to a maximum of $850 million (subject to proration)
(the "Cash Option"), or
- one Exchange Right exchangeable into a Unit of the Canadian Coal Trust, to
a maximum of approximately 42,405,000 Exchange Rights (subject to
proration) (the "Exchange Right Option"), or
- a combination of cash and Exchange Rights (subject to proration) (the
"Combination Option").
The Cash Option, the Exchange Right Option and the Combination Options are
subject to proration. The aggregate maximum amount of cash available to
Shareholders under the Enhanced Offer is $850 million (the "Maximum Cash
Amount"). The aggregate maximum number of Exchange Rights available to
Shareholders under the Enhanced Offer is approximately 42,405,000 Exchange
Rights (the "Maximum Exchange Right Amount"). If either of these limits is
exceeded in the elections made by Shareholders, the amount of cash paid or the
number of Exchange Rights distributed will be adjusted on a pro rata basis. If
all Shareholders (other than OTPP) elect to receive cash, then all Shareholders
will receive approximately $17.63 in cash and 0.496 of an Exchange Right per
Share. If all Shareholders elect to receive Exchange Rights, then all
Shareholders will receive approximately $6.13 in cash and 0.825 of an Exchange
Right per Share.
OTPP, whose subsidiary is one of the Partners, beneficially owns 3,150,260
Shares, representing approximately 6.2% of the outstanding Shares. OTPP has
advised the Offeror that it intends to deposit these Shares under the Enhanced
Offer and elect to receive Exchange Rights in consideration therefor, subject to
proration. OTPP has also advised the Offeror that it intends to vote its Shares
against the Fording-Teck Combination.
The Offeror has obtained a commitment for a bridge loan facility, of which
up to approximately $300 million is expected to be drawn, from an affiliate of
an investment banking firm and several Canadian chartered banks. Of the
$300 million expected to be drawn, approximately $90 million will be used to pay
the break fee and repay a portion of the existing debt and hedging arrangements
of Fording. The remaining $210 million expected to be drawn will be applied
towards the purchase of Shares. In the event that less than $210 million is
required from this bridge loan to purchase Shares under the Enhanced Offer,
then, to the extent of any such difference up to $210 million, the Offeror
intends that the proceeds of this bridge loan facility or funds available under
its other credit facilities will be used to fund a special distribution by SCAI
to the Partnership and the Canadian Coal Trust, on a pro rata ownership basis.
The Canadian Coal Trust will use the funds to pay a special distribution to
holders of Units. The bridge loan commitment is subject to customary conditions
including the absence of a material adverse change in the business or financial
condition of Fording and the entering into of definitive loan documents
containing usual and customary provisions for such a financing.
EXCHANGE RIGHTS. The Exchange Rights will be securities issued by Sherritt.
Each Exchange Right will entitle the holder to receive one Unit in the Canadian
Coal Trust on the Date of Exchange provided certain conditions are met. The Date
of Exchange will be the fifth business day after the day on which the Canadian
Coal Trust has received all required regulatory approvals for the exchange to
occur such that the Units will be issued as freely tradeable securities in each
of Canada and the United States. See Appendix A to the Circular for a
description of the Exchange Rights and the Canadian Coal Trust.
4
On the 10th Business Day following the Date of Exchange, the Canadian Coal
Trust will pay to all Unitholders of record on the Date of Exchange, for each
Unit held (net of applicable withholding taxes), a cash distribution, calculated
from the first Take Up and Pay Date up to but excluding the Date of Exchange, in
an amount accruing daily at the rate of $1.05 per calendar quarter per Unit (the
"Initial Trust Distribution"). See Appendix A to the Circular for a more
detailed description of the Initial Trust Distribution.
The proportionate interests of the Canadian Coal Trust and the Partnership
in the MetCoal Company will be dependent upon the percentage of Shares held by
Shareholders who elect to receive Exchange Rights in consideration for their
Shares deposited under the Enhanced Offer. After giving effect to the
acquisition of the Met Coal Assets, but excluding the exercise of the
Luscar Put (both as described below in this summary, see "Anticipated
Transactions and Structure") the interest of the Canadian Coal Trust in the
MetCoal Company will be not less than 57.6% and not more than 84.3% and for the
Partnership will be not less than 15.7% and not more than 42.4%.
UNITS. Approximately 51.4 million Units is the total number of Units that
will be issued to Fording Shareholders under the Enhanced Offer and issuable to
the Partnership upon the exchange of its interest in SCAI into Units. This
aggregate number is equal to the total number of Fording Shares outstanding
(calculated on a diluted basis).
BENEFITS OF THE ENHANCED OFFER
The Offeror believes that the Enhanced Offer is superior to the Fording-Teck
Combination for the following reasons:
EQUIVALENT DISTRIBUTABLE CASH FLOW INITIALLY AND HIGHER DISTRIBUTABLE CASH
FLOW LONG TERM. The first quarter 2003 target for distributable cash flow per
Unit of the Canadian Coal Trust and the proposed Fording-Teck Combination first
quarter 2003 target amount are the same at $1.05. The Offeror believes that the
Canadian Coal Trust will be able to generate an equivalent level of
distributable cash flow initially, and a higher level of distributable cash flow
per Unit over the long term, given the potential greater cost savings of the
combination of the metallurgical coal assets of Fording and the Met Coal Assets,
than the trust created in the Fording-Teck Combination.
The Offeror anticipates achieving approximately one-third of its cost
savings in 2003. The remaining cost savings, when realized after 2003, are
expected to increase annual distributable cash flow per Unit by approximately
$0.60 before the benefit of any marketing or coal blending synergies.
Factors driving this enhanced estimated distributable cash flow per Unit
include:
- The MetCoal Company will pay out 100% of distributable cash flow.
- The MetCoal Company is expected to achieve $50 million of annual cost
savings plus additional marketing and coal blending synergies.
- Fording has disclosed that its thermal coal operations will require
significant capital expenditures in 2003 and 2004 associated with a new
customer contract and expansion at the Genesee Mine. The MetCoal Company
will not have a material economic interest in Fording's thermal coal
operations nor have the obligations associated with funding these capital
expenditures.
- The MetCoal Company is expected to have approximately $300 million of
debt, excluding working capital, compared to approximately $425 million of
debt, excluding working capital, for Fording under the Fording-Teck
Combination and, accordingly, the MetCoal Company is expected to have a
lower interest expense.
- The MetCoal Company will enhance its distributable cash flow by acquiring
Luscar's and CONSOL's metallurgical coal assets.
5
- The MetCoal Company will pay out or otherwise relieve Fording of the
obligations under Fording's existing foreign currency hedge contract,
while the Fording-Teck Combination will retain it. The MetCoal Company
will also repay all outstanding indebtedness of Fording.
SUBORDINATION PROVIDES GREATER CERTAINTY OF DISTRIBUTABLE CASH FLOW PER
UNIT. The subordination feature of the Enhanced Offer is designed to reduce the
risk for Shareholders electing to receive Exchange Rights with respect to the
level of distributions they can expect to receive in 2003. The Offeror has a
target for distributable cash generated by the MetCoal Company in the first
quarter of 2003 of $1.05 per Unit. The Partnership will not receive any
distribution in respect of its interest in the MetCoal Company in any quarter in
2003 unless the Canadian Coal Trust has first received a cash interest on its
SCAI Series A Notes of $1.05 per Unit in respect of that quarter. This
subordination is subject to a maximum subordination amount of $11.25 million
each calendar quarter, for an aggregate annual maximum subordination amount of
$45 million. This subordination feature demonstrates the confidence Sherritt and
OTPP have in the superior cash distributions available to Unitholders through
the benefits of the combined metallurgical assets and resultant synergies. The
Fording-Teck Combination does not offer any subordination feature.
STRONGER CAPITAL STRUCTURE. The MetCoal Company is expected to have
consolidated debt of not more than $300 million, excluding working capital,
which includes the costs of unwinding Fording's exchange hedge arrangements and
paying the $51 million break fees under the Fording-Teck Combination. The
MetCoal Company is expected to have a debt to EBITDA ratio (excluding working
capital) of 1.1x based on annualized, year-to-date pro forma EBITDA, whereas,
under the Fording-Teck Combination, Fording is expected to have a pro forma debt
to EBITDA ratio of 2.0x based on annualized, year-to-date pro forma EBITDA.
LOWER CORPORATE OVERHEAD COSTS. An independent entity will be established
to provide management services to the MetCoal Company at a fee that will be less
than the corporate overhead expense for Fording in 2002 (excluding unusual and
one-time items). In addition, management of the independent entity will be
compensated based on the amount of savings generated. Unlike the 3.6 million
unit management option plan and the estimated $2 million of annual additional
corporate overhead costs under the Fording-Teck Combination, this management
structure will not result in increased costs to, or dilution of, the Canadian
Coal Trust.
STRONG CORPORATE GOVERNANCE. The Canadian Coal Trust will have entirely
independent trustees and the MetCoal Company will have a majority of independent
board members. Under the Fording-Teck Combination, Teck and Westshore combined
will have the ability to nominate a majority of the trustees of the trust and a
majority of the board members of Fording.
THE OFFEROR
The Offeror is a corporation incorporated under the laws of Canada. It has
been created for the purpose of making the Enhanced Offer and has not carried on
any material business or activity. The Partnership owns all the outstanding
shares of the Offeror. See Section 1 of the Circular, "The Offeror".
SHERRITT COAL PARTNERSHIP II
The Partnership is a general partnership formed under the laws of the
Province of Ontario. The Partnership has been created for the purpose of making
the Enhanced Offer and has not carried on any material business or activity. The
two partners of the Partnership are wholly-owned subsidiaries of Sherritt and
OTPP. See Section 2 of the Circular, "Sherritt Coal Partnership II".
ONTARIO TEACHERS' PENSION PLAN BOARD
OTPP is responsible for the retirement income of approximately 154,000
elementary and secondary school teachers and 88,500 retired teachers. Since
1990, OTPP's assets have grown from $17 billion to over $68 billion as of
June 30, 2002, representing an average annual return of 11.7%. OTPP also has a
50% interest in Luscar Energy Partnership. See Section 3 of the Circular,
"Ontario Teachers' Pension Plan Board".
6
SHERRITT INTERNATIONAL CORPORATION
Sherritt International Corporation is a diversified Canadian resource
company with assets of $2 billion that operates in Canada and internationally.
Sherritt, directly and through its subsidiaries, has a 50% interest in Luscar
Energy Partnership which owns Luscar Ltd., Canada's largest coal producer, 50%
of a vertically-integrated nickel/cobalt metals business, an oil and gas
exploration, development and production business with reserves in Cuba and
elsewhere, and 49.7% of Sherritt Power Corporation, which finances, constructs
and operates gas-fired electricity generation plants in Cuba. Sherritt also has
interests in cellular telecommunications, soybean-based food-processing,
agriculture and tourism in Cuba. See Section 4 of the Circular, "Sherritt
International Corporation".
THE CANADIAN COAL TRUST
The Canadian Coal Trust is an open-ended, limited purpose trust established
under the laws of Ontario and will be entirely dependent on the operations and
financial condition of the MetCoal Company. See Section 5 of the Circular,
"Canadian Coal Trust".
ANTICIPATED TRANSACTIONS AND STRUCTURE
In order to focus the operation of the MetCoal Company on metallurgical
coal, to realize the synergies, cost savings and benefits outlined in this
Circular, and to reduce indebtedness and capital expenditure commitments of the
MetCoal Company, the MetCoal Company intends:
- to acquire the Met Coal Assets from Luscar and CONSOL; and
- to enter into transactions that will result in the MetCoal Company not
having a material economic participation in Fording's thermal coal assets
and such economic participation being held by the Partnership, Luscar
and/or their respective affiliates.
Subject to obtaining any required regulatory and third party consents, the
MetCoal Company will cease to have a material economic participation in
Fording's thermal coal assets effective as of the first Take Up and Pay Date.
The proceeds of these transactions will be used to repay a portion of the
outstanding indebtedness of Fording, to terminate existing currency hedge
arrangements and to pay the break fees under the Fording-Teck Combination. As at
September 30, 2002, the aggregate outstanding indebtedness of Fording, including
costs in respect of the proposed Fording plans of arrangement, was approximately
$166 million. Currency hedge arrangement cancellation costs are estimated at
$115 million and break fees payable are $51 million. Approximately $90 million
of the above amounts are expected to be financed from borrowings under the
bridge loans described in Section 15 of the Circular, "Source of Funds".
The Offeror, Luscar and CONSOL have agreed in principle that effective on
the date on which the Offeror acquires 66 2/3% of the Shares, the MetCoal
Company will acquire for the aggregate consideration of 5.9 million Units of the
Canadian Coal Trust a 100% interest in the Line Creek mine, a 100% interest in
the undeveloped Cheviot mine project and a 46.4% interest in Neptune Bulk
(Canada) Terminals Ltd. ("Neptune Terminals") (collectively, the "Met Coal
Assets"), subject to settlement of definitive documentation and certain
conditions, including obtaining certain required consents which are expected to
be received by the Offeror prior to the completion of the Fording Acquisition.
This agreement in principle also provides Luscar and CONSOL with the right to
require the MetCoal Company to acquire for the aggregate consideration of
500,000 Units of the Canadian Coal Trust a 100% interest in the Luscar mine
(excluding pre-existing reclamation liabilities) within 30 days after the date
on which the Canadian Coal Trust becomes a reporting issuer in Canada (the
"Luscar Put"). See "Funding, Acquisition and Related Transactions -- MetCoal
Company and Related Matters" in Appendix A to the Circular.
Following the acquisition of the Met Coal Assets by the MetCoal Company and
assuming the exercise of the Luscar Put, each of Luscar and CONSOL will own
approximately 3.2 million Units of the Canadian Coal Trust, representing
approximately 5.5% of the outstanding Units, including the issuance of Units
upon exchange of the Partnership's interest in SCAI Shares and SCAI Series B
Notes for Units of the Canadian Coal Trust. See
7
"Share and Loan Capital of Sherritt Coal Acquisition Inc. -- Conversion
Agreement" in Appendix A to the Circular.
THE METCOAL COMPANY
After giving effect to the Enhanced Offer and the contemplated asset
transfers associated with it, the MetCoal Company will be the largest
metallurgical coal producer in Canada and the second largest exporter of
seaborne metallurgical coal in the world. The MetCoal Company's assets will
initially consist of Fording's metallurgical coal assets and industrial mineral
operations as well as certain of Luscar's and CONSOL's metallurgical coal
operations. The MetCoal Company will sell its metallurgical coal to a
diversified customer base primarily in the Pacific Rim, South America, the
United States, Europe and Canada. Over 90% of the MetCoal Company's revenue is
expected to be generated from the sale of metallurgical coal.
MANAGEMENT ARRANGEMENTS
Prior to the Date of Exchange, the Canadian Coal Trust will enter into an
administration agreement (the "Administration Agreement") and SCAI will enter
into a management agreement (the "Management Agreement"), each with a company
(the "Manager") which will be 50% owned by each of Sherritt and OTPP. Under the
terms of the Administration Agreement and the Management Agreement, the Manager
will provide management services to the Canadian Coal Trust and to SCAI and its
subsidiaries, respectively, subject to the overall direction of the Trustees in
respect of the Canadian Coal Trust and the board of directors of SCAI in respect
of SCAI and its subsidiaries. To the extent practicable, the Manager will
provide integrated and efficient management for all of the coal mining
properties of both the MetCoal Company and Luscar, in addition to combining
common management and administrative functions of the Canadian Coal Trust and
SCAI. See "-- Administration Agreement" and "-- Management Agreement" under the
heading "Directors, Management and Trustees" in Appendix A to the Circular.
PURPOSE OF THE ENHANCED OFFER
The purpose of the Enhanced Offer is to enable the Offeror to acquire,
directly or indirectly, all of the Shares of Fording. See Section 6 of the
Circular, "Purpose of the Enhanced Offer".
TIME FOR ACCEPTANCE
The Enhanced Offer is open for acceptance until 8:00 p.m. (Toronto time) on
January 6, 2003 or such later time or times and date or dates to which the
Enhanced Offer may be extended from time to time, by the Offeror in accordance
with Section 5 of the Enhanced Offer, "Extension, Variation or Change of the
Enhanced Offer", unless the Enhanced Offer is withdrawn by the Offeror.
MANNER OF ACCEPTANCE
A Shareholder wishing to accept the Enhanced Offer (i) should vote AGAINST
the Fording-Teck Combination, and (ii) must deposit the certificate(s)
representing his or her Shares, together with a properly completed and executed
Letter of Transmittal and Election Form (printed on pink paper) or a manually
executed facsimile thereof, at or prior to the Expiry Time, at any one of the
offices of the Depositary or the U.S. Forwarding Agent specified in the Letter
of Transmittal and Election Form. Detailed instructions are contained in the
Letter of Transmittal and Election Form which accompanies the Enhanced Offer.
If a Shareholder wishes to deposit Shares pursuant to the Enhanced Offer and
the certificate(s) representing his or her Shares are not immediately available,
or the certificate(s) and all other required documents cannot be provided to the
Depositary or the U.S. Forwarding Agent at or prior to the Expiry Time, the
Shares may nevertheless be deposited validly by the Shareholder under the
Enhanced Offer in compliance with the procedures for guaranteed delivery using
the accompanying Notice of Guaranteed Delivery (printed on orange paper). See
Section 3 of the Enhanced Offer, "Manner of Acceptance".
8
CONDITIONS OF THE ENHANCED OFFER
The Offeror reserves the right to withdraw or terminate the Enhanced Offer
and not take up and pay for any Shares deposited under the Enhanced Offer if the
conditions described in Section 4 of the Enhanced Offer, "Conditions of the
Enhanced Offer", are not satisfied or waived by the Offeror prior to the Expiry
Time. Those conditions include, among other things: (I) THAT THE FORDING-TECK
COMBINATION SHALL NOT HAVE BEEN APPROVED BY SHAREHOLDERS; and (ii) there being
validly deposited under the Enhanced Offer and not withdrawn at the Expiry Time
a number of Shares that, together with the Shares held by the Offeror, the
Partnership and the Partners, and their respective affiliates, represents at
least 66 2/3% of the outstanding Shares (calculated on a diluted basis). For a
complete description of the conditions of the Enhanced Offer, see Section 4 of
the Enhanced Offer, "Conditions of the Enhanced Offer".
PAYMENT
If the conditions referred to in Section 4 of the Enhanced Offer,
"Conditions of the Enhanced Offer", are satisfied or waived by the Offeror, the
Offeror will take up Shares validly deposited under the Enhanced Offer and not
withdrawn not later than 10 days after the Expiry Time and will pay for Shares
taken up as soon as possible, but in any event not later than the earlier of 3
Business Days after taking up the Shares and 10 days after the Expiry Time. Any
Shares deposited under the Enhanced Offer after the first date on which Shares
are first taken up under the Enhanced Offer will be taken up and paid for within
10 days of such deposit. See Section 6 of the Enhanced Offer, "Payment for
Deposited Fording Shares".
WITHDRAWAL OF DEPOSITED FORDING SHARES
All deposits of Shares pursuant to the Enhanced Offer are irrevocable,
except as provided in Section 7 of the Enhanced Offer, "Withdrawal of Deposited
Fording Shares".
ACQUISITION OF FORDING SHARES NOT DEPOSITED UNDER THE ENHANCED OFFER
If the Offeror takes up and pays for the Shares validly deposited under the
Enhanced Offer, the Offeror intends to acquire all of the outstanding Shares not
deposited under the Enhanced Offer. See Section 18 of the Circular, "Acquisition
of Fording Shares not Deposited under the Enhanced Offer".
REGULATORY MATTERS
The acquisition of the Shares by the Offeror is subject to the requirements
of the Competition Act and the HSR Act. See Section 17 of the Circular,
"Regulatory Matters".
CANADIAN AND UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
A Shareholder resident in Canada who holds Shares as capital property and
who disposes of those Shares under the Enhanced Offer will realize a capital
gain (or capital loss) equal to the amount by which the proceeds of disposition
of the Shares, net of reasonable costs of disposition, exceeds (or is less than)
the aggregate adjusted cost base to the Shareholder of those Shares. For this
purpose, the proceeds of disposition received by the Shareholder will equal the
amount of cash and the fair market value of the Exchange Rights. Shareholders
who are not resident in Canada will not be subject to Canadian income tax on a
disposition of their Shares pursuant to the Enhanced Offer unless those Shares
constitute "taxable Canadian property" to them which is not exempt from tax by
virtue of the provisions of an applicable income tax treaty or convention. See
Section 19 of the Circular, "Canadian Federal Income Tax Considerations".
A Shareholder who is a U.S. person and holds the Shares as a capital asset
and receives cash pursuant to the Enhanced Offer will recognize capital gain if
and to the extent that the amount of cash received by the Shareholder exceeds
his or her U.S. tax basis in those Shares or capital loss if and to the extent
that the Shareholder's U.S. tax basis in the Shares exceeds the amount of cash
received by the Shareholder. A Shareholder who receives Exchange Rights pursuant
to the Enhanced Offer and then receives Units pursuant to the terms of and in
exchange for the Exchange Rights may be able to treat the transaction as a tax
free
9
exchange of Shares for Units rather than a taxable exchange except to the extent
that the U.S. Shareholder receives cash in addition to the Exchange Rights.
OTHER TAX CONSIDERATIONS
Based on the assumptions set forth under "Eligibility for Investment" in
Appendix A to the Circular, the Exchange Rights and the Units will be qualified
investments for trusts governed by certain tax exempt plans, such as RRSPs and
RRIFs, and the Exchange Rights and the Units will not constitute foreign
property for such plans.
In order for the Trust to secure and maintain its status as a mutual fund
trust under the Tax Act, the Trust must not be established or maintained
primarily for the benefit of non-residents of Canada. Accordingly, the Exchange
Rights Agreement will provide, and the Declaration of Trust provides, that at no
time may non-residents of Canada be the beneficial owners of a majority of the
Exchange Rights or Units, as the case may be. See "Exchange Rights -- Limitation
of Non-Resident Ownership" and "The Canadian Coal Trust -- Limitation of
Non-Resident Ownership" in Appendix A to the Circular.
DEPOSITARY, U.S. FORWARDING AGENT AND INFORMATION AGENT
CIBC Mellon Trust Company is acting as Depositary and Mellon Investor
Services, LLC is acting as U.S. Forwarding Agent under the Enhanced Offer.
Innisfree M&A Incorporated is acting as Information Agent under the Enhanced
Offer. The Depositary and U.S. Forwarding Agent will receive deposits of
certificates representing Shares and accompanying Letters of Transmittal at the
offices specified in the Letter of Transmittal and Election Form. The Depositary
will receive Notices of Guaranteed Delivery at its Toronto office specified in
the Notice of Guaranteed Delivery. The Depositary will also be responsible for
giving certain notices, if required, and making payment for Shares purchased by
the Offeror under the Enhanced Offer. The Information Agent will be responsible
for providing information to Shareholders resident in the United States. See
Section 23 of the Circular, "Depositary, U.S. Forwarding Agent and Information
Agent".
FINANCIAL ADVISORS, DEALER MANAGERS AND SOLICITING DEALER GROUP
The Offeror has retained Goldman Sachs & Co., National Bank Financial Inc.
and BMO Nesbitt Burns Inc. to act as its financial advisors in connection with
the Enhanced Offer. National Bank Financial Inc. and BMO Nesbitt Burns Inc. and
their respective U.S. affiliates have been retained to serve as the Dealer
Managers for the Enhanced Offer. In addition, National Bank Financial Inc. and
BMO Nesbitt Burns Inc. have also been retained to form a soliciting dealer group
to solicit acceptances of the Enhanced Offer in Canada. The Offeror has agreed
to pay to each Soliciting Dealer whose name appears in the appropriate space in
the Letter of Transmittal and Election Form accompanying a deposit of Shares a
fee of Cdn.$0.20 for each such Share deposited and taken up by the Offeror under
the Enhanced Offer subject to limits on the amounts payable in respect of any
single depositing Shareholder. Depositing Shareholders will not be obligated to
pay any fee or commission if they accept the Enhanced Offer by utilizing the
services of the Dealer Managers or any member of the Soliciting Dealer Group to
accept the Enhanced Offer or by transmitting their Shares directly to the
Depositary or the U.S. Forwarding Agent. See Section 24 of the Circular,
"Financial Advisors, Dealer Managers and Soliciting Dealer Group". Further,
Peters & Co. Limited has been advising the Partnership and the Offeror in
respect of certain strategic matters related to the Enhanced Offer.
10
ENHANCED OFFER
December 16, 2002
TO: THE HOLDERS OF SHARES OF FORDING INC.
1. THE ENHANCED OFFER
The Offeror hereby varies its Original Offer by offering to purchase, on and
subject to the terms and conditions set forth in the Enhanced Offer, Circular,
Letter of Transmittal and Election Form and Notice of Guaranteed Delivery, all
of the outstanding common shares of Fording, including Shares that may become
outstanding on the exercise of options, in exchange for each Share deposited
under the Enhanced Offer, at the election of the Shareholder tendering to the
Enhanced Offer:
- $35.00 cash per Share to a maximum of $850 million (subject to proration
as described below) (the "Cash Option"), or
- one Exchange Right to a maximum of approximately 42,405,000 Exchange
Rights (subject to proration as described below) (the "Exchange Right
Option"), or
- a combination of cash and Exchange Rights (subject to proration as
described below) (the "Combination Option").
THE AGGREGATE MAXIMUM AMOUNT OF CASH AVAILABLE TO FORDING SHAREHOLDERS
ELECTING THE CASH OPTION OR COMBINATION OPTION IS $850 MILLION (THE "MAXIMUM
CASH AMOUNT"). IF MORE THAN THE MAXIMUM CASH AMOUNT IS ELECTED PURSUANT TO THE
CASH OPTION OR COMBINATION OPTION, IT WILL BE NECESSARY TO PRORATE THE MAXIMUM
CASH AMOUNT AMONG THOSE SHAREHOLDERS WHO HAVE ELECTED TO RECEIVE CASH AND PAY
THE BALANCE IN EXCHANGE RIGHTS.
THE AGGREGATE MAXIMUM NUMBER OF EXCHANGE RIGHTS AVAILABLE TO FORDING
SHAREHOLDERS ELECTING THE EXCHANGE RIGHT OPTION OR COMBINATION OPTION WILL NOT
BE MORE THAN 82.5% OF THE OUTSTANDING SHARES (CALCULATED ON A DILUTED BASIS)
(THE "MAXIMUM EXCHANGE RIGHT AMOUNT"). IF MORE THAN THE MAXIMUM EXCHANGE RIGHT
AMOUNT IS ELECTED PURSUANT TO THE EXCHANGE RIGHT OPTION OR COMBINATION OPTION,
IT WILL BE NECESSARY TO PRORATE THE MAXIMUM EXCHANGE RIGHT AMOUNT AMONG THOSE
SHAREHOLDERS WHO HAVE ELECTED TO RECEIVE EXCHANGE RIGHTS AND PAY THE BALANCE IN
CASH.
The Enhanced Offer is made only for the Shares and is not made for any
options, warrants or other rights to acquire Shares (other than SRP Rights). Any
holder of options, warrants or other rights to purchase Shares who wishes to
participate in the Enhanced Offer must exercise the options, warrants or other
rights to obtain certificates representing Shares and deposit those Shares under
the Enhanced Offer. Any such exercise must be sufficiently in advance of the
Expiry Time to assure the holders of the options, warrants or other rights to
purchase Shares that they will have share certificate(s) available for deposit
before the Expiry Time, or in sufficient time to comply with the procedures
referred to in Section 3 of the Enhanced Offer, "Manner of
Acceptance -- Procedure for Guaranteed Delivery".
The Letter of Transmittal and Election Form and Notice of Guaranteed
Delivery accompanying this Enhanced Offer and Circular set forth the manner in
which such elections may be made. SHAREHOLDERS WHO VALIDLY ACCEPT THE ENHANCED
OFFER BUT FAIL TO MAKE AN ELECTION OR FAIL TO PROPERLY MAKE AN ELECTION IN THE
LETTER OF TRANSMITTAL AND ELECTION FORM OR NOTICE OF GUARANTEED DELIVERY SHALL
BE DEEMED TO HAVE ELECTED TO RECEIVE THE EXCHANGE RIGHT OPTION. References
throughout this Enhanced Offer and Circular to a Shareholder having "elected",
or to an "election", will in all cases include a deemed election pursuant to the
foregoing sentence.
The actual consideration to be received by a Shareholder will be determined
in accordance with the following:
(a) Exchange Rights will not be issued in exchange for more than 82.5% of
the outstanding Shares (calculated on a diluted basis);
(b) The aggregate maximum amount of cash available for Shares tendered under
the Enhanced Offer is limited to $850 million;
11
(c) IF, on any Take Up and Pay Date, Shareholders in the aggregate elect to
receive Exchange Rights which exceed an aggregate number equal to the sum
of (i) the Maximum Exchange Right Amount multiplied by a fraction, the
numerator of which is the number of Shares to be taken up on such Take Up
and Pay Date and the denominator of which is the total number of Shares
outstanding (calculated on a diluted basis) (the "Maximum Exchange Right
Percentage Availability") plus (ii) the aggregate of the Maximum Exchange
Right Percentage Availability calculated in respect of all prior Take Up
and Pay Dates, less the total number of Exchange Rights issued as
consideration in respect of all prior Take Up and Pay Dates (such sum
being the "Maximum Take Up Date Exchange Right Consideration"), THEN the
number of Exchange Rights available to those Shareholders who have
elected to receive Exchange Rights will be allocated pro rata among such
Shareholders in an amount equal to the aggregate number of Exchange
Rights sought by such Shareholders, and the balance of their
consideration will be paid in cash; and
(d) IF, on any Take Up and Pay Date, Shareholders in the aggregate elect to
receive cash which exceeds an aggregate amount equal to the sum of
(i) the Maximum Cash Amount multiplied by a fraction, the numerator of
which is the number of Shares to be taken up on such Take Up and Pay Date
and the denominator of which is the total number of Shares outstanding
(calculated on a diluted basis), (the "Maximum Cash Percentage
Availability") plus (ii) the aggregate of the Maximum Cash Percentage
Availability calculated in respect of all prior Take Up and Pay Dates,
less the amount of cash paid as consideration in respect of all prior
Take Up and Pay Dates (such sum being the "Maximum Take Up Date Cash
Consideration"), THEN the cash available to those Shareholders who have
elected to receive cash will be allocated pro rata among such
Shareholders in an amount equal to the aggregate cash elected to be
received by such Shareholders, and the balance of their consideration
will be paid in Exchange Rights.
No fractional Exchange Rights will be issued pursuant to the Enhanced Offer.
In lieu of fractional Exchange Rights, a Shareholder accepting the Enhanced
Offer who would otherwise receive a fraction of an Exchange Right will receive a
cash payment determined on the basis of $35.00 for each whole Exchange Right.
The accompanying Circular, Letter of Transmittal and Election Form and
Notice of Guaranteed Delivery are incorporated into and form part of the
Enhanced Offer and contain important information that should be read carefully
before making a decision with respect to the Enhanced Offer. The accompanying
Glossary is also incorporated by reference and forms part of the Enhanced Offer.
2. TIME FOR ACCEPTANCE
This Enhanced Offer is open for acceptance for the period commencing on the
date hereof and ending at 8:00 p.m. (Toronto time) on January 6, 2003 or until
such later time or times and date or dates to which this Enhanced Offer may be
extended from time to time by the Offeror, in accordance with Section 5 of the
Enhanced Offer, "Extension, Variation or Change of the Enhanced Offer", unless
withdrawn by the Offeror.
3. MANNER OF ACCEPTANCE
LETTER OF TRANSMITTAL AND ELECTION FORM
This Enhanced Offer may be accepted by delivering the following documents to
the Depositary or U.S. Forwarding Agent at any one of their respective offices
listed in the Letter of Transmittal and Election Form accompanying this Enhanced
Offer and on the back of this document so as to arrive there not later than the
Expiry Time:
(a) certificate(s) representing the Shares for which this Enhanced Offer is
being accepted;
(b) a Letter of Transmittal and Election Form (printed on pink paper) in the
form accompanying this Enhanced Offer or a manually signed facsimile
thereof, properly completed and duly executed as required by the rules
and instructions set out in the Letter of Transmittal and Election Form;
and
(c) any other relevant documents required by the rules and instructions in
the Letter of Transmittal and Election Form.
12
Except as otherwise provided in the rules and instructions in the Letter of
Transmittal and Election Form, the signature on the Letter of Transmittal and
Election Form must be guaranteed by an Eligible Institution. If a Letter of
Transmittal and Election Form is executed by a person other than the registered
holder of the certificate(s) deposited therewith, the certificate(s) must be
endorsed, or accompanied by an appropriate share transfer power of attorney duly
and properly completed by the registered holder, with the signature on the
endorsement panel or transfer power guaranteed by an Eligible Institution.
Shareholders who cannot comply on a timely basis with the foregoing
procedures for acceptance of the Enhanced Offer may nevertheless accept the
Enhanced Offer by complying with the following procedures for guaranteed
delivery.
PROCEDURE FOR GUARANTEED DELIVERY
If a Shareholder wishes to deposit Shares pursuant to this Enhanced Offer
and (i) the certificate(s) representing the Shares are not immediately
available, or (ii) the certificate(s) and all other required documents cannot be
provided to the Depositary or U.S. Forwarding Agent at or prior to the Expiry
Time, the Shares may nevertheless be deposited validly by the Shareholder under
the Enhanced Offer, provided that all of the following conditions are met:
(a) the deposit is made by or through an Eligible Institution;
(b) a Notice of Guaranteed Delivery (printed on orange paper) in the form
accompanying the Enhanced Offer or a manually executed facsimile thereof,
in each case properly completed and duly executed, together with a
guarantee by the Eligible Institution in the form specified in the Notice
of Guaranteed Delivery, is received by the Depositary at or prior to the
Expiry Time at its Toronto office, as set forth on the accompanying
Notice of Guaranteed Delivery; and
(c) the certificate(s) representing deposited Shares, in proper form for
transfer, together with a Letter of Transmittal and Election Form
(printed on pink paper) in the form accompanying the Enhanced Offer or a
manually executed facsimile thereof, in each case, properly completed and
duly executed, and any other documents required by the Letter of
Transmittal and Election Form, are received by the Depositary at its
Toronto office at or prior to 5:00 p.m. (Toronto time) on the third
trading day on the TSX after the Expiry Time. To constitute delivery for
the purpose of satisfying a guaranteed delivery, the Letter of
Transmittal and Election Form and accompanying certificate(s) must be
delivered to the Toronto office of the Depositary as set forth in the
Notice of Guaranteed Delivery.
The Notice of Guaranteed Delivery may be delivered by hand or transmitted by
facsimile transmission or mailed to the Depositary at its Toronto office as
specified in the Notice of Guaranteed Delivery and must include a guarantee by
an Eligible Institution in the form set forth in the Notice of Guaranteed
Delivery.
GENERAL
The Offeror will, in its sole discretion, be entitled to determine finally
all questions relating to acceptances of this Enhanced Offer and to the
withdrawal of Shares deposited hereunder, including, without limitation, the
validity, form, eligibility (including timely receipt), time, acceptance and
effect of any deposit of Shares and/or withdrawal of Shares and the propriety of
the completion and execution of any Letter of Transmittal and Election Form or
Notice of Guaranteed Delivery. Depositing Shareholders agree that such
determinations by the Offeror will be final and binding. The Offeror reserves
the absolute right to reject any and all deposits that it determines not to be
in proper form or that may be unlawful to accept under the laws of any
jurisdiction. The Offeror reserves the absolute right to waive any defect or
irregularity in the deposit or acceptance of any particular Shares or
Shareholders. None of the Offeror, the Depositary, the U.S. Forwarding Agent or
any other person will be under any duty or obligation to give notice of any
defect or irregularity in any deposit or acceptance nor will any of them incur
any liability for failure to give such notice. The Offeror's interpretation of
the terms and conditions of the Enhanced Offer will be final and binding.
In all cases, payment for Shares deposited and taken up by the Offeror will
be made only after timely receipt by the Depositary or U.S. Forwarding Agent of
the certificate(s) representing the Shares and a Letter of Transmittal and
Election Form or a manually executed facsimile thereof, in each case properly
completed and
13
duly executed, covering such Shares with the signature(s) guaranteed in
accordance with the instructions set out in the Letter of Transmittal and
Election Form and any other required documents.
The acceptance of the Enhanced Offer pursuant to the procedures set forth
above will constitute an agreement between the depositing Shareholder and the
Offeror in accordance with the terms and conditions of the Enhanced Offer.
The execution of a Letter of Transmittal and Election Form irrevocably
constitutes and appoints the Depositary, the U.S. Forwarding Agent and each
senior officer of the Offeror, and any other person designated by the Offeror in
writing, as the true and lawful agents, attorney and attorney-in-fact of the
holder of the Shares covered by the Letter of Transmittal and Election Form with
respect to Shares registered in the name of the Shareholder on the securities
register maintained by or on behalf of Fording and deposited pursuant to the
Enhanced Offer and purchased by the Offeror (the "Purchased Shares"), and with
respect to any and all dividends, distributions, payments, securities, rights,
warrants, assets or other interests, other than the dividend of $0.15 per Share
that has been declared payable on December 16, 2002 to Shareholders of record on
November 20, 2002 (collectively, "distributions"), which may be declared, paid,
accrued, issued, distributed, made or transferred on or in respect of the
Purchased Shares or any of them on or after the date of the Enhanced Offer, full
power of substitution (such powers of attorney, being coupled with an interest,
being irrevocable), in the name of and on behalf of such Shareholder, to:
(a) register or record the transfer or cancellation of Purchased Shares and
distributions consisting of securities on the appropriate registers maintained
by or on behalf of Fording; (b) for so long as any such Purchased Shares are
registered or recorded in the name of such Shareholder (whether or not such
Purchased Shares are so registered or recorded as at the time of the completion
of the Letter of Transmittal and Election Form), vote, execute and deliver
(provided the same is not contrary to applicable law), as and when requested by
the Offeror, any instruments of proxy, voting instruction forms, authorizations
or consents in form and on terms satisfactory to the Offeror in respect of any
Purchased Shares and distributions, to revoke any such instruments, voting
instruction forms, authorizations or consents given prior to, on or after the
date the Offeror takes up and pays for the Deposited Shares, and to designate in
any such instruments of proxy any person or persons as the proxyholder of such
Shareholder in respect of such Purchased Shares and distributions; (c) execute,
endorse and negotiate any cheques or other instruments representing such
distributions payable to or to the order of, or endorsed in favour of, the
Shareholder; and (d) exercise any rights of such Shareholder with respect to the
Purchased Shares and any distribution with respect to such Purchased Shares, all
as specified in the Letter of Transmittal and Election Form.
Notwithstanding the foregoing, if a Shareholder was a beneficial or
registered shareholder of Fording on the record date (currently November 19,
2002) set by Fording for a special meeting of the shareholders and optionholders
of Fording originally scheduled to be held on December 20, 2002 and now
scheduled for January 3, 2003 and any and all adjournments or further
postponements thereof (the "Special Meeting"), then such Shareholder will
retain, with respect to the Special Meeting, to the extent that such Shareholder
had such rights on the record date for voting at the Special Meeting, the right
to vote, to execute and deliver (provided the same is not contrary to applicable
law) any instruments of proxy or voting instruction forms, as applicable, in
respect of Shares deposited under the Enhanced Offer, to revoke any instruments
of proxy or voting instruction forms given prior to, on or after the date the
Offeror takes up and pays for the Deposited Shares, and to designate in any such
instruments of proxy or voting instruction forms, any person or persons, which
person or persons may include, without limitation, the Offeror and/or a
representative of the Offeror, as the proxyholder of such Shareholder in respect
of the Shares so deposited.
The Offeror reserves the right to permit the Enhanced Offer to be accepted
in a manner other than as set forth herein.
SHAREHOLDERS ARE ADVISED THAT THE METHOD CHOSEN TO TRANSMIT ANY
CERTIFICATE(S) REPRESENTING THE SHARES, THE LETTER OF TRANSMITTAL AND ELECTION
FORM, ANY NOTICE OF GUARANTEED DELIVERY AND ANY OTHER DOCUMENT IS AT THE OPTION
AND RISK OF EACH DEPOSITING SHAREHOLDER. THE OFFEROR RECOMMENDS THAT MATERIAL BE
DELIVERED BY HAND TO THE DEPOSITARY OR U.S. FORWARDING AGENT AND A RECEIPT
OBTAINED, AND IF MAILED, THAT REGISTERED MAIL WITH RETURN RECEIPT REQUESTED BE
USED AND THAT PROPER INSURANCE BE OBTAINED.
14
Shareholders whose Shares are registered in the name of an Intermediary
should contact their Intermediary if they wish to accept the Enhanced Offer for
assistance in depositing the Shares under the Enhanced Offer.
4. CONDITIONS OF THE ENHANCED OFFER
The Offeror will have the right to withdraw the Enhanced Offer and not take
up and pay for, or to extend the period of time during which the Enhanced Offer
is open and delay taking up and paying for, any Shares deposited under the
Enhanced Offer, unless all of the following conditions are satisfied or waived
by the Offeror at or prior to the Expiry Time:
(a) THE FORDING-TECK COMBINATION WILL NOT HAVE BEEN APPROVED BY
SHAREHOLDERS;
(b) the Offeror will have received written confirmation from Fording
(i) that neither Fording Coal Limited/Les Charbons Fording, Limitee, nor
any of Fording's affiliates or associates have entered into, or will
prior to the Expiry Time enter into, a new and binding agreement with
Westshore for the provision of ship-loading and port services as
described in the supplement to Fording's Management Circular under the
heading "Combination Agreement -- Westshore Terminal Agreement" or any
similar agreement; or (ii) if such an agreement has been entered into,
the details of all material terms of such agreement, including its date,
minimum contractual volumes, price, and term, and all such terms shall be
acceptable to the Offeror in its sole discretion;
(c) a number of Shares that, together with the Shares of Fording held by the
Offeror, the Partnership, the Partners and their respective affiliates,
represents at least 66 2/3% of the Shares (calculated on a diluted basis)
shall have been validly deposited under the Enhanced Offer and not
withdrawn at the Expiry Time;
(d) all outstanding options, if any, to acquire Shares will have been
exercised, cancelled or otherwise dealt with on terms satisfactory to the
Offeror acting in its sole discretion;
(e) either: the applicable waiting period under Part IX of the Competition
Act will have expired or been waived in accordance with the Competition
Act and the Commissioner will have advised the Offeror in writing (which
advice will not have been rescinded or amended), to the satisfaction of
the Offeror, acting in its sole discretion, that the Commissioner does
not at that time have grounds on which to make application under
Part VIII of the Competition Act in respect of the purchase of the Shares
under the Enhanced Offer; or the Commissioner will have issued an advance
ruling certificate pursuant to section 102 of the Competition Act in
respect of the purchase of the Shares under the Enhanced Offer;
(f) the waiting period applicable to the consummation of the Enhanced Offer
under the HSR Act will have expired or been terminated; and it will not
have been publicly disclosed, nor will the Offeror have otherwise learned
that any person will have filed a Notification and Report Form under the
HSR Act (or amended a prior filing to increase the applicable filing
threshold set forth therein) or made a public announcement reflecting an
intent to acquire Fording or any assets or subsidiaries of Fording;
(g) a registration statement of which this Enhanced Offer and Circular
form a part, applicable to the issuance of the Exchange Rights and the
Units, will have become effective with the SEC and there will have been
no stop order or proceedings seeking a stop order with respect to such
registration statement;
(h) the Offeror will have determined in its sole judgment that all material
"blue sky" laws and other state securities laws applicable to the
issuance of the Exchange Rights and the Units will have been complied
with;
(i) the Offeror will have determined in its sole judgment that all material,
necessary or desirable regulatory approvals (including, without
limitation, those of any stock exchange or other regulatory authorities),
other than that listed immediately above, will have been obtained or
concluded on terms satisfactory to the Offeror in its sole judgment and
any applicable governmental or regulatory waiting periods will have
expired or been terminated;
15
(j) the Offeror will have determined in its sole judgment that (i) no act,
action, suit or proceeding will have been threatened or taken before or
by any domestic or foreign court or tribunal or Governmental Entity or by
any elected or appointed public official or private person (including,
without limitation, any individual, corporation, firm, group, trust,
trustee, personal representative or other entity) in Canada or elsewhere,
whether or not having the force of law, and (ii) no law, regulation or
policy will have been proposed, enacted, promulgated or applied, in the
case of either (i) or (ii):
(A) to cease trade, enjoin, prohibit or impose material limitations or
conditions on the purchase by or the sale to the Offeror of the
Shares or the right of the Offeror to own or exercise full rights of
ownership of the Shares;
(B) which if the Enhanced Offer were consummated, could, in the sole
judgment of the Offeror, materially and adversely affect Fording and
its subsidiaries, affiliates, associates or entities in which it has
a direct or indirect material interest, considered on a consolidated
basis; or
(C) which, in the sole judgment of the Offeror, might challenge, prevent,
or make uncertain the ability of or make it inadvisable, for the
Offeror to proceed with the Enhanced Offer and/or with the taking up
and paying for Shares under the Enhanced Offer;
(k) the Offeror will have determined in its sole judgment that there will
not exist any prohibition at law against the Offeror making the Enhanced
Offer or taking up and paying for the Shares deposited under the Enhanced
Offer;
(l) the Offeror will have determined in its sole judgment that Fording and
its affiliates and associates have not taken any action or have failed to
take any action which might make it inadvisable for the Offeror to
proceed with the Enhanced Offer and/or with the taking up and paying for
Shares under the Enhanced Offer and/or with the implementation of the
Offeror's plans as described in Section 8 of the Circular, "Plans for
Fording" and Section 18 of the Circular, "Acquisition of Fording Shares
not Deposited under the Enhanced Offer"; including, without limiting the
generality of the foregoing, any issuance of securities or options to
purchase securities, any payments or dividends out of the ordinary
course, any agreement or understanding relating to the sale, disposition
of or other dealing with the business or properties of Fording, its
affiliates or associates or any part thereof or interest therein or
relating to the rights of Fording, its affiliates or associates to
manage, operate or control the conduct of the business or any part
thereof;
(m) there will not have occurred (or, if there will have previously
occurred, there will not have been disclosed, generally or to the Offeror
in writing, prior to the commencement of the Enhanced Offer) any change
(or any condition, event or development involving a prospective change)
in the business, operations, assets, capitalization, financial condition,
prospects, licences, permits, rights, privileges or liabilities, whether
contractual or otherwise, of Fording or any of its affiliates or
associates considered on a consolidated basis which, in the sole judgment
of the Offeror, is material and adverse or may reasonably be considered
to be significant to a purchaser of Shares;
(n) the Offeror will have determined in its sole judgment that there will
not have occurred, developed or come into effect or existence any event,
action, state, condition or major financial occurrence of national or
international consequence or any law, regulation, action, government
regulation, inquiry or other occurrence of any nature whatsoever which
materially adversely affects, or may materially adversely affect, the
financial or syndicated loan markets in Canada, the United States or
elsewhere generally or other markets relevant to the business of Fording
or any of its affiliates or associates;
(o) the Offeror will have determined in its sole judgment that none of the
following exists or has occurred (which has not been cured or waived) or
has been threatened: (i) any material right, franchise or licence of
Fording or any of its associates or affiliates has been impaired or
otherwise adversely affected which might make it inadvisable for the
Offeror to proceed with the Enhanced Offer and/or with the taking up and
paying for Shares under the Enhanced Offer, or (ii) any covenant, term or
condition of any of Fording's or of any of its associates' or affiliates'
instruments or agreements exists which might make it inadvisable for the
Offeror to proceed with the Enhanced Offer and/or with the taking up and
paying for Shares under the Enhanced Offer (including, but not limited
to, any default
16
that may ensue as a result of the Offeror taking up and paying for Shares
under the Enhanced Offer); and
(p) the Offeror will not have become aware of any untrue statement of
material fact, or an omission to state a material fact that is required
to be stated or that is necessary to make a statement not misleading in
the light of the circumstances in which it was made and at the date it
was made (after giving effect to all subsequent filings in relation to
all matters covered in earlier filings), in any document filed by or on
behalf of Fording or any of its affiliates or associates with any
securities commission or similar securities regulatory authority in any
of the provinces of Canada, including without limitation any annual
information form, annual report, financial statement, material change
report, current report or management proxy circular or in any document so
filed or released by Fording to the public, which the Offeror will have
determined in its sole judgment is material and adverse or may reasonably
be considered to be significant to a purchaser of Shares.
The foregoing conditions are for the exclusive benefit of the Offeror and
may be asserted by the Offeror at any time, regardless of the circumstances
giving rise to such assertion, including any action or inaction by the Offeror.
Except as set out below, the Offeror may waive any of the foregoing conditions
in whole or in part at any time and from time to time, both before and after the
Expiry Time, without prejudice to any other rights that the Offeror may have.
The failure by the Offeror at any time to exercise any of the foregoing rights
will not be deemed a waiver of any such right and each such right will be deemed
an ongoing right that may be asserted at any time and from time to time.
Notwithstanding the foregoing, the Offeror may not and will not waive any of
the foregoing conditions in whole or in part to the extent that the waiver
thereof would result in the Enhanced Offer no longer being structured so as to
constitute a "Permitted Bid" within the meaning of the Shareholder Rights Plan
("SRP") of Fording. In particular, and despite paragraph (a) above, the Offeror
represents that no Shares will be taken up or paid for pursuant to the Enhanced
Offer (i) prior to the close of business on December 27, 2002; and (ii) unless
at the Expiry Time more than 50% of the Shares held by "Independent
Shareholders" (within the meaning of the SRP) shall have been deposited or
tendered pursuant to the Enhanced Offer and not withdrawn. The Offeror further
represents that Shares may be deposited pursuant to the Enhanced Offer at any
time prior to the Expiry Time and that any Shares deposited pursuant to the
Enhanced Offer may be withdrawn until taken up and paid for by the Offeror. In
addition, the Offeror also represents that in the event that at the Expiry Time
more than 50% of the Shares held by "Independent Shareholders" shall have been
deposited or tendered pursuant to the Enhanced Offer and not withdrawn, the
Offeror will make a public announcement of that fact and the Enhanced Offer will
remain open for deposits and tenders of Shares for not less than 10 "Business
Days" (as defined in the SRP) from the date of such public announcement.
Any waiver of a condition or the withdrawal of the Enhanced Offer will be
effective upon written notice or other communication confirmed in writing by the
Offeror to that effect to the Depositary at its principal office in Toronto. The
Offeror, forthwith after giving any such notice, will make a public announcement
of such waiver or withdrawal, will cause the Depositary as soon as practicable
thereafter to notify the Shareholders in the manner set forth in Section 11 of
the Enhanced Offer, "Notices and Delivery", and will provide a copy of the
aforementioned notice to the TSX. If the Enhanced Offer is withdrawn, the
Offeror will not be obligated to take up or pay for any Shares deposited under
the Enhanced Offer and the Depositary will promptly return all certificates
representing deposited Shares, Letters of Transmittal, Notices of Guaranteed
Delivery and related documents to the parties by whom they were deposited.
Any determination by the Offeror concerning the events described in this
Section 4 will be final and binding upon all parties.
5. EXTENSION, VARIATION OR CHANGE OF THE ENHANCED OFFER
The Enhanced Offer is open for acceptance until, but not after, the Expiry
Time.
The Offeror reserves the right, in its sole discretion, at any time and from
time to time while the Enhanced Offer is open for acceptance, to extend the
Expiry Time or to vary the Enhanced Offer by giving written notice of such
extension or variation to the Depositary at its principal office in Toronto, and
by causing the Depositary
17
to provide as soon as practicable thereafter a copy of such notice in the manner
set forth in Section 11 of the Enhanced Offer, "Notices and Delivery", to all
Shareholders whose Shares have not been taken up prior to the extension or
variation. The Offeror will, as soon as possible after giving notice of an
extension or variation to the Depositary, make a public announcement of the
extension or variation and provide a copy of the notice thereof to the TSX. Any
notice of extension or variation will be deemed to have been given and to be
effective on the day on which it is delivered or otherwise communicated to the
Depositary at its principal office in Toronto.
Where the terms of the Enhanced Offer are varied (other than a variation
consisting solely of a waiver of a condition of the Enhanced Offer set forth in
Section 4 of the Enhanced Offer, "Conditions of the Enhanced Offer"), the
Enhanced Offer will not expire before 10 days after the notice of such variation
has been given to Shareholders, unless otherwise permitted by applicable law.
During any such extension or in the event of any variation, all Shares
previously deposited and not taken up or withdrawn will remain subject to the
Enhanced Offer and may be accepted for purchase by the Offeror in accordance
with the terms hereof. An extension of the Expiry Time or a variation of the
Enhanced Offer does not constitute a waiver by the Offeror of its rights under
Section 4 of the Enhanced Offer, "Conditions of the Enhanced Offer".
If the consideration being offered for the Shares under the Enhanced Offer
is increased, the increased consideration will be paid to all depositing
Shareholders whose Shares are taken up under the Enhanced Offer.
6. PAYMENT FOR DEPOSITED FORDING SHARES
If all the conditions referred to under "Conditions of the Enhanced Offer"
in Section 4 of the Enhanced Offer have been fulfilled or waived at the Expiry
Time, the Offeror will become obligated to take up and pay for Shares deposited
under the Enhanced Offer and not withdrawn not later than 10 days from the
Expiry Time and will pay for Shares taken up as soon as possible, but in any
event not later than three Business Days after taking up the Shares. In
accordance with applicable law, the Offeror will take up and pay for Shares
deposited under the Enhanced Offer after the date on which it first takes up
Shares deposited under the Enhanced Offer within 10 days of such deposit. The
Offeror will be deemed to have taken up and accepted for payment Shares validly
deposited and not withdrawn pursuant to the Enhanced Offer as, if and when the
Offeror gives written notice to the Depositary to that effect.
The Offeror will pay for Shares validly deposited under the Enhanced Offer
and not withdrawn by providing the Depositary with sufficient funds (by bank
transfer or other means satisfactory to the Depositary), and by providing the
Depositary with sufficient certificates for the Exchange Rights in accordance
with Shareholder elections validly made, for transmittal to depositing
Shareholders. Under no circumstances will interest accrue or be paid by the
Offeror or the Depositary on the purchase price of the Shares purchased by the
Offeror, regardless of any delay in making such payment. Fractions of Exchange
Rights will not be distributed. Fractional interests will be paid for in cash as
provided in Section 1 of the Enhanced Offer.
The Depositary will act as the agent of persons who have deposited Shares in
acceptance of the Enhanced Offer for the purposes of receiving payment from the
Offeror and transmitting payment to such persons, and receipt of payment by the
Depositary will be deemed to constitute receipt of payment by persons
depositing Shares.
For Shareholders who have elected or are otherwise entitled to receive cash
in exchange for their Shares, the Depositary will forward to each such
Shareholder one or more cheques in Canadian dollars. For Shareholders who have
elected or are otherwise entitled to receive Exchange Rights in exchange for
their Shares, the Depositary will forward to each such Shareholder a certificate
representing the Exchange Rights to which such holder is entitled together with
a cheque in Canadian dollars for the cash portion, if any, of the payment in
lieu of any fractional interest in an Exchange Right. Delivery will be made by
first class mail, postage prepaid, to Shareholders at the address specified in
the Letter of Transmittal and Election Form unless the depositing Shareholder
instructs the Depositary in the Letter of Transmittal and Election Form to hold
the cheque(s) and, where and as applicable, certificate(s) representing Exchange
Rights for pick-up. If no address is
18
specified in a Letter of Transmittal and Election Form, the certificate(s) for
Exchange Rights and/or cheque(s) payable will be forwarded to the address of the
holder as shown on the share register of Fording.
7. WITHDRAWAL OF DEPOSITED FORDING SHARES
Except as otherwise provided in this Section 7, all deposits of Shares
pursuant to the Enhanced Offer are irrevocable. Unless otherwise required or
permitted by applicable law, any Shares deposited in acceptance of the Enhanced
Offer may be withdrawn by or on behalf of the depositing Shareholder at any time
until they are taken up and paid for by the Offeror.
In addition, if:
(a) there is a variation of the terms of the Enhanced Offer before the
Expiry Time (including any extension of the period during which Shares
may be deposited hereunder or the modification of a term or condition of
the Enhanced Offer, but excluding, unless otherwise required by
applicable law, a variation consisting solely of an increase in the
consideration offered under the Enhanced Offer, where the Expiry Time is
not extended for a period greater than 10 days after notice of the
variation has been delivered); or
(b) a notice of variation in respect of the information contained in the
Enhanced Offer and the accompanying Circular or in any subsequent notice
of variation is delivered to persons whose Shares were not taken up at
the date of the occurrence of the change,
then any Shares deposited under the Enhanced Offer and not taken up and paid for
by the Offeror at such time may be withdrawn by or on behalf of the depositing
Shareholder at the place of deposit at any time until the expiration of 10 days
after the date upon which the notice of such change or variation is mailed,
delivered or otherwise communicated.
For any withdrawal to be made, notice of the withdrawal must be made in
writing (which includes a facsimile communication or notice by electronic means
that produces a printed copy) and must be actually received by the Depositary or
the U.S. Forwarding Agent at the place of deposit within the period permitted
for withdrawal. Any such notice of withdrawal must be: (i) made by a method,
including a facsimile transmission, that provides the Depositary with a written
or printed copy; (ii) signed by or on behalf of the person who signed the Letter
of Transmittal and Election Form (or Notice of Guaranteed Delivery) that
accompanied the Shares to be withdrawn; and (iii) specify such person's name,
the number of Shares to be withdrawn, the name of the registered holder and the
certificate number shown on each certificate representing the Shares to be
withdrawn. Any signature in a notice of withdrawal must be guaranteed by an
Eligible Institution in the same manner as in the Letter of Transmittal and
Election Form (as described in the rules and instructions set out in such
letter), except in those cases where the Shares were deposited for the account
of an Eligible Institution. The withdrawal will take effect upon receipt by the
Depositary or the U.S. Forwarding Agent of the properly completed notice of
withdrawal. None of the Depositary, the Offeror, the U.S. Forwarding Agent or
any other person will be under any duty to give notification of any defect or
irregularity in any notice of withdrawal or will incur any liability for failure
to give such notification.
IN ADDITION TO THE FOREGOING RIGHTS OF WITHDRAWAL, SHAREHOLDERS IN CERTAIN
PROVINCES OF CANADA ARE ENTITLED TO STATUTORY RIGHTS OF RESCISSION OR TO
DAMAGES, OR BOTH, IN CERTAIN CIRCUMSTANCES. SEE SECTION 25 OF THE CIRCULAR,
"STATUTORY RIGHTS".
All questions as to the validity (including timely receipt) and form of
notices of withdrawal will be determined by the Offeror in its sole discretion,
and such determination will be final and binding.
Any Share withdrawn will be deemed not to be validly deposited for the
purposes of the Enhanced Offer, but may be redeposited at any subsequent time
prior to the Expiry Time by following any of the procedures described in
Section 3 of the Enhanced Offer, "Manner of Acceptance".
8. RETURN OF FORDING SHARES
Any deposited Shares that are not taken up by the Offeror will be returned,
at the expense of the Offeror, to the depositing Shareholder as soon as
practicable after the Expiry Time or withdrawal or early termination of
19
the Enhanced Offer, by either sending new certificates representing Shares not
purchased or returning the deposited certificates (and other relevant
documents).
Certificates (and other relevant documents) will be forwarded by first class
mail in the name of and to the address specified by the Shareholder in the
Letter of Transmittal and Election Form or, if such name or address is not so
specified, in such name and to such address as shown on the Share registers
maintained by or on behalf of Fording.
9. CHANGES IN CAPITALIZATION, DIVIDENDS, DISTRIBUTION, LIENS
If, on or after the date of the Enhanced Offer, Fording should split,
combine or otherwise change any of the Shares or its capitalization, or shall
disclose that it has taken or intends to take any such action, then the Offeror
may, in its sole discretion, make such adjustments as it considers appropriate
to the purchase price and other terms of the Enhanced Offer (including, without
limitation, the type of securities offered to be purchased and the amounts
payable therefor), to reflect such split, combination or other change.
Shares acquired by the Offeror pursuant to the Enhanced Offer shall be
transferred to the Offeror free and clear of all liens, charges, encumbrances,
claims and equities and together with all rights and benefits arising therefrom
including the right to all dividends, distributions, payments, securities,
rights, assets or other interests which may be declared, paid, issued,
distributed, made or transferred on or after the date of the Enhanced Offer on
or in respect of the Shares.
If, on or after the date of the Enhanced Offer, Fording should declare or
pay any dividend or declare, make or pay any other distribution or payment on or
declare, allot, reserve or issue any securities, rights or other interests with
respect to any Shares, which is or are payable or distributable to Shareholders
of record on a date which is prior to the date of the transfer to the name of
the Offeror or its nominees or transferees on the transfer register maintained
by or on behalf of Fording in respect of Shares accepted for purchase pursuant
to the Enhanced Offer, the whole of such dividend, distribution, payment, right
or other interest shall be received and held by the depositing Shareholder for
the account of the Offeror until the Offeror pays for those Shares and shall be
promptly remitted and transferred by the depositing Shareholder to the
Depositary for the account of the Offeror, accompanied by proper documentation
of transfer; provided that in the case of a cash dividend, distribution or
payment payable to a depositing Shareholder that does not exceed the purchase
price per Share payable in cash to such Shareholder pursuant to the Enhanced
Offer, the amount of such dividend, distribution or payment will be applied by
the Offeror in full or partial payment of such cash purchase price and the
amount of cash otherwise payable by the Offeror in payment of the purchase price
will be reduced by such amount. Pending such remittance, the Offeror will be
entitled to all rights and privileges as owner of any such dividend,
distribution, payment, right or other interest and may withhold the entire
purchase price payable by the Offeror to the depositing Shareholder or deduct
from the purchase price payable by the Offeror to the depositing Shareholder
pursuant to the Enhanced Offer the amount or value thereof, as determined by the
Offeror in its sole discretion.
On October 22, 2002, Fording declared a dividend of $0.15 per Share payable
on December 16, 2002 to Shareholders of record on November 20, 2002. The rights
of Shareholders to receive this $0.15 dividend will not be affected if they
deposit their Shares under the Enhanced Offer.
10. MARKET PURCHASES
Subject to applicable law, the Offeror reserves the right to and may
purchase Shares in the market at any time and from time to time prior to the
Expiry Time. If the Offeror purchases Shares other than pursuant to the Enhanced
Offer while the Enhanced Offer is outstanding, it will do so through the
facilities of the TSX and such purchases will not be made before the third
Business Day following the date of the Enhanced Offer. The aggregate number of
Shares acquired in this manner will not exceed 5% of the outstanding Shares on
the date of this Enhanced Offer and the Offeror will issue and file a press
release forthwith after the close of business of the TSX on each day on which
such Shares have been purchased. Any Shares so purchased will be counted in
determining whether the conditions as to the numbers of Shares deposited to the
Enhanced Offer have been fulfilled.
20
For purposes of this Section 10, "Market Purchases" includes purchases by
the Offeror and any person acting jointly or in concert with the Offeror.
11. NOTICES AND DELIVERY
Any notice to be given by the Offeror, the Depositary or the
U.S. Forwarding Agent pursuant to the Enhanced Offer will be deemed to have been
properly given if it is mailed by first class mail, postage prepaid, to the
registered Shareholders of Shares at their addresses as shown on the registers
maintained by or on behalf of Fording and will be deemed to have been received
on the first day following the date of mailing which is not a Business Day.
These provisions apply notwithstanding any accidental omission to give notice to
any one or more holders of Shares and notwithstanding any interruption of mail
services in Canada following mailing. In the event of any interruption of mail
service following mailing, the Offeror intends to make reasonable efforts to
disseminate the notice by other means, such as publication. Except as otherwise
required or permitted by law, if post offices in Canada are not open for the
deposit of mail, any notice which the Offeror or the Depositary may give or
cause to be given under the Enhanced Offer will be deemed to have been properly
given and to have been received by Shareholders if it is given to the TSX for
dissemination and if it is published (i) once in the National Edition of The
Globe and Mail; and (ii) once, if possible, in daily newspapers of general
circulation in each of the French and English languages in the City of Montreal,
provided that if the National Edition of The Globe and Mail is not being
generally circulated, publication thereof will be made in The National Post.
The Enhanced Offer will be mailed to registered holders of Shares or made in
such other manner as is permitted by applicable regulatory authorities.
WHEREVER THE ENHANCED OFFER CALLS FOR DOCUMENTS TO BE DELIVERED TO THE
DEPOSITARY OR THE U.S. FORWARDING AGENT, THOSE DOCUMENTS WILL NOT BE CONSIDERED
DELIVERED UNLESS AND UNTIL THEY HAVE BEEN PHYSICALLY RECEIVED AT ONE OF THE
ADDRESSES LISTED FOR THE DEPOSITARY OR THE U.S. FORWARDING AGENT ON THE LETTER
OF TRANSMITTAL AND ELECTION FORM OR NOTICE OF GUARANTEED DELIVERY, AS
APPLICABLE. WHEREVER THE ENHANCED OFFER CALLS FOR DOCUMENTS TO BE DELIVERED TO A
PARTICULAR OFFICE OF THE DEPOSITARY OR THE U.S. FORWARDING AGENT, THOSE
DOCUMENTS WILL NOT BE CONSIDERED DELIVERED UNLESS AND UNTIL THEY HAVE BEEN
PHYSICALLY RECEIVED AT THE PARTICULAR OFFICE AT THE ADDRESS INDICATED ON THE
LETTER OF TRANSMITTAL AND ELECTION FORM OR NOTICE OF GUARANTEED DELIVERY, AS
APPLICABLE.
12. MAIL SERVICE INTERRUPTION
Notwithstanding the provisions of the Enhanced Offer, the Circular, the
Letter of Transmittal and Election Form or the Notice of Guaranteed Delivery,
cheques, certificates for securities and any other relevant documents will not
be mailed if the Offeror determines that delivery thereof by mail may be
delayed. Persons entitled to cheques, certificates or any other relevant
documents which are not mailed for the foregoing reason may take delivery
thereof at the office of the Depositary to which the deposited certificates for
Shares were delivered until such time as the Offeror has determined that
delivery by mail will no longer be delayed. The Offeror will provide notice of
any such determination not to mail made under this Section 12 as soon as
reasonably practicable after the making of such determination and in accordance
with Section 11 of the Enhanced Offer, "Notices and Delivery". The deposit of
cheques and certificates for securities with the Depositary in such
circumstances will constitute delivery to the persons entitled thereto and the
Shares will be deemed to have been paid for immediately upon such deposit at the
office of the Depositary at which the Shares were deposited.
13. SHAREHOLDERS IN CERTAIN JURISDICTIONS
The Canadian Coal Trust and Sherritt are filing a registration statement
with the SEC with respect to the Exchange Rights and Units to be issued and
delivered pursuant to the Enhanced Offer in the United States. The Offeror and
Sherritt reserve the right to pay for the Shares validly deposited under the
Enhanced Offer and not withdrawn by providing the Depositary with sufficient
funds in cash (by bank transfer or other means satisfactory to the Depositary)
for transmittal to specific Shareholders, in the event that the Exchange Rights
or the Units may not be lawfully delivered without further action by the
Offeror, Sherritt or the Trust to persons resident in certain states of the
United States or residents in other jurisdictions. Tendering Shareholders in
such
21
jurisdictions or who appear to the Offeror, relying on the address provided by
the Shareholder, to be in such jurisdictions will receive, in lieu of the
Exchange Rights or the Units, the Cash Option.
14. OTHER TERMS OF THE ENHANCED OFFER
The Enhanced Offer and all contracts resulting from acceptance hereof will
be governed by and construed in accordance with the laws of the Province of
Ontario and the laws of Canada applicable therein. Each party to an agreement
resulting from the acceptance of the Enhanced Offer unconditionally and
irrevocably attorns to the exclusive jurisdiction of the courts of the Province
of Ontario.
Where the Enhanced Offer provides that the time for the taking of any
action, the doing of any thing or the end of any period, expires or falls upon a
day that is not a Business Day, the time shall be extended and action may be
taken, the thing may be done or the period shall end as the case may be, on the
next Business Day.
No broker, dealer or other person has been authorized to give any
information or make any representation on behalf of the Offeror, the
Partnership, the Partners or their respective affiliates not contained herein or
in the accompanying Circular and, if given or made, such information or
representation must not be relied upon as having been authorized.
The provisions of the Glossary, Circular, Letter of Transmittal and Election
Form and Notice of Guaranteed Delivery accompanying the Enhanced Offer,
including the instructions and rules contained therein, as applicable, form part
of the terms and conditions of the Enhanced Offer. The accompanying Circular
constitutes the take-over bid circular required under Canadian provincial
securities legislation with respect to the Enhanced Offer.
The enforcement by Shareholders of civil liabilities under the United States
federal securities laws may be affected adversely by the fact that each of the
Offeror and Sherritt is incorporated, and the Canadian Coal Trust has been
established under the laws of Canada, that some or all of the directors and
officers of the Offeror and Sherritt and the Trustees of the Canadian Coal Trust
are residents of a foreign country, that some or all of the Dealer Managers or
experts named in the registration statement referred to in Section 13 of the
Enhanced Offer, "Shareholders in Certain Jurisdictions", may be residents of a
foreign country, and that all or a substantial portion of the assets of said
persons may be located outside the United States.
Shareholders should be aware that, during the currency of the Enhanced
Offer, the Offeror, the Partnership and the Partners, and their respective
affiliates, may, directly or indirectly, bid for and make purchases of Shares or
other securities of Fording as permitted by applicable laws or regulations of
Canada or its provinces or territories.
The Offeror, in its sole discretion, will be entitled to make a final and
binding determination of all questions relating to the interpretation of the
Enhanced Offer, Circular, Letter of Transmittal and Election Form and Notice of
Guaranteed Delivery, the validity of any acceptance of the Enhanced Offer, the
validity of any elections and the validity of any withdrawals of Shares.
Dated: December 16, 2002
SHERRITT COAL ACQUISITION INC.
(Signed) DENNIS G. MASCHMEYER
President and Chief Executive Officer
22
CIRCULAR
The following information is supplied with respect to the accompanying
Enhanced Offer by the Offeror to purchase all of the outstanding Shares of
Fording, including Shares that may become outstanding on exercise of options.
The terms and conditions of the Enhanced Offer are incorporated in and form part
of this Circular, including details as to payment and withdrawal rights. Terms
defined in the Enhanced Offer and not otherwise defined in this Circular will
have the meanings given in the Enhanced Offer.
THE INFORMATION CONCERNING FORDING, TECK, WESTSHORE AND THEIR RESPECTIVE
AFFILIATES (INCLUDING FORWARD-LOOKING STATEMENTS) CONTAINED IN THE ENHANCED
OFFER AND THIS CIRCULAR HAS BEEN TAKEN FROM OR IS BASED UPON PUBLICLY AVAILABLE
DOCUMENTS AND RECORDS OF FORDING, TECK, WESTSHORE AND THEIR RESPECTIVE
AFFILIATES ON FILE WITH THE CANADIAN AND U.S. SECURITIES REGULATORY AUTHORITIES
AND OTHER PUBLIC SOURCES. ALTHOUGH THE OFFEROR HAS NO KNOWLEDGE THAT WOULD
INDICATE THAT ANY STATEMENTS CONTAINED HEREIN THAT ARE TAKEN FROM OR ARE BASED
UPON THOSE DOCUMENTS AND RECORDS OR OTHER PUBLIC SOURCES ARE UNTRUE OR
INCOMPLETE, THE OFFEROR DOES NOT ASSUME AND EXPRESSLY DISCLAIMS ANY
RESPONSIBILITY FOR THE ACCURACY OR COMPLETENESS OF THE INFORMATION TAKEN FROM OR
BASED UPON THOSE DOCUMENTS, RECORDS AND OTHER PUBLIC SOURCES, OR FOR ANY FAILURE
BY FORDING, TECK, WESTSHORE OR THEIR RESPECTIVE AFFILIATES TO DISCLOSE PUBLICLY
EVENTS OR FACTS THAT MAY HAVE OCCURRED OR WHICH MAY AFFECT THE SIGNIFICANCE OR
ACCURACY OF ANY INFORMATION, BUT WHICH ARE UNKNOWN TO THE OFFEROR.
1. THE OFFEROR
The Offeror was formed under the laws of Canada on October 24, 2002. The
Partnership is the owner of all the issued and outstanding shares of the
Offeror. The principal office of the Offeror is located at 1133 Yonge Street,
Toronto, Ontario, M4T 2Y7.
The Offeror has been formed solely for the purpose of making the Enhanced
Offer and has not otherwise carried on any material business or activity. As at
the date of this Circular, the Offeror does not own any Shares of Fording.
2. SHERRITT COAL PARTNERSHIP II
The Partnership was formed under the laws of Ontario on October 21, 2002.
The two partners of the Partnership are wholly-owned subsidiaries of Sherritt
and OTPP, respectively. The offices of the Partnership are located at 1133 Yonge
Street, Toronto, Ontario, M4T 2Y7.
The Partnership has been formed solely for the purpose of making the
Enhanced Offer and has not otherwise carried on any material business or
activity. As of the date of this Circular, the Partnership does not own any
Shares of Fording.
3. ONTARIO TEACHERS' PENSION PLAN BOARD
OTPP is responsible for the retirement income of approximately 154,000
elementary and secondary school teachers and 88,500 retired teachers. Since
1990, OTPP's assets have grown from $17 billion to over $68 billion as of
June 30, 2002, representing an average annual return of 11.7%. OTPP also has a
50% interest in Luscar Energy Partnership. The offices of OTPP are located at
5650 Yonge Street, Toronto, Ontario, M2M 4H5.
As of the date of this Circular, OTPP beneficially owns 3,150,260 Shares,
representing approximately 6.2% of the Shares of Fording outstanding at the date
hereof. OTPP has advised the Offeror that it intends to vote its Shares against
the Fording-Teck Combination and to deposit these Shares under the Enhanced
Offer and elect to receive Exchange Rights in consideration therefor.
4. SHERRITT INTERNATIONAL CORPORATION
Sherritt International Corporation is a diversified Canadian resource
company with assets of $2 billion that operates in Canada and internationally.
Sherritt, directly and through its subsidiaries, has a 50% interest in Luscar
Energy Partnership which owns Luscar Ltd., Canada's largest coal producer, 50%
of a vertically-integrated nickel/cobalt metals business, an oil and gas
exploration, development and production business with reserves in Cuba and
elsewhere, and 49.7% of Sherritt Power Corporation, which finances, constructs
and operates gas-fired electricity generation plants in Cuba. Sherritt also has
interests in cellular
23
telecommunications, soybean-based food-processing, agriculture and tourism in
Cuba. The principal office of Sherritt is located at 1133 Yonge Street, Toronto,
Ontario, M4T 2Y7. As at the date of this Circular, Sherritt does not own any
Shares of Fording.
The Exchange Rights that a Shareholder may elect to receive under the
Enhanced Offer are securities of Sherritt. Sherritt has undertaken to issue
sufficient Exchange Rights to the Offeror to satisfy its obligations pursuant to
the Enhanced Offer. Shareholders considering electing to receive Exchange Rights
pursuant to the Enhanced Offer are referred to Appendix B to the Circular for
detailed disclosure with respect to Sherritt and to Appendix C to the Circular
which contains certain financial statements of Sherritt.
5. THE CANADIAN COAL TRUST
The Canadian Coal Trust is an open-ended, limited purpose trust established
under the laws of Ontario by the Declaration of Trust on December 16, 2002. The
Canadian Coal Trust will have an indirect interest in the MetCoal Company
through its ownership of SCAI Shares and all of the SCAI Series A Notes. The
Partnership will also own the SCAI Shares and all of the SCAI Series B Notes.
See "The Canadian Coal Trust" in Appendix A to this Circular.
While it is intended that the Canadian Coal Trust will qualify as a "mutual
fund trust" for purposes of the Tax Act, the Canadian Coal Trust is neither a
mutual fund trust for the purposes of applicable securities laws in Canada, nor
registered as an "investment company" within the meaning of the United States
INVESTMENT COMPANY ACT OF 1940 (the "U.S. 1940 Act"). Therefore, the protections
of applicable securities laws in Canada regulating mutual funds and the
protection of the U.S. 1940 Act will not be available to Unitholders.
The principal office of the Canadian Coal Trust is located at 1133 Yonge
Street, Toronto, Ontario M4T 2Y7.
6. PURPOSE OF THE ENHANCED OFFER
If the Offeror takes up and pays for the Shares validly deposited under the
Enhanced Offer, the Offeror intends to exercise its rights under the CBCA to
permit it to acquire all the Shares not deposited under the Enhanced Offer or,
if such rights of Compulsory Acquisition are not available, the Offeror may seek
to acquire, directly or indirectly, all of the Shares through other means. See
Section 18 of the Circular, "Acquisition of Fording Shares not Deposited under
the Enhanced Offer". However, the Offeror reserves the right not to propose a
Compulsory Acquisition or a Subsequent Acquisition Transaction, or to propose a
Subsequent Acquisition Transaction on terms not described herein.
7. BENEFITS OF THE ENHANCED OFFER
The Offeror believes that the Enhanced Offer is superior to the Fording-Teck
Combination for the following reasons:
EQUIVALENT DISTRIBUTABLE CASH FLOW INITIALLY AND HIGHER DISTRIBUTABLE CASH FLOW
LONG TERM
The first quarter 2003 target for distributable cash flow per Unit of the
Canadian Coal Trust and the proposed Fording-Teck Combination first quarter 2003
target amount are the same at $1.05. The Offeror believes that the Canadian Coal
Trust will be able to generate an equivalent level of distributable cash flow
initially, and a higher level of distributable cash flow per Unit over the long
term, given the potential greater cost savings of the combination of the
metallurgical coal assets of Fording and the Met Coal Assets, than the trust
created in the Fording-Teck Combination.
The Offeror anticipates achieving approximately one third of its cost
savings in 2003. The remaining cost savings, when realized after 2003, are
expected to increase annual distributable cash flow per Unit by approximately
$0.60 before the benefit of any marketing or coal blending synergies.
Factors driving this enhanced estimated distributable cash flow per Unit
include:
- The MetCoal Company will pay out 100% of distributable cash flow;
24
- The MetCoal Company is expected to achieve $50 million of annual cost
savings plus additional marketing and coal blending synergies;
- Fording has disclosed that its thermal coal operations will require
significant capital expenditures in 2003 and 2004 associated with a new
customer contract and expansion at the Genesee Mine. The MetCoal Company
will not have a material economic interest in Fording's thermal coal
operations nor have the obligations associated with funding these capital
expenditures;
- The MetCoal Company is expected to have approximately $300 million of
debt, excluding working capital, compared to approximately $425 million of
debt, excluding working capital, for Fording under the Fording-Teck
Combination and accordingly the MetCoal Company is expected to have a
lower interest expense;
- The MetCoal Company will enhance its distributable cash flow by acquiring
Luscar's and CONSOL's metallurgical coal assets; and
- The MetCoal Company will pay out or otherwise relieve Fording of the
obligations under Fording's existing foreign currency hedge arrangements,
while the Fording-Teck Combination will retain it. The MetCoal Company
will also repay all outstanding indebtedness of Fording.
SUBORDINATION PROVIDES GREATER CERTAINTY OF DISTRIBUTABLE CASH FLOW PER UNIT
The subordination feature of the Enhanced Offer is designed to reduce the
risk for Shareholders electing to receive Exchange Rights with respect to the
level of distributions they can expect to receive in 2003. The Offeror has a
target for distributable cash generated by the MetCoal Company in the first
quarter of 2003 of $1.05 per Unit. The Partnership will not receive any
distribution in respect of its interest in the MetCoal Company in any quarter in
2003 unless the Canadian Coal Trust has first received cash interest on its SCAI
Series A Notes of $1.05 per Unit in respect of that quarter. This subordination
is subject to a maximum subordination amount of $11.25 million each calendar
quarter, for an aggregate annual maximum subordination amount of $45 million.
This subordination feature demonstrates the confidence Sherritt and OTPP have in
the superior cash distributions available to Unitholders through the benefits of
the combined metallurgical assets and resultant synergies. The Fording-Teck
Combination does not offer any subordination feature.
STRONGER CAPITAL STRUCTURE
The MetCoal Company is expected to have consolidated debt of not more than
approximately $300 million, excluding working capital, which includes the costs
of unwinding Fording's exchange hedge arrangements and paying the $51 million
break-up fees under the Fording-Teck Combination. The MetCoal Company is
expected to have a debt to EBITDA ratio (excluding working capital) of 1.1x
based on annualized, year-to-date pro forma EBITDA, whereas, under the
Fording-Teck Combination, Fording is expected to have a pro forma debt to EBITDA
ratio of 2.0x based on annualized, year-to-date pro forma EBITDA.
LOWER CORPORATE OVERHEAD COSTS
An independent entity will be established to provide management services to
the MetCoal Company at a fee that will be less than the corporate overhead
expense for Fording in 2002 (excluding unusual and one time items). In addition,
management of the independent entity will be compensated based on the amount of
savings generated. Unlike the 3.6 million unit management option plan and the
estimated $2 million of annual additional corporate overhead costs under the
Fording-Teck Combination, this management structure will not result in increased
costs to, or dilution of, the Canadian Coal Trust.
STRONG CORPORATE GOVERNANCE
The Canadian Coal Trust will have entirely independent trustees and the
MetCoal Company will have a majority of independent board members. Under the
Fording-Teck Combination, Teck and Westshore combined will have the ability to
nominate a majority of the trustees of the trust and a majority of the board
members of Fording.
25
8. PLANS FOR FORDING
On October 21, 2002, the Partnership announced its intention to make the
Original Offer and stated that it was also considering supplementing the
Original Offer to give Shareholders the opportunity to receive Exchange Rights
for income fund trust units for all or a portion of their Shares.
Later on October 21, 2002, Fording announced that its board of directors had
unanimously agreed to reorganize Fording into an income trust. Fording stated
that the reorganization would be undertaken by way of a plan of arrangement
under the CBCA. Pursuant to the arrangement, Shareholders would effectively
exchange their Shares on a one-for-one basis for units of a trust that would be
established as part of the arrangement. Fording stated that it anticipated that
a special meeting of Shareholders to consider the transaction would be held in
December 2002.
On November 6, 2002, Fording announced in its directors' circular (the
"Fording Director's Circular") that the board of directors of Fording
unanimously recommended rejection of the Original Offer to the Shareholders.
On November 12, 2002, Fording announced that upon implementation of its
proposed reorganization into an income trust announced on October 21, 2002,
Shareholders would receive $3.00 per Share in addition to an income trust unit
for each Share held. Fording also announced that it had negotiated the
replacement of bank credit facilities with RBC Capital Markets totalling
$425 million to fund the additional $3.00 per Share payment under the proposed
reorganization. Fording stated that its reorganization into an income trust and
payment of the $3.00 per Share would be effected by a plan of arrangement under
the CBCA, subject to Shareholder approval, among other things. Fording further
stated that, subject to an interim order by the Court of Queen's Bench of
Alberta, shareholder approval would be sought at a special meeting of
Shareholders to be held on December 20, 2002.
On November 20, 2002, Fording obtained an interim order of the Court of
Queen's Bench of Alberta, permitting Fording to call a Special Meeting of
Shareholders to consider and, if deemed advisable, to pass a special resolution
to approve the reorganization, on December 20, 2002. On November 25, 2002,
Fording filed and mailed its management information circular (the "Fording
Management Circular") in respect of the Special Meeting of Shareholders
scheduled to be held on December 20, 2002.
On December 4, 2002, Fording announced by way of press release that it had
entered into an agreement with Teck and Westshore whereby Fording would amend
the plan of arrangement it was presenting to Shareholders for approval to
provide that Shareholders would receive a combination of cash and units through
the Fording-Teck Combination. Fording advised that pursuant to the Fording-Teck
Combination, its income trust would own all the existing businesses of Fording
and, through a newly-formed partnership, the metallurgical coal assets of Teck.
Fording further stated that Teck and Westshore would subscribe for an aggregate
of $340 million in units of Fording's proposed income trust. On December 9,
2002, Fording filed and mailed a supplement to the Fording Management Circular
in respect of the Fording-Teck Combination. The payment of $3.00 per Share
originally proposed by Fording in the Fording Management Circular was withdrawn.
On December 12, 2002, the Partnership announced by way of press release that
it would cause the Offeror to enhance its Original Offer and outlined the terms
of the Enhanced Offer.
Later on December 12, 2002, Fording announced that it was postponing the
date of its Special Meeting of Shareholders that is being held to consider the
Fording-Teck Combination from December 20, 2002 to January 3, 2003.
Provided the Fording-Teck Combination is not approved, and the Enhanced
Offer is completed, the Offeror intends to acquire all of the outstanding Shares
of Fording. The Offeror's intention is to effect the various transactions
reflected in Appendix A to this Circular in relation to the Canadian Coal Trust,
SCAI, the MetCoal Company, the Units and the Exchange Rights, all having the
assets, rights, liabilities or attributes, as the case may be, as described in
greater detail in Appendix A to this Circular.
26
9. THE CANADIAN COAL TRUST, SCAI, THE METCOAL COMPANY, THE UNITS AND THE
EXCHANGE RIGHTS
Appendix A to this Circular contains detailed disclosure with respect to the
Canadian Coal Trust, SCAI (the "Offeror"), the MetCoal Company, the attributes
of the Exchange Rights and of the Units. Appendix B to this Circular contains
detailed disclosure with respect to Sherritt, as issuer of the Exchange Rights.
Reference should be made to both Appendix A and Appendix B, which form an
integral part of this Circular, for details of all these matters.
10. OWNERSHIP OF FORDING SHARES
To the knowledge of the directors and senior officers of the Offeror, based
on publicly available information, no Shareholder holds more than 10% of the
issued and outstanding Shares of Fording. As at the date hereof, OTPP
beneficially owns 3,150,260 Shares, representing approximately 6.2% of the
outstanding Shares and the Offeror, the Partnership, the Partners and Sherritt
neither own, nor exercise control or direction over, any securities of Fording.
OTPP has advised the Offeror that it intends to deposit these Shares under the
Enhanced Offer and elect to receive Exchange Rights in consideration therefor,
subject to proration. OTPP has also advised the Offeror that it intends to vote
its Shares against the Fording-Teck Combination.
Other than as set out above, no securities of Fording are owned, nor is
control or direction over securities of Fording exercised by, any director or
senior officer of the Offeror nor, to the knowledge of the directors and senior
officers of the Offeror after reasonable enquiry, by any associate of any such
director or senior officer, by any person or company holding more than 10% of
any equity securities of the Offeror, or by any person acting jointly or in
concert with the Offeror in connection with the Enhanced Offer.
There is no person or company acting jointly or in concert with the Offeror
in connection with the transactions described in the Enhanced Offer and this
Circular, other than the Partnership and the Partners, and their respective
affiliates.
11. PRICE RANGE AND TRADING VOLUME OF FORDING SHARES
No securities of Fording have been traded during the twelve-month period
preceding the date of the Original Offer by the Offeror, by the directors or
senior officers of the Offeror, nor to the knowledge of the directors and senior
officers of the Offeror after reasonable enquiry, by any associate or affiliate
of the Offeror, by any associate of any such director or senior officer of the
Offeror, by any person or company holding more than 10% of any equity securities
of the Offeror or by any person acting jointly or in concert with the Offeror,
except for the following purchases and sales of Shares:
Price Per Share (Cdn.$)
(includes commissions paid
Party Trade Date Nature of Trade Number of Shares in the case of OTPP)
----- ------------------- --------------- ---------------- --------------------------
OTPP.................... November 6, 2001 Sell (25,414) 26.23
OTPP.................... November 7, 2001 Sell (110,500) 25.80
OTPP.................... November 8, 2001 Sell (346,200) 25.16
OTPP.................... November 9, 2001 Sell (1,000) 24.97
OTPP.................... November 12, 2001 Sell (30,500) 24.97
OTPP.................... November 13, 2001 Sell (94,300) 25.18
OTPP.................... November 19, 2001 Sell (20,000) 25.97
OTPP.................... December 4, 2001 Purchase 35,000 26.74
OTPP.................... December 4, 2001 Purchase 15,000 26.43
OTPP.................... December 5, 2001 Purchase 50,000 27.36
OTPP.................... December 5, 2001 Purchase 2,500 27.32
OTPP.................... December 5, 2001 Purchase 57,800 27.33
OTPP.................... January 9, 2002 Sell (26,000) 26.83
OTPP.................... February 4, 2002 Sell (6,200) 26.36
OTPP.................... February 6, 2002 Sell (57,800) 26.72
OTPP.................... February 7, 2002 Sell (50) 26.90
OTPP.................... March 4, 2002 Sell (7,200) 28.79
27
Price Per Share (Cdn.$)
(includes commissions paid
Party Trade Date Nature of Trade Number of Shares in the case of OTPP)
----- ------------------- --------------- ---------------- --------------------------
OTPP.................... May 3, 2002 Sell (52,000) 30.90
OTPP.................... May 31, 2002 Purchase 80,500 31.63
OTPP.................... May 31, 2002 Purchase 1,800 31.68
OTPP.................... June 3, 2002 Purchase 57,000 32.64
OTPP.................... June 4, 2002 Sell (3,800) 32.09
OTPP.................... June 4, 2002 Purchase 40,700 32.54
OTPP.................... June 5, 2002 Sell (3,000) 32.18
OTPP.................... June 25, 2002 Sell (57,000) 28.27
OTPP.................... July 2, 2002 Sell (16,100) 28.11
OTPP.................... July 3, 2002 Sell (8,100) 28.98
OTPP.................... July 3, 2002 Sell (8,200) 29.25
OTPP.................... August 14, 2002 Sell (3,600) 23.77
OTPP.................... August 14, 2002 Sell (2,400) 23.39
OTPP.................... August 15, 2002 Sell (1,600) 23.83
OTPP.................... August 15, 2002 Sell (51,600) 23.72
OTPP.................... September 4, 2002 Sell (141,313) 23.32
OTPP.................... September 13, 2002 Purchase 337,000 22.83
OTPP.................... September 18, 2002 Purchase 250,000 23.03
OTPP.................... September 18, 2002 Purchase 50,000 23.03
OTPP.................... September 20, 2002 Purchase 2,500 22.70
OTPP.................... September 20, 2002 Purchase 4,100 22.85
OTPP.................... September 20, 2002 Purchase 4,300 22.70
OTPP.................... September 20, 2002 Purchase 9,500 22.70
OTPP.................... September 20, 2002 Purchase 3,500 22.65
OTPP.................... September 20, 2002 Purchase 2,500 22.65
OTPP.................... September 23, 2002 Purchase 25,100 22.17
OTPP.................... September 23, 2002 Purchase 5,000 22.10
OTPP.................... September 24, 2002 Purchase 189,300 22.18
OTPP.................... September 24, 2002 Purchase 31,700 22.17
OTPP.................... September 25, 2002 Purchase 61,000 22.53
OTPP.................... September 25, 2002 Purchase 18,000 22.25
OTPP.................... September 26, 2002 Purchase 26,400 23.03
OTPP.................... October 1, 2002 Purchase 58,700 22.53
OTPP.................... October 1, 2002 Purchase 4,800 21.79
OTPP.................... October 1, 2002 Purchase 5,300 21.98
OTPP.................... October 1, 2002 Purchase 5,800 22.04
OTPP.................... October 3, 2002 Purchase 242,500 22.43
OTPP.................... October 3, 2002 Purchase 75,500 22.43
OTPP.................... October 4, 2002 Purchase 10,100 23.03
OTPP.................... October 7, 2002 Purchase 13,400 22.91
OTPP.................... October 8, 2002 Purchase 8,900 23.03
OTPP.................... October 8, 2002 Purchase 24,600 23.01
OTPP.................... October 8, 2002 Purchase 1,100 23.03
OTPP.................... October 8, 2002 Purchase 10,000 23.03
OTPP.................... October 9, 2002 Purchase 626,400 22.92
OTPP.................... October 9, 2002 Purchase 301,100 22.93
OTPP.................... October 10, 2002 Purchase 9,000 22.96
12. COMMITMENTS TO ACQUIRE FORDING SHARES
With the exception of the Shares proposed to be acquired pursuant to the
Enhanced Offer, neither the Offeror nor any of its directors or senior officers,
nor, to the knowledge of the directors and senior officers of
28
the Offeror after reasonable enquiry, any associate or affiliate of the Offeror,
any associates of any such directors or senior officers, any person or company
who beneficially owns, directly or indirectly, more than 10% of any equity
securities of the Offeror or any person acting jointly or in concert with the
Offeror, has entered into any commitments to acquire any securities of Fording.
13. ARRANGEMENTS, AGREEMENTS OR UNDERSTANDINGS
There are no formal or informal arrangements or agreements made or proposed
to be made between the Offeror and any of the directors or senior officers of
Fording and no payments or other benefits are proposed to be made or given by
the Offeror by way of compensation for loss of office or for such directors or
senior officers remaining in or retiring from office as a result of the Enhanced
Offer. There are no contracts, arrangements or understandings, formal or
informal, between the Offeror and any security holder of Fording (other than
OTPP) with respect to the Enhanced Offer or between the Offeror and any person
with respect to any securities of Fording in relation to the Enhanced Offer.
14. MATERIAL CHANGES IN THE AFFAIRS OF FORDING AND OTHER INFORMATION
The Offeror has no information that indicates any material change in the
affairs of Fording since the date of the last published financial statements of
Fording, other than matters disclosed in this Circular, Fording Directors'
Circular, Fording's Management Circular and the supplement to the Fording
Management Circular dated December 8, 2002. The Offeror has no knowledge of any
other matter that has not previously been generally disclosed and that would
reasonably be expected to affect the decision of Shareholders to accept or
reject the Enhanced Offer.
15. SOURCE OF FUNDS
If all outstanding Shares are deposited under the Enhanced Offer, the
maximum amount of cash required by the Offeror to purchase all Shares will be
$850 million. In addition, the Offeror estimates the amounts required to pay
break fees in connection with the Fording-Teck Combination, to repay debt
facilities and to terminate certain foreign exchange arrangements of Fording
will be approximately $332 million.
Of the total funds required, up to $400 million will be funded in equal
amounts by the Partners from funds on hand. These funds will be injected by way
of equity contribution to, or long term subordinated indebtedness of, the
Offeror.
The Offeror has obtained a commitment for a bridge loan facility, of which
up to approximately $300 million is expected to be drawn, from an affiliate of
an investment banking firm and several Canadian chartered banks. Of the
$300 million expected to be drawn, approximately $90 million will be used to pay
the break fee and repay a portion of the existing debt and hedging obligations
of Fording. The remaining $210 million expected to be drawn will be applied
towards the purchase of Shares. In the event that less than $210 million is
required from this bridge loan to purchase Shares under the Enhanced Offer,
then, to the extent of any such difference up to $210 million, the Offerer
intends that the proceeds of this bridge loan facility or funds available under
its other credit facilities will be used to fund a special distribution by SCAI
to the Partnership and the Canadian Coal Trust, on a pro rata ownership basis.
The Canadian Coal Trust will use the funds to pay a special distribution to
holders of Units. The bridge loan commitment is subject to customary conditions
including the absence of a material adverse change in the business or financial
condition of Fording and the entering into of definitive loan documents
containing usual and customary provisions for such a financing.
The bridge loan facility will initially be secured by a pledge of all of the
Shares acquired by the Offeror and any other assets of the Offeror. The bridge
loan facility is required to be repaid in full on the first day following the
first anniversary of the date of the initial advance, and is also subject to
mandatory repayment from the proceeds of certain asset sales and future debt or
equity offerings. The facility bears interest and is subject to fees at levels
customary for credit facilities of this type. The bridge loan facility will
include covenants, representations, warranties, conditions and default
provisions which are customary for credit facilities of this type. It is
expected that borrowings under the bridge loan facility will be repaid from
future cash flow of the MetCoal Company and from future financings during the
bridge period. At the time of the Amalgamation, the
29
bridge loan facility will be assumed by the MetCoal Company and secured by
substantially all of the assets of the MetCoal Company and its subsidiaries
(other than inventory and receivables). The Offeror expects that the bridge loan
facility will be refinanced with a credit facility on or about the Date of
Exchange on terms consistent with investment grade facilities. The Offeror has
received an offer of a committed $425 million investment grade credit facility
of this type from a Canadian chartered bank to refinance both this bridge loan
facility and the $100 working capital facility described under "Funding,
Acquisition and Related Transactions -- Credit Arrangements of Sherritt Coal
Acquisition Inc. and the MetCoal Company" in Appendix A to the Circular.
OTPP has also agreed to provide financing in the form of a subordinated loan
facility in an amount, if any, equal to the balance required to complete the
Enhanced Offer, from funds on hand. Availability of the subordinated loan
facility is subject to the entering into of definitive loan documents. The
subordinated loan facility is unsecured, has a term of 15 years and is not
subject to scheduled repayments. The subordinated loan facility is available to
the Partnership and will be advanced to the Offeror by way of long term
subordinated indebtedness. The facility bears interest and is subject to fees at
levels appropriate for long term, subordinated and unsecured indebtedness. The
subordinated loan facility will include covenants, representations, warranties,
conditions and default provisions which are customary for unsecured and
subordinated indebtedness. It is expected that borrowings under the subordinated
loan facility will be repaid from future cash flow of the MetCoal Company and
from future financings.
16. INFORMATION CONCERNING FORDING SHARES
AUTHORIZED AND OUTSTANDING CAPITAL
The authorized capital of Fording consists of an unlimited number of Shares.
As at November 15, 2002, Fording's issued and outstanding capital consisted of
50,656,443 Shares (51,432,477 million Shares on a diluted basis). Each Share
carries the right to one vote at all meetings of Shareholders of Fording and the
right to receive such dividends as the directors of Fording in their discretion
may declare.
PRICE RANGE AND TRADING VOLUME OF FORDING SHARES
The Shares are listed and posted for trading on the TSX and the NYSE. The
following table sets forth the volume of trading and price range of the Shares
on the TSX in the twelve month period prior to the date hereof:
TSX-Period High Low Volume
---------- ---------- ---------- ----------
2001
October................................................... Cdn.$25.52 Cdn.$20.00 20,234,959
November.................................................. 27.50 24.00 6,723,330
December.................................................. 28.50 24.75 3,409,340
2002
January................................................... 28.50 25.55 4,014,335
February.................................................. 29.85 25.91 3,754,697
March..................................................... 31.60 28.26 3,950,840
April..................................................... 32.50 27.90 3,750,718
May....................................................... 32.18 28.50 2,511,213
June...................................................... 32.75 28.15 3,011,593
July...................................................... 29.47 23.50 3,542,662
August.................................................... 25.74 23.34 3,274,491
September................................................. 24.53 22.00 4,309,759
October................................................... 33.00 21.59 25,101,707
November.................................................. 33.05 31.25 13,959,484
December 1 to 13.......................................... 33.60 32.31 16,752,183
The Offeror announced its intention to make the Original Offer for all the
Shares on October 21, 2002. The closing price of the Shares on the TSX on
October 18, 2002, the last day on which the Shares traded prior to the
announcement of the Original Offer, was Cdn.$25.99.
30
The following table sets forth the volume of trading and price range of the
Shares on the NYSE in the twelve month period prior to the date hereof:
NYSE-Period High Low Volume
----------- ---------- ---------- ---------
2001
October................................................... U.S.$16.35 U.S.$12.85 3,761,800
November.................................................. 17.00 15.13 808,100
December.................................................. 17.91 15.75 790,400
2002
January................................................... 17.95 16.03 939,300
February.................................................. 18.64 16.25 487,500
March..................................................... 19.74 17.94 832,400
April..................................................... 20.63 17.65 969,600
May....................................................... 20.95 18.52 404,700
June...................................................... 21.45 18.48 333,700
July...................................................... 19.10 15.10 478,200
August.................................................... 16.28 14.95 1,006,100
September................................................. 15.75 13.90 724,700
October................................................... 21.20 13.70 1,302,400
November.................................................. 21.30 19.82 424,400
December 1 to 13.......................................... 21.60 20.49 197,000
The Offeror announced its intention to make the Original Offer for all the
Shares on October 21, 2002. The closing price of the Shares on the NYSE on
October 18, 2002, the last day on which the Shares traded prior to the
announcement of the Original Offer, was U.S.$16.50.
EFFECT OF THE ENHANCED OFFER ON THE MARKET FOR AND LISTING OF SHARES
The purchase of Shares by the Offeror pursuant to the Enhanced Offer will
reduce the number of Shares that might otherwise trade publicly as well as the
number of Shareholders and, depending on the number of Shareholders depositing
and the number of Shares purchased under the Enhanced Offer, would likely
adversely affect the liquidity and market value of the remaining Shares held by
the public.
The rules and regulations of the TSX and the NYSE establish certain criteria
which, if not met, could lead to the delisting of the Shares from such
exchanges. Among such criteria are the number of Shareholders, the number of
Shares publicly held and the aggregate market value of the Shares publicly held.
Depending upon the number of Shares purchased under the Enhanced Offer, it is
possible that the Shares would fail to meet the criteria for continued listing
on such exchanges. It is the intention of the Offeror to apply to delist the
Shares from such exchanges as soon as practicable after completion of the
Enhanced Offer or a Compulsory Acquisition or Subsequent Acquisition
Transaction, if required.
17. REGULATORY MATTERS
COMPETITION ACT (CANADA)
Under the Competition Act, the parties to certain transactions involving the
acquisition of voting shares of a corporation that carries on (or controls a
corporation that carries on) an operating business in Canada are required to
notify the Commissioner that the transaction is proposed, and to observe a
statutory waiting period of prescribed length, before the transaction may be
completed. If a transaction is subject to the statutory notification
requirements (a "Notifiable Transaction"), notification must be made on the
basis of either a short-form filing (in respect of which there is a 14-day
statutory waiting period) or a long-form filing (in respect of which there is a
42-day statutory waiting period). Alternatively, where the Commissioner is
satisfied by the parties to a proposed transaction that there would not be
sufficient grounds on which to challenge the transaction before the Competition
Tribunal (the "Tribunal"), the Commissioner may issue an advance ruling
certificate (an "ARC"), which exempts the transaction from the statutory
notification requirements.
31
A Notifiable Transaction may not be completed until the applicable statutory
waiting period has expired or been waived or an ARC has been issued. However,
the Commissioner's review of a Notifiable Transaction may take longer than the
statutory waiting period, in which case the parties may be asked to delay
completion of the transaction until the review is completed and the Commissioner
has determined his position. Upon completion of the review, the Commissioner may
decide to: (i) challenge the Notifiable Transaction, if the Commissioner
concludes that it is likely to substantially lessen or prevent competition, by
seeking an order of the Tribunal (a) prohibiting the completion of the
transaction; (b) requiring the divestiture of shares or assets; or (c) with the
consent of the person against whom the order is directed, requiring that person
to take any other action; (ii) issue a "no-action" letter stating that the
Commissioner does not intend, at that time, to make an application to the
Tribunal for an order as described in (i) above; or (iii) issue an ARC. Where an
ARC is issued, the Commissioner cannot subsequently apply to the Tribunal for an
order in respect of the Notifiable Transaction solely on the basis of
information that is the same or substantially the same as the information on the
basis of which the ARC was issued. Where a "no-action" letter is issued in
respect of a Notifiable Transaction, the Commissioner reserves the right to
apply to the Tribunal for an order in respect of the transaction for a period of
three years following its completion.
The Original Offer was a Notifiable Transaction. Accordingly, on
November 5, 2002, the Offeror made a long-form pre-merger notification filing
with the Commissioner, the waiting period in respect of which will expire on
December 17, 2002. On November 15, 2002, the Offeror also submitted a request
for an ARC in respect of the purchase of Shares under the Original Offer. The
obligation of the Offeror to complete the Enhanced Offer is subject to the
condition that either the Commissioner has issued an ARC in respect of the
Enhanced Offer, or the applicable waiting period under Part IX of the
Competition Act will have expired and the Commissioner will have issued a
"no-action letter" to the satisfaction of the Offeror (in its sole discretion).
Based on the Offeror's assessment to date of publicly available information, the
Offeror believes that the Commissioner will allow the Enhanced Offer to proceed
without challenge on the terms and in accordance with the timing which will be
acceptable to the Offeror, although no assurances can be made in this regard.
UNITED STATES HART-SCOTT-RODINO ACT
Under the United States HART-SCOTT-RODINO ANTITRUST IMPROVEMENTS ACT OF
1976, as amended, and the rules and regulations that have been promulgated
thereunder (collectively, the "HSR Act") by the U.S. Federal Trade Commission
(the "FTC"), certain acquisition transactions may not be consummated until
information and documentary material has been furnished for review by the
Antitrust Division of the U.S. Department of Justice (the "Antitrust Division")
and the FTC and waiting period requirements have been satisfied. Due to the
nature of Fording's assets, the amount of Fording's sales in the United States
and the size of the Enhanced Offer, the acquisition of Shares pursuant to the
Enhanced Offer may be subject to such requirements. The Offeror filed on
November 27, 2002, a Premerger Notification and Report Form with the Antitrust
Division and the FTC in connection with the purchase of Shares pursuant to the
Enhanced Offer.
Under the provisions of the HSR Act applicable to the Enhanced Offer, the
purchase of Shares pursuant to the Enhanced Offer may not be consummated until
the expiration of a 30-calendar day waiting period following the filing by the
Offeror, unless such waiting period is earlier terminated by the FTC and the
Antitrust Division. If, within such 30-day waiting period, either the Antitrust
Division or the FTC requests additional information or documentary material from
the Offeror concerning the Enhanced Offer, the waiting period would expire at
11:59 p.m., New York City time, on the thirtieth calendar day after the date of
substantial compliance with such request. Thereafter, the waiting period could
be extended only by court order or with the consent of the Offeror. The
additional 30-calendar day waiting period may be terminated sooner by the FTC
and the Antitrust Division. Although Fording is required to file certain
information and documentary material with the Antitrust Division and the FTC in
connection with the Enhanced Offer, neither Fording's failure to make such
filings nor a request from the Antitrust Division or the FTC for additional
information or documentary material made to Fording will extend the waiting
period with respect to the Enhanced Offer.
The Offeror will not accept for payment Shares tendered pursuant to the
Enhanced Offer unless and until the waiting period requirements imposed by the
HSR Act with respect to the Enhanced Offer have been satisfied. See Section 4 of
the Enhanced Offer, "Conditions of the Enhanced Offer".
32
Pursuant to the HSR Act, the Offeror has requested early termination of the
waiting period applicable to the Enhanced Offer. There can be no assurance,
however, that such waiting period will be terminated early.
The Antitrust Division, the FTC and U.S. state antitrust enforcement
agencies frequently scrutinize the legality under the antitrust laws of
transactions such as the Offeror's acquisition of Shares pursuant to the
Enhanced Offer. At any time before or after the Offeror's acquisition of Shares,
any such agency could take such action under U.S. antitrust laws as it deems
necessary or desirable in the public interest, including seeking to enjoin the
acquisition of Shares pursuant to the Enhanced Offer or otherwise or seeking
divestiture of Shares acquired by the Offeror or divestiture of substantial
assets of the Offeror and/or Fording. Private parties may also bring legal
action under the antitrust laws under certain circumstances.
18. ACQUISITION OF FORDING SHARES NOT DEPOSITED UNDER THE ENHANCED OFFER
COMPULSORY ACQUISITION
If within 120 days from the date the Enhanced Offer is made, the Enhanced
Offer is accepted by Shareholders representing at least 90% of the outstanding
Shares (other than 3,150,260 Shares beneficially owned, or over which control or
direction is exercised, on the date of the Enhanced Offer by the Offeror, its
affiliates and associates) and the Offeror is bound to take up and pay for, or
has taken up and paid for the Shares of the Shareholders who have accepted the
Enhanced Offer, then the Offeror will be entitled to acquire the remainder of
the Shares on the same terms and for the same consideration per Share payable or
paid, as the case may be, under the Enhanced Offer, pursuant to the provisions
of the CBCA (a "Compulsory Acquisition"). If a Compulsory Acquisition is
available, it is the current intention of the Offeror to elect to exercise its
rights to cause a Compulsory Acquisition and acquire the remainder of the Shares
for consideration equal to that offered under the Exchange Right Option or, at
the election of each Shareholder, for a price per Share equal to the cash
consideration offered under the Enhanced Offer.
To exercise these statutory rights with respect to the Shares, the Offeror
must give notice (the "Offeror's Notice") under the CBCA to each Shareholder
(each a "Dissenting Offeree") who did not accept the Enhanced Offer (and each
person who subsequently acquires those Shares) on or before the earlier of
60 days from the Expiry Time and in any event within 180 days from the date of
the Enhanced Offer. Within 20 days of providing the Offeror's Notice, the
Offeror must pay or transfer to Fording the consideration the Offeror would have
had to pay or transfer to the Dissenting Offerees if they had elected to accept
the Enhanced Offer, to be held in trust for the Dissenting Offerees. In
accordance with Section 206 of the CBCA, within 20 days after receiving the
Offeror's Notice, each Dissenting Offeree must send the certificate(s)
representing the Shares held by that Dissenting Offeree to the Offeror, and may,
within 20 days after the date of the Offeror's Notice, elect either to transfer
such securities to the Offeror on the terms of the Enhanced Offer or to demand
payment of the fair value of such securities held by such holder by so notifying
the Offeror. If a Dissenting Offeree has elected to demand payment of the fair
value of such securities, the Offeror may apply to a court having jurisdiction
to hear an application to fix the fair value of such securities of that
Dissenting Offeree within 20 days after it made the payment or transferred the
consideration of Fording referred to above. If there is no such demand for fair
value by the Dissenting Offeree within the period referred to above, the
Dissenting Offeree will be deemed to have elected to transfer such securities to
the Offeror on the terms of the Enhanced Offer. Any judicial determination of
the fair value of the securities could be more or less than the amount paid
pursuant to the Enhanced Offer.
THE FOREGOING IS A SUMMARY ONLY. REFERENCE IS MADE TO SECTION 206 OF THE
CBCA FOR THE TEXT OF THE RELEVANT STATUTORY PROVISION. SECTION 206 OF THE CBCA
IS COMPLEX AND MAY REQUIRE STRICT ADHERENCE TO NOTICE AND TIMING PROVISIONS,
FAILING WHICH SUCH RIGHTS MAY BE LOST OR ALTERED. SHAREHOLDERS WHO WISH TO BE
BETTER INFORMED ABOUT THE PROVISIONS OF SECTION 206 OF THE CBCA SHOULD CONSULT
THEIR LEGAL ADVISORS.
SUBSEQUENT ACQUISITION TRANSACTION
If the foregoing statutory right of acquisition is not available, the
Offeror intends to consider other means of acquiring, directly or indirectly,
all of the equity interest in Fording available in accordance with applicable
law, including a Subsequent Acquisition Transaction. In order to effect a
Subsequent Acquisition Transaction, the Offeror may seek to cause a special
meeting of holders of Shares to be called to consider an amalgamation, statutory
arrangement or other transaction involving the Offeror (or a wholly-owned
subsidiary of the Offeror)
33
and Fording and the securityholders of Fording for the purposes of Fording
becoming, directly or indirectly, a wholly-owned subsidiary of the Offeror or
effecting an amalgamation or merger of Fording's business and assets with or
into the Offeror (or a wholly-owned subsidiary of the Offeror). Depending upon
the nature and terms of the Subsequent Acquisition Transaction, the approval of
at least 66 2/3% of the votes cast by holders of the outstanding Shares may be
required at a meeting duly called and held for the purpose of approving the
Subsequent Acquisition Transaction. The Offeror would cause the Shares acquired
under the Enhanced Offer to be voted in favour of such a transaction.
The details of any Subsequent Acquisition Transaction, including the timing
of its implementation and the consideration to be received by the other holders
of Shares, would necessarily be subject to a number of considerations, including
the number of Shares acquired pursuant to the Enhanced Offer.
The tax consequences to a Shareholder of a Subsequent Acquisition
Transaction may differ from the tax consequences to such Shareholder having its
Shares acquired pursuant to the Enhanced Offer. See Section 19 of this Circular,
"Canadian Federal Income Tax Considerations -- Subsequent Acquisition
Transaction" and Section 20 of this Circular, "United States Federal Income Tax
Considerations -- Subsequent Acquisition Transaction".
SECURITIES LAW REQUIREMENTS FOR GOING PRIVATE TRANSACTIONS
Rule 61-501, Policy Q-27, and the regulations to securities legislation in
certain of the provinces and territories of Canada (collectively, the
"Regulations") may deem certain types of Subsequent Acquisition Transactions,
including the transaction described above, to be "going private transactions" if
those Subsequent Acquisition Transactions would result in the interest of a
holder of Shares ("affected securities") being terminated without the consent of
the holder, subject to certain exceptions under Rule 61-501 and Policy Q-27,
and in the case of the Regulations, if the transaction does not provide for the
substitution therefor of an interest of equivalent value in a participating
security of Fording, a successor to the business of Fording or a person who
controls Fording or a person who controls a successor to the business of
Fording. Those methods of acquiring the remaining outstanding Shares may also be
"related party transactions" within the meaning of Rule 61-501 and Policy Q-27,
although Rule 61-501 and Policy Q-27 also provide an exemption from related
party transaction requirements where the transaction is also a going private
transaction.
Rule 61-501 and Policy Q-27 provide that, unless exempted, an issuer
proposing to carry out a going private transaction is required to prepare a
valuation of the affected securities (and any non-cash consideration being
offered therefor) and provide to the holders of the affected securities a
summary of that valuation. The Regulations also impose a requirement to include
a summary of a valuation in a take-over bid circular where the Offeror
thereunder anticipates that a going private transaction will follow the
take-over bid. To the extent required, the Offeror intends to rely on available
exemptions under or to seek waivers pursuant to Rule 61-501, Policy Q-27
and the Regulations exempting Fording or the Offeror or its affiliates, as
appropriate, from the requirement to prepare any valuation in connection with a
Subsequent Acquisition Transaction.
The Offeror intends to rely upon the exemption contained in
Paragraph 4 -- Second Step Going Private Transaction in Section 4.5 of
Rule 61-501 and Section 4.4 of Policy Q-27 in that: (a) the going private
transaction in respect of Fording will be effected by the Offeror or an
affiliated entity of the Offeror following the formal bid constituted by this
Enhanced Offer and will be in respect of the Shares that will be the subject of
the bid contemplated hereby; (b) the going private transaction will be completed
no later than 120 days after the expiry of the Enhanced Offer; (c) the intent of
the Offeror to effect a going private transaction is disclosed in the Enhanced
Offer and this Circular; (d) the consideration per Share paid by the Offeror or
an affiliated entity of the Offeror in the going private transaction: (i) will
be at least equal in value to the consideration per Share that is being paid
hereunder; and (ii) will be in the same form as the consideration per Share
being paid by the Offeror hereunder, and to the extent the consideration paid
hereunder consists of securities, will consist of the same securities; and
(e) the disclosure hereunder discloses that the tax consequences of the Enhanced
Offer and the Subsequent Acquisition Transaction may be different, since, on the
date hereof, the Offeror does not know and cannot reasonably foresee the tax
consequences arising from the Subsequent Acquisition Transaction, other than as
described herein.
34
To complete a going private transaction, Rule 61-501 and Policy Q-27
require, in addition to any other required securityholder approval, the approval
of a majority of the votes cast by "minority" holders of the affected securities
be obtained. The necessary level of approval by the holders of the affected
securities required to complete a going private transaction is a simple
majority. In relation to the Enhanced Offer and any Subsequent Acquisition
Transaction which constitutes a going private transaction, the "minority"
holders will be, unless an exemption is available or discretionary relief is
granted by the OSC and the CVMQ, as required, all holders of Shares other than
Fording, the Offeror, the directors and senior officers of the Offeror, any
associate or affiliate of the Offeror, any person or company acting jointly or
in concert with any of the foregoing persons (other than Fording) and any person
who is a "related party" of the Offeror as defined by Rule 61-501 and
Policy Q-27, which the Offeror has determined is 3,150,260 Shares or
approximately 6.2% of the outstanding Shares. However, Rule 61-501 and
Policy Q-27 also provide that the Offeror generally may treat Shares acquired
pursuant to the Enhanced Offer as "minority" securities and to vote them, or to
consider them voted, in favour of that going private transaction if the
consideration per Share in the going private transaction is at least equal in
value to the consideration pursuant to the Enhanced Offer and in the case of
Rule 61-501 and Policy Q-27, is in the same form as the consideration pursuant
to the Enhanced Offer. The Offeror currently intends that the consideration
under any Subsequent Acquisition Transaction proposed by it would be identical
to the consideration under the Enhanced Offer and believes that the required
disclosure has been provided in this Circular.
IF A SUBSEQUENT ACQUISITION TRANSACTION WERE TO BE CONSUMMATED, HOLDERS OF
THE SHARES MAY, UNDER THE CBCA, HAVE THE RIGHT TO DISSENT AND DEMAND PAYMENT OF
THE FAIR VALUE OF SUCH SHARES. THIS RIGHT, IF THE STATUTORY PROCEDURES ARE
COMPLIED WITH, COULD LEAD TO A JUDICIAL DETERMINATION OF THE FAIR VALUE REQUIRED
TO BE PAID TO THOSE DISSENTING HOLDERS FOR THEIR SHARES. THE FAIR VALUE OF THE
SHARES SO DETERMINED COULD BE MORE OR LESS THAN THE AMOUNT PAID PER SECURITY
PURSUANT TO THE SUBSEQUENT ACQUISITION TRANSACTION OR THE ENHANCED OFFER. ANY
SUCH JUDICIAL DETERMINATION OF THE FAIR VALUE OF THE SHARES COULD BE BASED UPON
CONSIDERATIONS OTHER THAN, OR IN ADDITION TO, THE MARKET PRICE OF THE SHARES.
Shareholders should consult their legal advisors for a determination of
their legal rights with respect to any Subsequent Acquisition Transaction,
including a "going private transaction" or a "related party transaction".
See Section 19 this Circular, "Canadian Federal Income Tax Considerations",
for a discussion of the Canadian federal income tax considerations relevant to
Shareholders in the event of a Subsequent Acquisition Transaction and
Section 20 of this Circular, "United States Federal Income Tax
Considerations -- Subsequent Acquisition Transaction" for a discussion of the
U.S. federal income tax considerations relevant to Shareholders in the event of
a Subsequent Acquisition Transaction.
OTHER ALTERNATIVES
If the Offeror decides not to effect a Compulsory Acquisition or propose a
Subsequent Acquisition Transaction involving Fording, or proposes a Subsequent
Acquisition Transaction but cannot promptly obtain any required approval, the
Offeror will evaluate its other alternatives. Such alternatives could include,
to the extent permitted by applicable law, purchasing additional Shares in
privately negotiated transactions or in another take-over bid or taking no
further action to acquire additional Shares. Any additional purchases of Shares
could be at a price greater than, equal to or less than the price paid for
Shares under the Enhanced Offer and could be for cash or other consideration.
Alternatively, the Offeror may sell or otherwise dispose of any or all Shares
acquired pursuant to the Enhanced Offer or otherwise. Such transactions may be
effected on terms and at prices then determined by the Offeror, which may vary
from the price paid for Shares under the Enhanced Offer. The tax consequences to
a Shareholder of such an alternative may differ from the tax consequences to
such Shareholder of having its Shares acquired pursuant to the Enhanced Offer.
JUDICIAL DEVELOPMENTS
Certain judicial decisions may be considered relevant to any Subsequent
Acquisition Transaction which may be proposed or effected subsequent to the
expiry of the Enhanced Offer. Prior to the adoption of Rule 61-501 (and its
predecessor, OSC Policy 9.1) and Policy Q-27, Canadian courts, in a few
instances, granted preliminary injunctions to prohibit transactions involving
going private transactions. The current trend both in legislation
35
and in the American jurisprudence upon which the previous Canadian decisions
were based is toward permitting going private transactions to proceed subject to
compliance with procedures designed to ensure substantive fairness to the
minority shareholders.
19. CANADIAN FEDERAL INCOME TAX CONSIDERATIONS
In the opinion of Torys LLP, counsel to the Offeror, the following is a
summary of the principal Canadian federal income tax considerations under the
Tax Act generally applicable to a holder of Shares who sells Shares pursuant to
the Enhanced Offer or otherwise disposes of Shares pursuant to certain
transactions described under Section 18 of the Circular, "Acquisition of Fording
Shares not Deposited under the Enhanced Offer". The summary is based on the
current provisions of the Tax Act and counsel's understanding of the current
published administrative policies and assessing practices of the Canada Customs
and Revenue Agency (the "CCRA"). The summary takes into account all Tax
Proposals, although there is no certainty that the Tax Proposals will be enacted
in the form currently proposed, or at all. The summary does not otherwise take
into account or anticipate any other changes in law, whether by judicial,
governmental or legislative decision or action, or other changes in
administrative policies or assessing practices of the CCRA, nor does it take
into account provincial, territorial or foreign income tax legislation or
considerations, which may materially differ from federal income tax legislation
or considerations. This summary also assumes that the Shares have been and will
be at all relevant times listed on a prescribed stock exchange (which includes
the TSX).
THIS SUMMARY IS OF A GENERAL NATURE ONLY AND IS NOT INTENDED TO BE, NOR
SHOULD IT BE CONSTRUED TO BE, LEGAL OR TAX ADVICE OR REPRESENTATIONS TO ANY
PARTICULAR SHAREHOLDER TO WHOM THE ENHANCED OFFER IS MADE. ACCORDINGLY,
SHAREHOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THEIR
PARTICULAR CIRCUMSTANCES, INCLUDING THE APPLICATION AND EFFECT OF THE INCOME AND
OTHER TAX LAWS OF ANY COUNTRY, PROVINCE, TERRITORY, STATE OR LOCAL TAX
AUTHORITY.
SHAREHOLDERS RESIDENT IN CANADA
This part of the summary is applicable only to Shareholders who, for
purposes of the Tax Act and at all relevant times, are resident or are deemed to
be resident in Canada, hold their Shares as capital property, deal at arm's
length with Fording and the Offeror and are not affiliated with Fording or the
Offeror. Certain Shareholders whose Shares might not otherwise be considered to
be capital property may be entitled to have their Shares deemed to be capital
property by making an irrevocable election provided for by subsection 39(4) of
the Tax Act. This part of the summary does not apply to "financial institutions"
within the meaning of section 142.2 of the Tax Act or to "specified financial
institutions" as defined in the Tax Act nor is it applicable to a Shareholder an
interest in which is a "tax shelter investment" as defined in the Tax Act.
DISPOSITION OF SHARES PURSUANT TO THE ENHANCED OFFER
A Shareholder whose Shares are taken up and paid for under the Enhanced
Offer will be considered to have disposed of such Shares for purposes of the
Tax Act. On such disposition, the Shareholder will realize a capital gain (or a
capital loss) in respect of the Shares so disposed of to the extent that the
proceeds of disposition received by the Shareholder for such Shares exceed (or
are less than) the total of the adjusted cost base to the Shareholder of such
Shares and any reasonable costs of disposition. For this purpose, the proceeds
of disposition will be equal to the amount of cash paid and the fair market
value, at the time of disposition of the Shares, of the Exchange Rights
received.
CAPITAL GAINS AND CAPITAL LOSSES
A shareholder will be required to include one-half of the amount of any
capital gain (a "taxable capital gain") in income, and will generally be
entitled to deduct one-half of the amount of any capital loss (an "allowable
capital loss") against taxable capital gains realized in the year of
disposition. Allowable capital losses not deductible in the taxation year in
which they are realized may ordinarily be deducted against taxable capital gains
realized in any of the three preceding taxation years or in any following
taxation year to the extent and under the circumstances specified in the
Tax Act, including certain transitional provisions relating to recent changes in
the capital gains inclusion rate under the Tax Act.
36
In general, a capital loss otherwise arising on the disposition of Shares by
a Shareholder which is a corporation may in certain circumstances be reduced by
the amount of dividends received or deemed to have been received on such Shares
(or on certain other shares where the Shares have been acquired in exchange for
such shares). Any such reduction will not occur where the corporate Shareholder
owned the relevant Share continuously for 365 days or longer immediately before
the disposition and such Shareholder (together with any persons with which it
did not deal at arm's length) did not own more than 5% of the shares of any
class or series of Fording at the time the relevant dividends were received or
deemed to have been received. Similar rules may also apply in other
circumstances, including where a corporation, trust or partnership is a member
of a partnership or a beneficiary of a trust that owns Shares. Shareholders to
whom these rules may be relevant should consult their own tax advisors.
A Shareholder that is throughout the relevant taxation year a
"Canadian-controlled private corporation" as defined in the Tax Act may be
liable to pay, in addition to the tax otherwise payable under the Tax Act, a
refundable tax of 6 2/3% determined by reference to its aggregate investment
income for the year, which is defined to include an amount in respect of taxable
capital gains. Eighty percent of capital gains realized by an individual or a
trust, other than certain specified trusts, will be taken into account in
determining their liability for alternative minimum tax under the Tax Act.
COMPULSORY ACQUISITION OF SHARES
As described under Section 18 of this Circular, "Acquisition of Fording
Shares not Deposited under the Enhanced Offer -- Compulsory Acquisition", Shares
may be acquired, in certain circumstances, pursuant to the compulsory
acquisition provisions of the CBCA. The tax consequences to Shareholders of a
disposition of Shares in such circumstances generally will be as described
above, but Shareholders whose Shares may be so acquired should consult their own
tax advisors in this regard.
SUBSEQUENT ACQUISITION TRANSACTION
If the compulsory acquisition provisions of the CBCA are not utilized, other
means of acquiring the remaining issued and outstanding Shares may be proposed.
The tax treatment of a Subsequent Acquisition Transaction described in
Section 18 of this Circular, "Acquisition of Fording Shares not Deposited under
the Enhanced Offer -- Subsequent Acquisition Transaction" to a Shareholder may
be substantially the same or materially different than would apply if Shares are
sold to the Offeror under the Enhanced Offer and will depend upon the exact
manner in which the Subsequent Acquisition Transaction is carried out.
Shareholders should consult their own tax advisors for advice with respect to
the income tax consequences to them of having their Shares acquired pursuant to
a Subsequent Acquisition Transaction.
A Subsequent Acquisition Transaction could be implemented by means of an
amalgamation of Fording with the Offeror or a wholly-owned subsidiary of the
Offeror pursuant to which Shareholders who have not deposited their Shares under
the Enhanced Offer would have their Shares exchanged on the amalgamation for
redeemable preference shares of the amalgamated corporation ("Redeemable
Shares") which would then immediately be redeemed for cash. Such a Shareholder
would not realize a capital gain or capital loss as a result of such exchange
and the cost of the Redeemable Shares received would be the aggregate of the
adjusted cost base of the Shares to the Shareholder immediately before the
amalgamation.
Upon the redemption of the Redeemable Shares, the holder thereof would be
deemed to have received a dividend (subject to the potential application of
subsection 55(2) of the Tax Act to holders of such shares that are corporations
as discussed below) equal to the amount, if any, by which the redemption price
of the Redeemable Shares exceeds their paid-up capital for purposes of the
Tax Act. The difference between the redemption price and the amount of the
deemed dividend would be treated as proceeds of disposition of such shares for
purposes of computing any capital gain or capital loss arising on a disposition
of such shares.
Subject to the potential application of the rules discussed below, dividends
deemed to be received by a corporation as a result of the redemption of the
Redeemable Shares will be included in computing its income, but normally will
also be deductible in computing its taxable income. A holder that is a "private
corporation" (as defined in the Tax Act) or any other corporation resident in
Canada and controlled by or for the benefit of an individual (other than a
trust) or a related group of individuals (other than trusts) will generally be
liable to pay
37
a 33 1/3% refundable tax under Part IV of the Tax Act on dividends deemed to be
received on the Redeemable Shares to the extent that such dividends are
deductible in computing the corporation's taxable income. Subsection 55(2) of
the Tax Act provides that where a corporate holder is deemed to receive a
dividend under the circumstances described above and such dividend is deductible
in computing the holder's taxable income and is not subject to Part IV tax that
is not refunded as part of the series of transactions that includes the
redemption, all or part of the deemed dividend may be treated as proceeds of
disposition of the Redeemable Shares for the purpose of computing the holder's
capital gain on the disposition of such shares. Accordingly, corporate holders
should consult their own tax advisors for specific advice with respect to the
potential application of this provision.
In the case of a holder who is an individual, dividends deemed to be
received as a result of the redemption of Redeemable Shares will be included in
computing the holder's income and will be subject to the gross-up and dividend
tax credit rules normally applicable to taxable dividends paid by taxable
Canadian corporations.
Under the current administrative practice of the CCRA, Shareholders who
exercise their right of dissent in respect of an amalgamation will be considered
to have disposed of their Shares for proceeds of disposition equal to the amount
paid to them for such Shares, less the amount of any interest awarded by the
court, and will realize a capital gain (capital loss) to the extent that those
proceeds of disposition, net of any reasonable costs of disposition, exceed (are
less than) the adjusted cost base to them of such Shares. Any interest awarded
to a dissenting Shareholder will be included in the dissenting Shareholder's
income. DUE TO UNCERTAINTIES UNDER THE RELEVANT LEGISLATION, DISSENTING
SHAREHOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS IN THIS REGARD.
As an alternative to the amalgamation discussed above, the Offeror may
propose a statutory arrangement or other transaction, the tax consequences of
which may differ from those described above. No opinion is expressed herein as
to the tax consequences of any such transaction to a Shareholder.
QUALIFIED INVESTMENTS
If the Shares cease to be listed on a stock exchange prescribed under the
Tax Act, the Shares may no longer be qualified investments under the Tax Act for
a trust governed by a Registered Plan. Shareholders that are trusts governed by
Registered Plans should consult with their tax advisors with respect to the tax
consequences to them (and to the annuitants, beneficiaries or subscribers
thereunder) of holding Shares if such shares are not qualified investments and
of disposing of their Shares pursuant to a Compulsory Acquisition or a
Subsequent Acquisition Transaction.
SHAREHOLDERS NOT RESIDENT IN CANADA
This part of the summary is applicable only to Shareholders who, for
purposes of the Tax Act and at all relevant times, are not resident or deemed to
be resident in Canada, do not carry on business in Canada, deal at arm's length
with the Offeror and Fording, hold their Shares as capital property and do not
use or hold, and are not deemed to use or hold, their Shares in, or in the
course of, carrying on a business in Canada (a "Non-Resident Shareholder").
Special rules, which are not discussed in this summary, may apply to a
non-resident of Canada that is an insurer carrying on business in Canada and
elsewhere.
DISPOSITION OF SHARES PURSUANT TO THE ENHANCED OFFER
A Non-Resident Shareholder will not be subject to tax under the Tax Act on
any capital gain realized on the disposition of Shares pursuant to the Enhanced
Offer unless the shares constitute "taxable Canadian property" of the
Non-Resident Shareholder.
Generally, Shares will not constitute "taxable Canadian property" to a
Non-Resident Shareholder at a particular time unless, at any time during the
sixty-month period immediately preceding the particular time, not less than 25%
of the issued shares of any class or series of a class of the capital stock of
Fording were owned by the Non-Resident Shareholder, persons with whom the
Non-Resident Shareholder did not deal at arm's length or any combination
thereof. The CCRA takes the position that, for this purpose, the Non-Resident
Shareholder and persons with whom the Shareholder did not deal at arm's length
are considered to own any Shares which
38
such Shareholder or such persons have an interest in or option to acquire. A
Non-Resident Shareholder's Shares may be deemed to be "taxable Canadian
property" in certain circumstances set out in the Tax Act.
In the event that the Shares constitute taxable Canadian property to a
particular Non-Resident Shareholder on the disposition thereof pursuant to the
Enhanced Offer, and a capital gain realized on the disposition of such Shares is
not exempt from tax under the Tax Act by virtue of the terms of an income tax
treaty or a convention between Canada and the country in which the Non-Resident
Shareholder is resident, such Non-Resident Shareholder will realize a capital
gain (or capital loss) generally in the circumstances and computed in the manner
described above under "-- Shareholders Resident in Canada -- Disposition of
Shares pursuant to the Enhanced Offer" and the tax consequences described above
under "-- Shareholders Resident in Canada -- Capital Gains and Capital Losses"
will generally apply. Non-Resident Shareholders whose Shares are taxable
Canadian property should consult their own tax advisors for advice having regard
to their particular circumstances.
COMPULSORY ACQUISITION OF SHARES
As discussed in Section 18 of this Circular, "Acquisition of Fording Shares
not Deposited under the Enhanced Offer -- Compulsory Acquisition", the Offeror
may, in certain circumstances, acquire Shares not deposited under the Enhanced
Offer pursuant to the compulsory acquisition provisions of the CBCA. A
Non-Resident Shareholder whose Shares are not taxable Canadian property will
generally not be subject to tax under the Tax Act on the disposition of such
Shares pursuant to the Compulsory Acquisition. If the Shares are not listed on a
stock exchange prescribed under the Tax Act at the time of disposition, they
will be taxable Canadian property to a Non-Resident Shareholder. Where such a
Shareholder disposes of Shares that are taxable Canadian property to the
Shareholder, the disposition may give rise to a capital gain. If such capital
gain is not exempt from Canadian tax under the terms of an applicable income tax
treaty or convention, the tax consequences as described above under
"-- Shareholders Resident in Canada -- Disposition of Shares pursuant to the
Enhanced Offer" will generally apply. In addition, if the Shares are not listed
on a stock exchange prescribed under the Tax Act at the time of their
disposition, the notification and withholding provisions of section 116 of the
Tax Act will apply to such Shareholder. Non-Resident Shareholders whose Shares
are being compulsorily acquired should consult their own tax advisors with
respect to their particular circumstances.
SUBSEQUENT ACQUISITION TRANSACTION
If the compulsory acquisition provisions of the CBCA are not utilized, other
means of acquiring the remaining issued and outstanding Shares may be proposed.
The tax treatment of a Subsequent Acquisition Transaction described above under
Section 18 of this Circular, "Acquisition of Fording Shares not Deposited under
the Enhanced Offer -- Subsequent Acquisition Transaction", to a Non-Resident
Shareholder may be substantially the same or materially different than would
apply if Shares are sold to the Offeror under the Enhanced Offer and will depend
upon the exact manner in which a Subsequent Acquisition Transaction is carried
out and whether the Shares are listed on a stock exchange prescribed under the
Tax Act at the relevant time.
A Subsequent Acquisition Transaction could be implemented by means of an
amalgamation of Fording with the Offeror (or a wholly-owned subsidiary of the
Offeror) pursuant to which Non-Resident Shareholders who have not deposited
their Shares under the Enhanced Offer would have their Shares exchanged on the
amalgamation for Redeemable Shares which would then immediately be redeemed for
cash. Such a redemption may result in a Non-Resident Shareholder being deemed to
have received a dividend, and possibly a capital gain in respect of the
Redeemable Shares in the manner described above under "-- Shareholders Resident
in Canada -- Subsequent Acquisition Transaction", without regard to
subsection 55(2) of the Tax Act. Dividends on Shares owned by a Non-Resident
Shareholder are subject to Canadian non-resident withholding tax at a rate of
25%. Such rate may be reduced under the provisions of an applicable Canadian
income tax treaty or convention. Under the CANADA-UNITED STATES INCOME TAX
CONVENTION (1980) (the "Treaty"), the rate of withholding tax on dividends paid
to Non-Resident Shareholders who qualify as residents of the United States for
purposes of the Treaty generally is reduced to 15%. In addition, the Redeemable
Shares may be "taxable Canadian property", as a result of which any capital gain
realized on the disposition of such shares may be subject to the treatment
discussed above under "-- Compulsory Acquisition of Shares".
39
Where a Non-Resident Shareholder receives interest consequent upon the
exercise of his or her dissent rights, such amount will be subject to Canadian
withholding tax at the rate of 25%, unless the rate is reduced under the
provisions of an applicable income tax treaty. For instance, under the Treaty,
the rate of withholding tax on interest paid to Non-Resident Shareholders who
qualify as residents of the United States for the purposes of the Treaty
generally is reduced to 10%.
As an alternative to the amalgamation discussed above, the Offeror may
propose a statutory arrangement or other transaction, the tax consequences of
which may differ from those described above. No opinion is expressed herein as
to the tax consequences of any such transaction to a Non-Resident Shareholder.
To the extent that a Subsequent Acquisition Transaction is proposed,
Non-Resident Shareholders are urged to consult their own tax advisors to
determine the tax consequences to them of the transaction and, in particular,
whether the notification and withholding provisions of section 116 of the
Tax Act would apply to the Non-Resident Shareholder as a result of a Subsequent
Acquisition Transaction.
20. UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of certain material Federal income tax
consequences of the Enhanced Offer to Shareholders who are "U.S. persons"
("U.S. Shareholders"). The summary is based on the Internal Revenue Code of
1986, as amended (the "Code"), its legislative history, Treasury Regulations
promulgated thereunder, court decisions and rulings by the Internal Revenue
Service ("IRS"), all as in effect on the date hereof and all of which are
subject to change at any time, possibly with retroactive effect. The summary
only applies to U.S. Shareholders that hold Shares as capital assets and does
not address tax considerations which apply to taxpayers who are subject to
special rules (e.g., financial institutions, tax exempt organizations, insurance
companies and foreign taxpayers) or to persons who acquired Shares pursuant to
employee stock options. Each U.S. Shareholder's individual circumstances may
affect the tax consequences of the Enhanced Offer to such shareholder.
Accordingly, U.S. Shareholders should consult their own tax advisors regarding
the particular consequences to them of the Enhanced Offer, including the
applicability of any state, local or foreign tax laws to which they may be
subject.
For purposes of this summary, a "U.S. Shareholder" is a holder of Shares who
is a "U.S. person" and a "U.S. person" means: (i) an individual who is a citizen
or resident of the United States; (ii) a corporation or partnership (or entity
that is treated as a corporation or partnership for U.S. federal income tax
purposes) that is either created or organized in or under the laws of the United
States or any political subdivision thereof; (iii) an estate the income of which
is subject to U.S. federal income tax regardless of source; or (iv) a trust if
both (A) a U.S. court is able to exercise primary supervision over the
administration of the trust and (B) one or more U.S. persons have the authority
to control all substantial decisions of the trust.
CONSEQUENCES OF ENHANCED OFFER
A U.S. Shareholder who receives cash pursuant to the Enhanced Offer will
recognize: (i) capital gain if and to the extent that the amount of cash
received by the U.S. Shareholder exceeds his or her U.S. tax basis in those
Shares; or (ii) capital loss if and to the extent that the U.S. Shareholder's
U.S. tax basis in the Shares exceeds the amount of cash received by the
U.S. Shareholder. Any capital gain or loss recognized on the exchange will be
long term gain or loss if the Shares have been held for more than one year on
the date of the exchange of those Shares pursuant to the Enhanced Offer. In the
case of non-corporate U.S. Shareholders, long term capital gains are subject to
tax at reduced rates. Capital losses may be subject to limitations on
deductibility. Any gain or loss recognized by a U.S. Shareholder will be from
U.S. sources for most U.S. Shareholders for foreign tax credit purposes.
A U.S. Shareholder who receives Exchange Rights pursuant to the Enhanced
Offer and then receives Units pursuant to the terms of, and in exchange for, the
Exchange Rights should be able to treat the transaction as an exchange of Shares
for Units. A U.S. Shareholder generally may treat the deemed exchange of Shares
for Units as a tax-free exchange. However, if a U.S. Shareholder receives cash
in addition to the Exchange Rights, such U.S. Shareholder generally will be
required to recognize a capital gain equal to the difference between: (i) the
amount of cash received in the Enhanced Offer; and (ii) the U.S. Shareholder's
tax basis in the Shares exchanged therefor. However, if either: (i) the receipt
of cash is "essentially equivalent to a dividend"; or (ii) the
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Shareholder's proportionate interest in the company has dropped by more than 80%
as a result of the Enhanced Offer, the U.S. Shareholder would instead recognize
dividend income equal to the amount of cash received in the Enhanced Offer.
If a U.S. Shareholder sells or otherwise disposes of its Exchange Rights
prior to exchanging its Exchange Rights for Units, such U.S. Shareholder
generally would recognize capital gain or loss equal to the difference between:
(i) the amount of cash and the fair market value of any other property received
in exchange for the Exchange Rights; and (ii) the U.S. Shareholder's basis in
the Exchange Rights, and any capital gain realized on a sale or disposition of
Exchange Rights would be long term capital gain, and subject to tax at reduced
rates, if the U.S. Shareholder's holding period in the Exchange Rights exceeded
one year at the time of the sale or disposition. If the sale or disposition of
the Exchange Rights does not result in a U.S. federal income tax
characterization of the initial exchange of Shares for Exchange Rights that is
different from that described in the preceding paragraph, a U.S. Shareholder's
basis in the Exchange Rights generally would be equal to the U.S. Shareholder's
basis in the Shares exchanged therefor and its holding period in the Exchange
Rights would include its holding period in the Shares exchanged therefor. If,
however, the sale or disposition of Exchange Rights prior to their being
exchanged for Units caused the U.S. federal income tax treatment of the initial
exchange of Shares for Exchange Rights to be different than that described in
the preceding paragraph, the tax consequences to U.S. Shareholders of the
Enhanced Offer and the subsequent sale or disposition of Exchange Rights could
be different.
COMPULSORY ACQUISITION OF SHARES
As described under Section 18 of this Circular, "Acquisition of Fording
Shares not Deposited under the Enhanced Offer", the Shares of a
U.S. Shareholder may be acquired, in certain circumstances, pursuant to the
compulsory acquisition provisions of the CBCA. The U.S. federal income tax
consequences to U.S. Shareholders of a disposition of shares pursuant to such
provisions generally will be the same as those described immediately above, but
U.S. Shareholders who dispose of their shares in such fashion should consult
their own tax advisors in this regard.
SUBSEQUENT ACQUISITION TRANSACTION
If the compulsory acquisition provisions of the CBCA are not utilized, other
means of acquiring the remaining issued and outstanding Shares may be proposed.
The U.S. federal income tax consequences of a Subsequent Acquisition Transaction
generally should be the same as those described above under "-- Consequences of
Enhanced Offer", but U.S. Shareholders who dispose of their Shares in such
fashion should consult their own tax advisors in this regard.
21. SHAREHOLDER RIGHTS PLAN
The Original Offer was and it is intended that the Enhanced Offer is and any
other variation of the Original Offer will be structured so as to constitute a
"Permitted Bid" within the meaning of the Shareholder Rights Plan of Fording.
22. ACCEPTANCE OF THE ENHANCED OFFER
The Shares held by the Offeror and its affiliates and associates will be
deposited under the Enhanced Offer. The Fording Directors' Circular states that
as of November 6, 2002, the directors and senior officers of Fording, together
with their respective associates, had indicated their intention to not tender
their 107,737 Shares to the Original Offer. The Offeror has no knowledge
regarding whether the directors and officers of Fording, together with their
respective associates, will accept the Enhanced Offer. The Offeror has no
knowledge regarding whether any other holders of Shares will accept the Enhanced
Offer.
23. DEPOSITARY, U.S. FORWARDING AGENT AND INFORMATION AGENT
The Offeror has engaged the Depositary and the U.S. Forwarding Agent for the
receipt of certificates in respect of Shares and related Letters of Transmittal
deposited under the Enhanced Offer and other documents and, in the case of the
Depositary, for the payment for Shares purchased by the Offeror pursuant to the
41
Enhanced Offer. The Depositary will also receive Notices of Guaranteed Delivery
at the office specified therein. The Offeror has engaged the Information Agent
to provide a resource for information for Shareholders, particularly those
resident in the United States. The Depositary, the U.S. Forwarding Agent and the
Information Agent will receive reasonable and customary compensation from the
Offeror for their services in connection with the Enhanced Offer, will be
reimbursed for certain out-of-pocket expenses and will be indemnified against
certain liabilities, including liabilities under securities laws and expenses in
connection therewith.
No broker, dealer, bank or trust company shall be deemed to be the agent of
the Offeror, the Depositary or the U.S. Forwarding Agent for purposes of the
Enhanced Offer.
24. FINANCIAL ADVISORS, DEALER MANAGERS AND SOLICITING DEALER GROUP
The Offeror has retained Goldman Sachs & Co., BMO Nesbitt Burns Inc. and
National Bank Financial Inc. to act as its financial advisors in connection with
the Enhanced Offer.
The Offeror has engaged the services of BMO Nesbitt Burns Inc. and National
Bank Financial Inc. and their respective U.S. affiliates as Dealer Managers.
BMO Nesbitt Burns Inc. and National Bank Financial Inc. have also undertaken
to form a soliciting dealer group to solicit acceptances of the Enhanced Offer
in Canada. Each member of the Soliciting Dealer Group, including BMO Nesbitt
Burns Inc. and National Bank Financial Inc., is referred to herein as a
"Soliciting Dealer". The Offeror has agreed to pay to each Soliciting Dealer
whose name appears in the appropriate space in the Letter of Transmittal and
Election Form accompanying a deposit of Shares a fee of $0.20 for each such
Share deposited and taken up by the Offeror under the Enhanced Offer. The
aggregate amount payable with respect to any single depositing Shareholder will
not be less than $85 (provided that such depositing Shareholder deposits a
minimum of 400 Shares) nor more than $1,500. If Shares deposited and registered
in a single name are beneficially owned by more than one person, the minimum and
maximum amount will be applied separately in respect of each such beneficial
owner. The Offeror may require a Soliciting Dealer to furnish evidence of such
beneficial ownership satisfactory to the Offeror at the time of deposit.
No brokerage fees or commissions will be payable by any Shareholder who
transmits Shares directly to the Depositary or the U.S. Forwarding Agent or who
uses the services of the Dealer Managers or a member of the Soliciting Dealer
Group to accept the Enhanced Offer. Shareholders should contact the Depositary,
the U.S. Forwarding Agent, the Dealer Managers or a broker or dealer for
assistance in accepting the Enhanced Offer and in depositing Shares with the
Depositary or U.S. Forwarding Agent.
Peters & Co. Limited has been advising the Partnership and the Offeror in
respect of certain strategic matters related to the Enhanced Offer.
25. STATUTORY RIGHTS
Securities legislation in certain of the provinces and territories of Canada
provides security holders of the offeree issuer with, in addition to any other
rights they may have at law, rights of rescission or to damages, or both, if
there is a misrepresentation in a circular or a notice that is required to be
delivered to such securityholders. However, such rights must be exercised within
prescribed time limits. Securityholders should refer to the applicable
provisions of the securities legislation of their province or territory for
particulars of those rights or consult with a lawyer.
26. RESTRICTIONS ON NON-CANADIANS
The constating documents of the Canadian Coal Trust contain, and the
Exchange Rights Agreement will contain, restrictions as to the percentage of
Exchange Rights and Units that can be held by non-residents of Canada. See
"Exchange Rights -- Limitation of Non-Resident Ownership" and "The Canadian Coal
Trust -- Limitation of Non-Resident Ownership" in Appendix A to this Circular.
In addition, the INVESTMENT CANADA ACT (the "ICA") applies to an acquisition
of control, directly or indirectly, and through one or more transactions, of a
"Canadian business" by a "non-Canadian", as each of those terms is defined in
the ICA. The ICA requires the investor to give notice of the investment to
Investment
42
Canada or, above certain monetary thresholds, to file an application for review
and approval by Investment Canada of the investment as one that is likely to be
of net benefit to Canada based upon certain prescribed factors.
There are, at the date hereof, no other decrees or regulations in Canada
which restrict the export or import of capital, including foreign exchange
controls, or that affect the remittance of dividends, interest or other payments
to non-resident holders of the Canadian Coal Trust's securities except as
discussed in Section 19, "Canadian Federal Income Tax Considerations",
Section 20, "United States Federal Income Tax Considerations", and under the
titles "Certain Canadian Federal Income Tax Considerations" and "Certain United
States Federal Income Tax Considerations", contained in Appendix A to the
Circular.
FORDING, TECK AND WESTSHORE INFORMATION
The Offeror has included in this document information concerning Fording,
Teck and Westshore to the extent it is publicly disclosed by Fording, Teck or
Westshore, as the case may be, or reasonably available to the Offeror. However,
Fording, Teck and Westshore are not affiliated with the Offeror and none of
Fording, Teck or Westshore has yet permitted the Offeror access to their
respective books and records or any other non-public information regarding
Fording, Teck or Westshore. Therefore, information concerning Fording, Teck and
Westshore that has not been made public is not available to the Offeror.
Although the Offeror has no knowledge indicating that statements relating to
Fording, Teck and Westshore contained in this document in reliance upon publicly
available information are inaccurate or incomplete, the Offeror was not involved
in the preparation of the Fording, Teck and Westshore information or statements
and, for these reasons, is not in a position to verify any of the Fording, Teck
and Westshore information or statements.
Fording, Teck and Westshore file annual, periodic and other reports and
other information with Canadian securities regulators and/or with the
U.S. Securities and Exchange Commission. You may read and copy any reports,
statements and other information which Fording, Teck and Westshore file at the
website maintained by the Canadian Securities Administrators at
"http://www.sedar.com" and at the website maintained by the U.S. Securities and
Exchange Commission at "http://www.sec.gov".
DOCUMENTS FILED AS PART OF THE UNITED STATES REGISTRATION STATEMENT
A registration statement (the "Registration Statement") has been filed with
the Securities and Exchange Commission of the United States (the "SEC") under
the United States SECURITIES ACT OF 1933, as amended, relating to the Enhanced
Offer. The following documents have been filed with the SEC as part of the
Registration Statement of which the Enhanced Offer and Circular is part, insofar
as called for by the SEC: (i) the letter to the Shareholders from the
Partnership; (ii) the Enhanced Offer and the Circular; (iii) the form of the
Letter of Transmittal and Election Form; (iv) the form of Notice of Guaranteed
Delivery; (v) consents of accountants, counsel, financial advisors and other
experts; (vi) powers of attorney pursuant to which amendments to the
Registration Statement may be signed; (vii) the Declaration of Trust of the
Canadian Coal Trust; (viii) Sherritt's Annual Information Form dated March 15,
2002, which is incorporated by reference herein, and (ix) Sherritt's Management
Information Circular dated April 15, 2002 in connection with the May 30, 2002
Annual and Special Meeting of Shareholders, other than the sections entitled
"Composition of the Compensation Committee in 2001", "Report on Executive
Compensation", "Performance Graph", and "Corporate Governance", which is
incorporated by reference herein.
Additional copies of these documents may be obtained on request without
charge from the Corporate Secretary of the Offeror, 1133 Yonge Street, Toronto,
Ontario M4T 2Y7, telephone (416) 924-4551.
43
COMPARISON OF RIGHTS OF FORDING SHAREHOLDERS, HOLDERS OF
EXCHANGE RIGHTS AND UNITHOLDERS
Following the acceptance of the Enhanced Offer, the shareholders of Fording,
a corporation incorporated under the laws of Canada, may become holders of
Exchange Rights, which will entitle each holder to Units of the Canadian Coal
Trust, a trust established pursuant to a declaration of trust made under the
laws of the Province of Ontario (the "Declaration of Trust"). The following is a
summary of the material differences between the current rights of Fording
shareholders and the rights of holders of Exchange Rights and Unitholders. These
differences arise from differences between the CANADA BUSINESS CORPORATIONS ACT
(the "CBCA") and Fording's articles of amalgamation and by-laws and the
Declaration of Trust. For a more detailed description of the rights of Fording
shareholders you should refer to the relevant provisions of the CBCA and
Fording's articles and by-laws. For a more detailed description of the rights of
holders of Exchange Rights and Unitholders, you should refer to the Declaration
of Trust.
Fording shareholders, whose rights are currently governed by the Fording
articles of amalgamation, the Fording by-laws and the CBCA, may, if they so
choose, upon acceptance of the Enhanced Offer become holders of Exchange Rights,
which will entitle the holder to Units, and their rights with respect to the
Units will be governed by the Declaration of Trust and the laws of the province
of Ontario applicable thereto. There will be changes to the rights of the
Fording shareholders who choose to accept this option of the Enhanced Offer. The
following is a summary of the significant differences between the CBCA and the
provisions of the Declaration of Trust, which may affect the rights of Fording
shareholders. The following is a summary only and does not purport to be a
comprehensive statement of the statutory provisions or sections of the
Declaration of Trust, as the case may be, to which reference is made.
AUTHORIZED SHARE CAPITAL/UNIT CAPITAL
Under the CBCA, there is no provision for par value shares and corporations
may authorize an unlimited number of shares, if permitted by their articles of
incorporation. Pursuant to Fording's articles of amalgamation, the total
authorized shares of Fording consists of an unlimited number of common shares
without nominal or par value, an unlimited number of first preferred shares and
an unlimited number of second preferred shares.
The Declaration of Trust provides that the Canadian Coal Trust has an
unlimited number of Units and only one class of Units.
PRE-EMPTIVE RIGHTS
Under the CBCA, the granting of pre-emptive rights with respect to the
issuance of new shares is permissive rather than mandatory, and so are granted
only if the articles so provide. However, the articles of Fording do not contain
a provision for pre-emptive rights.
The Declaration of Trust provides that no person shall be entitled, as a
matter of right, to subscribe for or purchase any Unit.
SIZE OF BOARD OF DIRECTORS/TRUSTEES
Under the CBCA, the shareholders of a corporation may amend the articles to
increase the minimum or maximum number of directors, or may amend the articles
to decrease the minimum or maximum number of directors, but only if the votes
cast in favour of the motion to decrease the number of directors is greater than
the product of the number of directors required by the articles and the number
of votes cast against the motion. In addition, no decrease shall shorten the
term of the incumbent director.
Fording's board of directors currently has nine members. Fording's articles
provide that Fording has a minimum of five and a maximum of 20 directors.
Fording's articles and by-laws provide that the actual number of directors may
be fixed by the board of directors from time to time by resolution and any
vacancy among the directors resulting from an increase in the number of
directors as so determined may be filled by resolution of the directors.
44
The Declaration of Trust states that the Canadian Coal Trust has a minimum
of three and a maximum of seven Trustees. The initial number of Trustees is set
at four. The Declaration of Trust also provides that the number of Trustees is
to be fixed by resolution of the Trustees.
CUMULATIVE VOTING
Under the CBCA, shareholders have cumulative voting rights in the election
of directors if the articles so provide. Where cumulative voting is provided for
by the articles, the following conditions must be met:
- the articles must require a fixed number of directors;
- each shareholder entitled to vote at an election of directors has the
right to cast a number of votes equal to the number of votes attached to
the shareholder's shares multiplied by the number of directors to be
elected. The shareholder is entitled to cast all such votes in favor of
one candidate for director or distribute them among the candidates in any
manner;
- a separate vote of shareholders must be taken with respect to each
candidate nominated for director, unless a resolution is passed
unanimously permitting two or more persons to be elected by a single
resolution;
- if a shareholder has voted for more than one candidate without specifying
the distribution of votes, the shareholder is deemed to have distributed
the votes equally among those candidates;
- if the number of candidates nominated exceeds the number of positions to
be filled, the candidates who receive the least number of votes will be
eliminated until the number of candidates equals the number of positions;
- each director ceases to hold office at the close of the first annual
meeting of shareholders following the director's election;
- a director may be removed from office only if the number of votes cast in
favor of the removal is greater than the product of the number of
directors required by the articles and the number of votes cast against
the motion; and
- the number of directors required by the articles may be decreased only if
the votes cast in favor of the motion to decrease is greater than the
product of the number of directors required by the articles and the number
of votes cast against the motion.
However, the articles and by-laws of Fording do not provide for cumulative
voting.
The Declaration of Trust does not provide for any cumulative voting rights.
CLASS DIRECTORS/TRUSTEES
Under the CBCA, holders of a particular class or series of shares may have
the exclusive right to elect one or more directors. A removal of such a
director, or a vacancy to be filled by such a director, can only be effected by
the holders of that class or series of shares, and then only if the vacancy was
not created by an increase in the number of directors for that class or series
or from a failure to elect the number of directors for that class or series.
The articles of amalgamation and by-laws of Fording do not provide for
exclusive voting rights with respect to election of directors for a particular
class. However, only the holders of the common shares are entitled to vote at
shareholder meetings, except as may be required by law.
As there is only one class of Units, the Declaration of Trust does not
contain any provision entitling holders of specific classes or series of Units
to have the exclusive right to elect one or more Trustees.
FILLING VACANCIES ON THE BOARD OF DIRECTORS/TRUSTEES
Under the CBCA, a quorum of the board of directors may fill any vacancy in
the board, except a vacancy resulting from an increase in the number or the
minimum or maximum number of directors or a failure to elect
45
the number or minimum number of directors provided for in the articles. If there
is not a quorum of the board of directors or if there has been a failure to
elect the number or the minimum number of directors required by the articles or
the CBCA, the directors then in office are required to call a special meeting of
the shareholders to fill the vacancy, and if they fail to do so or if there are
no directors then in office, the meeting may be called by any shareholder.
The Fording articles state that the directors may, by resolution, determine
the actual number within the minimum and maximum, and any vacancy among the
directors resulting from an increase in the number of directors as so determined
may be filled by resolution of the directors.
The Declaration of Trust provides that a quorum of Trustees may fill a
vacancy among the Trustees, except a vacancy resulting from an increase in the
number of Trustees or from a failure to elect the minimum number of Trustees
fixed by or pursuant to the Declaration of Trust. The Declaration of Trust also
provides that if there is not a quorum, or if there is a failure to elect the
minimum number of Trustees, the Trustees then in office must call a special
meeting of Unitholders to fill the vacancy, or the meeting will be called by any
Unitholder if the Trustees fail to do so.
REMOVAL OF DIRECTORS/TRUSTEES
Under the CBCA, shareholders may, by ordinary resolution at a special
meeting, remove any director or directors from office, and a vacancy created by
the removal of a director may be filled at the meeting of the shareholders at
which the director is removed. However, a director may be removed only if the
number of votes cast in favor of the director's removal is greater than the
product of the number of directors required by the articles and the number of
votes cast against the motion. In addition, where the holders of any class or
series of shares have an exclusive right to elect one or more directors, a
director so elected may only be removed by an ordinary resolution at a meeting
of the shareholders of that class or series.
The Declaration of Trust provides that the Unitholders may remove any
Trustee or Trustees from office by ordinary resolution at a meeting of
Unitholders called for that purpose.
SHAREHOLDER/UNITHOLDER ACTION WITHOUT A MEETING
Under the CBCA, shareholder action without a meeting may only be taken by
written resolution signed by all shareholders who would be entitled to vote
thereon at a meeting. Special meetings of shareholders may be called by the
board of directors, or in certain circumstances by a court. In addition, in
certain circumstances a meeting can be requisitioned by a holder of not less
than five percent of the outstanding shares.
The Declaration of Trust states that a resolution in writing by Unitholders
holding more than 66 2/3% of the outstanding Units at any time shall be valid
and binding as if such Unitholders had exercised at that time all of the voting
rights to which they were entitled under the Declaration of Trust in favor of
such resolution at a meeting called for the purpose.
AMENDMENT TO GOVERNING DOCUMENTS
Under the CBCA, any amendment to the articles generally requires approval by
special resolution, which is a resolution passed at a meeting by not less than
two-thirds of the votes cast by shareholders entitled to vote on the resolution.
The CBCA also provides that unless the articles, by-laws or a unanimous
shareholder agreement otherwise provide, the directors may, by resolution, make,
amend or repeal any by-laws that regulate the business or affairs of a
corporation. Where the directors make, amend or repeal a bylaw, they are
required to submit the by-law, amendment or repeal to the shareholders at the
next meeting of shareholders, and the shareholders may confirm, reject or amend
the bylaw, amendment or repeal by an ordinary resolution, which is a resolution
passed at a meeting by a majority of the votes cast by shareholders entitled to
vote on the resolution.
46
Under the CBCA, the holders of a class or series are, unless the articles
otherwise provide, entitled to vote separately as a class or series on a
proposal to amend the articles on certain issues that will affect that class or
series, including amendments that would:
- increase or decrease the maximum number of authorized shares of the class
or increase the maximum number of authorized shares of a class or series
having rights equal or superior to the class or series;
- effect an exchange, reclassification or cancellation of all or part of the
shares of such class or series;
- add, change or remove the rights, privileges, restrictions or conditions
attached to the shares of the class or series;
- increase the rights or privileges of any class or series of shares having
rights or privileges equal or superior to the class or series;
- create a new class or series of shares equal or superior to the shares of
the class or series;
- make any class or series of shares having rights or privileges inferior to
the shares of the class equal or superior to the shares of the class or
series;
- effect an exchange or create a right of exchange of the shares of another
class or series into shares of the class or series; and
- constrain the issue, transfer or ownership of the shares of such class or
change or remove such constraint.
Only if the proposed amendment would affect the shares of a series in a
manner different from other shares of the same class are the holders of that
series entitled to vote separately as a series on the proposed amendment.
The Declaration of Trust provides that its provisions may only be amended by
the Trustees with the consent of the Unitholders by special resolution, except
where specifically provided otherwise.
The Declaration of Trust also states that provisions of the Declaration of
Trust may be amended by the Trustees without consent, approval or ratification
of the Unitholders prior to the Date of Exchange and, in addition, the Trustees
may make certain amendments to the Declaration of Trust, including amendments:
- for the purpose of ensuring continuing compliance with applicable laws,
regulations, requirements or policies of any governmental authority having
jurisdiction over the Trustees or the Canadian Coal Trust;
- deemed necessary or advisable to ensure that the Canadian Coal Trust has
not been established or maintained primarily for the benefit of
non-residents of Canada within the meaning of the Tax Act;
- which, in the opinion of counsel to the Trustees, provide additional
protection or added benefits for Unitholders;
- to remove any conflicts or inconsistencies in the Declaration of Trust or
to make minor changes or corrections, including the correction or
rectification of any ambiguities, defective provisions, errors, mistakes
or omissions, which, in the opinion of the Trustees, are necessary or
desirable and not prejudicial to the Unitholders;
- to add provisions to permit a single corporate Trustee to assume the role
of Trustee and provide commercially reasonable protections to such Trustee
and such other administrative provisions as are required to retain such
Trustee; and
- which, in the opinion of the Trustees, are necessary or desirable as a
result of changes in taxation laws.
SPECIAL MEETINGS OF SHAREHOLDERS/UNITHOLDERS
Under the CBCA, the board of directors may at any time call a special
meeting of the shareholders. Special meetings of shareholders may, in certain
circumstances, be requisitioned by a holder of at least 5% of the outstanding
shares or by a court. Written notice of all meetings of shareholders must be
sent, in the case of an offering corporation, such as Fording, not less than
21 days and not more than 60 days before the meeting, to each shareholder
entitled to vote at the meeting, to each director and to the auditor of the
corporation.
47
The Declaration of Trust provides that special meetings of the Unitholders
may be called at any time by the Trustees and will provide that such meetings
shall be called by the Trustees upon a written request of Unitholders holding in
the aggregate not less than 5% of the Units then outstanding, such request
specifying in reasonable detail the business proposed to be transacted at the
meeting.
VOTE REQUIRED FOR EXTRAORDINARY TRANSACTIONS
Under the CBCA, certain extraordinary corporate actions or "arrangements",
such as certain reorganizations of the shares or classes of shares of the
corporation, amalgamations, continuances, and sales, leases or exchanges of all
or substantially all the property of a corporation other than in the ordinary
course of business, and other extraordinary corporate actions such as
liquidations, dissolutions, and (if ordered by a court) arrangements, are
required to be approved by special resolution. A special resolution is defined
in the CBCA as a resolution passed at a meeting by not less than two-thirds of
the votes cast by the shareholders entitled to vote on the resolution. In
certain cases, a special resolution to approve an extraordinary corporate action
is also required to be approved separately by the holders of a class or series
of shares.
The Declaration of Trust provides that the Canadian Coal Trust shall not
vote its SCAI Shares and SCAI Notes or permit (to the extent that it is within
the Canadian Coal Trust's power as a shareholder of SCAI) SCAI to vote its
MetCoal Common Shares and MetCoal Notes to authorize, among other things:
- any material amendment to the articles of SCAI or the MetCoal Company to
change the authorized share capital of those companies, in a manner which
may be prejudicial to the Canadian Coal Trust;
- any sale, lease or other disposition of all or substantially all of the
assets of SCAI or the MetCoal Company, except in conjunction with an
internal reorganization or a permitted charge, pledge or lien;
- any amalgamation, arrangement, combination or other merger of SCAI or the
MetCoal Company with any other entity, except in conjunction with an
internal reorganization;
- any material amendment to the SCAI Note Indenture other than in
contemplation of a further issuance of SCAI Notes to the Canadian Coal
Trust that are identical in all material respects to the SCAI Notes; or
- the winding-up or dissolution of SCAI or the MetCoal Company prior to the
end of the term of the Canadian Coal Trust,
without the authorization of the Unitholders by Special Resolution.
DISSENTERS' RIGHTS, INCLUDING APPRAISAL RIGHTS
The CBCA provides that shareholders of any class of a corporation may
dissent if the corporation is subject to a court order permitting a shareholder
to dissent, or if the corporation resolves to:
- amend the corporation's articles to add, change, or remove any provisions
restricting the issue, transfer, or ownership of shares of that class;
- amend the corporation's articles to add, change, or remove any restriction
upon the business or businesses that the corporation may carry on;
- amalgamate with another corporation (other than with certain affiliated
corporations);
- be continued under the laws of another jurisdiction;
- sell, lease, or exchange all or substantially all the property of the
corporation other than in the ordinary course of business; or
- carry out a going-private transaction or a squeeze-out transaction.
A holder of shares of any class or series of shares entitled to vote with
respect to issues that affect that class or series may dissent if the
corporation resolves to amend its articles in a manner that affects that class
or series.
48
The CBCA provides that when the action approved by the resolution from which
the shareholder dissents or an order made becomes effective, the dissenting
shareholder has the right to be paid by the corporation the fair value of the
shares in respect of which the shareholder dissents, determined as of the close
of business on the day before the resolution was adopted or the order made, but
such payment by the corporation is subject to the ability of the corporation to
pay its liabilities, and to the value of its assets being more than its
liabilities. Where a corporation fails to make an offer to pay for the
dissenting shareholder's shares, or if a dissenting shareholder fails to accept
an offer, the corporation may apply to a court to fix a fair value for the
shares of any dissenting shareholder. A dissenting shareholder may make such an
application if the corporation fails to do so within a prescribed time. The
court shall then fix a fair value for the shares of the dissenting shareholder.
Under the CBCA, a shareholder may be able, in addition to exercising dissenters'
rights, to seek an oppression remedy for any act or omission of a corporation
which is oppressive, unfairly prejudicial to, or that unfairly disregards, a
shareholder's interests.
The Declaration of Trust contains provisions with respect to dissenting
Unitholders' rights only with respect to compulsory and compelled acquisitions
(see "-- Take-Over Bid Rules and Anti-Take-Over Statutes" below).
INSPECTION OF DOCUMENTS
Under the CBCA, shareholders and creditors and their personal
representatives are permitted during the usual business hours of the corporation
to examine the corporation's records, and may take extracts from such documents,
free of charge. The corporation's records include the articles, by-laws,
unanimous shareholder agreements known to the directors, minutes of meetings and
resolutions of shareholders, notices with respect to directors' information, and
a securities register. If the corporation is a distributing corporation, such as
Fording, any other person may also do so on payment of a reasonable fee.
The CBCA also allows shareholders of a corporation, creditors and their
personal representatives and, where the corporation is a distributing
corporation, such as Fording, any other person, upon payment of a reasonable fee
and upon sending to the corporation or its transfer agent an affidavit in the
form prescribed by the CBCA, to require that the corporation or its transfer
agent furnish a basic list made up to a date not more than ten days before the
date of receipt of the affidavit, setting out the names of the shareholders of
the corporation, the number of shares owned by each shareholder and the address
of each shareholder, all as shown on the records of the corporation. Such a
person may also require the corporation to provide it with supplemental lists
setting out any changes in the information in the list.
The Declaration of Trust states that each Unitholder has the right to
obtain, on demand and without fee, from the head office of the Trust a copy of
the Declaration of Trust and any amendments thereto relating to Units held by
that Unitholder and shall be entitled to inspect and, on payment of a reasonable
fee therefor and after delivering to the Trustees a statutory declaration
stating the name and address of the person requiring the Trustees to furnish the
list of Unitholders and, if the person is a body corporate, the address for
service thereof, and that the list will not be used except in connection with
(a) an effort to influence the voting of the holders of Units; (b) an offer to
acquire Units; or (c) any other matter relating to the Units or the affairs of
the Trust, a list of the Unitholders for the aforesaid purposes.
TAKE-OVER BID RULES AND ANTI-TAKE-OVER STATUTES
The CBCA does not contain anti-take-over provisions or specific rules with
respect to restrictions or prohibitions on business combinations and take-overs.
However, it does contain provisions with respect to the rights of dissenting
offeree shareholders in compulsory and compelled acquisitions. The CBCA gives a
90% shareholder the right to acquire the shares held by the dissenting offeree
shareholders, at which point the dissenting offeree shareholders may elect to
either transfer their shares or demand payment of the fair value of their
shares.
The Declaration of Trust contains provisions to the effect that if a
take-over bid is made for the Units and an offeror acquires not less than 90% of
the outstanding Units (excluding Units held at the date of the take-over bid by
or on behalf of the offeror or associates or affiliates of the offeror), the
offeror will be entitled to acquire the Units held by Unitholders who did not
accept the take-over bid on the terms offered by the offeror. The Declaration of
Trust also provides that such dissenting Unitholders may demand payment of the
fair value of
49
their Units and have the fair value fixed by a court in a manner similar to
those rights provided to shareholders under the CBCA.
SHAREHOLDER/UNITHOLDER PROPOSALS
Under the CBCA, a registered holder or beneficial owner of shares that are
entitled to be voted at an annual meeting may submit notice of any matter the
person proposes to raise at a meeting and discuss at the meeting any matter in
respect of which the person would have been entitled to submit a proposal. To be
eligible to submit a proposal, a person must be, for at least six months
immediately preceding the day of the proposal submission, the holder or owner of
at least the number of voting shares (i) that is equal to 1% of the total number
of the outstanding voting shares as of the day of the proposal submission, or
(ii) whose fair market value, at the close of business on the day before the
proposal submission is at least $2,000, and must have the support of persons
who, in the aggregate, including or not the person submitting the proposal, have
been, for at least the prescribed period, the holders or owners of at least the
prescribed number of outstanding shares.
The Declaration of Trust does not contain any provisions with respect to
Unitholder proposals, and rules governing such proposals will be left to the
discretion of the Trustees.
50
GLOSSARY
In the Enhanced Offer and Circular (including Appendix A and Appendix B),
unless the subject matter or context is inconsistent therewith, the following
terms will have the following meanings:
"ADMINISTRATION AGREEMENT" means the administration agreement to be entered
into between the Canadian Coal Trust and the Manager prior to the Date of
Exchange, pursuant to which the Manager will provide administrative services to
the Canadian Coal Company;
"AFFILIATE" has the meaning given to the term "affiliated entity" in
Rule 45-501 of the OSC;
"AMALGAMATION" means the amalgamation of Fording and Newco under the CBCA;
"ASSOCIATE" has the meaning given in the Securities Act;
"BUSINESS DAY" means any day, other than a Saturday or Sunday or a day on
which banking institutions in Toronto, Ontario or Calgary, Alberta are
authorized or obligated by law to close;
"CANADIAN COAL TRUST" or "TRUST" means the Canadian Coal Trust, an
unincorporated, open-ended limited purpose trust formed pursuant to the
Declaration of Trust under the laws of the Province of Ontario;
"CAPITAL EXPENDITURE" means additions, replacements or improvements to
property, plant or equipment to enhance or maintain business operations;
"CASH OPTION" means the option, available at the election of a Shareholder,
to tender Shares under the Enhanced Offer for a cash amount of $35.00 per Share,
subject to proration;
"CBCA" means the CANADA BUSINESS CORPORATIONS ACT, as amended;
"CIRCULAR" means the varied and restated take-over bid circular accompanying
and forming part of the Enhanced Offer;
"COMBINATION OPTION" means the combination of the Cash Option and Exchange
Right Option, available at the election of a Shareholder, to tender Shares under
the Enhanced Offer, subject to proration;
"COMMISSIONER" means the Commissioner of Competition appointed under the
Competition Act;
"COMPETITION ACT" means the COMPETITION ACT (Canada) and the regulations
promulgated thereunder, in each case, as amended;
"COMPULSORY ACQUISITION" has the meaning ascribed to that term in
Section 18 of the Circular, "Acquisition of Fording Shares not Deposited under
the Enhanced Offer -- Compulsory Acquisition";
"CONSOL" means CONSOL Energy Inc.;
"CONVERSION AGREEMENT" means the conversion agreement to be entered into by
the Canadian Coal Trust and the Partnership prior to the Date of Exchange,
pursuant to which the Partnership will be entitled to exchange all of its SCAI
Shares and SCAI Series B Notes for Units;
"CVMQ" means the Commission des valeurs mobilieres du Quebec;
"DATE OF EXCHANGE" means the fifth business day after the day on which the
Canadian Coal Trust has received all required regulatory approvals for the
exchange to occur such that the Units will be issued as freely tradeable
securities in each of Canada and the United States. Sherritt will issue a press
release on the date on which all required regulatory approvals have been
received that will indicate that day determined to be the Date of Exchange;
"DEALER MANAGERS" means collectively National Bank Financial Inc. and BMO
Nesbitt Burns Inc.;
"DECLARATION OF TRUST" means the declaration of trust pursuant to which the
Canadian Coal Trust has been created, as may be amended and restated;
"DEPOSITARY" means CIBC Mellon Trust Company at the offices specified in the
Letter of Transmittal and Election Form and on the last page of this document;
51
"DILUTED BASIS" means, with respect to the number of outstanding Shares at
any time, such number of outstanding Shares calculated assuming that all
outstanding options and warrants, if any, to purchase Shares (other than SRP
Rights) are exercised, and that any outstanding convertible securities of
Fording are converted;
"EBITDA" means earnings before interest, income taxes, depreciation and
amortization. EBITDA is not intended to be representative of cash flows or
earnings of the relevant entities determined in accordance with GAAP. EBITDA may
not be comparable to similar measures presented by others;
"ELIGIBLE INSTITUTION" means a Canadian Schedule I chartered bank, a major
trust company in Canada, a commercial bank or trust company in the United
States, a member of the Securities Transfer Association Medallion Program
(STAMP), a member of the Stock Exchange Medallion Program (SEMP) or a member of
the New York Stock Exchange Inc. Medallion Signature Program (MSP). Members of
these programs are usually members of or participating organizations in a
recognized stock exchange in Canada and/or the United States, members of the
Investment Dealers Association of Canada, members of the National Association of
Securities Dealers or banks and trust companies in the United States;
"ENHANCED OFFER" or "OFFER" means the Original Offer as varied by the Notice
of Variation, the terms and conditions of which are set forth in the
accompanying varied and restated offer document, including the Circular, Letter
of Transmittal and Election Form and Notice of Guaranteed Delivery;
"EXCHANGE" means the exchange of Units for Exchange Rights on a one-for-one
basis to occur at 5:00 p.m. (Toronto time) on the Date of Exchange;
"EXCHANGE AGENT" means the person appointed as exchange agent for the
Exchange Rights pursuant to the Exchange Rights Agreement;
"EXCHANGE RIGHTS" means the obligation of Sherritt in accordance with the
terms of the Exchange Rights Agreement to deliver Units to the holders thereof,
such Exchange Rights to be exchangeable for Units on the Date of Exchange on a
one-for-one basis;
"EXCHANGE RIGHTS AGREEMENT" means the exchange rights agreement to be
entered among the Offeror, Sherritt, the Canadian Coal Trust and CIBC Mellon
Trust Company as Exchange Agent;
"EXCHANGE RIGHT OPTION" means the option, available at the election of a
Shareholder, to tender Shares under the Enhanced Offer for one Exchange Right
exchangeable into a Unit of the Canadian Coal Trust per Share, subject to
proration;
"EXPIRY TIME" means 8:00 p.m. (Toronto time) on January 6, 2003 or such
later time and date or times and dates to which the Enhanced Offer may be
extended from time to time by the Offeror in accordance with Section 5 of the
Enhanced Offer, "Extension, Variation or Change of the Enhanced Offer";
"EXTRAORDINARY RESOLUTION" means a resolution passed at a meeting of holders
duly convened for the purpose of approving such resolution at which the holders
of more than 50% of the principal amount of SCAI Notes then outstanding are
present in person or represented by proxy and passed by the holders of not less
than 66 2/3% of the principal amount of SCAI Notes represented at the meeting,
or approval in writing by holders of not less than 66 2/3% of the aggregate
principal amount of SCAI Notes then outstanding;
"FORDING" means Fording Inc., a corporation existing under the CBCA;
"FORDING ACQUISITION" means the acquisition by the Offeror of all of the
outstanding Shares of Fording pursuant to the Enhanced Offer and Compulsory
Acquisition, Subsequent Acquisition Transaction or otherwise;
"FORDING DIRECTORS' CIRCULAR" means the Directors' Circular of Fording dated
November 6, 2002 relating to the Offer;
"FORDING MANAGEMENT CIRCULAR" means the Management Information Circular of
Fording dated November 20, 2002 relating to the special meeting of Shareholders
scheduled to be held on December 20, 2002, as supplemented on December 8, 2002;
"FORDING-TECK COMBINATION" means Fording's proposal to Shareholders that, at
a special meeting of Shareholders originally scheduled to be held on
December 20, 2002 and now scheduled for January 3, 2003,
52
approval be given to a plan of arrangement pursuant to which Fording and certain
of its subsidiaries would be converted into an income trust with the
participation of Teck and Westshore;
"GAAP" means generally accepted accounting principles, as applicable;
"GOVERNMENTAL ENTITY" means (a) any multinational, federal, provincial,
state, regional, municipal, local or other government, governmental or public
department, central bank, court, tribunal, arbitral body, commission, board,
bureau or agency, whether domestic or foreign, (b) any subdivision, agent,
commission, board, regulatory authority, administrative agency or other
authority of any of the foregoing, or (c) any quasi-governmental or private body
exercising any regulatory, expropriation or taxing authority under or for the
account of any of the foregoing;
"HELMS-BURTON ACT" means the United States CUBAN LIBERTY AND DEMOCRATIC
SOLIDARITY (LIBERTAD) ACT;
"HSR ACT" means the United States HART-SCOTT-RODINO ANTITRUST IMPROVEMENTS
ACT OF 1976, as amended, and the rules and regulations that have been
promulgated thereunder;
"INFORMATION AGENT" means Innisfree M&A Incorporated;
"INITIAL TRUST DISTRIBUTION" means the distribution by the Canadian Coal
Trust on the 10th Business Day following the Date of Exchange to its Unitholders
of record on the Date of Exchange of a cash amount for each Unit held (net of
withholding taxes), calculated from the initial Take Up and Pay Date up to but
excluding the Date of Exchange, in an amount accruing daily at the rate of $1.05
per calendar quarter per Unit;
"INTERMEDIARY" means a registered broker or dealer, financial institution or
other intermediary (within the meaning ascribed to that term in National
Instrument 54-101 of the Canadian Securities Administrators, as amended) that
holds Shares on behalf of a person who is not the registered holder thereof;
"LEP" means Luscar Energy Partnership, formerly Sherritt Coal Partnership, a
partnership between a wholly-owned subsidiary of Sherritt and a wholly-owned
subsidiary of OTPP;
"LETTER OF TRANSMITTAL AND ELECTION FORM" means the amended letter of
transmittal printed on pink paper in the form accompanying the Enhanced Offer
and Circular;
"LUSCAR" means Luscar Coal Ltd. and Luscar Ltd., a wholly-owned subsidiary
of Luscar Coal Ltd.;
"LUSCAR NOTES" means the 9.75% senior notes issued by Luscar Coal Ltd. due
October 15, 2011;
"LUSCAR PUT" means the right of each of Luscar and CONSOL to require the
MetCoal Company to acquire their respective interests in the Luscar mine within
30 days after the date on which the Canadian Coal Trust becomes a reporting
issuer in Canada;
"MANAGEMENT AGREEMENT" means the management agreement to be entered into
between SCAI and the Manager prior to the Date of Exchange, pursuant to which
the Manager will provide management services to SCAI and its subsidiaries;
"MANAGER" means a person which will be 50%-owned by each of Sherritt and
OTPP or subsidiaries thereof and which will be a party to the Administration
Agreement and the Management Agreement;
"MAXIMUM CASH AMOUNT" means $850 million, representing the maximum amount of
cash available to Shareholders who elect the Cash Option or the Combination
Option;
"MAXIMUM EXCHANGE RIGHT AMOUNT" means the aggregate maximum number of
Exchange Rights available to Fording Shareholders electing the Exchange Right
Option or the Combination Option which will be not more than 82.5% of the
outstanding Shares (calculated on a diluted basis);
"MET COAL ASSETS" means, collectively, a 100% interest in the Line Creek
mine, a 100% interest in the undeveloped Cheviot mine project and a 46.4%
interest in Neptune Bulk (Canada) Terminals Ltd.;
"METCOAL COMPANY" means the corporation to be created under the CBCA and
resulting from the Amalgamation;
"METCOAL COMMON SHARES" means the common shares in the capital of the
MetCoal Company;
53
"METCOAL NOTES" means the unsecured, subordinated notes of the MetCoal
Company;
"METCOAL NOTE INDENTURE" means the note indenture which will provide for the
issuance of the MetCoal Notes;
"NEWCO" means a wholly-owned subsidiary of the Offeror to be created under
the CBCA;
"NOTICE OF GUARANTEED DELIVERY" means the amended notice of guaranteed
delivery printed on orange paper in the form accompanying the Enhanced Offer and
Circular;
"NOTICE OF VARIATION" means the Notice of Variation dated December 16, 2002
varying the Original Offer;
"NYSE" means the New York Stock Exchange;
"OFFEROR" or "SCAI" means Sherritt Coal Acquisition Inc., a corporation
incorporated under the laws of Canada and wholly-owned by the Partnership;
"ORIGINAL OFFER" means the offer dated October 25, 2002 made by the Offeror
to the Shareholders to purchase all of the outstanding Shares for Cdn.$29.00 per
Share, the terms and conditions of which were set forth in the offer document,
including the circular, letter of transmittal and notice of guaranteed delivery
which accompanied the Original Offer;
"OSC" means the Ontario Securities Commission;
"OTPP" means Ontario Teachers' Pension Plan Board, a non-share capital
corporation established under the laws of the Province of Ontario;
"PARTNERS" means the wholly-owned subsidiaries of each of Sherritt and OTPP,
respectively, which are the two partners of the Partnership;
"PARTNERSHIP" means Sherritt Coal Partnership II, a general partnership
formed under the laws of the Province of Ontario, the two partners of which are
the Partners;
"PERSON" includes any individual, firm, partnership, joint venture, venture
capital fund, association, trust, trustee, executor, administrator, legal
personal representative, estate, group, body corporate, corporation,
unincorporated association or organization, Governmental Entity, syndicate or
other entity, whether or not having legal status;
"POLICY Q-27" means Policy Q-27 of the CVMQ, as amended;
"REGISTERED PLANS" means, collectively, registered retirement savings plans
("RRSP"), registered retirement income funds ("RRIF"), deferred profit sharing
plans ("DPSP") and registered education savings plans ("RESP");
"RULE 61-501" means Rule 61-501 of the OSC, as amended;
"SCAI" or the "OFFEROR" means Sherritt Coal Acquisition Inc., a corporation
incorporated under the laws of Canada and wholly-owned by the Partnership;
"SCAI NOTE INDENTURE" means the note indenture which will provide for the
issuance of the SCAI Notes to be dated prior to the Date of Exchange and entered
into between SCAI and the SCAI Note Trustee;
"SCAI NOTES" means the SCAI Series A Notes and the SCAI Series B Notes and
any other series of notes to be issued pursuant to the SCAI Note Indenture,
collectively;
"SCAI NOTE TRUSTEE" means the trustee appointed pursuant to the SCAI Note
Indenture;
"SCAI SERIES A NOTES" means the unsecured, subordinated Series A notes of
SCAI to be issued pursuant to the SCAI Note Indenture;
"SCAI SERIES B NOTES" means the unsecured, subordinated Series B notes of
SCAI to be issued pursuant to the SCAI Note Indenture;
"SCAI SHARES" means the common shares of SCAI;
54
"SEC" means the United States Securities and Exchange Commission;
"SECURITIES ACT" means the SECURITIES ACT (Ontario), as amended;
"SHAREHOLDER" means a registered holder of Shares;
"SHAREHOLDER RIGHTS PLAN" or "SRP" means the shareholder rights plan
agreement dated April 15, 2002, as amended between Fording and Computershare
Trust Company of Canada;
"SHAREHOLDERS AGREEMENT" means the shareholders agreement to be entered into
prior to the Date of Exchange between the Canadian Coal Trust, the Partnership
and SCAI;
"SHARES" means the outstanding common shares of Fording together with the
associated SRP Rights;
"SHERRITT" means Sherritt International Corporation, a corporation
incorporated under the laws of the Province of New Brunswick;
"SHERRITT POWER NOTES" means the 12.125% senior unsecured amortizing notes
issued by Sherritt Power Corporation due 2007;
"SPECIAL RESOLUTION" means a resolution passed by the affirmative votes of
the holders of more than 66 2/3% of the Units represented and voted upon such
resolution, either in person or by proxy, at the meeting of Unitholders called
for the purpose of approving such resolution, or approved in writing by the
holders of Units holding more than 66 2/3% of the outstanding Units entitled to
be voted on such resolution;
"SRP RIGHTS" means the rights issued or issuable pursuant to the Shareholder
Rights Plan;
"SUBSEQUENT ACQUISITION TRANSACTION" means an amalgamation, statutory
arrangement, capital reorganization, winding up, liquidation, asset disposition
or other transaction that may involve the Offeror (or a wholly-owned subsidiary
of the Offeror) and Fording, as contemplated in Section 18 of the Circular,
"Acquisition of Fording Shares not Deposited under the Enhanced
Offer -- Subsequent Acquisition Transaction";
"SUBSIDIARY" has the meaning given in the Securities Act;
"TAKE UP AND PAY DATE" means each date on which the Offeror takes up and
pays for the Shares deposited under the Enhanced Offer;
"TAX ACT" means the INCOME TAX ACT (Canada) and the regulations thereunder;
"TAX PROPOSALS" means all specific proposals to amend the Tax Act publicly
announced by or on behalf of the Minister of Finance (Canada) prior to the date
hereof;
"TECK" means Teck Cominco Limited, a corporation existing under the CBCA;
"TRUSTEES" means the trustees of the Canadian Coal Trust to be elected or
appointed pursuant to the Declaration of Trust;
"TSX" means the Toronto Stock Exchange;
"UNITHOLDERS" means, at any time, the holders at that time of one or more
Units as shown on the register for the Units;
"UNITS" means the trust units of the Canadian Coal Trust, each trust unit
representing an equal undivided beneficial interest therein;
"U.S." or "UNITED STATES" means the United States of America;
"U.S. 1940 ACT" means the United States INVESTMENT COMPANY ACT OF 1940, as
amended;
"U.S. FORWARDING AGENT" means Mellon Investor Services, LLC at the offices
specified in the Letter of Transmittal and Election Form and on the last page of
this document;
"U.S. PERSON" has the meaning given in Regulation S to the United States
SECURITIES ACT OF 1933, as amended, except in the section of Appendix B entitled
"Risk Factors -- The U.S. Embargo and the Helms-Burton Act", where it has the
meaning as defined in that section; and
"WESTSHORE" means Westshore Terminals Income Fund, an open-ended trust
existing under the laws of British Columbia.
55
EXCHANGE RATES
In this document, unless otherwise indicated, all dollar amounts are
expressed in Canadian dollars. The following table reflects the low and high
rates of exchange for one Canadian dollar, expressed in United States dollars,
in effect during the periods noted, the rates of exchange at the end of such
periods and the average rates of exchange during such periods, based on the Bank
of Canada average noon spot rate of exchange.
Year Ended December 31,
------------------------------------------------------------------------------------------------
Nine Months Ended
September 30, 2002 2001 2000 1999 1998 1997 1996 1995
------------------- -------- -------- -------- -------- -------- -------- --------
U.S.$ U.S.$ U.S.$ U.S.$ U.S.$ U.S.$ U.S.$ U.S.$
Low for the period...... 0.6199 0.6242 0.6413 0.6537 0.6343 0.6948 0.7215 0.7025
High for the period..... 0.6618 0.6695 0.6973 0.6929 0.7105 0.7489 0.7515 0.7529
Rate at the end of the
period................ 0.6306 0.6279 0.6666 0.6929 0.6534 0.6997 0.7301 0.7325
Average noon spot rate
for the period........ 0.6369 0.6460 0.6736 0.6731 0.6750 0.7225 0.7334 0.7287
2002
----------------------------------------------------------------
November October September August July June
-------- -------- --------- -------- -------- --------
U.S.$ U.S.$ U.S.$ U.S.$ U.S.$ U.S.$
Low for the month............................ 0.6289 0.6273 0.6306 0.6276 0.6303 0.6452
High for the month........................... 0.6439 0.6409 0.6434 0.6443 0.6603 0.6618
Rate at the end of the month................. 0.6388 0.6409 0.6306 0.6415 0.6312 0.6585
Average noon spot rate for the month......... 0.6364 0.6338 0.6346 0.6378 0.6470 0.6530
On December 13, 2002, the Bank of Canada noon spot rate of exchange was
U.S.$1.00 = Cdn.$1.5602. On December 13, 2002, the inverse of the noon buying
rate of exchange, as reported by the Bank of Canada, was Cdn.$1.00 =
U.S.$0.6409.
56
CONSENT OF TORYS LLP
TO: Sherritt Coal Acquisition Inc.
AND TO: The Board of Directors of Sherritt Coal Acquisition Inc.
We hereby consent to the reference to our opinion contained under
Section 19 of the Circular, "Canadian Federal Income Tax Considerations", under
the heading "Eligibility for Investment" in Appendix A to the Circular and under
the heading "Certain Canadian Federal Income Tax Considerations" in Appendix A
to the Circular, pursuant to the Enhanced Offer dated December 16, 2002 by
Sherritt Coal Acquisition Inc. to the holders of Shares of Fording Inc., which
is also part of the Registration Statement under the UNITED STATES SECURITIES
ACT OF 1933, as amended, of Sherritt International Corporation and the Canadian
Coal Trust filed with the Securities and Exchange Commission, and any amendments
thereto.
Toronto, Canada (Signed) TORYS LLP
December 16, 2002
57
CONSENT OF MAYER, BROWN, ROWE & MAW
TO: Sherritt Coal Acquisition Inc.
AND TO: The Board of Directors of Sherritt Coal Acquisition Inc.
We hereby consent to the reference to our opinion contained under
Section 20 of the Circular, "United States Federal Income Tax Considerations",
and under the heading "Certain Federal Income Tax Considerations -- Certain
United States Federal Income Tax Considerations" in Appendix A to the Circular,
pursuant to the Enhanced Offer dated December 16, 2002 by Sherritt Coal
Acquisition Inc. to the holders of Shares of Fording Inc., which is also part of
the Registration Statement under the UNITED STATES SECURITIES ACT OF 1933, as
amended, of Sherritt International Corporation and the Canadian Coal Trust filed
with the Securities and Exchange Commission, and any amendments thereto.
Chicago, Illinois (Signed) MAYER, BROWN, ROWE & MAW
December 16, 2002
58
CONSENT OF NORWEST CORPORATION
TO: Sherritt Coal Acquisition Inc.
AND TO: The Board of Directors of Sherritt Coal Acquisition Inc.
We hereby consent to the reference to our firm under the heading "Summary of
Distributable Cash Flows of the Canadian Coal Trust" appearing in Appendix A
to the Circular and to our "Independent Opinion of Norwest Corporation Regarding
Line Creek Mine Plan and Cost Estimates" appearing in Appendix D to the
Circular, pursuant to the Enhanced Offer dated December 16, 2002 by Sherritt
Coal Acquisition Inc. to the holders of Shares of Fording Inc., which is also
part of the Registration Statement under the UNITED STATES SECURITIES ACT OF
1933, as amended, of Sherritt International Corporation and the Canadian Coal
Trust filed with the Securities and Exchange Commission, and any amendments
thereto.
Calgary, Alberta (Signed) NORWEST CORPORATION
December 16, 2002
59
APPROVAL AND CERTIFICATE OF SHERRITT COAL ACQUISITION INC.
DATED: December 16, 2002
The contents of the Original Offer and the Enhanced Offer have been
approved, and the sending, communication or delivery thereof to the Shareholders
of Fording Inc. has been authorized by the Board of Directors of Sherritt Coal
Acquisition Inc. The foregoing contains no untrue statement of a material fact
and does not omit to state a material fact that is required to be stated or that
is necessary to make a statement not misleading in the light of the
circumstances in which it was made. In addition, the foregoing does not contain
any misrepresentation likely to affect the value or the market price of the
Shares which are the subject of the Enhanced Offer.
SHERRITT COAL ACQUISITION INC.
(Signed) DENNIS G. MASCHMEYER (Signed) JOWDAT WAHEED
President and Senior Vice President and
Chief Executive Officer Chief Financial Officer
On behalf of the Board of Directors
(Signed) TREVOR M. APPERLEY (Signed) SAMUEL W. INGRAM, Q.C.
Director Director
60
FOR FURTHER INFORMATION OR ADDITIONAL COPIES OF THIS DOCUMENT, THE LETTER OF
TRANSMITTAL AND ELECTION FORM OR THE NOTICE OF GUARANTEED DELIVERY PLEASE
CONTACT:
THE DEPOSITARY FOR THE ENHANCED OFFER IS:
CIBC MELLON TRUST COMPANY
BY MAIL
P.O. Box 1036
Adelaide Street Postal Station
Toronto, Ontario
M5C 2K4
BY HAND OR BY COURIER
199 Bay Street
Commerce Court West
Securities Level
Toronto, Ontario
M5L 1G9
Telephone: (416) 643-5500
Toll Free: 1-800-387-0825
E-mail: inquiries@cibcmellon.com
HALIFAX MONTREAL
1660 Hollis Street 2001 University Street
Centennial Building, Suite 406 16th Floor
Halifax, NS Montreal, PQ
B3J 1V7 H3A 2A6
CALGARY VANCOUVER
600 The Dome Tower 1066 West Hastings Street
333 - 7th Ave. S.W., 6th Floor 16th Floor
Calgary AB Vancouver, BC
T2P 2Z1 V6E 3X1
THE U.S. FORWARDING AGENT FOR THE ENHANCED OFFER THE INFORMATION AGENT FOR THE ENHANCED OFFER IS:
IS: INNISFREE M&A INCORPORATED
MELLON INVESTOR SERVICES, LLC
BY HAND OR BY COURIER 501 Madison Avenue
120 Broadway Street 20th Floor
13th Floor New York, New York
New York, New York 10022
10271
Telephone: 1-877-750-5837 (English speakers)
1-877-750-9499 (French speakers)
Banks and Brokers Call Collect: (212) 750-5833
THE DEALER MANAGERS FOR THE ENHANCED OFFER IN CANADA ARE:
National Bank Financial Inc. BMO Nesbitt Burns Inc.
Telephone: (416) 869-3707 Telephone: (416) 359-8137
ANY QUESTIONS AND REQUESTS FOR ASSISTANCE MAY BE DIRECTED
TO THE DEALER MANAGERS, THE DEPOSITARY, THE U.S. FORWARDING AGENT OR THE
INFORMATION AGENT
AT THEIR RESPECTIVE TELEPHONE NUMBERS AND LOCATIONS SET OUT ABOVE.
APPENDIX A
INFORMATION CONCERNING THE CANADIAN COAL TRUST
THE CANADIAN COAL TRUST
TABLE OF CONTENTS
Page
--------
NOTICE...................................................... A-5
OVERVIEW.................................................... A-5
General................................................... A-5
Structure................................................. A-5
Anticipated Transactions.................................. A-6
Business of the MetCoal Company........................... A-7
GREATER POTENTIAL FOR THE METCOAL COMPANY................... A-7
Increased Efficiency of Existing Mine Operations.......... A-8
More Efficient Use of Terminal Handling Facilities........ A-8
More Efficient Use of Rail Transportation and Reduced
Vessel Demurrage Charges................................ A-9
Superior Product Offering................................. A-9
Potential Tax Savings..................................... A-9
INDUSTRY OVERVIEW........................................... A-9
Coal Industry Overview.................................... A-9
Wollastonite and Tripoli Industry Overview................ A-13
OVERVIEW OF THE METCOAL COMPANY............................. A-14
Principal Properties and Facilities....................... A-14
Coal and Other Reserves................................... A-18
Employees and Labour Relations............................ A-22
Capital Expenditures...................................... A-22
Law and Regulation........................................ A-23
Canadian Environmental Matters............................ A-24
United States Environmental Matters....................... A-27
SELECTED INFORMATION FOR FORDING'S MOUNTAIN OPERATIONS AND
FORDING'S INDUSTRIAL MINERALS OPERATIONS.................. A-29
REVIEW OF FINANCIAL RESULTS OF FORDING'S MOUNTAIN OPERATIONS
AND FORDING'S INDUSTRIAL MINERALS OPERATIONS.............. A-30
Results of Operations..................................... A-30
Capital Expenditures...................................... A-32
SELECTED INFORMATION FOR THE MET COAL ASSETS................ A-32
REVIEW OF FINANCIAL CONDITION OF THE MET COAL ASSETS........ A-33
Overview.................................................. A-33
Results of Operations..................................... A-34
SELECTED INFORMATION FOR THE LUSCAR MINE.................... A-36
REVIEW OF FINANCIAL CONDITION OF THE LUSCAR MINE............ A-37
Overview.................................................. A-37
Results of Operations..................................... A-37
SUMMARY OF DISTRIBUTABLE CASH OF CANADIAN COAL TRUST........ A-38
A-2
Page
--------
DIRECTORS, MANAGEMENT AND TRUSTEES.......................... A-40
Trustees and Executive Officers of Canadian Coal Trust.... A-40
Directors and Executive Officers of Sherritt Coal
Acquisition Inc......................................... A-40
Governance of Canadian Coal Trust......................... A-41
Governance of Sherritt Coal Acquisition Inc............... A-41
Remuneration of Trustees of Canadian Coal Trust and
Directors of Sherritt Coal Acquisition Inc.............. A-42
Insurance Coverage for Canadian Coal Trust, Sherritt Coal
Acquisition Inc. and Related Entities and
Indemnifications........................................ A-42
Management Agreement for SCAI and its Subsidiaries........ A-42
Administration Agreement for Canadian Coal Trust.......... A-44
FUNDING, ACQUISITION AND RELATED TRANSACTIONS............... A-45
Credit Arrangements of Sherritt Coal Acquisition Inc. and
the MetCoal Company..................................... A-45
Acquisition of SCAI Securities............................ A-45
MetCoal Company and Related Matters....................... A-46
THE CANADIAN COAL TRUST..................................... A-48
Activities of Canadian Coal Trust......................... A-48
Units..................................................... A-49
Issuance of Units......................................... A-49
Trustees.................................................. A-50
Cash Distributions........................................ A-51
Redemption Right.......................................... A-52
Meetings of Unitholders................................... A-53
Limitation of Non-Resident Ownership...................... A-54
Amendments to Trust....................................... A-54
Term of Trust............................................. A-55
Take-over Bids............................................ A-56
Exercise of Certain Voting Rights Attached to Securities
of Sherritt Coal Acquisition Inc........................ A-56
Information and Reports................................... A-56
Unitholder Liability Protection Measures.................. A-57
Book-Entry Only System.................................... A-58
Listing of Units.......................................... A-58
EXCHANGE RIGHTS............................................. A-59
General................................................... A-59
Terms of the Exchange Rights.............................. A-59
Limitation of Non-Resident Ownership...................... A-61
Listing................................................... A-61
Exchange Agent............................................ A-61
CONSOLIDATED CAPITALIZATION OF THE CANADIAN COAL TRUST...... A-62
SHARE AND LOAN CAPITAL OF SHERRITT COAL ACQUISITION INC..... A-62
Distribution Policy....................................... A-62
SCAI Shares............................................... A-62
SCAI Notes and Subordination.............................. A-63
Conversion Agreement...................................... A-65
Shareholders Agreement.................................... A-65
SHARE AND LOAN CAPITAL OF THE METCOAL COMPANY............... A-66
Distribution Policy....................................... A-66
RISK FACTORS................................................ A-67
Risks Related to the MetCoal Company's Business and
Industry................................................ A-67
Risks Related to Structure of Canadian Coal Trust......... A-74
A-3
Page
--------
CERTAIN CANADIAN FEDERAL INCOME TAX CONSIDERATIONS.......... A-77
Holders Resident in Canada................................ A-77
Holders Not Resident in Canada............................ A-81
CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS.............. A-82
Consequences of Exchanging Exchange Rights for Units...... A-82
U.S. Federal Income Taxation of Dividends................. A-83
U.S. Taxation of Capital Gains............................ A-83
Controlled Foreign Corporation and Foreign Personal
Holding Company Rules................................... A-84
Passive Foreign Investment Company Rules.................. A-84
Backup Withholding........................................ A-84
ELIGIBILITY FOR INVESTMENT.................................. A-85
MATERIAL CONTRACTS.......................................... A-85
LEGAL MATTERS............................................... A-85
LEGAL PROCEEDINGS........................................... A-86
AUDITORS, EXCHANGE AGENT, TRANSFER AGENT AND REGISTRAR...... A-86
GLOSSARY OF MINING TERMS.................................... A-87
A-4
NOTICE
INFORMATION CONCERNING FORDING, TECK AND WESTSHORE (INCLUDING
FORWARD-LOOKING STATEMENTS) CONTAINED IN THE ENHANCED OFFER AND CIRCULAR,
INCLUDING THIS APPENDIX A, HAS BEEN TAKEN FROM OR IS BASED UPON PUBLICLY
AVAILABLE DOCUMENTS OR RECORDS ON FILE WITH SECURITIES REGULATORY AUTHORITIES
AND OTHER PUBLIC SOURCES. ALTHOUGH THE OFFEROR HAS NO KNOWLEDGE THAT WOULD
INDICATE THAT ANY STATEMENTS CONTAINED HEREIN THAT ARE TAKEN FROM OR BASED UPON
THOSE DOCUMENTS AND RECORDS OR OTHER PUBLIC SOURCES ARE UNTRUE OR INCOMPLETE,
THE OFFEROR DOES NOT ASSUME AND EXPRESSLY DISCLAIMS ANY RESPONSIBILITY FOR THE
ACCURACY OR COMPLETENESS OF THE INFORMATION TAKEN FROM OR BASED UPON THOSE
DOCUMENTS, RECORDS AND OTHER PUBLIC SOURCES OR FOR ANY FAILURE BY FORDING, TECK
AND WESTSHORE TO DISCLOSE PUBLICLY EVENTS OR FACTS WHICH MAY HAVE OCCURRED OR
WHICH MAY AFFECT THE SIGNIFICANCE OR ACCURACY OF ANY SUCH INFORMATION, BUT WHICH
ARE UNKNOWN TO THE OFFEROR.
FOR MORE COMPLETE DISCLOSURE OR FOR FURTHER INFORMATION ON FORDING, TECK AND
WESTSHORE, REFERENCE SHOULD BE MADE TO THE PUBLICLY AVAILABLE DOCUMENTS AND
RECORDS ON FILE WITH SECURITIES REGULATORY AUTHORITIES FOR EACH OF FORDING, TECK
AND WESTSHORE, AS APPLICABLE.
UNLESS OTHERWISE INDICATED, ALL AMOUNTS IN THIS APPENDIX A ARE STATED IN
CANADIAN DOLLARS. CERTAIN CAPITALIZED WORDS AND OTHER TERMS USED IN THIS
APPENDIX A BUT NOT DEFINED SHALL HAVE THE SAME MEANINGS HEREIN AS IN THE
ENHANCED OFFER TO WHICH THIS APPENDIX A IS ATTACHED.
OVERVIEW
GENERAL
The Canadian Coal Trust has been established to allow Fording Shareholders
to maintain an interest in the business of Fording which the Offeror intends to
enhance through the acquisition of certain selected metallurgical coal assets of
Luscar and CONSOL and the disposition or monetization of Fording's thermal coal
assets. The Canadian Coal Trust has been structured as an income fund trust to
allow its Unitholders to receive maximum value from the significant cash flows
that are expected to be generated by the MetCoal Company.
To acquire an interest in the Canadian Coal Trust, Fording Shareholders must
elect to receive Exchange Rights for their Fording Shares deposited under the
Enhanced Offer. Each Exchange Right will be automatically exchanged for one Unit
of the Canadian Coal Trust on the Date of the Exchange. On the 10th business day
following the Date of Exchange, the Canadian Coal Trust will pay to all
Unitholders of record on the Date of Exchange, for each Unit held (net of
applicable withholding taxes), a cash distribution, calculated from the first
Take Up and Pay Date up to but excluding the Date of Exchange, in an amount
accruing daily at the rate of $1.05 per calendar quarter per Unit.
STRUCTURE
Upon completion of the Fording Acquisition, the Offeror will cause Fording
to be amalgamated under the CBCA with a wholly-owned subsidiary of the Offeror.
The resulting corporation will be the MetCoal Company. The Canadian Coal Trust
together with the Partnership will hold an indirect interest in the MetCoal
Company. The Canadian Coal Trust's sole assets will be its indirect interest in
the MetCoal Company and, accordingly, it will be entirely dependent on the
operations and financial condition of the MetCoal Company. The proportionate
interests of the Canadian Coal Trust and the Partnership in the MetCoal Company
will be dependent upon the percentage of Shares held by Shareholders who elect
to receive Exchange Rights in consideration for their Shares deposited under the
Enhanced Offer, and initially for the Canadian Coal Trust will not be less than
52.8% or more than 82.5%, before the acquisition of the Met Coal Assets or
exercise of the Luscar Put. Giving effect to the acquisition of the Met Coal
Assets, but excluding the exercise of the Luscar Put, the equivalent percentages
for the Canadian Coal Trust will be not less than 57.6% and not more than 84.3%
and for the Partnership will be not less than 15.7% and not more than 42.4%.
Except as otherwise noted or as the context requires, all information in
this Appendix A assumes the MetCoal Company exists and has completed the
acquisition of the Met Coal Assets, but that the Luscar Put has not been
exercised.
A-5
The diagram below illustrates the structure after the Date of Exchange
(before the exercise of the Luscar Put):
[GRAPHIC]
ANTICIPATED TRANSACTIONS
In order to focus the operation of the MetCoal Company on metallurgical
coal, to realize the synergies, cost savings and benefits outlined in this
Circular, and to reduce indebtedness and capital expenditure commitments in the
MetCoal Company, the MetCoal Company intends:
- to acquire the Met Coal Assets from Luscar and CONSOL; and
- to enter into transactions that will result in the MetCoal Company not
having a material economic participation in Fording's thermal coal assets
and such economic participation being held by the Partnership, Luscar
and/or their affiliates.
Subject to obtaining any required regulatory and third party consents, the
MetCoal Company will cease to have a material economic participation in those
thermal assets from the first Take Up and Pay Date. The proceeds of these
transactions will be used to repay a portion of the outstanding indebtedness of
Fording, to terminate existing currency hedge arrangements and to pay the break
fees under the Fording-Teck Combination. As at September 30, 2002, the aggregate
outstanding indebtedness of Fording, including costs in respect of the proposed
Fording plans of arrangement was approximately $166 million. Currency hedge
arrangement cancellation costs are estimated at $115 million and break fees
payable are $51 million. Approximately $90 million of the above amounts are
expected to be financed from borrowings under the bridge loans described in
Section 15 of the Circular, "Source of Funds".
The Offeror and Luscar and CONSOL have agreed in principle that effective on
the date on which the Offeror acquires 66 2/3% of the Shares, the MetCoal
Company will acquire for the aggregate consideration of 5.9 million Units of the
Canadian Coal Trust a 100% interest in the Line Creek mine, a 100% interest in
the undeveloped Cheviot mine project and a 46.4% interest in Neptune Bulk
(Canada) Terminals Ltd. ("Neptune Terminals") (collectively, the "Met Coal
Assets"), subject to settlement of definitive documentation and certain
conditions, including obtaining certain required consents, which are expected to
be received by the Offeror prior to the completion of the Fording Acquisition.
This agreement in principle also provides Luscar and CONSOL with the right to
require the MetCoal Company to acquire for the aggregate consideration of
500,000 Units of the Canadian Coal Trust a 100% interest in the Luscar mine
(excluding pre-existing reclamation liabilities) within 30 days after the date
on which the Canadian Coal Trust becomes a reporting issuer in Canada (the
"Luscar Put"). Furthermore, under the terms of this agreement in principle, on
the Date of Exchange, the
A-6
Partnership has agreed to nominate a representative of CONSOL as a Trustee and
as a director of SCAI. See "Funding, Acquisition and Related
Transactions -- MetCoal Company and Related Matters" in this Appendix A. Luscar
Coal Ltd. and Luscar Ltd. (collectively referred to herein as "Luscar") are
indirect subsidiaries of Sherritt and OTPP. As a result, Luscar is a related
party to the Offeror, the Partnership, Sherritt and OTPP.
Following the acquisition of the Met Coal Assets by the MetCoal Company and
assuming the exercise of the Luscar Put, each of Luscar and CONSOL will own
approximately 3.2 million Units of the Canadian Coal Trust, representing
approximately 5.5% of the outstanding Units, including the issuance of Units
upon exchange of the Partnership's interest in SCAI Shares and SCAI Series B
Notes for Units of the Canadian Coal Trust. See "Share and Loan Capital of
Sherritt Coal Acquisition Inc. -- Conversion Agreement" in this Appendix A.
BUSINESS OF THE METCOAL COMPANY
The metallurgical and other assets of the MetCoal Company will consist of
the following:
- all of Fording's mountain operations including the Fording River mine, the
Greenhills mine and the Coal Mountain mine;
- all of Fording's industrial minerals operations;
- a 100% interest in the Line Creek mine;
- a 100% interest in the undeveloped Cheviot mine project;
- a 46.4% interest in Neptune Terminals; and
- the coal and mineral reserves and resources related to the above
metallurgical and mineral properties.
If the Luscar Put is exercised by Luscar and CONSOL, the MetCoal Company
will be required to acquire a 100% interest in the Luscar mine within 30 days
after the date on which the Canadian Coal Trust becomes a reporting issuer.
After giving effect to the Enhanced Offer and the contemplated asset
transfers associated with it, the MetCoal Company will be the largest
metallurgical coal producer in Canada and the second largest exporter of
seaborne metallurgical coal in the world. The MetCoal Company will sell its
metallurgical coal to a diversified customer base primarily in the Pacific Rim,
South America, the United States, Europe and Canada. Over 90% of the MetCoal
Company's revenue is expected to be generated from the sale of metallurgical
coal.
The MetCoal Company will have proven and probable coal reserves in western
Canada that will last for more than 20 years based on 2001 production from its
four operating mines. The MetCoal Company will also own the Cheviot mine project
which, the Offeror believes, represents the most significant potential to expand
high quality metallurgical coal production in Canada. Further, through its
ownership of Fording's industrial minerals operations, the MetCoal Company will
be the world's largest producer of wollastonite. Upon completion of the Fording
Acquisition, the Offeror currently intends to examine possible value
optimization alternatives for Fording's industrial minerals operations. See
"Overview of the MetCoal Company -- Principal Properties and Facilities" and
"Overview of the MetCoal Company -- Coal and Other Reserves" in this
Appendix A.
GREATER POTENTIAL FOR THE METCOAL COMPANY
The Offeror believes that the metallurgical coal assets and associated
operations of Fording and the Met Coal Assets are complementary and that the
combination thereof will provide the MetCoal Company with capabilities and
resources that are better positioned to succeed in the highly competitive global
metallurgical coal market. Generally, the combination is expected to enhance the
profitability and growth prospects of the MetCoal Company by generating
significant operating efficiencies from a larger base of mining operations and
port facilities. The Offeror expects the combination of Fording and the Met Coal
Assets to generate cost savings of approximately $50 million annually, plus
additional marketing and coal blending synergies. The Offeror
A-7
believes the most significant benefits of the combination of the metallurgical
coal assets and operations of Fording and the Met Coal Assets are as follows:
INCREASED EFFICIENCY OF EXISTING MINE OPERATIONS
The Fording metallurgical coal assets and the Line Creek mine included in
the Met Coal Assets are in close proximity to each other in the Elk Valley
region in southeastern British Columbia. See map below. The combination of these
metallurgical coal assets will allow the MetCoal Company to share contiguous
production, management and infrastructure, optimize production from lower cost
reserves, provide superior coal blending capability, enhance the production of
higher quality reserves and achieve lower costs on certain goods, services and
equipment through purchasing efficiencies. The Line Creek mine is contiguous
with the Greenhills mine and the Fording River mine, whereas Teck's Elkview mine
is not. By combining the metallurgical coal reserves held by Fording and the
Line Creek mine, the MetCoal Company may be able to extend the life of Fording's
existing mines beyond their current planned closure dates.
[GRAPHIC]
MORE EFFICIENT USE OF TERMINAL HANDLING FACILITIES
The MetCoal Company expects to sell a greater proportion of its coal to
overseas customers through bulk handling facilities on the Canadian west coast
at Neptune Terminals, in which the MetCoal Company will own a 46.4% interest. In
addition the MetCoal Company intends to continue shipping a significant amount
of its coal through Westshore, which shall remain an important bulk handling
facility for the MetCoal Company. By agreement with the other shareholders of
Neptune Terminals, rates charged for the handling of coal and other products are
based on the actual costs allocated to the handling of each product. As a
result, it is anticipated that the port costs allocated to the MetCoal Company's
shipments through Neptune Terminals will be significantly lower than commercial
rates charged by Westshore. Fording currently ships to all of its overseas
customers through Westshore under three contracts, two of which have expired or
will expire before the end of 2002. The incremental cost of throughput at
Neptune Terminals, including ancillary rail charges, is approximately $2.50 per
A-8
tonne, which is less than half of the average coal loading revenue of $5.75 per
tonne realized by Westshore during the first nine months of 2002. During 2002,
the Line Creek mine has reduced its port costs by increasing shipments through
Neptune Terminals. Neptune Terminals currently has the capacity to handle an
additional 4.0 million tonnes of coal in 2003 and, with modest capital
expenditures, increase its capacity by a further 4.0 million tonnes. The MetCoal
Company will also continue to have access to Westshore under existing contracts.
Having access to both terminals will provide the MetCoal Company with
significant flexibility, including the ability to continue shipping coal in the
event of disruptions at either terminal facility.
MORE EFFICIENT USE OF RAIL TRANSPORTATION AND REDUCED VESSEL DEMURRAGE CHARGES
Rail transportation is one of the largest costs incurred in the delivery of
coal to customers. It is expected that the combination of the Met Coal Assets
and Fording will allow for more efficient scheduling of rail cars and will
optimize the movement of coal and deliveries to customers. It is also expected
that the increased use of Neptune Terminals will allow the MetCoal Company to
reduce vessel demurrage charges that result from port congestion.
SUPERIOR PRODUCT OFFERING
Steel makers blend a wide range of metallurgical coals to provide the
optimum chemical and physical characteristics of coke for their specific
circumstances while minimizing their costs. Coals within a mine site and between
differing mines can have significantly varying characteristics. The MetCoal
Company will have a greater degree of flexibility in blending coals to better
meet a broader range of customer specifications and, accordingly, will have
greater opportunities to broaden its customer base and increase revenues.
POTENTIAL TAX SAVINGS
As at December 31, 2001, the Line Creek mine had a $307.2 million cumulative
provincial mineral tax cost pool which could be used to reduce the amount of
provincial mineral taxes currently paid at Fording's mines, which amounted to
$18.4 million in 2001 and $15.5 million through the nine months ending
September 30, 2002.
INDUSTRY OVERVIEW
COAL INDUSTRY OVERVIEW
Coal is the world's most abundant fossil fuel and is more evenly distributed
throughout the world than other fossil fuels. The World Coal Institute estimates
that world production of coal in 2001 was approximately 4.7 billion tonnes.
Although 87% of world coal production is consumed in the country in which it is
produced, the remaining 13% represents one of the largest volumes of world trade
for a single commodity. Coal that is sold in the export markets is typically of
higher value than coal sold in regional markets due to the fact the cost of
transporting coal from mine to customer can be large relative to the value of
the coal itself.
Coal is generally classified according to its heat content as either
lignite, bituminous, subbituminous or anthracite. Lignite has the lowest heat
content and anthracite the highest. Most coals are used primarily for their
heating characteristics in the production of electricity, steam and process
heat. Certain types of bituminous coals are also classified as metallurgical
coals. Metallurgical coal that is used primarily for its chemical, physical and
heating characteristics is an important ingredient in the steel manufacturing
process and is typically sold at higher prices than thermal coal due to its
special characteristics. Metallurgical coal is less abundant than thermal coal
and is produced for export primarily in Australia, Canada, the United States and
China.
STEEL INDUSTRY
The primary production processes for steel include integrated steel mills
(illustrated below), electric arc scrap recovery mills and some newer
technologies, which directly reduce iron to steel. Integrated steel mills, which
account for approximately 70% of global steel production, are the primary users
of metallurgical coal.
Integrated steel mills use coal in blast furnaces in the form of coke or as
a direct input known as pulverized coal injection. Coke, made from metallurgical
coal, provides heat and carbon to convert iron ore to liquid pig iron. Due to
its porous nature and strength at elevated temperatures, coke provides critical
support for the blast
A-9
furnace charge throughout the blast furnace process. It is important for the
performance of the blast furnace and the quality of the final steel product that
the coke have low levels of impurities such as ash, sulphur and phosphorus, and
that it retain its hardness and strength inside the blast furnace. Metallurgical
coals that retain their hardness through the coking process are also referred to
as hard coking coals. The volume of metallurgical coal used in coke ovens is
relatively stable from year to year because coke oven batteries are operated
continuously from the time they are put into operation until they are
decommissioned several decades later. Coal utilized for pulverized coal
injection is generally derived from less expensive coals, which tend to be
priced relative to thermal coals. These coals provide a source of heat and
carbon for the steel-making process but cannot be used to make coke.
The following schematic outlines how steel is produced in a typical
integrated steel mill:
[GRAPHIC]
--------------------------
Source: Barlow Jonker Pty. Limited
Coke quality is driven by the technical requirements of blast furnaces,
which have increasingly focused on coke strength. Because of their individual
operating circumstances, each integrated steel mill requires a unique blend of
metallurgical coal. The blending of coals used by individual integrated steel
mills is a complex task focused on achieving the required coke quality,
including reducing impurities such as sulphur and phosphorus, at the lowest
cost.
Coal blends for coke making are generally a combination of low, mid and high
volatile coking coals. All three of these types of coal are also hard coking
coals as coke made from them retains its hardness and strength inside blast
furnaces. Low volatile coking coals generally attract the highest price and are
exported primarily from Australia and the United States. Most Canadian hard
coking coals are mid volatile and compete primarily with Australian coals for
inclusion in the coke blend. Australia and the United States are the primary
exporters of high volatile coking coal. Weak coking coals, which generally
attract the lowest price, are often included in coking coal blends to reduce the
cost of producing coke. Australia and China are the dominant suppliers of weak
coking coal, although a weak coking coal product has been sold from the Coal
Mountain mine in the past.
The Offeror believes that the combined Fording and mines included in the Met
Coal Assets will provide a wider selection of coal qualities to meet customer
needs for mid volatile coals in the making of high quality coke. This can be
expected to create increased sales opportunities with certain export customers.
Additionally, the Offeror believes that steel mills will value the low sulphur
content and the low phosphorous content of the metallurgical coals to be
produced at the Cheviot mine project.
METALLURGICAL COAL MARKET
The metallurgical coal market is influenced by crude steel production, which
is largely dependent on the overall state of the global economy. Crude steel
production from integrated steel mills has experienced slow, steady growth of
approximately 1.8% per annum over the last decade. From 1997 to 2000, worldwide
steel consumption grew at an average rate of 2.3% per annum according to Barlow
Jonker Pty. Limited. The
A-10
corresponding growth in crude steel production has been 1.5% per annum, and in
pig iron production 1.3% per annum. Although there are fluctuations in the total
amount of steel produced worldwide, the amount of steel produced by the
integrated steel mill process has been relatively stable. In turn, the volume of
metallurgical coal used in this process has not generally experienced the same
variability as total steel production, and the Offeror expects that over the
near term, such stability of demand will continue.
An October 2002 forecast by the International Iron and Steel Institute,
medium case, projects 2.9% per annum growth in steel consumption through 2006.
On the basis of this forecast, the Offeror believes there will be stable ongoing
demand for metallurgical coals of the type that will be produced by the MetCoal
Company.
The main markets for the metallurgical coals produced by the MetCoal Company
will be those steel-producing countries that must import coal by means of
seaborne vessels, primarily Japan, Korea and other Pacific Rim countries, and
South America and western European countries. The major countries that export
metallurgical coal to this seaborne metallurgical coal market are Australia,
Canada, the eastern United States and China.
In addition to the seaborne metallurgical coal market, the MetCoal Company
will also supply metallurgical coal to steel mills in the Great Lakes area of
the United States and Canada in competition with United States coal producers.
The Offeror believes the MetCoal Company will be competitive in these markets
due, in part, to the specific metallurgical characteristics of the coal required
by these steel mills, the low exchange value of the Canadian dollar and the
depletion of comparable coal supplies from the United States.
Seaborne trade of metallurgical coals, including hard coking coal, is
estimated by Barlow Jonker Pty. Limited to have been 193.0 million tonnes during
2001. The following chart shows the market share of seaborne trade of
metallurgical coal for each supply region during 2001:
SUPPLY REGIONS AND RELATIVE VOLUMES OF SEABORNE METALLURGICAL COAL IN 2001
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
AUSTRALIA 56%
Canada 14%
USA 12%
Other 8%
China 6%
Russia 3%
Poland 1%
--------------------------
Source: Barlow Jonker Pty. Limited
Australia is the dominant exporter of metallurgical coal, supplying
106.0 million tonnes or 56% of the total seaborne market in 2001. Australian
mines produce competitive, high quality metallurgical coals, including a
dominant share of low volatile coking coals that are in favour with many coal
buyers. Australia also supplies significant quantities of mid volatile coking
coals and semi-soft coking coals. Australian metallurgical coal producers have
benefited from the significant decline in the value of the Australian dollar
relative to the
A-11
Canadian dollar and from their relative short overland transportation distance
to port facilities. Canada is the second largest exporter of metallurgical coal
with a 14% share of the seaborne market in 2001. Most of Canada's exports are
mid volatile coking coals produced by mines situated in mountainous regions more
than 1,000 kilometres from port facilities.
Metallurgical coal exports from the United States decreased from
44.0 million tonnes in 1998 to 23.0 million tonnes in 2001. These exports are
predominantly low volatile and high volatile coking coals and are generally very
expensive. Metallurgical coals produced in the United States are no longer
widely sold in Asia.
During 2001, China supplied 6% of worldwide metallurgical coal exports,
almost double its 2000 exports. These exports were primarily semi-soft coking
coals and pulverized coal injection coals for which Chinese producers have a
competitive cost structure. The Offeror does not expect Chinese exports of hard
coking coal to increase significantly in the near future due to expansions in
China's pig iron production.
According to the recent study from Barlow Jonker Pty. Limited, it is
estimated that there will be an 11 million tonne net increase in hard coking
coal export capacity over the next five years, principally from Australia, China
and the former Soviet Union countries. This forecast increase in net production
includes output from the Cheviot mine project.
Large international mining companies, which can supply multiple types of
coal from several mines are increasingly dominating the seaborne market. These
include BHP Billiton Limited and BHP Billiton plc, Mitsubishi, China National
Coal Industry Import & Export (Group) Corporation, Anglo American plc,
Rio Tinto Limited, Xstrata plc and M.I.M. Holdings Limited. These companies
compete on the basis of price, quality and long-term deliverability. The Offeror
believes the MetCoal Company, with the combined metallurgical coal assets of
Fording and the mines included in the Met Coal Assets, will form a stronger,
more viable competitor in the seaborne metallurgical coal market.
METALLURGICAL COAL PRICING
The sale of seaborne coking coal is typically governed under contracts that
fix the coal price for one year and require annual price negotiations. As
demonstrated by the chart below, metallurgical coal prices have been cyclical
for many years. Up until the year 2000, benchmark prices for Australian and
Canadian hard coking coals were negotiated with Japanese steel mills and there
was little variation in pricing amongst the coals that fell into the hard coking
coal category. Pricing in most other markets was negotiated annually between
individual buyers and sellers after Japanese price negotiations were finished.
Since 2001, Japanese hard coking coal buyers have been negotiating prices
individually and the influence on overall pricing by the Japanese steel industry
has diminished. The Offeror believes that 2002 pricing for Canadian coking coals
has been settled with Japanese customers at lower prices than for high quality
Australian mid volatile coking coals with the same customers. The Offeror
believes the wide pricing differential between hard coking coals and weak coking
coals is encouraging steel-makers to increase the use of weak coking coal at the
expense of hard coking coal. As illustrated below, for the first time in
20 years the pricing of hard coking coal and weak coking coal moved in different
directions in 2002.
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AUSTRALIAN COKING COAL CONTRACTS TO JAPAN
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
HARD COKING SEMI-SOFT
1984 $52.50 $39.50
1985 $52.50 $39.50
1986 $49.00 $37.25
1987 $44.00 $32.50
1988 $46.90 $36.90
1989 $50.40 $42.40
1990 $52.30 $44.20
1991 $51.30 $43.20
1992 $50.80 $42.20
1993 $48.80 $39.70
1994 $44.95 $36.40
1995 $50.60 $42.67
1996 $53.20 $43.87
1997 $53.20 $42.00
1998 $50.95 $37.90
1999 $41.90 $32.20
2000 $39.75 $30.60
2001 $42.75 $36.00
2002 $48.00 $33.00
--------------------------
Source: Barlow Jonker Pty. Limited
THERMAL COAL MARKETS
In addition to the seaborne metallurgical coal market, the MetCoal Company
will also sell smaller quantities of bituminous thermal coal, produced as a
co-product from metallurgical coal operations, to electric power utilities in
Asia and to industrial users in Canada.
Demand for Canadian export thermal coal is driven by coal-fired electricity
generation in the Pacific Rim. Demand for thermal coal has risen significantly
due to growth in coal-fired generating capacity in this region, which the
Offeror expects to continue. During 2001 and 2002, new supply from Chinese and
Australian producers caused intense competition from suppliers and an oversupply
in the market. Spot prices for export thermal coals decreased significantly as a
result and although these spot prices have increased in recent months, they
remain significantly lower than during 2001. Historically prices for export
thermal coal markets have been cyclical and Canadian suppliers have little
influence on pricing due to the limited volumes shipped. Export thermal coal
prices decreased by about 30% from 1997 to 2000 due to the Asian economic crisis
and increased export sales by Australian, Chinese and other producers. Prices in
Pacific Rim markets increased by approximately 20% in 2001 due to continued
growth in coal demand and delay in additional supply capacity from new mines.
WOLLASTONITE AND TRIPOLI INDUSTRY OVERVIEW
WOLLASTONITE
Wollastonite is a naturally occurring calcium silicate, which breaks down
during crushing and grinding into needle-shaped particles. The structure and
chemistry of wollastonite makes it useful as a functional additive in certain
applications. Wollastonite is used in ceramics, plastics, metallurgy, paints,
friction products and other applications. Wollastonite is also used in
adhesives, joint compounds, refractories, rubber and wallboard. Wollastonite ore
is mined using conventional open pit mining methods.
In light of its use as a replacement for man-made fibres and asbestos,
concern has been expressed regarding the health effects of wollastonite.
Numerous studies have demonstrated that wollastonite is a benign mineral, its
dust is highly biosoluble (meaning that inhaled dust will dissolve rapidly in
lung fluids) and it is non-fibrogenic
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(meaning that it is not conducive to lung scarring). Accordingly, wollastonite
has been classified as a Group 3 agent by the International Agency for Research
on Cancer ("IARC") meaning that it is not classifiable as to its carcinogenicity
to humans.
TRIPOLI
Tripoli is a naturally occurring mild abrasive that is used in a variety of
industries for sharpening, buffing and polishing purposes, such as commercial
polishes and automotive buffing compounds. It is also used as a filler in paint.
Tripoli deposits occur primarily in the southeastern United States, however,
some production has historically occurred in Spain and Portugal, and deposits
have been reported in Germany and France. Due in part to its dielectric physical
properties and chemical resistance, tripoli is becoming increasingly valuable to
the rubber and plastics resin industries. Tripoli has been classified as a Group
1 agent by the IARC.
OVERVIEW OF THE METCOAL COMPANY
PRINCIPAL PROPERTIES AND FACILITIES
The mines that will comprise the MetCoal Company are located in two
geographic areas, both of which are in the Canadian Rockies. The Fording River,
Greenhills, Coal Mountain and Line Creek mines are located in close proximity in
the Elk Valley in southeastern British Columbia. The Cheviot mine project and
the Luscar mine (which is subject to the Luscar Put) are located on the eastern
slopes of the Rocky Mountains, near Hinton, Alberta. Surface rights to mine
lands are either owned or leased from provincial governments or private owners
and the Offeror believes that all surface rights for current mining are in
place.
The following map shows the locations of the MetCoal Company's mines,
including the Luscar mine (which is subject to the Luscar Put):
[GRAPHIC]
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The mining operations at the five operating mines, including the Luscar mine
(which is subject to the Luscar Put), and, as planned, at the Cheviot mine
project are similar and well suited to the extraction of coal in mountainous
regions. Each of the existing mines uses large shovels and other loading
equipment to remove most of the overburden, which is hauled using large
rear-dump haul trucks. The Fording River mine also uses a large dragline in its
mining operations. Shovels and front-end loaders are used to load coal into
large haul trucks, for transportation directly to the nearby processing plant,
where it is crushed, cleaned and dried. The Line Creek mine also uses an 11
kilometre coal conveyor for transportation to the nearby processing plant. From
the processing plant, the coal is loaded onto trains for transport directly to
customers or to port facilities for further transportation by ship. Luscar and
CONSOL own all the equipment and facilities at the Line Creek mine, Cheviot mine
project and the Luscar mine (which is subject to the Luscar Put) and the Offeror
believes that Fording owns all of the equipment and facilities at the Fording
River and Coal Mountain mines and an 80% interest in the equipment and
facilities at the Greenhills mine.
FORDING RIVER MINE
The Fording River mine is located approximately 29 kilometres northeast of
Elkford, British Columbia and has been in production since 1972. This mine
primarily supplies bituminous metallurgical coal to international steel
producers and also produces a limited quantity of thermal coal. This mine's
operations' annual production capacity is 9.5 million tonnes, most of which is
metallurgical coal. The Fording River mine produced 9.4 million tonnes during
2001. This mine had proven reserves of 157.0 million tonnes and probable
reserves of 60.0 million tonnes at December 31, 2001.
The bituminous metallurgical and thermal coal at Fording River mine is
produced from fifteen seams of varying thickness, lying in a syncline. The seams
average one to 15 metres in thickness. Most of the current production is derived
from the Eagle Mountain pit. During 2001, the strip ratio of the mine was 7.8
BCM per tonne and is projected to decrease during the term of the current mine
plan.
GREENHILLS MINE
The Greenhills mine is located approximately 8 kilometres northeast of
Elkford, British Columbia and has been in production for approximately
20 years. Fording acquired this mine in 1992. This mine primarily supplies
bituminous metallurgical coal to a variety of international steel producers and
also produces a limited quantity of thermal coal. This mine's operations' annual
production capacity is 4.5 million tonnes, most of which is metallurgical coal,
and its processing plant has a capacity of 5.0 million tonnes. Greenhills mine
produced 4.9 million tonnes during 2001. This mine had proven reserves of
103.0 million tonnes and probable reserves of 7.0 million tonnes at
December 31, 2001.
The bituminous metallurgical and thermal coal at Greenhills mine is produced
from thirteen seams of varying thickness, lying in a syncline. Most of the
current production is derived from the Cougar North pit, which is fully
developed. Development and pre-stripping of the Cougar South pit is underway and
is expected to provide a long-term source of coal. During 2001, the strip ratio
of the mine was 9.6 BCM per tonne and is projected to decrease over the life of
the mine.
Greenhills is operated under a joint venture agreement (the "Greenhills
Joint Venture Agreement") with Pohang Steel Canada Limited ("Poscan") and
Poscan's parent, Pohang Iron and Steel Co., Ltd. ("Posco"). Pursuant to the
agreement, Fording currently has an 80% interest in the joint venture while
Poscan has a 20% interest. It is intended that the MetCoal Company will acquire
Fording's 80% interest in the joint venture, subject to obtaining any required
regulatory and third party approvals. The mine equipment and preparation plant
are owned by the joint venture partners in proportion to their respective
interests. Under the Greenhills Joint Venture Agreement, Fording is the manager
and operator of Greenhills and it is intended that the MetCoal Company will
become the manager and operator of Greenhills upon completion of the Fording
Acquisition. The joint venture partners bear all costs and expenses incurred in
operating Greenhills in proportion to their respective interests. Poscan,
pursuant to a property rights grant, has a right to 20% of all of the coal mined
at Greenhills from certain defined lands until the Greenhills Joint Venture
Agreement terminates. The Greenhills Joint Venture Agreement terminates on the
earlier of: (i) the date the reserves on the defined lands have been depleted;
(ii) March 31, 2003, if prior to December 31, 2002, the joint venture
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partners have not entered into coal sale contracts on mutually satisfactory
terms providing for coal deliveries between April 1, 2003 and March 31, 2013
(the "Posco Coal Sales Agreements"); or (iii) March 31, 2013, if on or before
December 31, 2002, the joint venture partners have agreed to the Posco Coal
Sales Agreements. Both the joint venture partners have expressed their intention
to negotiate the Posco Coal Sales Agreements. If the MetCoal Company decides to
carry on mining after the termination of the joint venture, it will be required
to negotiate in good faith with Poscan regarding Poscan's continued
participation at Greenhills, and if an agreement cannot be reached, to acquire
Poscan's interest in the mine equipment and preparation plant.
COAL MOUNTAIN MINE
The Coal Mountain mine is located approximately 30 kilometres southeast of
Sparwood, British Columbia and has been in production for approximately
20 years. Fording acquired this mine during 1994. Coal Mountain mine produces
bituminous metallurgical and thermal coals. This mine's annual production
capacity is 2.5 million tonnes. Coal Mountain mine produced 2.5 million tonnes
during 2001. This mine had proven reserves of 32.0 million tonnes and probable
reserves of 1.0 million tonnes at December 31, 2001.
The bituminous metallurgical and thermal coal at Coal Mountain mine is
produced from multiple seams of varying thickness, lying in a syncline. During
2001, the strip ratio of the mine was 5.5 BCM per tonne and is projected to
decrease over the life of the mine.
LINE CREEK MINE
The Line Creek mine is located approximately 22 kilometres north of
Sparwood, British Columbia and is adjacent to the Greenhills mine and in close
proximity to the Fording River mine. The Line Creek mine supplies bituminous
metallurgical and thermal coal to a variety of international and domestic steel
producers and Pacific Rim electric utilities. Operations at this mine commenced
in 1981. A predecessor to Luscar acquired the operations of the Line Creek mine
in 1992. The mine's annual production capacity is currently being expanded to
3.2 million tonnes of metallurgical coal and 0.4 million tonnes of thermal coal.
In 2001, sales were 2.4 million tonnes of metallurgical coal and 0.6 million
tonnes of thermal coal. The mine's proven reserves were 57.0 million tonnes as
at December 31, 2001.
The bituminous metallurgical and thermal coal at the Line Creek mine is
mined from nine seams lying in a syncline. The seams average two to 13 metres in
thickness, with the thickest seam reaching 15 metres in several places.
CHEVIOT MINE PROJECT
The Cheviot mine project is located at the site of the inactive Mountain
Park mine, which Luscar operated from 1911 to 1950. The Cheviot mine project is
situated in close proximity to the Luscar mine, which Luscar and CONSOL have
continuously operated since 1970. The coal reserves at the Cheviot mine project
includes 36.4 million tonnes of proven bituminous metallurgical coal reserves
and 25.6 million tonnes of probable bituminous metallurgical coal reserves.
These coal reserves are classified as mid volatile hard coking coals, similar in
quality to those of the nearby Luscar mine, and comparable in rank to certain
hard coking coals produced in the Elk Valley. Compared with Elk Valley coals,
Cheviot coal has higher fluidity for improved coke blending performance and
exceptionally low phosphorus levels, which is an important quality
characteristic for export customers.
In December 2000, the Government of Alberta approved and issued the mine
permit for the Cheviot project at a design capacity of 3.2 million tonnes per
year. This approval contemplated the construction of a processing plant,
maintenance and administration facilities, a public access road, railway access
and other infrastructure requirements. In April 2001, the Government of Canada
announced its acceptance of the recommendation by the joint federal and
provincial review panel in favour of the development of Cheviot, which allows
the federal government to issue the regulatory authorizations required for the
project to proceed.
During 2002, Luscar and CONSOL applied for an amendment to the existing
Government of Alberta approvals and permits to allow the joint venture to extend
an existing haul road at the Luscar mine to access the reserves at the Cheviot
mine project. This 10 kilometre road would be used to haul raw coal mined at the
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Cheviot mine project in large haul trucks to the existing processing plant, rail
loadout and support facilities at the nearby Luscar mine which is subject to the
Luscar Put. While the Government of Alberta must approve the amendment, the
Offeror believes that no further approval from the Government of Canada is
required. The Offeror anticipates that the Government of Alberta will approve
the amendment of its existing permits early in 2003. At that time, the MetCoal
Company intends to proceed with development of the Cheviot mine project subject,
in part, to an assessment of the optimum coking coal quality mix required to
best service its customers internationally. If a decision is made to proceed,
the Cheviot mine project could begin production at the rate of 2.0 million
tonnes per year, beginning in early 2004. In addition, if approved for
development, the Offeror expects that the initial expansion capital expenditures
required to develop the Cheviot mine project would total approximately
$80 million.
The Offeror expects that mining costs at the Cheviot mine project will be
competitive with other Canadian metallurgical coal producers. If the MetCoal
Company acquires the Luscar mine pursuant to the Luscar Put, the MetCoal Company
could use the existing infrastructure and workforce of the Luscar mine at the
Cheviot mine project, which would significantly reduce the initial capital
investment and time frame for the development of the Cheviot mine project as
compared to a greenfield project. Recently the union at the Luscar mine
committed to a five year contract that would provide for the transition of the
employees from the Luscar mine to the Cheviot mine project. The Offeror also
believes that the Cheviot mine project could have a competitive advantage over
other Canadian metallurgical coal producers by utilizing existing capacity
available at the Neptune Terminals at costs lower than rates charged by
Westshore to other Canadian coal producers.
NEPTUNE TERMINALS
The MetCoal Company will acquire Luscar's and CONSOL's interests in Neptune
Terminals, a multi-product bulk handling port facility located at Vancouver,
British Columbia. Through its 46.4% interest and port contracts, the MetCoal
Company will have access to dedicated capacity of the coal handling facilities
at Neptune Terminals. The MetCoal Company intends to use Neptune Terminals to
unload coal shipped by rail, for loading onto seaborne vessels destined for
overseas customers. Neptune Terminals has a long-term lease which expires in
2014 with the Vancouver Port Authority and is currently finalizing an extension
to this lease. Shippers can access the Neptune Terminals facilities from the
Canadian National rail system and, through interconnection, with the Canadian
Pacific rail system, both of which are the exclusive rail shippers for coal
producers in the Alberta and the Elk Valley, respectively.
By agreement with the other shareholders of Neptune Terminals, rates charged
for the handling of coal and other products are based on the actual costs
allocated to the handling of each product. As a result, it is anticipated that
the port costs allocated to the MetCoal Company's shipments through Neptune
Terminals will be significantly lower than commercial rates charged by
Westshore. Fording currently ships to all of its overseas customers through
Westshore under three contracts, two of which have expired or will expire before
the end of 2002. The incremental cost of throughput at Neptune Terminals,
including ancillary rail charges, is approximately $2.50 per tonne, which is
less than half of the average coal loading revenue of $5.75 per tonne realized
by Westshore during the first nine months of 2002. During 2002, the Line Creek
mine has reduced its port costs by increasing shipments through Neptune
Terminals. The MetCoal Company will also continue to have access to Westshore
under existing contracts. Having access to both terminals will provide the
MetCoal Company with significant flexibility and the ability to continue
shipping coal in the event of disruptions at either terminal facility.
Neptune Terminals currently has the capacity to handle approximately an
additional 4.0 million tonnes of coal in 2003 from existing Fording mines. With
a modest capital investment, the Offeror believes Neptune Terminals could handle
a further additional 4.0 million tonnes.
The transfer of Luscar's and CONSOL's interests and port contracts to the
MetCoal Company requires certain consents from Neptune Terminals and its other
shareholders, which the Offeror expects will be received prior to the completion
of the Fording Acquisition.
A-17
FORDING'S INDUSTRIAL MINERALS OPERATIONS
The industrial minerals operations consist of NYCO Minerals, Inc.'s ("NYCO")
operations at Willsboro, New York, Minera NYCO S.A. de C.V.'s Pilares operations
located near Hermosillo in the northwestern state of Sonora, Mexico and American
Tripoli, Inc.'s operations located near Seneca, Missouri.
For the Willsboro operations, the processing plant is located in Willsboro,
New York, and the mine site is located 22 kilometres west of Willsboro.
Willsboro's primary product is wollastonite. It is extracted using open pit
mining techniques and trucked to the Willsboro processing plant. In 2001, the
Willsboro operation produced 58,500 tonnes of wollastonite.
For the Pilares operations, the processing facilities, truck loadout and
mine site are located approximately 50 kilometres northwest of Hermosillo,
Sonora, Mexico. Pilares' primary product is wollastonite. It is extracted using
open pit mining techniques for processing at the property's on-site plants. In
2001, the Pilares operation produced 26,500 tonnes of wollastonite.
For the Seneca operations, the processing facilities are located in Seneca,
Missouri. The processing facilities include a processing plant and drying shed.
The mine site is located approximately 12 kilometres northwest of Seneca in
Ottawa County, Oklahoma. Seneca's primary product is tripoli. It is extracted
using open pit mining techniques and trucked to the Seneca processing
facilities. In 2001, Seneca produced 11,700 tonnes of tripoli.
Upon completion of the Fording Acquisition, the Offeror currently intends to
examine possible value optimization alternatives for Fording's industrial
minerals operations.
LUSCAR MINE
Luscar and CONSOL have the right to require the MetCoal Company to acquire
for aggregate consideration of 500,000 Units of the Canadian Coal Trust a 100%
interest in the Luscar mine pursuant to the Luscar Put. There can be no
assurance that Luscar and CONSOL will exercise the Luscar Put. This mine is
currently a 50/50 joint venture between Luscar and an affiliate of CONSOL. The
Luscar mine is located approximately 42 kilometres south of Hinton, Alberta. It
supplies metallurgical coal to a variety of international steel producers. The
Luscar mine commenced operations in 1970. Annual production capacity at the
Luscar mine is 2.8 million tonnes and 2001 sales were 3.0 million tonnes. As at
December 31, 2001, the Luscar mine's proven and probable reserves were
3.4 million tonnes.
The bituminous metallurgical coal at the Luscar mine is mined from a seam
which has an average thickness of 10 to 12 metres, although in some areas
folding and faulting has produced sections of coal up to 40 metres thick.
This mine is scheduled to close in early 2004 due to the depletion of
reserves and the associated reclamation and mine closure costs have been
accrued. The Luscar Put, if exercised, provides that most of these reclamation
and mine closure costs will not be assumed by the MetCoal Company.
COAL AND OTHER RESERVES
COAL RESERVES FOR THE MET COAL ASSETS
Coal products can be classified according to their relative heat content,
volatile matter content, sulphur content and their characteristics for making
steel. The four primary types of coal, in order of increasing heat content, are
lignite, subbituminous, bituminous and anthracite. All of the metallurgical coal
related to the Met Coal Assets is bituminous. Each type has characteristics that
make it more or less suitable for different end uses. Heat content, or the
amount of energy in coal, is commonly measured in Btu per pound. Coal reserves
for the Line Creek mine and the Cheviot mine project which are listed below, are
classified as bituminous coal, with a heat value that ranges from
27,000 - 33,000 kJ/kg (10,500 to 14,000 Btu per pound). The moisture content of
bituminous coal is generally less than 15% by weight. The heat values of
bituminous coal are high enough to make it economic to transport it to distant
markets.
Sulphur content is another important characteristic of coal. Steel-makers
often find benefit in having low sulphur content in coking coal because of the
increased quality of steel. Coal combustion produces sulphur
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dioxide, the amount of which varies depending on the concentration of sulphur in
the coal and the manner in which coal is burned. Due to restrictive
environmental regulations regarding sulphur dioxide emissions, coal is commonly
described with reference to its sulphur content. Thermal coal that is less than
1% sulphur by weight is referred to as low-sulphur coal. On average, all of the
coal reserves for the Line Creek mine and the Cheviot mine project meets this
criterion.
Also refer to "Industry Overview -- Coal Industry Overview" and "Glossary of
Mining Terms" in this Appendix A for additional information about the categories
of coal.
As at December 31, 2001, coal reserves for the Line Creek mine and the
Cheviot mine project were approximately 93.4 million tonnes of proven reserves
and approximately 25.6 million tonnes of probable reserves. The following table
summarizes the surface mineable, recoverable and saleable coal reserves for the
Line Creek mine and the Cheviot mine project, as at December 31, 2001:
COAL RESERVES
Reserves Reserve Sulphur Heat Value
Proven(1) Probable(2)
Coal Type/Property ------------ ------------
Life(3) Content (Btu/lb)(5)
(millions of tonnes) (%)(4)
Bituminous metallurgical
Line Creek mine 50.4 -- 20 0.42 15,350
Cheviot mine project 36.4 25.6 N/A 0.33-0.49 15,540
Bituminous thermal
Line Creek mine 6.6 -- 20 0.42 13,810
---- ----
Total Reserves 93.4 25.6
(1) Proven (Measured) Reserves means reserves for which: (a) quantity is
computed from dimensions revealed in outcrops, trenches, workings or drill
holes, grade or quality are computed from the results of detailed sampling;
and (b) the sites for inspection, sampling and measurement are spaced so
closely and the geologic character is so well defined that the size, shape,
depth and mineral content of the reserves are well-established.
(2) Probable (Indicated) Reserves means reserves for which quantity and grade
and/or quality are computed from information similar to that used for proven
(measured) reserves, but the sites available for inspection, sampling and
measurement are farther apart or are otherwise less adequately spaced. The
degree of assurance, although lower than for proven (measured) reserves, is
high enough to assume continuity between points of observation.
(3) Years based on proven plus probable reserves divided by 2001 production.
(4) Estimated sulphur by weight: contract specification for bituminous coals.
(5) Approximate average calorific value, moist, ash free basis and air dried
basis.
Coal reserves are broadly defined as coal that can be economically mined
using current technology and are further classified as proven or probable
according to the degree of certainty of existence. Reserve estimates for the
Line Creek mine and the Cheviot mine project as set forth above were prepared
internally by Luscar's professional engineers and geologists under the
supervision of Luscar's operating Vice President, Howard Ratti, P. Eng. and
Luscar's Chief Geologist, Gary Johnston, P. Geol. Estimates are based on
geological data derived from ongoing mining operations, drilling program and
other geological examination. This information is combined with knowledge of
mining variables such as the maximum digging depth of equipment, the maximum
amount of overburden that can be moved to permit economic recovery of coal, the
percentage of in-place coal that can be recovered in mining, the percentage of
coal that can be economically recovered through processing plants and equipment
and labour productivity. Also considered are legal impediments to mining,
government regulations requiring efficient extraction of coal, coal prices and
economic conditions. These estimates are reviewed annually to reflect actual
coal production, new data or developments and changes in other assumptions and
parameters. Accordingly, reserve estimates will change from time to time
reflecting mining activities, analysis of new engineering and geological data,
changes in reserve holdings, modification of mining plans or methods, changes in
coal prices or production costs and other factors.
The Offeror believes, the classification and presentation of proven
(measured) and probable (indicated) reserves of Fording conform to the
requirements of the Canadian securities regulations as set out in National
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Instrument 43-101 (the "National Instrument") and the SEC contained in Industry
Guide 7 -- Description of Property by Issuers Engaged or to be Engaged in
Significant Mining Operations ("SEC Guide 7").
FORDING RESERVES
The selected information provided below with respect to Fording's Reserves
has been taken from Fording's Annual Information Form dated May 16, 2002
("Fording's AIF"). For further information concerning Fording's Reserves, see
Fording's AIF.
Fording has disclosed that, as a Canadian mining company, it is subject to
the provisions of the National Instrument with respect to the manner in which it
determines and reports its reserves. Fording is also a reporting company in the
United States, and subject to United States securities laws. Accordingly
reserves have been presented in tabular form in accordance with the National
Instrument and a paragraph has been included after each reserve table reporting
such information in accordance with SEC Guide 7.
Fording Reserves as at December 31, 2001, as presented in Fording's Annual
Information Form dated May 16, 2002, have been estimated internally by Fording
engineers and geologists in accordance with the National Instrument under the
supervision of Fording's Manager, Energy Resource Planning, C.J. McKenny,
P. Geol., who is a "qualified person" for the purposes of the National
Instrument. These estimates are reviewed and updated periodically to reflect new
data from mining experience, drilling results and analysis.
Feasibility studies assume technological and economic conditions prevailing
at the time the study is prepared.
For further information on Fording's coal Reserves and wollastonite and
tripoli Reserves, see Fording's AIF.
With respect to minerals other than coal, Fording has stated in its publicly
disclosed information that it uses definitions of reserves ascribed by the
Canadian Institute of Mining, Metallurgy and Petroleum Standards on Mineral
Resources and Reserves Definitions and Guidelines, adopted August 20, 2000 (the
"CIM Standards"), to the terms "Mineral Reserve", "Proven" and "Probable", which
are applicable to reporting mineral deposits (other than coal) in accordance
with the National Instrument. Fording utilizes definitions ascribed by SEC Guide
7 to the terms "Reserve", "Proven Reserves" and "Probable Reserves", which are
applicable to Fording's mineral reserves, including coal, when being reported on
in accordance with SEC Guide 7. The information in this section entitled
"Fording Reserves" has been presented using the same definitions.
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All coal Reserves in the following tables are mineable using conventional
open pit mining methods. The following table sets forth Fording's Proven and
Probable coal Reserves at December 31, 2001.
COAL RESERVES
As at December 31, 2001
(millions of tonnes)(1)
Rank Proven(3) Probable(3) Total(3) Type of Coal Ownership Calorific Sulphur
(%)(2) Value Percent (by
kJ/kg(3) wt.)(3)
Bituminous Coal
Fording River 157 60 217 Metallurgical L 100 30,200 0.62%
Greenhills 103 7 110 Metallurgical FS 100 30,200 0.62%
Coal Mountain 32 1 33 Metallurgical L 100 28,600 0.35%
--- -- ---
Total 292 68 360
(1) Bituminous coal Reserves are reported in millions of metric tonnes of clean
coal (i.e., tonnage remaining after mining and processing losses but
including coal used in plant operations). Reserves are reported exclusive of
interests of third parties except at Greenhills where Reserves are reported
inclusive of Poscan's interest. For a description of Poscan's interest see
"Overview of the MetCoal Company -- Principal Properties and
Facilities -- Greenhills Mine" in this Appendix A.
(2) Ownership of the coal Reserves is described as "FS" for fee simple or "L"
for leasehold.
(3) Numbers have been rounded.
Fording's Proven and Probable coal Reserves determined in accordance with
SEC Guide 7 are the same as those determined in accordance with the National
Instrument as presented in the above table.
The following table sets forth Fording's Proven and Probable Reserves of
wollastonite and tripoli as at December 31, 2001.
INDUSTRIAL MINERAL RESERVES
As at December 31, 2001
(millions of tonnes)(1)
Minerals Proven(3) Probable(3) Total(3) Grade(2)
Wollastonite
NYCO 4 2 6 54.5%
Minera 20 85 105 54.8%
--- --- ---
Total Wollastonite 24 87 111
--- --- ---
Tripoli 2 -- 2 94 - 98%
(1) Wollastonite and tripoli Reserves are reported in millions of metric tonnes
in the ground before recovery through mining and without application of
recovery factors. Reserves are reported exclusive of interests of third
parties.
(2) All grades are reported as a percentage (by weight) of material. For
wollastonite, it is percentage of CaSiO(3) (wollastonite). For tripoli, it
is reported as a percentage SiO(2) (silicon dioxide).
(3) Numbers have been rounded.
Fording's industrial mineral Reserves determined in accordance with SEC
Guide 7 are the same as those determined in accordance with the National
Instrument.
Fording has indicated it has all necessary permits which are required to
mine the tonnes attributed to the above-noted mines.
A-21
The following chart lists significant mineral rights held by Fording,
excluding those mineral rights that the Offeror believes will be transferred to
Luscar as part of the transactions.
SIGNIFICANT MINERAL RIGHTS
As at December 31, 2001
(thousand hectares)
Fee Simple Crown Lease Freehold Leases Total
Mineral Holdings and License
Coal
British Columbia(2) 13.4 37.9 -- 51.3
All Mines and Minerals
New York(3) 1.7 -- -- 1.7
Oklahoma 1.2 -- -- 1.2
Mexico -- 9.4 -- 9.4
---- ---- ---- ----
Total(1) 16.3 47.3 -- 63.6
(1) Numbers have been rounded.
(2) 10,245 hectares in Vancouver Island held in fee simple have been
recharacterized as non-coal lands.
(3) Review and adjustment of New York land base and status, August 2001.
EMPLOYEES AND LABOUR RELATIONS
As of December 31, 2001, the Line Creek mine had approximately 500
employees, all of which are unionized except for staff employees. Recently, the
union at the Luscar mine (which is subject to the Luscar Put) committed to a
five year contract that would provide for the transition of the employees from
the Luscar mine to the Cheviot mine project. Based on publicly available
information, the Offeror believes that Fording had a total of approximately
1,900 employees, including employees related to Fording's thermal coal assets
which will not form part of the assets to be acquired by the MetCoal Company.
All of Fording's operations to be assumed by the MetCoal Company are unionized
except staff employees and those employed at the Greenhills mine and Pilares
operations.
The following summarizes the most significant collective bargaining
arrangements relating to the Met Coal Assets and Fording's mountain and
industrial minerals operations:
Mine Union Contract Expiry
Fording River United Steel Workers of America -- Local 7884 April 30, 2006
Coal Mountain United Mine Workers of America -- Local 7292 December 31, 2004
International Union of Operating Engineers -- Local
Line Creek 155C May 31, 2005
Luscar/Cheviot United Mine Workers of America -- Local 1656 June 30, 2007
CAPITAL EXPENDITURES
The MetCoal Company's share of sustaining capital expenditures for the Met
Coal Assets is expected to be approximately $10 million per year over the next
five years, principally for normal replacements of mining equipment and
continuing development of existing pits.
Fording has disclosed that it expects its sustaining capital expenditures to
average approximately $40 million per year over the next several years. The
Offeror believes that Fording's estimates of sustaining capital expenditures
include amounts related to certain of its thermal coal assets, which will not be
retained by the MetCoal Company. The Offeror expects that over the next five
years the removal of sustaining capital expenditures for Fording's thermal coal
assets will likely offset the additional sustaining capital expenditures for the
Met Coal Assets being acquired by the MetCoal Company. In addition, the Offeror
believes that Fording's estimates of sustaining capital expenditures do not
include expansion capital expenditures, which are estimated
A-22
to be approximately $18 million for the Highvale mining contract and
approximately $30 million for the expansion of the Genesee mine, both of which
are included in the thermal coal assets which will not be retained by the
MetCoal Company.
The Offeror expects that the MetCoal Company will fund sustaining capital
expenditures out of distributable cash and that new debt or equity financing
would fund expansion capital projects such as the Cheviot mine project. If
approved for development, the Offeror expects that the initial expansion capital
expenditures required to develop the Cheviot mine project would total
approximately $80 million.
LAW AND REGULATION
LAND AND MINERAL RIGHTS
Coal reserves and leases in Canada are generally under the jurisdiction of
provincial governments. Coal reserves are accessed through: (i) coal leases from
provincial governments, which are referred to as Crown coal leases;
(ii) freehold or fee simple ownership of coal; and (iii) subleases from third
parties who hold Crown coal leases. Royalty payments may be paid on Crown coal
leases, freehold rights and/or subleases. In general, coal reserves at any
particular mine are accessed through a variety of the above-mentioned methods.
ALBERTA
Under the MINES AND MINERALS ACT (Alberta), Alberta Crown coal leases are
granted for a term of 15 years and are renewable, subject to the regulations in
force at the time of renewal and to any terms and conditions prescribed by order
of the Minister of Energy, with consideration being given to remaining coal
reserves. In the past, renewals of these leases have generally been granted,
although there can be no assurance that this will continue in the future. Annual
lease rental rates are $3.50 per hectare and there are no other expenditures
required to maintain the leases. New Crown coal leases on lands in Category 4 of
"A Coal Development Policy for Alberta, 1976" are made available to the public
through a competitive bidding process. Luscar's Alberta coal leases were
acquired prior to the initiation of the bidding process.
For bituminous coal under Crown coal leases, royalties are levied based on
the mine-mouth value of marketable coal produced and revenue generated by the
sale of the coal resource. Royalties are based on a two-tiered system with an
initial rate of 1% of the mine-mouth value of marketable coal produced from the
Crown coal leases per month. Following the date when the cumulative mine-mouth
revenue of the coal mine equals or exceeds the aggregate of the allowed
cumulative project costs and the cumulative return allowance of the project, an
additional royalty on bituminous coal, equivalent to 13% of the net revenue
earned from Crown leases for a calendar year, is payable to the Crown. Coal sold
from leased, third party freeholds may also be subject to private royalties
pursuant to agreements under which the rights have been acquired. No provincial
royalties are payable on freehold coal.
BRITISH COLUMBIA
British Columbia Crown coal licences and Crown coal leases are granted under
the COAL ACT (British Columbia). Crown coal licences are granted for an
indefinite term with rental rates starting at $7.00 per hectare, escalating to
$10.00 per hectare after the first five years and continuing to escalate by
$5.00 per hectare every five years thereafter. There is presently no cap on the
rental rates. Prior to obtaining a Crown coal lease, the licensee must first
obtain a project approval certificate issued under the ENVIRONMENTAL ASSESSMENT
ACT (British Columbia). Once a project approval certificate has been obtained,
an application may be made for a coal lease. Crown coal leases have a term of
30 years but may be renewed for a subsequent period of 15 years. Annual rental
rates are currently $10.00 per hectare. In the past, renewals of these licences
and leases have generally been granted, although there can be no assurance that
this will continue in the future. There is no competitive bidding process for
British Columbia Crown coal rights.
In British Columbia, both Crown and freehold coal sales are subject to the
payment of a two level mineral tax. The first level is 2% on revenue less
operating costs (not including interest) and the next level is 13% on cumulative
revenue minus operating costs, capital costs and the amount payable under the
first level. The second level is applicable only after the mine has recovered
its cumulative expenditures account balance. Under the MINERAL LAND TAX ACT
(British Columbia), every owner of mineral land must pay to the Crown a yearly
tax based on the number of hectares owned. This mineral land tax escalates on a
graduated scale from $1.25 per hectare
A-23
(20,235 hectares or less) to $4.94 per hectare (more than 404,686 hectares). The
$1.25 per hectare charge applies to freehold mineral interests held in
British Columbia. The Line Creek mine has a cumulative provincial mineral tax
cost pool of $307.2 million as at December 31, 2001 that may be transferred or
combined, in certain circumstances, with other mining operations under common
ownership.
OTHER COUNTRIES
Properties in the U.S. are fee simple lands or freehold leases under which
royalties are paid to third parties. Mineral rights in Mexico are granted by the
government through the issuance of exploration and exploitation permits.
Exploration permits have annual fees of approximately $2.00 per hectare and are
issued for six years. At the end of six years, they must be converted into
exploitation permits or else they revert to the government. Exploitation permits
are issued for 50 years and have annual fees of approximately $22.75 per
hectare. Fording also holds in fee simple 1,855 hectares of surface land
situated above some of the mineral holdings of the Pilares operations in Mexico.
ABORIGINAL RIGHTS
Canadian courts have recognized that aboriginal peoples may continue to have
unenforced rights at law in respect of land used or occupied by their ancestors
where treaties have not been concluded to deal with those rights. These rights
may vary from limited rights of use for traditional purposes to a right of
aboriginal title and will depend upon, among other things, the nature and extent
of prior aboriginal use and occupation. The courts have encouraged the federal
and provincial governments and aboriginal peoples to resolve rights claims
through negotiation of treaties.
In British Columbia, few treaties exist with aboriginal peoples. Nearly all
of the land in British Columbia has been identified as being part of a
traditional territory for at least one aboriginal people. Under the
British Columbia Treaty Commission, each aboriginal people files a statement of
intent to negotiate, identifying the territory in which they historically lived
and carried out traditional activities.
In Alberta, there are many treaties in place, and aboriginal rights and
claims have less impact on resource development since they are handled under the
terms of those treaties.
CANADIAN ENVIRONMENTAL MATTERS
ENVIRONMENTAL, HEALTH AND SAFETY
The coal mining industry is subject to extensive regulation by federal,
provincial and local authorities as to environmental and health and safety
matters including: employee health and safety; air quality; water quality and
availability; the protection and enhancement of the environment (including the
protection of plants and wildlife); land-use zoning; development approvals; the
generation, handling, use, storage, transportation, release, disposal and
clean-up of regulated materials, including wastes; and the reclamation and
restoration of mining properties after mining is completed.
The MetCoal Company's mining operations will be primarily regulated by
provincial legislation but must also comply with applicable federal legislation
and local by-laws. A breach of environmental legislation may result in the
imposition of fines, other penalties and clean-up orders, which could
potentially have a material adverse effect on their operations.
The environmental legislation and requirements in each of the provinces in
which the MetCoal Company will operate are stringent, requiring approval for
many aspects of their coal mining operations. The construction, development and
operation of a mine entails compliance with applicable environmental legislation
and the obtaining of land use and other permits, licences and similar approvals
from various governmental authorities, which can include costly and time
consuming environmental impact assessments. In addition, legislation requires
that sites be abandoned and reclaimed to the satisfaction of provincial
authorities. The Offeror does not anticipate significant approval, issuance or
renewal problems for required licences and permits, but cannot assure investors
that licences or permits will be renewed or granted in the future or that delays
in obtaining or failure to obtain approval will not adversely affect operations.
A-24
PROVINCIAL ENVIRONMENTAL LEGISLATION
The MetCoal Company's mining operations are located in two provinces in
Canada: British Columbia and Alberta. In general, both provinces have similar
environmental legislation. Both provinces have requirements for environmental
impact assessments of new projects or major expansions. These assessments
typically involve extensive stakeholder consultation, including public
advertising and input. Provincial jurisdiction extends from the opening of a
mine to its operations and closure. Both provinces also have their own
legislation with respect to heritage and cultural resources, the handling and
transportation of dangerous goods and site remediation and reclamation.
In Alberta, the ENVIRONMENTAL PROTECTION AND ENHANCEMENT ACT (the "EPEA")
establishes stringent environmental requirements relating to emissions,
clean-up, reclamation, conservation and disclosure. Alberta's EPEA also governs
the conduct of environmental impact assessments of new projects, existing
operations and mine closures. Operating licences for up to ten years are issued
under the EPEA for virtually all aspects of mining operations. The COAL
CONSERVATION ACT (Alberta), which is administered by the Alberta Energy
Resources Conservation Board, is the regulatory instrument that governs coal
mining operations. The use and protection of water are governed by the WATER ACT
(Alberta).
The Alberta government requires security bonding to be posted for mine
reclamation obligations based upon estimated costs to reclaim disturbed lands.
The MetCoal Company will satisfy this security obligation through letters of
credit to be provided by Canadian banks or other acceptable forms of security.
In British Columbia the primary legislation for the protection of the
environment is the WASTE MANAGEMENT ACT, including regulations made thereunder.
A project may be subject to review under British Columbia's ENVIRONMENTAL
ASSESSMENT ACT. Operating approvals are issued under a number of other Acts,
including the MINES ACT, the WASTE MANAGEMENT ACT, the WATER ACT, the COAL ACT,
the LAND ACT and the FOREST ACT. Approvals are typically issued for the life of
a specific mine, pit or mining block, and include requirements to submit updated
reclamation information. The British Columbia government has a reclamation
bonding system similar to that of Alberta. The Offeror expects that the MetCoal
Company will comply with this reclamation bonding system through the posting of
letters of credit provided by Canadian banks.
FEDERAL ENVIRONMENTAL LEGISLATION
Coal mining frequently involves crossing, impounding, diverting and using
surface waters. Such activities can require approval under federal legislation,
such as the federal FISHERIES ACT for the construction of a project that may
result in the harmful alteration of fish habitat or the federal NAVIGABLE WATERS
PROTECTION ACT if the water course is navigable by watercraft.
Other federal legislation that the MetCoal Company will be required to
comply with includes the federal CANADIAN ENVIRONMENTAL PROTECTION ACT, 1999,
which generally regulates the use, importing, storage and interprovincial or
international transport of certain restricted and prohibited substances. The
federal FISHERIES ACT prohibits the alteration or destruction of fish habitat,
and prohibits the deposit of any substance that may be harmful into water that
may be inhabited by fish.
The federal CANADIAN ENVIRONMENTAL ASSESSMENT ACT ("CEAA") requires that an
environmental impact assessment be conducted with respect to certain proposed
projects. Projects that are subject to CEAA include federally financed projects,
projects requiring the disposition of federal lands and projects requiring
prescribed federal regulatory actions, such as federal approvals. The CEAA may
apply to some proposed projects, which, for example, may impact fish habitat or
navigable waters.
Although approvals under the federal MIGRATORY BIRDS CONVENTION ACT, 1994
are not required, penalties under this statute can be imposed if activities
result in harm to migratory birds. New federal legislation relating to the
protection of endangered species is pending which could impact the ability to
develop new mines, to mine in certain areas or could require added expenses to
preserve or enhance habitat for endangered species.
MINE PERMITTING
In order to develop or extend an existing coal property, it is necessary to
obtain a mine permit from the applicable provincial government. In certain
instances, such as when mine operations cross navigable waters or interfere with
a fishery, it may be necessary to obtain permits from the federal government.
The process to
A-25
obtain these permits involves disclosure of the project to the applicable
authorities. Proposed components of an environmental impact assessment ("EIA")
are then published for public input and, with such input the procedures and
studies to be included in the EIA are finalized. The applicant must then
complete the EIA and document full details of the mine development and
operational plans to complete the application. The authorities review the
application again with public input, and following required amendments or
additions, the application is deemed complete. Dependent upon the magnitude of
the project, the level of public interest and the location of the project, the
regulators may then require a public hearing process. When this process is
complete, the regulators will either approve the project, request modifications
to the project and approve it as modified or reject the project. Once approved
the required permits are issued.
If both the federal and provincial governments are involved, the application
is subject to joint review. For a greenfields project the permitting process can
take 3 to 5 years whereas for a mine extension 2 years is usually required
because the EIA is not as detailed.
The Offeror believes that the MetCoal Company will have the permits
necessary to develop the Cheviot mine project, which is included in its proven
and probable reserves. Application has been made to amend these permits to allow
for construction of a coal haulage road to the existing processing plant at the
nearby Luscar mine which the Offeror anticipates will receive provincial
approval in 2003. The Offeror believes that no federal approvals are required
with respect to the amendment.
MUNICIPAL BY-LAWS
The MetCoal Company will also be subject to local laws, including by-laws
passed by local municipalities relating to local land use, rural road closures,
storm run-off, and nuisance situations such as weed control.
AIR QUALITY AND CLIMATE CHANGE
Public and government concern is growing over the increase in concentration
of greenhouse gases in the atmosphere. The burning of fossil fuels, including
coal, emits carbon dioxide, a greenhouse gas that is considered by some to
contribute to global warming. Legislation may be enacted that restricts the
burning of coal or may cause coal consumers to control the emission through
investments in control technologies. Canada, as a party to the United Nations
Framework Convention on Climate Change and the subsequent implementation
protocol, known as the Kyoto Protocol, that was adopted in 1997, has stated its
intention to reduce overall greenhouse gas emissions to 94% of 1990 levels by no
later than 2012. Many other countries who are parties to this convention and the
Kyoto Protocol have stated similar intentions to limit greenhouse gas emissions.
The Kyoto Protocol will come into effect 90 days after ratification by at least
55 countries accounting for at least 55% of total greenhouse gas emissions. The
Government of Canada ratified the Kyoto Protocol on December 10, 2002.
ENVIRONMENTAL MANAGEMENT AND COMPLIANCE
It is anticipated that the MetCoal Company will be committed to continuing
to meet its responsibilities to protect the environment wherever it operates.
The Offeror expects that the MetCoal Company may be required to make increased
capital and other expenditures as a result of increasingly stringent
environmental protection legislation.
It is expected that the MetCoal Company will establish a comprehensive
environmental management program directed at environmental protection. The
Offeror anticipates that the program will consist of an environmental policy,
codes of practice, regular audits, the integration of environmental procedures
with operating procedures, employee training and emergency prevention and
response procedures.
The Offeror believes that the business of the MetCoal Company will be in
material compliance with all applicable environmental legislation. The Offeror
expects that the MetCoal Company will endeavour to conduct mining operations in
compliance with all applicable federal, provincial and local laws, including by
obtaining all required approvals under those laws and instituting appropriate
policies and procedures. Given the nature of the extensive and comprehensive
regulatory requirements, violations during mining operations inevitably occur
from time to time. The Offeror believes that Luscar and Fording have been cited
for few environmental violations, and the Offeror is unaware of the occurrence
of any violations, other than those disclosed in Luscar's and Fording's public
documents, that have had a material adverse effect on the environment, the
ability of either
A-26
Luscar or Fording to continue any operation, or on either of their financial
condition, other than the Mount Washington claim described below.
The Offeror believes that the MetCoal Company will obtain all approvals
currently required to conduct their current mining operations. The Offeror
anticipates that the MetCoal Company may be required to prepare and present to
federal, provincial or local authorities data relating to the impact that any
proposed development or existing coal mine may have on the environment.
Fulfilling any such requirement could prove costly and time-consuming and could
delay the commencement and continuing exploration or production operations.
Future legislation and administrative regulations may further emphasize the
protection and enhancement of the environment and, as a consequence, the MetCoal
Company's activities may be even more closely regulated. Future legislative
initiatives, changes to legislation, future interpretations of laws or increased
enforcement could collectively or individually cause substantial increases in
the MetCoal Company's equipment and operating costs as well as delays,
interruptions or even termination of operations, the extent of which cannot be
predicted.
MOUNT WASHINGTON
On October 30, 2001, the Canadian Pacific Railway Company ("CPR") by notice
under an arrangement agreement entered into among CPR, Fording and others as of
July 30, 2001 (the "Arrangement Agreement") asserted a claim against Fording in
connection with purported environmental damage at the former Mount Washington
minesite on Vancouver Island. The notice states that CPR, as the parent company
to the registered titleholder of the mineral rights, was served with an
Inspectors Direction under the FISHERIES ACT (Canada) on June 26, 2001 wherein
CPR and the third-party owner of the surface rights were directed to remediate
the Mount Washington minesite. CPR is claiming a right for indemnification
against Fording under the Arrangement Agreement on the basis that responsibility
for remediation of the Mount Washington minesite relates to the Fording business
as Fording is the beneficial owner of the mineral rights. Fording disputes that
it has any liability in connection with the Inspectors Direction against CPR as
Fording did not at any material time, own the alleged deleterious substance or
have the charge, management or control of it or cause or contribute to the
causation of its deposit or the danger of it.
HEALTH AND SAFETY
As with environmental matters, the provinces have primary jurisdiction over
health and safety matters at coal mines. The provinces either enforce federal
standards or have established their own equivalent legislation governing safe
work practices, both generally and specifically with respect to mines. The
MetCoal Company will carry out extensive health and safety training programs in
an attempt to provide a safe work place for their respective employees. In
addition, all mines have emergency response crews that are trained in advanced
first aid and emergency rescue situations.
UNITED STATES ENVIRONMENTAL MATTERS
Upon completion of the Fording Acquisition, the Offeror currently intends to
examine possible value optimization alternatives for Fording's industrial
minerals operations. If these industrial minerals operations are not sold, these
operations will be subject to government regulation in the United States,
including various federal, state and local pollution control and health and
safety programs that are administered and enforced by regulatory agencies. These
programs are applicable or potentially applicable to one or more existing
operations. The primary U.S. federal statutes affecting the business are
summarized below.
The CLEAN WATER ACT (the "Clean Water Act") regulates the discharge of
pollutants into waters of the United States. The Clean Water Act establishes a
system of standards, permits and enforcement procedures for the discharge of
pollutants from industrial and municipal wastewater sources. The law sets
treatment standards for industries and wastewater treatment plants and provides
federal grants to assist municipalities in complying with the new standards.
The Clean Water Act also prohibits certain discharges of oil or hazardous
substances and authorizes the federal government to remove or arrange for
removal of such oil or hazardous substances. In addition, the Clean Water Act
requires the adoption of the National Contingency Plan to cover removal of such
materials. Under
A-27
the Clean Water Act, the owner or operator of a vessel or facility may be liable
for penalties and costs incurred by the federal government in responding to a
discharge of oil or hazardous substances.
THE RESOURCE CONSERVATION AND RECOVERY ACT ("RCRA") is the principal federal
statute governing hazardous and solid waste generation, treatment, storage and
disposal. RCRA and state hazardous waste management programs govern the handling
and disposal of hazardous waste. The United States Environmental Protection
Agency ("EPA") has issued regulations pursuant to RCRA, and states have
promulgated regulations under comparable state statutes, that govern hazardous
waste generators, transporters and owners and operators of hazardous waste
treatment, storage or disposal facilities. These regulations impose detailed
operating, inspection, training and emergency preparedness and response
standards and requirements for closure, financial responsibility, manifesting of
wastes, record-keeping and reporting, as well as treatment standards for any
hazardous wastes intended for land disposal.
RCRA regulations also require financial assurance that funds will be
available when needed for closure and post-closure care at RCRA-regulated
facilities, the cost of which could be substantial. Such regulations allow the
financial assurance requirements to be satisfied by various means, including
letters of credit, surety bonds, trust funds, a financial (net worth) test, and
a guarantee by a parent corporation. Under RCRA regulations, a company must pay
the closure costs for a facility owned by it upon the closure of the facility
and thereafter pay post-closure care costs.
The COMPREHENSIVE ENVIRONMENTAL RESPONSE, COMPENSATION AND LIABILITY ACT
("CERCLA") provides for immediate response and removal actions coordinated by
the EPA for releases of hazardous substances into the environment and authorizes
the government, or private parties, to respond to the release or threatened
release of hazardous substances. The government may also order persons
responsible for the release to perform any necessary cleanup. Liability extends
to the present owners and operators of waste disposal facilities from which a
release occurs, as well as persons who owned or operated such facilities at the
time the hazardous substances were released. CERCLA has been interpreted to
create strict, joint and several liability for the cost of removal and
remediation, other necessary response costs and damages for injury to natural
resources.
The CLEAN AIR ACT (the "Clean Air Act") provides for federal, state and
local regulation of emissions of air pollutants into the atmosphere. Any
modification or construction of a facility with regulated air emissions must be
a permitted or authorized activity. The Clean Air Act provides for
administrative and judicial enforcement against owners and operators of
regulated facilities, including substantial penalties. In 1990, the Clean Air
Act was reauthorized and amended, substantially increasing the scope and
stringency of the Clean Air Act's regulations.
A-28
SELECTED INFORMATION FOR FORDING'S MOUNTAIN OPERATIONS AND
FORDING'S INDUSTRIAL MINERALS OPERATIONS
The following summary contains certain selected combined financial and
operating information for the mountain operations and the industrial minerals
operations of Fording as at and for the four years ended December 31, 2001,
2000, 1999 and 1998 and as at and for the nine months ended September 30, 2002
and 2001 which are extracted from, and should be read in conjunction with,
Fording's audited consolidated financial statements for the four years ended
December 31, 2001, 2000, 1999 and 1998, Fording's management's discussion and
analysis for the years ended December 31, 2001, 2000 and 1999, Fording's
unaudited consolidated financial statements for the nine months ended
September 30, 2002 and 2001 and Fording's management's discussion and analysis
for the nine months ended September 30, 2002, all as filed with Canadian
securities regulatory authorities. The Offeror did not have access to other than
publicly available financial information and accordingly, certain information
was not available for all periods, including capital expenditures and coal
production by mine. The mountain operations and industrial mineral operations of
Fording have been operated together with Fording's thermal coal operations. As a
result the financial information below, which is presented excluding Fording's
thermal coal assets, may not be entirely reflective of the operating results of
Fording's mountain operations and industrial minerals operations if they were
operated as a separate businesses. The financial information included in this
table is prepared in accordance with Canadian GAAP. The Offeror did not have
access to this financial information prepared in accordance with U.S. GAAP.
Nine months
ended
September 30, Year ended December 31,
------------------- -----------------------------------------
2002 2001 2001 2000 1999 1998
-------- -------- -------- -------- -------- --------
(unaudited)
Financial Information (millions of dollars)
Revenue
Mountain Operations............................ $583.1 $663.6 $872.6 $755.9 $711.6 $768.5
Industrial Minerals............................ 36.8 36.5 47.6 55.5 59.3 53.6
------ ------ ------ ------ ------ ------
Total revenue.................................... 619.9 700.1 920.2 811.4 770.9 822.1
Cost of sales.................................. 475.9 543.5 706.4 687.0 671.0 657.4
------ ------ ------ ------ ------ ------
Operating margin(1).............................. 144.0 156.6 213.8 124.4 99.9 164.7
Selling, general and administrative(2)......... 12.0 9.6 15.2 11.8 11.3 13.8
Depreciation and depletion(2).................. 48.3 46.4 62.2 65.3 62.9 60.0
------ ------ ------ ------ ------ ------
Income from continuing operations................ $ 83.7 $100.6 $136.4 $ 47.3 $ 25.7 $ 90.9
------ ------ ------ ------ ------ ------
Capital expenditures(2).......................... (3) (3) $ 61.1 $ 34.5 $ 27.9 $ 60.4
Operating Information
Coal production (millions of tonnes)
Fording River mine............................. (3) (3) 9.4 9.0 8.3 7.9
Greenhills mine................................ (3) (3) 4.9 4.4 4.2 4.0
Coal Mountain mine............................. (3) (3) 2.5 2.3 2.1 1.8
------ ------ ------ ------ ------ ------
Total............................................ 11.2 12.8 16.8 15.7 14.6 13.7
------ ------ ------ ------ ------ ------
Average realized price per tonne............... $ 62 $ 57 $ 58 $ 50 $ 50 $ 62
------------
(1) Operating margin (comprising revenue less cost of sales) can be used as a
measure to represent cash generated from operating activities that is
available to meet capital needs and to service its long-term debt.
(2) Includes corporate general and other segment.
(3) This information was not provided in the public filings.
A-29
REVIEW OF FINANCIAL RESULTS OF FORDING'S MOUNTAIN OPERATIONS
AND FORDING'S INDUSTRIAL MINERALS OPERATIONS
This review of the results of operations and liquidity and capital resources
of Fording's mountain operations and industrial minerals operations has been
extracted from Fording's management's discussion and analysis of financial
condition for the years ended December 31, 2000 and 2001 and nine months
September 30, 2002. This review should be read together with the Fording's
management's discussion and analysis of financial condition and audited
consolidated financial statements for the years ended December 31, 2000 and 2001
and Fording's management's discussion and analysis of financial condition and
unaudited consolidated financial statements for the nine months ended
September 30, 2002 as filed with Canadian securities regulatory authorities.
Since this review is comprised of information extracted from Fording's
management's discussion and analysis of the financial condition for its entire
operations it may not be entirely reflective of the results of operations and
liquidity of capital resources of Fording's mountain operations and industrial
minerals operations if they were operated as separate businesses. The financial
statements from which this review has been extracted have been prepared in
accordance with Canadian GAAP, which differs in certain respects from
U.S. GAAP. The Offeror did not have access to this financial information
prepared in accordance with U.S. GAAP. Fording's balance sheet, cash flow, other
expenses and taxation are not allocated to each operation and accordingly are
not discussed in this review. Reference should also be made to "Selected
Information for Fording's Mountain Operations and Fording's Industrial Minerals
Operations" above.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED WITH NINE MONTHS ENDED
SEPTEMBER 30, 2001
MOUNTAIN OPERATIONS
Income from operations of $90 million for the nine months ended
September 30, 2002 was 12% lower than the same period in 2001. The decrease was
a result of higher unit cost of sales and lower sales volumes, partially offset
by higher sales prices.
For the first nine months of 2002, revenue declined 13% to $583 million.
Metallurgical coal sale volumes for the first nine months of the year were
9.4 million tonnes compared with 11.6 million tonnes in the first nine months of
2001.
Recently Fording reduced its 2002 metallurgical coal sales guidance to
13.0 million tonnes to reflect that coal liftings are behind pro rata
expectations on certain contracted commitments, limited success in placing
available tonnage into spot or tender markets and a reduction in tonnage from
some customers.
Metallurgical coal sales prices for the current nine-month period were US$44
per tonne, which was 13% above the same period in 2001 and reflected higher
contract settlements for hard coking coal in the 2002 coal year. The realized
Canadian dollar prices increased from $57 per tonne to $62 per tonne for the
first nine months of the current year. Previously established foreign exchange
forward contracts resulted in a realized exchange rate of US$0.71 for the
2002 year-to-date compared with US$0.68 in the same period of 2001.
Cost of sales decreased 13% while unit cost of sales increased 7% to $48 per
tonne. Unit distribution costs for the first nine months of 2002 were 5% higher
primarily due to rail and port rate increases effective April 1, 2001 and the
impact of a higher proportion of North American sales, which have higher rail
costs. The unit cost of production was 9% higher, reflecting lower production
volumes due to vacation and inventory control shutdowns and increased haul
distances.
Selling, general and administrative expenses for the year-to-date were
consistent with the same period in 2001. Depreciation and depletion increased
$1 million year-to-date due to capital spending programs in 2001.
INDUSTRIAL MINERALS OPERATIONS
Year-to-date operating income in 2002 declined by $3 million from the same
period in 2001, as reduced sales volumes were partially offset by an increase in
the average sales price, which was primarily a result of product mix.
Wollastonite sales volumes of 66,000 tonnes in the nine months ended
September 30, 2002 were 14% lower than the same period in 2001. Lower sales
volumes were due to the exit from lower priced markets and the continued weak
economies in the U.S. and Europe. Upon completion of the Fording Acquisition,
the Offeror currently intends to examine possible sale alternatives for
Fording's industrial minerals operations.
A-30
YEAR ENDED DECEMBER 31, 2001 COMPARED WITH YEAR ENDED DECEMBER 31, 2000
OVERVIEW
Strong financial results in 2001 reflected the continued recovery of world
metallurgical coal markets, as sales prices rose and the supply/demand balance
remained tight. The mountain operations financial results improved substantially
reflecting near record sales volumes of 15.0 million tonnes and an $8 per tonne
increase in average sales prices over the previous year.
The industrial minerals operations were affected by the slowing global
economy, and the wollastonite market continues to be in an oversupply position,
particularly in the competitive low-value segment.
MOUNTAIN OPERATIONS
The mountain operations achieved record performance levels in 2001,
generating income from operations of $142 million, which represents a gain of
208% over 2000. Sales volume of 15.0 million tonnes was close to the prior
year's record volume of 15.1 million tonnes. After many years of oversupply,
metallurgical coal supply and demand returned to balance during 2000 and
remained tight through 2001. Price increases were achieved in all metallurgical
coal markets for the coal year commencing April 1, 2001. In addition to price
increases, demand has remained strong and volumes in excess of the prior year's
record tonnage would have been achieved if vessel scheduling, poor weather
conditions and mechanical difficulties at the port had not prevented several
vessels from loading in December. Operating revenues rose to $873 million from
$756 million in 2000. Average coal sales prices from the mountain operations
rose 16% over the prior year to US$40 per tonne, while realized Canadian dollar
prices rose to $58 per tonne from $50 per tonne in 2000.
Cost of sales increased to $676 million in 2001 from $654 million in 2000 as
a result of a 4% increase in unit cost of sales. The rise in unit costs was
primarily a result of higher distribution costs. Rail rates increased effective
April 1, 2001 in the same proportion as the price increase for metallurgical
coal negotiated with certain Pacific market customers for the 2001 coal year. In
addition, higher port rates and an increase in the proportion of North American
customers which are rail direct also contributed to higher distribution costs.
Production costs increased by 1%, as higher energy costs and inflation were
offset by operating efficiencies.
Selling, general and administrative expenses were essentially unchanged for
the year at $2 million, while depreciation and depletion decreased slightly to
$52 million in 2001 from $54 million in 2000. The lower depreciation and
depletion expense was a result of certain mining equipment becoming fully
depreciated, which has lowered depreciation costs.
INDUSTRIAL MINERALS OPERATIONS
Income from the industrial minerals operations declined to $2 million in
2001 from $7 million in 2000 due to lower average sales prices. This decrease
was principally due to the slowing of the global economy, particularly in the
United States. Wollastonite sales volume of 99,000 tonnes in 2001 was 21% lower
than in 2000. Reduced sales volumes were partially offset by a 12% increase in
the average Canadian dollar sales price. Due to the competitiveness of low-value
products, the business has reduced its presence in certain markets and focused
on higher-value products.
YEAR ENDED DECEMBER 31, 2000 COMPARED WITH YEAR ENDED DECEMBER 31, 1999
MOUNTAIN OPERATIONS
Income from the mountain operations increased to $46 million in 2000 from
$23 million in 1999 largely due to a 6% increase in sales volumes. The increased
sales volume was accompanied by an increase in realized Canadian dollar prices
and a decrease in unit cost of sales. The mountain operations achieved record
export coal sales of 15.1 million tonnes in 2000 compared to 14.2 million tonnes
in 1999. Although price negotiations with the Japanese Steel Mills ("JSM") for
the 2000 coal year resulted in price decreases of up to 5%, markets outside Asia
did not follow the JSM settlements. Price reductions in non-Asian markets were
typically less than those agreed to with the JSM and some European contracts had
small price increases. Average sales prices of coal products from the mountain
operations decreased to US$34 per tonne in 2000 from US$36 per tonne in 1999,
due to lower average contract prices. However, realized Canadian dollar prices
increased 30 cents to just over $50 per tonne due to lower hedged foreign
exchange rates.
A-31
Cost of sales increased to $654 million in 2000 from $637 million in 1999 as
a result of higher sales volumes, partially offset by a 3% decrease in cost of
sales on a per tonne basis. A 2% increase in operating costs, primarily due to
higher fuel and energy costs, partially offset a reduction in unit distribution
costs. In addition, as a result of new accounting standards implemented in 2000,
mineral taxes were defined to be included in income taxes whereas in prior years
these amounts were included in the cost of sales.
Selling, general and administrative expenses were essentially unchanged for
the year. Depreciation and depletion increased to $54 million in 2000 from
$52 million in 1999 due to higher production volumes.
INDUSTRIAL MINERALS OPERATIONS
Income from the industrial minerals operations decreased to $7 million in
2000 from $8 million in 1999. Operating revenue declined to $56 million in 2000
from $59 million in the previous year reflecting a 7% decline in the average
sales price of wollastonite. This decline was partially offset by an increase in
wollastonite sales volumes to 125,000 tonnes in 2000 from 123,000 tonnes in
1999. Cost of sales declined slightly in this period to $33 million reflecting
lower production for inventory control purposes, and selling, general and
administrative costs decreased by $1 million to $7 million in 2000. Depreciation
and depletion was essentially unchanged over the period at $9 million.
CAPITAL EXPENDITURES
Capital expenditures were $61.1 million (including corporate) for 2001 and
primarily included the purchase of new haul trucks, the refurbishing of
equipment and normal maintenance expenditures required to sustain operations.
SELECTED INFORMATION FOR THE MET COAL ASSETS
The following summary contains selected combined financial and operating
information for the Met Coal Assets as at and for the five years ended
December 31, 2001, 2000, 1999, 1998 and 1997 and as at and for the nine months
ended September 30, 2002 and 2001. The summary information has been prepared by
the Offeror on the basis of discussions and in consultation with the management
of Luscar. It should be read in conjunction with the audited annual financial
statements and the unaudited interim financial statements of Luscar for the
respective periods presented as filed with securities regulatory authorities.
See the audited financial statements and the unaudited financial statements of
Luscar in Appendix C to the Circular. Operations relating to Luscar's and
CONSOL's respective interests in the Line Creek mine, the Cheviot mine project
and Neptune Terminals which comprise the Met Coal Assets have been included in
their other respective operations and as a result the financial information
below may not be entirely reflective of the operating results of such interests
if each such interest had been operated as if it were a separate business. The
financial information included in this table has been prepared in accordance
with Canadian GAAP, which differs in certain respects from U.S. GAAP. Reference
should be made to Luscar's Form 20-F for the year ended December 31, 2001 filed
with the SEC on May 28, 2002 for a further discussion on the differences between
Canadian GAAP and U.S. GAAP.
Nine months
ended
September 30, Year ended December 31,
------------------- ----------------------------------------------------
2002 2001 2001 2000 1999 1998 1997
-------- -------- -------- -------- -------- -------- --------
(unaudited)
Financial Information (millions of
dollars)
Revenue.................................. $131.0 $123.4 $176.4 $140.7 $142.0 $208.8 $208.9
Cost of sales.......................... 127.2 115.3 164.5 138.7 137.5 160.9 170.2
------ ------ ------ ------ ------ ------ ------
Operating margin(1)...................... $ 3.8 $ 8.1 $ 11.9 $ 2.0 $ 4.5 $ 47.9 $ 38.7
------ ------ ------ ------ ------ ------ ------
Capital expenditures..................... $ 2.2 $ 8.4 $ 9.1 $ 2.7 $ 6.3 $ 30.4 $ 20.7
------ ------ ------ ------ ------ ------ ------
Operating Information
Coal sales volumes (millions of tonnes)
Line Creek mine........................ 2.1 2.1 2.9 2.6 2.5 3.0 3.9
Average realized prices per tonne........ $63.29 $58.70 $60.90 $54.67 $56.77 $69.24 $53.79
------------
(1) The use of the term "operating margin" reflects the cash flow from the Met
Coal Assets before changes in working capital, which tend to be caused by
temporary changes in inventory and accounts receivable and before selling,
general and administrative costs, which are not allocated to mine sites. The
term "operating margin" is used to represent cash generated from operating
activities that is available to meet overhead, capital needs and to service
its long-term debt.
A-32
REVIEW OF FINANCIAL CONDITION OF THE MET COAL ASSETS
This review of the financial condition of the Met Coal Assets has been
prepared by the Offeror on the basis of discussions and in consultation with the
management of Luscar and has been extracted from Luscar's annual audited
financial statements and its management's discussion and analysis for the year
ended December 31, 2001 and unaudited financial statements and its management's
discussion and analysis for the nine months ended September 30, 2002 and should
be read in conjunction therewith. Since this review of the financial condition
of the Met Coal Assets has been extracted from financial information for
Luscar's entire operations, it may not be entirely reflective of the financial
condition of the Line Creek mine, the Cheviot mine project and the Neptune
Terminals which comprise the Met Coal Assets if each were operated as a separate
business. The financial statements from which this review has been extracted
have been prepared in accordance with Canadian GAAP, which differs in certain
respects from U.S. GAAP. Reference should be made to Luscar's Form 20-F for the
year ended December 31, 2001 filed with the SEC on May 28, 2002 for a further
discussion on the differences between Canadian GAAP and U.S. GAAP.
OVERVIEW
The Met Coal Assets include substantially all of the assets and liabilities
of the Line Creek mine and the Cheviot mine project which are currently owned
and operated by Luscar and CONSOL. Further details with regard to the Met Coal
Assets are provided in the "Overview of the MetCoal Company -- Principal
Properties and Facilities" in this Appendix A.
Luscar acquired the Line Creek mine in 1998 and subsequently sold a 50%
joint venture interest to CONSOL on December 31, 2000. Shortly thereafter, the
joint venture expanded production at the Line Creek mine, which is targeted to
reach approximately 3.6 million tonnes. At December 31, 2001, the proven and
probable coal reserves at the Line Creek mine were approximately 57.0 million
tonnes. The Offeror believes that there are also substantial coal resources at
the mine that will require further exploration before they can be classified as
proven reserves. As at December 31, 2001, the Line Creek mine had a
$307.2 million cumulative provincial mineral tax cost pool which could be used
to reduce the amount of provincial mineral taxes currently paid at Fording's
mines, which amounted to $18.4 million in 2001 and $15.5 million through the
nine months ending September 30, 2002.
Luscar and CONSOL are currently seeking regulatory approvals to amend their
existing permits to develop the Cheviot mine project, from which coal would be
hauled to the Luscar mine's existing processing plant as early as the first
quarter of 2004. The coal reserves at the Cheviot mine project are sufficient to
sustain operations for approximately 30 years, based on targeted production.
Luscar and CONSOL together have a 46.4% ownership interest in Neptune
Terminals which provides them with a competitive advantage over other Canadian
coal exporters. Rates paid by Luscar and CONSOL to Neptune Terminals are based
on allocation of actual costs, which are significantly lower than rates charged
by Westshore. The revenues and operating margins discussed below do not include
revenues and operating margins of the Neptune Terminals which is operated on a
break-even basis. Since April 2002, most of the Line Creek mine's coal has been
shipped through Neptune Terminals at lower costs than under the contract with
Westshore that expired on March 31, 2002.
Most of the revenue from the Line Creek mine is derived from hard coking
coal sold to steel producing customers outside of Canada, and limited amounts of
bituminous thermal coal sold to overseas electric utilities and local industrial
users. During 2001, 23% of export sales were made to Japan, 19% to Korea, 17% to
South America, 25% to the United States and 16% to Europe and other regions.
Luscar has long-term relationships with most of its export customers and its
export sales are made under contracts of one to five years in duration, with
prices being negotiated annually. During 1998, export coal prices and demand
volumes decreased significantly as a result of an economic recession in Asia.
The resurgence of the Asian economies in 2000, combined with rising energy
prices and steel production, led to increases in demand and higher prices for
hard coking coal exports in 2001 and 2002. At this time, price and volume
negotiations for the contract year that starts April 1, 2003 have not commenced.
A-33
Cost of sales includes the costs related to mining and processing coal,
transportation, royalties and production taxes as well as land reclamation. The
costs of mining vary from mine to mine based on the method of mining, which in
turn is based on the mine's geology and topography. As mining operations
progress further into reserves, the ratio of overburden to coal may change and
extraction costs may vary as a result. Although the Offeror believes that
reserves at the Line Creek mine are economically recoverable with its existing
equipment, it is possible to reduce extraction costs through investment in
larger equipment, improvements in pit designs and other innovations. Processing
costs are incurred to remove impurities from the coal prior to shipment to
increase the coal's heat content or improve its coking characteristics, to meet
customer specifications and to reduce shipping costs. The capacities of the Line
Creek mine's processing plants are higher than planned production rates for
2003, and the Offeror believes the Line Creek mine can increase its throughput
with modest investments in additional extraction equipment.
Prior to Luscar's acquisition of the Line Creek mine in 1998, the mine was
operated at mining ratios significantly lower than ratios for the remaining coal
reserves. Since that time, cash flow constraints due to cyclically low coal
prices delayed the removal of the overburden backlog, which in turn reduced the
efficiency of mining operations. Starting in 2001, with higher coal prices, the
Line Creek mine has operated at a significantly higher mining ratio to remove
the overburden backlog and to pre-strip additional overburden in connection with
the expansion of the mine's capacity. These measures, which have increased
operating costs during 2001 and 2002, are expected to result in higher
production and greater efficiency in the future as mining ratios return to
normal levels. During the nine months ended September 30, 2002, the Line Creek
mine has set numerous productivity records related to overburden removal, coal
production and cable belt conveyor throughput. The cable belt conveyor is an
11 kilometre conveyor installed at the Line Creek mine to move coal from mining
areas to the coal processing plant.
Significant rail transportation and port costs are incurred to deliver coal
to export customers. Most coal production is subject to royalties and production
taxes that are payable to provincial governments and other mineral rights
holders. The Line Creek mine has significant cost shelter from cumulative
provincial mineral tax cost pools, which may be transferable to other mining
operations of the MetCoal Company to the extent permitted by British Columbia
mineral tax legislation.
Luscar's management operates and manages each mine as a separate business
unit to ensure accountability and efficiency. Each operating mine is under the
direction of a general manager. Each mine submits an annual budget and a
long-term plan that is updated annually. Luscar's management has a practice of
requiring each mine to generate sufficient operating cash flow to fund its
ongoing capital needs. To control and manage this expectation, Luscar's
management utilizes a concept of "operating margin" that consists of the profit
generated by the mine before deducting selling, general and administrative costs
and depreciation and amortization expenses. Luscar's management's use of the
term "operating margin" reflects the cash flow from the mines before changes in
working capital, which tend to be caused by temporary changes in inventory and
accounts receivable. Luscar's management uses "operating margin" to represent
cash generated from operating activities that is available to meet overhead,
capital needs and to service its long-term debt. In the discussion below under
"-- Results of Operations", reference to "operating margin" is based on normal
management practices of Luscar.
Capital expenditures are incurred to replace existing equipment that has
served its useful life, to develop new mining areas at existing mines, to expand
production capacity and to effect productivity improvements. Capital
expenditures at the Line Creek mine are projected to be approximately
$10 million over the next five years. Capital requirements are funded from cash
provided by operating activities. It is expected that cash generation in the
future will be sufficient to meet these needs. As of September 30, 2002,
outstanding capital commitments related to the Line Creek mine were not
significant and were incurred in the ordinary course of business.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED WITH NINE MONTHS ENDED
SEPTEMBER 30, 2001
Revenue for the nine months ended September 30, 2002 increased to
$131.0 million from $123.4 million for the same period in 2001, or 6%. This
increase was due to higher prices. Average export coal prices increased to
A-34
$63.29 per tonne in the nine months ended September 30, 2002 from $58.70 per
tonne during the same period in 2001, reflecting price increases for hard coking
coals effective April 2001.
Cost of sales for the Line Creek mine increased during the nine months ended
September 30, 2002 to $127.2 million from $115.3 million in the same period
during 2001, or 10%. This increase resulted from increased production volumes at
the Line Creek mine and higher unit production costs, because the ratio of
overburden to coal was temporarily increased to 13.2 to 1.0 to pre-strip
additional overburden in connection with the expansion of the mine. As a result,
cash production costs for the nine months ended September 30, 2002 increased to
$39.09 per tonne from $34.36 in the same period in 2001. Transportation costs
for the Line Creek mine increased due to higher rail freight rates from the Elk
Valley, which were partially offset by lower port costs as a result of the Line
Creek mine shipping coal through the Neptune Terminals from March 31, 2002
onwards.
The operating margins for the nine months ended September 30, 2002 decreased
to $3.8 million from $8.1 million or 53%, due to the changes in revenue and cost
of sales discussed above.
During the nine months ended September 30, 2002, capital expenditures
totalled $2.2 million compared with $8.4 million during the same period in 2001.
During 2001, capital expenditures included additional equipment for the
expansion of production at the Line Creek mine.
YEAR ENDED DECEMBER 31, 2001 COMPARED WITH YEAR ENDED DECEMBER 31, 2000
Revenue in 2001 increased to $176.4 million from $140.7 million in 2000, or
25%. Average export coal prices increased to $60.90 per tonne in 2001 from
$52.23 per tonne in 2000, reflecting market price increases that became
effective on April 1, 2001. During 2001, the Line Creek mine started an
expansion of mine capacity and sales and volumes increased to 2.9 million tonnes
from 2.7 million tonnes in 2001, or 7%.
Cost of sales amounted to $164.5 million in 2001 compared with
$138.7 million in 2000, or 19%. Cost of sales in 2001 increased due to expansion
at the Line Creek mine and higher transportation costs. The increase in average
export coal selling prices led to higher transportation costs as rail freight
rates are affected by realized average selling prices. During 2001, production
costs per tonne increased at the Line Creek mine as productivity fell short of
targets while the mine's capacity was expanded. Labour negotiations during the
third quarter, which resulted in a new four-year collective bargaining
agreement, also had a temporary impact on productivity at the Line Creek mine.
Cash production costs averaged $35.38 per tonne during 2001 compared to $30.71
per tonne during 2000.
The operating margins in 2001 increased to $11.9 million from $2.0 million
in 2000, due to the changes in revenue and cost of sales discussed above.
Capital expenditures during 2001 amounted to $9.1 million compared with
$2.7 million during 2000. Most of the capital expenditures incurred during 2001
related to the expansion of the Line Creek mine. During 2000, most capital
spending related to equipment replacement at the Line Creek mine.
YEAR ENDED DECEMBER 31, 2000 COMPARED WITH YEAR ENDED DECEMBER 31, 1999
Revenue in 2000 decreased to $140.7 million from $142.0 million during 1999,
or 1%, as a result of lower export selling prices. Coal prices averaged $52.23
per tonne during 2000 compared with $56.77 per tonne in 1999. Sales volume
increased by 0.2 million tonnes due to higher production from the Line Creek
mine.
Cost of sales increased to $138.7 million in 2000 from $137.5 million in
1999, or 1%. This increase reflects the higher sales volume, as well as lower
rail transportation and port costs. Cash production costs averaged $30.71 per
tonne during 2000 compared to $28.00 per tonne during 1999.
The operating margins decreased to $2.0 million in 2000 from $4.5 million in
1999, due to the factors discussed above.
Capital expenditures during 2000 totalled $2.7 million compared with
$6.3 million during 1999, when significant capital expenditures were made to
complete the rebuild of the cable belt conveyor at the Line Creek mine.
A-35
SELECTED INFORMATION FOR THE LUSCAR MINE
Luscar and CONSOL have the right under the Luscar Put to require the MetCoal
Company to acquire a 100% interest in the Luscar mine within 30 days after the
Canadian Coal Trust becomes a reporting issuer in Canada. The following summary
contains selected financial and operating information for the Luscar mine as at
and for the five years ended December 31, 2001, 2000, 1999, 1998 and 1997 and as
at and for the nine months ended September 30, 2002 and 2001. The summary
information has been prepared by the Offeror on the basis of discussions and in
consultation with the management of Luscar. It should be read in conjunction
with the audited annual financial statements and the unaudited interim financial
statements of Luscar for the respective periods presented as filed with
securities regulatory authorities. See the audited financial statements and the
unaudited financial statements of Luscar in Appendix C to this Circular.
Operations relating to Luscar's and CONSOL's respective interests in the Luscar
mine have been included in their other respective operations and as a result the
financial information below may not be entirely reflective of the operating
results of such interests if each such interest had been operated as if it were
a separate business. The financial information included in this table has been
prepared in accordance with Canadian GAAP, which differs in certain respects
from U.S. GAAP. Reference should be made to Luscar's Form 20-F for the year
ended December 31, 2001 filed with the SEC on May 28, 2002 for a further
discussion on the differences between Canadian GAAP and U.S. GAAP.
Nine months
ended
September 30, Year ended December 31,
------------------- ----------------------------------------------------
2002 2001 2001 2000 1999 1998 1997
-------- -------- -------- -------- -------- -------- --------
(unaudited)
Financial Information (millions of
dollars)
Revenue.................................. $117.0 $149.0 $178.3 $138.7 $168.8 $178.4 $191.9
Cost of sales.......................... 97.1 127.3 147.2 122.6 140.7 126.5 144.4
------ ------ ------ ------ ------ ------ ------
Operating margin(1)...................... $ 19.9 $ 21.7 $ 31.1 $ 16.1 $ 28.1 $ 51.9 $ 47.5
------ ------ ------ ------ ------ ------ ------
Capital expenditures..................... $ 0.7 $ 0.5 $ 0.5 $ 1.7 $ 3.1 $ 3.5 $ 5.7
Operating Information
Coal sales volumes (millions of tonnes)
Luscar mine............................ 1.8 2.5 2.9 2.5 2.8 2.5 2.7
Average realized prices per tonne........ $64.66 $60.37 $61.02 $56.05 $60.83 $71.58 $71.19
------------
(1) The use of the term "operating margin" reflects the cash flow from the
Luscar mine before changes in working capital, which tend to be caused by
temporary changes in inventory and accounts receivable and before selling,
general and administrative costs, which are not allocated to the mine site.
The term "operating margin" is used to represent cash generated from
operating activities that is available to meet overhead, capital needs and
to service its long-term debt.
A-36
REVIEW OF FINANCIAL CONDITION OF THE LUSCAR MINE
Luscar and CONSOL have the right under the Luscar Put to require the MetCoal
Company to acquire a 100% interest in the Luscar mine within 30 days after the
Canadian Coal Trust becomes a reporting issuer in Canada. This review of the
financial condition of the Luscar mine has been prepared by the Offeror on the
basis of discussions and in consultation with the management of Luscar and has
been extracted from Luscar's annual audited financial statements and its
management's discussion and analysis for the year ended December 31, 2001 and
unaudited financial statements and its management's discussion and analysis for
the nine months ended September 30, 2002 and should be read in conjunction
therewith. Since this review of the financial condition of the Luscar mine has
been extracted from financial information for Luscar's entire operations, it may
not be entirely reflective of the financial condition of the Luscar mine if each
were operated as a separate business. The financial statements from which this
review has been extracted have been prepared in accordance with Canadian GAAP,
which differs in certain respects from U.S. GAAP. Reference should be made to
Luscar's Form 20-F for the year ended December 31, 2001 filed with the SEC on
May 28, 2002 for a further discussion on the differences between Canadian GAAP
and U.S. GAAP.
OVERVIEW
Substantially all of the assets and liabilities of the Luscar mine are owned
and operated through a joint venture between Luscar and CONSOL. Luscar and
CONSOL have jointly operated the Luscar mine for over thirty years. This mine is
close to being depleted and is expected to cease coal sales in early 2004. If
the Luscar Put is exercised, the MetCoal Company will acquire the Luscar mine
and Luscar and CONSOL will retain certain assets and liabilities of the Luscar
mine to reclaim the mine site, excluding those portions related to the assets
being sold.
The revenue from the Luscar mine is derived from hard coking coal sold to
steel producing customers outside of Canada. The Luscar mine has long-term
relationships with most of its export customers and its export sales are made
under contracts of one to five years in duration, with prices being negotiated
annually.
Certain major events and transactions have affected the comparability of the
selected financial information concerning the Luscar mine. With the downturn in
the export markets in 2000, Luscar and CONSOL decided not to proceed with the
Cheviot mine project until there was less uncertainty in the export markets. As
a result, it was necessary to increase the provision for closure costs at the
Luscar mine to provide for the termination of the workforce which otherwise
would have been transferred to the Cheviot site.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED WITH NINE MONTHS ENDED
SEPTEMBER 30, 2001
Revenue for the nine months ended September 30, 2002 decreased to
$117 million from $149.0 million for the same period in 2001, or 21%. This
decrease was due to a 27% decrease in sales volume that was partially offset by
higher prices. Sales volume from the Luscar mine reflects lower production
levels as the mine nears depletion. The increase in average export coal prices
to $64.66 per tonne in the nine months ended September 30, 2002 from $60.37 per
tonne during the same period in 2001 reflects price increases for hard coking
coals effective April 1, 2001, partly offset by pricing incentives given to
customers due to the pending closure of the mine.
Cost of sales for the Luscar mine decreased during the nine months ended
September 30, 2002 to $97.1 million from $127.3 million in the same period
during 2001, or 24%. Compared with the prior year period, production has been
scaled down due to impending closure of the mine. Unit production costs
increased due to the lower production volume and higher mining ratio pits
undertaken to extend the life of the mine until early 2004.
The operating margins for the nine months ended September 30, 2002 decreased
to $19.9 million from $21.7 million, or 8%, due to the changes in revenue and
cost of sales discussed above.
No significant capital expenditures were incurred in either period for the
Luscar mine, other than cost related to the application to amend the permits for
the Cheviot mine project.
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YEAR ENDED DECEMBER 31, 2001 COMPARED WITH YEAR ENDED DECEMBER 31, 2000
Revenue in 2001 increased to $178.3 million from $138.7 million in 2000, or
29%. Sales volume rose to 2.9 million tonnes in 2001 from 2.5 million tonnes in
the prior year due to higher demand in export markets. Average export coal
prices increased to $61.02 per tonne in 2001 from $56.05 per tonne in 2000,
reflecting market price increases that became effective on April 1, 2001.
Cost of sales amounted to $147.2 million in 2001 compared with
$122.6 million in 2000, in part due to higher sales volume. During 2000,
additional closure costs of $9.2 million were provided at the Luscar mine. The
increase in average export coal selling prices led to higher transportation
costs as rail freight rates were affected by realized average selling prices.
Production costs at the Luscar mine also increased because electricity costs
more than doubled upon deregulation of the electricity markets in Alberta and
supply shortages. Electricity costs moderated in the latter half of 2001 but
remain higher than in 2000.
The operating margins in 2001 increased to $31.1 million from $16.1 million
in 2000, or 93%, due to the changes in revenue and cost of sales discussed
above.
Capital costs in both years were nominal and related to the development of
new pits.
YEAR ENDED DECEMBER 31, 2000 COMPARED WITH YEAR ENDED DECEMBER 31, 1999
Revenue in 2000 decreased to $138.7 million from $168.8 million during 1999,
or 18%, as a result of lower export selling prices. Coal prices averaged $56.05
per tonne during 2000 compared with $60.83 per tonne in 1999. Sales volume
decreased by 0.3 million tonnes due to lower production from the Luscar mine.
Cost of sales decreased to $122.6 million in 2000 from $140.7 million in
1999, or 13%. This decrease was due to lower sales volumes, as well as lower
rail transportation and port costs. Cost of sales in 2000 also included
$9.2 million for additional provisions for the closure of the Luscar mine.
The operating margins decreased to $16.1 million in 2000 from $28.1 million
in 1999, or 43%, due to the factors discussed above.
Capital expenditures in both years were nominal and related to development
of new pits.
SUMMARY OF DISTRIBUTABLE CASH OF CANADIAN COAL TRUST
The following analysis has been prepared by the Offeror to assist
Shareholders of Fording, who are considering electing to receive Exchange Rights
(and therefore an entitlement to Units) for their Fording Shares. This analysis
compares distributable cash per Unit estimated by the Offeror to pro forma
distributable cash provided by Fording in its supplement to the Fording
Management Circular.
These calculations of estimated distributable cash per Unit for the year
ended December 31, 2001 and nine months ended September 30, 2002 assume that the
Enhanced Offer and the transactions involving the Met Coal Assets, the Luscar
mine (pursuant to the Luscar Put) and the Fording thermal assets have been
completed at the beginning of such periods. See "Funding, Acquisition and
Related Transactions -- MetCoal Company and Related Matters" in this
Appendix A.
Estimates of distributable cash are not intended to be representative of the
earnings of SCAI or the Canadian Coal Trust. Also, distributable cash is not a
measure of cash flow or earnings recognized by GAAP and does not have a
standardized meaning. Therefore, distributable cash is unlikely to be comparable
with similar measures presented by others.
EBITDA is used to refer to earnings before interest, income taxes,
depreciation and amortization. EBITDA is not intended to be representative of
cash flows or earnings of the relevant entities determined in accordance with
GAAP. EBITDA may not be comparable to similar measures presented by others.
The following analysis is not a forecast or a projection of future results
and is not a summary of pro forma financial information calculated in accordance
with applicable securities legislation. The amounts included in this analysis
include estimates made by the Offeror. Actual results may vary from these
estimates and such variations may be material. See "Risk Factors" in this
Appendix A for a discussion of factors that may cause
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actual results to vary from these estimates. The amounts of distributable cash
estimated by the Offeror are not necessarily indicative of the results of
operations or financial position which would have been achieved had the
transactions occurred at the beginning of the respective periods and may not be
indicative of future operating results or financial condition for the Canadian
Coal Trust.
Nine months
ended Year ended
September 30, December 31,
2002 2001
--------------- --------------
(unaudited)
(millions of dollars, except per
unit amounts)
Pro forma Fording Income Trust Distributable Cash(1):
FORDING INCOME TRUST DISTRIBUTABLE CASH PER UNIT.......... $ 2.30 $ 2.75
Total distributable cash.................................. 87.9 107.6
Cash reserve add back..................................... 9.8 12.0
------ ------
Available cash before cash reserve........................ 97.7 119.6
Adjustments to available cash:
Estimated EBITDA less taxes and capital expenditures for
Industrial Minerals................................... (6.0) (8.6)
Estimated interest, administration and other expenses... 14.7 21.2
------ ------
Fording Income Trust distributable cash..................... $106.4 $132.2
------ ------
Canadian Coal Trust Distributable Cash:
Fording Coal Partnership available cash(2).................. $170.8 $212.2
SCAI Adjustments:
Elimination of losses under Fording's foreign exchange
hedge arrangements(3)................................... 64.7 54.0
Inclusion of EBITDA for Met Coal Assets(5)................ 3.8 11.9
Inclusion of capital expenditures for Met Coal Assets..... (2.2) (9.1)
Inclusion of EBITDA for the Luscar mine(4)................ 19.9 31.1
Inclusion of capital expenditures for the Luscar mine..... (0.7) (0.6)
Effect of SCAI interest expense(6)........................ (12.2) (16.3)
Inclusion of estimated EBITDA less taxes and capital
expenditures for Industrial Minerals.................... 6.0 8.6
Elimination of estimated EBITDA for Elkview mine(5)....... (79.0) (79.0)
Removal of capital expenditures for Elkview mine.......... 6.3 15.0
Elimination of estimated EBITDA for thermal coal assets... (33.1) (47.6)
Removal of estimated capital expenditure for thermal coal
assets.................................................. 3.1 4.2
------ ------
Canadian Coal Trust distributable cash...................... $147.4 $184.4
------ ------
Number of units (in millions)(7)............................ 57.8 57.8
CANADIAN COAL TRUST DISTRIBUTABLE CASH PER UNIT............. $ 2.55 $ 3.19
-------------
(1) Amounts in respect of Fording Income Trust were extracted from Fording's
supplement to the Fording Management Circular and other documents filed by
Fording with securities regulatory authorities.
(2) Based on Fording Income Trust's 62.3% ownership of Fording Coal Partnership.
(3) Fording will retain its current foreign exchange hedge position. SCAI will
terminate all foreign exchange hedge arrangements and does not intend to
enter into foreign exchange hedge arrangements in the future.
(4) Assumes the Luscar Put is exercised.
(5) Net of mine taxes.
(6) Based on an estimate of $300 million of term debt and $25 million of working
capital debt at a 5% interest rate.
(7) Calculated based upon the number of Units issuable to Fording Shareholders
and to the Partnership upon conversion of its interest in SCAI to Units of
Canadian Coal Trust of 51.4 million and including the purchase of the Met
Coal Assets (5.9 million Units) and the exercise of the Luscar Put
(0.5 million Units).
Fording has announced that its revised plan of arrangement estimates cash
distribution for the quarter ending March 31, 2003 to be approximately $1.05 per
unit based on contracted coal sales prices for the year ended March 31, 2003.
The Offeror has also targeted its distributable cash for the quarter ending
March 31,
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2003 to be $1.05 per Unit. This target takes into account the items reflected
under "SCAI adjustments" in the above table as well as cost savings that are
anticipated to be realized in the first quarter of 2003.
In order to provide Unitholders with greater certainty with respect to the
amount of distributions in 2003, the Partnership will subordinate its right to
receive any distribution in respect of its holdings of SCAI Series B Notes in
the 2003 year until the Canadian Coal Trust first received cash interest on its
SCAI Series A Notes of $1.05 per Unit per quarter, subject to a maximum
subordination of $11.25 million for each calendar quarter, for an aggregate
maximum subordination for the year of $45 million. See "Share and Loan Capital
of Sherritt Coal Acquisition -- SCAI Notes and Subordination -- Subordination"
in this Appendix A.
The Offeror's target of distributable cash is based on expected higher cash
flow from the Met Coal Assets, lower debt levels and cost savings to be realized
from the combination of Fording and the Met Coal Assets. The expectation of
higher cash flows from the Met Coal Assets reflects the completion of the
removal of the overburden backlog and the pre-stripping of additional overburden
in connection with the expansion of the Line Creek mine's capacity. During the
nine months ended September 30, 2002, the Line Creek mine set numerous
productivity records related to overburden removal, end production and cable
belt conveyor throughput. See "Review of Financial Condition of the Met Coal
Assets". An assessment of the next 10 years of the Line Creek mine's operating
plans by Norwest Corporation, an independent engineering firm, is included in
Appendix D to the Circular. The MetCoal Company is expected to have
approximately $300 million of term debt and $25 million of working capital debt
compared with at least $425 million of debt of Fording and Fording's share of
working capital debt of the Fording Coal Partnership. The Offeror anticipates
achieving one-third of its estimated $50 million annual cost savings during
2003. The remaining cost savings, when realized after 2003, are expected to
increase annual distributable cash flow per Unit by approximately $0.60 before
the benefit of any marketing or coal blending synergies.
DIRECTORS, MANAGEMENT AND TRUSTEES
TRUSTEES AND EXECUTIVE OFFICERS OF CANADIAN COAL TRUST
The trustees of the Canadian Coal Trust are Dennis G. Maschmeyer, Jowdat
Waheed, Samuel W. Ingram, Q.C. and Trevor M. Apperley.
On the Date of Exchange, it is anticipated that the Canadian Coal Trust will
have seven Trustees. Each of the Trustees after the Date of Exchange will be
independent of Sherritt, OTPP, the Partnership and any of their respective
affiliates. It is currently anticipated that the Canadian Coal Trust will have
no officers.
Pursuant to an agreement in principle among the Offeror, Luscar, CONSOL and
the Partnership, on the Date of Exchange, the Partnership has agreed to nominate
a representative of CONSOL who shall be independent of the Partnership, the
Offeror, OTPP and Sherritt, as a Trustee and as a director of SCAI.
For details regarding the Trustees' rights and obligations, see "The
Canadian Coal Trust -- Trustees" in this Appendix A.
DIRECTORS AND EXECUTIVE OFFICERS OF SHERRITT COAL ACQUISITION INC.
The governing documents of SCAI will provide that SCAI will have between
four and thirteen directors.
Prior to the Date of Exchange, the board of directors of SCAI will consist
of four directors. The following table sets out the name, municipality of
residence, age, proposed position with SCAI and current principal occupation for
each person anticipated to serve as a director and/or officer of SCAI during the
period from the date hereof to the Date of Exchange.
Name and Municipality of Residence Age Proposed Position(s) Current Principal Occupation
---------------------------------- -------- ---------------------- -----------------------------------------
Dennis G. Maschmeyer 63 Director and President President and Chief Executive Officer of
Bruderheim, Alberta and Chief Executive Sherritt International Corporation
Officer
Jowdat Waheed 39 Director and Senior Vice-President, Finance and Chief
Toronto, Ontario Vice-President, Chief Financial Officer of Sherritt
Financial Officer and International Corporation
Treasurer
Samuel W. Ingram, Q.C. 57 Director and Senior Vice-President, General Counsel
Toronto, Ontario Vice-President and and Corporate Secretary of Sherritt
Secretary International Corporation
Trevor M. Apperley 52 Director and Director, Relationship Investments,
Calgary, Alberta Vice-President Ontario Teachers' Pension Plan Board
A-40
Following the Date of Exchange, the number of directors of SCAI will be
increased to nine and the directors of SCAI will be elected in accordance with
the Shareholders Agreement described below under the heading "Share and Loan
Capital of Sherritt Coal Acquisition Inc. -- Shareholders Agreement" in this
Appendix A. Under the terms of the Shareholders Agreement, the Trustees will
have the right to nominate for election at least a majority of the directors of
SCAI. It is anticipated that the nominees of the Trustees for election as
directors of SCAI will be selected from among the Trustees.
Pursuant to an agreement in principle among the Offeror, Luscar, CONSOL and
the Partnership, on the Date of Exchange, the Partnership has agreed to nominate
a representative of CONSOL who shall be independent of the Partnership, the
Offeror, OTPP and Sherritt, as a Trustee and as a director of SCAI.
Following the Date of Exchange, the officers of SCAI will be appointed by
the board of directors of SCAI in accordance with the terms of the Management
Agreement described below in this Appendix A under the heading "Directors,
Management and Trustees -- Management Agreement for SCAI and its Subsidiaries".
GOVERNANCE OF CANADIAN COAL TRUST
The Trustees will be directly responsible for developing the Canadian Coal
Trust's approach to governance issues, including forming committees of Trustees,
filling vacancies among the Trustees and periodically reviewing the composition
and effectiveness of the Trustees and the contribution of individual Trustees.
The Trustees will also be responsible for adopting and periodically
reviewing and updating the Canadian Coal Trust's written corporate disclosure
and insider trading policies. These policies will, among other things:
- articulate the legal obligations of the Canadian Coal Trust, its
affiliates and their respective Trustees, directors, officers and
employees with respect to confidential corporate information;
- identify spokespersons of the Canadian Coal Trust who are authorized to
communicate with third parties such as analysts, the media and investors;
- provide guidelines on the disclosure of forward-looking information;
- require advance review by senior representatives of any disclosure of
financial information to ensure that the information is not material, and
to ensure that selective disclosure of material information does not
occur, and that if it does occur, a news release be issued promptly; and
- establish "black-out" periods immediately prior to and following the
disclosure of quarterly and annual financial results during which the
Canadian Coal Trust, its affiliates and their respective Trustees,
directors, officers and certain other persons may not purchase or sell
Units of the Canadian Coal Trust.
The Trustees will directly fulfill their responsibilities of oversight and
supervision of:
- the accounting for and financial reporting practices and procedures of the
Canadian Coal Trust;
- the adequacy of internal accounting controls and procedures of the
Canadian Coal Trust; and
- the quality and integrity of financial statements of the Canadian Coal
Trust.
In addition, the Trustees will be responsible for directing the auditors'
examination into specific areas. See also "The Canadian Coal Trust" in this
Appendix A.
GOVERNANCE OF SHERRITT COAL ACQUISITION INC.
The board of directors of SCAI will be responsible for the management of
SCAI and will establish the committees it determines are necessary, including
the following committees:
CORPORATE GOVERNANCE COMMITTEE. This committee will be responsible for
assisting the board in supervising the Management Agreement described below
under the heading "-- Management Agreement for SCAI and its Subsidiaries" and
the Administration Agreement described below under the heading
"-- Administration
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Agreement for Canadian Coal Trust" in this Appendix A, as well as reviewing the
adequacy and form of directors' compensation. The committee is expected to
review annually the performance of the Manager under the Management Agreement
and the Administration Agreement against the goals and objectives established by
the board of directors of SCAI for that year. The committee will also administer
and make recommendations regarding any actions under or changes to the
Management Agreement and the Administration Agreement. The committee will also
be responsible for developing SCAI's approach to corporate governance issues,
advising the board of directors of SCAI in filling vacancies and periodically
reviewing the composition and effectiveness of the board and the contribution of
individual directors.
AUDIT COMMITTEE. This committee will be responsible for monitoring the
financial reporting, accounting systems and internal controls and liaising with
external auditors for SCAI and each of its subsidiaries, including the MetCoal
Company.
REMUNERATION OF TRUSTEES OF CANADIAN COAL TRUST AND DIRECTORS OF SHERRITT COAL
ACQUISITION INC.
The compensation paid to each Trustee and to each individual who acts as a
director of SCAI nominated by the Trustees will be determined on or before the
Date of Exchange. Only directors of SCAI who are nominated by the Trustees will
receive compensation from SCAI, except that all Trustees and all directors of
SCAI will be reimbursed for their reasonable expenses. No Trustee or director of
SCAI will be paid for serving as a director of the MetCoal Company.
INSURANCE COVERAGE FOR CANADIAN COAL TRUST, SHERRITT COAL ACQUISITION INC. AND
RELATED ENTITIES AND INDEMNIFICATIONS
The Canadian Coal Trust and SCAI will seek to obtain directors' and
officers' liability insurance for the Trustees of the Canadian Coal Trust and
the directors and officers of SCAI and its subsidiaries. The Declaration of
Trust provides, and the by-laws of each of SCAI and its subsidiaries will also
provide, for the indemnification of the Trustees and of the directors and
officers of SCAI and its subsidiaries from and against liabilities and costs in
respect of any action or suit against them in connection with the execution of
their duties of office, subject to the limitations contained in the CBCA.
MANAGEMENT AGREEMENT FOR SCAI AND ITS SUBSIDIARIES
Prior to the Date of Exchange, SCAI will enter into a management agreement
(the "Management Agreement") with the Manager. Under the terms of the Management
Agreement, the Manager will provide management services to SCAI and its
subsidiaries, subject to the overall direction of the board of directors of SCAI
in respect of SCAI and its subsidiaries. To the extent practicable, the Manager
will provide integrated and efficient management for all of the coal mining
properties of both the MetCoal Company and Luscar, in addition to combining
common management and administrative functions of SCAI.
SERVICES PROVIDED BY THE MANAGER
The services to be provided by the Manager to SCAI and its subsidiaries,
including the MetCoal Company, will include: (i) providing all personnel
required to manage and administer business operations, including nominees as
officers for SCAI and its subsidiaries; (ii) providing transportation, logistics
and procurement services; (iii) providing all financial services, including
financial reporting, accounting, treasury, tax, legal and marketing services;
(iv) preparing for board review and approval and implementing annual operating
and capital expenditure budgets, strategic plans and annual business plans;
(v) providing maintenance management services; (vi) providing overhead
administration; (vii) providing mine engineering services; (viii) developing for
board review and approval and implementing acquisitions, divestitures and
investments; (ix) overseeing the business and affairs of SCAI and its
subsidiaries and reporting to the boards of directors, as the case may be, as
appropriate; (x) assisting in connection with arranging any financing;
(xi) preparing, planning and co-ordinating meetings of the directors of SCAI and
of its subsidiaries; (xii) operating and maintaining the assets of SCAI and its
subsidiaries; and (xiii) negotiating contracts with customers, suppliers and
other third parties (other than with
A-42
the Manager). These services will be provided by the Manager subject to the
overall direction of the board of directors of SCAI.
COMPENSATION OF THE MANAGER
The Manager will provide management services to SCAI and its subsidiaries
against payment by SCAI of the actual costs incurred by the Manager (including a
reasonable allocation for indirect overheads) to provide the services. However,
the Management Agreement will provide that the annual cost to SCAI of these
management services shall not exceed the costs incurred by Fording and its
subsidiaries to provide the equivalent management services for the year ending
December 31, 2002 (excluding any unusual and one-time items), as adjusted by
certain stipulated inflation related indices on an annual basis (the adjusted
amount being the "Base Cost"). The Manager will also provide additional services
necessary for the proper administration and governance of SCAI at the Manager's
cost (including a reasonable allocation for indirect overheads). All management
and administrative services not provided by the Manager and instead provided by
third parties will be billed at cost directly to SCAI.
In addition to payment of its costs, the Manager will be entitled to receive
annually from SCAI a specified percentage of the difference between: (i) the
Base Cost, adjusted to take into account the actual costs incurred in that year
of transferring to the Manager the employees and functions of SCAI and of the
Canadian Coal Trust; and (ii) the actual cost incurred by the Manager to provide
management the corresponding services to SCAI (including a reasonable allocation
for indirect overheads). The specified percentage will be determined prior to
the Date of Exchange by negotiation between the Manager and the Trustees (all of
whom will be independent of the Manager, the Partnership, Sherritt, OTPP and
their respective affiliates), based upon terms and conditions customary for
agreements of this nature.
The Manager will also be entitled to an incentive payment from SCAI each
year to reward the Manager for improvements in those operating costs, production
volumes and cash operating margins which are within the reasonable influence of
the Manager, relative to those cost, production and margin levels required to
maintain certain minimum cash distributions by SCAI. The incentive payments will
be determined prior to the Date of Exchange by negotiation between the Manager
and the Trustees (all of whom will be independent of the Manager, the
Partnership, Sherritt, OTPP and their respective affiliates), based upon terms
and conditions customary for agreements of this nature.
For any services requested by SCAI or any of its subsidiaries that are
extraordinary in nature and are not provided for in the Management Agreement,
the Manager will be reimbursed by the requesting party at its cost (including a
reasonable allocation for indirect overhead costs) for such services. The
Manager will be required to submit a written estimate and to receive approval
from the requesting party for such costs prior to acting upon such requests. The
Manager will not be entitled to any portion of cost savings, if any, which is
attributable to the Manager providing these additional services or to any
incentive payments in respect of these additional services.
SUPERVISION OF THE MANAGER
Pursuant to the Management Agreement, the authority of the Manager to manage
and administer the day-to-day affairs of SCAI and its subsidiaries will be
subject to the overall direction, supervision and review of the board of
directors of SCAI, as well as to the constating documents of each of SCAI and
its subsidiaries and the Shareholders Agreement. The Management Agreement will
stipulate that a number of material actions may not be undertaken by the Manager
without first obtaining the approval of a majority of the directors of SCAI. The
restricted actions will include: (i) disposing of any material assets or
equipment used in operating or maintaining the coal mining properties of SCAI or
its subsidiaries, other than in the ordinary course of business or as provided
for in the annual business plan; (ii) adopting, amending or materially deviating
from the annual business plan or any operating or capital expenditure budget;
and (iii) making any material expenditure or commitment outside the Manager's
scope of responsibilities which is not in accordance with the annual business
plan or the approved operation and capital expenditure programs or which would
result in a variance to the annual business plan. The board of directors of SCAI
may from time to time appoint an independent engineer to, among other
responsibilities, review and assess: (i) the operating results and performance
of the Manager;
A-43
(ii) the operation and maintenance of the coal mining properties of SCAI and its
subsidiaries; and (iii) the adequacy of the actual or proposed operational and
capital expenditure programs of SCAI and its subsidiaries or any modifications
thereto.
TERM AND TERMINATION
The initial term of the Management Agreement will be five years, renewable
thereafter for three year terms with the consent of SCAI. SCAI or the Manager
may, by written notice, immediately terminate the Management Agreement in the
event of: (i) the winding-up, liquidation, bankruptcy, insolvency or
receivership of a counterparty to the Management Agreement; (ii) a default by a
counterparty to the Management Agreement in the performance of any material
obligation of that counterparty under the Management Agreement (other than as a
result of the occurrence of a FORCE MAJEURE event), which is not remedied within
90 days after notice thereof has been delivered or, when the default is not
capable of being remedied within 90 days, the defaulting party fails to commence
and diligently pursue steps to remedy that default; and (iii) a change of
control of the Canadian Coal Trust. SCAI will also have the right to terminate
the Management Agreement upon 365 days' notice at any time after the initial
five year term. Upon termination of the Management Agreement for any of the
foregoing reasons, the Manager will be entitled to be paid: (i) all amounts
payable to, or accrued to the benefit of, the Manager (including the Manager's
specified percentage of cost savings to date and any accrued incentive
payments); and (ii) all out-of-pocket costs incurred or reasonably likely to be
incurred by the Manager in connection with the termination.
Upon a termination of the Management Agreement for any reason by SCAI, the
Manager will be required to arrange for the transfer or recruitment of
sufficient employees to SCAI and its subsidiaries so that each of these entities
will be able to reasonably conduct independent business operations. The parties
will reimburse the Manager for all reasonable transfer, recruitment or other
costs incurred in connection with this obligation.
DUTIES OF THE MANAGER
In exercising its powers and discharging its duties under the Management
Agreement, the Manager will be required to exercise the degree of care,
diligence and skill that a reasonably prudent manager of a similar business
would exercise in comparable circumstances. Although the Management Agreement
will permit the Manager to delegate its responsibilities, no such delegation
will relieve the Manager of any of its obligations under the Management
Agreement. Subject to limited exceptions, the Manager will only be permitted to
assign the Management Agreement with the consent of SCAI, acting reasonably. No
amendments to the Management Agreement will be permitted without the approval of
SCAI.
TRANSITIONAL MATTERS
The Manager intends to offer employment to existing Canadian management and
administrative employees of Fording on terms that are substantially similar to
their current arrangements with Fording, including base pay and bonus
arrangements, pension plans and extended health and other employment related
benefits. The Manager also intends to assume all collective agreements governing
those employees, if any, and the obligations under all existing pension and
other plans. However, the Manager will not assume any obligations that arise
directly from a change of control of Fording nor will the Manager assume any
pension liabilities of Fording that are unfunded as at the date of transfer of
employees. The MetCoal Company shall continue to be liable for any such
obligations.
ADMINISTRATION AGREEMENT FOR CANADIAN COAL TRUST
Prior to the Date of Exchange, the Canadian Coal Trust will enter into an
administration agreement (the "Administration Agreement") with the Manager.
Under the terms of the Administration Agreement, the Manager will provide
administrative services to the Canadian Coal Trust, subject to the overall
direction of the Trustees in respect of the Canadian Coal Trust and to the
Declaration of Trust. The services will include: (i) providing all personnel
required to manage and administer the operations of the Canadian Coal Trust;
(ii) administering the day-to-day operations of the Canadian Coal Trust,
including the provision of all clerical
A-44
and administrative functions and all financial services, including financial
reporting, accounting, treasury, tax, legal and marketing services;
(iii) providing administration; (iv) assisting in connection with arranging any
financing; (v) preparing, planning and co-ordinating meetings of the Trustees;
and (vi) negotiating contracts with customers, suppliers and other third parties
(other than with the Manager). The Manager will provide these administrative
services to the Canadian Coal Trust against payment by the Canadian Coal Trust
of the actual costs incurred by the Manager (including a reasonable allocation
for indirect overheads) to provide those services. The Canadian Coal Trust and
the Manager will each have the right to terminate the Administration Agreement
upon 365 days' notice at any time. Upon termination of the Administration
Agreement for any of the foregoing reasons, the Manager will be entitled to be
paid: (i) all amounts payable to, or accrued to the benefit of, the Manager; and
(ii) all out-of-pocket costs incurred or reasonably likely to be incurred by the
Manager in connection with the termination.
FUNDING, ACQUISITION AND RELATED TRANSACTIONS
CREDIT ARRANGEMENTS OF SHERRITT COAL ACQUISITION INC. AND THE METCOAL COMPANY
At the Date of Exchange, the MetCoal Company will have indebtedness under
the MetCoal Notes described below under "Share and Loan Capital of the MetCoal
Company". In addition, the MetCoal Company will have indebtedness under a
revolving credit facility with one or more Canadian chartered banks in an amount
sufficient to meet its working capital requirements. The Offeror has obtained a
commitment for the revolving credit facility in an amount of up to $100 million
from a Canadian chartered bank. It is anticipated that the facility will be
entered into on the date of completion of the Fording Acquisition (or,
alternatively, that it will be entered into by SCAI prior to such date and
assumed by the MetCoal Company on such date). The revolving credit facility will
be guaranteed by the subsidiaries of the MetCoal Company and secured against the
inventory and receivables of the MetCoal Company and its subsidiaries. The
revolving credit facility will bear interest and fees, and include covenants,
representations and warranties, conditions and default provisions, which in each
case are customary for credit facilities of this type. The revolving facility
will have a term of 364 days.
In addition, prior to the Date of Exchange, the MetCoal Company will have
assumed the obligations of SCAI under a bridge loan facility described in
section 15 of the Circular, "Source of Funds".
As of the Date of Exchange, SCAI will be indebted to each of the Partnership
and the Canadian Coal Trust pursuant to the SCAI Notes. See "Share and Loan
Capital of Sherritt Coal Acquisition Inc. -- SCAI Notes and Subordination" in
this Appendix A. SCAI will also be a guarantor of the revolving credit facility
and of the bridge loan facility described above, and will have pledged the
shares held by it in the MetCoal Company and the MetCoal Notes in support of its
guarantee of the bridge loan facility described above.
ACQUISITION OF SCAI SECURITIES
The Canadian Coal Trust and Sherritt will enter into an acquisition
agreement prior to the first Take Up and Pay Date. The acquisition agreement
will provide that, immediately prior to each Take Up and Pay Date, the Canadian
Coal Trust will acquire all SCAI Shares and SCAI Series A Notes held by Sherritt
(which will have been acquired by Sherritt in exchange for issuing Exchange
Rights to SCAI) in exchange for issuing to Sherritt a number of Units equal to
the number of SCAI Shares held by Sherritt.
Immediately following the completion of this acquisition, the Canadian Coal
Trust will hold SCAI Shares and SCAI Series A Notes, in addition to the SCAI
Shares it will already hold. The percentage of SCAI Shares owned by the Canadian
Coal Trust will depend on the percentage of Shares tendered by Fording
Shareholders who elect to receive Exchange Rights in consideration for their
Shares deposited and taken up pursuant to the Enhanced Offer.
Prior to the initial Take Up and Pay Date, the Partnership will subscribe
for SCAI Shares and SCAI Series B Notes in consideration for sufficient cash to
fund the cash being paid to Fording Shareholders pursuant to the Enhanced Offer,
net of the bridge loan.
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The total consideration paid by the Canadian Coal Trust and the Partnership
for their interests in SCAI will be allocated between the SCAI Shares and SCAI
Series A Notes and SCAI Series B Notes. Depending upon elections made by Fording
Shareholders to receive cash or Exchange Rights or a combination of cash and
Exchange Rights, the per share price of SCAI Shares paid by the Partnership may
be lower than that paid by the Canadian Coal Trust. For example, based on the
assumptions used in the pro forma financial statements of SCAI and the Canadian
Coal Trust and without giving effect to the transactions contemplated by the
agreement in principle among the Offeror, Luscar, CONSOL and the Partnership
with respect to the Met Coal Assets and the Luscar Put, in the event elections
are made by Fording Shareholders for the maximum cash amount of $850 million,
the Partnership would acquire 47.2% of the SCAI Shares for $10.0 million and
$680.0 million of the SCAI Series B Notes and the Canadian Coal Trust would
acquire 52.8% of the SCAI Shares for $189.8 million and $759.2 million of the
SCAI Series A Notes. However, in the event elections are made by Fording
Shareholders for the maximum Exchange Rights, the Partnership would acquire
17.5% of the SCAI Shares for $63.0 million and $252.0 million of the SCAI
Series B Notes and the Canadian Coal Trust would acquire 82.5% of the
SCAI Shares for $296.8 million and $1,187.2 million of the SCAI Series A Notes.
Pursuant to the terms of the Conversion Agreement to be entered into between
the Canadian Coal Trust and the Partnership prior to the Date of Exchange, the
Partnership will be entitled to exchange all or a portion of its SCAI Shares and
SCAI Series B Notes for a number of Units equal to the number of SCAI Shares
being exchanged by the Partnership. See "Share and Loan Capital of Sherritt Coal
Acquisition Inc. -- Conversion Agreement" in this Appendix A. If the Partnership
exercises its right to exchange all of its SCAI Shares and SCAI Series B Notes,
the effective cost per Unit to the Partnership would be $28.41 in the maximum
cash scenario and $35.00 in the maximum exchange rights scenario described
above.
METCOAL COMPANY AND RELATED MATTERS
In order to focus the operation of the MetCoal Company on metallurgical
coal, to realize the synergies, cost savings and benefits outlined in this
Circular, and to reduce indebtedness and capital expenditure commitments in the
MetCoal Company, the MetCoal Company intends:
- to acquire the Met Coal Assets from Luscar and CONSOL; and
- to enter into transactions that will result in the Met Coal Company not
having a material economic participation in Fording's thermal coal assets
and such economic participation being held by the Partnership, Luscar
and/or their affiliates.
Subject to obtaining required regulatory and third party approvals, the
MetCoal Company will cease to have a material economic participation in those
thermal assets from the first Take Up and Pay Date. The proceeds of these
transactions will be used to repay a portion of the outstanding indebtedness of
Fording, to terminate existing currency hedge arrangements and to pay the break
fees under the Fording-Teck Combination. As at September 30, 2002, the aggregate
outstanding indebtedness of Fording, including costs in respect of the proposed
Fording plans of arrangement was approximately $166 million. Currency hedge
arrangement cancellation costs are estimated at $115 million and break fees
payable are $51 million. Approximately $90 million of the above amounts are
expected to be financed from borrowings under the bridge loans described in
section 15 of the Circular, "Source of Funds".
The Offeror, Luscar and CONSOL have agreed in principle that effective on
the date on which the Offeror acquires 66 2/3% of the Shares, the MetCoal
Company will acquire, subject to settlement of definitive documentation and
certain conditions, including obtaining certain required consents, which are
expected to be received by the Offeror prior to the completion of the Fording
Acquisition, the following:
- a 100% interest in the Line Creek mine;
- a 100% interest in the undeveloped Cheviot mine project;
- a 46.4% interest in the Neptune Terminals; and
- the coal reserves and resources related to the above metallurgical
properties.
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Each of Luscar and CONSOL is entitled to receive as consideration under
these transactions 2.95 million Units of the Canadian Coal Trust. Under the
transactions, the MetCoal Company will also assume all of the liabilities and
obligations of Luscar and CONSOL related to the Met Coal Assets. The amount of
consideration to be received by Luscar and CONSOL is subject to an adjustment
for working capital to the extent transferred to the MetCoal Company, which
amount will be satisfied in cash.
Under these transactions, the MetCoal Company will acquire, among other
assets, real property at the mine sites, related infrastructure, coal resources
and reserves, machinery and other personal property, and all related
transferable licences, permits, approvals and contracts for sale of coal
produced. The MetCoal Company will also acquire approximately $307.2 million of
cumulative provincial mineral tax cost pool in British Columbia in respect of
the Line Creek mine. In the case of the Neptune Terminals, Luscar and CONSOL
will transfer to the MetCoal Company its contracted capacity and storage
entitlements, but will retain the right to ship its expected thermal coal volume
through the Neptune Terminals.
In addition, this agreement in principle also provides Luscar and CONSOL
with the right to require the MetCoal Company to acquire their interests (which
together amount to 100%) in the Luscar mine (excluding pre-existing reclamation
liabilities) for 250,000 additional Units each, provided that this right may
only be exercised within 30 days after the Canadian Coal Trust becomes a
reporting issuer in Canada and may only be exercised by both Luscar and CONSOL
concurrently. If effected, the terms of this transaction involving the Luscar
mine would be similar to the transaction involving the Line Creek mine, the
Cheviot mine project and the Neptune Terminals described above, including having
the same effective date, except that the MetCoal Company will not assume the
pre-existing reclamation, environmental or associated liabilities in respect to
the Luscar mine.
In connection with these transactions, on the Date of Exchange, the Offeror
has agreed to nominate one representative of CONSOL who shall be independent of
the Partnership, the Offeror, OTPP and Sherritt, as one of the Trustees of the
Canadian Coal Trust and as a member of the Board of Directors of SCAI.
Following the acquisition of the Met Coal Assets by the MetCoal Company and
assuming the exercise of the Luscar Put, each of Luscar and CONSOL will own
approximately 3.2 million Units of the Canadian Coal Trust, representing
approximately 5.5% of the outstanding Units, including the issuance of Units
upon exchange of the Partnership's interest in SCAI Shares and SCAI Series B
Notes for Units of the Canadian Coal Trust. See "Share and Loan Capital of
Sherritt Coal Acquisition Inc. -- Conversion Agreement" in this Appendix A.
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THE CANADIAN COAL TRUST
The Canadian Coal Trust is an unincorporated, open-ended limited purpose
trust established under the laws of the Province of Ontario pursuant to a
Declaration of Trust dated December 16, 2002. The Canadian Coal Trust is
administered by the Trustees. The registered and head office of the Canadian
Coal Trust is located at 1133 Yonge Street, Toronto, Ontario, M4T 2Y7.
The Canadian Coal Trust will hold an indirect interest in the MetCoal
Company through its ownership of SCAI Shares and all of the SCAI Series A Notes
and SCAI's ownership of all the MetCoal Common Shares and MetCoal Notes. The
Partnership will hold the remaining interest in the MetCoal Company through its
ownership of SCAI Shares and all of the SCAI Series B Notes.
While it is intended that the Canadian Coal Trust will qualify as a mutual
fund trust for the purposes of the Tax Act, the Canadian Coal Trust is neither a
mutual fund for the purposes of applicable securities laws in Canada nor
registered as an "investment company" within the meaning of the United States
INVESTMENT COMPANY ACT OF 1940, as amended (the "U.S. 1940 Act"). Therefore, the
protections of applicable securities laws in Canada regulating mutual funds and
the protection of the U.S. 1940 Act will not be available to Unitholders. See
also "Certain Canadian Federal Income Tax Considerations" and "Certain
U.S. Federal Income Tax Considerations" in this Appendix A.
The following is a summary of the material attributes and characteristics of
the Units issuable pursuant to the Declaration of Trust and certain provisions
of the Declaration of Trust and is not intended to be complete.
ACTIVITIES OF CANADIAN COAL TRUST
The Declaration of Trust provides that the Canadian Coal Trust is restricted
to:
- investing in securities, including the SCAI Shares, the SCAI Notes and
other securities issued by SCAI or its affiliates or otherwise lending
funds to SCAI or its affiliates;
- temporarily holding cash in interest bearing accounts, short-term
government debt or short-term investment grade corporate debt for the
purposes of paying the expenses and liabilities of the Canadian Coal
Trust, paying amounts owing by the Canadian Coal Trust in connection with
the redemption of any Units or other securities and making distributions
to Unitholders;
- issuing Units (or rights, warrants, convertible securities or options to
acquire Units, including rights in connection with a Unitholder rights
plan) pursuant to the Declaration of Trust;
- issuing debt securities or otherwise borrowing funds (including letters of
credit, bank guarantees and bankers acceptances);
- guaranteeing (as guarantor, surety or co-principal obligor) the payment of
any indebtedness, liability or obligation of SCAI or any affiliate of the
Canadian Coal Trust or SCAI or the performance of any obligation of SCAI
or any affiliate of the Canadian Coal Trust or SCAI, and mortgaging,
pledging, charging, granting a security interest in or otherwise
encumbering all or any part of the Canadian Coal Trust assets, including
securities issued by the Canadian Coal Trust or SCAI or any affiliate of
the Canadian Coal Trust or of SCAI, as the case may be, as security for
such guarantee, and subordinating its rights under the SCAI Notes to other
indebtedness;
- disposing of any part of the assets of the Canadian Coal Trust;
- issuing or redeeming rights and Units pursuant to any Unitholder rights
plan adopted by the Canadian Coal Trust;
- repurchasing securities issued by the Canadian Coal Trust;
- satisfying the obligations, liabilities or indebtedness of the Canadian
Coal Trust; and
- undertaking all other usual and customary activities for the conduct of
the business of the Canadian Coal Trust in the ordinary course as are
approved by the Trustees from time to time, or as are contemplated by the
Declaration of Trust, provided that the Canadian Coal Trust shall not
undertake any activity, take any
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action, or make or retain any investment which would result (or fail to
take any action where such failure would result) in: (i) the Canadian Coal
Trust not being considered a "mutual fund trust" for purposes of the
Tax Act; or (ii) the Units being treated as "foreign property" for
purposes of Part XI of the Tax Act.
The Canadian Coal Trust will not hold securities of entities other than SCAI
and its affiliates, except in connection with its short-term cash management
requirements.
UNITS
The beneficial interests in the Canadian Coal Trust are divided into
interests designated as "Units". An unlimited number of Units are issuable
pursuant to the Declaration of Trust. Each Unit is transferable and represents
an equal undivided beneficial interest in any distributions from the Canadian
Coal Trust (whether of net income, net realized capital gains or other amounts)
and in the net assets of the Canadian Coal Trust in the event of termination or
winding up of the Canadian Coal Trust. All Units are of the same class with
equal rights and privileges. The Units are not subject to future calls or
assessments, and entitle the holders thereof to one vote for each whole Unit
held at all meetings of Unitholders. Except as set out under "Redemption Right"
below, the Units have no conversion, retraction, redemption or pre-emptive
rights.
The Units do not represent a traditional investment and should not be viewed
by investors as "shares" in any of the Canadian Coal Trust, SCAI or any of its
subsidiaries. As holders of Units in the Canadian Coal Trust, Unitholders do not
have the statutory rights normally associated with ownership of shares of a
corporation including, for example, the right to bring "oppression" or
"derivative" actions.
The Units are not "deposits" within the meaning of the CANADIAN DEPOSIT
INSURANCE CORPORATION ACT and are not insured under the provisions of the Act or
any other legislation. Furthermore, the Canadian Coal Trust is not a trust
company and, accordingly, is not registered under any trust and loan company
legislation as it does not carry on or intend to carry on the business of a
trust company.
ISSUANCE OF UNITS
The Declaration of Trust provides that Units or rights to acquire Units may
be issued at the times, to the persons, for the consideration and on the terms
and conditions as the Trustees may determine. Units shall only be issued as
fully paid in money, or property, or past services and shall not be subject to
future calls or assessments, except that Units to be issued under an offering
may be payable in installments, subject to certain restrictions. At the option
of the Trustees, Units are issuable in satisfaction of any distribution of the
Canadian Coal Trust to Unitholders on a pro rata basis to the extent that the
Canadian Coal Trust does not have cash available to fund such distributions. The
Declaration of Trust also provides that, unless the Trustees determine
otherwise, immediately after any pro rata distribution of Units to all
Unitholders in satisfaction of all or part of any such distribution, the number
of outstanding Units will be consolidated such that each Unitholder will hold
after the consolidation the same number of Units as the Unitholder held before
the distribution except where tax is required to be withheld in respect of the
Unitholder's share of the distribution. In this case, each certificate (if any)
representing a number of Units prior to the distribution will be deemed to
represent the same number of Units after the distribution and the consolidation.
Where amounts so distributed represent income, non-resident Unitholders will be
subject to withholding tax and the consolidation will not result in such
non-resident Unitholders holding the same number of Units. Such non-resident
Unitholders will be required to surrender the certificates (if any) representing
their original Units in exchange for a certificate representing their
post-consolidation Units.
The trustees of the Canadian Coal Trust may refuse to allow the Canadian
Coal Trust to issue or register the transfer of any Units, where such issuance
or transfer would, in their opinion, adversely affect the treatment of the
Canadian Coal Trust or the companies in which it invests under applicable
Canadian and/or U.S. tax legislation. See "The Canadian Coal Trust -- Limitation
of Non-Resident Ownership", "Certain Canadian Federal Income Tax Considerations"
and "Certain U.S. Federal Income Tax Considerations" in this Appendix A.
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TRUSTEES
The Canadian Coal Trust has a minimum of three Trustees and a maximum of
seven Trustees and presently has four Trustees. On the Date of Exchange, the
Canadian Coal Trust will have seven Trustees. Each of the Trustees will be
independent of each of the Offeror, Sherritt, OTPP, the Partnership and their
respective affiliates. Pursuant to an agreement in principle among the Offeror,
Luscar, CONSOL and the Partnership, the Partnership has agreed to nominate a
representative of CONSOL as an initial Trustee of the Canadian Coal Trust. See
"Share and Loan Capital of Sherritt Coal Acquisition Inc. -- Conversion
Agreement" in this Appendix A. See "Directors, Management and
Trustees -- Trustees and Executive Officers of Canadian Coal Trust" and
"Directors, Management and Trustees -- Governance of Canadian Coal Trust" in
this Appendix A. Trustees are appointed at each annual meeting of Unitholders by
a resolution of Unitholders, to hold office for a term expiring at the close of
the next annual meeting, subject to their earlier resignation or removal.
The Declaration of Trust provides that, subject to the terms and conditions
thereof, the Trustees may, in respect of the trust assets, exercise any and all
rights, powers and privileges that could be exercised by a legal and beneficial
owner thereof and will supervise the investments and affairs of the Canadian
Coal Trust. The Declaration of Trust requires a majority of the Trustees to be
residents of Canada for the purposes of the Tax Act and questions decided by the
Trustees must be decided by a majority of resident Canadians. The Trustees are
responsible for, among other things:
- acting for, voting on behalf of and representing the Canadian Coal Trust
as a shareholder and noteholder of SCAI;
- maintaining records and providing reports to Unitholders;
- supervising the activities of the Canadian Coal Trust;
- effecting payments of distributable cash from the Canadian Coal Trust to
Unitholders; and
- voting in favour of the Canadian Coal Trust's nominees to serve as
directors of SCAI (or to fill any vacancies or remove any director
thereof).
The Trustees have the right to approve the adoption of a Unitholder rights
plan if the Trustees determine in good faith that such action is appropriate.
The Declaration of Trust provides that any one or more of the Trustees may
resign effective upon 30 days' written notice to the Canadian Coal Trust and may
be removed by a resolution passed by a majority of the Unitholders. The vacancy
created by such removal or resignation will be required to be filled by the
Unitholders at the same meeting, failing which it may be filled by the former
Trustee or Trustees.
Trustees are appointed at each annual meeting of Unitholders to hold office
for a term expiring at the close of the next annual meeting. A quorum of the
Trustees, being the greater of two Trustees or a majority of the Trustees then
holding office, may fill a vacancy, except a vacancy resulting from an increase
in the number of Trustees beyond the limit described above, or from a failure of
the Unitholders to elect the required number of Trustees. In the absence of a
quorum of Trustees, or if the vacancy has arisen from a failure of the
Unitholders to elect the required number of Trustees, the Trustees must
forthwith call a special meeting of the Unitholders to fill the vacancy. If the
Trustees fail to call such meeting or if there are no Trustees then in office,
any Unitholder will be entitled to call the meeting. The Trustees are entitled,
between annual meetings of Unitholders, to appoint one or more additional
Trustees to serve until the next annual meeting of Unitholders without the
consent of the Unitholders, but the number of additional Trustees appointed
between annual meetings may not at any time exceed one-third of the number of
Trustees who held office at the expiration of the immediately preceding annual
meeting of Unitholders.
The Declaration of Trust provides that the Trustees are to act honestly and
in good faith with a view to the best interests of the Canadian Coal Trust and
in connection with that duty shall exercise the degree of care, diligence and
skill that a reasonably prudent person would exercise in comparable
circumstances. The Declaration of Trust provides that each Trustee and officer
of the Trust, as well as former Trustees and officers, and the respective heirs
and legal representatives of all the foregoing, are entitled to indemnification
from the assets of the Canadian Coal Trust in respect of the exercise of the
Trustee's powers and the discharge of the
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Trustee's duties, provided that the Trustee will not be indemnified if the
Trustee fails to act in good faith with a view to the best interests of the
Unitholders.
Indemnification agreements may be entered into with the Trustees and
officers of the Canadian Coal Trust pursuant to which the Canadian Coal Trust
would agree to indemnify such Trustees and officers from losses, costs or
damages incurred or sustained by acting in the capacity of Trustee or officer.
Directors' and officers' liability insurance may also be secured to cover the
Trustees and officers of the Canadian Coal Trust.
CASH DISTRIBUTIONS
It is the intention that the amount of cash to be distributed quarterly on
each Unit by the Canadian Coal Trust to the Unitholders will be equal to a
pro rata share of the interest and principal repayments received on the SCAI
Notes and dividends and other distributions received by the Canadian Coal Trust
on or in respect of the SCAI Shares owned by the Canadian Coal Trust, less:
- administrative expenses and other obligations of the Canadian Coal Trust,
including payments under the Administration Agreement;
- amounts which may be paid by the Canadian Coal Trust in connection with
any cash redemptions of Units;
- any other net interest expense incurred by the Canadian Coal Trust between
distributions; and
- any amount that the Trustees may reasonably consider to be necessary to
provide for the payment of any costs that have been or are reasonably
expected to be incurred by the Canadian Coal Trust, including any tax
liabilities of the Canadian Coal Trust.
Under the terms of the SCAI Notes, interest will be calculated and,
following the Date of Exchange, payable quarterly in arrears on or prior to the
fifth last business day of the first month of the following quarter. The
interest rate on the SCAI Notes will be determined based on a recommendation
from a qualified investment bank and is expected to be approximately 15% per
annum.
The Canadian Coal Trust will be able to make additional distributions in
excess of the quarterly distributions during the year, as the Trustees may
determine in their sole discretion. Any amounts of net income and net realized
capital gains of the Canadian Coal Trust for a taxation year ending on
December 15th of a calendar year not otherwise distributed during such taxation
year will be payable on December 31 of such calendar year.
Any income of the Canadian Coal Trust that is applied to cash redemptions of
Units or is otherwise unavailable for cash distribution will, to the extent
necessary to ensure that the Canadian Coal Trust does not have a net income tax
liability, be distributed to Unitholders in the form of additional Units. Those
additional Units will be issued pursuant to applicable exemptions under
applicable securities laws, discretionary exemptions granted by applicable
securities regulatory authorities or a prospectus or similar filing.
Quarterly distributions will be paid to Unitholders of record on the last
business day of each quarter and will be paid within 30 days following each
quarter end. In respect of the period from the first Take up and Pay Date up to
but excluding the Date of Exchange, an amount accruing daily at the rate of
$1.05 per calendar quarter per Unit, substantially all of which will be
considered to be a distribution of income to the Unitholder for Canadian tax
purposes, will be paid to Unitholders of record on the Date of Exchange and will
be paid within 10 business days of the Date of Exchange. It is anticipated that
following the Date of Exchange, the cash distribution for the period from the
Date of Exchange until the end of the quarter in which the Date of Exchange
occurs will be reduced by the amount of any payment made in accordance with the
preceding sentence in respect of that quarter and will be paid to Unitholders of
record on the last business day of that quarter and will be paid within 30 days
of the end of the quarter. See "Certain Canadian Federal Income Tax
Considerations" and "Certain U.S. Federal Income Tax Considerations" in this
Appendix A. Any cash, securities, or other property received by the Canadian
Coal Trust upon the sale, exchange, redemption, cancellation, or other
disposition of securities of SCAI will, after appropriate deductions for
expenses, be promptly distributed to Unitholders.
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REDEMPTION RIGHT
Units are redeemable at any time on demand by the holders. If the Units are
issued pursuant to the Book-Entry Only System described below, a Unitholder who
wishes to exercise the redemption right will be required to obtain a redemption
notice form from the Unitholder's investment dealer, who will be required to
deliver the completed redemption notice form to the Canadian Coal Trust at its
head office and to the Canadian Depositary for Securities Limited ("CDS"). Upon
receipt of the redemption notice by the Canadian Coal Trust, all rights to and
under the Units tendered for redemption shall be surrendered and the holder
thereof shall be entitled to receive a price per Unit (the "Redemption Price")
equal to the lesser of:
- 90% of the "market price" of a Unit immediately prior to the date on which
the Units were surrendered for redemption (the "Redemption Date"); and
- 100% of the "closing market price" on the principal exchange or market on
which the Units are listed or quoted for trading on the Redemption Date.
The "market price" of a Unit for the purpose of the foregoing calculations,
as at a specified date, will be:
- an amount equal to the weighted average price of a Unit on the principal
exchange or market on which the Units are listed or quoted for trading
during the period of 10 consecutive trading days ending on the third
trading day before such date; or
- an amount equal to the weighted average of the closing prices of a Unit on
the principal exchange or market on which the Units are listed or quoted
for trading during the period of 10 consecutive trading days ending on the
third trading day before such date, if the applicable exchange or market
does not provide information necessary to compute a weighted average
trading price.
The "closing market price" of a Unit for the purpose of the foregoing
calculations, as at any date, will be:
- an amount equal to the weighted average price of a Unit on the principal
exchange or market on which the Units are listed or quoted for trading on
the specified date and the principal exchange or market provides
information necessary to compute a weighted average price of the Units on
the specified date;
- an amount equal to the closing price of a Unit on the principal market or
exchange if there was a trade on the specified date and the principal
exchange or market provides only a closing price of the Units on the
specified date;
- an amount equal to the weighted average of the highest and lowest prices
of the Units on the principal market or exchange if there was trading on
the specified date and the principal exchange or market provides only the
highest and lowest trading prices of Units on the specified date; or
- the weighted average of the last bid and last asking prices of the Units
on the principal market or exchange if there was no trading on the
specified date.
The aggregate Redemption Price payable by the Canadian Coal Trust in respect
of any Units surrendered for redemption during any calendar month will be
satisfied by way of a cash payment no later than the last day of the month
following the month in which the Units were tendered for redemption, provided
that Unitholders will not be entitled to receive cash upon the redemption of
their Units:
- to the extent that the total amount payable by the Canadian Coal Trust in
respect of such Units and all other Units tendered for redemption in the
same calendar month exceeds $50,000, provided that the Trustees may, in
their sole discretion, waive such limitation in respect of all Units
tendered for redemption in any calendar month;
- if, at the time such Units are tendered for redemption, the outstanding
Units are not listed for trading on a stock exchange or traded or quoted
on another market which the Trustees consider, in their sole discretion,
provides representative fair market value prices for the Units; or
- if the normal trading of Units is suspended or halted on any stock
exchange on which the Units are listed (or, if not listed on a stock
exchange, on any market on which the Units are quoted for trading) on the
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Redemption Date or for more than five trading days during the ten trading
day period commencing immediately after the Redemption Date.
If a Unitholder is not entitled to receive cash upon the redemption of Units
as a result of one or more of the foregoing limitations, then each Unit tendered
for redemption will, subject to any applicable regulatory approvals, be redeemed
by way of a distribution IN SPECIE of the assets (including, if applicable, a
pro rata number of securities of SCAI) held by the Canadian Coal Trust and in
accordance with the Declaration of Trust. No fractional SCAI Shares or SCAI
Notes in integral multiples of other than $100 will be distributed and, where
the number of securities of SCAI to be received by a Unitholder includes a
fraction or a multiple less than $100, such number will be rounded to the next
lowest whole number or integral of $100. If applicable, the Canadian Coal Trust
will be entitled to all interest paid on the SCAI Notes and the distributions
paid on the SCAI Shares on or before the date of the distribution IN SPECIE. A
Unitholder will be entitled to interest that has accrued on the SCAI Notes and
has not been paid to the Canadian Coal Trust on or before the date of the
distribution IN SPECIE and to all declared but unpaid distributions on the SCAI
Shares being transferred. Where the Canadian Coal Trust will make a distribution
IN SPECIE of a pro rata number of securities of SCAI and any other property held
by the Canadian Coal Trust on the redemption of Units of a Unitholder, it is
intended that the Canadian Coal Trust will designate to that Unitholder any
income or capital gain realized by the Canadian Coal Trust as a result of the
distribution of those properties to the Unitholder. See "Certain Canadian
Federal Income Tax Considerations" and "Certain U.S. Federal Income Tax
Considerations" in this Appendix A.
It is anticipated that the redemption right described above will not be the
primary mechanism for holders of Units to dispose of their Units. It is not
expected that the securities of SCAI which may be distributed IN SPECIE to
Unitholders in connection with a redemption be listed on any stock exchange and
no market is expected to develop in securities of SCAI. Those securities of SCAI
may be subject to an indefinite "hold period" or other resale restrictions under
applicable securities laws. Securities of SCAI so distributed may not be
qualified investments for trusts governed by registered retirement savings
plans, registered retirement income funds, deferred profit sharing plans and
registered education savings plans, depending upon the circumstances at the
time. See "Certain Canadian Federal Income Tax Considerations" and "Certain
U.S. Federal Income Tax Considerations" in this Appendix A.
MEETINGS OF UNITHOLDERS
Meetings of Unitholders will be required to be called and held annually,
commencing no later than June 30, 2004, for, among other matters, the election
of Trustees and the appointment of auditors of the Canadian Coal Trust. The
Declaration of Trust provides that the Unitholders will be entitled to pass
resolutions that will bind the Canadian Coal Trust only with respect to:
- the election or removal of Trustees of the Canadian Coal Trust;
- the election or removal of nominees of the Canadian Coal Trust to serve as
directors of SCAI (except for filling casual vacancies);
- the appointment or removal of the auditors of the Canadian Coal Trust;
- the termination of the Canadian Coal Trust;
- the approval of amendments to the Declaration of Trust (except as
described below under "-- Amendments to Trust" in this Appendix A);
- the exercise of certain voting rights attached to the securities of SCAI
held by the Canadian Coal Trust and securities of the MetCoal Company held
by SCAI (see below under "-- Exercise of Certain Voting Rights Attached to
Securities of SCAI" in this Appendix A);
- the exercise of any and all available remedies in the event of a default
under the note indenture governing the SCAI Notes upon a request of at
least 25% of the Unitholders;
- the appointment of an inspector to investigate the performance by the
Trustees in respect of their respective responsibilities and duties in
respect of the Canadian Coal Trust;
- the sale of all or substantially all of the assets of the Canadian Coal
Trust; and
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- the dissolution of the Canadian Coal Trust prior to the end of its term.
No other action taken by Unitholders or any other resolution of the
Unitholders at any meeting shall in any way bind the Trustees.
A resolution electing or removing nominees of the Canadian Coal Trust to
serve as directors of SCAI and a resolution appointing or removing the Trustees
or the auditors of the Canadian Coal Trust or appointing an inspector must be
passed by a simple majority of the votes cast by Unitholders. The balance of the
foregoing matters must be passed by a Special Resolution.
The Declaration of Trust provides that a meeting of Unitholders may be
convened at any time and for any purpose by the Trustees and must be convened,
except in certain circumstances, if requisitioned by the holders of not less
than 5% of the Units then outstanding by a written requisition. A requisition
must, among other things, state in reasonable detail the matters proposed to be
transacted at the meeting.
The Declaration of Trust provides that Unitholders may attend and vote at
all meetings of the Unitholders either in person or by proxy and that a proxy
holder need not be a Unitholder. Two persons present in person or represented by
proxy and representing in the aggregate at least 10% of the votes attached to
all outstanding Units will constitute a quorum for the transaction of business
at all meetings, provided that in the case of a meeting called by the Trustees
that is adjourned for lack of quorum, the quorum at the adjourned meeting shall
be of those holders present in person or by proxy.
The Declaration of Trust contains provisions as to the notice required and
other procedures with respect to the calling and holding of meetings of
Unitholders.
LIMITATION OF NON-RESIDENT OWNERSHIP
In order for the Canadian Coal Trust to secure and maintain its status as a
mutual fund trust under the Tax Act, the Canadian Coal Trust must not be
established or maintained primarily for the benefit of non-residents of Canada
within the meaning of the Tax Act. Accordingly, in order to comply with those
provisions, the Declaration of Trust provides that at no time may non-residents
of Canada be the beneficial owners of a majority of the Units.
The Trustees may require declarations as to the jurisdictions in which
beneficial owners of Units are resident. If the Trustees become aware that the
beneficial owners of 49% of the Units then outstanding are, or may be,
non-residents of Canada or that such a situation is imminent, the Trustees will
direct the transfer agent to make a public announcement thereof and the transfer
agent and registrar will not accept a subscription for Units from, or issue or
register a transfer of Units to, a person unless the person provides a
declaration in form and content satisfactory to the Trustees that he or she is
not a non-resident of Canada. If, notwithstanding the foregoing, the Trustees
determine that a majority of the Units are beneficially held by non-residents of
Canada, the Trustees may send a notice to non-resident beneficial holders of
Units, chosen in inverse order to the order of acquisition or registration or in
such manner as the Trustees may in their discretion consider equitable or
appropriate, requiring them to sell their Units or a portion of their Units
within a specified period of not less than 60 days. If the Unitholders receiving
the notice have not sold the specified number of Units or provided the Trustees
with satisfactory evidence within that period that the holder is not a
non-resident of Canada, the Declaration of Trust provides that Trustees may, on
behalf of those Unitholders, sell those Units and, in the interim, will suspend
the voting and distribution rights attached to those Units. Upon that sale, the
affected holders will cease to be the holders of the Units and their rights will
be limited to receiving the net proceeds of sale upon surrender of the
certificates representing those Units. The Declaration of Trust provides that
the Trustees will have no liability for the amount received provided that they
act in good faith.
AMENDMENTS TO TRUST
The Declaration of Trust provides that it may be amended or altered from
time to time by Special Resolution of the Unitholders.
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The Declaration of Trust also provides that the Trustees may, without the
approval of the Unitholders, amend the Declaration of Trust prior to the Date of
Exchange and, in addition, make certain amendments to the Declaration of Trust,
including amendments:
- for the purpose of ensuring continuing compliance with applicable laws
(including the Tax Act), regulations, requirements or policies of any
governmental authority having jurisdiction over the Trustees or over the
Canadian Coal Trust;
- deemed necessary or advisable to ensure that the Canadian Coal Trust has
not been established or maintained primarily for the benefit of
non-residents of Canada within the meaning of the Tax Act;
- which, in the opinion of counsel to the Trustees, provide additional
protection or added benefits for Unitholders;
- to remove any conflicts or inconsistencies in the Declaration of Trust or
to make minor changes or corrections, including the correction or
rectification of any ambiguities, defective provisions, errors, mistakes
or omissions, which, in the opinion of the Trustees, are necessary or
desirable and not prejudicial to the Unitholders; and
- which, in the opinion of the Trustees, are necessary or desirable as a
result of changes in taxation laws.
TERM OF TRUST
The Canadian Coal Trust has been established for a term ending 21 years
after the date of death of the last surviving issue of Her Majesty, Queen
Elizabeth II, alive on December 16, 2002. On a date selected by the Trustees
which is not more than two years prior to the expiry of the term of the Canadian
Coal Trust, the Trustees are obligated to commence to wind up the affairs of the
Canadian Coal Trust so that it will terminate on the expiration of the term. In
addition, at any time prior to the expiry of the term of the Canadian Coal
Trust, the Unitholders may by Special Resolution require the Trustees to
commence to wind up the affairs of the Canadian Coal Trust.
The Declaration of Trust provides that, upon being required to commence to
wind up the affairs of the Canadian Coal Trust, the Trustees will give notice
thereof to the Unitholders, which notice will designate the time or times at
which Unitholders shall surrender their Units for cancellation and the date at
which the register of Units will be closed. After the register is closed, the
Declaration of Trust provides that the Trustees shall proceed to wind up the
affairs of the Canadian Coal Trust as soon as may be reasonably practicable.
Subject to any direction to the contrary in respect of a termination authorized
by a resolution of the Unitholders, the Declaration of Trust provides that the
Trustees will cause the Canadian Coal Trust to fulfill or discharge the
contracts of the Canadian Coal Trust, perform or cause the auditor to perform
any final audit of the Canadian Coal Trust assets, cause the Canadian Coal Trust
to collect its assets, sell, convey, assign, exchange, transfer or otherwise
dispose of all or any part of the remaining Canadian Coal Trust assets
(including, if applicable, the SCAI Shares and the SCAI Notes) to one or more
persons in one transaction or a series of transactions at public or private
sales for consideration which may consist in whole or in part of cash,
securities or other property of any kind, discharge or pay its liabilities, and
do all other acts appropriate to liquidate the Canadian Coal Trust. After
requiring the Canadian Coal Trust to pay, retire, discharge or make provision
for the payment, retirement or discharge of all known liabilities and
obligations of the Canadian Coal Trust and to provide for indemnity against any
other outstanding liabilities and obligations, the Declaration of Trust provides
that the Trustees will distribute the remaining part of the proceeds of the sale
of the SCAI Shares, SCAI Notes and other assets together with any cash forming
part of the assets of the Canadian Coal Trust among the Unitholders in
accordance with their pro rata interests. If the Trustees are unable to sell all
or any of the assets comprising the Canadian Coal Trust (including, if
applicable, the SCAI Shares or SCAI Notes) by the date set for termination, the
Declaration of Trust provides that the Trustees may distribute the remaining
assets comprising the Canadian Coal Trust (including, if applicable, the SCAI
Shares and SCAI Notes) IN SPECIE directly to the Unitholders in accordance with
their pro rata interests, subject to obtaining all required regulatory
approvals.
The Canadian Coal Trust may from time to time purchase Units in accordance
with applicable securities legislation and the rules prescribed under applicable
stock exchange or regulatory policies. Any such purchases
A-55
may constitute an "issuer bid" under Canadian provincial securities legislation
and if so must be conducted in accordance with the applicable requirements
thereof.
TAKE-OVER BIDS
The Declaration of Trust contains provisions to the effect that if a
take-over bid is made for the Units and the offeror acquires not less than 90%
of the outstanding Units (excluding Units held at the date of the take-over bid
by or on behalf of the offeror or associates or affiliates of the offeror), the
offeror will be entitled to acquire the Units held by Unitholders who did not
accept the take-over bid on the terms offered by the offeror. The Declaration of
Trust provides that such Unitholders may demand payment of the fair value of
their Units and have the fair value fixed by a court in a manner similar to that
provided to shareholders under the CBCA.
EXERCISE OF CERTAIN VOTING RIGHTS ATTACHED TO SECURITIES OF SHERRITT COAL
ACQUISITION INC.
The Declaration of Trust provides that the Canadian Coal Trust shall not
vote its SCAI Shares and SCAI Notes or permit (to the extent that it is within
the Canadian Coal Trust's power as a shareholder of SCAI) SCAI to vote its
MetCoal Common Shares and MetCoal Notes to authorize, among other things:
- any material amendment to the articles of SCAI or the MetCoal Company to
change the authorized share capital of those companies, in a manner which
may be prejudicial to the Canadian Coal Trust;
- any sale, lease or other disposition of all or substantially all of the
assets of SCAI or the MetCoal Company, except in conjunction with an
internal reorganization or a permitted charge, pledge or lien;
- any amalgamation, arrangement, combination or other merger of SCAI or the
MetCoal Company with any other entity, except in conjunction with an
internal reorganization;
- any material amendment to the SCAI Note Indenture other than in
contemplation of a further issuance of SCAI Notes to the Canadian Coal
Trust that are identical in all material respects to the SCAI Notes; or
- the winding-up or dissolution of SCAI or the MetCoal Company prior to the
end of the term of the Canadian Coal Trust,
without the authorization of the Unitholders by Special Resolution. See also
"Share and Loan Capital of Sherritt Coal Acquisition Inc." in this Appendix A.
INFORMATION AND REPORTS
The Canadian Coal Trust will furnish to Unitholders, in accordance with
applicable securities laws, all consolidated financial statements of the
Canadian Coal Trust (including quarterly and annual consolidated financial
statements) and other reports as are from time to time required by applicable
law, including prescribed forms needed for the completion of Unitholders' tax
returns under the Tax Act and equivalent provincial legislation.
Prior to each meeting of Unitholders, the Trustees will provide to the
Unitholders (along with notice of the meeting) all information as is required by
applicable law and by the Declaration of Trust to be provided to Unitholders.
SCAI will undertake to provide the Canadian Coal Trust with:
- a report of any material change in its affairs;
- all quarterly and annual financial statements; and
- management's discussion and analysis for the relevant period covered by
each set of financial statements,
in each case, in the form and content that it would be required to file with the
OSC if it were a reporting issuer under Ontario securities law and such other
similar disclosure documents in the form and content that it would be required
if it were a registrant to file with the SEC under U.S. securities laws, if
applicable. All of such reports
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and statements will be provided to the Canadian Coal Trust in a timely manner so
as to permit the Canadian Coal Trust to comply with the continuous disclosure
requirements under applicable securities laws relating to the reporting of
material changes in an issuer's affairs and the filing and delivery to
shareholders of financial statements and management's discussion and analysis or
similar disclosure.
In addition, SCAI will undertake to the securities commission or other
securities regulatory authority in each of the provinces and territories of
Canada, following the Date of Exchange and for so long as the Canadian Coal
Trust is a reporting issuer or registrant under U.S. securities laws, if
applicable, under applicable securities laws, to:
- to the extent that the Canadian Coal Trust does not issue a press release
and file a material change report providing substantially equivalent
disclosure, issue a press release and deliver to the Canadian Coal Trust
for filing a material change report or similar disclosure document for
U.S. purposes, if applicable, in respect of any material change in SCAI's
affairs;
- to the extent that the Canadian Coal Trust does not prepare consolidated
financial statements including its results of operations, deliver to the
Canadian Coal Trust quarterly unaudited and annual audited financial
statements, accompanied by management's discussion and analysis for the
relevant period covered by the financial statements, for filing with the
securities commissions or other securities regulatory authorities in each
of the provinces and territories of Canada or to the SEC, if applicable,
and for delivery to the Canadian Coal Trust's registered Unitholders and
to beneficial Unitholders of the Canadian Coal Trust in accordance with
applicable securities laws; and
- provide to the Canadian Coal Trust all information which would be required
to be included in an annual information form or similar disclosure
document for U.S. purposes, if applicable, or any other report which would
be required to be filed by SCAI if it were a reporting issuer under
Ontario securities law or registrant under U.S. securities laws, if
applicable,
such press releases, material change reports, financial statements (including
management's discussion and analysis for the relevant period covered by each set
of financial statements), annual information forms and other reports, in each
case, in the form and content that SCAI would be required to file with the OSC
if it were a reporting issuer under Ontario securities law and such other
similar disclosure documents in the form and content that it would be required
if it were a registrant to file with the SEC under U.S. securities laws, if
applicable. These quarterly unaudited and annual audited financial statements
(including management's discussion and analysis for the relevant period covered
by each set of financial statements) of SCAI will be delivered by the Canadian
Coal Trust to its Unitholders concurrently with the financial statements of the
Canadian Coal Trust for the corresponding period.
The Canadian Coal Trust will undertake to the securities commission or other
regulatory authority in each of the provinces and territories of Canada that,
following the Date of Exchange and for so long as the Canadian Coal Trust is a
reporting issuer under applicable securities laws or registrant under
U.S. securities laws, if applicable, it will:
- treat as if it were information of the Canadian Coal Trust all information
received from SCAI which would be required to be included in an annual
information form or any other report or similar disclosure document for
U.S. purposes, if applicable, which would be required to be filed by SCAI
if it were a reporting issuer in Ontario or registrant under
U.S. securities laws, if applicable; and
- file such information received from SCAI or distribute it as part of the
Canadian Coal Trust's annual information form or other report or similar
disclosure document for U.S. purposes, if applicable, to its registered
Unitholders and to the beneficial unitholders of the Canadian Coal Trust
in accordance with applicable securities laws.
UNITHOLDER LIABILITY PROTECTION MEASURES
The Declaration of Trust provides that no Unitholder will be subject to any
liability in connection with the Canadian Coal Trust or its obligations and
affairs, and in the event that a court determines Unitholders are subject to any
such liabilities, the liabilities will be enforceable only against, and will be
satisfied only out of the
A-57
Unitholder's share of the Canadian Coal Trust's assets. Pursuant to the
Declaration of Trust, the Canadian Coal Trust will indemnify and hold harmless
each Unitholder from any costs, damages, liabilities, expenses, charges and
losses suffered by a Unitholder resulting from or arising out of such Unitholder
not having such limited liability. The Declaration of Trust provides that the
Trustees and the Canadian Coal Trust will make reasonable efforts to include a
provision in all contracts signed by or on behalf of the Canadian Coal Trust to
the effect that such obligation will not be binding upon the Trustees or
Unitholders personally. Personal liability may also arise in respect of claims
against the Canadian Coal Trust (to the extent that claims are not satisfied by
the Canadian Coal Trust) that do not arise under contracts, including claims in
tort, claims for taxes and possibly certain other statutory liabilities.
Notwithstanding the terms of the Declaration of Trust, Unitholders, unlike
shareholders of a corporation, do not currently have the benefit of statutory
limited liability and may not be protected from liabilities of the Canadian Coal
Trust to the same extent as a shareholder is protected from the liabilities of a
corporation.
BOOK-ENTRY ONLY SYSTEM
It is currently anticipated that the Units will be evidenced by physical
unit certificates and that registration of interests in and transfers of the
Units will not be made only through the book-entry system administered by CDS
(the "Book-Entry Only System"). If in fact the Canadian Coal Trust uses the
Book-Entry Only System, on the Date of Exchange, the Trustees would deliver to
CDS one or more certificates evidencing the aggregate number of Units subscribed
for under the Enhanced Offer. Units must be purchased, transferred and
surrendered for redemption through a participant in the CDS Depository Service
(a "CDS Participant"). All rights of Unitholders would be exercised through, and
all payments or other property to which such Unitholder is entitled would be
made or delivered by, CDS or the CDS Participant through which the Unitholder
holds such Units. Upon purchase of any Units, the Unitholders would receive only
the customary confirmation from the registered dealer which is a CDS Participant
and from or through which the Units are purchased. References in this document
to a Unitholder mean, unless the context otherwise requires, the owner of the
beneficial interest in those Units.
The ability of a beneficial owner of Units to pledge those Units or
otherwise take action with respect to the Unitholder's interest in those Units
(other than through a CDS Participant) might be limited due to the lack of a
physical certificate if the Book-Entry Only System is used.
If the Book-Entry Only System is used, the Canadian Coal Trust will have the
option to terminate registration of the Units through the Book-Entry Only
System, in which case certificates for the Units in fully registered form would
be issued to beneficial owners of such Units or their nominees.
LISTING OF UNITS
THERE IS CURRENTLY NO MARKET THROUGH WHICH THE UNITS MAY BE SOLD AND HOLDERS
OF UNITS MAY NOT BE ABLE TO RESELL UNITS ACQUIRED PURSUANT TO THIS ENHANCED
OFFER.
Sherritt has applied on behalf of the Canadian Coal Trust to list the Units
for trading on the TSX. Listing will be subject to the Canadian Coal Trust
fulfilling all the listing requirements of the TSX. The Units will not be listed
on the NYSE.
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EXCHANGE RIGHTS
GENERAL
The purpose of the Exchange Rights is to allow Fording Shareholders to
exchange their interest in Fording into an interest in the Canadian Coal Trust.
Subject to the Maximum Exchange Rights Consideration described under Section 1
of the Enhanced Offer under the heading "The Enhanced Offer", on each Take Up
and Pay Date, the Offeror will deliver Exchange Rights to Fording Shareholders
who have deposited their Shares and elected to receive Exchange Rights. Except
as otherwise provided below, each Exchange Right will entitle the holder to
receive, after all required regulatory approvals are obtained, one Unit of the
Canadian Coal Trust.
The Offeror, Sherritt, the Canadian Coal Trust and the Exchange Agent will
enter into an exchange rights agreement (the "Exchange Rights Agreement")
setting forth, among other things, the attributes of the Exchange Rights, the
manner to effect the exchange into Units and other responsibilities of the
parties to the Exchange Rights Agreement.
TERMS OF THE EXCHANGE RIGHTS
The following is a summary of the material attributes and characteristics of
the Exchange Rights and the material terms of the Exchange Rights Agreement.
RIGHT TO ACQUIRE A UNIT
Each Exchange Right will entitle the holder thereof to receive from
Sherritt, for no additional consideration, one Unit on the Date of Exchange. The
Exchange will take place automatically on the Date of Exchange, without any
action required by the holder of the Exchange Right. Prior to the Exchange,
holders of Exchange Rights will have no rights as a security holder of the
Canadian Coal Trust.
RIGHTS IN SHERRITT
Although the Exchange Rights are being issued by Sherritt, a holder of
Exchange Rights will not have any rights of a shareholder or debtholder of
Sherritt. In particular, a holder of Exchange Rights will not be entitled to
vote at any meeting of shareholders of Sherritt and will not be entitled to any
distributions made on any securities of Sherritt.
ACCRUED DISTRIBUTIONS
On the 10th business day following the Date of Exchange, the Canadian Coal
Trust will pay to all Unitholders of record on the Date of Exchange, for each
Unit held (net of applicable withholding taxes), a cash distribution, calculated
from the first Take Up and Pay Date up to but excluding the Date of Exchange, in
an amount accruing daily at a rate of $1.05 per calendar quarter per Unit.
DATE OF EXCHANGE
The Date of Exchange will be the fifth business day after the day on which
the Canadian Coal Trust has received all required regulatory approvals for the
Exchange to occur such that the Units will be issued as freely tradable
securities in Canada and in the United States. Sherritt will issue a press
release on the date on which all required regulatory approvals have been
received that will indicate the day determined to be the Date of Exchange.
COVENANTS
Each of the Offeror, Sherritt and the Canadian Coal Trust will covenant to
use all reasonable efforts:
- to organize and establish the Canadian Coal Trust, SCAI and the MetCoal
Company, substantially as described in this Appendix A as promptly as is
reasonably practicable;
A-59
- to obtain all required regulatory approvals to enable the exchange of the
Exchange Rights for Units to occur such that the Units will be freely
tradable in Canada and in the United States as promptly as is practicable;
- to list the Units for trading on the TSX beginning on the Date of
Exchange; and
- to cause Fording and each successor thereto, including the MetCoal Company
and the Successor Company (as defined below), as the case may be, to
maintain its status as a reporting issuer not in default under the
securities laws of each of the provinces and territories of Canada until
the earlier of the Exchange Date or the occurrence of an Exchange Right
Termination Event.
Sherritt will covenant to use all reasonable efforts to maintain its status
as a reporting issuer not in default under the securities laws in each of the
provinces and territories of Canada until the earlier of the Exchange Date or
the occurrence of an Exchange Right Termination Event.
EXCHANGE RIGHT TERMINATION EVENT
Where as a result of a change of law, rule, policy, regulation or practice,
or a fact related to Fording that was not publicly disclosed by Fording: (i) it
is no longer legally possible to comply with the covenants set forth in
paragraphs (a) or (b) under the heading "Covenants" above, or (ii) Sherritt has
received an opinion from a nationally recognized securities dealer that is
independent of Sherritt, SCAI and the MetCoal Company, prepared under the
supervision of a committee of the board of directors of Sherritt that is
independent of management of Sherritt, that it would be materially adverse to
the holders of Exchange Rights to receive Units on the Exchange as opposed to
receiving common shares of the Successor Company (as defined below) as
consideration on the repurchase of the Exchange Rights by Sherritt (an event
described in (i) or (ii) being referred to as an "Exchange Right Termination
Event"), then the covenants set forth in sections (a), (b) and (c) under the
heading "Covenants" above shall immediately terminate.
NON-OCCURRENCE OF THE DATE OF EXCHANGE, EXCHANGE RIGHT TERMINATION EVENT OR
WIND UP OF SHERRITT
In the event that (i) an Exchange Right Termination Event occurs; (ii) the
Date of Exchange does not occur by September 30, 2003; or (iii) a binding
determination is made to liquidate, dissolve or wind up Sherritt, Sherritt will
repurchase, on a date that is not later than 30 days after such date (or in the
case of the liquidation, dissolution or wind up of Sherritt, on a date prior to
the liquidation, dissolution or wind up), all of the outstanding Exchange Rights
for consideration that is comprised of one common share of the Successor Company
(as defined below).
The Offeror is not aware of anything that would prevent it, together with
Sherritt and the Canadian Coal Trust, from acquiring the required regulatory
approvals on or before September 30, 2003. The Offeror currently expects the
Exchange Date will occur not later than April 30, 2003.
In connection with the repurchase by Sherritt of the Exchange Rights as
provided for herein, all of the outstanding SCAI Series A Notes and SCAI
Series B Notes will be converted into SCAI Shares, the Canadian Coal Trust will
be wound up, the MetCoal Company and SCAI will be amalgamated to form the
"Successor Company" and the Successor Company will apply to list its common
shares on the TSX. Each of the Offeror, Sherritt and the Canadian Coal Trust
will take such actions as are reasonably necessary to maintain the capital
structure of the MetCoal Company and SCAI such that, in the event that the
repurchase obligations of Sherritt provided for in this section arise, the
shares of Successor Company can be delivered by Sherritt to the holders of
Exchange Rights and will represent a common share interest that is substantially
similar in corporate form and proportional rights (subject to the issue of any
Exchange Rights to each of Luscar and CONSOL in connection with the anticipated
acquisition of the Met Coal Assets) to the interest held in Fording by the
Fording Shareholders who tendered their shares under the Enhanced Offer.
MEETINGS OF EXCHANGE RIGHT HOLDERS
Each Exchange Right will entitle the holder thereof to one vote at all
meetings of holders of Exchange Rights. A meeting of holders of Exchange Rights
may be convened on not less than 10 days' prior written notice by the Offeror,
Sherritt, the Exchange Agent or by holders of Exchange Rights representing not
less than 5% of
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the Exchange Rights outstanding. Holders of Exchange Rights may attend meetings
in person or proxy and a proxyholder need not be a holder of an Exchange Right.
One or more persons present in person or represented by proxy and representing
in the aggregate at least 10% of the Exchange Rights outstanding will constitute
a quorum for the transaction of business at all meetings, provided that in the
case of a meeting called by the Offeror or Sherritt that is adjourned for lack
of quorum, the quorum at the adjourned meeting shall be of those holders present
or by proxy. Matters submitted to any meeting including any proposal to modify,
alter or compromise any rights of the holders of Exchange Rights, shall be
required to be approved by two-thirds of the holders of Exchange Rights at the
meeting.
LIMITATION OF NON-RESIDENT OWNERSHIP
In order for the Canadian Coal Trust to secure and maintain its status as a
mutual fund trust under the Tax Act, the Canadian Coal Trust must not be
established or maintained primarily for the benefit of non-residents of Canada
within the meaning of the Tax Act. Accordingly, in order to comply with those
provisions, the Exchange Rights Agreement will provide that at no time may
non-residents of Canada be the beneficial owners of a majority of the Exchange
Rights.
The board of directors of Sherritt will be entitled to require declarations
as to the jurisdictions in which beneficial owners of Exchange Rights are
resident. If the board of directors of Sherritt becomes aware that the
beneficial owners of 49% of the Exchange Rights then outstanding are, or may be,
non-residents of Canada or that such a situation is imminent the board of
directors of Sherritt will direct the Exchange Agent to make a public
announcement thereof and the Exchange Agent will not accept a subscription for
Exchange Rights from, or issue or register a transfer of Exchange Rights to, a
person unless the person provides a declaration in form and content satisfactory
to the board of directors of Sherritt that he or she is not a non-resident of
Canada. If, notwithstanding the foregoing, the board of directors of Sherritt
determine that a majority of the Exchange Rights are beneficially held by
non-residents of Canada, the board of directors of Sherritt may send a notice to
non-resident beneficial holders of Exchange Rights, chosen in inverse order to
the order of acquisition or registration or in such manner as the board of
directors of Sherritt may in their discretion consider equitable or appropriate,
requiring them to sell their Exchange Rights or a portion of their Exchange
Rights within a specified period of not less than 60 days. If the holders of
Exchange Rights receiving the notice have not sold the specified number of
Exchange Rights or provided the board of directors of Sherritt with satisfactory
evidence within that period that the holder is not a non-resident of Canada, the
Exchange Rights Agreement will provide that the board of directors of Sherritt
may, on behalf of those holders of Exchange Rights, sell those Exchange Rights.
Upon that sale, the affected holders will cease to be the holders of the
Exchange Rights and their rights will be limited to receiving the net proceeds
of sale upon surrender of the certificates representing those Exchange Rights.
The Exchange Rights Agreement will provide that the board of directors of
Sherritt will have no liability for the amount received provided that they act
in good faith.
LISTING
The TSX has conditionally approved the listing of the Exchange Rights. The
listing of the Exchange Rights is subject to Sherritt fulfilling all the listing
requirements of the TSX on or before March 13, 2003.
EXCHANGE AGENT
It is anticipated that the Exchange Agent for the Exchange Rights will be
CIBC Mellon Trust Company at 199 Bay Street, Commerce Court West, Toronto,
Ontario.
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CONSOLIDATED CAPITALIZATION OF THE CANADIAN COAL TRUST
The following table sets forth the consolidated capitalization of the
Canadian Coal Trust as at December 16, 2002 and the Date of Exchange, both
before and after giving effect to the Exchange.
After giving effect
After giving effect to the Exchange
to the Exchange (assuming maximum
(assuming maximum tender for
Designation Authorized December 16, 2002 tender for cash) Exchange Rights)
----------- ---------- ------------------- ------------------- -------------------
(millions of dollars)
Term debt(1)........................ N/A $ -- $ 300.0 $ 300.0
Series B Notes...................... N/A -- 680.0 252.0
Units(2)............................ Unlimited $10 (1 unit) 1,155.5 1,690.5
-------- --------
$2,135.5 $2,242.5
-------- --------
------------
(1) A commitment has been received by the Offeror from a Canadian chartered bank
for a $100 million working capital facility. The Offeror has also received
from a Canadian chartered bank an offer to provide a $425 million credit
facility which will be used to refinance the bridge loan facility and the
$100 million working capital facility. Both facilities bear interest at
rates which are consistent with investment grade facilities of this type.
(2) Number of outstanding Units is 33.6 million Units under the maximum tender
for cash scenario and 48.3 million Units under the maximum tender for
Exchange Rights scenario, and includes 5.9 million Units issued in
connection with the Met Coal Assets purchase.
SHARE AND LOAN CAPITAL OF SHERRITT COAL ACQUISITION INC.
On the Date of Exchange, the authorized share capital of SCAI will consist
of an unlimited number of common shares (the "SCAI Shares"). On the Date of
Exchange, the Canadian Coal Trust will hold a portion of the outstanding SCAI
Shares and the Partnership will hold the remaining portion of the outstanding
SCAI Shares.
Depending on the number of Shares tendered for Exchange Rights, the SCAI
Shares held by the Canadian Coal Trust will represent between 57.6% and 84.3% of
the SCAI Shares after the Date of Exchange but before the Luscar Put. See
"Funding, Acquisition and Related Transactions -- Acquisition of SCAI
Securities" in this Appendix A.
DISTRIBUTION POLICY
Prior to the Date of Exchange, the board of directors of SCAI will adopt a
policy to distribute, subject to applicable law and compliance with its
contractual obligations, by way of quarterly dividends on its SCAI Shares or
other distributions on its securities, all of the distributions it receives as
holder of all the outstanding MetCoal Common Shares and MetCoal Notes from the
MetCoal Company, less any deductions for administrative and other expenses,
including costs and expenses incurred under the Management Agreement.
Consolidated distributable cash will consist of all available consolidated cash
and cash equivalents on hand on the last day of each quarter, less amounts
required for the following:
- satisfaction of its debt service obligations, if any;
- satisfaction of its interest (including interest on the SCAI Notes) and
other expense obligations;
- making any principal repayments in respect of the SCAI Notes considered
advisable by the board of directors of SCAI, with the consent of the
holders of the series of SCAI Notes being repaid; and
- making provision for reasonable reserves as considered appropriate by the
board of directors of SCAI from time to time.
SCAI SHARES
The following is a description of the terms and conditions to be attached to
the SCAI Shares.
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Each SCAI Share will entitle the holder thereof to receive notice of and to
attend all meetings of shareholders of SCAI. Each SCAI Share will entitle the
holder thereof to one vote per share at such meetings (other than meetings of
another class or series of shares of SCAI).
The SCAI Shares will entitle the holders thereof to receive in any year
dividends as and when declared by the board of directors on the SCAI Shares. In
the event of the liquidation, dissolution or winding up of SCAI or other
distribution of its assets among its shareholders, holders of the SCAI Shares,
after payment of or other proper provision for all of the liabilities of SCAI,
will be entitled to share ratably in all remaining assets of SCAI.
SCAI NOTES AND SUBORDINATION
The following is a summary of the material attributes and characteristics of
the SCAI Series A Notes and SCAI Series B Notes (collectively, the "SCAI Notes")
which will be issued under the SCAI Note Indenture.
The SCAI Notes authorized will be unlimited and will mature 15 years after
the Date of Exchange subject to prepayment from time to time as considered
advisable by the board of directors of SCAI, with the consent of the holders of
the SCAI Notes by Extraordinary Resolution. The initial 15 year term of the SCAI
Notes will be subject to extension for two additional successive terms of five
years each, with the consent of the Canadian Coal Trust and the holders of the
SCAI Notes by Extraordinary Resolution.
The SCAI Notes will be issuable only as fully registered in minimum
denominations of $100 or integral multiples thereof.
INTEREST
The interest rate on the SCAI Notes will be determined based on a
recommendation from a qualified investment bank and is expected to be
approximately 15% per annum, calculated and payable quarterly in arrears on or
prior to the fifth last business day of the first month of the following
quarter. The first interest payment in respect of the period from the first Take
Up and Pay Date up to but excluding the Date of Exchange will be payable on or
prior to the fifth business day after the Date of Exchange. It is anticipated
that following the Date of Exchange, the interest payment in respect of the
period from the Date of Exchange until the end of the quarter in which the Date
of Exchange occurs will be payable on or prior to the fifth last business day of
the month following the end of the quarter in which the Date of Exchange occurs.
The interest and principal on the SCAI Notes will be payable in lawful money of
Canada.
SUBORDINATION
Cash interest payments on the SCAI Series B Notes in each quarter will be
subordinated to cash interest payments on the SCAI Series A Notes until the end
of the fourth full quarter of 2003. On each quarterly interest payment date
during that period, if the pro-rata amount of cash available to SCAI for the
payment of interest on the SCAI Series A Notes but for the subordination
provision (as distinct from the pro-rata amount of cash available to SCAI for
the payment of interest on the SCAI Series B Notes but for the subordination
provision) would be less than an amount equal to $1.05 times the number of Units
outstanding on the Date of Exchange (the difference being the "Unit Distribution
Deficiency"), then an amount of interest on the SCAI Series B Notes equal to the
least of:
- the amount of cash which otherwise would have been paid by SCAI as
interest on the Series B Notes on that interest payment date but for the
subordination provision;
- the amount of the Unit Distribution Deficiency; and
- $11.25 million,
will not be payable on the SCAI Series B Notes and will instead be payable in
cash on that interest payment date as interest on the SCAI Series A Notes.
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PAYMENT UPON MATURITY
On maturity, SCAI will be required to repay the indebtedness represented by
the SCAI Notes by paying to the trustee in respect of the SCAI Notes, on behalf
of the holders, an amount equal to the principal amount of the outstanding SCAI
Notes, together with accrued and unpaid interest thereon. SCAI may at its option
repay all or a part of the outstanding principal amount in kind by issuing SCAI
Shares with a fair market value at the time of repayment equal to that principal
amount.
REDEMPTION
From time to time, the board of directors of SCAI will review the status of
SCAI's assets and the economic condition relating to the business and the
industry within which it operates. If this review, in the opinion of the board
of directors of SCAI, indicates that it is unlikely that the indebtedness of
SCAI evidenced by the SCAI Notes could be refinanced on the same terms and
conditions upon maturity of such notes, then SCAI may, subject to: (i) the
consent of the Canadian Coal Trust and the holders of the SCAI Notes by
Extraordinary Resolution; (ii) the subordination provisions applicable to the
SCAI Notes; and (iii) the terms of any indebtedness of SCAI which is senior to
the SCAI Notes, commence principal repayments on the SCAI Notes so that, in the
opinion of the board of directors of SCAI, the SCAI Notes are expected to be
fully repaid upon maturity. In that event, the available cash of SCAI will be
utilized to the extent required to fund such repayments in lieu of or in
addition to dividends on the SCAI Shares. In addition, if SCAI has available
cash, but is prohibited from declaring or paying a dividend or reducing its
stated capital under applicable corporate laws, subject to the subordination
provisions applicable to the SCAI Notes, the board of directors of SCAI may make
principal repayments on the SCAI Notes to the extent of such available cash.
Except as set out above, the SCAI Notes will not be redeemable at the option of
SCAI or by the holders thereof prior to maturity.
RANKING
The SCAI Notes will be unsecured debt obligations of SCAI and will be
subordinate in right of payment to other indebtedness of SCAI (directly or by
guarantee) for borrowed money or performance bonds, to personal property leases
and other secured financings and to certain other obligations that SCAI may
designate from time to time and rank PARI PASSU with all other direct unsecured
indebtedness and other liabilities of SCAI which do not by their terms rank
either senior or junior to the SCAI Notes. Pursuant to the terms of the SCAI
Note Indenture, the trustee in respect of the SCAI Notes may enter into
subordination agreements with the holders of certain senior debt of SCAI under
which the trustee in respect of the SCAI Notes on behalf of the holders of SCAI
Notes, may agree directly with a holder of senior debt of SCAI as to
subordination terms of the SCAI Notes.
In addition, the SCAI Series A Notes and SCAI Series B Notes will be subject
to any security interest granted by the Canadian Coal Trust or the Partnership,
respectively, in the SCAI Series A Notes and SCAI Series B Notes in favour of
holders of indebtedness (whether direct or guaranteed) of the Canadian Coal
Trust or the Partnership, respectively.
DEFAULT
The SCAI Note Indenture provides that any of the following shall constitute
an Event of Default (as defined in the SCAI Note Indenture):
- default in payment of the principal of the SCAI Notes when due;
- the failure to pay the interest obligations of the SCAI Notes when due,
for a period of 90 days;
- acceleration on any indebtedness of SCAI exceeding $10 million;
- a judgment or order for the payment of money in excess of $10 million is
rendered against SCAI and either enforcement proceedings have been
commenced or there is a period of 30 days during which a stay is not in
effect;
- certain events of winding up, liquidation, bankruptcy, insolvency or
receivership;
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- the seizing by an encumbrancer of all or substantially all of the property
of SCAI;
- SCAI ceasing to generally carry on business in the ordinary course; or
- default in the observance or performance of any other covenant or
condition of the SCAI Note Indenture and the continuance of such default
for a period of 90 days after notice in writing has been given by the
trustee in respect of the SCAI Notes to SCAI specifying the default and
requiring SCAI to rectify the default.
The SCAI Note Indenture also provides that the trustee in respect of the
SCAI Notes shall not take steps or actions with respect to an Event of Default
without the prior consent of holders of SCAI Notes which hold, directly or
indirectly, at least 25% of the aggregate principal amount of the outstanding
SCAI Series A Notes and at least 25% of the aggregate principal amount of the
outstanding SCAI Series B Notes. Certain other provisions under the SCAI Note
Indenture require the prior consent or authorization of holders of SCAI Notes
which hold, directly or indirectly, at least 25% of the aggregate principal
amount of the outstanding SCAI Series A Notes and at least 25% of the aggregate
principal amount of the outstanding SCAI Series B Notes. The ability of the
holders of the SCAI Notes to exercise any rights and remedies after the
occurrence of an Event of Default will also be subject to the terms of any
subordination agreement entered into with the holders of any senior debt of
SCAI.
CONVERSION AGREEMENT
Prior to the Date of Exchange, the Canadian Coal Trust and the Partnership
will enter into a conversion agreement (the "Conversion Agreement"). The
Conversion Agreement will grant the Partnership the right to require the
Canadian Coal Trust to acquire all or any portion of the SCAI Shares and SCAI
Series B Notes held by the Partnership in exchange for issuing to the
Partnership a number of Units equal to the number of SCAI Shares being exchanged
by the Partnership. In any exchange pursuant to the Conversion Agreement, the
proportion of SCAI Shares to SCAI Series B Notes being exchanged must be equal
to the proportion of SCAI Shares to SCAI Series B Notes not being exchanged,
except if all remaining securities of SCAI held by the Partnership are being
exchanged.
The Partnership will be granted registration rights, including the right to
require the Canadian Coal Trust to file a prospectus and take such other steps
as may be necessary to facilitate a public offering of Units, pursuant to the
terms and conditions of the Conversion Agreement. Rights under the Conversion
Agreement may be assigned by the Partnership in whole or in part in connection
with a transfer of its SCAI Shares and SCAI Series B Notes.
Pursuant to the Conversion Agreement, no conversion rights will be exercised
until the end of the fourth full quarter of 2003. However, if any person
acquires 20% or more (calculated without giving effect to any redemptions of
Units) of the outstanding Units, the Partnership will have the right to
immediately convert SCAI Shares and SCAI Series B Notes for Units in accordance
with the Conversion Agreement and participate in any take-over bid for Units
(including exchanging on the condition that the take-over bid is successfully
completed).
SHAREHOLDERS AGREEMENT
Prior to the Date of Exchange, the Canadian Coal Trust, the Partnership and
SCAI will enter into a shareholders agreement (the "Shareholders Agreement").
DIRECTORS. The Shareholders Agreement will provide that the board of
directors of SCAI will be comprised of nine directors. The Canadian Coal Trust
will have the right to nominate for election at least five directors of SCAI and
it is intended that the Canadian Coal Trust will nominate for election directors
of SCAI from among the Trustees of the Canadian Coal Trust. Initially, the
remaining four directors of SCAI will be nominated for election by the
Partnership. So long as the Partnership holds at least 15% of the SCAI Shares,
the Partnership will be entitled to nominate for election four directors of SCAI
and the Canadian Coal Trust will be entitled to nominate for election the
remaining five directors of SCAI. If the Partnership holds less than 15% of SCAI
Shares, the Canadian Coal Trust will be entitled to nominate for election nine
directors of SCAI and the Partnership will have no entitlement to nominate for
election directors of SCAI. Under the terms of the
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Shareholders Agreement, all shareholders of SCAI will be required to elect each
others' nominees for election as directors.
SCAI SHARES. The Shareholders Agreement will provide that the Partnership
may transfer or pledge its SCAI Shares and SCAI Series B Notes to any person
provided that the person agrees to be bound by the Shareholders Agreement,
subject to (i) restrictions on transfer contained in the Shareholders Agreement,
and (ii) the requirement that security interests may be granted only over SCAI
Shares and SCAI Series B Notes in a proportion which is the same as the
proportion of SCAI Shares to SCAI Series B Notes currently held by the
Partnership. Without the approval of shareholders holding at least an 85%
interest in SCAI, each shareholder of SCAI is prohibited from transferring any
SCAI Shares or SCAI Notes it owns without the consent of the Partnership.
The Shareholders Agreement will also provide that no shareholder of SCAI
will be permitted to transfer any SCAI Shares unless those shares are
accompanied by SCAI Notes such that the proportion of SCAI Shares to SCAI Notes
is the same as the proportion of SCAI Shares to SCAI Notes currently held by the
shareholder, except with the unanimous consent of all holders of shares of that
class.
PRE-EMPTIVE RIGHTS. The Shareholders Agreement will also provide that all
shareholders of SCAI will have pre-emptive rights to purchase SCAI Shares and
SCAI Notes to maintain their pro rata ownership of SCAI in the event that SCAI
decides to issue SCAI Shares or SCAI Notes, subject to certain exceptions. Any
shareholder of SCAI exercising this right will be entitled to participate in the
issuance of SCAI Shares or SCAI Notes by SCAI at the most favourable price and
on the most favourable terms as such securities are to be offered to a third
party. Notwithstanding the foregoing, shareholders of SCAI shall only be
entitled to purchase SCAI Shares and SCAI Notes in the same proportion of SCAI
Shares to SCAI Notes as they hold at that time.
SHAREHOLDER APPROVAL FOR CERTAIN MATTERS. The Shareholders Agreement will
provide that none of SCAI or any of its subsidiaries can take certain actions
without the prior approval of holders of at least 85% of the SCAI Shares,
including: (i) amalgamating or merging SCAI with any other person or initiating
a plan of arrangement or other comparable corporate reorganization;
(ii) disposing of all or a material portion of its assets; (iii) completing an
acquisition or joint venture where the purchase price or commitment exceeds
$50 million or where the purchase price and commitments for all such
transactions in any twelve month period exceeds $150 million; (iv) making any
capital expenditures in excess of $20 million in any twelve month period,
excluding any sustaining capital expenditures (as determined by the board of
directors); (v) incurring any indebtedness, other than replacement of existing
indebtedness, in excess of $50 million; (vi) issuing SCAI Shares or SCAI Notes,
or any equity or indebtedness of subsidiaries of SCAI, with a combined fair
value in excess of $100 million in any twelve month period; (vii) amending the
articles of SCAI; (viii) liquidating or dissolving SCAI; and (ix) redeeming or
purchasing any securities of SCAI, except to the extent that such redemption or
purchase occurs on a pro rata basis for all securities of SCAI with similar
attributes.
SHARE AND LOAN CAPITAL OF THE METCOAL COMPANY
On the Date of Exchange, the authorized share capital of the MetCoal Company
will consist of an unlimited number of MetCoal Common Shares. The MetCoal
Company will also issue MetCoal Notes pursuant to the MetCoal Note Indenture
which will have terms and conditions comparable to the SCAI Notes. On the Date
of Exchange, SCAI will hold all of the MetCoal Common Shares and all of the
MetCoal Notes.
DISTRIBUTION POLICY
The board of directors of the MetCoal Company will adopt a policy to
distribute, subject to applicable law and compliance with its contractual
obligations, by way of quarterly dividends on its MetCoal Common Shares or other
distributions on its securities, all of its consolidated distributable cash.
Consolidated distributable cash will consist of all available consolidated
cash and cash equivalents on hand on the last day of each quarter, less amounts
required for the following:
- satisfaction of its debt service obligations, if any;
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- satisfaction of its interest (including interest on the MetCoal Notes) and
other expense obligations, including costs and expense incurred in
connection with the Management Agreement;
- making any principal repayments in respect of the MetCoal Notes considered
advisable by the board of directors of the MetCoal Company, with the
consent of SCAI; and
- making provision for sustaining capital expenditures, reasonable working
capital and other reserves as considered appropriate by the board of
directors of the MetCoal Company from time to time.
For additional detail regarding capital expenditures, see "Overview of the
MetCoal Company -- Capital Expenditures" in this Appendix A.
RISK FACTORS
RISKS RELATED TO THE METCOAL COMPANY'S BUSINESS AND INDUSTRY
A SIGNIFICANT REDUCTION IN PURCHASES BY THE METCOAL COMPANY'S LARGEST
CUSTOMERS COULD ADVERSELY AFFECT THE METCOAL COMPANY'S REVENUES
The metallurgical coal industry is characterized by a relatively small
number of customers worldwide, many of whom have had long-standing relationships
with their suppliers. A loss of, or a significant reduction in, purchases by any
of its largest customers could adversely affect the MetCoal Company's revenues.
Some of the MetCoal Company's coal supply contracts with its key customers
may allow the customers to terminate the contracts under a number of
circumstances including its failure to perform its obligations under the
contract. In addition, these contracts may allow customers to temporarily
suspend or terminate the contract as a result of specified events beyond the
control of the affected party. In addition, these customers may choose not to
extend their existing contracts or not to enter into new contracts. If that
happens, the MetCoal Company could be affected adversely to the extent that it
is unable to find other customers to purchase coal at the same level of
profitability.
THERE HAS BEEN SUBSTANTIAL CYCLICALITY IN THE COAL BUSINESS IN THE PAST AND
THE OFFEROR EXPECTS THAT THIS CYCLICALITY WILL CONTINUE
There have been substantial price fluctuations in the coal business in the
past and the Offeror expects that such fluctuations will continue. The export
markets of the MetCoal Company will include customers in Japan, Korea, other
Pacific Rim countries and South American countries, all of which are countries
that have experienced recent economic slowdowns. Metallurgical coal markets are
cyclical and characterized by: (i) periods of increased or excess supply
resulting from an expansion of production designated for export sales, more
efficient mining techniques or other factors; and (ii) periods of decreased or
insufficient demand resulting from weak general economic conditions, reduced
production by customers or other factors. In addition, an increase in the use of
substitutes for steel (such as aluminum, composites or plastics) or steel-making
technologies that use less or no metallurgical coal (such as pulverized coal
injection or electric arc furnaces) could reduce demand for metallurgical coal
and adversely impact prices. These circumstances could result in downward
pressure on metallurgical coal prices or demand, which would reduce the MetCoal
Company's revenues and profitability. Metallurgical coal prices may not remain
at current levels. A slowdown in economic growth may significantly reduce the
price and the demand for metallurgical coal. Any prolonged or severe weakness in
metallurgical coal prices or demand by foreign steel industries would reduce the
MetCoal Company's revenues and profitability and could cause the MetCoal Company
to reduce its output or, possibly, close one or more of its mines, all of which
would reduce its cash flow from operations.
For example, the recent economic slowdown in the Pacific Rim resulted in
reduced steel production in the region at a time when additional coal supplies
had become available. These events resulted in four consecutive years of
metallurgical coal price decreases totalling just under 30% from 1997 to 2000.
The Offeror is aware that the impact of these events on Luscar and Fording was
lower realized coal prices.
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THE METCOAL COMPANY MAY NOT BE ABLE TO ACQUIRE, RETAIN AND DEVELOP COAL
RESERVES
The MetCoal Company's ability to supply coal to its customers will depend on
its ability to retain and exploit its coal reserves in an economic fashion. Any
defect in its rights to mine any of its coal reserves could adversely affect its
ability to mine these reserves and to supply its customers. In addition, the
MetCoal Company will often need to obtain land access rights from third parties
to mine its coal reserves. The acquisition of these rights could increase its
costs. The failure to acquire these rights could prevent the MetCoal Company
from mining the particular coal reserves. If the MetCoal Company is not
successful in obtaining coal rights and sustaining its coal reserves, the
Offeror believes its future revenues and potential growth will be adversely
affected. A component of its business strategy will be to acquire and develop
new coal reserves.
Some of the MetCoal Company's properties will contain non-reserve coal.
Properties are referred to as having non-reserve coal, as opposed to coal
reserves, when the feasibility of mining the coal on that property has not been
economically evaluated or if, based on such an evaluation, it has been concluded
that the coal cannot be economically mined based on current technology and
market conditions. If any or all of its non-reserve coal cannot be economically
mined, the MetCoal Company may need to seek new non-reserve coal or reserves for
development or other alternatives to support its growth strategy.
In addition, the MetCoal Company may be limited by its capital resources
from further developing its existing coal reserves and non-reserve coal, finding
and developing new non-reserve coal that can be economically mined or acquiring
new coal mines, reserves and non-reserve coal.
THE METCOAL COMPANY CANNOT BE CERTAIN OF THE TRUE EXTENT OF ITS COAL
RESERVES BECAUSE THEY ARE BASED ON ESTIMATES OF ECONOMICALLY RECOVERABLE
COAL
The MetCoal Company's stated coal reserves are based on estimates. Estimates
of coal reserves and future net cash flows derivable from them may differ from
actual results, depending on a number of variables and assumptions, which
include:
- historical coal recovery from an area compared with coal recovery from
other areas;
- coal seam thickness and the amount of rock and soil overlying the coal
deposit;
- availability of labour, equipment, and services required to mine and
deliver coal to its customers;
- effects of legislation and regulations; and
- future coal prices, operating costs, development and reclamation costs.
For these reasons: (i) estimates of economically recoverable quantities of
coal; (ii) classifications of reserves based on probability of recovery; and
(iii) estimates of future net cash flows expected from reserves prepared by
different engineers or by the same engineers at different times may vary
substantially. Actual coal tonnage recovered from identified reserves and
revenues, mining costs and capital expenditures related to such tonnage may be
materially different from estimates, which may adversely affect its operating
results.
THE METCOAL COMPANY MAY NOT ACHIEVE THE SYNERGIES IT EXPECTS TO ACHIEVE AS A
RESULT OF THE TRANSACTIONS CONTEMPLATED BY THE ENHANCED OFFER
The MetCoal Company may not achieve the operating synergies it currently
expects to achieve from the combination of the metallurgical coal assets of
Fording and the Met Coal Assets. This may, in part, result from unexpected
difficulty or delay in obtaining regulatory or third party approvals to the
transfer of the metallurgical coal assets of Fording or the Met Coal Assets to
the MetCoal Company including the settlement of definitive documentation with
Luscar and CONSOL to complete the acquisition of the Met Coal Assets. Reduced
synergies could also result from unexpected difficulties in integrating the
workforce, management and culture of Fording and operations from the Met Coal
Assets. Even if achieved, the integration of these businesses could involve
significantly more expense and management attention than currently anticipated.
The Luscar mine is subject to the Luscar Put. Luscar and CONSOL may not exercise
the Luscar Put, in which case the Luscar mine would not be conveyed. This would
further reduce the synergies possible as a result of the transactions
contemplated in the Enhanced Offer. If substantially fewer synergies are
achieved than are currently expected,
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the distributable cash flow of the MetCoal Company could be reduced
significantly. Even if achieved, these synergies may take longer to be achieved
than currently anticipated.
FAILURE TO OBTAIN CERTAIN REGULATORY AND THIRD PARTY CONSENTS AND APPROVALS
COULD HAVE A MATERIAL ADVERSE EFFECT ON THE METCOAL COMPANY
Certain agreements to which Fording is a party may require regulatory and
third party approvals to be obtained prior to effecting certain of the
transactions described herein. The Offeror believes such agreements include the
arrangement agreement pursuant to which Fording and certain operating
subsidiaries of Canadian Pacific Limited were spun off into separate public
companies, the agreement between Fording Coal Limited and Canadian Pacific
Railway Company dated April 1, 2001, the Genesee Coal Mine Operating Agreement
between the City of Edmonton and Fording Coal Limited made as of August 7, 1980,
the Genesee Coal Mine Joint Venture Agreement between the City of Edmonton and
Fording Coal Limited made as of August 7, 1980 and certain coal sales agreements
and foreign exchange forward contracts to which Fording is a party. A failure or
delay in obtaining these required regulatory and third party approvals may
adversely affect the MetCoal Company's ability to effect the transactions
described herein with respect to Fording.
NEW CREDIT FACILITIES MAY RESTRICT THE METCOAL COMPANY'S ABILITY TO TAKE
CERTAIN ACTIONS
It is anticipated that the MetCoal Company will enter into credit facilities
and other agreements in respect of indebtedness from time to time that contain
covenants that may require it to meet certain financial tests and that will
restrict, among other things, its ability to incur additional debt, dispose of
assets or pay dividends or interest in certain circumstances. These restrictions
may preclude it from making distributions on the MetCoal Common Shares or the
MetCoal Notes. If the MetCoal Company is precluded from making distributions on
the MetCoal Common Shares or the MetCoal Notes, the Canadian Coal Trust's
ability to make cash distributions to Unitholders could be materially and
adversely affected.
In addition, it is anticipated that the MetCoal Company's initial debt
facilities will have a term of approximately one year. There can be no assurance
that the MetCoal Company will be able to extend or refinance its debt facilities
on comparable terms, or at all, when those facilities mature.
GOVERNMENT REGULATIONS COULD INCREASE ITS COSTS OF DOING BUSINESS
The MetCoal Company will be subject to extensive mining, environmental and
health and safety laws and regulations, including those relating to:
- conflicts with other land users such as recreational, agricultural,
forestry, and oil and gas users;
- employee health and safety;
- mining and other permit and license requirements;
- the protection of the environment, including air quality, water pollution
and other discharges of materials into the environment, groundwater
quality and availability, plant and wildlife protection, and reclamation
and restoration of mining properties; and
- land use fees and royalties.
Numerous government permits, licences and other approvals are required for
mining. The MetCoal Company may be required to prepare and present to government
authorities data pertaining to the impact that any proposed exploration or
production of coal may have on the environment, as well as efficient resource
utilization, multiple land use issues and other factors its operations may
influence. The process for obtaining environmental approvals, including the
completion of any necessary environmental impact assessments, can be lengthy,
subject to public input, controversial and expensive. Furthermore, changes in
legislation, regulations or their enforcement may materially adversely affect
its mining operations or its costs. The MetCoal Company could experience
difficulty and significantly increased costs to meet new or amended
environmental legislation, to obtain approvals or to comply with the conditions
imposed in new or revised approvals.
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The MetCoal Company's failure to comply with legislation and regulations
could subject it to significant liabilities, including fines, other penalties
and clean-up orders or could require the MetCoal Company to reduce production.
GLOBAL WARMING CONCERNS AND THE KYOTO PROTOCOL MAY DISCOURAGE OR RESTRICT
THE METCOAL COMPANY'S CUSTOMERS' USE OF COAL
Public and government concern is growing over the increase in concentration
of greenhouse gases in the atmosphere. The burning of fossil fuels, including
coal, emits carbon dioxide, a greenhouse gas that is considered by some to
contribute to global warming. Legislation may be enacted that restricts the
burning of coal or may cause coal consumers to control the emission through
investments in control technologies. Canada, as a party to the United Nations
Framework Convention on Climate Change and the subsequent implementation
protocol, known as the Kyoto Protocol, that was adopted in 1997, has stated its
intention to reduce overall greenhouse gas emissions to 94% of 1990 levels by no
later than 2012. Many other countries who are parties to this convention and the
Kyoto Protocol have stated similar intentions to limit greenhouse gas emissions.
The Kyoto Protocol will come into effect 90 days after ratification by at least
55 countries accounting for at least 55% of total greenhouse gas emissions. The
Government of Canada ratified the Kyoto Protocol on December 10, 2002.
Widespread adoption of the Kyoto Protocol, could significantly limit the use of
coal and adversely affect the MetCoal Company's revenues and net income.
Further, reduction of coal use by the customers of the MetCoal Company, and any
restrictions on the burning of coal, will negatively impact the MetCoal
Company's ability to extend existing contracts or to grow through new coal
sales.
COAL MINING IS SUBJECT TO INHERENT RISKS AND IS DEPENDENT UPON MANY FACTORS
AND CONDITIONS BEYOND ITS CONTROL, WHICH MAY ADVERSELY AFFECT ITS
PRODUCTIVITY AND ITS FINANCIAL POSITION
Coal mining is subject to inherent risks and is dependent upon a number of
conditions beyond the MetCoal Company's control which can affect its costs at
particular mines, including the delivery of coal. These risks and conditions
include:
- inclement weather conditions;
- unexpected equipment or maintenance problems;
- variations in geological conditions;
- natural disasters;
- environmental hazards;
- industrial accidents;
- explosions caused by the ignition of coal dust or other explosive
materials at its mine sites; and
- fires caused by the spontaneous combustion of coal.
These risks and conditions could result in damage to or the destruction of
mineral properties or production facilities, personal injury or death,
environmental damage, delays in mining, monetary losses and legal liability.
Insurance coverage may not be available or sufficient to fully cover claims
which may arise from the above conditions. In the past, some of the Met Coal
Assets have been adversely affected by conditions which were not covered by
insurance. Any of these risks or conditions could have a negative impact on the
cash available from the MetCoal Company's operations and its financial position.
WORK STOPPAGES OR OTHER LABOUR DISRUPTIONS AT THE METCOAL COMPANY'S
OPERATIONS OR THOSE OF ITS KEY CUSTOMERS OR SERVICE PROVIDERS COULD HAVE AN
ADVERSE EFFECT ON ITS PROFITABILITY AND FINANCIAL CONDITION
Most of the MetCoal Company's mining operations will be unionized. The
MetCoal Company will be subject to the risk of work stoppages as the result of a
strike or lockout. Any work stoppage could have a material adverse effect on its
financial condition and results of operations.
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In addition, any work stoppage or labour disruption at any of its key
customers or service providers could impede its ability to supply coal, to
receive critical equipment and supplies for its mining operations or to collect
payment from customers encountering labour disruptions. This may increase its
costs or impede its ability to operate one or more of its mining operations.
COMPETITION COULD PUT DOWNWARD PRESSURE ON COAL PRICES, REDUCING ITS
PROFITABILITY, OR COULD CAUSE THE METCOAL COMPANY TO LOSE CUSTOMERS
The coal industry is highly competitive, typically with numerous producers
competing in each coal consuming region of the international export market. The
MetCoal Company will compete with large and small producers in certain regions.
Because of significant consolidation in the coal industry over the past few
years, some of its competitors have significantly increased their scale and have
a greater ability to influence pricing and be long-term suppliers of
competitively priced coals. In addition, many of its competitors have
significantly greater financial resources than the MetCoal Company will have,
which may allow them to compete more effectively than the MetCoal Company will
be able to. Competitive factors could put downward pressure on coal prices or
result in the loss of customers.
CURRENCY EXCHANGE RATE FLUCTUATIONS COULD ADVERSELY AFFECT THE METCOAL
COMPANY'S FINANCIAL CONDITION
The MetCoal Company will incur costs and expenses primarily in Canadian
dollars; however, substantially all of its revenue from metallurgical coal sales
is denominated in United States dollars. If the Canadian dollar gains value
against the United States dollar while other factors remain constant, the
MetCoal Company will see a relative decrease in revenue and its cash flow will
be diminished. Adverse changes in the United States dollar/ Canadian dollar
exchange rate could make some of its mines uneconomic to operate and could make
it necessary for the MetCoal Company to close them. Any such mine closures and
the resulting closure costs would reduce its cash flow from operations.
If the MetCoal Company's competitors' currencies decline against the
Canadian and United States dollars, their competitive position in the
marketplace may allow them to offer lower prices to their customers.
Furthermore, if the currencies of the Canadian Coal Trust's overseas customers
were to significantly decline in value in comparison to the United States
dollar, those customers may seek decreased prices for the coal the MetCoal
Company will sell to them. Both of these factors could reduce its profitability
or result in a loss of coal sales.
THE METCOAL COMPANY'S ABILITY TO SELL COAL DEPENDS ON TRANSPORTATION BEING
AVAILABLE AND AFFORDABLE
The MetCoal Company will depend on rail and ship transportation to deliver
coal to its distant customers. For most of its coal sales, the MetCoal Company
will pay for rail haulage of coal to the west coast of Canada and the port cost
of loading coal onto ships. These transportation costs are a significant
component of the total cost of supplying coal to these customers. Any increase
in the costs of transporting its coal, whether borne by the MetCoal Company or
its customers, could adversely affect its competitive position in specific
market regions and its profitability from sales in that region. Disruption of
rail and port services could impair its ability to supply coal to its customers
thereby resulting in lost sales and reduced profitability. The MetCoal Company's
mines will be dependent upon third party rail carriers for delivery of coal.
ADVERSE ENVIRONMENTAL IMPACT FROM COAL MINING AND COAL USE MAY LEAD TO
INCREASED COSTS TO THE METCOAL COMPANY AND ITS CUSTOMERS
Coal contains elements including sulphur, mercury, arsenic, nitrogen,
cadmium, uranium and selenium. Depending on the concentration of these elements,
their release into the environment through the mining process or through the
consumption of coal may have an adverse impact on the environment. The
unauthorized release of regulated materials on or from properties owned, leased,
occupied or used by the MetCoal Company could result in penalties, including
potentially significant fines, and governmental orders requiring the
investigation, control and remediation of these releases. The release of these
materials could have a material adverse effect on its ability to continue mine
operations or to sell its interest in its property or could lead to claims by
third parties. Its customers will be subject to similar regulations. In
addition, environmental
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regulations may restrict its customers' ability to burn coal. As a result, such
customers may reduce their use of coal or need to invest in costly emission
control technologies.
Coal mines may harm the environment by contaminating waterways, polluting
ground water and creating unwanted dust or noise. Significant sanctions could
result from any of these events. Insurance against environmental liability is
generally not available within the coal industry. The cost to control or
remediate emissions and disturbances or the sanctions imposed as a result of
them may reduce the MetCoal Company's profitability or require it to reduce its
coal production.
RECLAMATION AND MINE CLOSURE COSTS COULD ADVERSELY AFFECT THE METCOAL
COMPANY'S CASH FLOW FROM OPERATIONS
Luscar and Fording have accrued for the estimated costs of reclamation and
mine closing. The accrual for these costs is based upon government regulations
in effect at the time, its estimates of these costs, the timing of reclamation
and mine closure procedures. Changes in government regulations, cash costs or
timing of reclamation or mine closure procedures could result in adjustments to
its estimates. As a result, the accruals may need to be increased, reducing its
earnings. Actual cash costs may be greater than the estimated costs to complete
reclamation and mine closing procedures, which would negatively impact the
results of the MetCoal Company's operations.
In addition, the MetCoal Company will be required to provide financial
security to provincial authorities covering future reclamation costs. These
financial security requirements arise out of their obligation under provincial
mining and environmental legislation to reclaim lands that they disturb during
mining. The form of the security must be acceptable to the provincial
government. The MetCoal Company may be unable to obtain adequate financial
security in the future or may be required to replace existing security with more
expensive forms of security, which might include cash deposits, which would
reduce its cash available for operations. If governmental regulations change in
a manner that significantly increases the costs associated with reclamation and
mine closure, it could materially reduce its results of operations and make
further development of existing and new mines less economically viable.
NEW REGULATIONS OR LEGISLATION MAY HAVE A SIGNIFICANT IMPACT ON THE COAL
MINING OPERATIONS OF THE METCOAL COMPANY
The electric utility industry, steel mills and other coal consumers are
subject to extensive regulation regarding the environmental impact of activities
involving the use of coal and other fossil fuels. New legislation or regulations
could be adopted that may have a significant impact on coal mining operations or
the ability of coal customers to use coal. Future legislation and regulations
could cause additional expense, capital expenditures, reclamation obligations,
restrictions and delays in the development of new coal mines or the operation of
existing coal mines, the extent of which cannot be predicted. In the context of
environmental permitting, including the approval of reclamation plans, the
MetCoal Company will be required to comply with legislated or regulated
standards and existing laws and regulations. These may entail greater or lesser
costs and delays depending on the nature of the activity to be permitted and how
stringently the regulations are implemented by the permitting authority.
POTENTIAL CHANGE OF CONTROL PROVISIONS MAY BE TRIGGERED WHICH MAY RESULT IN
THE METCOAL COMPANY LOSING CERTAIN RIGHTS OR PAYING CERTAIN FEES OR
PENALTIES
Fording may be party to a number of concessions, licences and other
agreements that contain change of control provisions that could be triggered by
the Fording Acquisition. The Offeror does not have all of the information it
needs to assess the impact of triggering such change of control provisions;
however, such impact could be material and result in the MetCoal Company losing
certain rights under any such concessions, licences or other agreements or being
required to pay certain fees or penalties.
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THE METCOAL COMPANY REQUIRES HIGHLY SKILLED WORKERS TO OPERATE ITS MINES,
AND THE METCOAL COMPANY COMPETES WITH OTHER INDUSTRIES FOR THESE WORKERS
The MetCoal Company's mining operations will require employees with a high
degree of technical or professional skills, such as engineers, trades people and
equipment operators. The MetCoal Company will compete with other local
industries, such as oil and gas or forest products businesses, for these skilled
workers. In the future, if the MetCoal Company is unable to find an adequate
supply of skilled workers, a decrease in productivity or an increase in costs
will result which would have an adverse effect on its results of operations and
its financial condition.
THE METCOAL COMPANY'S OPERATING EXPENSES COULD INCREASE SIGNIFICANTLY IF THE
PRICE OF ELECTRICITY, FUELS OR OTHER INPUTS INCREASE
The MetCoal Company will be a substantial consumer of electricity, fuels and
other inputs. For example, a substantial portion of its major mining equipment
and processing plants will be powered by electricity that the MetCoal Company
will have to purchase from outside sources. The electric utility industry in
Alberta was deregulated in January 2001 resulting in a significant increase in
the cost of electricity for 2001. The electric utility industry in British
Columbia, where the MetCoal Company will produce most of its coal, remains
regulated. Similarly, recent fluctuations in crude oil and natural gas prices
will affect its costs of diesel fuel and natural gas, which are important inputs
into the production of coal. The MetCoal Company may not be able to pass on cost
increases to its other customers, which could negatively impact its operating
profits.
IF THE ASSUMPTIONS TO DETERMINE LIABILITY FOR EMPLOYEE BENEFITS WERE TO
MATERIALLY CHANGE, THE METCOAL COMPANY'S LIABILITY COULD BE MATERIALLY
GREATER THAN AMOUNTS ACCRUED FOR SUCH LIABILITY
The MetCoal Company may become the successor sponsor of certain programs
which provide various health and welfare benefits to its employees and retired
employees, including pension benefits, health care and life insurance. If the
assumptions employed by Fording or Luscar in relation to Met Coal Assets or, if
the Luscar Put is exercised, in relation to the Luscar mine, as applicable, to
determine liability for pension, health and welfare benefits to certain current
or former of their respective employees were to materially change, the MetCoal
Company's liability in connection with such benefits could be materially greater
than the amounts which have been accrued in respect of such obligations, and
such additional liability could have a material adverse effect upon the MetCoal
Company and its ability to make distributions.
The funding requirements of these defined benefit pension plans are based on
actuarial valuations. In recent years, the rates of investment return realized
by these pension funds have been less than the rates assumed in the most recent
actuarial valuations. These shortfalls in investment returns could lead to
materially increased funding requirements following the next actuarial
valuation. In addition, according to public documents, Fording was involved in
proceedings pertaining to one of the pension plans which, depending on the
outcome, could result in a material increase in funding requirements. Increases
in pension funding requirements could have a material adverse effect on the
available cash of the MetCoal Company.
NO ASSURANCE CAN BE MADE THAT ADDITIONAL LIABILITIES OR EXPENSES RELATED TO
ENVIRONMENTAL MATTERS WILL NOT BE INCURRED IN THE FUTURE BY THE METCOAL
COMPANY
The MetCoal Company may also have obligations arising under federal,
provincial and state environmental legislation in relation to future mine
closures and land reclamation. These obligations are estimated based on permit
requirements and various assumptions concerning costs and production. The
magnitude of these liabilities and the costs of fulfilling the MetCoal Company's
obligations cannot be predicted with certainty due to many factors such as the
potential for new or changed legislation or the potential for the development of
new remediation technologies. As a result, there can be no assurance that
additional liabilities or expenses related to environmental matters will not be
incurred in the future and such liabilities could have a material adverse effect
upon the MetCoal Company.
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THE ASSERTION OF ABORIGINAL RIGHTS' CLAIMS MAY IMPAIR THE METCOAL COMPANY'S
ABILITY TO FURTHER DEVELOP EXISTING PROPERTIES OR TO ACQUIRE NEW PROPERTIES
Canadian courts have recognized that aboriginal peoples may continue to have
unenforced rights at law in respect of land used or occupied by their ancestors
where treaties have not been concluded to deal with those rights. These rights
may vary from limited rights of use for traditional purposes to a right of
aboriginal title and will depend upon, among other things, the nature and extent
of prior aboriginal use and occupation. The courts have encouraged the federal
and provincial governments and aboriginal peoples to resolve rights claims
through negotiation of treaties. It is not possible to predict the impact which
aboriginal rights claims or future treaties that deal with these rights may have
on resource development or the MetCoal Company's ability to develop new or
further develop existing properties in British Columbia.
HEALTH RISKS ASSOCIATED WITH CERTAIN OF THE METCOAL COMPANY'S INDUSTRIAL
MINERALS PRODUCT MAY IMPAIR PROFITABILITY
NYCO produces wollastonite as its primary product. Analyses of some of the
wollastonite product produced and shipped from NYCO's Willsboro facility
indicated the presence of small quantities of asbestiform tremolite (tremolite
asbestos) at levels giving rise to certain labelling requirements in Canada and
other jurisdictions. The levels detected in the samples analyzed did not require
labelling in the United States. The source of asbestiform tremolite has been
traced to one of several ore sources supplying the operation. This ore source
has been segregated from Willsboro's mining operations.
Tremolite asbestos has been classified by IARC as a Group 1 agent. This
category is used when there is sufficient evidence of carcinogenicity when
humans are exposed to the substance in certain circumstances. The earlier
presence of tremolite asbestos at one of NYCO's ore sources and in some of its
products could result in NYCO becoming exposed to liabilities, including
worker's compensation and product liability claims. Further, in the event that
NYCO's wollastonite products continued to contain small amounts of asbestiform
tremolite, the demand for these products could materially decrease.
Tripoli produced at American Tripoli, Inc. is a type of crystalline silica
which has been classified by the IARC as Group 1 agent. In the event that it was
demonstrated that tripoli contributed to the development of cancer, the markets
for this product would be very limited and American Tripoli, Inc. could become
exposed to workers' compensation and product liability claims.
FAILURE TO DEVELOP NEW APPLICATIONS FOR WOLLASTONITE WOULD IMPAIR THE GROWTH
OF THE METCOAL COMPANY'S WOLLASTONITE BUSINESS
The wollastonite market is currently in an oversupply position. The Offeror
believes that the oversupply situation will only be resolved if demand for
wollastonite substantially increases, which the Offeror believes will not occur
until further applications for this mineral are developed and there is market
acceptance of the use of wollastonite in those applications. A failure to
develop new applications for the use of wollastonite or a failure of consumers
to accept the use of wollastonite in those applications would have a material
adverse effect on the growth of the MetCoal Company's wollastonite business.
RISKS RELATED TO STRUCTURE OF CANADIAN COAL TRUST
CASH DISTRIBUTIONS PER UNIT WILL BE DEPENDENT ON THE METCOAL COMPANY'S
ABILITY TO PAY ITS INTEREST AND OBLIGATIONS UNDER THE METCOAL COMMON SHARES
AND THE METCOAL NOTES
The Canadian Coal Trust is a limited purpose trust, which will be entirely
dependent on the operations and assets of the MetCoal Company through the
ownership of SCAI Shares and SCAI Series A Notes and SCAI's ownership of the
MetCoal Common Shares and MetCoal Notes. Accordingly, the cash distributions per
Unit to the Unitholders will be dependent on the ability of the MetCoal Company
to pay its interest obligations under the MetCoal Notes and to declare and pay
dividends or make other distributions on the MetCoal Common Shares.
A-74
CASH DISTRIBUTIONS ARE NOT GUARANTEED AND WILL FLUCTUATE WITH THE METCOAL
COMPANY'S PERFORMANCE
Although it is intended that the Canadian Coal Trust will distribute the
interest and dividend income earned by the Canadian Coal Trust less expenses and
amounts, if any, paid by the Canadian Coal Trust in connection with the
redemption of Units, there can be no assurance regarding the amounts of income
to be generated by the MetCoal Company and paid to SCAI and then to the Canadian
Coal Trust. As a result, cash distributions by Canadian Coal Trust are not
guaranteed and will fluctuate with the performance of the MetCoal Company. The
actual amount distributed in respect of the Units will depend upon numerous
factors, including profitability, debt covenants, fluctuations in working
capital, the sustainability of EBITDA margins and Capital Expenditures of the
MetCoal Company.
THE UNITS AND EXCHANGE RIGHTS ARE NOT THE EQUIVALENT OF SHARES AND HOLDERS
WILL NOT HAVE THE STATUTORY RIGHTS NORMALLY ASSOCIATED WITH SHARES
Securities such as the Exchange Rights and Units are hybrids in that they
share certain attributes common to both equity securities and debt instruments.
The Units and Exchange Rights do not represent a direct investment in the
business and should not be viewed by investors as shares or debt of Sherritt,
SCAI or the MetCoal Company. As holders of Units or Exchange Rights, as
applicable, holders will not have the statutory rights normally associated with
ownership of shares of a corporation including, for example, the right to bring
"oppression" or "derivative" actions, or the right to bring a claim for
non-payment of indebtedness. The Exchange Rights represent a conditional right
to receive a Unit. The Units will represent a fractional interest in the
Canadian Coal Trust. The Canadian Coal Trust's primary assets will be SCAI Notes
and SCAI Shares. SCAI will own all the outstanding MetCoal Common Shares and
MetCoal Notes. Accordingly, the value of an Exchange Right and a Unit will be a
function of anticipated distributable income of the MetCoal Company.
THERE IS CURRENTLY NO PUBLIC MARKET FOR THE UNITS AND EXCHANGE RIGHTS
Prior to the issuance of the Exchange Rights and the Units upon the
Exchange, there will be no public market for the Exchange Rights or the Units.
The value of an Exchange Right upon issue and the value of a Unit upon the
Exchange will be based on several factors, and may bear no relationship to the
price at which the Exchange Rights or the Units will trade in the public market
subsequent to the Exchange.
THERE WILL BE NO PUBLIC MARKET FOR THE SCAI SHARES AND SCAI NOTES AND THESE
SECURITIES MAY NOT BE QUALIFIED INVESTMENTS FOR REGISTERED PLANS
Upon a redemption of Units or termination of the Canadian Coal Trust, the
Trustees may distribute the SCAI Shares and SCAI Notes directly to the
Unitholders, subject to obtaining all required regulatory approvals. There is
currently no market for the SCAI Shares and SCAI Notes. In addition, neither the
SCAI Shares nor SCAI Notes are expected to be freely tradeable or listed or
quoted on any stock exchange or market. See "The Canadian Coal Trust" in this
Appendix A. Securities of SCAI so distributed may not be qualified investments
for trusts governed by Registered Plans, depending upon the circumstances at the
time.
THE CANADIAN COAL TRUST MAY ISSUE ADDITIONAL UNITS, DILUTING EXISTING
UNITHOLDERS' INTERESTS
The Declaration of Trust authorizes the Canadian Coal Trust to issue an
unlimited number of Units for such consideration and on such terms and
conditions as shall be established by the Trustees without the approval of any
Unitholders. The issuance of additional Units may dilute a Unitholder's
investment in the Canadian Coal Trust and reduce distributable cash per Unit.
LACK OF INCREASED CASH FLOW OR ADDITIONAL FINANCING COULD RESTRICT GROWTH OF
THE METCOAL COMPANY
The payout by the MetCoal Company of substantially all of its operating cash
flow will make expansion capital expenditures and further acquisitions dependent
on debt financing or the issuance of additional units. Lack of such funds could
limit the future growth of the MetCoal Company and its cash flow or otherwise
adversely affect the MetCoal Company.
A-75
THE MARKET PRICE FOR THE UNITS AND EXCHANGE RIGHTS MAY BE AFFECTED BY THE
LEVEL OF INTEREST RATES PREVAILING AT ANY ONE TIME
It is anticipated that the market price for the Exchange Rights and the
Units at any given time may be affected by the level of interest rates
prevailing at the time. A rise in interest rates may have a negative effect on
the market price of the Exchange Rights and the Units.
THE HOLDINGS OF THE CANADIAN COAL TRUST WILL BE UNDIVERSIFIED AND ILLIQUID
The Canadian Coal Trust's holding of SCAI Shares and SCAI Notes will be
undiversified, and such securities will be illiquid, as they are not expected to
be listed or quoted on any stock exchange or other market.
IF THE CANADIAN COAL TRUST DOES NOT QUALIFY AS A MUTUAL FUND TRUST, THE
EXCHANGE RIGHTS AND THE UNITS WILL NOT BE QUALIFIED INVESTMENTS
The status of the Exchange Rights at the time of issuance as qualified
investments for Registered Plans is based on the assumption that Exchange Rights
will be replaced by Units. If that does not occur, the Exchange Rights will not
be qualified investments for trusts governed by Registered Plans. There can be
no assurance that Exchange Rights, after the time of issuance, or Units, after
the Date of Exchange, will continue to be qualified investments for Registered
Plans. Adverse consequences may arise under the Tax Act as a result of the
acquisition or holding of non-qualified investments by a Registered Plan.
HOLDERS OF UNITS AND EXCHANGE RIGHTS MAY BE ADVERSELY AFFECTED BY CHANGES IN
FEDERAL INCOME TAX LAWS
There can be no assurance that Canadian federal income tax laws respecting
the treatment of mutual funds will not be changed in a manner which adversely
affects the holders of Exchange Rights and Units. If the Canadian Coal Trust
fails or ceases to qualify as a "mutual fund trust" under the Tax Act, the
income tax considerations described under the heading "Certain Canadian Federal
Income Tax Considerations" in this Appendix A would be materially different in
certain respects.
Income fund structures generally involve significant amounts of
inter-company or similar debt, generating substantial interest expense, which
serves to reduce earnings and therefore income tax payable. There can be no
assurance that taxation authorities will not seek to challenge the amount of
interest expense deducted. If such a challenge were to succeed against SCAI or
its affiliates, it could materially adversely affect the amount of distributable
cash available.
SCAI and the MetCoal Company may be reassessed for taxes from time to time.
Such reassessments together with associated interest and penalties could
adversely affect SCAI, the MetCoal Company and the Canadian Coal Trust.
Further, interest on the SCAI Notes accrues at the Canadian Coal Trust level
for income tax purposes whether or not actually paid. The Declaration of Trust
will provide that an amount equal to the taxable income of the Canadian Coal
Trust will be distributed each year to Unitholders in order to reduce the
Canadian Coal Trust's taxable income to zero. Where interest payments on the
SCAI Notes are due but not paid in whole or in part, the Declaration of Trust
provides that any additional amount necessary to be distributed to Unitholders
will be distributed in the form of additional Units rather than in cash.
Unitholders will be required to include such additional amount in income even
though they do not receive a cash distribution.
TERMINATION OF EXCHANGE RIGHTS MAY HAVE AN ADVERSE ECONOMIC EFFECT OR TAX
CONSEQUENCES TO THEIR HOLDERS
In the event that either an Exchange Right Termination Event occurs, or the
Date of Exchange does not occur by September 30, 2003, or Sherritt is
liquidated, dissolved or wound up, the SCAI Notes will be converted into equity
of SCAI, the MetCoal Company and SCAI will be amalgamated to form a Successor
Company, the Canadian Coal Trust will be wound up and holders of Exchange Rights
will receive common shares in such Successor Company. Although it is intended
that such common shares of the Successor Company will represent an interest that
is similar in many respects to the interest in Fording currently held by Fording
Shareholders, no assurances can be given that such interest will not be
different in some material respects from a common share
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of Fording or that the properties and liabilities of the Successor Company will
not be different in some material respects from the current properties and
liabilities of Fording. In particular, the Successor Company may have no
material economic participation in the thermal coal assets of Fording and may
own the Met Coal Assets and, if the Luscar Put is exercised, the Luscar mine.
Further, the transactions described above may have tax or other consequences
that may be adverse to the Successor Company or to the holders of Exchange
Rights.
CERTAIN CANADIAN FEDERAL INCOME TAX CONSIDERATIONS
In the opinion of Torys LLP, Canadian counsel to the Offeror, the following
is a summary of the principal Canadian federal income tax considerations under
the Tax Act generally applicable to a Shareholder who acquires Exchange Rights
pursuant to the Enhanced Offer. This summary is based upon the provisions of the
Tax Act in force at the date hereof and counsel's understanding of the current
published administrative and assessing practices of the Canada Customs and
Revenue Agency (the "CCRA"). The summary takes into account all Tax Proposals,
although there is no certainty that the Tax Proposals will be enacted in the
form currently proposed, or at all. The summary does not otherwise take into
account or anticipate other changes in law, whether by judicial, governmental or
legislative decision or action, or other changes in administrative policies or
assessing practices of the CCRA, nor does it take into account provincial,
territorial or foreign tax legislation or considerations, which may materially
differ from federal income tax legislation and considerations.
THIS SUMMARY IS NOT EXHAUSTIVE OF ALL POSSIBLE CANADIAN FEDERAL TAX
CONSIDERATIONS APPLICABLE TO AN INVESTMENT IN EXCHANGE RIGHTS OR UNITS.
MOREOVER, THE INCOME AND OTHER TAX CONSEQUENCES OF ACQUIRING, HOLDING OR
DISPOSING OF EXCHANGE RIGHTS AND UNITS WILL VARY DEPENDING ON THE HOLDER'S
PARTICULAR CIRCUMSTANCES, INCLUDING THE COUNTRY OR PROVINCE IN WHICH THE HOLDER
RESIDES OR CARRIES ON BUSINESS. THIS SUMMARY IS OF A GENERAL NATURE ONLY AND IS
NOT INTENDED TO BE LEGAL OR TAX ADVICE TO ANY PROSPECTIVE HOLDER OF EXCHANGE
RIGHTS OR UNITS. ACCORDINGLY, SHAREHOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS
WITH RESPECT TO THE TAX CONSEQUENCES OF AN INVESTMENT IN EXCHANGE RIGHTS OR
UNITS BASED ON THEIR PARTICULAR CIRCUMSTANCES.
HOLDERS RESIDENT IN CANADA
This part of the summary is applicable only to Shareholders who become
holders of Exchange Rights as a result of the acquisition thereof pursuant to
the Enhanced Offer and who, for purposes of the Tax Act and at all relevant
times, are resident in Canada, deal at arm's length with the Canadian Coal Trust
and will hold their Exchange Rights and Units as capital property. Certain
Shareholders whose Units might not otherwise be considered to be capital
property may be entitled to have their Units deemed to be capital property by
making the irrevocable election provided for by subsection 39(4) of the
Tax Act. This part of the summary does not apply to "financial institutions"
within the meaning of section 142.2 of the Tax Act or to "specified financial
institutions" as defined in the Tax Act nor is it applicable to a Unitholder an
interest in which is a "tax shelter investment" as defined in the Tax Act.
EXCHANGE RIGHTS
At the time of their issuance, the Exchange Rights will be qualified
investments of trusts governed by Registered Plans, subject to the specific
provisions of any particular Registered Plan. If the Canadian Coal Trust does
not qualify as a mutual fund trust, as discussed below under "Status of the
Canadian Coal Trust", the Exchange Rights will not be qualified investments for
Registered Plans. At the time of their issuance, Exchange Rights will not
constitute foreign property for a trust governed by an RRSP, RRIF or DPSP or for
other persons subject to tax under Part XI of the Tax Act. Trusts governed by
RESPs are not subject to the foreign property rules.
The exchange of Exchange Rights for Units is not a disposition for the
purposes of the Tax Act and, accordingly, no gain or loss on the Exchange Rights
will be recognized for the purposes of the Tax Act. The cost of the Exchange
Rights acquired pursuant to the Enhanced Offer will be their fair market value
at the time of acquisition by the holder. The cost of Units acquired on the
exchange of Exchange Rights for Units will be equal to the cost of the Exchange
Right at the time of the exchange.
On a disposition or deemed disposition of Exchange Rights (including a
repurchase thereof by Sherritt), the holder will realize a capital gain (or a
capital loss) in respect of the Exchange Rights so disposed of to the extent
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that the proceeds of disposition received or deemed to be received by the holder
for such Exchange Rights exceed (or are less than) the total of the adjusted
cost base to the holder of such Exchange Rights immediately before the
disposition and any reasonable costs of disposition.
A holder will be required to include one-half of the amount of any capital
gain (a "taxable capital gain") in income, and will generally be entitled to
deduct one-half of the amount of any capital loss (an "allowable capital loss")
against taxable capital gains realized in the year of disposition. Allowable
capital losses not deductible in the taxation year in which they are realized
may ordinarily be deducted against taxable capital gains realized in any of the
three preceding taxation years or in any following taxation year to the extent
and under the circumstances specified in the Tax Act including certain
transitional provisions relating to recent changes in the capital gains
inclusion rate under the Tax Act. A holder that is throughout the relevant
taxation year a "Canadian-controlled private corporation" as defined in the
Tax Act may be liable to pay, in addition to the tax otherwise payable under the
Tax Act, a refundable tax of 6 2/3% determined by reference to its aggregate
investment income for the year, which is defined to include an amount in respect
of taxable capital gains. Eighty percent of capital gains realized by an
individual or a trust, other than certain specified trusts, will be taken into
account in determining their liability for alternative minimum tax under the
Tax Act.
STATUS OF THE CANADIAN COAL TRUST
Based on the terms of the Declaration of Trust that established the Canadian
Coal Trust, the Canadian Coal Trust qualifies as a "unit trust" as defined in
the Tax Act. This summary assumes that the Canadian Coal Trust will also qualify
as a "mutual fund trust" as defined in the Tax Act as a result of the transfer
of its Units to holders of Exchange Rights, and will thereafter continuously
qualify as a mutual fund trust. In order for the Canadian Coal Trust to qualify
as a mutual fund trust at a particular time, in addition to being a unit trust
resident in Canada, it must meet certain prescribed conditions ("minimum
distribution requirement") relating to the number of Unitholders, dispersal of
ownership of Units and public trading of its Units at such time; its sole
undertaking must be the investing of its funds in property (other than real
property); and it must not be established or maintained primarily for the
benefit of non-resident persons. In the opinion of counsel, the sole undertaking
of the Canadian Coal Trust as described in this Enhanced Offer will be the
investing of its funds in property (other than real property) and this summary
assumes that this will continue to be the case at all relevant times. This
summary assumes that the Canadian Coal Trust will satisfy the minimum
distribution requirement on the exchange of Units for Exchange Rights in 2003,
so that it may and will elect to be deemed to be a mutual fund trust from the
date it was established until such time, and that it will continuously satisfy
the minimum distribution requirement thereafter. This summary also assumes that
the Canadian Coal Trust was not established and will not be maintained primarily
for the benefit of non-resident persons, and counsel is of the view that such
assumption is reasonable in light of the restriction on the ownership of Units
by non-residents, which is contained in the Declaration of Trust. If the
Canadian Coal Trust were not to qualify as a mutual fund trust, the income tax
considerations described in this summary would, in some respects, be materially
different.
QUALIFIED INVESTMENTS
At the time of their exchange for Exchange Rights, the Units will be
qualified investments for trusts governed by Registered Plans, subject to the
specific provisions of any particular Registered Plan. If the Canadian Coal
Trust ceases to qualify as a mutual fund trust, the Units will cease to be
qualified investments for trusts governed by Registered Plans.
Registered Plans that own Units should consult their own tax advisors before
deciding to exercise the right to redeem Units, since no assurance can be given
that SCAI Shares or SCAI Notes, if they are received upon a redemption of Units,
will be qualified investments for trusts governed by Registered Plans.
FOREIGN PROPERTY
Units, if issued on the date hereof, would not constitute foreign property
for a trust governed by an RRSP, RRIF or DPSP or for other persons subject to
tax under Part XI of the Tax Act and would not constitute foreign property
immediately following the completion of the Enhanced Offer and related
transactions if they were completed on the date hereof. Trusts governed by RESPs
are not subject to the foreign property rules.
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TAXATION OF THE CANADIAN COAL TRUST
The taxation year of the Canadian Coal Trust will end on December 15th of
each calendar year. In each taxation year, the Canadian Coal Trust will be
subject to tax under Part I of the Tax Act on its income for the year, including
net realized taxable capital gains, less the portion thereof that it deducts in
respect of amounts paid or payable in the year to Unitholders. For this purpose,
amounts paid or payable to Unitholders after December 15th of a particular
taxation year of the Canadian Coal Trust and before the end of the calendar year
that includes that December 15th are treated as having been paid or made payable
on that December 15th. An amount will be considered to be payable to a
Unitholder when it is paid to the Unitholder by the Canadian Coal Trust or when
the Unitholder becomes entitled to enforce payment of the amount.
The Canadian Coal Trust will include in its income for each taxation year
all interest on the SCAI Notes that accrues to the Canadian Coal Trust to the
end of the taxation year.
In addition, the Canadian Coal Trust will include in its income any
dividends received on the SCAI Shares. Any amount paid to the Canadian Coal
Trust in respect of the SCAI Shares (other than an amount that is a return of
capital for purposes of the Tax Act) will generally constitute a dividend to the
Canadian Coal Trust. Provided that such amounts are distributed to Unitholders
and appropriate designations are made by the Canadian Coal Trust, all amounts
which would otherwise be included in its income as dividends received on the
SCAI Shares will be deemed to have been received by the Unitholders and not to
have been received by the Canadian Coal Trust.
A distribution by the Canadian Coal Trust of SCAI Shares or SCAI Notes upon
a redemption of Units will be treated as a disposition by the Canadian Coal
Trust of the securities so distributed for proceeds of disposition equal to
their fair market value. The Canadian Coal Trust's proceeds of disposition of
SCAI Series A Notes will be reduced by any accrued but unpaid interest in
respect thereof, which interest will generally be included in the Canadian Coal
Trust's income in the year of disposition to the extent it was not included in
its income for a previous year. The Canadian Coal Trust will realize a capital
gain (or a capital loss) to the extent that the proceeds of disposition exceed
(or are less than) the adjusted cost base of the relevant property and any
reasonable costs of disposition.
The Declaration of Trust provides that an amount equal to all of the income
of the Canadian Coal Trust, including the non-taxable portion of any net capital
gains realized by it, but excluding capital gains arising on a distribution IN
SPECIE of SCAI Shares or SCAI Notes on a redemption of Units which are payable
and designated by the Canadian Coal Trust to redeeming Unitholders, will be
payable in the year to the holders of the Units by way of cash distributions,
subject to the exceptions described below. Income of the Canadian Coal Trust
that is applied to fund redemptions of Units for cash or is otherwise
unavailable for cash distributions will be distributed to Unitholders in the
form of additional Units. Income of the Canadian Coal Trust payable to
Unitholders, whether in cash, additional Units or otherwise, will generally be
deductible by the Canadian Coal Trust in computing its income for the purposes
of the Tax Act.
The Canadian Coal Trust will be entitled for each taxation year to reduce
(or receive a refund in respect of) its liability, if any, for tax on its net
realized taxable capital gains by an amount determined under the Tax Act based
on the redemption of Units during the year (the "Capital Gains Refund"). In
certain circumstances, the Capital Gains Refund for a particular taxation year
may not completely offset the Canadian Coal Trust's tax liability for such
taxation year arising as a result of the distribution of SCAI Shares or SCAI
Notes on the redemption of Units. The Declaration of Trust provides that any
capital gain realized by the Canadian Coal Trust as a result of such redemption
may, at the discretion of the Trustees, be treated as paid to redeeming
Unitholders and the taxable portion thereof designated as a taxable capital gain
of the redeeming Unitholders. Any amount so designated as a taxable capital gain
must be included in computing the income of the redeeming Unitholders and will
be deductible by the Canadian Coal Trust. In addition, certain accrued interest
on SCAI Series A Notes distributed to a redeeming Unitholder will be treated as
an amount paid to such Unitholder and will be deductible by the Canadian Coal
Trust.
Counsel has been advised that the Canadian Coal Trust intends to make
sufficient distributions in each year of its net income for tax purposes and net
realized capital gains so that the Canadian Coal Trust will generally not be
liable in such year for income tax under Part I of the Tax Act.
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TAXATION OF UNITHOLDERS
DISTRIBUTIONS BY THE CANADIAN COAL TRUST
A Unitholder will generally be required to include in income for a
particular taxation year the portion of the net income of the Canadian Coal
Trust, including net realized taxable capital gains, that is paid or payable to
the Unitholder in the particular taxation year, whether such amount is received
in cash, additional Units or otherwise. The Canadian Coal Trust's taxation year
will end on December 15th of each calendar year. Amounts paid or made payable by
the Canadian Coal Trust to a Unitholder after December 15th and before the end
of the calendar year will be treated as having been paid or having become
payable on that December 15th.
Provided that appropriate designations are made by the Canadian Coal Trust,
such portion of its taxable dividends received from taxable Canadian
corporations and net taxable capital gains as is paid or payable to a Unitholder
will effectively retain its character and be treated as such in the hands of the
Unitholder for purposes of the Tax Act. To the extent that amounts are
designated as taxable dividends from SCAI, the normal gross-up and dividend tax
credit provisions will be applicable in respect of Unitholders who are
individuals, the refundable tax under Part IV of the Tax Act will be payable by
Unitholders that are private corporations and certain other corporations
controlled directly or indirectly by or for the benefit of an individual or
related group of individuals, and the deduction in computing taxable income will
be available to Unitholders that are corporations.
The non-taxable portion of any net realized capital gains of the Canadian
Coal Trust that is paid or payable to a Unitholder in a taxation year will not
be included in computing the Unitholder's income for the year. Any other amount
in excess of the net income of the Canadian Coal Trust that is paid or payable
to a Unitholder in such year generally will not be included in the Unitholder's
income for the year. However, where such an amount is paid or payable to a
Unitholder (other than as proceeds of disposition of a Unit), the Unitholder
will be required to reduce the adjusted cost base of the Units to the Unitholder
by such amount.
The cost to a Unitholder of additional Units received in lieu of a cash
distribution will be the amount distributed by the issue of such Units. For the
purpose of determining the adjusted cost base to a Unitholder of Units, when a
Unit is acquired, the cost of the newly-acquired Unit will be averaged with the
adjusted cost base of all of the Units owned by the Unitholder as capital
property immediately before such acquisition.
DISPOSITIONS OF UNITS
On the disposition or deemed disposition of a Unit, whether on a redemption
or otherwise, the Unitholder will realize a capital gain (or capital loss) equal
to the amount by which the Unitholder's proceeds of disposition exceed (or are
less than) the aggregate of the adjusted cost base of the Unit to the Unitholder
and any reasonable costs of disposition. Proceeds of disposition will not
include an amount payable by the Canadian Coal Trust that is otherwise required
to be included in the Unitholder's income or is the non-taxable portion of net
realized capital gains of the Canadian Coal Trust paid or payable to the
Unitholder. Where a Unitholder that is a corporation or trust (other than a
mutual fund trust) disposes of a Unit, any capital loss on the disposition will
generally be reduced by the amount of distributions designated as taxable
dividends previously distributed to the Unitholder except to the extent that a
loss on any previous disposition of a Unit has been reduced by such dividends.
Analogous rules apply where a corporation or trust (other than a mutual fund
trust) is a member of a partnership that disposes of Units.
Where Units are redeemed by the distribution of SCAI Notes or SCAI Shares to
the redeeming Unitholder, the proceeds of disposition to the Unitholder of the
Units will generally be equal to the fair market value of the SCAI Notes or SCAI
Shares so distributed less any capital gain realized by the Canadian Coal Trust
as a result of the redemption of such Units which has been designated and made
payable by the Canadian Coal Trust to the Unitholder and, in the case of SCAI
Notes, any accrued interest thereon. Where a capital gain realized by the
Canadian Coal Trust as a result of the distribution of SCAI Shares or SCAI Notes
on the redemption of Units has been designated and made payable by the Canadian
Coal Trust to a redeeming Unitholder, the Unitholder will be required to include
in income the taxable portion of the capital gain so payable. Interest on the
SCAI Notes accrued in the taxation year of the Canadian Coal Trust in which the
redemption occurs but which has not been paid at the time of redemption will be
treated as an amount of income paid to the Unitholder and
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therefore will be included in the Unitholder's income in the year the Unit is
redeemed. The cost of any SCAI Note or SCAI Share distributed by the Canadian
Coal Trust to a Unitholder upon a redemption of Units will be equal to the fair
market value of such security at the time of the distribution less, in the case
of a SCAI Note, any accrued interest thereon. The Unitholder will thereafter be
required to include in income interest on any SCAI Note so distributed
(including interest paid on a SCAI Note) in accordance with the provisions of
the Tax Act. To the extent that the Unitholder is thereafter required to include
in income any interest accrued to the date of the acquisition of a SCAI Note by
the Unitholder, an offsetting deduction will be available. If a Unitholder
receives a payment of interest on a SCAI Note in the form of SCAI Shares, the
cost of such SCAI Shares will be equal to the value of the SCAI Shares included
in the Unitholders' income in respect of such payment, subject to the
averaging rules discussed above under the heading "-- Taxation of Unitholders
-- Distributions By Canadian Coal Trust".
CAPITAL GAINS AND CAPITAL LOSSES
One-half of any capital gain realized by a Unitholder on the disposition of
a Unit and the amount of any net taxable capital gains designated by the
Canadian Coal Trust in respect of a Unitholder will be included in the
Unitholder's income as a taxable capital gain and one-half of any capital loss
realized by a Unitholder on the disposition of a Unit may generally be deducted
only from taxable capital gains in accordance with the provisions of the
Tax Act.
ALTERNATIVE MINIMUM TAX
In general terms, net income of the Canadian Coal Trust paid or payable to a
Unitholder who is an individual (including most trusts) that is designated as
taxable dividends or as net realized taxable capital gains and capital gains
realized on the disposition of Units may increase the Unitholder's liability for
alternative minimum tax.
HOLDERS NOT RESIDENT IN CANADA
This part of the summary applies to a Shareholder who becomes a holder of
Exchange Rights as a result of the acquisition thereof pursuant to the Enhanced
Offer and who, for the purposes of the Tax Act and at all relevant times, is not
resident in Canada and is not deemed to be resident in Canada, does not use or
hold, and is not deemed to use or hold, Exchange Rights or Units in, or in the
course of, carrying on a business in Canada, and is not an insurer who carries
on or is deemed to carry on an insurance business in Canada and elsewhere (a
"Non-Resident Holder").
The exchange of the Exchange Rights for Units is not a disposition for the
purposes of the Tax Act and, accordingly, no gain or loss in the Exchange Rights
would be recognized for the purposes of the Tax Act. On a disposition or deemed
disposition of Exchange Rights (including a repurchase thereof by Sherritt) any
capital gain (or capital loss) realized by a Non-Resident Holder will not give
rise to any tax under the Tax Act provided that the Exchange Rights do not
constitute "taxable Canadian property". Exchange Rights of a Non-Resident Holder
will not generally constitute "taxable Canadian property" under the Tax Act
unless either: (i) at any time preceding the disposition of the Exchange Rights
by such Non-Resident Holder, not less than 25% of the issued Exchange Rights
were owned by the Non-Resident Holder, by persons with whom the Non-Resident
Holder did not deal at arm's length or by any combination thereof; or (ii) the
Non-Resident Holder's Exchange Rights are otherwise deemed to be taxable
Canadian property. A Non-Resident Holder will generally compute the cost and
adjusted cost base of Exchange Rights under the same rules as apply to residents
of Canada.
Where the Canadian Coal Trust pays or credits, or is deemed to pay or
credit, an amount to a Non-Resident Holder out of its income, such amount will
be subject to Canadian withholding tax at the rate of 25%, unless such rate is
reduced under the provisions of an applicable tax treaty. The rate of
withholding is reduced to 15% of the gross income where such distributions are
paid or credited, or deemed to be paid or credited, to Non-Resident Holders who
are residents of the United States for the purposes of the Canada -- United
States Income Tax Convention (1980) (the "Treaty").
A capital gain realized by a Non-Resident Holder from a disposition or
deemed disposition of a Unit will not give rise to any tax under the Tax Act
provided that the Unit does not constitute "taxable Canadian
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property". Units of a Non-Resident Holder will not generally constitute "taxable
Canadian property" under the Tax Act unless either: (i) at any time during the
period of sixty months immediately preceding the disposition of Units by such
Non-Resident Holder, not less than 25% of the issued Units (taking into account
any rights to acquire Units) were owned by the Non-Resident Holder, by persons
with whom the Non-Resident Holder did not deal at arm's length or by any
combination thereof; or (ii) the Non-Resident Holder's Units are otherwise
deemed to be taxable Canadian property. A Non-Resident Holder will generally
compute the adjusted cost base of the Units under the same rules as apply to
residents of Canada.
Interest payable on the SCAI Notes to a Non-Resident Holder will generally
be subject to Canadian withholding tax at the rate of 25%, unless such rate is
reduced under the provisions of an applicable tax treaty. For instance, under
the Treaty the rate of withholding tax on interest paid to Non-Resident Holders
who qualify as residents of the United States for the purposes of the Treaty
generally is reduced to 10%. Dividends paid on SCAI Shares to a Non-Resident
Holder will generally be subject to Canadian withholding tax at the rate of 25%,
unless such rate is reduced under the provisions of an applicable tax treaty.
For instance, under the Treaty the rate of withholding tax on dividends paid to
Non-Resident Holders who qualify as residents of the United States for the
purposes of the Treaty generally is reduced to 15%.
The SCAI Notes will not be taxable Canadian property and, accordingly, any
capital gain (or capital loss) will not be subject to tax under the Tax Act. The
SCAI Shares will be taxable Canadian property of a Non-Resident Holder who
acquires such shares. Accordingly, on a disposition of an SCAI Share by a
Non-Resident Holder that held the SCAI Share as capital property, the
Non-Resident Holder will be required to include one-half of any capital gain
realized in its taxable income earned in Canada which is subject to Canadian
income tax, subject to the provisions of an applicable tax treaty. One-half of
any capital loss realized generally may be deducted only from taxable capital
gains in accordance with the provisions of the Tax Act. In addition, the
notification and withholding provisions of section 116 of the Tax Act will apply
to dispositions of SCAI Shares by Non-Resident Holders.
If the Canadian Coal Trust ceases to qualify as a mutual fund trust, there
may be adverse income tax consequences for Non-Resident Holders who acquire an
interest in the Canadian Coal Trust.
CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
In the opinion of Mayer, Brown, Rowe & Maw, U.S. counsel to the Offeror, the
following is a summary of certain material Federal income tax consequences of
exchanging Shares for Exchange Rights and of owning Exchange Rights and Units to
holders who are "U.S. persons". The summary is based on the Internal Revenue
Code of 1986, as amended (the "Code"), its legislative history, Treasury
Regulations promulgated thereunder, court decisions and rulings by the Internal
Revenue Service (the "IRS"), all as in effect on the date hereof and all of
which are subject to change at any time, possibly with retroactive effect. The
summary only applies to U.S. persons that hold Shares as capital assets and that
will hold Exchange Rights and Units as capital assets and does not address tax
considerations which apply to taxpayers who are subject to special rules
(e.g., financial institutions, tax exempt organizations, insurance companies and
non-U.S. taxpayers). Each U.S. person's individual circumstances may affect the
tax consequences of the Enhanced Offer to such person. Accordingly,
U.S. persons should consult their own tax advisors regarding the particular
consequences to them of the Enhanced Offer, including the applicability of any
state, local or foreign tax laws to which they may be subject.
For purposes of this summary, a "U.S. person" means: (i) an individual who
is a citizen or resident of the United States; (ii) a corporation or partnership
(or an entity that is treated as a corporation or partnership for U.S. federal
income tax purposes) that is either created or organized in or under the laws of
the United States or any political subdivision thereof; (iii) an estate the
income of which is subject to U.S. federal income tax regardless of source; or
(iv) a trust if both (A) a U.S. court is able to exercise primary supervision
over the administration of the trust and (B) one or more U.S. persons have the
authority to control all substantial decisions of the trust.
CONSEQUENCES OF EXCHANGING EXCHANGE RIGHTS FOR UNITS
The exchange of the Exchange Rights for Units should be combined with the
exchange of Shares for Exchange Rights because persons who receive Exchange
Rights will be required to exchange them for Units.
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Accordingly, a U.S. person who receives Exchange Rights pursuant to the Enhanced
Offer and then receives Units pursuant to the terms of, and in exchange for, the
Exchange Rights should be able to treat the transaction as an exchange of Shares
for Units. A U.S. person generally may treat the deemed exchange of Shares for
Units as a tax-free exchange. However, to the extent a U.S. person receives cash
in addition to the Exchange Rights such U.S. person generally will be required
to recognize capital gain equal to the difference between (i) the amount of cash
received in the Enhanced Offer and (ii) such U.S. person's tax basis in the
Shares exchanged therefore. However, if the receipt of cash is either
(i) "essentially equivalent to a dividend" or (ii) the U.S. person's
proportionate interest in the company has dropped by more than 80% as a result
of the Enhanced Offer, such U.S. person would instead recognize dividend income
equal to the amount of cash received in the Enhanced Offer.
If a U.S. person sells or otherwise disposes of its Exchange Rights prior to
exchanging its Exchange Rights for Units, such U.S. person generally would
recognize capital gain or loss equal to the difference between (i) the amount of
cash and the fair market value of any other property received in exchange for
the Exchange Rights and (ii) the U.S. person's basis in the Exchange Rights, and
any capital gain realized on a sale or disposition of Exchange Rights would be
long term capital gain, and subject to tax at reduced rates in the case of
non-corporate U.S. persons, if the U.S. person's holding period in the Exchange
Rights exceeded one year at the time of the sale or disposition. If the sale or
disposition of the Exchange Rights does not result in a U.S. federal income tax
characterization of the initial exchange of Shares for Exchange Rights that is
different from that described in the preceding paragraph, a U.S. person's basis
in the Exchange Rights generally would be equal to the U.S. person's basis in
the Shares exchanged therefor and its holding period in the Exchange Rights
would include its holding period in the Shares exchanged therefor. If, however,
the sale or disposition of Exchange Rights prior to their being exchanged for
Units caused the U.S. federal income tax treatment of the initial exchange of
Shares for Exchange Rights to be different than that described in the preceding
paragraph, the tax consequences to U.S. persons of the Enhanced Offer and the
subsequent sale or disposition of Exchange Rights could be different.
U.S. FEDERAL INCOME TAXATION OF DIVIDENDS
The Canadian Coal Trust will be treated as a corporation for U.S. federal
income tax purposes. Accordingly, the gross amount of any distribution paid by
the Canadian Coal Trust to a U.S. person (i.e., the distribution plus any taxes
withheld with respect to such distribution) will be included in gross income and
treated as foreign source dividend income of such U.S. person for U.S. federal
income tax purposes only to the extent such distribution is paid out of current
or accumulated earnings and profits of the Canadian Coal Trust (as determined
for U.S. federal income tax purposes). A distribution made by the Canadian Coal
Trust to a U.S. person in excess of the Trust's current or accumulated earnings
and profits will be treated as a non-taxable return of capital to the extent of
such U.S. person's tax basis in the Units, and any distribution in excess of
such basis will constitute capital gain.
A distribution made by the Canadian Coal Trust that is treated as a dividend
will not be eligible for the dividends received deduction allowed to
U.S. corporations. The amount includable in income for a dividend paid in
Canadian dollars will be the U.S. dollar value of the payment (as of the time of
payment) regardless of whether the payment is in fact converted into
U.S. dollars. Generally, any gain or loss resulting from currency exchange
fluctuations during the period from the date of the dividend payment to the date
such dividend payment is converted into U.S. dollars will be treated as ordinary
income or loss and will be treated as U.S.-source income or loss for
U.S. foreign tax credit purposes. Canadian dollars received by U.S. persons will
have a tax basis equal to the U.S. dollar value at the time of distribution.
Subject to certain limitations, the applicable Canadian withholding tax will be
treated as a foreign tax eligible for credit against the U.S. person's
U.S. federal income tax or, at the election of the U.S. person, may be claimed
as a deduction in computing U.S. taxable income. Special rules apply for
purposes of determining the foreign tax credit available to a U.S. corporation
which controls 10% or more of the voting power of the Canadian Coal Trust.
U.S. TAXATION OF CAPITAL GAINS
Upon a sale or exchange of Units, a U.S. person will recognize capital gain
or loss for U.S. federal income tax purposes in an amount equal to the
difference between the amount realized in the transaction (or the
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U.S. dollar value thereof determined at the spot rate on the date of disposition
if the amount realized is not denominated in U.S. dollars) and the
U.S. person's tax basis for such Units. The amount realized will equal the
amount of any cash and the fair market value of any property received by the
U.S. person. U.S. Unitholders who receive their Units in the Enhanced Offer will
have a tax basis in their Units equal to the tax basis of the Shares which they
exchanged for the Units increased by any gain recognized by such U.S. person in
the exchange. Any such gain or loss generally would be treated as U.S. source
for foreign tax credit purposes. The capital gain or loss will be long term if
the Units have been held for more than one year on the date of the sale or
exchange. In the case of non-corporate U.S. persons, long-term capital gains are
subject to tax at reduced rates. The deductibility of capital losses is subject
to limitation.
CONTROLLED FOREIGN CORPORATION AND FOREIGN PERSONAL HOLDING COMPANY RULES
Income earned by a non-U.S. corporation which constitutes a "foreign
personal holding company" or a "controlled foreign corporation" may be imputed
to its U.S. shareholders even if such income is not distributed. The Trust will
not constitute a foreign personal holding company if Units are sufficiently
widely held so that five or fewer individual U.S. persons at any time during the
taxable year do not own (directly, indirectly, or constructively) more than 50%
of the voting power or value of the outstanding Units. In addition, the Canadian
Coal Trust will not constitute a controlled foreign corporation if Units are
widely held so that U.S. persons owning (directly, indirectly, or
constructively) at least 10% of the Units (by voting power) do not in the
aggregate own (directly, indirectly, or constructively) more than 50% of the
voting power or value of the outstanding Units. It is not anticipated that
U.S. ownership of the Canadian Coal Trust will be sufficiently concentrated to
result in the Canadian Coal Trust being classified as either a foreign personal
holding company or a controlled foreign corporation. Whether the Canadian Coal
Trust is a foreign personal holding company or a controlled foreign corporation
is a factual determination that must be made annually and thus may change.
PASSIVE FOREIGN INVESTMENT COMPANY RULES
Under the current U.S. federal income tax law, a foreign corporation is a
"passive foreign investment company" ("PFIC") for any taxable year if 75% or
more of its gross income consists of passive income or 50% or more of the
average value of its assets consists of assets that produce, or are held for the
production of, passive income. If the Canadian Coal Trust were classified as a
passive foreign investment company for any taxable year during which a
U.S. person held Units, and unless certain elections were made, such
U.S. persons would generally be subject to special tax rules, regardless of
whether the Canadian Coal Trust remained a passive foreign investment company,
on certain distributions made by the Canadian Coal Trust and on any gain
realized on a disposition of Units. Based upon its current and projected income,
business investment plan, assets and activities, the Canadian Coal Trust does
not expect to be considered a PFIC for its current taxable year or for future
years. This is a factual determination that must be made annually and thus may
change.
BACKUP WITHHOLDING
A U.S. person that owns Units may be subject to backup withholding
(currently at a rate of 30%) with respect to dividends on, or the proceeds of a
sale or disposition of, such Units unless such U.S. person: (i) is a corporation
or comes within certain other exempt categories of taxpayers and, when required,
demonstrates this fact; or (ii) provides a taxpayer identification number
(generally on Internal Revenue Service Form W-9), certifies as to no loss of
exemption from backup withholding, and otherwise complies with applicable backup
withholding rules. Backup withholding is not an additional tax. Any amounts
withheld under the backup withholding rules may be claimed as a credit against a
U.S. person's U.S. federal income tax liability, provided that the required
information is furnished to the IRS.
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ELIGIBILITY FOR INVESTMENT
Based on legislation in effect at the date hereof and subject to compliance
with the prudent investor standards and the general provisions and restrictions
of the statutes referred to below (and, where applicable, the regulations
thereunder) and, in certain cases, subject to the satisfaction of additional
requirements relating to investment or lending policies, standards, procedures
and goals, the Exchange Rights and the Units issuable in connection with the
Enhanced Offer would not, if issued on the date hereof, be precluded as
investments under the following statutes:
- INSURANCE COMPANIES ACT (Canada);
- PENSION BENEFITS STANDARDS ACT, 1985 (Canada);
- TRUST AND LOAN COMPANIES ACT (Canada);
- CO-OPERATIVE CREDIT ASSOCIATIONS ACT (Canada);
- LOAN AND TRUST CORPORATIONS ACT (Alberta);
- INSURANCE ACT (Alberta);
- EMPLOYMENT PENSION PLANS ACT (Alberta);
- ALBERTA HERITAGE SAVINGS TRUST FUND ACT (Alberta);
- PENSION BENEFITS STANDARDS ACT (British Columbia);
- FINANCIAL INSTITUTIONS ACT (British Columbia);
- THE INSURANCE ACT (Manitoba);
- THE TRUSTEE ACT (Manitoba);
- THE PENSION BENEFITS ACT (Manitoba);
- PENSION BENEFITS ACT (Nova Scotia);
- TRUSTEE ACT (Nova Scotia);
- PENSION BENEFITS ACT (Ontario);
- TRUSTEE ACT (Ontario);
- LOAN AND TRUST CORPORATIONS ACT (Ontario);
- AN ACT RESPECTING INSURANCE (Quebec);
- AN ACT RESPECTING TRUST COMPANIES AND SAVINGS COMPANIES (Quebec);
- SUPPLEMENTAL PENSION PLANS ACT (Quebec); and
- THE PENSION BENEFITS ACT, 1992 (Saskatchewan).
In the opinion of Torys LLP, counsel for the Offeror, under the provisions
of the Tax Act as of the date hereof and provided that the Canadian Coal Trust
is a mutual fund trust for the purposes of the Tax Act on each Take Up and Pay
Date and thereafter, (i) the Exchange Rights, on each Take Up and Pay Date, and
the Units will be qualified investments under the Tax Act for trusts governed by
Registered Plans, and (ii) the Exchange Rights and the Units will not constitute
"foreign property" for the purposes of the tax imposed under Part XI of the
Tax Act on Registered Plans (other than RESPs), registered investments and other
tax exempt entities, including registered pension funds or plans. RESPs are not
subject to the foreign property rules.
MATERIAL CONTRACTS
In the event the Offeror completes the Fording Acquisition, it is
anticipated that the following material agreements will be entered into prior to
the Exchange:
- the Declaration of Trust;
- the SCAI Note Indenture;
- the Exchange Rights Agreement;
- the Management Agreement;
- the Conversion Agreement; and
- the Shareholders Agreement.
LEGAL MATTERS
Certain legal matters relating to the Exchange Rights and the Units will be
passed upon on behalf of the Canadian Coal Trust, Sherritt, SCAI and the MetCoal
Company by Torys LLP and Mayer, Brown, Rowe & Maw. As of December 12, 2002, the
partners and associates of each of Torys LLP and Mayer, Brown, Rowe & Maw
beneficially owned, directly or indirectly as a group, less than 1% of the
restricted voting shares of Sherritt outstanding as of such date.
A-85
LEGAL PROCEEDINGS
Based solely on the publicly filed documents of Fording, and without any
further enquiry, neither the Offeror nor Sherritt is aware of any material
litigation outstanding, threatened or pending as of the date hereof by or
against Fording or related to its business which would be material to
Shareholders in considering the Offer other than as described under "Overview of
the MetCoal Company -- Law and Regulation".
The Offeror is not aware of any material litigation outstanding, threatened
or pending as of the date hereof by or against the Offeror or which would be
material to Shareholders in considering the Offer.
AUDITORS, EXCHANGE AGENT, TRANSFER AGENT AND REGISTRAR
The auditors of Sherritt, the Canadian Coal Trust, SCAI and the MetCoal
Company are or will be, as the case may be, Deloitte & Touche LLP, Toronto,
Ontario.
It is anticipated that the Exchange Agent for the Exchange Rights and the
transfer agent and registrar for the Units will be CIBC Mellon Trust Company at
its principal transfer office in Toronto, Ontario.
A-86
GLOSSARY OF MINING TERMS
"ANTHRACITE COAL" means a class of coal of the highest rank and having a
heat value as high as 15,000 Btu per pound and primarily used for industrial and
home heating processes.
"BCM" means bank cubic metre, which represents one cubic metre of material
measured prior to disturbance.
"BITUMINOUS COAL" means a class of coal having heat values typically ranging
from 10,500 to 14,000 Btu per pound, commonly used for utility and industrial
steam purposes and in the steel-making industry for making coke or for injection
into the blast furnace.
"BTU" means a British thermal unit; the amount of heat needed to raise the
temperature of one pound of water by one degree Fahrenheit.
"CMT" means a clean metric tonne, which represents one metric tonne of coal
which has been prepared for sale in a preparation plant.
"COAL RANK" means the classification of coal from lignite to anthracite
based on heating capability, carbon content and other qualitative
characteristics.
"COKE" means a hard, dry carbon substance produced by heating coal to a very
high temperature in the absence of air, used primarily in the manufacture of
iron and steel.
"COKING COAL" is metallurgical coal that exhibits the physical and chemical
properties that are necessary to form coke.
"DRAGLINE" means a large, electrically powered, mobile machine with a large
bucket suspended from the end of a long boom used to remove overburden and coal
materials a short distance in the surface mining process.
"HAUL TRUCK" means a large, off-road truck used to haul overburden or coal
on a mine site.
"LIGNITE COAL" means a class of coal of the lowest rank and having a heat
value ranging from 6,300 to 8,300 Btu per pound and used primarily for power
generation and the making of char.
"LOADER" means a large machine used to load coal or overburden.
"METALLURGICAL COAL" means the various grades of coal suitable for
carbonization used to make coke, or for pulverized coal injection into the blast
furnace for steel manufacture.
"NON-RESERVE COAL" means coal quantities that have not been economically
evaluated or if evaluated, it has been concluded that those coal quantities
cannot be economically mined based on current technology and market conditions.
"OVERBURDEN" means materials that overlie a coal deposit.
"PROCESSING PLANT" means a facility for crushing, sizing, or washing coal to
prepare it for sale.
"PULVERIZED COAL INJECTION" refers to that step in the integrated steel mill
process where coal is pulverized and injected into a blast furnace. The grades
of coal used in the process are generally metallurgical coals that are
non-coking. In the integrated steel mill process, pulverized coal injection
grade coal is used primarily as a heat source for partial replacement of the use
of coke which is typically more expensive.
"RECLAMATION" means the restoration of land and the surrounding environment
of a mining site after the coal is extracted.
"RESERVE" means coal quantities that are anticipated to be mineable based
upon the completion of feasibility studies, utilizing existing technology, under
prevailing economic conditions and which have no legal impediment to mining.
"SEAM" means a three dimensional zone consisting of one or more layers of
coal, which may be separated by one or more thin layers of rock.
A-87
"SHOVEL" means a large electric or diesel powered machine used in the
surface mining process to remove and load overburden or coal.
"STEAM COAL" is the same as thermal coal.
"STRIP RATIO" means the ratio of overburden materials to underlying coal,
generally measured in cubic metres of overburden in place to tonnes of coal.
"SUBBITUMINOUS COAL" means a class of coal intermediate in rank between
lignite and bituminous coal and possessing a heat value generally ranging from
approximately 8,300 to 11,500 Btu per pound, used primarily for generating
electricity.
"SURFACE MINE" means a mine in which the coal lies sufficiently near the
surface to be extracted by removing the overburden.
"SYNCLINE" means a series of flat-lying rock strata that over time has been
folded into a trough-like structure within which coal seams may lie.
"THERMAL COAL" means coal used for its heating value by power plant and
industrial facilities to produce steam or process heat.
"TONNE" means a metric ton which is equal to approximately 2,204.6 pounds.
"VESSEL DEMURRAGE CHARGE" means a delay charge paid by coal shippers when an
ocean-going vessel remains at the loading port for a longer period than agreed
under the sales contract.
"VOLATILES" or "VOLATILE MATTER" means that portion of coal that is driven
off in gaseous and vapour form when coal is subjected to a standard heating
test.
A-88
CONVERSION FACTORS
Measurements in this document are generally given in metric units. The
following table sets forth standard conversions between metric units of measure
and Imperial units of measure.
To convert from To Multiply By
--------------- -- -----------
Cubic metres cubic yards 1.308
Metres feet 3.281
Kilometres miles 0.621
Hectares acres 2.471
Kilograms pounds 2.205
Tonnes short tons 1.102
Tonnes long tons 0.984
KJ/kg Btu/lb 0.430
A-89
APPENDIX B
INFORMATION CONCERNING SHERRITT INTERNATIONAL CORPORATION
SHERRITT INTERNATIONAL CORPORATION
TABLE OF CONTENTS
Page
--------
SHERRITT INTERNATIONAL CORPORATION.......................... B-3
SUMMARY DESCRIPTION OF BUSINESS OF SHERRITT INTERNATIONAL
CORPORATION............................................... B-3
General................................................... B-3
Coal...................................................... B-3
Metals.................................................... B-4
Oil and Gas............................................... B-5
Electricity............................................... B-6
Communications............................................ B-7
Other Investments......................................... B-7
DESCRIPTION OF SHARE AND LOAN CAPITAL....................... B-7
Sherritt Shares........................................... B-7
Multiple Voting Shares.................................... B-8
Sherritt Debentures....................................... B-8
CONSOLIDATED CAPITALIZATION................................. B-9
SUMMARY CONSOLIDATED FINANCIAL INFORMATION.................. B-10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. B-12
Introduction.............................................. B-12
Overview.................................................. B-12
Results for the nine months ended September 30, 2002
compared with the nine months ended
September 30, 2001...................................... B-13
Results for year ended December 31, 2001 compared with the
year ended December 31, 2000............................ B-20
Results for year ended December 31, 2000 compared with the
year ended December 31, 1999............................ B-26
Liquidity and Capital Resources........................... B-30
Risks and Uncertainties................................... B-32
Critical Accounting Policies.............................. B-33
Sensitivities............................................. B-33
Differences between Canadian GAAP and U.S. GAAP........... B-34
Recently Issued Accounting Standards...................... B-34
RISK FACTORS................................................ B-34
Risks Related to Sherritt's Investments in Cuba........... B-34
The U.S. Embargo and the Helms-Burton Act................. B-35
LEGAL MATTERS............................................... B-36
AUDITORS.................................................... B-36
DOCUMENTS INCORPORATED BY REFERENCE......................... B-36
GLOSSARY FOR APPENDIX B..................................... B-38
CERTIFICATE OF SHERRITT INTERNATIONAL CORPORATION........... B-39
B-2
SHERRITT INTERNATIONAL CORPORATION
Sherritt International Corporation ("Sherritt"), formerly Sherritt
International Corp., was incorporated on October 4, 1995 by articles of
incorporation under the BUSINESS CORPORATIONS ACT (New Brunswick) (the "NBBCA").
The articles of incorporation were amended in October and November 1995 to
provide for Sherritt's current name and capital structure. Its authorized
capital consists of an unlimited number of restricted voting shares (the
"Sherritt Shares") and 100 multiple voting shares (the "Multiple Voting
Shares").
Sherritt's principal and head office is located at 1133 Yonge Street,
Toronto, Ontario, M4T 2Y7.
The following table sets out the relationship of Sherritt to its principal
subsidiaries and investments and indicates their respective jurisdictions of
incorporation or governing jurisdictions:
Jurisdiction of % of Voting
Incorporation/ Securities Held
Name Governing Jurisdiction (directly or indirectly)
---- ---------------------- ------------------------
Luscar Energy Partnership (formerly Sherritt Coal
Partnership).............................................. Ontario 50%
Luscar Energy Holdings Ltd.................................. Ontario 100%
Luscar Ltd.................................................. Alberta 50%
Luscar Coal Ltd............................................. Alberta 50%
Sherritt Power Corporation(1)............................... New Brunswick 49.7%
Sherritt International Oil and Gas Limited.................. Alberta 100%
Moa Nickel S.A.............................................. Cuba 50%
The Cobalt Refinery Company Inc............................. Alberta 50%
International Cobalt Company Inc............................ Bahamas 50%
CNWL Oil (Espana) S.A....................................... Spain 100%
Sherritt International (Cuba) Oil and Gas Limited........... Barbados 100%
Sherritt International Investments (Cuba) Limited........... Barbados 100%
Telefonos Celulares de Cuba S.A............................. Cuba 40%
Procesadora de Soya, S.A.................................... Cuba 49%
------------
(1) Sherritt also holds $60.2 million principal amount of 12.125% senior
unsecured amortizing notes due 2007 issued by Sherritt Power Corporation,
comprising approximately 33% of the outstanding notes as of the date hereof.
The common shares of Sherritt Power are listed for trading on the TSX under
the symbol "U".
SUMMARY DESCRIPTION OF BUSINESS OF SHERRITT INTERNATIONAL CORPORATION
GENERAL
Sherritt International Corporation is a diversified Canadian resource
company with assets of approximately $2 billion that operates in Canada and
internationally. Sherritt, directly or through its subsidiaries, has a 50%
interest in Luscar Energy Partnership (which owns 100% of Luscar Ltd., Canada's
largest coal producer), 50% of a vertically-integrated nickel/cobalt metals
business, an oil and gas exploration, development and production business with
reserves in Cuba and elsewhere, and 49.7% of the shares of Sherritt Power
Corporation ("Sherritt Power"), which finances, constructs and operates
gas-fired electricity generation plants in Cuba. Sherritt also has interests in
cellular telecommunications, soybean-based food-processing, agriculture and
tourism in Cuba.
COAL
Sherritt's coal business consists of its 50% indirect interest in Luscar
Energy Partnership and includes the sale of coal in domestic markets primarily
for use as a fuel to generate electricity and the sale of export coal for use in
steel making and as a fuel to generate electricity.
On May 11, 2001, Sherritt Coal Partnership, a partnership between Sherritt
and a subsidiary of OTPP, acquired a majority of the outstanding trust units
("Luscar Units") and convertible debentures ("Luscar Debentures") of Luscar Coal
Income Fund. By June 29, 2001, Sherritt Coal Partnership had acquired the
remaining Luscar Units and Luscar Debentures of the Luscar Coal Income Fund. The
Luscar Coal Income Fund
B-3
is an open-ended trust, which has invested in the securities of Luscar
Coal Ltd. ("Luscar Coal") and Luscar Ltd. (collectively, "Luscar").
Following the acquisition, Sherritt Coal Partnership changed its name to
Luscar Energy Partnership ("LEP"), and on October 5, 2001, Sherritt transferred
its interest in LEP to a wholly-owned subsidiary.
Sherritt's share of the total acquisition cost of the Luscar Coal Income
Fund was $236 million, comprising cash consideration of $136 million and the
issue of 25 million Sherritt Shares at an assigned value of $4.00 per Sherritt
Share. In October 2001, as part of a refinancing, Luscar Coal issued
U.S.$275 million of 9.75% senior notes due October 15, 2011 (the "Luscar
Notes"). The Luscar Notes are guaranteed as to principal and interest by LEP.
The acquisition was accounted for by LEP using the purchase method of
accounting. Sherritt's 2001 audited consolidated financial statements included
its 50% proportionate interest in the results of LEP for the period from
May 12, 2001 to December 31, 2001. Sherritt's share of operating earnings for
this period was $20.2 million on revenues of $204.5 million. As at December 31,
2001, Sherritt's share of assets related to the coal business of Luscar was
$769.3 million.
Luscar is the largest coal producer in Canada and one of the largest coal
producers in North America. Production from Luscar's mines was approximately
27 million tonnes for the first nine months of 2002 and 37 million tonnes for
the 2001 year, approximately half of all Canadian coal production, based
on tonnes produced. As of December 31, 2001, Luscar's proven coal reserves and
probable coal reserves within operating mine permit areas and on development
properties were 675 million tonnes and 29.6 million tonnes, respectively.
All of Luscar's coal production and coal reserves at its existing mines are
less than 1% sulphur by weight on average, which is considered to be low-sulphur
coal. Many utilities use low-sulphur coal in their efforts to comply with
environmental regulations for sulphur-dioxide emissions. Luscar Ltd. generates a
substantial portion of its operating margin from long-term contracts with ATCO
Electric Ltd., Saskatchewan Power Corporation and TransAlta Corporation, the
major electricity generators in Alberta and Saskatchewan. Luscar services these
contracts from four of its mine-mouth operations, which are located in close
proximity to the coal-fired power plants operated by these customers.
METALS
Sherritt's metals segment is comprised of its 50% indirect interest in a
vertically-integrated commodity, nickel/cobalt metals business (the "Metals
Enterprise") and its marketing and trading activities in commodity metals, as
well as its fertilizer and utilities assets.
The Metals Enterprise is a vertically-integrated nickel and cobalt mining,
processing, refining and marketing joint venture between subsidiaries of
Sherritt and General Nickel Company S.A., a Cuban company. Mixed sulphides
containing nickel and cobalt are produced from ore mined and processed at Moa,
Cuba. In 2001, the Metals Enterprise produced a record of 32,360 tonnes of
nickel and cobalt in mixed sulphides. The mixed sulphides are shipped to Canada
by sea, and then transported by rail to the metals refinery in Fort
Saskatchewan, Alberta. The metals refinery produced record volumes for that
facility of 29,225 tonnes of finished nickel and 2,943 tonnes of finished cobalt
in 2001 and 23,432 tonnes of finished nickel and 2,200 tonnes of finished cobalt
for the nine months ended September 30, 2002.
B-4
The following table sets out the Metals Enterprises' estimates of its proven
and probable ore reserves as at December 31, 2001.
ESTIMATE OF ORE RESERVES AS AT DECEMBER 31, 2001
Classification Tonnes % Nickel % Cobalt
-------------- ---------- -------- --------
(millions)
Proven...................................................... 33.8 1.24 0.14
Probable.................................................... 2.4 1.18 0.13
---- ---- ----
Proven and Probable......................................... 36.2 1.24(1) 0.14(1)
---- ---- ----
------------
(1) Weighted average percentage.
Sherritt also produces fertilizer products. Fertilizer revenue is largely
derived from the sale of nitrogen fertilizers, and from sulphate fertilizers
produced as a by-product of the metals refining process.
OIL AND GAS
Sherritt explores for, develops and produces oil and natural gas from fields
primarily located in Cuba and Spain.
Sherritt holds indirect working interests varying from 40% to 100% in six
exploration production-sharing contracts with Union Cubapetroleo ("Cupet"), a
Cuban government agency, which involve the exploration for and development of
new oil and gas reservoirs in Cuba, or the extension of the known field
boundaries of existing reservoirs. Sherritt also holds 100% indirect working
interests in four enhanced production-sharing contracts with Cupet, which
require it to provide services and technical assistance to rework and enhance
the production of selected wells, or to drill new wells in existing oil fields.
The ten production-sharing contracts cover a total of 5.1 million gross acres
with Sherritt's net acreage equal to 2.8 million acres. Oil produced in Cuba is
currently sold to Petromax S.A., a Cuban company, at sales prices based on an
international reference price for U.S. Gulf Coast Fuel Oil No. 6.
Sherritt also has indirect working interests in various producing oil fields
located in the Gulf of Valencia, off the coast of Spain and in the Ghauspur
concession in Pakistan's central Indus Basin.
Sherritt's share of oil production during 2001 averaged 20,735 barrels per
day, 97% of which occurred in Cuba, and Sherritt's share of oil production for
the nine months ended September 30, 2002, was 21,900 barrels per day, 97% of
which occurred in Cuba.
B-5
The following tables set out Sherritt's estimates of its total proved
reserves for oil and the estimated present worth of such reserves (before income
tax) as at December 31, 2001.
ESTIMATE OF OIL RESERVES AS OF DECEMBER 31, 2001(4)
(thousands bbls)
Gross Net
------------ -----------------------------------------------
Total Proved Proved Total
Proved Reserves (constant price scenario) Proved(1)(2) Producing(1)(3) Undeveloped(1)(3) Proved(1)
----------------------------------------- ------------ --------------- ----------------- ---------
Cuba.............................................. 52,659 19,550 -- 19,550
Spain............................................. 3,887 657 -- 657
------ ------ ------ ------
Total............................................. 56,546 20,207 -- 20,207
------ ------ ------ ------
------------
(1) PROVED RESERVES are those reserves estimated as recoverable under current
technology and existing economic conditions, from that portion of a
reservoir which can be reasonably evaluated as economically productive on
the basis of analysis of drilling, geological, geophysical and engineering
data, including the reserves to be obtained by enhanced recovery processes
demonstrated to be economically and technically successful in the subject
reservoir. PROVED PRODUCING RESERVES are proved reserves that are actually
in production or, if not producing, that could be recovered from existing
wells or facilities and where the reason for the current non-producing
status is the choice of the owner. An illustration of such a situation is
where a well or zone is capable of producing but is shut-in because its
deliverability is not required to meet contract commitments. PROVED
UNDEVELOPED RESERVES are reserves which are expected to be recovered from
new wells on undrilled acreage or from existing wells where a relatively
major capital expenditure will be required.
(2) GROSS RESERVES means the total quantity of reserves, including royalties and
other interests that can reasonably be expected to be recovered from the
subject reservoir under current technology and existing economic conditions.
(3) NET PROVED PRODUCING AND NET PROVED UNDEVELOPED RESERVES are determined by
deducting royalties and other interests from gross proved reserves. Such
royalties are subject to change by legislation or regulation and can also
vary depending upon production rates, selling prices and timing of initial
production. Royalties and other interests includes the share of production
allocated to the government of Cuba from time to time under the
production-sharing contracts, other royalty payments to host governments and
the participating interest share of production of Sherritt's joint venture
partners.
(4) Estimates of the proved oil reserves attributable to Sherritt's interests
were provided by McDaniel & Associates Consultants Ltd.
ESTIMATED PRESENT WORTH VALUES OF RESERVES BEFORE INCOME TAX AS OF DECEMBER 31,
2001
(millions of U.S. dollars)
Discounted at
-----------------------
0% 10%
---------- ----------
Total Proved Producing Reserves -- Cuba(1)(2)(3)............ U.S.$171.3 U.S.$131.4
Total Proved Producing Reserves -- Spain(1)(2)(3)........... 2.6 2.5
---------- ----------
Total Proved Producing Reserves(1)(2)(3).................... U.S.$173.9 U.S.$133.9
---------- ----------
------------
(1) The definition of Proved Producing Reserves is set forth in footnote (1) in
the above reserves table.
(2) Reflects Sherritt's net working interest share of reserves.
(3) In Cuba and Spain, no royalty is payable on Sherritt's net working interest
share of reserves.
ELECTRICITY
Sherritt owns four million common shares, or approximately 49.7% of the
equity, of Sherritt Power. In addition, Sherritt owns $60.2 million principal
amount ($75 million face amount) of 12.125% senior unsecured amortizing notes
(the "Sherritt Power Notes") due 2007 issued by Sherritt Power (approximately
33% of the outstanding Sherritt Power Notes). Sherritt Power is a public company
engaged in the power generation business. Its common shares are listed for
trading on the TSX under the symbol "U".
Through a wholly-owned subsidiary, Sherritt Power holds a one-third interest
in Energas S.A. ("Energas"), a joint venture with two Cuban agencies, Union
Electrica and Cupet. Energas was established to build and operate power
generating facilities in Cuba. Sherritt Power has constructed and commissioned
for Energas modern power plants at Varadero and Boca de Jaruco with a combined
installed capacity of 131 megawatts ("MW"). These facilities are designed to
produce low-cost reliable power utilizing natural gas from Cuba's petroleum
fields. The plants also recover natural gas liquids and sulphur from the gas
stream, providing a
B-6
positive impact on air quality in the region. An existing 20 MW turbine located
near the Varadero plant has been refurbished to utilize surplus natural gas from
the present Varadero operations.
Commissioning of the third phase of the Varadero facility has commenced,
with first delivery of electricity to the Cuban grid expected in January 2003.
This phase will expand the plant by 75 MW through the conversion to a combined
cycle operation. Sherritt Power is also working with its Cuban partners to
assess the possibility of installing additional generation capacity at the Boca
site.
COMMUNICATIONS
Sherritt holds a 40% indirect interest in Telefonos Celulares de Cuba S.A.
("Cubacel"), a Cuban joint venture among the Ministry of Information Technology
and Communications of the Government of Cuba and private foreign investors.
Cubacel is the sole provider of cellular communications within the 800 MHz band
throughout Cuba. Cubacel's concession is for a period of 20 years from the date
of institution of service in each region, subject to further extensions from the
Ministry of Information Technology and Communications.
OTHER INVESTMENTS
Procesadora de Soya, S.A. ("PDS") is a Cuba-based joint venture that has
constructed and operates a 500 tonne per day soybean-based food-processing plant
at Santiago de Cuba. Sherritt holds a 49% indirect interest in PDS, which
produces crude soy oil, soy meal, flour, vegetable protein and lecithin for sale
into the domestic and export markets. The other participant is Corporacion
Alimentaria S.A., a Cuban company. The plant was commissioned in April 2001.
During 2001, approximately 46,300 tonnes of soybeans were processed and in the
first nine months of 2002, approximately 65,297 tonnes of soybeans were
processed.
Sherritt holds a 25% indirect interest in the concession for the Las
Americas luxury beachfront hotel and bungalow complex located on the Hicacos
peninsula in Varadero, Cuba. Sherritt also holds a 12.5% indirect interest in
the Hotel Habana, a business-oriented hotel in Havana, Cuba. The Sol Melia hotel
group of Spain manages the business operations of both hotel complexes. The
Cuban participant in these hotel projects is Cubanacan.
Sherritt holds a 50% indirect interest in a market garden joint venture with
Acopio, a Cuban company, which operates under the trade name Sherritt Green. The
joint venture operates a 200 hectare farm in Matanzas, Cuba.
Sherritt owns 36,947,369 common shares of Anaconda Nickel Limited
("Anaconda"), which owns a 60% indirect interest in the Murrin Murrin
nickel/cobalt project in West Australia. In 2001, Sherritt wrote down this
investment by $23.4 million ($18.8 million after tax). During the third quarter
of 2002, this investment was written down by a further $37.0 million
($29.8 million after tax). This investment had a book value of $6.4 million,
which approximates the market value as at September 30, 2002. Under Canadian
GAAP, this investment is valued at cost less any write-down for estimated
non-temporary impairment in value. Sherritt continues to review the long-term
net carrying value of this investment on a quarterly basis.
DESCRIPTION OF SHARE AND LOAN CAPITAL
The authorized share capital of Sherritt consists of an unlimited number of
Sherritt Shares and 100 Multiple Voting Shares. Currently there are
$600 million principal amount of Sherritt Debentures outstanding. The
outstanding Sherritt Shares and Sherritt Debentures are listed for trading on
the TSX under the symbol "S" and "S.DB", respectively. The following is a
summary of the principal terms and conditions of the Sherritt Shares, Multiple
Voting Shares and Sherritt Debentures. Reference should be made to the articles
of incorporation of Sherritt for full particulars of the provisions attaching to
the Sherritt Shares and Multiple Voting Shares.
SHERRITT SHARES
Each holder of Sherritt Shares is entitled to receive notice of and to
attend any meeting of the shareholders of Sherritt and is entitled to one vote
in respect of each Sherritt Share held at such meetings. Each holder of Sherritt
Shares is entitled to receive dividends, if, as and when declared by the board
of directors of Sherritt and will participate equally in any distribution of the
assets of Sherritt on its liquidation, dissolution or winding-up.
B-7
The Sherritt Shares do not have any pre-emptive rights, are not convertible or
exchangeable into any other shares or securities and do not have any redemption,
retraction, purchase for cancellation or surrender provisions or any sinking
fund or purchase provisions.
The NBBCA requires cumulative voting in respect of the election of directors
of Sherritt, meaning that each holder of Sherritt Shares entitled to vote for
the election of directors has the right to cast a number of votes equal to the
number of votes attached to the Sherritt Shares held by that shareholder
multiplied by the number of directors to be elected. A shareholder may cast all
such votes in favour of one nominee or distribute them among the nominees in any
manner.
DIVIDEND POLICY
During the second quarter of 2000, Sherritt initiated the payment of
quarterly dividends on the Sherritt Shares. Dividends totalling $0.30 per share
and $0.25 per share were paid in 2000 and 2001, respectively. In November 2001,
Sherritt announced that due to the impact on its earnings of the decline in the
prices of oil, nickel and cobalt, as well as the uncertain outlook for these
commodities, Sherritt's board of directors had decided to discontinue payment of
a quarterly dividend and to retain earnings to fund the growth of its business.
The decision to pay dividends rests with Sherritt's board of directors,
exercising its discretion from time to time, and may change as business
conditions warrant.
MULTIPLE VOTING SHARES
The Chairman of Sherritt, Ian W. Delaney, holds all of the Multiple Voting
Shares, which give him sufficient votes to elect a majority of the directors of
Sherritt under the cumulative voting provisions of the NBBCA. However, since
their issuance in 1995, Mr. Delaney has not exercised the votes attached to the
Multiple Voting Shares, with the result that the holders of the Sherritt Shares
have elected the entire board of directors of Sherritt. The holder of the
Multiple Voting Shares is not entitled to receive dividends and, in the event of
any liquidation, dissolution or winding-up of Sherritt, the holder of the
Multiple Voting Shares shall not be entitled to share in any distribution of the
assets or property of Sherritt. The rights attaching to the Multiple Voting
Shares are subject to limitations contained in the articles of incorporation of
Sherritt. Specifically, except as specified in the NBBCA, the holder of Multiple
Voting Shares is only entitled to vote in respect of matters relating to or in
connection with the board of directors of Sherritt, and has no vote with respect
to any other matter which may come before a meeting of shareholders. The
articles also include a provision that the Multiple Voting Shares are
non-transferable and automatically convert into Sherritt Shares on a
share-for-share basis upon Mr. Delaney ceasing to be a director of Sherritt or
upon the earlier of his incapacity, death or November 24, 2005.
SHERRITT DEBENTURES
In November, 1996, Sherritt issued $675 million aggregate principal amount
of 6% convertible unsecured subordinated debentures (the "Sherritt Debentures").
Sherritt has subsequently repurchased $75 million of the Sherritt Debentures,
such that $600 million principal amount of Sherritt Debentures are currently
outstanding. The Sherritt Debentures have a maturity date of December 15, 2006,
and are convertible at the option of the holder into Sherritt Shares at a
conversion price of $8.775 per Sherritt Share. The Sherritt Debentures are
redeemable, provided that the trading price of Sherritt Shares reaches a certain
limit. Subject to regulatory approval, Sherritt may, at its option, satisfy the
obligation to pay interest on the Sherritt Debentures or repay the principal
amount of the Sherritt Debentures on redemption or at maturity of the Sherritt
Debentures in Sherritt Shares. If all of the Sherritt Debentures are converted
into Sherritt Shares at the option of the holders thereof, up to 68,376,068
additional Sherritt Shares may be issued on or before December 14, 2006.
B-8
CONSOLIDATED CAPITALIZATION
The following table sets forth the consolidated capitalization of Sherritt
as at December 31, 2001 and September 30, 2002, as adjusted to give effect to
the issuance of approximately 42,405,000 Exchange Rights, the maximum number
which may be created and issued under the Enhanced Offer (the "Exchange Right
Issuance"):
Outstanding as at
December 31, 2001
after giving effect
Outstanding as at to the Exchange
December 31, 2001 Right Issuance
------------------ -------------------
(unaudited)
(thousands of dollars)
Long-term debt (including current portion).................. $ 260,861 $ 260,861
Exchange Rights
Exchange Rights........................................... --
After giving effect to the maximum Exchange Rights
Issuance, approximately 42,405,000 Exchange Rights(1)... --
Minority interest in subsidiary companies................... 3,989 3,989
Shareholders' equity
Sherritt Debentures....................................... 587,314 587,314
Capital stock -- without par value, unlimited number
authorized. Issued and outstanding -- 97.7 million
Sherritt Shares and 100 Multiple Voting Shares.......... 450,716 450,716
Contributed surplus....................................... 199,787 199,787
Retained earnings......................................... 79,041 79,041
---------- ----------
Total capitalization........................................ $1,581,708 $1,581,708
---------- ----------
------------
(1) Exchange Rights are exchangeable into Units of the Canadian Coal Trust.
Outstanding as at
September 30, 2002
after giving effect
Outstanding as at to the Exchange
September 30, 2002 Right Issuance
------------------- -------------------
(unaudited)
(thousands of dollars)
Long-term debt (including current portion).................. $ 257,044 $ 257,044
Exchange Rights
Exchange Rights........................................... --
After giving effect to the maximum Exchange Rights
Issuance, approximately 42,405,000 Exchange Rights(1)... --
Minority interest in subsidiary companies................... 4,736 4,736
Shareholders' equity
Sherritt Debentures....................................... 587,314 587,314
Capital stock -- without par value, unlimited number
authorized. Issued and outstanding -- 97.7 million
Sherritt Shares and 100 Multiple Voting Shares.......... 450,957 450,957
Contributed surplus....................................... 199,787 199,787
Retained earnings......................................... 107,457 107,457
---------- ----------
Total capitalization........................................ $1,607,295 $1,607,295
---------- ----------
------------
(1) Exchange Rights are exchangeable into Units of the Canadian Coal Trust.
B-9
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
The summary consolidated financial data set forth below should be read
together with the consolidated financial statements of Sherritt and the related
notes thereto in Appendix C to the Circular. The summary consolidated financial
data for the nine month periods ended September 30, 2002 and September 30, 2001
are unaudited and include all adjustments considered necessary for a fair
presentation of the results for those periods. Such interim results should not
be relied upon as being indicative of results that may be expected for the full
year.
Nine Months Ended
September 30, Year Ended December 31,
--------------------- ----------------------------------
2002 2001 2001 2000 1999
---------- -------- ---------- ---------- --------
(unaudited)
(thousands of dollars, except per share amounts)
RESULTS OF OPERATIONS
Revenue................................... $ 609,471 $447,642 $ 636,618 $ 480,355 $372,346
Operating earnings........................ 105,326 64,552 78,455 120,304 67,085
Net earnings(1)........................... 45,816 60,817 51,595 115,570 66,601
EBITDA(2)................................. 212,680 144,727 195,420 191,190 115,011
Earnings per restricted voting share:
Basic................................... 0.29 0.52 0.34 1.38 0.60
Diluted................................. 0.28 0.40 0.33 0.84 0.45
Weighted average number of shares - basic
(thousands)............................. 97,729 85,278 88,412 72,378 72,215
CASH FLOW DATA
Cash from operating activities............ 208,778 111,875 152,537 129,169 89,979
Capital expenditures...................... 92,857 84,920 113,567 116,343 87,818
Acquisition of business................... -- 136,039 136,039 -- --
Increase (decrease) in cash and cash
equivalents............................. 123,640 (78,457) (80,791) 27,136 (64,419)
BALANCE SHEET DATA
Cash and cash equivalents................. 232,643 109,003 189,794
Total assets.............................. 2,010,715 1,998,414 1,341,650
Long-term debt............................ 257,044 260,861 --
Shareholders' equity(3)................... 1,345,515 1,316,858 1,208,109
------------
(1) Net earnings for the year ended December 31, 2001 and nine months ended
September 30, 2002 include a $18.8 million and $29.8 million after tax
investment write-down, respectively.
(2) EBITDA is defined as earnings before net financing income (expense), income
taxes, depletion and amortization and write-down of investments. EBITDA has
been disclosed in order to provide an indication of revenue less cash
operating expense. EBITDA does not have any standardized meaning prescribed
by Canadian generally accepted accounting principles and is therefore
unlikely to be comparable to similar measures presented by other issuers. A
reconciliation of EBITDA to net earnings follows in the table below.
(3) Includes $600 million principal amount of 6% convertible unsecured
subordinated debentures that have a maturity date of December 15, 2006.
B-10
Nine Months Ended
September 30, Year Ended December 31,
-------------------- --------------------------------
2002 2001 2001 2000 1999
--------- -------- --------- --------- --------
(unaudited)
(thousands of dollars, except per share amounts)
EBITDA....................................... $ 212,680 $144,727 $ 195,420 $ 191,190 $115,011
Depletion and amortization................... (109,758) (81,067) (118,768) (71,228) (50,379)
Write-down of investments.................... (37,000) -- (23,441) -- --
Amortization of goodwill..................... -- (1,014) (1,357) (1,286) (1,236)
Net financing income (expense)............... (10,023) 8,256 4,437 29,045 26,924
Income taxes................................. (10,083) (10,085) (4,696) (32,151) (23,719)
--------- -------- --------- --------- --------
Net earnings................................. $ 45,816 $ 60,817 $ 51,595 $ 115,570 $ 66,601
--------- -------- --------- --------- --------
Nine Months Ended
September 30, Year Ended December 31,
-------------------- --------------------------------
2002 2001 2001 2000 1999
--------- -------- --------- --------- --------
(unaudited)
(thousands of dollars, except per share amounts)
U.S. GAAP SUPPLEMENTAL DISCLOSURE
Net earnings................................. $29,783 $37,267 $23,084 $104,045 $33,539
Earnings per restricted voting share:
Basic...................................... 0.30 0.44 0.26 1.44 0.46
Diluted.................................... 0.28 0.35 0.26 0.82 0.38
December 31,
September 30, -----------------------
2002 2001 2000
-------------- ---------- ----------
(unaudited)
(thousands of dollars)
Total assets................................................ $2,011,089 $1,974,137 $1,307,501
Shareholders' equity........................................ 708,587 657,279 575,722
B-11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The following discussion and analysis of Sherritt's financial results for
the nine months ended September 30, 2002, year ended December 31, 2001 and year
ended December 31, 2000 should be read in conjunction with the unaudited
consolidated financial statements and related notes for the nine months ended
September 30, 2002 and audited consolidated financial statements and related
notes for the years ended December 31, 2001 and December 31, 2000.
References to "Sherritt" in this section of the document refer to Sherritt
International Corporation and its share of consolidated subsidiaries and joint
ventures unless the context otherwise indicates. All references to "tonnes" are
references to metric tonnes. All dollar references are in Canadian dollars
unless otherwise specifically indicated. References to "$" or "Cdn$" are to
Canadian dollars and references to "U.S.$" are to United States dollars.
OVERVIEW
Sherritt, with assets of approximately $2 billion, is a diversified Canadian
resource company that operates in Canada and internationally. Sherritt, directly
and through its subsidiaries, has interests in the following businesses: coal,
metals, oil and gas, power generation, telecommunications, soybean-based food
processing, agriculture and tourism.
Sherritt's 97.8 million Sherritt Shares and Sherritt Debentures trade on the
TSX under the symbols "S" and "S.DB", respectively.
The Coal business is comprised of Sherritt's 50% indirect interest in LEP,
which is jointly owned with a subsidiary of OTPP. During the second quarter of
2001, LEP acquired Luscar Coal Income Fund and its subsidiaries, Luscar Coal and
Luscar Ltd. Luscar Ltd., an established, cost-efficient coal producer, holds
significant developed and undeveloped low-sulphur coal reserves and resources,
primarily in western Canada. Revenue is derived from the production and sale of
coal in domestic and export markets primarily for use as fuel to generate
electricity and produce coke for use in steel making.
The Metals business comprises Sherritt's 50% indirect interest in the Metals
Enterprise. The Metals Enterprise is a vertically-integrated nickel and cobalt
mining, processing, refining and marketing joint venture with General Nickel
Company S.A. ("GNC"), a Cuban company. Mixed sulphides containing nickel and
cobalt are produced by the mining and processing facilities at Moa, Cuba. The
mixed sulphides are shipped to Canada by sea, and then transported by rail to
the metals refinery in Fort Saskatchewan. Sherritt's Metals business also owns
100% of certain fertilizer, utilities and other assets located in Fort
Saskatchewan, Alberta, which provide the metals refinery with certain essential
inputs and produce agricultural fertilizer for sale primarily into
western Canada.
The Oil & Gas business has oil fields in Cuba and Spain. Approximately 97%
of Sherritt's oil sales volume is from fields in Cuba, where Sherritt is the
largest foreign producer of oil in the country. Sherritt also has various
interests in exploration including Cuba, Spain and Pakistan.
Other businesses are comprised of:
- Power generation, a 49.7% interest in the shares, and $60.2 million
principal amount of Sherritt Power Notes ($75 million face amount), which
has financed, constructed and is operating gas-fired electricity
generating plants in Cuba;
- Telecommunications, an indirect 40% interest in Cubacel, which provides
cellular services in Cuba;
- Soybean-based food processing, a 49% indirect interest in a joint venture
which operates a soybean-based food processing facility in Santiago de
Cuba;
B-12
- Tourism, a 25% indirect interest in a resort hotel in Varadero, Cuba and a
12.5% indirect interest in a business-oriented hotel in Havana, Cuba; and
- Agriculture, a 50% indirect interest in a 200-hectare market-garden
business in Cuba.
RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED WITH THE NINE
MONTHS ENDED SEPTEMBER 30, 2001
SUMMARY OF CONSOLIDATED RESULTS
Sherritt generated net earnings of $45.8 million or $0.29 per Sherritt Share
for the first nine months of 2002 compared with $60.8 million or $0.52 per
Sherritt Share for the first nine months of 2001. Strong operating earnings for
the period were reduced by a $37.0 million ($29.8 million after tax) write-down
of Sherritt's investment in Anaconda, a nickel mining company, to reflect recent
developments in Anaconda's financial restructuring. Excluding the impact of the
Anaconda investment write-down, earnings for the nine months were $75.6 million
or $0.60 per Sherritt Share.
The increase in net earnings for the nine month period, excluding the
Anaconda investment write-down, reflected higher earnings by the Metals and Oil
and Gas businesses due to higher nickel and oil prices, respectively, partly
offset by higher financing expenses and lower earnings from the Coal business.
Consolidated revenue for the nine months ended September 30, 2002 was
$609.5 million, up by $161.8 million over the same period in 2001. The inclusion
of results from the Coal business for the full nine months contributed to
$105.0 million of this increase with the remaining increase primarily resulting
from higher Metals and Oil and Gas revenue, reflecting higher realized nickel
and oil prices and higher sales volumes.
Operating, selling, general and administrative costs were $387.3 million for
the first nine months of 2002 compared with $296.9 million for the same period
in 2001. The $90.4 million increase reflected the inclusion of costs from the
Coal and soybean-based food processing businesses for the full nine months of
2002, partly offset by lower operating costs in the Metals business.
Depletion and amortization expense for the nine months ended September 30,
2002 was $109.8 million compared with $81.1 million for the same period in 2001.
The $28.7 million increase reflected the inclusion of results of the Coal
business for the full nine months and higher depletion and amortization rates in
the Oil and Gas business.
A net financing expense of $10.0 million was incurred for the nine months
ended September 30, 2002 compared with net financing income of $8.3 million for
the same period in 2001. The higher net expense resulted from the inclusion of
Luscar Coal's indebtedness for the full nine months of 2002 and lower interest
income due to lower average cash balances and interest rates.
Excluding the impact of the Anaconda Nickel write-down, Sherritt's effective
tax rate was 19% for the nine months ended September 30, 2002 compared with 14%
for the prior year period. The increase in the effective tax rate primarily
resulted from higher earnings in the Metals business, which is taxed at a higher
rate than the Oil & Gas business.
Cash and cash equivalents totaled $232.6 million at September 30, 2002. For
the nine months ended September 30, 2002, cash from operating activities before
working capital changes was $173.4 million, $33.2 million higher than the prior
year period. Non-cash working capital changes contributed $35.4 million during
the nine-month period, primarily reflecting lower accounts receivable.
Significant cash usages during the nine months included capital expenditures
($92.9 million), convertible debenture interest payments ($18.0 million) and
reductions in debt ($6.6 million).
OUTLOOK
In the Coal business, thermal coal supplied by Luscar to mine-mouth power
plants for the fourth quarter is expected to remain close to levels experienced
during the third quarter. Weak spot prices for export thermal coal experienced
in the second and third quarters have recently shown some improvement. Luscar's
inventory levels for such coal are above normal levels and are expected to
decrease as the market improves. These markets are
B-13
being closely monitored to maintain a reasonable balance between production and
sales. Metallurgical coal production to the end of the year and into the first
quarter of 2003 is committed to customers under contracts at firm prices.
Overall, Luscar's sales volumes in the fourth quarter are expected to equal the
quarterly average experienced to date. During 2002, overburden removal costs at
Line Creek mine are higher than in prior years. To increase mine capacity, a
higher volume of overburden is being removed, for which the related coal
production will increase in due course. Also, to improve the efficiency of
operations, the Line Creek mine is removing additional overburden to rectify a
backlog created prior to Luscar's acquisition of the mine in 1998. Over the next
two years, cash flow from the Line Creek mine is expected to improve
significantly as the mining ratio decreases from the current level of 13.2 BCM
per tonne to the life of mine mining ratio of 9.9 BCM per tonne. Capital
expenditure expectations for the Coal business remain at $25 million for the
year.
Fourth quarter finished nickel and cobalt production volumes are anticipated
to meet or exceed quarterly production volumes achieved to date this year.
Capital expenditures by the Metals business in the fourth quarter are forecast
at $9 million, as a number of smaller projects will be completed. This will
bring annual capital expenditures by Metals to approximately $15 million.
Sherritt's net oil production is expected to remain relatively steady for
the balance of the year. Oil and Gas capital expenditures are expected to be
$100 million for the year, mainly focused on continued development of Cuban
properties, facilities and seismic commitments.
On October 25, 2002, Sherritt Coal Acquisition Inc., a corporation
wholly-owned by Sherritt Coal Partnership II, the partners of which are two
wholly-owned subsidiaries of Sherritt and Ontario Teachers' Pension Plan Board,
respectively made an offer (the "Original Offer") to purchase all of the
outstanding common shares of Fording at a price of $29 per share. The Original
Offer was subject to a number of conditions including there being validly
deposited under the Original Offer and not withdrawn at the Expiry Time at least
66 2/3% of the outstanding common shares of Fording (calculated on a diluted
basis) and the receipt of customary regulatory approvals, including under the
COMPETITION ACT (Canada). Sherritt Coal Acquisition Inc. and Sherritt Coal
Partnership II have agreed to pay certain advisory and other fees in connection
with this transaction.
Fording is the largest producer of metallurgical coal in Canada, with three
bituminous coal mines in southern British Columbia. Their metallurgical coal,
which is primarily used in the manufacture of steel, is exported to many
countries around the world. Fording has Alberta mining operations that supply
thermal coal to electric utilities in Alberta. They are also the world's largest
producer of the industrial mineral wollastonite.
Sherritt has an agreement with a third party, which provides Sherritt with
the right, at any time prior to April 30, 2003, to sell special warrants to the
third party for cash by way of private placement, subject to regulatory
approval. Each special warrant would be exercisable by the holder to acquire one
Sherritt Share for no additional consideration. The maximum number of special
warrants issuable under the option agreement is the lesser of $30 million
divided by the purchase price and 5% of the aggregate number of Sherritt Shares
that would be outstanding after giving effect to the exercise of the special
warrants. Upon exercise of the option, Sherritt is obliged to, among other
things, file a prospectus qualifying the issuance of Sherritt Shares upon
exercise of the special warrants. The special warrants would be automatically
exercised upon receipt of regulatory approval of this prospectus.
B-14
COAL
Nine Months
Ended May 12 to
September 30, September 30,
2002 2001(3)
-------------- --------------
(unaudited)
FINANCIAL (thousands of dollars)(1)
Revenue..................................................... $229,200 $124,177
Operating, selling, general and administrative.............. 178,774 94,268
-------- --------
50,426 29,909
Depletion and amortization.................................. 32,036 16,548
Provision for site restoration and abandonment.............. 5,166 2,544
-------- --------
Operating earnings.......................................... $ 13,224 $ 10,817
-------- --------
CAPITAL EXPENDITURES(1)..................................... $ 16,839 $ 4,870
SALES VOLUMES (thousands of tonnes)(1)
Domestic coal(2)............................................ 11,764 6,085
Export coal................................................. 1,708 915
-------- --------
13,472 7,000
-------- --------
REALIZED PRICES (per tonne)
Domestic coal............................................... $ 11.46 $ 12.04
Export coal................................................. 55.25 55.76
------------
(1) Represents Sherritt's 50% share of LEP.
(2) Primarily comprises sale of thermal coal to domestic power-generating
utilities and contract mining operations.
(3) LEP was formed on February 20, 2001 and acquired Luscar Coal Income Fund and
related companies on May 11, 2001.
Operating earnings from the coal business were $13.2 million on revenues of
$229.2 million for the nine months ended September 30, 2002.
Domestic revenue for the nine months ended September 30, 2002 was
$134.8 million. A significant part of domestic revenue is derived from the
supply of thermal coal to major Canadian electric utilities by mine-mouth
operations located at or near power generating facilities in Alberta and
Saskatchewan. These mine-mouth operations are exclusive suppliers to the
generating facilities they supply and revenues are escalated pursuant to the
terms of long-term contracts. Other domestic revenues are derived from
short-term contracts for the sale of coal to industrial customers and other
electric utilities, as well as from the Highvale mine under a mining contract
that will terminate on December 31, 2002.
Domestic operating margins for the nine months ended September 30, 2002 were
$3.45 per tonne, and for the period May 12 to September 30, 2001 were $3.90
per tonne. The decrease was primarily due to the increased proportion of low
margin shipments from Highvale and reduced sales to the Milner generating
station and Ontario Power Generation.
Export revenue for the nine months ended September 30, 2002 was
$94.4 million compared with $51.0 million during the shorter period last year.
Export revenue is derived from the sale of metallurgical and thermal coal sold
to customers outside of Canada. Year over year, production capacity has
increased at the Line Creek mine, offsetting lower production from the Luscar
mine, where reserves will be largely depleted by the end of 2003. Compared with
2001, average realized export prices decreased slightly as higher metallurgical
coal prices were offset by lower prices for export thermal coals. Market
fundamentals for metallurgical coals are solid. However export thermal coal
markets are in a cyclical downturn caused by oversupply and intense competition
among major producers.
Export operating margins for the nine months ended September 30, 2002 were
$5.01 per tonne, and for the period May 12 to September 30, 2001 were $6.17
per tonne. The decrease reflects lower export thermal coal
B-15
prices, a lower proportion of higher priced metallurgical coal in the sales mix,
and higher production costs from the final pits at the Luscar mine, where coal
reserves will be largely depleted during 2003.
Capital expenditures amounted to $16.8 million for the nine months ended
September 30, 2002 compared with $4.9 million during the shorter period in 2001.
In addition to capital spending to maintain and upgrade mine operations, the
2002 capital program includes a dragline tub replacement at the Poplar River
mine, replacement of equipment used in reclamation at the Boundary Dam mine, and
the implementation of new business systems.
Luscar was unsuccessful in its bid for a new five-year contract to mine
TransAlta Corporation's Highvale and Whitewood mines. Luscar will continue to
mine at Highvale until December 31, 2002 and demobilization costs will be paid
by TransAlta. The impact of this event on Sherritt's earnings is not expected to
be significant, due to the low-margin nature of the contract, although coal
sales will be reduced by approximately 6.5 million tonnes annually.
METALS
Nine Months Ended
September 30,
-------------------
2002 2001
-------- --------
(unaudited)
FINANCIAL (thousands of dollars)(1)
Revenue..................................................... $192,690 $174,889
Operating, selling, general and administrative.............. 145,473 152,580
-------- --------
47,217 22,309
Depletion and amortization.................................. 14,929 13,875
Provision for site restoration and abandonment.............. 782 1,317
-------- --------
Operating earnings.......................................... $ 31,506 $ 7,117
-------- --------
CAPITAL EXPENDITURES(1)..................................... $ 5,619 $ 9,957
SALES VOLUMES(1)
Nickel (thousands of pounds)................................ 26,449 23,850
Cobalt (thousands of pounds)................................ 2,489 2,375
Fertilizers (tonnes)........................................ 173,880 152,669
PRODUCTION VOLUMES (tonnes)(1)
Mixed sulphides containing nickel and cobalt................ 12,612 12,372
Nickel...................................................... 11,716 10,539
Cobalt...................................................... 1,100 1,067
REALIZED PRICES (per pound)
Nickel...................................................... $ 4.76 $ 4.16
Cobalt...................................................... 11.33 16.32
AVERAGE REFERENCE PRICES (U.S. per pound)
Nickel...................................................... $ 3.02 $ 2.83
Cobalt...................................................... 7.08 10.33
------------
(1) Represents Sherritt's 50% share of the Metals Enterprise, Sherritt's
marketing and trading activities in commodity metals and its fertilizer and
utilities assets.
The Metals segment achieved operating earnings of $31.5 million on revenue
of $192.7 million during the first nine months of the year compared with
operating earnings of $7.1 million on revenue of $174.9 million for the first
nine months of 2001. The significant improvement in operating results largely
reflected higher nickel prices and sales volumes, higher cobalt sales volumes
and lower production costs, partially offset by lower cobalt prices.
B-16
Results for the first nine months of 2002 were negatively impacted by a
$4.1 million bad debt provision made in the second quarter as the result of the
compulsory liquidation of a customer in Europe alleged to have been engaged in a
complex fraud involving receivables and inventory, which could result in
significant losses by several major international banks and corporations.
The London Metal Exchange ("LME") cash price for nickel averaged U.S.$3.02
per pound for the nine month period, up from U.S.$2.83 per pound for the same
period in 2001, helped by strong demand from the stainless steel industry. The
Metal Bulletin ("MB") 99.3% free market cobalt price averaged U.S.$7.08 per
pound for the nine month period, down from U.S.$10.33 per pound during the same
period last year. The lower cobalt prices realized were partially a result of
lower global demand in the super alloy market.
The Moa mining and processing facilities produced a total of 25,223 tonnes
of nickel plus cobalt contained in mixed sulphides in the first nine months of
2002, up by 479 tonnes from the 24,744 tonnes produced during the first nine
months of 2001. Continued operational stability and higher ore grade contributed
to the higher production compared with the same period last year.
The Fort Saskatchewan refinery produced a total of 23,431 tonnes of finished
nickel for the first nine months of 2002, compared with 21,078 tonnes in the
same period last year, while total finished cobalt production for the nine
months ended September 30, 2002 was 2,199 tonnes compared with 2,135 tonnes
during the same period last year. The increase in nickel and cobalt production
reflected strong performance by the refinery, allowing higher quantities of
mixed sulphides to be processed.
Operating earnings of $3.5 million were generated from the sale of
fertilizer products during the nine months ended September 30, 2002 compared
with an operating loss of $2.7 million during the same period in the previous
year. The improved operating results were due largely to higher ammonium
sulphate sales volumes and prices, and lower energy costs compared with the same
period last year, partially offset by lower anhydrous ammonia sales due to the
drought conditions in western Canada.
Capital expenditures of $5.6 million incurred during the nine months were
primarily directed towards maintaining and upgrading plant operations and
efficiency improvements.
B-17
OIL AND GAS
Nine Months Ended
September 30,
-------------------
2002 2001
-------- --------
(unaudited)
FINANCIAL (thousands of dollars)
Revenue..................................................... $161,649 $131,652
Operating, selling, general and administrative.............. 29,169 28,109
-------- --------
132,480 103,543
Depletion and amortization.................................. 54,613 42,399
Provision for site restoration and abandonment.............. 1,150 1,256
-------- --------
Operating earnings.......................................... $ 76,717 $ 59,888
-------- --------
CAPITAL EXPENDITURES........................................ $ 68,909 $ 65,027
GROSS WORKING INTEREST PRODUCTION (thousands of barrels)
Cuba(1)..................................................... 9,826 7,783
Spain....................................................... 166 204
-------- --------
9,992 7,987
-------- --------
NET SALES VOLUME (thousands of barrels)
Cuba(2)..................................................... 5,809 5,270
Spain....................................................... 166 204
-------- --------
5,975 5,474
-------- --------
REALIZED PRICES (per barrel)
Cuba........................................................ $ 26.27 $ 22.74
Spain....................................................... 36.98 39.27
AVERAGE REFERENCE PRICES (U.S. per barrel)
U.S. Gulf Coast Fuel Oil No. 6.............................. $ 20.18 $ 17.75
------------
(1) In the first quarter of 2002, Sherritt changed its presentation of Cuban oil
production from gross operated production to gross working interest
production. Gross operated production represents oil production before
allocation to joint venture partners and agencies of the Cuban Government.
Gross working interest production refers to oil production after allocation
to joint venture partners but before allocation to agencies of the Cuban
Government. Prior period production numbers have been restated to conform to
this new disclosure methodology.
(2) Gross working interest production in Cuba is allocated to Sherritt and
agencies of the Cuban Government in accordance with participation and
production-sharing contracts. Net working interest production or net sales
volumes represents Sherritt's share of gross working interest production.
Net working interest production for each production-sharing contract
comprises profit oil (which is based upon a negotiated percentage) and cost
recovery oil (which is based upon Sherritt's development and operating
costs). Development and operating costs, upon certification by agencies of
the Cuban Government, are accumulated in cost recovery pools by each
production-sharing contract and reduced by allocation of produced oil to
Sherritt. Production allocated to agencies of the Cuban Government is
considered to be a royalty interest.
The Oil and Gas business generated revenue for the nine month period of
$161.6 million, $29.9 million higher than the same period last year. The
increase in revenue reflected higher realized oil prices and higher sales volume
in Cuba. Operating earnings for the nine months were $76.7 million,
$16.8 million higher than the prior year period, as higher revenue and lower
unit operating costs were partly offset by higher depletion and amortization
rates.
Depletion and amortization expense, based on Sherritt's share of oil
produced was $9.14 per barrel for the first nine months of 2002 compared with
$7.75 per barrel for first nine months of 2001. The increase in the per-barrel
expense primarily reflected capital expenditures and reserve adjustments during
the period.
Gross working interest oil production in Cuba for the nine months was 35,992
barrels per day, a 26% increase over the same period last year. The increased
production came from new wells in the Puerto Escondido, Yumuri, Varadero and
Canasi oil fields. Sherritt's net working interest oil production in Cuba during
the nine
B-18
months was 21,279 barrels per day compared with 19,304 barrels per day for the
prior year period. Natural declines during the nine months contributed to a 19%
decrease in production from Spain in comparison with the same period in 2001.
The average realized oil price for the first nine months of 2002 was $26.57
per barrel compared with $22.97 per barrel for same period in 2001. The
U.S. Gulf Coast Fuel Oil No. 6 average reference price was U.S.$20.18 per barrel
for the nine months compared with U.S.$17.75 per barrel for the same period in
2001.
Sherritt completed eleven development wells and two exploration wells in
Cuba during the nine months ended September 30, 2002. Development drilling was
primarily concentrated in the Yumuri, Canasi and Puerto Escondido fields. In the
Majaguillar East area of Block 9, the Majaguillar East 1 exploration well was
completed during the second quarter but produced at uneconomic rates. In the Via
Blanca West area of Block 7, an exploration well was suspended during the third
quarter after experiencing drilling difficulties and failing to encounter the
expected reservoir. During the fourth quarter of 2002, the Castillo No. 1
exploration well was drilled in Block 9 but did not encounter the expected
reservoir and was abandoned.
During the third quarter of 2002, Sherritt signed a production sharing
contract with the Cuban state oil company for exclusive exploration rights on
four blocks in the deepwater economic zone in the Cuban sector of the Gulf of
Mexico. Approximately two million undeveloped acres are covered under these new
blocks. Sherritt intends to acquire and evaluate new seismic data over the
remainder of 2002 and 2003. Subsequently, Sherritt will assess the prospects for
proceeding further.
Sherritt anticipates drilling two additional development wells in the fourth
quarter of 2002 in the Puerto Escondido and Varadero fields.
OTHER BUSINESSES
Nine Months Ended
September 30,
-------------------
2002 2001
-------- --------
(unaudited)
FINANCIAL (thousands of dollars)
Revenue..................................................... $ 25,932 $ 16,924
Operating, selling, general and administrative.............. 20,341 10,711
-------- --------
5,591 6,213
Depletion and amortization.................................. 5,559 5,157
-------- --------
Operating earnings.......................................... $ 32 $ 1,056
-------- --------
SHARE OF LOSS OF EQUITY INVESTMENTS......................... $ (1,657) $ (44)
CAPITAL EXPENDITURES........................................ 1,097 4,873
Operating earnings from Other Businesses were essentially breakeven compared
with earnings of $1.1 million for the first nine months of 2001, primarily
reflecting lower earnings from the communications business. Increases in
Sherritt's share of equity losses reflected lower income from the hotel
operations due to lower occupancy. In addition, Sherritt Power had lower
earnings as a result of scheduled maintenance at the Energas plants and
increased financing costs, as construction of the combined cycle phase at the
Varadero site nears completion. Commissioning of this final phase is underway
and expected to be in operation in January 2003, which will add 75 MW of net
power capacity for a total contracted capacity of 226 MW.
As a result of delays in construction of the combined cycle phase, which has
delayed the expected revenue stream from this phase and increased capital costs,
Sherritt Power, together with Sherritt, is evaluating various alternatives which
are required to provide for the necessary financial flexibility to meet the
scheduled repayment under its Notes in March 2003 and to provide the funds to
invest in gas related infrastructure and additional power capacity.
B-19
RESULTS FOR YEAR ENDED DECEMBER 31, 2001 COMPARED WITH THE YEAR ENDED
DECEMBER 31, 2000
HIGHLIGHTS OF 2001
Sherritt continued to develop its existing operations and expand its asset
base during 2001.
Sherritt has a 50% indirect interest in LEP, a partnership with a subsidiary
of OTPP. During the second quarter, the partnership acquired Luscar Coal Income
Fund and its subsidiaries, Luscar Coal and Luscar Ltd., a Canadian coal
producer. Sherritt's share of the total acquisition cost was $236 million,
comprising cash consideration of $136 million and the issue of 25 million
Sherritt Shares at an assigned value of $4.00 per share. These transactions are
more fully described in the 2001 consolidated financial statements of Sherritt.
In October 2001, Luscar Coal issued at par, U.S.$275 million of the 9.75%
Luscar Notes, due October 15, 2011, the proceeds of which were used to repay
Luscar Coal's existing bank indebtedness and increase its cash position to fund
operations and future growth. At the same time, Luscar Coal obtained a
$100 million 364-day secured revolving bank credit facility.
The Metals refinery achieved record finished nickel production of 29,225
tonnes and, for the sixth consecutive year, record finished cobalt production of
2,943 tonnes. At the Moa facility, production of nickel plus cobalt contained in
mixed sulphides was a record for the second consecutive year.
The Oil and Gas operations continued its successful development along the
north coast of Cuba, achieving record oil production for the fifth consecutive
year.
In March 2001, Sherritt Power obtained approval from holders of the Sherritt
Power Notes to amend the trust indenture governing its $225 million of Sherritt
Power Notes, including $75 million held by Sherritt. The amendment enabled
Sherritt Power to accelerate the first amortization of Sherritt Power Notes to
March 31, 2001 and extended the schedule for future amortizations, in exchange
for a consent premium and a higher interest rate. Accordingly, Sherritt now
holds $60.2 million principal amount of Sherritt Power Notes. These changes are
expected to provide Sherritt Power with sufficient cash resources to pursue
future incremental growth opportunities.
Commissioning of the 500-tonne per day soybean-based food processing
facility in Santiago de Cuba commenced in March 2001. The facility is now
producing a full range of soybean-based products.
SUMMARY OF CONSOLIDATED RESULTS
Consolidated net earnings for 2001 were $51.6 million or $0.34 per Sherritt
Share compared with $115.6 million or $1.38 per Sherritt Share in 2000. Results
for the year included a $23.4 million ($18.8 million after tax) write-down of
Sherritt's investment in Anaconda and a $6.8 million ($4.4 million after tax)
ceiling test write-down of oil properties in Spain. Excluding the impact of
these adjustments, consolidated net earnings were $74.8 million or $0.60 per
Sherritt Share. The reduction in earnings largely reflected a lower contribution
from the Metals business and lower net financing income, partly offset by
operating earnings from the Coal business.
Consolidated revenue reached a record $636.6 million in 2001, a
$156.3 million or 33% increase from the $480.4 million achieved in 2000. The
Coal business contributed $204.5 million of revenue during the period from
May 12 to December 31, 2001. Metals revenue declined by $68.8 million compared
with the prior year to $230.3 million due to lower nickel and cobalt realized
prices and lower fertilizer sales volumes. Revenue from the Oil and Gas
operations increased by $11.5 million reflecting an 18% increase in sales
volume, offset by lower average realized prices.
Operating, selling, general and administrative costs of $431.9 million were
$146.6 million or 51% higher than in 2000, primarily due to the inclusion of
expenses from the Coal business.
Depletion and amortization expense was $118.8 million in 2001 compared with
$71.2 million in 2000. Approximately $27.4 million of the increase arose from
inclusion of the Coal business. The remaining increase primarily comprised
higher depletion and amortization in the Oil and Gas business and a
$6.8 million ceiling test write-down of oil properties in Spain.
B-20
Net financing income comprised interest income, interest expense and foreign
exchange gains, and decreased by $24.6 million in 2001 to $4.4 million. Interest
income of $15.6 million was $10.6 million lower than the prior year, reflecting
lower average cash balances and lower interest rates. Sherritt's cash
equivalents and short-term investments earned a weighted average interest rate
of 4.4% in 2001 compared with 5.5% in 2000. An interest expense of
$16.8 million was recognized in 2001, largely comprising interest on debt of the
Coal business and Sherritt's other working capital facilities. Foreign exchange
gains were $5.4 million in 2001 compared with $3.4 million in 2000, reflecting a
stronger U.S. dollar.
Sherritt's effective tax rate was 8% in 2001 compared with 22% in 2000.
Excluding the impact of the Anaconda and Spanish ceiling test write-downs,
Sherritt's effective tax rate was 14%. The decrease in the effective tax rate
was primarily due to a higher proportion of net earnings generated by the Oil
and Gas business, which is taxed at a comparatively low effective rate.
Cash and cash equivalents at December 31, 2001 totaled $109.0 million
compared with $189.8 million at the end of 2000.
Cash from operating activities before working capital changes was
$195.1 million in 2001 compared with $193.2 million in 2000. Working capital
increased by $42.5 million during the year primarily due to an increase in Cuban
oil receivables following the extension of credit terms that was provided in
late 2000, combined with a $32 million collection scheduled for December 2001
that was not received until January 2002. The increase in oil receivables was
partly offset by lower Metals receivables, reflecting lower commodity prices.
Significant uses of cash during 2001 included $136.0 million for Sherritt's
share of the Luscar acquisition, capital expenditures of $113.6 million,
convertible debenture interest payments of $36.0 million, dividends of
$21.8 million and a $7.8 million investment in Anaconda under a rights offering.
Sherritt's total assets at December 31, 2001 were $2.0 billion. Increases in
assets and liabilities from December 31, 2000 largely reflected Sherritt's share
of net assets of the Coal business acquisition. In addition, short-term advances
and loans receivable increased by $37.2 million to $42.2 million primarily
reflecting $19.6 million advanced to Sherritt Power under the Cash Flow
Assurances Agreement dated March 1998 and working capital financing provided to
joint ventures. Excluding the Luscar acquisition, accounts receivable increased
by approximately $35.9 million mainly due to higher oil receivables. A
$35.0 million reduction in investments during 2001 to $143.4 million resulted
from the Anaconda investment write-down and a reduction in the Sherritt Power
investment due to the amendment to the trust indenture for the Sherritt Power
Notes, partly offset by the additional investment in Anaconda. The increase in
long-term future income tax assets from $19.9 million in 2000 to $27.7 million
in 2001 primarily comprised the recognition of the benefit of additional tax
losses during the year.
B-21
COAL
May 12 to
December 31,
2001(3)
-------------
FINANCIAL (thousands of dollars)(1)
Revenue..................................................... $204,450
Operating, selling, general and administrative.............. 152,022
--------
52,428
Depletion and amortization.................................. 27,425
Provision for site restoration and abandonment.............. 4,850
--------
Operating earnings.......................................... $ 20,153
--------
CAPITAL EXPENDITURES(1)..................................... $ 8,303
SALES VOLUMES (thousands of tonnes)(1)
Domestic coal(2)............................................ 10,030
Export coal................................................. 1,479
--------
11,509
--------
REALIZED PRICES (per tonne)
Domestic coal............................................... $ 11.99
Export coal................................................. 56.94
------------
(1) Represents Sherritt's 50% share of LEP.
(2) Primarily comprises sale of thermal coal to domestic power-generating
utilities and contract mining operations.
(3) LEP was formed on February 20, 2001 and acquired Luscar Coal Income Fund and
related companies on May 11, 2001.
For the period from May 12 to December 31, 2001, operating earnings were
$20.2 million on revenues of $204.5 million.
Domestic revenue of $120.3 million was mostly derived from the supply of
thermal coal to major Canadian electric utilities from mines located at or near
power-generating facilities. Such sales were made under long-term coal supply
agreements, which expire at varying times between 2009 and 2026. Prices under
these contracts do not fluctuate based on the prices of other coals, competing
fuels or electricity and tend to be stable. Prices are generally adjusted
annually for inflation and certain other factors. Demand for electricity
remained strong in western Canada throughout 2001, of which the power-generation
facilities supplied by these mines form a significant part of the base load.
Domestic revenues were also derived from shorter-term contracts for the sale of
coal to industrial customers, other power-generators and contract mining at the
Highvale mine. Domestic operating margins for the period May 12 to December 31,
2001 were $42.0 million or $4.19 per tonne.
Export revenue of $84.2 million was derived from metallurgical and thermal
coal sold to customers outside of Canada. Export operating margins for the
period from May 12 to December 31, 2001 were $8.7 million or $5.90 per tonne.
Realized prices from the export market improved significantly during 2001 after
declining in the previous four years. The full benefit of higher prices was
partly offset by increased transportation and energy costs incurred by the
export mining operations. Operating results were also impacted by lower
productivity at the Line Creek mine during the negotiation period prior to the
successful contract settlement in September 2001.
Export coal sales are generally made under contracts of one to five years in
duration, with prices negotiated annually. Prices for export coal vary according
to coal quality, regional supply and demand and transportation costs. Japanese
electric utilities and steel makers, which are large importers of coal,
traditionally establish annual reference prices that relate to coal prices in
other international markets. However, actual pricing varies and is dependent
upon various factors including the origin and quality of the coal.
Capital expenditures of $8.3 million were made during the period, primarily
to maintain and upgrade mine operations. During 2001, total annualized
production capacity at the Coal Valley, Line Creek and Bienfait mines expanded
by a total of 1.9 million tonnes and the life of the Luscar mine was extended
until the end of 2002.
B-22
METALS
Year Ended
December 31,
-------------------
2001 2000
-------- --------
FINANCIAL (thousands of dollars)(1)
Revenue..................................................... $230,253 $299,018
Operating, selling, general and administrative.............. 207,016 219,782
-------- --------
23,237 79,236
Depletion and amortization.................................. 18,524 15,287
Provision for site restoration and abandonment.............. 982 2,098
-------- --------
Operating earnings.......................................... $ 3,731 $ 61,851
-------- --------
CAPITAL EXPENDITURES(1)..................................... $ 19,772 $ 26,779
SALES VOLUMES
Nickel (thousands of pounds)(1)............................. 33,125 29,480
Cobalt (thousands of pounds)(1)............................. 3,295 3,075
Fertilizers (tonnes)........................................ 205,240 330,337
PRODUCTION VOLUMES (tonnes)(1)
Mixed sulphides containing nickel and cobalt................ 16,180 14,760
Nickel...................................................... 14,613 14,035
Cobalt...................................................... 1,471 1,427
REALIZED PRICES (per pound)
Nickel...................................................... $ 4.00 $ 5.80
Cobalt...................................................... 15.17 19.65
AVERAGE REFERENCE PRICES (U.S. per pound)
Nickel...................................................... $ 2.70 $ 3.92
Cobalt...................................................... 9.56 13.26
------------
(1) Represents Sherritt's 50% share of the Metals Enterprise, Sherritt's
marketing and trading activities in commodity metals and its fertilizer and
utilities assets.
The Metals business generated operating earnings of $3.7 million on revenue
of $230.3 million in 2001, compared with operating earnings of $61.9 million on
revenue of $299.0 million in 2000. Lower realized nickel and cobalt prices and
lower fertilizer sales volumes were the primary reasons for the reduction in
revenue and operating earnings. The reduction in operating, selling, general and
administrative costs was largely due to lower energy costs and the impact of the
full year suspension of production from the urea facility.
The Moa facility established a production record in 2001 of 32,360 tonnes of
nickel plus cobalt contained in mixed sulphides, 10% higher than the previous
production record of 29,520 tonnes established in 2000. Moa's record production
was a reflection of steady plant operation, higher ore grade and systematic
debottlenecking initiatives.
The Fort Saskatchewan refinery set records for both nickel and cobalt
production. Total finished nickel production for 2001 of 29,225 tonnes exceeded
the previous year's production by 4% and the previous record established in 1999
by 2%. Total finished cobalt production of 2,943 tonnes surpassed last year's
record by 3% and was a record for the sixth consecutive year. A modified leach
autoclave configuration and continued operating stability in the refinery
contributed to the record nickel and cobalt production.
Nickel prices on the LME opened the year at U.S.$3.17 per pound, reached a
high of U.S.$3.42 per pound in May, a low of U.S.$2.00 per pound in October, and
closed at U.S.$2.58 per pound. The average LME nickel settlement price for 2001
was U.S.$2.70 per pound, 31% lower than the 2000 average of U.S.$3.92 per pound,
reflecting softening worldwide demand for nickel under weakening economic
conditions.
B-23
During 2001, the Metal Bulletin 99.3% free market cobalt price traded in a
range between U.S.$6.50 per pound and U.S.$12.35 per pound, averaging U.S.$9.56
per pound for the year, 28% lower than the average price for 2000. The lower
cobalt price reflected weakening global economic conditions and increased
international supply.
Fertilizer sales volumes of 205,240 tonnes in 2001 were 38% lower than the
330,337 tonnes sold in 2000. The lower sales volumes largely reflected the
full-year suspension of urea production. An operating loss of $6.4 million was
incurred from the sale of fertilizer products in 2001 compared with a loss of
$8.2 million in the previous year.
Capital expenditures of $19.8 million in 2001 were primarily directed
towards efficiency improvements and maintaining and upgrading plant operations.
OIL AND GAS
Year Ended
December 31,
-------------------
2001 2000
-------- --------
FINANCIAL (thousands of dollars)
Revenue..................................................... $176,689 $165,183
Operating, selling, general and administrative.............. 39,056 36,889
-------- --------
137,633 128,294
Depletion and amortization.................................. 62,016 47,308
Provision for site restoration and abandonment.............. 1,630 1,415
-------- --------
Operating earnings.......................................... $ 73,987 $ 79,571
-------- --------
CAPITAL EXPENDITURES........................................ $ 78,984 $ 66,263
GROSS WORKING INTEREST PRODUCTION (thousands of barrels)
Cuba(1)..................................................... 10,979 10,024
Spain....................................................... 266 293
-------- --------
11,245 10,317
-------- --------
NET SALES VOLUME (thousands of barrels)
Cuba(2)..................................................... 7,568 6,360
Spain....................................................... 266 293
-------- --------
7,834 6,653
-------- --------
REALIZED PRICES (per barrel)
Cuba........................................................ $ 21.49 $ 23.35
Spain....................................................... 37.58 42.29
AVERAGE REFERENCE PRICES (U.S. per barrel)
U.S. Gulf Coast Fuel Oil No. 6.............................. $ 16.92 $ 20.76
------------
(1) In the first quarter of 2002, Sherritt changed its presentation of Cuban oil
production from gross operated production to gross working interest
production. Gross operated production represented oil production before
allocation to joint venture partners and agencies of the Cuban Government.
Gross working interest production refers to oil production after allocation
to joint venture partners but before allocation to agencies of the Cuban
Government. Prior period production numbers have been restated to conform to
this new disclosure methodology.
(2) Gross working interest production in Cuba is allocated to Sherritt and
agencies of the Cuban Government in accordance with participation and
production-sharing contracts. Net working interest production or net sales
volumes represents Sherritt's share of gross working interest production.
Net working interest production for each production-sharing contract
comprises profit oil (which is based upon a negotiated percentage) and cost
recovery oil (which is based upon Sherritt's development and operating
costs). Development and operating costs, upon certification by agencies of
the Cuban Government, are accumulated in cost recovery pools by each
production-sharing contract and reduced by allocation of produced oil to
Sherritt. Production allocated to agencies of the Cuban Government is
considered to be a royalty interest.
B-24
Record oil production in Cuba boosted revenue in 2001 by 7% over the prior
year to $176.7 million. Operating earnings were $74.0 million for the year
compared with $79.6 million in 2000, reflecting an increase in depletion and
amortization expenses due to higher sales volumes, lower oil prices and a
$6.8 million ceiling test write-down of oil properties in Spain. Excluding the
impact of the ceiling test write-down, the annual depletion and amortization
expense, based on Sherritt's share of oil production, was $7.04 per barrel in
2001 compared with $7.09 per barrel in 2000.
Sherritt continued its development success along the north coast of Cuba,
setting an oil production record for the fifth consecutive year. During 2001,
approximately 94% of Oil and Gas revenue was derived from oil production in
Cuba. Gross working interest oil production in Cuba increased by 10% in 2001 to
11 million barrels or an average of 30,079 barrels per day compared with
10 million barrels or an average of 27,389 barrels per day in 2000. Sherritt's
share of oil production in Cuba averaged 20,735 barrels per day in 2001 compared
with 17,424 barrels per day in 2000. The higher production primarily arose from
new wells in the Yumuri, Canasi and Seboruco fields in Cuba. Natural declines
continued in Spain and resulted in a 9% decrease in production year over year.
Oil production in Cuba is sold to a Cuban government agency at sales prices
based on an international reference price for fuel oil of comparable quality.
Oil prices experienced downward pressure during 2001. The average U.S. Gulf
Coast Fuel Oil No. 6 reference price decreased 18% from U.S.$20.76 per barrel in
2000 to U.S.$16.92 in 2001.
Sherritt concentrated its efforts during 2001 towards the development of
known reserves along the north coast of Cuba, in order to maximize production. A
total of seven successful development wells and two exploratory wells were
drilled during 2001. In the Block L contract area, the Felipe 1-X exploration
well did not encounter commercially productive horizons and was abandoned. In
Block 7, the Faustino-1 exploration well, which was ongoing at year end,
encountered oil in sub-commercial quantities. Sherritt has elected not to
proceed with the development of this discovery. Sherritt plans to continue with
its development of known reserves in 2002 and will also focus on evaluating
prospects on the Block 9 area near the Varadero-producing trend.
OTHER BUSINESSES
Year Ended
December 31,
-------------------
2001 2000
-------- --------
FINANCIAL (thousands of dollars)
Revenue..................................................... $25,226 $16,154
Operating, selling, general and administrative.............. 17,942 7,475
------- -------
7,284 8,679
Depletion and amortization.................................. 6,864 4,847
------- -------
Operating earnings.......................................... $ 420 $ 3,832
------- -------
SHARE OF EARNINGS (LOSS) OF EQUITY INVESTMENTS.............. $ (679) $ 788
CAPITAL EXPENDITURES........................................ 5,024 11,423
Revenue and operating earnings from this segment comprise Sherritt's share
of the communications and soybean-based food processing businesses. Operating
earnings of $0.4 million were generated on revenues of $25.2 million in 2001
compared with operating earnings of $3.8 million on revenues of $16.2 million in
2000. The soybean-based food processing business, which incurred a start-up loss
for the year, commenced selling products during the second quarter of 2001 and
is now capable of operating at full capacity. Cubacel's revenue increased by 10%
in 2001 to $17.7 million, reflecting a 24% increase in the year-over-year number
of subscribers, offset by a 17% decrease in average monthly revenue per user to
U.S.$273. Lower long distance customer usage and a switch to billing customers
on a real time basis from the historic practice of billing by full minute
contributed to the lower average revenue per user.
Earnings (loss) of equity investments comprise Sherritt's share of income
from tourism investments and net loss of Sherritt Power. A higher loss was
sustained by Sherritt Power in 2001, primarily due to lower investment
B-25
and project interest income as a result of lower interest rates. The power
facilities constructed and operated by Sherritt Power had an installed capacity
of 151 MW throughout 2001. Construction of the final phase at the Varadero
facility is well underway and will expand capacity at this facility by 75 MW
through conversion to a combined cycle operation, which will use waste heat from
the existing facility to generate steam to power a new turbine.
Capital expenditures of $5.0 million during the year largely comprised
expenditures in the communications business to expand and improve network
coverage.
RESULTS FOR YEAR ENDED DECEMBER 31, 2000 COMPARED WITH THE YEAR ENDED
DECEMBER 31, 1999
SUMMARY OF CONSOLIDATED RESULTS
Consolidated net earnings increased by $49.0 million or 74% to
$115.6 million or $1.38 per Sherritt Share compared with $66.6 million or $0.60
per Sherritt Share in 1999. On a diluted basis, earnings per Sherritt Share
increased from $0.45 per Sherritt Share in 1999 to $0.84 per Sherritt Share in
2000. In December 2000, a new accounting standard was issued for calculating
earnings per Sherritt Share, which was retroactively adopted by Sherritt in its
2000 consolidated financial statements. The effect of these new recommendations,
which are described in the notes to the consolidated financial statements, was a
$0.10 increase in basic earnings per Sherritt Share (1999 -- nil) and a $0.07
increase in diluted earnings per Sherritt Share (1999 -- $0.02).
Consolidated revenue for 2000 reached $480.4 million, a 29% increase from
$372.3 million in 1999. All operations experienced significantly higher revenue.
Metals revenue increased by 19% or $48.5 million, primarily due to higher
realized nickel prices. Revenue from the Oil and Gas business grew by 55% or
$58.7 million reflecting record oil production in Cuba and higher average oil
prices.
Operating, selling, general and administrative costs of $285.3 million were
$34.6 million or 14% higher than in 1999. Most of the increase was due to higher
energy costs experienced by the Metals business combined with higher operating
costs in the Oil and Gas business, consistent with an increase in oil
production. In the third quarter of 2000, Sherritt realized a $3.0 million gain
on the sale of its remaining properties in Italy.
Depletion and amortization expense was $71.2 million in 2000 compared with
$50.4 million in 1999. Most of the increase arose in the Oil and Gas business as
a result of higher production volumes and a higher depletion rate.
Financing income comprised net interest income and foreign exchange gains
and losses. The $2.1 million increase to $29.0 million in 2000 included a
$3.4 million foreign exchange gain versus a $5.0 million foreign exchange loss
in 1999. This gain reflected a stronger U.S. dollar at the end of 2000 compared
with the prior year. Net interest income declined by $6.3 million in 2000 to
$25.6 million due to lower average cash and short-term investment balances.
Sherritt's short-term investments had a weighted-average interest rate of 5.5%
in 2000 compared with 4.8% in 1999.
Sherritt's effective tax rate in 2000 was 22% compared with 26% in 1999. The
decrease in the effective tax rate was primarily due to a higher proportion of
net earnings generated by the Oil and Gas business, which is taxed at a lower
rate.
Cash and cash equivalents at December 31, 2000 totaled $189.8 million
compared with $162.7 million at the end of 1999.
Cash from operating activities of $129.2 million was generated in 2000
compared with $90.0 million in 1999. The $39.2 million increase in operating
cash flow reflected higher net earnings, partly offset by a $64.0 million
build-up in working capital. Working capital increased in 2000 primarily due to
higher oil volumes and changes in billing procedures agreed to with the Cuban
agency responsible for purchasing Sherritt's oil production in Cuba. The result
of these changes was an improved process for certifying accumulated development
and operating costs and an extension of credit terms in certain circumstances.
The terms of credit now vary with the market price of oil and, depending upon
such price, bear interest at a fixed rate.
Uses of cash during 2000 included capital expenditures of $116.3 million,
repurchase of convertible debentures of $58.1 million, convertible debenture
interest of $37.5 million, dividends of $21.7 million and
B-26
$8.4 million related to the 1999 divestiture of the Vega platform. Cash realized
from maturity of short-term investments and from restricted cash was
$151.8 million.
METALS
Year Ended
December 31,
-------------------
2000 1999
-------- --------
FINANCIAL (thousands of dollars)(1)
Revenue..................................................... $299,018 $250,473
Operating, selling, general and administrative.............. 219,782 190,750
-------- --------
79,236 59,723
Depletion and amortization.................................. 15,287 11,523
Provision for site restoration and abandonment.............. 2,098 1,943
-------- --------
Operating earnings.......................................... $ 61,851 $ 46,257
-------- --------
CAPITAL EXPENDITURES(1)..................................... $ 26,779 $ 21,171
SALES VOLUMES
Nickel (thousands of pounds)(1)............................. 29,480 31,623
Cobalt (thousands of pounds)(1)............................. 3,075 3,390
Fertilizers (tonnes)........................................ 330,337 306,579
PRODUCTION VOLUMES (tonnes)(1)
Mixed sulphides containing nickel and cobalt................ 14,760 13,510
Nickel...................................................... 14,035 14,322
Cobalt...................................................... 1,427 1,385
REALIZED PRICES (per pound)
Nickel...................................................... $ 5.80 $ 3.94
Cobalt...................................................... 19.65 19.42
AVERAGE REFERENCE PRICES (U.S. per pound)
Nickel...................................................... $ 3.92 $ 2.73
Cobalt...................................................... 13.26 15.29
------------
(1) Represents Sherritt's 50% share of the Metals Enterprise, Sherritt's
marketing and trading activities in commodity metals and its fertilizer and
utilities assets.
The Metals business achieved record operating earnings of $61.9 million on
record revenue of $299.0 million in 2000, surpassing the previous record
operating earnings of $46.3 million on revenue of $250.5 million in 1999. The
34% increase in operating earnings was primarily due to higher realized nickel
prices, partially offset by higher energy costs.
The Fort Saskatchewan refinery set a cobalt production record for the fifth
consecutive year. Total finished cobalt production of 2,855 tonnes in 2000
surpassed last year's total finished cobalt production of 2,770 tonnes by 3%.
Higher cobalt content feeds contributed to record cobalt production. Total
finished nickel production for 2000 was 28,070 tonnes, slightly below the record
production of 28,643 tonnes established in 1999.
A new production record of 29,520 tonnes of nickel plus cobalt contained in
mixed sulphides was achieved by the Moa mining and processing facilities in
2000, 9% higher than both the 1999 production of 27,020 tonnes and the previous
production record of 27,066 established in 1998. Moa's record production is a
reflection of the systematic upgrading, rehabilitation and debottlenecking
initiatives that have been undertaken since the inception of the joint venture.
Nickel prices on the LME were volatile throughout 2000, opening the year at
U.S.$3.74 per pound, rising to a high of U.S.$4.84 per pound and closing at
U.S.$3.26 per pound. Strong worldwide nickel demand and supply
B-27
interruptions supported the nickel price for the first three quarters in 2000.
The average LME nickel settlement price for 2000 was U.S.$3.92 per pound, 44%
higher than the 1999 average of U.S.$2.73 per pound.
During 2000, the Metal Bulletin 99.3% free market cobalt price traded in a
range between U.S.$10.55 per pound and U.S.$15.85 per pound, averaging
U.S.$13.26 per pound for the year, compared with U.S.$15.29 per pound in 1999.
The lower cobalt price reflected additional production from several
international expansions and increased production from new international
laterite projects.
Fertilizer sales volumes of 330,337 tonnes in 2000 were 8% higher than the
306,579 tonnes sold in 1999, largely from increased ammonium sulphate sales. An
operating loss of $8.2 million compared with $2.7 million in 1999 reflected
higher natural gas and energy costs, a major input in the production of nitrogen
fertilizers. Higher energy costs in western Canada necessitated the suspension
of the urea facility in October 2000. The operating status of the urea facility
will continue to be reviewed in relation to prevailing market conditions.
Capital expenditures of $26.8 million in 2000 were primarily directed
towards opening up the new higher-grade Moa Oriental orebody, maximizing cobalt
production, attaining production improvements and maintaining and upgrading
plant operations.
B-28
OIL AND GAS
Year Ended
December 31,
-------------------
2000 1999
-------- --------
FINANCIAL (thousands of dollars)
Revenue..................................................... $165,183 $106,511
Operating, selling, general and administrative.............. 36,889 33,812
-------- --------
128,294 72,699
Depletion and amortization.................................. 47,308 31,318
Provision for site restoration and abandonment.............. 1,415 2,238
-------- --------
Operating earnings.......................................... $ 79,571 $ 39,143
-------- --------
CAPITAL EXPENDITURES........................................ $ 66,263 $ 51,718
GROSS WORKING INTEREST PRODUCTION (thousands of barrels)
Cuba(1)..................................................... 10,024 7,232
Spain....................................................... 293 429
Italy....................................................... -- 204
-------- --------
10,317 7,865
-------- --------
NET SALES VOLUME (thousands of barrels)
Cuba(2)..................................................... 6,360 4,797
Spain....................................................... 293 429
Italy....................................................... -- 204
-------- --------
6,653 5,430
-------- --------
REALIZED PRICES (per barrel)
Cuba........................................................ $ 23.35 $ 18.01
Spain....................................................... 42.29 25.59
Italy....................................................... -- 34.09
AVERAGE REFERENCE PRICES (U.S. per barrel)
U.S. Gulf Coast Fuel Oil No. 6.............................. $ 20.76 $ 14.28
------------
(1) In the first quarter of 2002, Sherritt changed its presentation of Cuban oil
production from gross operated production to gross working interest
production. Gross operated production represented oil production before
allocation to joint venture partners and agencies of the Cuban Government.
Gross working interest production refers to oil production after allocation
to joint venture partners but before allocation to agencies of the Cuban
Government. Prior period production numbers have been restated to conform to
this new disclosure methodology.
(2) Gross working interest production in Cuba is allocated to Sherritt and
agencies of the Cuban Government in accordance with participation and
production-sharing contracts. Net working interest production or net sales
volumes represents Sherritt's share of gross working interest production.
Net working interest production for each production-sharing contract
comprises profit oil (which is based upon a negotiated percentage) and cost
recovery oil (which is based upon Sherritt's development and operating
costs). Development and operating costs, upon certification by agencies of
the Cuban Government, are accumulated in cost recovery pools by each
production-sharing contract and reduced by allocation of produced oil to
Sherritt. Production allocated to agencies of the Cuban Government is
considered to be a royalty interest.
Record oil production in Cuba and higher realized oil prices boosted revenue
by 55% in 2000 to $165.2 million. These factors also contributed to record
operating earnings in 2000 of $79.6 million, more than double that reported for
the previous year. The increase in production resulted in a higher depletion and
amortization expense, up $16.0 million in 2000 to $47.3 million. The annual
depletion and amortization rate, based on Sherritt's share of oil production,
increased by 24% to $7.09 per barrel reflecting the impact of changes in reserve
estimates during the year. During the third quarter of 2000, Sherritt realized a
$3.0 million gain from the sale of its gas properties in Italy.
Oil production in Cuba is sold to a Cuban government agency at sales prices
based on an international reference price for fuel oil of comparable quality.
The average U.S. Gulf Coast Fuel Oil No. 6 reference price
B-29
averaged U.S.$20.76 per barrel in 2000, compared with U.S.$14.28 per barrel in
1999. During the year, Sherritt employed forward contracts to fix the price of
approximately 5,900 barrels of oil per day at an average U.S. Gulf Coast Fuel
Oil No. 6 price of U.S.$17.89 per barrel. No fixed price contracts were
outstanding at the end of 2000.
Sherritt set a new gross working interest oil production record for the
fourth consecutive year. During 2000, approximately 92% of Oil and Gas revenue
was derived from oil production in Cuba. Gross working interest oil production
in Cuba increased by 39% during 2000 to 10 million barrels or 27,389 barrels per
day, compared with 7 million barrels in 1999 or 19,814 barrels per day. The
increase in production arose from new wells in the Varadero, Varadero West,
Seboruco and Yumuri areas. Sherritt's share of oil production in Cuba in 2000
averaged 17,424 barrels per day compared with an average of 13,143 barrels per
day in 1999. In Spain, natural declines contributed to a 32% decrease in
production.
A total of six development wells and one exploratory well were drilled in
Cuba during 2000. Drilling of the Felipe 1-X exploration well was ongoing at the
end of the year. In Spain, two exploratory wells were drilled, one of which
discovered the Barracuda field. The Barracuda well commenced commercial
production in December 2000.
Total proved oil reserves in Cuba decreased from 63.4 million barrels at the
end of 1999 to 54.5 million barrels at the end of 2000, reflecting production
during the year and reserve adjustments. Sherritt concentrated its efforts in
Cuba towards the development of known reserves along the north coast of Cuba, in
order to maximize production during a period of high oil prices.
OTHER BUSINESSES
Year Ended
December 31,
-------------------
2000 1999
-------- --------
FINANCIAL (thousands of dollars)
Revenue..................................................... $16,154 $15,362
Operating, selling, general and administrative.............. 7,475 8,311
------- -------
8,679 7,051
Depletion and amortization.................................. 4,847 3,490
------- -------
Operating earnings.......................................... $ 3,832 $ 3,561
------- -------
SHARE OF EARNINGS (LOSS) OF EQUITY INVESTMENTS.............. $ 788 $(1,275)
CAPITAL EXPENDITURES........................................ 11,423 14,310
Revenue from this segment comprises Sherritt's share of Cubacel's revenue.
Revenue in 1999 also included a one-time amount of $1.8 million. Cubacel's
revenue increased by 20% in 2000, primarily reflecting a 30% increase in the
number of subscribers. During 2000, Cubacel continued its infrastructure
expansion to provide national coverage. Service now extends to twenty of the
largest cities and along all major road links in Cuba. During the third quarter
of 2000, Sherritt increased its effective ownership of Cubacel from 37.5% to 40%
for a cash consideration of $4.4 million. Income from equity investments
comprised Sherritt's 49.7% share of Sherritt Power's net loss and income from
tourism investments. At the end of 2000, the power projects undertaken by
Sherritt Power had a total installed capacity of 151 megawatts.
Capital expenditures include construction costs associated with the soybean
processing plant and expenditures to expand the communications infrastructure in
Cuba.
LIQUIDITY AND CAPITAL RESOURCES
Short-term debt at the end of 2001 comprised Sherritt's revolving term
credit facility and operating lines of credit of certain joint ventures. In
February 2001, Sherritt obtained an external 364-day revolving term facility of
$75 million from a Canadian bank, secured by Sherritt's accounts receivable and
inventory and those of certain of Sherritt's joint ventures. This facility is
used by Sherritt to fund normal working capital requirements of
B-30
Sherritt's operations. Approximately $25.6 million of this facility was
drawn-down at December 31, 2001. In addition, certain of Sherritt's joint
ventures had outstanding amounts under various credit facilities, of which
Sherritt's share was approximately $10.4 million.
Long-term debt at the end of 2001 is primarily comprised of Luscar Notes and
promissory notes of Luscar Ltd. In October 2001, Luscar Coal issued at par,
U.S.$275 million of the 9.75% Luscar Notes, due 2011. Approximately
$349 million of the $417 million in net proceeds from the issue were used to
repay borrowings under Luscar Ltd.'s existing credit facility and to terminate
this facility. The total surplus proceeds from this issue of $68 million were
retained to fund the operations of the Coal business. The terms of the Luscar
Notes include restrictions on amounts that LEP can distribute to its partners.
Concurrent with the issue of the Luscar Notes, Luscar Coal obtained a
$100 million 364-day secured revolving bank credit facility from three Canadian
banks, secured by accounts receivable, coal inventory and a $25 million charge
on a dragline. Approximately $64 million of this facility was utilized to
support letters of credit issued in order to satisfy Luscar Coal's statutory
reclamation obligations. LEP, Luscar Coal Income Fund and Luscar Coal's
subsidiaries have guaranteed the principal and interest obligations on the
Luscar Notes and bank credit facility. Sherritt's long-term debt includes
promissory notes issued by Luscar Ltd., which are stated net of sinking funds
and are funded by a Crown Corporation in conjunction with long-term coal supply
agreements. The coal supply agreements require the Crown Corporation to
reimburse Luscar Ltd. upon maturity of the promissory notes for any net
repayment required above the sinking funds proceeds.
On March 21, 2001, holders of Sherritt Power Notes approved an extraordinary
resolution to amend the trust indenture governing its $225 million of Sherritt
Power Notes, including $75 million held by Sherritt. The amendment resulted in:
- An acceleration of the first amortization of $198 per $1,000 principal
amount to March 31, 2001 from March 31, 2002;
- A revision to the remaining amortization schedule such that $200 per
$1,000 principal amount is amortized on March 31 in each of 2003, 2004 and
2005 and $101 per $1,000 principal amount is amortized on each of
March 31, 2006 and 2007. The original terms specified amortization
payments of $401 per $1,000 principal amount on each of March 31, 2003 and
2004;
- An increase in the interest rate from 11.50% to 12.125% effective
April 1, 2001; and
- The payment of a consent premium of $15 per $1,000 principal amount of
Sherritt Power Notes.
As a result of this amendment, Sherritt received approximately
$20.3 million from Sherritt Power on April 2, 2001 representing the payment of
the first amortization, the consent premium and accrued interest. Accordingly,
Sherritt now holds $60.2 million principal amount of Sherritt Power Notes
($75 million face amount). Sherritt also advanced Sherritt Power $19.6 million
on April 2, 2001 under the Cash Flow Assurances Agreement dated March 1998 for
the purposes of funding the accelerated amortization. This advance bears
interest at LIBOR plus 6% and is included in current advances and receivables.
At the end of 2001, Sherritt and its affiliates had outstanding letters of
credit drawn against bank facilities, of which Sherritt's share was
approximately $49.4 million. As at December 31, 2001, cash and cash equivalents
was $109.0 million, and cash subject to restrictions on use was $23.8 million.
Dividends of $0.25 per share were paid during 2001, comprising $0.10 per
share in each of the first and second quarters and $0.05 per share in the third
quarter. Given declines in the prices of oil, nickel and cobalt and the
uncertain outlook for these commodities, the Board of Directors decided in
November 2001 to discontinue payment of a quarterly dividend and retain earnings
to fund the growth of its businesses. Sherritt received dividends of
$18.3 million during the year from its joint ventures and investments.
In order to maintain sufficient flexibility to make long-term strategic
investments, Sherritt invested excess funds in short-term liquid Canadian
marketable securities. The agreements establishing the various joint ventures in
which Sherritt has interests require the unanimous consent of shareholders for
the joint venture to pay dividends. Sherritt does not believe that these
restrictions will have a material impact on the cash available to meet its
obligations. Cash generated from operations and cash and short-term investments
on hand are expected to be sufficient to finance ongoing operations.
B-31
RISKS AND UNCERTAINTIES
Sherritt's principal businesses include the sale of several commodities.
Revenues, earnings and cash flows from the sale of nickel, cobalt, oil and coal
on the international export market are sensitive to changes in market prices
over which Sherritt has little or no control. Sherritt has the ability to
address its price-related exposures through the limited use of options, futures
and forward contracts. In 2000, Sherritt employed forward contracts to fix the
price of approximately 5,900 barrels of oil per day at an average U.S. Gulf
Coast Fuel Oil No. 6 price of U.S.$17.89 per barrel. No derivative contracts
were utilized to mitigate market price risk as at September 30, 2002.
Market risks associated with commodities used by Sherritt's businesses are
not considered material to Sherritt's overall financial position, results of
operations or liquidity. However, in order to manage price volatility related to
certain consumables, Sherritt's businesses may enter into short-term purchase
arrangements that fix the price for certain commodities, including diesel fuel,
natural gas and electric power.
Many of Sherritt's businesses transact in currencies other than Canadian
dollars. Sherritt's Coal business has a U.S. dollar denominated debt, of which
Sherritt's share is U.S.$137.5 million. Interest on this debt is payable in
U.S. dollars and offsets a portion of foreign currency risks related to export
revenue of this business. Sherritt is also sensitive to foreign exchange
exposures when commitments are made to deliver products quoted in foreign
currencies or when the contract currency is different from the product price
currency.
Sherritt has the ability to address its currency-related exposure through
the use of foreign exchange contracts. The Coal business has a number of foreign
exchange contracts to mitigate a small portion of its export revenue cash flow.
These contracts mature in 2002. No other derivative contracts were utilized to
mitigate currency risk as at September 30, 2002.
Substantially all of Sherritt's long-term debt obligations have fixed rates
of interest that range from 6% to 12.75% and have maturities ranging from 2004
to 2011. Short-term borrowings of $36.0 million at December 31, 2001 used to
meet working capital requirements are largely financed at variable interest
rates. As at December 31, 2001, approximately 9% of Sherritt's total debt was
subject to variable interest rates.
Sherritt's Coal business is obligated under an interest rate swap, which
fixes the interest rate of $50 million of floating rate debt at 5.72% plus the
applicable interest rate margin. This swap matures in December 2003 and was
originally established to hedge Luscar Coal's exposure to its floating interest
rate debt, which was repaid in October 2001. No other derivative financial
instruments were utilized to mitigate interest rate risk.
Sherritt maintains a system of internal controls to minimize the risks
associated with derivatives and credit risk associated with derivative
counter-parties.
A portion of the assets in which Sherritt has an indirect interest is
located in Cuba. This gives rise to certain risks and uncertainties which are
more fully described below under the title "Risk Factors -- Risks Related to
Sherritt's Investments in Cuba".
More generally, the U.S. embargo, adverse developments in U.S. law, and
underlying political tensions between the United States and Cuba are matters
beyond Sherritt's control.
In September 2001, Deutsche Bank Canada discontinued the "oppression"
application it had commenced against Sherritt in May 2000. The discontinuance
involved no settlement with, payment by or admission of wrongdoing by Sherritt.
The Court Order approving the discontinuance also provided that it shall be a
complete defence to any subsequent proceeding that might arise out of the same
subject matter.
In October 2001, Sherritt received a statement of claim setting out a claim
against it and Dynatec Corporation, brought in the Supreme Court of Australia,
by Fluor Australia Pty. Ltd. ("Fluor"). The claim relates to alleged
deficiencies in the facilities of Anaconda's Murrin Murrin mine development in
Australia. The alleged deficiencies are the subject of an ongoing arbitration
commenced by Anaconda against Fluor, which was retained by Anaconda to provide
engineering, procurement and construction services. In the arbitration
proceedings, Anaconda alleges that Fluor breached the services contract between
them. Sherritt believes Fluor's claim is without merit and intends to defend it
vigorously.
B-32
Sherritt conducts its businesses to comply with or exceed all applicable
environmental regulations and observes internationally accepted environmental
management practices. Environmental laws and regulations are continually
evolving in all locations where Sherritt operates. Compliance with environmental
regulations can require significant expenditures and there can be no assurance
that the costs to ensure compliance would not materially affect Sherritt's
financial condition or results of operations.
Accounting provisions are made on an annual basis for future site
restoration liabilities based on an estimate of the future liabilities,
environmental laws and regulations and remaining reserve lives. Estimated future
liabilities may be affected by changes in environmental laws and regulations and
changes in operating assumptions. Any such changes would be recognized
prospectively as a change in accounting estimate.
Changes in environmental legislation or regulations may also have a material
adverse affect on product demand and methods of production and distribution, the
impact of which is not possible to predict.
CRITICAL ACCOUNTING POLICIES
The estimates of Sherritt's reserves, including its coal, nickel, cobalt and
oil resources, are critical for the determination of significant accounting
estimates including rates of depletion and amortization expense, provisions for
site restoration and abandonment, and recoverability of asset carrying values.
Sherritt reviews and evaluates its reserves on a regular basis to reflect new
data and developments affecting the reserves. Accordingly, reserve estimates
will change from time to time reflecting recent activities, analyses of new
engineering and geological data, changes in reserve holdings, modification of
operating plans and methods, changes in commodity prices, production costs and
other factors.
Future tax assets arise primarily from recognizing the tax benefit of
interest on convertible debentures and from write-downs of Sherritt's investment
in Anaconda. Ongoing recognition of these tax losses is dependent upon
Sherritt's continued estimation of its ability to generate sufficient taxable
income and capital gains in the future.
SENSITIVITIES
The following table identifies the approximate sensitivity of Sherritt's
2001 financial results to changes in selected product prices and volumes, and
exchange rates. These may not necessarily be indicative of sensitivities on
future results.
Approximate Approximate
Annual Change in Annual Change
Factor Change Net Earnings in EPS
------ --------- --------------------- ---------------
(millions of dollars) ($/basic share)
Prices
Coal -- Average export prices per tonne(1)............ U.S.$1.00 1.2 0.01
Nickel -- LME price per pound......................... U.S.$0.10 2.6 0.03
Cobalt -- Metal Bulletin price per pound.............. U.S.$1.00 2.8 0.03
Oil -- U.S. Gulf Coast Fuel Oil No. 6 price per
barrel.............................................. U.S.$0.50 4.3 0.05
Volumes
Coal -- tonnes(1)(2).................................. 500,000 0.9 0.01
Nickel -- tonnes...................................... 1,000 0.8 0.01
Cobalt -- tonnes...................................... 100 0.3 --
Oil -- barrels per day................................ 1,000 2.8 0.03
------------
(1) Sensitivities incorporate results of the Coal business from May 12, 2001
onwards.
(2) Based on a split of 13% export volume and 87% domestic volume.
B-33
DIFFERENCES BETWEEN CANADIAN GAAP AND U.S. GAAP
This discussion and analysis has been based upon financial statements
prepared in accordance with Canadian GAAP, which differs in certain respects
from U.S. GAAP, on matters including:
- Derivative financial instruments
- Promissory Notes sinking funds
- Comprehensive income and investments
- Stated capital adjustments
- Pension asset valuation allowances
- Convertible debentures
- Full cost accounting
- Income tax rate changes
- Capitalized interest
- Employee termination benefits
- Stock-based compensation
Reference should be made to Sherritt's consolidated financial statements and
notes thereto included in Appendix C to the Circular for a further discussion on
the differences between Canadian GAAP and U.S. GAAP.
RECENTLY ISSUED ACCOUNTING STANDARDS
There have been recent releases related to accounting standards. In Canada,
these include rules for determining when hedge accounting may be used. In the
United States, these include accounting for asset retirement obligations and
reporting gains or losses from extinguishment of debt. Sherritt is in the
process of assessing the impact of these releases. Although the assessment is
not complete, Sherritt does not believe that these releases will have a
significant impact on its financial results.
RISK FACTORS
Sherritt will be the issuer of the Exchange Rights. Shareholders considering
an election to receive Exchange Rights under the Enhanced Offer should give
careful consideration to the risks and uncertainties described in "Risk Factors"
in Appendix A to the Circular, in the documents incorporated by reference in
this Appendix B, including the discussion of "Risks and Uncertainties" in the
Sherritt's Management's Discussion and Analysis of Financial Condition and
Results of Operations found at pages 26 to 28 of Sherritt's 2001 Annual Report
and the discussion entitled "Environment" found at pages 37 to 42 of Sherritt's
Annual Information Form dated March 15, 2002, and to the additional risk factors
set out below.
RISKS RELATED TO SHERRITT'S INVESTMENTS IN CUBA
The processing facilities and mining properties of 50%-owned Moa
Nickel S.A., a substantial portion of oil exploration, development and
production activities, 49.7%-owned Sherritt Power's electricity generating
operations, as well as other interests in cellular communications, soybean-based
food processing, agriculture and tourism of Sherritt, are located in Cuba. As
such, the operations of the Cuban businesses may be affected by economic
pressures on Cuba. Risks include, but are not limited to, fluctuations in
official or convertible currency exchange rates and high rates of inflation. Any
changes in regulations or shifts in political attitudes are beyond the control
of Sherritt and may adversely affect its business. Operations may be affected in
varying degrees by such factors as Cuban government regulations with respect to
production, price controls, export controls, income taxes, expropriation of
property, environmental legislation, land use, water use and mine safety. The
Metals Enterprise joint venture (comprised of Moa Nickel S.A., The Cobalt
Refinery Company Inc. and International Cobalt Company Inc., each 50%-owned
indirectly by Sherritt) obtains virtually all of its cobalt and nickel feed
supply from its reserves in Cuba to process in its refinery in Fort
Saskatchewan, Alberta. If factors beyond Sherritt's control interrupted supply
and alternative sources of supply could not be located, the lack of appropriate
feed for the refinery could result in a substantial decrease in production and
potentially the shutdown of the refinery.
B-34
The Cuban government has, over the last decade, sought to encourage foreign
investment by removing certain restrictions on foreign investments and
permitting foreign entities to repatriate profits out of Cuba. There can be no
assurance that this moderating attitude to foreign investment will continue or
that a change in economic conditions will not result in a change in the policies
of the Cuban government or the imposition of more stringent foreign investment
restrictions. Such changes are beyond the control of Sherritt and the effect of
any such changes cannot be accurately predicted.
All sales generated by Sherritt's oil and gas operations in Cuba are made to
an agency of the Government of Cuba, as are all electricity sales made by the
power generation joint venture in which Sherritt Power has an interest. The
access of the Cuban government to foreign exchange is severely limited. In
addition, the ongoing ramifications of the events of September 11, 2001 and the
destruction caused by Hurricane Michelle in November 2001 and Hurricanes Isidore
and Lilli in 2002 may continue to adversely impact the ability of Cuban entities
to make payments in foreign currencies and to honour other contractual
obligations. Accordingly, there is a risk, beyond the control of Sherritt, that
receivables and contractual performance due from Cuban entities will not be paid
or performed in a timely manner, or at all.
THE U.S. EMBARGO AND THE HELMS-BURTON ACT
The United States has maintained a general embargo against Cuba since the
early 1960s, and the enactment in 1996 of the CUBAN LIBERTY AND DEMOCRATIC
SOLIDARITY (LIBERTAD) ACT (commonly known as the Helms-Burton Act) extended the
reach of the U.S. embargo. The general embargo bars U.S. citizens,
U.S. residents, U.S. individuals and entities located in the United States,
entities organized under U.S. law, and entities owned or controlled by any of
the foregoing (collectively, "U.S. Persons") from engaging in most transactions
with Cuba, Cuban nationals, or entities deemed to be owned or controlled by Cuba
("specially designated nationals" or SDNs). The Helms-Burton Act authorizes
sanctions on individuals or entities that "traffic" in Cuban property that was
confiscated from U.S. nationals or from persons who have become U.S. nationals.
Because of Sherritt's investments in Cuba, Sherritt takes the general embargo
and the Helms-Burton Act into account in conducting its operations. The three
entities constituting the Metals Enterprise joint venture in which Sherritt
holds an indirect 50% interest have been deemed SDNs by the U.S. Department of
the Treasury ("Treasury"), but Sherritt itself is not an SDN. The
U.S. Department of State has deemed Sherritt's indirect 50% interest in Moa
Nickel S.A. to be a form of "trafficking" under the Helms-Burton Act and has
therefore excluded certain Sherritt directors and officers from the United
States.
As described elsewhere in the Enhanced Offer, Fording Shareholders will be
able to elect to receive as consideration for their Fording Shares tendered
under the Enhanced Offer: $35.00 cash per Share to a maximum of $850 million
(subject to proration), or one Exchange Right exchangeable into a Unit of the
Canadian Coal Trust (subject to proration), or a combination of cash and
Exchange Rights (subject to proration). The Offeror believes that neither the
general embargo nor the Helms-Burton Act restricts, or imposes liability for, a
Fording Shareholder's acceptance of the first form of consideration, cash,
because the funds being used to provide the cash consideration were not derived
from Sherritt's Cuba-related activities. As for the second form of
consideration, the Exchange Rights, although Sherritt is the issuer of the
Exchange Rights, the Exchange Rights themselves enable the holder only to
acquire a Unit of the Canadian Coal Trust that will hold indirectly the
metallurgical coal assets of Fording, the Met Coal Assets and, if the Luscar Put
is exercised, the Luscar mine, which have no relationship to Cuba, Cuban
nationals, SDNs, or confiscated Cuban property. Accordingly, the Offeror
believes that neither the general embargo nor the Helms-Burton Act restricts, or
imposes liability for, a Fording Shareholder's acceptance of the Exchange
Rights.
Sherritt conducts its Cuba-related operations so as not to require
U.S. Persons to violate the U.S. embargo. The general embargo limits Sherritt's
access to U.S. capital, U.S. financing sources, U.S. customers, and
U.S. suppliers. The Helms-Burton Act has resulted, as previously noted, in the
exclusion of certain Sherritt directors and officers from the United States.
Although the Helms-Burton Act also authorizes damages lawsuits to be brought in
U.S. courts by U.S. claimants against those "trafficking" in the claimants'
confiscated property, no such lawsuits have been filed, because both President
Clinton and President Bush have exercised their authority to suspend the right
of claimants to bring such lawsuits. The current suspension by President Bush
expires on January 31, 2003, and it may be renewed indefinitely at six-month
intervals. Even if the suspension were permitted to expire, Sherritt does not
believe that its operations would be materially affected by any
B-35
Helms-Burton Act lawsuits, because Sherritt's minimal contacts with the United
States would likely deprive any U.S. court of personal jurisdiction over
Sherritt. Furthermore, even if personal jurisdiction were exercised, any
successful U.S. claimant would have to seek enforcement of the U.S. court
judgment outside the United States in order to reach material Sherritt assets.
Sherritt believes it unlikely that a court in any country in which Sherritt has
material assets would enforce a Helms-Burton Act judgment.
The FOREIGN EXTRATERRITORIAL MEASURES ACT (Canada) was amended as of
January 1, 1997 to provide that any judgment given under the Helms-Burton Act
will not be recognized or enforceable in any manner in Canada. The amendments
permit the Attorney General of Canada to declare, by order, that a Canadian
corporation may sue for and recover in Canada any loss or damage it may have
suffered by reason of the enforcement of a Helms-Burton Act judgment abroad. In
such a proceeding, the Canadian court could order the seizure and sale of any
property in which the defendant has a direct or indirect beneficial interest, or
the property of any person who controls or is a member of a group of persons
that controls, in law or in fact, the defendant. The property seized and sold
could include shares of any corporation incorporated under a law of Canada or a
province.
The federal Government of Canada has also responded to the Helms-Burton Act
through diplomatic channels. Other countries, such as the members of the
European Union and the Organization of American States, have expressed their
strong opposition to the Helms-Burton Act and, like Canada, are taking or
considering taking steps, both domestically and multilaterally, to counter its
effect.
Nevertheless, in the absence of any judicial interpretation of the scope of
the Helms-Burton Act, the threat of potential litigation discourages some
potential investors, lenders, suppliers, and customers from doing business with
Sherritt.
The general embargo has been, and may in the future be, amended from time to
time, as may the Helms-Burton Act, and therefore the U.S. sanctions applicable
to transactions with Cuba may become more or less stringent. The stringency and
longevity of the U.S. laws relating to Cuba are likely to continue to be
functions of political developments in the United States and Cuba, over which
Sherritt has no control.
LEGAL MATTERS
Estimates of reserves and resources referred to in this Appendix B have been
provided by "qualified persons" (for the purposes of the National Instrument
43-101) retained by Sherritt or Luscar Ltd.
The information contained in this Appendix B regarding entities in which
Sherritt has an indirect interest, which do business in Cuba, is accurate as of
the date the Exchange Rights are effective with the Florida Department of
Banking and Finance. Current information concerning those entities' business
dealings with the government of Cuba or with any person or affiliate located in
Cuba may be obtained from the Director, Division of Securities and Investor
Protection, Florida Department of Banking and Finance, the Capitol, Tallahassee,
Florida, 32399-0350, telephone (850) 410-9286.
AUDITORS
The auditors of Sherritt are Deloitte & Touche LLP, Toronto, Ontario.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents filed with the securities commission or similar
authority in each of the provinces and territories of Canada are specifically
incorporated by reference in this Appendix B to the Circular:
- Sherritt's Annual Information Form dated March 15, 2002;
- Sherritt's management information circular dated April 15, 2002 in
connection with the May 30, 2002 Annual and Special Meeting of
Shareholders, other than the sections entitled "Composition of the
Compensation Committee in 2001", "Report on Executive Compensation",
"Performance Graph" and "Corporate Governance"; and
- Sherritt's material change report dated October 21, 2002.
B-36
All documents (excluding confidential material change reports) of the type
referred to in the preceding paragraphs filed by Sherritt with a securities
commission or any similar authority in any of the provinces and territories of
Canada, after the date of the Enhanced Offer and prior to the Expiry Time, shall
be deemed to be incorporated by reference in this Appendix B to the Circular.
ANY STATEMENT CONTAINED IN A DOCUMENT INCORPORATED OR DEEMED TO BE
INCORPORATED BY REFERENCE HEREIN SHALL BE DEEMED TO BE MODIFIED OR SUPERSEDED
FOR THE PURPOSES OF THIS APPENDIX B TO THE EXTENT THAT A STATEMENT CONTAINED
HEREIN, OR IN ANY OTHER SUBSEQUENTLY FILED DOCUMENT WHICH ALSO IS INCORPORATED
OR IS DEEMED TO BE INCORPORATED BY REFERENCE HEREIN, MODIFIES OR SUPERSEDES SUCH
STATEMENT. THE MODIFYING OR SUPERSEDING STATEMENT NEED NOT STATE THAT IT HAS
MODIFIED OR SUPERSEDED A PRIOR STATEMENT OR INCLUDE ANY OTHER INFORMATION SET
FORTH IN THE DOCUMENT THAT IT MODIFIES OR SUPERSEDES. THE MAKING OF A MODIFYING
OR SUPERSEDING STATEMENT WILL NOT BE DEEMED AN ADMISSION FOR ANY PURPOSES THAT
THE MODIFIED OR SUPERSEDED STATEMENT, WHEN MADE, CONSTITUTED A
MISREPRESENTATION, AN UNTRUE STATEMENT OF A MATERIAL FACT OR AN OMISSION TO
STATE A MATERIAL FACT THAT IS REQUIRED TO BE STATED OR THAT IS NECESSARY TO MAKE
A STATEMENT NOT MISLEADING IN LIGHT OF THE CIRCUMSTANCES IN WHICH IT WAS MADE.
ANY STATEMENT SO MODIFIED OR SUPERSEDED SHALL NOT BE DEEMED, EXCEPT AS SO
MODIFIED OR SUPERSEDED, TO CONSTITUTE A PART OF THIS APPENDIX B TO THE CIRCULAR.
Information has been incorporated by reference in this Appendix B to the
Circular from documents filed with securities commissions or similar authorities
in Canada. Copies of the documents incorporated herein by reference may be
obtained on request without charge from the Corporate Secretary of Sherritt at
5th Floor, 1133 Yonge Street, Toronto, Ontario M4T 2Y7, Telephone:
(416) 924-4551 or via SEDAR at www.sedar.com. For the purpose of the Province of
Quebec, this document contains information to be completed by consulting the
permanent information record. A copy of the permanent information record may be
obtained from the Corporate Secretary of Sherritt at the above-mentioned address
and telephone number or via SEDAR at www.sedar.com.
B-37
GLOSSARY FOR APPENDIX B
"MW" means a megawatt and is equal to 1,000 kW.
"MWH" means a megawatt hour and is equal to 1,000 kWh.
"PROBABLE" with respect to coal and ore reserves means those reserves for
which tonnage is computed partly from specific measurements, and partly from
projection for a reasonable distance on geological evidence, and for which the
sites available for inspection, measurement and sampling are too widely or
otherwise inappropriately spaced to be classified as "proven". The confidence
level for reported probable tonnage is between 80% and 90%.
"PROVEN" with respect to coal and ore reserves means those reserves for
which tonnage is computed from dimensions revealed in outcrops, trenches,
underground workings or drill holes and for which the sites for inspection,
sampling and measurement are so spaced with respect to the complexity of seam
geometry within the deposit that the size and shape of the deposit is
established to within a level of confidence of 90%.
"TON" means 2,000 pounds.
"TONNE" means a metric tonne equal to 1.102 tons (short) or 2,205 pounds.
"W" or "WATT" is a scientific unit of electric power representing the rate or
work of one joule per second.
B-38
CERTIFICATE OF SHERRITT INTERNATIONAL CORPORATION
DATED: December 16, 2002
The disclosure in this Appendix B contains no untrue statement of a material
fact and does not omit to state a material fact that is required to be stated or
that is necessary to make a statement not misleading in light of the
circumstances in which it was made.
SHERRITT INTERNATIONAL CORPORATION
(Signed) DENNIS G. MASCHMEYER (Signed) JOWDAT WAHEED
President and Senior Vice President and
Chief Executive Officer Chief Financial Officer
On behalf of the Board of Directors
(Signed) IAN W. DELANEY (Signed) DANIEL P. OWEN
Chairman and Director Director
B-39
APPENDIX C
FINANCIAL STATEMENTS
APPENDIX C
INDEX OF FINANCIAL STATEMENTS
Page
--------
SHERRITT INTERNATIONAL CORPORATION
PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Compilation report...................................... C-4
Pro forma consolidated condensed statement of operations
for the year ended December 31, 2001................... C-5
Pro forma consolidated condensed statement of operations
for the nine months ended September 30, 2002........... C-7
Pro forma consolidated condensed balance sheet as at
September 30, 2002..................................... C-9
Notes to pro forma consolidated condensed financial
statements............................................. C-11
SHERRITT COAL ACQUISITION INC. AND CANADIAN COAL TRUST
PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Compilation report...................................... C-22
Pro forma consolidated condensed statements of income
for the year ended December 31, 2001................... C-23
Pro forma consolidated condensed statements of income
for the nine months ended September 30, 2002........... C-25
Pro forma consolidated condensed balance sheets as at
September 30, 2002..................................... C-27
Notes to pro forma consolidated condensed financial
statements............................................. C-29
SHERRITT INTERNATIONAL CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
Auditors' report........................................ C-36
Consolidated balance sheets............................. C-37
Consolidated statements of operations................... C-38
Consolidated statements of retained earnings
(deficit).............................................. C-39
Consolidated statements of cash flow.................... C-40
Notes to consolidated financial statements.............. C-41
SHERRITT COAL ACQUISITION INC.
BALANCE SHEET
Auditors' report........................................ C-82
Balance sheet........................................... C-83
Notes to the balance sheet.............................. C-84
CANADIAN COAL TRUST
BALANCE SHEET
Auditors' report........................................ C-86
Balance sheet........................................... C-87
Notes to the balance sheet.............................. C-88
LUSCAR COAL INCOME FUND
FINANCIAL STATEMENTS
Auditors' report........................................ C-90
Balance sheets.......................................... C-91
Statements of earnings.................................. C-92
Statements of unitholders' equity....................... C-93
Statements of cash flows................................ C-94
Notes to financial statements........................... C-95
LUSCAR COAL LTD.
CONSOLIDATED FINANCIAL STATEMENTS
Auditors' report........................................ C-106
Consolidated balance sheets............................. C-107
Consolidated statements of deficit...................... C-108
Consolidated statements of earnings..................... C-109
Consolidated statements of cash flows................... C-110
Notes to consolidated financial statements.............. C-111
C-2
SHERRITT INTERNATIONAL CORPORATION
PRO FORMA CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS
(UNAUDITED)
C-3
COMPILATION REPORT
To the Directors of Sherritt International Corporation
We have reviewed, as to compilation only, the accompanying unaudited
pro forma consolidated condensed balance sheets of Sherritt International
Corporation as at September 30, 2002 and the unaudited pro forma consolidated
condensed statements of operations for the nine month period ended
September 30, 2002 and year ended December 31, 2001. These pro forma financial
statements have been prepared for inclusion in the Enhanced Offer and Circular
relating to the offer by Sherritt Coal Acquisition Inc. to purchase all of the
outstanding shares of Fording Inc. In our opinion, the unaudited pro forma
consolidated condensed balance sheets and the unaudited pro forma consolidated
condensed statements of operations have been properly compiled to give effect to
the proposed transactions and assumptions described in the notes thereto.
Deloitte & Touche LLP
Chartered Accountants
Toronto, Canada
December 16, 2002
COMMENTS FOR UNITED STATES READERS ON DIFFERENCES BETWEEN CANADIAN AND UNITED
STATES REPORTING STANDARDS
The above report, provided solely pursuant to Canadian requirements, is
expressed in accordance with standards of reporting generally accepted in
Canada. Such standards contemplate the expression of an opinion with respect to
the compilation of pro forma financial statements. United States standards do
not provide for the expression of an opinion on the compilation of pro forma
financial statements. To report in conformity with United States standards on
the reasonableness of the pro forma adjustments and their application to the
pro forma financial statements requires an examination or review substantially
greater in scope than the review we have conducted. Consequently, we are unable
to express any opinion in accordance with standards of reporting generally
accepted in the United States with respect to the compilation of the
accompanying unaudited pro forma financial information.
Deloitte & Touche LLP
Chartered Accountants
Toronto, Canada
December 16, 2002
C-4
SHERRITT INTERNATIONAL CORPORATION ("SHERRITT")
PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2001
(UNAUDITED)
(MILLIONS OF CANADIAN DOLLARS, EXCEPT PER SHARE AMOUNTS)
MAXIMUM CASH (NOTE 2)
Pro forma
Sherritt Luscar(1) Fording(2) adjustments Notes Pro forma
-------- --------- ---------- ----------- --------- ---------
Revenue................................. 636.6 115.1 1,000.4 (1,000.4) 3(a)(i) 751.7
----- ----- ------- -------- -------
Cost of sales, selling, general and
administrative expenses............... 439.4 95.9 754.2 (754.2) 3(a)(i) 535.3
Depletion and amortization.............. 118.8 17.2 69.8 (69.8) 3(a)(i) 134.8
(1.7) 3(a)(ii)
0.5 3(a)(ii)
Write-down of Anaconda investment....... 23.4 -- -- -- 23.4
Amortization of goodwill................ 1.4 -- -- -- 1.4
Share of loss of equity investments..... 0.6 -- -- 3.6 3(a)(i) 4.2
Interest income on SCAI Notes........... -- -- -- (29.7) 3(a)(iii) (29.7)
Interest and other expenses............. (4.4) 7.3 12.6 (12.6) 3(a)(i) 30.7
1.9 3(a)(iv)
25.9 3(a)(v)
Minority interest....................... 1.1 -- -- -- 1.1
Takeover response costs................. -- 6.1 -- (6.1) 3(a)(vi) --
----- ----- ------- -------- -------
EARNINGS (LOSS) BEFORE INCOME TAXES..... 56.3 (11.4) 163.8 (158.2) 50.5
Income taxes (recovery)................. 4.7 (16.0) 69.2 (64.9) 3(a)(vii) (7.0)
----- ----- ------- -------- -------
NET EARNINGS............................ 51.6 4.6 94.6 (93.3) 57.5
===== ===== ======= ======== =======
NET EARNINGS PER RESTRICTED VOTING SHARE
Basic................................... 0.34 0.40
Diluted................................. 0.33 0.37
WEIGHTED AVERAGE NUMBER OF RESTRICTED
VOTING SHARES OUTSTANDING (MILLIONS)
Basic................................... 88.4 88.4
Diluted................................. 157.0 157.0
------------
(1) Represents Sherritt's 50% interest in the combined statement of earnings of
Luscar Coal Income Fund and Luscar Coal Ltd. from January 1 to May 11, 2001.
(2) Represents the consolidated statement of earnings of Fording Inc. for the
year ended December 31, 2001.
C-5
SHERRITT INTERNATIONAL CORPORATION ("SHERRITT")
PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2001
(UNAUDITED)
(MILLIONS OF CANADIAN DOLLARS, EXCEPT PER SHARE AMOUNTS)
MAXIMUM TRUST UNITS (NOTE 2)
Pro forma
Sherritt Luscar(1) Fording(2) adjustments Notes Pro forma
-------- --------- ---------- ----------- --------- ---------
Revenue................................ 636.6 115.1 1,000.4 (1,000.4) 3(b)(i) 751.7
----- ----- ------- -------- -----
Cost of sales, selling, general and
administrative expenses.............. 439.4 95.9 754.2 (754.2) 3(b)(i) 535.3
Depletion and amortization............. 118.8 17.2 69.8 (69.8) 3(b)(i) 134.4
(1.7) 3(b)(ii)
0.1 3(b)(ii)
Write-down of Anaconda investment...... 23.4 -- -- -- 23.4
Amortization of goodwill............... 1.4 -- -- -- 1.4
Share of loss of equity investments.... 0.6 -- -- 1.0 3(b)(i) 1.6
Interest income on SCAI Notes.......... -- -- -- (12.5) 3(b)(iii) (12.5)
Interest and other expenses............ (4.4) 7.3 12.6 (12.6) 3(b)(i) 9.1
1.9 3(b)(iv)
4.3 3(b)(v)
Minority interest...................... 1.1 -- -- -- 1.1
Takeover response costs................ -- 6.1 -- (6.1) 3(b)(vi) --
----- ----- ------- -------- -----
EARNINGS (LOSS) BEFORE INCOME TAXES.... 56.3 (11.4) 163.8 (150.8) 57.9
Income taxes (recovery)................ 4.7 (16.0) 69.2 (62.8) 3(b)(vii) (4.9)
----- ----- ------- -------- -----
NET EARNINGS........................... 51.6 4.6 94.6 (88.0) 62.8
===== ===== ======= ======== =====
NET EARNINGS PER RESTRICTED VOTING
SHARE
Basic.................................. 0.34 0.46
Diluted................................ 0.33 0.40
WEIGHTED AVERAGE NUMBER OF RESTRICTED
VOTING SHARES OUTSTANDING (MILLIONS)
Basic.................................. 88.4 88.4
Diluted................................ 157.0 157.0
------------
(1) Represents Sherritt's 50% interest in the combined statement of earnings of
Luscar Coal Income Fund and Luscar Coal Ltd. from January 1 to May 11, 2001.
(2) Represents the consolidated statement of earnings of Fording Inc. for the
year ended December 31, 2001.
C-6
SHERRITT INTERNATIONAL CORPORATION ("SHERRITT")
PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2002
(UNAUDITED)
(MILLIONS OF CANADIAN DOLLARS, EXCEPT PER SHARE AMOUNTS)
MAXIMUM CASH (NOTE 2)
Pro forma
Sherritt Fording(1) adjustments Notes Pro forma
-------- ---------- ----------- --------- ---------
Revenue.......................................... 609.5 669.8 (669.8) 3(a)(i) 609.5
----- ----- ------ -----
Cost of sales, selling, general and
administrative expenses........................ 394.4 504.7 (504.7) 3(a)(i) 394.4
Depletion and amortization....................... 109.8 53.9 (53.9) 3(a)(i) 110.2
0.4 3(a)(ii)
Write-down of Anaconda investment................ 37.0 -- -- 37.0
Brooks capital expense........................... -- 7.9 (7.9) 3(a)(i) --
Share of loss of equity investments.............. 1.7 -- 5.8 3(a)(i) 7.5
Interest income on SCAI Notes.................... -- -- (20.6) 3(a)(iii) (20.6)
Interest and other expenses...................... 10.0 4.2 (4.2) 3(a)(i) 29.4
19.4 3(a)(v)
Minority interest................................ 0.7 -- -- 0.7
----- ----- ------ -----
EARNINGS BEFORE INCOME TAXES..................... 55.9 99.1 (104.1) 50.9
Income taxes..................................... 10.1 50.8 (50.5) 3(a)(vii) 10.4
----- ----- ------ -----
NET EARNINGS..................................... 45.8 48.3 (53.6) 40.5
===== ===== ====== =====
NET EARNINGS PER RESTRICTED VOTING SHARE
Basic............................................ 0.29 0.24
Diluted.......................................... 0.28 0.24
WEIGHTED AVERAGE NUMBER OF RESTRICTED VOTING
SHARES OUTSTANDING (MILLIONS)
Basic............................................ 97.7 97.7
Diluted.......................................... 166.4 166.4
------------
(1) Represents the consolidated statement of earnings of Fording Inc. for the
nine months ended September 30, 2002.
C-7
SHERRITT INTERNATIONAL CORPORATION ("SHERRITT")
PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2002
(UNAUDITED)
(MILLIONS OF CANADIAN DOLLARS, EXCEPT PER SHARE AMOUNTS)
MAXIMUM TRUST UNITS (NOTE 2)
Pro forma
Sherritt Fording(1) adjustments Notes Pro forma
-------- ---------- ----------- --------- ---------
Revenue.......................................... 609.5 669.8 (669.8) 3(b)(i) 609.5
----- ----- ------ -----
Cost of sales, selling, general and
administrative expenses........................ 394.4 504.7 (504.7) 3(b)(i) 394.4
Depletion and amortization....................... 109.8 53.9 (53.9) 3(b)(i) 109.9
0.1 3(b)(ii)
Write-down of Anaconda investment................ 37.0 -- -- 37.0
Brooks capital expense........................... -- 7.9 (7.9) 3(b)(i) --
Share of loss of equity investments.............. 1.7 -- 2.2 3(b)(i) 3.9
Interest income on SCAI Notes.................... -- -- (8.5) 3(b)(iii) (8.5)
Interest and other expenses...................... 10.0 4.2 (4.2) 3(b)(i) 13.2
3.2 3(b)(v)
Minority interest................................ 0.7 -- -- 0.7
----- ----- ------ -----
EARNINGS BEFORE INCOME TAXES..................... 55.9 99.1 (96.1) 58.9
Income taxes..................................... 10.1 50.8 (48.6) 3(b)(vii) 12.3
----- ----- ------ -----
NET EARNINGS..................................... 45.8 48.3 (47.5) 46.6
===== ===== ====== =====
NET EARNINGS PER RESTRICTED VOTING SHARE
Basic............................................ 0.29 0.30
Diluted.......................................... 0.28 0.28
WEIGHTED AVERAGE NUMBER OF RESTRICTED VOTING
SHARES OUTSTANDING (MILLIONS)
Basic............................................ 97.7 97.7
Diluted.......................................... 166.4 166.4
------------
(1) Represents the consolidated statement of earnings of Fording Inc. for the
nine months ended September 30, 2002.
C-8
SHERRITT INTERNATIONAL CORPORATION ("SHERRITT")
PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET
SEPTEMBER 30, 2002
(UNAUDITED)
(MILLIONS OF CANADIAN DOLLARS)
MAXIMUM CASH (NOTE 2)
Pro forma
Sherritt Fording(1) adjustments Notes Pro forma
-------- ---------- ----------- ---------- ----------
ASSETS
CURRENT ASSETS
Cash and short-term investments............... 253.0 6.8 (214.1) 2(d)(i) 45.7
Advances and loans receivable................. 42.4 -- -- 42.4
Accounts receivable........................... 224.3 41.3 (41.3) 2(d)(ii) 224.3
Inventories................................... 114.8 186.8 (186.8) 2(d)(ii) 114.8
Overburden removal costs...................... 15.6 -- -- 15.6
Prepaid expenses.............................. 9.0 10.4 (10.4) 2(d)(ii) 9.0
Future income taxes........................... 3.7 -- -- 3.7
------- ------- ------- -------
662.8 245.3 (452.6) 455.5
CAPITAL ASSETS.................................. 1,118.9 789.3 (789.3) 2(d)(iii) 1,118.9
INVESTMENTS..................................... 101.0 -- 5.0 2(d)(iv) 106.0
SCAI SERIES B NOTES............................. -- -- 340.0 2(d)(v) 340.0
FUTURE INCOME TAXES............................. 29.7 -- -- 29.7
OTHER ASSETS.................................... 98.3 10.5 (10.5) 2(d)(iii) 105.6
7.3 2(d)(iii)
------- ------- ------- -------
2,010.7 1,045.1 (900.1) 2,155.7
======= ======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term debt and bank indebtedness......... 32.2 10.7 (10.7) 2(d)(vi) 32.2
Accounts payable and accrued liabilities...... 109.6 74.8 (74.8) 2(d)(vi) 109.6
Current portion of long-term debt............. 12.9 -- -- 12.9
Site restoration and abandonment.............. 10.5 -- -- 10.5
Future income taxes........................... 1.4 -- -- 1.4
Swaps and forward contracts................... 1.8 -- -- 1.8
------- ------- ------- -------
168.4 85.5 (85.5) 168.4
LONG-TERM DEBT.................................. 244.2 136.0 9.0 2(d)(vii) 389.2
FUTURE INCOME TAXES............................. 203.9 185.7 (185.7) 2(d)(viii) 203.9
MINORITY INTEREST............................... 4.7 -- -- 4.7
OTHER LONG-TERM LIABILITIES..................... 44.0 62.9 (62.9) 2(d)(viii) 44.0
------- ------- ------- -------
665.2 470.1 (325.1) 810.2
------- ------- ------- -------
SHAREHOLDERS' EQUITY
Convertible debentures........................ 587.3 -- -- 587.3
Capital stock................................. 451.0 122.1 (122.1) 2(d)(ix) 451.0
Contributed surplus........................... 199.8 -- -- 199.8
Foreign currency translation adjustments...... -- 34.3 (34.3) 2(d)(ix) --
Retained earnings............................. 107.4 418.6 (418.6) 2(d)(ix) 107.4
------- ------- ------- -------
1,345.5 575.0 (575.0) 1,345.5
------- ------- ------- -------
2,010.7 1,045.1 (900.1) 2,155.7
======= ======= ======= =======
------------
(1) Represents the consolidated balance sheet of Fording Inc. as at
September 30, 2002.
C-9
SHERRITT INTERNATIONAL CORPORATION ("SHERRITT")
PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET
SEPTEMBER 30, 2002
(UNAUDITED)
(MILLIONS OF CANADIAN DOLLARS)
MAXIMUM TRUST UNITS (NOTE 2)
Pro forma
Sherritt Fording(1) adjustments Notes Pro forma
-------- ---------- ----------- ---------- ----------
ASSETS
CURRENT ASSETS
Cash and short-term investments............... 253.0 6.8 (165.8) 2(d)(i) 94.0
Advances and loans receivable................. 42.4 -- -- 42.4
Accounts receivable........................... 224.3 41.3 (41.3) 2(d)(ii) 224.3
Inventories................................... 114.8 186.8 (186.8) 2(d)(ii) 114.8
Overburden removal costs...................... 15.6 -- -- 15.6
Prepaid expenses.............................. 9.0 10.4 (10.4) 2(d)(ii) 9.0
Future income taxes........................... 3.7 -- -- 3.7
------- ------- -------- -------
662.8 245.3 (404.3) 503.8
CAPITAL ASSETS.................................. 1,118.9 789.3 (789.3) 2(d)(iii) 1,118.9
INVESTMENTS..................................... 101.0 -- 31.5 2(d)(iv) 132.5
SCAI SERIES B NOTES............................. -- -- 126.0 2(d)(v) 126.0
FUTURE INCOME TAXES............................. 29.7 -- -- 29.7
OTHER ASSETS.................................... 98.3 10.5 (10.5) 2(d)(iii) 99.8
1.5 2(d)(iii)
======= ======= ======== =======
2,010.7 1,045.1 (1,045.1) 2,010.7
======= ======= ======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term debt and bank indebtedness......... 32.2 10.7 (10.7) 2(d)(vi) 32.2
Accounts payable and accrued liabilities...... 109.6 74.8 (74.8) 2(d)(vi) 109.6
Current portion of long-term debt............. 12.9 -- -- 12.9
Site restoration and abandonment.............. 10.5 -- -- 10.5
Future income taxes........................... 1.4 -- -- 1.4
Swaps and forward contracts................... 1.8 -- -- 1.8
------- ------- -------- -------
168.4 85.5 (85.5) 168.4
LONG-TERM DEBT.................................. 244.2 136.0 (136.0) 2(d)(vii) 244.2
FUTURE INCOME TAXES............................. 203.9 185.7 (185.7) 2(d)(viii) 203.9
MINORITY INTEREST............................... 4.7 -- -- 4.7
OTHER LONG-TERM LIABILITIES..................... 44.0 62.9 (62.9) 2(d)(viii) 44.0
------- ------- -------- -------
665.2 470.1 (470.1) 665.2
------- ------- -------- -------
SHAREHOLDERS' EQUITY
Convertible debentures........................ 587.3 -- -- 587.3
Capital stock................................. 451.0 122.1 (122.1) 2(d)(ix) 451.0
Contributed surplus........................... 199.8 -- -- 199.8
Foreign currency translation adjustments...... -- 34.3 (34.3) 2(d)(ix) --
Retained earnings............................. 107.4 418.6 (418.6) 2(d)(ix) 107.4
------- ------- -------- -------
1,345.5 575.0 (575.0) 1,345.5
------- ------- -------- -------
2,010.7 1,045.1 (1,045.1) 2,010.7
======= ======= ======== =======
------------
(1) Represents the consolidated balance sheet of Fording Inc. as at
September 30, 2002.
C-10
SHERRITT INTERNATIONAL CORPORATION ("SHERRITT")
NOTES TO PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(ALL TABULAR AMOUNTS IN MILLIONS OF DOLLARS)
1. BASIS OF PRESENTATION
The unaudited pro forma consolidated condensed financial statements have
been prepared by management of Sherritt in accordance with Canadian
generally accepted accounting principles for inclusion in the Enhanced Offer
and Circular ("Enhanced Offer") relating to the offer of Sherritt Coal
Acquisition Inc. ("SCAI") to purchase all of the outstanding shares of
Fording Inc. ("Fording").
The acquisition of 50% of Luscar Coal Income Fund was accounted for by
Sherritt in its audited consolidated financial statements for the year ended
December 31, 2001 using the purchase method of accounting. Accordingly,
Sherritt's audited consolidated financial statements for the year ended
December 31, 2001 includes 50% of the combined financial statements of
Luscar Coal Income Fund and Luscar Coal Ltd. from May 12, 2001. The
pro forma consolidated statements of operations for the year ended
December 31, 2001 give effect to the acquisition of Luscar Coal Income Fund
as if it had occurred on January 1, 2001.
The pro forma consolidated balance sheets have been prepared to give effect
to the transactions related to the proposed acquisition of Fording as if
they had occurred on the balance sheet date while the pro forma consolidated
statements of income give effect to the acquisition of Luscar Coal Income
Fund and transactions related to the proposed acquisition of Fording as if
they had occurred at January 1, 2001. The pro forma financial statements may
not be indicative of results that actually would have occurred if the events
reflected therein had been in effect on the dates indicated or of the
results that may be obtained in the future.
The information and pro forma adjustments relating to Luscar Coal Income
Fund and Luscar Coal Ltd. for the year ended December 31, 2001 were derived
from the unaudited combined financial statements of Luscar Coal Income Fund
and Luscar Coal Ltd. for the period January 1 to May 11, 2001.
The information and pro forma adjustments related to Fording included in
these statements were derived solely from publicly available documents on
file with the Canadian securities regulatory authorities. Consent of
Fording's auditors to use of their audit report has not been obtained.
The pro forma financial statements should be read in conjunction with
Sherritt's consolidated financial statements and the financial statements of
Luscar Coal Income Fund and Luscar Coal Ltd., all of which are included
elsewhere in the Enhanced Offer and Fording's audited consolidated financial
statements as at and for the year ended December 31, 2001 and unaudited
consolidated financial statements as at and for the nine months ended
September 30, 2002.
In accordance with the Companion Policy to Rule 41-501 of the Ontario
Securities Commission, adjustments included in pro forma financial
statements shall be limited to those which are "directly attributable to
specific completed or proposed transactions for which there are commitments
and for which the complete financial effects are objectively determinable".
There are a number of transactions contemplated and potential benefits
described in the Enhanced Offer that do not meet these criteria and,
accordingly, cannot be reflected in the pro forma financial statements.
These include:
- SCAI intends to enter into transactions involving Fording's thermal assets
with Sherritt Coal Partnership II ("SCP II"), a partnership between
Sherritt and Ontario Teachers' Pension Plan Board ("OTPP"), and Luscar
Energy Partnership (a partnership controlled by the ultimate partners of
SCP II) or subsidiaries of Luscar Energy Partnership. The effect of such
transactions, which will be subject to obtaining any required regulatory
and third party consents, would be such that SCAI will cease to have a
material economic participation in these thermal assets. Agreements are
not yet in place to effect these transactions.
- SCAI has an agreement in principle with Luscar Ltd. ("Luscar"), a
subsidiary of Luscar Energy Partnership, and CONSOL Energy Inc. ("CONSOL")
for the purchase of the jointly-owned Met Coal Assets, comprising the Line
Creek mine, the undeveloped Cheviot mine project and a 46.4% interest in
the Neptune Terminals, in exchange for 5.9 million trust units. Definitive
documentation has not yet been signed for this proposed transaction;
however, the Partnership has agreed in principle that the Partnership or
one of its affiliates will purchase the Exchange Rights or Units received
by CONSOL if CONSOL so elects. Also, this proposed transaction will be
subject to necessary regulatory and third party consents.
- SCAI also intends to enter into a put option agreement with Luscar and
CONSOL to sell the Luscar mine to SCAI in exchange for 0.5 million trust
units. Definitive documentation has not yet been signed for this proposed
transaction. Also, this proposed transaction will be subject to necessary
regulatory and third party consents.
- Uncertainty exists as to whether provisions exist in Fording's banking
facilities and foreign exchange contracts that would require early
termination of these arrangements upon a change of control. SCAI intends
to discharge all existing indebtedness of Fording, including any
indebtedness in respect of outstanding amounts under bank credit
facilities and foreign exchange swaps; however, the cost of discharging
these obligations is uncertain.
- SCAI and its subsidiaries intend to replace the bridge financing and a
$100 million working capital facility with a $425 million term facility
negotiated with a Canadian chartered bank which will bear interest at
rates consistent with investment grade facilities of this
C-11
SHERRITT INTERNATIONAL CORPORATION ("SHERRITT")
NOTES TO PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(ALL TABULAR AMOUNTS IN MILLIONS OF DOLLARS)
1. BASIS OF PRESENTATION (CONTINUED)
type. Because definitive agreements have not yet been signed for the term
facility, the effect of the lower interest rate is not reflected in the
pro forma financial statements.
- SCP II will not receive any distribution in respect of its interest in
SCAI during any quarter in 2003 unless Canadian Coal has first received
interest on Notes of SCAI equivalent to $1.05 per Unit in respect of each
calendar quarter, for a maximum quarterly subordination amount of
$11.25 million. The impact of this subordination feature would be a
reduction in Sherritt's pro forma net earnings, however, the actual impact
is not objectively determinable on the basis that pro forma information
was not available on a quarterly basis and that inclusion of the above
transactions would impact the amount of subordination.
In preparing these pro forma financial statements, no adjustments were made
to reflect operating synergies, general and administrative cost savings or
possible tax benefits that may result from the transaction. Restructuring
and other non-recurring costs are also excluded. The purchase price
calculation and allocation is based on estimates and the actual allocation
will vary from this estimate. Given these facts and the number of
transactions contemplated in the Enhanced Offer that are not reflected in
the pro forma financial statements and other uncertainties resulting from
the fact that management did not have access to the detailed records of
Fording when preparing the statements, these pro forma financial statements
differ from the results that would have been compiled and presented if
management had access to all pertinent information. These differences will
be material.
Financial statements require management to make estimates and assumptions
that affect the reported amounts of pro forma assets and liabilities at the
date of the balance sheets and the reported amounts of pro forma revenues
and expenses during the reported period. Actual results could differ from
those estimates.
The pro forma financial statements give effect to the assumptions that
approval has been obtained by the regulators for the listing of Canadian
Coal, that the Exchange Rights have been exchanged for trust units and that
the proposed transactions described in note 2 have occurred.
2. PRO FORMA TRANSACTION ASSUMPTIONS
Under the terms of the Enhanced Offer, each Fording shareholder will be
given the opportunity to elect the following consideration for each Fording
share:
- $35 in cash;
- one Exchange Right of Sherritt ("Exchange Right"), which will be
exchangeable into a trust unit of Canadian Coal; or
- a combination of cash and Exchange Rights.
In the event that more than 24.3 million Fording shares are elected for the
cash offer, the Enhanced Offer provides a pool of cash of $850 million and a
pool of approximately 27.1 million Exchange Rights, with an ascribed value
of $949 million. In this event, Fording shareholders will receive a
pro rata amount of cash and Exchange Rights, such that the total
consideration equals $850 million of cash and approximately 27.1 million
Exchange Rights.
A maximum amount of up to approximately 42,405,000 Exchange Rights will be
issued. In the event that elections for Exchange Rights exceed this maximum,
a pro rata amount of cash and Exchange Rights will be issued.
Ontario Teachers' Pension Plan Board owns approximately 3.2 million Fording
shares and has indicated its intention to elect for Exchange Rights.
The number of outstanding Fording shares on the date of the acquisition is
assumed to be approximately 51.4 million.
As discussed in note 1, management did not have access to the detailed
records of Fording. As a result, management has not attempted to estimate
fair value adjustments related to the purchase price allocation, other than
recognizing the unrealized loss as at September 30, 2002, of $151.9 million
before tax, on Fording's foreign exchange arrangements. The residual
difference between the purchase price and the book values after this
adjustment has been preliminarily allocated to goodwill.
The fair values of the assets and liabilities will be determined at the
actual date of acquisition and will differ from the amounts shown below in
the assumed pro forma purchase price allocation. This will include
valuations for surface coal reserves, customer contracts, land rights and
mine development projects, the impact of which will be a change in value of
capital assets and goodwill, offset in part by amortization of the above
assets, as well as other adjustments to allocate fair values to assets and
liabilities.
C-12
SHERRITT INTERNATIONAL CORPORATION ("SHERRITT")
NOTES TO PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(ALL TABULAR AMOUNTS IN MILLIONS OF DOLLARS)
2. PRO FORMA TRANSACTION ASSUMPTIONS (CONTINUED)
As the consideration paid to Fording shareholders may be in varying
proportions of cash and Exchange Rights, the pro forma financial statements
present two of the possible alternative scenarios. Unaudited pro forma
financial statements have been prepared under the scenarios that the maximum
cash is used or that the maximum number of Trust Units is issued, as
described below. These scenarios are named as "Maximum Cash", and "Maximum
Trust Units" to describe the scenario after completion of the exchange of
Exchange Rights for Trust Units.
A) SHERRITT COAL PARTNERSHIP II
The initial contribution by the partners of SCP II is up to $400 million
in cash, contributed equally by OTPP and Sherritt.
In the case of the Maximum Cash scenario, the additional cash required to
fund the cash component of the acquisition will be obtained from bridge
debt facilities. The pro forma adjustments reflect Sherritt's
proportionate share of such debt, being $145 million.
B) SCAI
The initial capitalization of SCAI is as follows:
Maximum Maximum
Cash Trust Units
--------- ------------
Common shares issued to Sherritt and SCP II................. 199.8 359.8
Series A Notes issued to Sherritt........................... 759.2 1,187.2
Series B Notes issued to SCP II............................. 680.0 252.0
Short-term debt............................................. 210.0 46.0
------- -------
1,849.0 1,845.0
======= =======
In exchange for:
Exchange Rights............................................. 949.0 1,484.0
Cash........................................................ 690.0 315.0
Proceeds from debt issue.................................... 210.0 46.0
------- -------
1,849.0 1,845.0
======= =======
C-13
SHERRITT INTERNATIONAL CORPORATION ("SHERRITT")
NOTES TO PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(ALL TABULAR AMOUNTS IN MILLIONS OF DOLLARS)
2. PRO FORMA TRANSACTION ASSUMPTIONS (CONTINUED)
Concurrently with the capitalization, SCAI acquires all of the
outstanding shares of Fording in exchange for a combination of cash and
Exchange Rights. The acquisition is accounted for by SCAI using the
purchase method of accounting for business combinations, as follows:
Maximum Maximum
Cash Trust Units
--------- ------------
ACQUISITION COSTS
Consideration in cash....................................... 850.0 315.0
Consideration in Exchange Rights............................ 949.0 1,484.0
Transaction costs incurred by SCAI.......................... 33.7 32.8
------- -------
1,832.7 1,831.8
======= =======
ALLOCATION OF ACQUISITION COST
Capital assets.............................................. 789.3 789.3
Goodwill.................................................... 1,406.7 1,406.9
Net working capital......................................... 78.8 78.8
Long-term debt.............................................. (136.0) (136.0)
Future income taxes......................................... (101.8) (102.9)
Foreign exchange arrangements............................... (151.9) (151.9)
Other assets and liabilities................................ (52.4) (52.4)
------- -------
1,832.7 1,831.8
======= =======
The remaining cash raised on the initial capitalization of SCAI is used
to pay financing fees associated with debt incurred to fund the
acquisition. These fees are recorded as follows:
Maximum Maximum
Cash Trust Units
--------- -----------
Prepaid expenses............................................ 9.7 6.6
Other assets................................................ 6.6 6.6
----- -----
16.3 13.2
===== =====
Following this transaction, SCAI would consolidate the operating results
and financial position of Fording.
The amounts above include takeover-related costs of $81.0 million to be
incurred by Fording, as disclosed in Fording's Supplement to the
Management Information Circular, which have been deducted from net
working capital. The related future tax benefit of $9.9 million has been
included in future income taxes. SCAI is expected to incur estimated
financing and transaction costs of $50.0 million and $46.0 million,
respectively, under the two scenarios. The related future tax benefit of
$16.3 million and $15.2 million, respectively, has also been reflected in
future income taxes.
C) CANADIAN COAL TRUST
The initial capitalization of Canadian Coal Trust is as follows:
Maximum Maximum
Cash Trust Units
--------- ------------
Trust Units issued to Sherritt.............................. 949.0 1,484.0
======= =======
In exchange for:
Common shares of SCAI held by Sherritt...................... 189.8 296.8
Series A Notes held by Sherritt............................. 759.2 1,187.2
------- -------
949.0 1,484.0
======= =======
C-14
SHERRITT INTERNATIONAL CORPORATION ("SHERRITT")
NOTES TO PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(ALL TABULAR AMOUNTS IN MILLIONS OF DOLLARS)
2. PRO FORMA TRANSACTION ASSUMPTIONS (CONTINUED)
Following approval by the regulators to provide for the free tradeability
of the Trust Units of Canadian Coal, the Exchange Rights held by the
ex-Fording shareholders are to be exchanged for Trust Units held by
Sherritt.
In the Maximum Trust Units scenario, SCP II will own 17.5% of SCAI and in
the Maximum Cash scenario, SCP II will own approximately 47.2% of SCAI.
Sherritt would proportionately consolidate its 50% interest in SCP II,
which, in turn, equity accounts for its investment in SCAI as a result of
various provisions in the proposed management agreement and shareholders
agreement which indicate that SCP II will be able to exert significant
influence over SCAI. Under equity accounting, SCP II's share of the
assets and liabilities of SCAI and its subsidiaries would be shown in the
balance sheet on a net basis as an investment. The facts and
circumstances which exist after the acquisition will determine the actual
method of accounting for the interest in SCAI.
MAXIMUM CASH
SCP II acquires a 47.2% ownership interest in SCAI for $690.0 million,
comprising $10.0 million in share capital and $680.0 million in Series B
Notes. Canadian Coal Trust acquires a 52.8% ownership interest in SCAI
for $949.0 million, comprising $189.8 million in equity and
$759.2 million in Series A Notes.
MAXIMUM TRUST UNITS
SCP II acquires a 17.5% ownership interest in SCAI for $315.0 million,
comprising $63.0 million in share capital and $252.0 million Series B
Notes. Canadian Coal Trust acquires an 82.5% ownership interest in SCAI
for $1,484.0 million, comprising $296.8 million in equity and
$1,187.2 million in Series A Notes.
Under the Maximum Units scenario, lower external debt is required to
finance the purchase of the Fording shares. In such an instance, SCAI has
indicated its intention to draw down its debt facilities and to pay a
distribution to the shareholders. The effect of this proposed possible
transaction is not included in the pro forma financial statements.
D) PRO FORMA ADJUSTMENTS -- BALANCE SHEET
Maximum Maximum
Cash Trust Units
--------- ------------
(i) CASH
Capitalization of SCP II.................................. (200.0) (157.5)
Financing costs........................................... (7.3) (1.5)
Fording elimination....................................... (6.8) (6.8)
------ ------
(214.1) (165.8)
====== ======
(ii) OTHER ASSETS -- CURRENT -- FORDING ELIMINATIONS
Accounts receivable....................................... (41.3) (41.3)
====== ======
Inventory................................................. (186.8) (186.8)
====== ======
Prepaid expenses.......................................... (10.4) (10.4)
====== ======
(iii) OTHER ASSETS -- NON-CURRENT
Capital assets -- Fording elimination..................... (789.3) (789.3)
====== ======
Other assets -- Fording elimination....................... (10.5) (10.5)
====== ======
-- Deferred Financing costs.................... 7.3 1.5
====== ======
(iv) INVESTMENTS
Shares of SCAI............................................ 5.0 31.5
====== ======
(v) SCAI SERIES B NOTES
Investment in Notes....................................... 340.0 126.0
====== ======
C-15
SHERRITT INTERNATIONAL CORPORATION ("SHERRITT")
NOTES TO PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(ALL TABULAR AMOUNTS IN MILLIONS OF DOLLARS)
2. PRO FORMA TRANSACTION ASSUMPTIONS (CONTINUED)
Maximum Maximum
Cash Trust Units
--------- ------------
(vi) OTHER CURRENT LIABILITIES -- FORDING ELIMINATIONS
Short-term debt and bank indebtedness..................... (10.7) (10.7)
====== ======
Accounts payable and accrued liabilities.................. (74.8) (74.8)
====== ======
(vii) LONG-TERM DEBT
-- Long-term debt -- Fording elimination... (136.0) (136.0)
-- Bridge debt............................. 145.0 --
------ ------
9.0 (136.0)
====== ======
(viii) OTHER LONG-TERM -- FORDING ELIMINATIONS
Future income taxes....................................... (185.7) (185.7)
====== ======
Other long-term liabilities............................... (62.9) (62.9)
====== ======
(ix) SHAREHOLDERS' EQUITY -- FORDING ELIMINATIONS
Capital stock............................................. (122.1) (122.1)
Foreign currency translation adjustments.................. (34.3) (34.3)
Retained earnings......................................... (418.6) (418.6)
------ ------
(575.0) (575.0)
====== ======
3. PRO FORMA ADJUSTMENTS -- STATEMENT OF OPERATIONS
(a) Maximum Cash
As described in note 2, if the Maximum Cash scenario occurs, SCP II would
own 47.2% of SCAI. SCP II would equity account for this investment.
Sherritt would proportionately consolidate its 50% interest in SCP II.
The following describes pro forma adjustments to the consolidated
statement of operations as if the transactions had occurred at the
beginning of the periods:
(i) Revenue and expenses of Fording have been eliminated to reflect
equity accounting for this investment.
(ii) Depletion and amortization expense has been adjusted to reflect the
amortization of adjustments to the carrying value of Luscar Coal
Income Fund's assets arising from the acquisition of Luscar by
Sherritt ($1.7 million in 2001) and amortization of deferred
financing costs relating to financing associated with the Fording
transaction.
(iii) Interest to a maximum of 15% per annum, limited to the extent of
SCAI's distributable cash, has been recognized as income.
(iv) Interest and other expense has been adjusted to reflect the
reduction in interest income from lower cash and short-term
investment balances resulting from the cash component of the Luscar
acquisition.
(v) Interest and other expense has been adjusted to reflect the impacts
of the Fording transaction as follows:
Nine months ended
September 30, Year ended
2002 December 31, 2001
--------------------- ---------------------
Maximum Maximum
Maximum Trust Maximum Trust
Cash Units Cash Units
--------- --------- --------- ---------
Interest on financing of the acquisition.................... 15.2 -- 20.3 --
Reduction in interest income from cash used in the
acquisitions.............................................. 4.2 3.2 5.6 4.3
---- --- ---- ---
19.4 3.2 25.9 4.3
==== === ==== ===
(vi) Direct costs incurred by Luscar Coal Income Fund to respond to the
takeover bid have been eliminated.
(vii) Income tax expense has been adjusted for the impact of the above
items.
C-16
SHERRITT INTERNATIONAL CORPORATION ("SHERRITT")
NOTES TO PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(ALL TABULAR AMOUNTS IN MILLIONS OF DOLLARS)
3. PRO FORMA ADJUSTMENTS -- STATEMENT OF OPERATIONS (CONTINUED)
(b) Maximum Trust Units
As described in note 2, if the Maximum Trust Units scenario occurs,
SCP II would own 17.5% of SCAI. In such an instance, SCP II would equity
account for this investment and Sherritt would proportionately
consolidate its 50% interest in SCP II. The following describes
pro forma adjustments to the consolidated statement of operations as if
the transaction had occurred at the beginning of the periods:
(i) Revenue and expenses of Fording have been eliminated to reflect the
effects of equity accounting for this investment.
(ii) Depletion and amortization expense has been adjusted to reflect
amortization of adjustments to the carrying value of Luscar Coal
Income Fund's assets arising from the Luscar acquisition
($1.7 million in 2001) and amortization of deferred financing costs
relating to financing associated with the Fording transaction.
(iii) Interest to a maximum of 15% per annum, limited to the extent of
SCAI's distributable cash, has been recognized as income.
(iv) Interest and other expense has been adjusted to reflect the
reduction in interest income from lower cash and short-term
investment balances resulting from the cash component of the Luscar
acquisition.
(v) Interest and other expenses have been adjusted to reflect the
impacts of the Fording transaction as disclosed in
Note 3(a)(v) above.
(vi) Direct costs incurred by Luscar Coal Income Fund to respond to the
takeover bid have been eliminated.
(vii) Income tax expense has been adjusted for the impact of the above
items.
4. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
The pro forma consolidated financial statements of Sherritt have been
prepared in accordance with Canadian generally accepted accounting
principles ("Canadian GAAP") which, in most respects, conform to
United States generally accepted accounting principles ("U.S. GAAP").
Fording does not provide information regarding differences between Canadian
and U.S. GAAP in its quarterly financial statements and as such no
pro forma information is provided on differences between Canadian and
U.S. GAAP that may exist for pro forma information presented under
Canadian GAAP as at and for the nine months ended September 30, 2002.
Readers are cautioned that differences from U.S. GAAP as at and for the nine
months ended September 30, 2002, if any, could be material. Significant
differences between Canadian and U.S. GAAP for the year ended December 31,
2001 are as follows:
A. Pro forma Statement of Operations
Year ended December 31, 2001
------------------------------------------------------
Pro forma Sherritt
---------------------
Maximum
Maximum Trust
Sherritt Luscar Fording Cash Units
-------- -------- -------- --------- ---------
NET INCOME UNDER CANADIAN GAAP.............................. 51.6 4.6 94.6 57.5 62.8
Impact of U.S. GAAP, net of tax
Derivative financial instruments (a)...................... (1.1) (2.9) (55.8) (17.2) (8.9)
Stock based compensation (b).............................. -- -- (3.2) (0.8) (0.3)
Convertible debentures (e)................................ (24.8) -- -- (24.8) (24.8)
Pension valuation allowance (f)........................... 0.3 -- -- 0.3 0.3
Full cost accounting (g).................................. (6.1) -- -- (6.1) (6.1)
Income tax rate changes (h)............................... 2.9 (0.1) -- 2.8 2.8
Capitalized interest (i).................................. 0.3 -- -- 0.3 0.3
Change in accounting policies (k)......................... -- 1.6 -- 1.6 1.6
----- ----- ----- ----- -----
NET INCOME UNDER U.S. GAAP.................................. 23.1 3.2 35.6 13.6 27.7
===== ===== ===== ===== =====
C-17
SHERRITT INTERNATIONAL CORPORATION ("SHERRITT")
NOTES TO PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(ALL TABULAR AMOUNTS IN MILLIONS OF DOLLARS)
4. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
B. Pro forma Statement of Comprehensive Income
Comprehensive income is measured in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income".
This standard defines comprehensive income as all changes in equity other
than those resulting from investments by owners and distributions to owners.
The concept of comprehensive income does not exist under Canadian GAAP.
Year ended December 31, 2001
------------------------------------------------------
Pro forma Sherritt
---------------------
Maximum
Maximum Trust
Sherritt Luscar Fording Cash Units
-------- -------- -------- --------- ---------
NET INCOME UNDER U.S. GAAP.................................. 23.1 3.2 35.6 13.6 27.7
Other comprehensive income, net of tax
Cumulative translation adjustment (c)..................... -- -- 14.4 3.4 1.3
Investments (d)
Unrealized loss......................................... (39.6) -- -- (39.6) (39.6)
Reclassification to net earnings of realized losses and
write-downs........................................... 19.0 -- -- 19.0 19.0
Minimum pension liability (j)............................. -- -- (3.3) (0.8) (0.3)
----- ----- ----- ----- -----
(20.6) -- 11.1 (18.0) (19.6)
----- ----- ----- ----- -----
COMPREHENSIVE INCOME (LOSS) UNDER U.S. GAAP................. 2.5 3.2 46.7 (4.4) 8.1
===== ===== ===== ===== =====
C. Balance Sheet
Insufficient information is included in Fording's financial statements to
provide a September 30, 2002 balance sheet prepared in accordance with
U.S. GAAP.
(A) DERIVATIVE FINANCIAL INSTRUMENTS
Under United States GAAP, the Corporation is required to adopt
SFAS No. 133 and its related amendments SFAS No. 137 and SFAS No. 138.
SFAS No. 133 requires that all derivative instruments be recorded on the
balance sheet at fair value. Derivatives that are not designated as
hedges for accounting purposes must be adjusted to fair value through
income. If the derivative is designated and is effective as a hedge for
accounting purposes, depending on the nature of the hedge, changes in the
fair value of derivatives are either offset against the change in the
fair value of hedged and underlying assets, liabilities, or firm
commitments through earnings or recognized in other comprehensive income
until the hedged item is recognized in earnings. The ineffective portion
of a hedging derivative's change in fair value is recognized in earnings
immediately. Sherritt, Luscar and Fording did not designate any
instruments as hedges for the purposes of U.S. GAAP. The adjustment
presented for Sherritt is net of the amortization of effects on the
purchase price allocations for Sherritt's acquisition of Luscar.
(B) STOCK-BASED COMPENSATION
Under U.S. GAAP, a compensation expense must be recorded if the intrinsic
value of stock options is not exactly the same immediately before and
after an equity restructuring. As a result of a prior restructuring,
Fording had stock options outstanding which had a different intrinsic
value after the restructuring than prior to the restructuring.
Canadian GAAP does not require revaluation of these options.
(C) CUMULATIVE FOREIGN CURRENCY TRANSLATION
Under U.S. GAAP, changes in the cumulative foreign currency translation
accounts are considered to be a component of other comprehensive income.
(D) INVESTMENTS
U.S. GAAP requires that certain long-term investments not held for
trading be recorded at fair value, with unrealized holding gains and
losses excluded from the determination of earnings and reported as a
separate component of other comprehensive income.
C-18
SHERRITT INTERNATIONAL CORPORATION ("SHERRITT")
NOTES TO PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(ALL TABULAR AMOUNTS IN MILLIONS OF DOLLARS)
4. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
Amounts are reclassified from other comprehensive income to earnings when
an impairment is considered other than temporary and when gains or losses
are realized.
(E) CONVERTIBLE DEBENTURES
The Corporation accounts for the convertible debentures in accordance
with their substance and, as such, they are presented in the financial
statements as a separate component of shareholders' equity net of the
associated financing costs. Under U.S. GAAP the interest payments and the
amortization of the deferred debenture interest are recorded as an
expense and the financing costs are recorded as a deferred charge and
amortized on a straight-line basis over the term of the convertible
debentures.
(F) PENSION VALUATION ALLOWANCE
Under Canadian GAAP, when a company recognizes a pension surplus as an
asset, the asset must be tested for impairment based upon the expected
future benefit to be derived by the company. A valuation allowance is
recorded against the asset when such impairment exists. U.S. GAAP does
not provide for valuation allowances against pension assets and thus the
effects of recognizing a pension valuation allowance should be recorded
as a difference between U.S. and Canadian GAAP.
(G) FULL COST ACCOUNTING
There are certain differences between the full cost method of accounting
for oil and gas assets as applied under Canadian GAAP and as applied
under U.S. GAAP. Under Canadian GAAP it is permissible, under certain
circumstances, to allocate a portion of general and administrative costs
to exploration and development activities whereas under U.S. GAAP this
allocation is not permitted. In addition, there are differences related
to the method of performing ceiling test evaluations under the full cost
accounting rules. Under Canadian GAAP, non-discounted future net revenues
from oil and gas production, less an estimate for future general and
administrative expenses, financing costs and income taxes are compared
with the carrying value of the properties with proved reserves, whereas
for U.S. GAAP future net revenues are discounted to present value at 10%
per annum and compared with the carrying value of the properties with
proved reserves. The resulting differences in the carrying values of the
Corporation's oil and gas properties under Canadian and U.S. GAAP further
results in differences in depletion expense in subsequent periods.
(H) INCOME TAX RATE CHANGES
Under Canadian GAAP, the effects of changes in income tax rates are
recorded when the income tax rate is substantively enacted whereas under
U.S. GAAP the effect is recorded when the income tax rate is enacted. The
adjustment presented for Sherritt is net of the amortization of effects
on the purchase price allocations for Sherritt's acquisition of Luscar.
(I) CAPITALIZED INTEREST
Interest that can be identified with major projects has been capitalized
until the project achieves commercial production. Under U.S. GAAP,
interest is capitalized as it arises from indebtedness incurred to
finance major projects, either directly or indirectly, until the project
is available for its intended use. As a result of the differences in the
carrying amount of capital assets under Canadian and U.S. GAAP, there are
differences in depreciation expense in subsequent periods.
(J) MINIMUM PENSION LIABILITY
Under U.S. GAAP, an additional minimum pension liability is recorded that
represents the excess of unfunded accumulated benefit obligations over
previously recorded pension cost liabilities for underfunded plans. The
increase in liabilities is charged to other comprehensive income, net of
related income taxes.
(K) CHANGE IN ACCOUNTING POLICIES
In fiscal 2001, Luscar changed its accounting policy for revenue
recognition and coal inventory valuation. Under United States GAAP, a
change in accounting policy resulting from the guidance of SAB 101 is
required to be accounted for as an adjustment to earnings in the year of
the change. The change was accounted for retroactively under
Canadian GAAP resulting in a restatement of earnings for 2000. The
cumulative effect of this change in accounting policy is reflected as a
change in earnings for the period from January 1 to May 11, 2001 under
United States GAAP.
C-19
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C-20
SHERRITT COAL ACQUISITION INC. AND
CANADIAN COAL TRUST
PRO FORMA CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS
(UNAUDITED)
C-21
COMPILATION REPORT
To the Directors of Sherritt Coal Acquisition Inc.
We have reviewed, as to compilation only, the accompanying unaudited
pro forma consolidated condensed balance sheets of Sherritt Coal
Acquisition Inc. and Canadian Coal Trust as at September 30, 2002 and the
unaudited pro forma consolidated condensed statements of income for the nine
month period ended September 30, 2002 and year ended December 31, 2001. These
pro forma financial statements have been prepared for inclusion in the Enhanced
Offer and Circular relating to the offer by Sherritt Coal Acquisition Inc. to
purchase all of the outstanding shares of Fording Inc. In our opinion, the
unaudited pro forma consolidated condensed balance sheets and the unaudited
pro forma consolidated condensed statements of income have been properly
compiled to give effect to the proposed transactions and assumptions described
in the notes thereto.
Deloitte & Touche LLP
Chartered Accountants
Toronto, Canada
December 16, 2002
COMMENTS FOR UNITED STATES READERS ON DIFFERENCES BETWEEN CANADIAN AND UNITED
STATES REPORTING STANDARDS
The above report, provided solely pursuant to Canadian requirements, is
expressed in accordance with standards of reporting generally accepted in
Canada. Such standards contemplate the expression of an opinion with respect to
the compilation of pro forma financial statements. United States standards do
not provide for the expression of an opinion on the compilation of pro forma
financial statements. To report in conformity with United States standards on
the reasonableness of the pro forma adjustments and their application to the
pro forma financial statements requires an examination or review substantially
greater in scope than the review we have conducted. Consequently, we are unable
to express any opinion in accordance with standards of reporting generally
accepted in the United States with respect to the compilation of the
accompanying unaudited pro forma financial information.
Deloitte & Touche LLP
Chartered Accountants
Toronto, Canada
December 16, 2002
C-22
SHERRITT COAL ACQUISITION INC. ("SCAI") AND
CANADIAN COAL TRUST ("CANADIAN COAL")
PRO FORMA CONSOLIDATED CONDENSED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, 2001
(UNAUDITED)
(MILLIONS OF CANADIAN DOLLARS, EXCEPT PER UNIT AMOUNTS)
MAXIMUM CASH
Pro Pro forma
Pro forma forma Pro forma Canadian
SCAI(1) Fording(2) adjustments Notes SCAI adjustments Notes Coal
-------- ---------- ----------- --------- -------- ----------- -------- ----------
Revenue........................ -- 1,000.4 -- 1,000.4 -- 1,000.4
------- ------- ------ ------- ------ -------
Cost of sales, selling, general
and administrative
expenses..................... -- 754.2 -- 754.2 -- 754.2
Depletion and amortization..... -- 69.8 10.1 3(a)(i) 79.9 -- 79.9
Interest and other expenses.... -- 12.6 147.8 3(a)(ii) 160.4 (66.4) 3(b)(i) 94.0
Minority interest.............. -- -- -- -- (7.2) 3(b)(ii) (7.2)
------- ------- ------ ------- ------ -------
INCOME BEFORE INCOME TAXES..... -- 163.8 (157.9) 5.9 73.6 79.5
------- ------- ------ ------- ------ -------
Income taxes
Current...................... -- 78.8 (48.0) 3(a)(iii) 30.8 -- 30.8
Future....................... -- (9.6) -- (9.6) -- (9.6)
------- ------- ------ ------- ------ -------
-- 69.2 (48.0) 21.2 -- 21.2
------- ------- ------ ------- ------ -------
NET INCOME (LOSS).............. -- 94.6 (109.9) (15.3) 73.6 58.3
======= ======= ====== ======= ====== =======
Net income per unit............ 2.15
=======
Weighted average number of
outstanding units
(millions)................... 27.1
=======
------------
(1) SCAI was formed on October 24, 2002 and has had no operations since that
date.
(2) Represents the consolidated statement of earnings of Fording Inc.
C-23
SHERRITT COAL ACQUISITION INC. ("SCAI") AND
CANADIAN COAL TRUST ("CANADIAN COAL")
PRO FORMA CONSOLIDATED CONDENSED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, 2001
(UNAUDITED)
(MILLIONS OF CANADIAN DOLLARS, EXCEPT PER UNIT AMOUNTS)
MAXIMUM TRUST UNITS (NOTE 2)
Pro Pro forma
Pro forma forma Pro forma Canadian
SCAI(1) Fording(2) adjustments Notes SCAI adjustments Notes Coal
-------- ---------- ----------- --------- -------- ----------- -------- ----------
Revenue........................ -- 1,000.4 -- 1,000.4 -- 1,000.4
------- ------- ------ ------- ------ -------
Cost of sales, selling, general
and administrative
expenses..................... -- 754.2 -- 754.2 -- 754.2
Depletion and amortization..... -- 69.8 7.0 3(a)(i) 76.8 -- 76.8
Interest and other expenses.... -- 12.6 147.8 3(a)(ii) 160.4 (117.9) 3(b)(i) 42.5
Minority interest.............. -- -- -- -- (2.2) 3(b)(ii) (2.2)
------- ------- ------ ------- ------ -------
INCOME BEFORE INCOME TAXES..... -- 163.8 (154.8) 9.0 120.1 129.1
------- ------- ------ ------- ------ -------
Income taxes
Current...................... -- 78.8 (48.0) 3(a)(iii) 30.8 -- 30.8
Future....................... -- (9.6) -- (9.6) -- (9.6)
------- ------- ------ ------- ------ -------
-- 69.2 (48.0) 21.2 -- 21.2
------- ------- ------ ------- ------ -------
NET INCOME (LOSS).............. -- 94.6 (106.8) (12.2) 120.1 107.9
======= ======= ====== ======= ====== =======
Net income per unit............ 2.54
=======
Weighted average number of
outstanding units
(millions)................... 42.4
=======
------------
(1) SCAI was formed on October 24, 2002 and has had no operations since that
date.
(2) Represents the consolidated statement of earnings of Fording Inc.
C-24
SHERRITT COAL ACQUISITION INC. ("SCAI") AND
CANADIAN COAL TRUST ("CANADIAN COAL")
PRO FORMA CONSOLIDATED CONDENSED STATEMENTS OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 2002
(UNAUDITED)
(MILLIONS OF CANADIAN DOLLARS, EXCEPT PER UNIT AMOUNTS)
MAXIMUM CASH
Pro Pro forma
Pro forma forma Pro forma Canadian
SCAI(1) Fording(2) adjustments Notes SCAI adjustments Notes Coal
-------- ---------- ----------- --------- -------- ----------- -------- ----------
Revenue........................ -- 669.8 -- 669.8 -- 669.8
------- ----- ------ ----- ----- -----
Cost of sales, selling, general
and administrative
expenses..................... -- 504.7 504.7 -- 504.7
Depletion and amortization..... -- 53.9 0.3 3(a)(i) 54.2 -- 54.2
Brooks capital expense......... -- 7.9 -- 7.9 -- 7.9
Interest and other expenses.... -- 4.2 101.0 3(a)(ii) 105.2 (46.0) 3(b)(i) 59.2
Minority interest.............. -- -- -- -- (11.6) 3(b)(ii) (11.6)
------- ----- ------ ----- ----- -----
INCOME (LOSS) BEFORE INCOME
TAXES........................ -- 99.1 (101.3) (2.2) 57.6 55.4
------- ----- ------ ----- ----- -----
Income taxes
Current...................... -- 43.2 (28.4) 3(a)(iii) 14.8 -- 14.8
Future....................... -- 7.6 -- 7.6 -- 7.6
------- ----- ------ ----- ----- -----
-- 50.8 (28.4) 22.4 -- 22.4
------- ----- ------ ----- ----- -----
NET INCOME (LOSS).............. -- 48.3 (72.9) (24.6) 57.6 33.0
======= ===== ====== ===== ===== =====
Net income per unit............ 1.22
=====
Weighted average number of
outstanding units
(millions)................... 27.1
=====
------------
(1) SCAI was formed on October 24, 2002 and has had no operations since that
date.
(2) Represents the consolidated statement of earnings of Fording Inc.
C-25
SHERRITT COAL ACQUISITION INC. ("SCAI") AND
CANADIAN COAL TRUST ("CANADIAN COAL")
PRO FORMA CONSOLIDATED CONDENSED STATEMENTS OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 2002
(UNAUDITED)
(MILLIONS OF CANADIAN DOLLARS, EXCEPT PER UNIT AMOUNTS)
MAXIMUM TRUST UNITS (NOTE 2)
Pro Pro forma
Pro forma forma Pro forma Canadian
SCAI(1) Fording(2) adjustments Notes SCAI adjustments Notes Coal
-------- ---------- ----------- --------- -------- ----------- -------- ----------
Revenue........................ -- 669.8 -- 669.8 -- 669.8
----- ----- ------ ----- ----- -----
Cost of sales, selling, general
and administrative
expenses..................... -- 504.7 -- 504.7 -- 504.7
Depletion and amortization..... -- 53.9 0.3 3(a)(i) 54.2 -- 54.2
Brooks capital expense......... -- 7.9 -- 7.9 -- 7.9
Interest and other expenses.... -- 4.2 101.0 3(a)(ii) 105.2 (80.9) 3(b)(i) 24.3
Minority interest.............. -- -- -- -- (4.3) 3(b)(ii) (4.3)
----- ----- ------ ----- ----- -----
INCOME (LOSS) BEFORE INCOME
TAXES........................ -- 99.1 (101.3) (2.2) 85.2 83.0
----- ----- ------ ----- ----- -----
Income taxes
Current...................... -- 43.2 (28.4) 3(a)(iii) 14.8 -- 14.8
Future....................... -- 7.6 -- 7.6 -- 7.6
----- ----- ------ ----- ----- -----
-- 50.8 (28.4) 22.4 -- 22.4
----- ----- ------ ----- ----- -----
NET INCOME (LOSS).............. -- 48.3 (72.9) (24.6) 85.2 60.6
===== ===== ====== ===== ===== =====
Net income per unit............ 1.43
=====
Weighted average number of
outstanding units
(millions)................... 42.4
=====
------------
(1) SCAI was formed on October 24, 2002 and has had no operations since that
date.
(2) Represents the consolidated statement of earnings of Fording Inc.
C-26
SHERRITT COAL ACQUISITION INC. ("SCAI") AND
CANADIAN COAL TRUST ("CANADIAN COAL")
PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEETS
SEPTEMBER 30, 2002
(UNAUDITED)
(MILLIONS OF CANADIAN DOLLARS, EXCEPT PER UNIT AMOUNTS)
MAXIMUM CASH
Pro forma
Pro forma Pro forma Pro forma Canadian
SCAI(1) Fording(2) adjustments Notes SCAI adjustments Notes Coal
-------- ---------- ----------- -------- ---------- ----------- -------- ----------
ASSETS
CURRENT ASSETS
Cash and short-term
investments............... -- 6.8 -- 6.8 -- 6.8
Accounts receivable......... -- 41.3 -- 41.3 -- 41.3
Inventory................... -- 186.8 -- 186.8 -- 186.8
Prepaid expenses............ -- 10.4 9.7 2(a) 20.1 -- 20.1
------- ------- ------- ------- -------- -------
-- 245.3 9.7 255.0 -- 255.0
CAPITAL ASSETS................ -- 789.3 -- 789.3 -- 789.3
FUTURE INCOME TAXES........... -- -- 83.9 2(a) 83.9 -- 83.9
OTHER ASSETS.................. -- 10.5 6.6 2(a) 17.1 -- 17.1
GOODWILL...................... -- -- 1,406.7 2(a) 1,406.7 84.3 2(b) 1,491.0
------- ------- ------- ------- -------- -------
-- 1,045.1 1,506.9 2,552.0 84.3 2,636.3
======= ======= ======= ======= ======== =======
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Short-term debt and bank
indebtedness.............. -- 10.7 210.0 2(a) 220.7 -- 220.7
Accounts payable............ -- 74.8 81.0 2(a) 155.8 -- 155.8
------- ------- ------- ------- -------- -------
-- 85.5 291.0 376.5 -- 376.5
NON-CURRENT LIABILITIES....... -- 62.9 151.9 2(a) 214.8 -- 214.8
SCAI SERIES B NOTES........... -- -- 680.0 2(a) 680.0 -- 680.0
LONG-TERM DEBT................ -- 136.0 759.2 2(a) 895.2 (759.2) 2(b) 136.0
FUTURE INCOME TAXES........... -- 185.7 -- 185.7 -- 185.7
MINORITY INTEREST............. -- -- -- -- 94.3 2(b) 94.3
------- ------- ------- ------- -------- -------
-- 470.1 1,882.1 2,352.2 (664.9) 1,687.3
------- ------- ------- ------- -------- -------
EQUITY
Capital stock -- Fording.... -- 122.1 (122.1) 2(a) -- -- --
Capital stock -- SCAI....... -- -- 199.8 2(a) 199.8 (199.8) 2(b) --
Unitholders' equity......... -- -- -- -- 949.0 2(b) 949.0
Retained earnings........... -- 418.6 (418.6) 2(a) -- -- --
Foreign currency translation
adjustment................ -- 34.3 (34.3) 2(a) -- -- --
------- ------- ------- ------- -------- -------
-- 575.0 (375.2) 199.8 749.2 949.0
------- ------- ------- ------- -------- -------
-- 1,045.1 1,506.9 2,552.0 84.3 2,636.3
======= ======= ======= ======= ======== =======
------------
(1) SCAI was formed on October 24, 2002 and has had no operations since that
date.
(2) Represents the consolidated balance sheet of Fording Inc.
C-27
SHERRITT COAL ACQUISITION INC. ("SCAI") AND
CANADIAN COAL TRUST ("CANADIAN COAL")
PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEETS
SEPTEMBER 30, 2002
(UNAUDITED)
(MILLIONS OF CANADIAN DOLLARS, EXCEPT PER UNIT AMOUNTS)
MAXIMUM TRUST UNITS (NOTE 2)
Pro forma
Pro forma Pro forma Pro forma Canadian
SCAI(1) Fording(2) adjustments Notes SCAI adjustments Notes Coal
-------- ---------- ----------- -------- ---------- ----------- -------- ----------
ASSETS
CURRENT ASSETS
Cash and short-term
investments............... -- 6.8 -- 6.8 -- 6.8
Accounts receivable......... -- 41.3 -- 41.3 -- 41.3
Inventory................... -- 186.8 -- 186.8 -- 186.8
Prepaid expenses............ -- 10.4 6.6 2(a) 17.0 -- 17.0
------- ------- ------- ------- -------- -------
-- 245.3 6.6 251.9 -- 251.9
CAPITAL ASSETS................ -- 789.3 -- 789.3 -- 789.3
FUTURE INCOME TAXES........... -- -- 82.8 82.8 -- 82.8
OTHER ASSETS.................. -- 10.5 6.6 2(a) 17.1 -- 17.1
GOODWILL...................... -- -- 1,406.9 1,406.9 -- 1,406.9
------- ------- ------- ------- -------- -------
-- 1,045.1 1,502.9 2,548.0 -- 2,548.0
======= ======= ======= ======= ======== =======
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Short-term debt and bank
indebtedness.............. -- 10.7 46.0 2(a) 56.7 -- 56.7
Accounts payable............ -- 74.8 81.0 2(a) 155.8 -- 155.8
------- ------- ------- ------- -------- -------
-- 85.5 127.0 212.5 -- 212.5
NON-CURRENT LIABILITIES....... -- 62.9 151.9 2(a) 214.8 -- 214.8
SCAI SERIES B NOTES........... -- -- 252.0 2(a) 252.0 -- 252.0
LONG-TERM DEBT................ -- 136.0 1,187.2 2(a) 1,323.2 (1,187.2) 2(b) 136.0
FUTURE INCOME TAXES........... -- 185.7 -- 185.7 -- 185.7
MINORITY INTEREST............. -- -- -- -- 63.0 2(b) 63.0
------- ------- ------- ------- -------- -------
-- 470.1 1,718.1 2,188.2 (1,124.2) 1,064.0
------- ------- ------- ------- -------- -------
EQUITY
Capital stock -- Fording.... -- 122.1 (122.1) 2(a) -- -- --
Capital stock -- SCAI....... -- -- 359.8 2(a) 359.8 (359.8) 2(b) --
Unitholders' equity......... -- -- -- -- 1,484.0 2(b) 1,484.0
Retained earnings........... -- 418.6 (418.6) 2(a) -- -- --
Foreign currency translation
adjustment................ -- 34.3 (34.3) 2(a) -- -- --
------- ------- ------- ------- -------- -------
-- 575.0 (215.2) 359.8 1,124.2 1,484.0
------- ------- ------- ------- -------- -------
-- 1,045.1 1,502.9 2,548.0 -- 2,548.0
======= ======= ======= ======= ======== =======
------------
(1) SCAI was formed on October 24, 2002 and has had no operations since that
date.
(2) Represents the consolidated balance sheet of Fording Inc.
C-28
SHERRITT COAL ACQUISITION INC. ("SCAI") AND
CANADIAN COAL TRUST ("CANADIAN COAL")
NOTES TO PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(ALL TABULAR AMOUNTS IN MILLIONS OF DOLLARS)
1. BASIS OF PRESENTATION
The unaudited pro forma consolidated condensed financial statements have
been prepared by management of SCAI in accordance with Canadian generally
accepted accounting principles for inclusion in the Enhanced Offer and
Circular ("Enhanced Offer") relating to the offer of SCAI to purchase all of
the outstanding shares of Fording Inc. ("Fording").
As part of the Enhanced Offer, Fording shareholders have the ability to
elect to receive Exchange Rights, which will be exchangeable into trust
units of Canadian Coal. Accordingly, pro forma financial statements have
been prepared for SCAI and Canadian Coal to give effect to the proposed
acquisition and subsequent issue of trust units. The pro forma consolidated
balance sheets have been prepared to give effect to the transactions as if
they had occurred on the balance sheet date while the pro forma consolidated
statements of income give effect to the transactions as if they had occurred
at January 1, 2001. The pro forma financial statements may not be indicative
of results that actually would have occurred if the events reflected therein
had been in effect on the dates indicated or of the results that may be
obtained in the future.
The information and pro forma adjustments related to Fording included in
these statements were derived solely from publicly available documents on
file with the Canadian securities regulatory authorities. Consent of
Fording's auditors to use of their audit report has not been obtained.
The information related to SCAI has been prepared from the audited balance
sheet of SCAI as at October 24, 2002. SCAI did not exist prior to that date.
The pro forma financial statements should be read in conjunction with the
audited consolidated financial statements of Fording as at and for the year
ended December 31, 2001, the unaudited consolidated financial statements of
Fording as at and for the nine months ended September 30, 2002 and the
audited balance sheet of SCAI as at October 24, 2002 included elsewhere in
the Enhanced Offer.
In accordance with the Companion Policy to Rule 41-501 of the Ontario
Securities Commission, adjustments included in pro forma financial
statements shall be limited to those which are "directly attributable to
specific completed or proposed transactions for which there are commitments
and for which the complete financial effects are objectively determinable".
There are a number of transactions contemplated and potential benefits
described in the Enhanced Offer that do not meet these criteria and,
accordingly, cannot be reflected in the pro forma financial statements.
These include:
- SCAI intends to enter into transactions involving Fording's thermal assets
with Sherritt Coal Partnership II ("SCP II"), a partnership between
Sherritt International Corporation ("Sherritt") and Ontario Teachers'
Pension Plan Board, and Luscar Energy Partnership (a partnership
controlled by the ultimate partners of SCP II) or subsidiaries of Luscar
Energy Partnership. The effect of such transactions, which will be subject
to obtaining any required regulatory and third party consents, would be
such that SCAI will cease to have a material economic participation in
those thermal assets. Agreements are not yet in place to effect these
transactions.
- SCAI has an agreement in principle with Luscar Ltd. ("Luscar"), a
subsidiary of Luscar Energy Partnership, and CONSOL Energy Inc. ("CONSOL")
for the purchase of the jointly-owned Met Coal Assets, comprising the Line
Creek mine, the undeveloped Cheviot mine project and a 46.4% interest in
the Neptune Terminals, in exchange for 5.9 million trust units. Definitive
documentation has not yet been signed for this proposed transaction;
however the Partnership has agreed in principle that the Partnership or
one of its affiliates will purchase the Exchange Rights or Units received
by CONSOL if CONSOL so elects. Also, this proposed transaction will be
subject to necessary regulatory and other third party consents.
- SCAI also intends to enter into a put option agreement with Luscar and
CONSOL to sell the Luscar mine to SCAI, in exchange for 0.5 million trust
units. Definitive documentation has not yet been signed for this proposed
transaction. Also, this proposed transaction will be subject to necessary
regulatory and third party consents.
- Uncertainty exists as to whether provisions exist in Fording's banking
facilities and foreign exchange contracts that would require early
termination of these arrangements upon a change of control. SCAI intends
to discharge all existing indebtedness of Fording, including any
indebtedness in respect of outstanding amounts under bank credit
facilities and foreign exchange swaps; however, the cost of discharging
these obligations is uncertain.
- SCAI and its subsidiaries intend to replace the bridge financing and a
$100 million working capital facility with a $425 million term facility
negotiated with a Canadian chartered bank which will bear interest at
rates consistent with investment grade facilities of this type. Because
definitive agreements have not yet been signed for the term facility, the
effect of the lower interest rate is not reflected in the pro forma
financial statements.
C-29
SHERRITT COAL ACQUISITION INC. ("SCAI") AND
CANADIAN COAL TRUST ("CANADIAN COAL")
NOTES TO PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(ALL TABULAR AMOUNTS IN MILLIONS OF DOLLARS)
1. BASIS OF PRESENTATION (CONTINUED)
- SCP II will not receive any distribution in respect of its interest in
SCAI during any quarter in 2003 unless Canadian Coal has first received
interest on Notes of SCAI equivalent to $1.05 per Unit in respect of each
calendar quarter, for a maximum quarterly subordination amount of
$11.25 million. The impact of this subordination feature would be a
possible increase in Canadian Coal's pro forma net earnings available for
distribution, however the actual impact is not objectively determinable on
the basis that pro forma information was not available on a quarterly
basis and that inclusion of the above transactions would impact the amount
of subordination.
In preparing these pro forma financial statements, no adjustments were made
to reflect operating synergies, general and administrative cost savings or
possible tax benefits that may result from the transaction. Acquisition and
other non-recurring costs are also excluded. The purchase price calculation
and allocation is based on estimates and the actual allocation will vary
from this estimate. Given these facts and the number of transactions
contemplated in the Enhanced Offer that are not reflected in the pro forma
financial statements and other uncertainties resulting from the fact that
management did not have access to the detailed records of Fording when
preparing the statements, these pro forma financial statements differ from
the results that would have been compiled and presented if management had
access to all pertinent information. These differences will be material.
Financial statements require management to make estimates and assumptions
that affect the reported amounts of pro forma assets and liabilities at the
date of the balance sheets and the reported amounts of pro forma revenues
and expenses during the reported periods. Actual results could differ from
those estimates.
The pro forma financial statements give effect to the assumptions that
approval has been obtained by the regulators for the listing of Canadian
Coal Trust, that the Exchange Rights have been exchanged for trust units and
that the proposed transactions described in note 2 have occurred.
2. PRO FORMA TRANSACTION ASSUMPTIONS
Under the terms of the Enhanced Offer, each Fording shareholder will be
given the opportunity to elect the following consideration for each Fording
share:
- $35 in cash;
- one Exchange Right of Sherritt ("Exchange Right"), which will be
exchangeable into a trust unit of Canadian Coal; or
- a combination of cash and Exchange Rights.
In the event that more than 24.3 million Fording shares are elected for the
cash offer, the Enhanced Offer provides a pool of cash of $850 million and a
pool of approximately 27.1 million Exchange Rights, with an ascribed value
of $949 million. In this event, Fording shareholders will receive a
pro rata amount of cash and Exchange Rights, such that the total
consideration equals $850 million of cash and approximately 27.1 million
Exchange Rights.
A maximum amount of up to approximately 42,405,000 Exchange Rights will be
issued. In the event that elections for Exchange Rights exceed this maximum,
a pro-rata amount of cash and Exchange Rights will be issued.
Ontario Teachers' Pension Plan Board owns approximately 3.2 million Fording
shares and has indicated its intention to elect for Exchange Rights.
The number of outstanding Fording shares on the date of the acquisition is
assumed to be approximately 51.4 million.
As discussed in note 1, management did not have access to the detailed
records of Fording. As a result, management has not attempted to estimate
fair value adjustments related to the purchase price allocation, other than
recognizing the unrealized loss as at September 30, 2002, of $151.9 million
before tax, on Fording's foreign exchange arrangements. The residual
difference between the purchase price and the book values after this
adjustment has been preliminarily allocated to goodwill.
The fair values of the assets and liabilities will be determined at the
actual date of acquisition and will differ from the amounts shown below in
the assumed pro forma purchase price allocation. This will include
valuations for surface coal reserves, customer contracts, land rights and
mine development projects, the impact of which will be a change in value of
capital assets and goodwill, offset in part by amortization of the above
assets, as well as other adjustments to allocate fair values to assets and
liabilities.
C-30
SHERRITT COAL ACQUISITION INC. ("SCAI") AND
CANADIAN COAL TRUST ("CANADIAN COAL")
NOTES TO PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(ALL TABULAR AMOUNTS IN MILLIONS OF DOLLARS)
2. PRO FORMA TRANSACTION ASSUMPTIONS (CONTINUED)
As the consideration paid to Fording shareholders may be in varying
proportions of cash and Exchange Rights, the pro forma financial statements
present two of the possible alternative scenarios. Unaudited pro forma
financial statements have been prepared under the scenarios that the maximum
cash is used or that the maximum number of Trust Units is issued, as
described below. These scenarios are named as "Maximum Cash" and "Maximum
Trust Units" to describe the scenario after completion of the exchange of
Exchange Rights for Trust Units.
Unaudited pro forma financial statements have been prepared for both SCAI
and Canadian Coal Trust to give effect to the proposed transaction.
A) SCAI
The initial capitalization of SCAI is as follows:
Maximum Maximum
Cash Trust Units
---------- -----------
Common shares issued to Sherritt and SCP II................. 199.8 359.8
Series A Notes issued to Sherritt........................... 759.2 1,187.2
Series B Notes issued to SCP II............................. 680.0 252.0
Short-term debt............................................. 210.0 46.0
------- -------
1,849.0 1,845.0
======= =======
In exchange for:
Exchange Rights............................................. 949.0 1,484.0
Cash........................................................ 690.0 315.0
Proceeds from debt issue.................................... 210.0 46.0
------- -------
1,849.0 1,845.0
======= =======
Concurrently with the capitalization, SCAI acquires all of the
outstanding shares of Fording in exchange for a combination of Exchange
Rights and cash. The acquisition is accounted for by SCAI using the
purchase method of accounting for business combinations, as follows:
Maximum Maximum
Cash Trust Units
---------- -----------
ACQUISITION COSTS
Consideration in cash....................................... 850.0 315.0
Consideration in Exchange Rights............................ 949.0 1,484.0
Transaction costs incurred by SCAI.......................... 33.7 32.8
------- -------
1,832.7 1,831.8
======= =======
ALLOCATION OF ACQUISITION COST
Capital assets.............................................. 789.3 789.3
Goodwill.................................................... 1,406.7 1,406.9
Net working capital......................................... 78.8 78.8
Long-term debt.............................................. (136.0) (136.0)
Future income taxes......................................... (101.8) (102.9)
Foreign exchange arrangements............................... (151.9) (151.9)
Other assets and liabilities................................ (52.4) (52.4)
------- -------
1,832.7 1,831.8
======= =======
C-31
SHERRITT COAL ACQUISITION INC. ("SCAI") AND
CANADIAN COAL TRUST ("CANADIAN COAL")
NOTES TO PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(ALL TABULAR AMOUNTS IN MILLIONS OF DOLLARS)
2. PRO FORMA TRANSACTION ASSUMPTIONS (CONTINUED)
The remaining cash raised on the initial capitalization of SCAI is used
to pay financing fees associated with debt incurred to fund the
acquisition. These fees are recorded as follows:
Maximum Maximum
Cash Trust Units
---------- -----------
Prepaid expenses............................................ 9.7 6.6
Other assets................................................ 6.6 6.6
---- ----
16.3 13.2
==== ====
Following this transaction, SCAI would consolidate the operating results
and financial position of Fording.
The amounts above include takeover-related costs of $81.0 million to be
incurred by Fording, as disclosed in Fording's Supplement to the
Management Information Circular, which have been deducted from net
working capital. The related future tax benefit of $9.9 million has been
included in future income taxes. SCAI is expected to incur estimated
financing and transaction costs of $50.0 million and $46.0 million,
respectively, under the two scenarios. The related future tax benefit of
$16.3 million and $15.2 million, respectively, has also been reflected in
future income taxes.
B) CANADIAN COAL TRUST
The initial capitalization of Canadian Coal Trust is as follows:
Maximum Maximum
Cash Trust Units
---------- -----------
Trust Units issued to Sherritt.............................. 949.0 1,484.0
======= =======
In exchange for:
Common shares of SCAI held by Sherritt...................... 189.8 296.8
Series A Notes held by Sherritt............................. 759.2 1,187.2
------- -------
949.0 1,484.0
======= =======
Following approval by the regulators to provide for the free tradeability
of the Trust Units of Canadian Coal, the Exchange Rights held by the
ex-Fording shareholders are to be exchanged for Trust Units held by
Sherritt.
MAXIMUM CASH
SCP II acquires a 47.2% ownership interest in SCAI for $690.0 million,
comprising $10.0 million in share capital and $680.0 million in Series B
Notes. Canadian Coal acquires a 52.8% ownership interest in SCAI for
$949.0 million, comprising $189.8 million in equity and $759.2 million in
Series A Notes.
The minority interest recorded by Canadian Coal in respect of SCAI
reflects SCP II's proportionate interest in the net assets of SCAI.
Additional goodwill recorded by Canadian Coal represents the amount by
which Canadian Coal's cost per unit of SCAI equity is higher than
SCP II's unit cost.
MAXIMUM TRUST UNITS
SCP II acquires a 17.5% ownership interest in SCAI for $315.0 million,
comprising $63.0 million in share capital and $252.0 million in Series B
Notes. Canadian Coal Trust acquires an 82.5% ownership interest in SCAI
for $1,484.0 million, comprising $296.8 million in equity and
$1,187.2 million in Series A Notes.
Under the Maximum Units scenario, lower external debt is required to
finance the purchase of the Fording shares. In such an instance, SCAI has
indicated its intention to draw down its debt facilities and to pay a
distribution to the shareholders. The effect of this proposed possible
transaction is not included in the pro forma financial statements.
In the Maximum Trust Units scenario, Canadian Coal will own 82.5% of SCAI
and in the Maximum Cash scenario, Canadian Coal will own 52.8% of SCAI.
Canadian Coal consolidates its interest in SCAI under both scenarios. The
facts and circumstances which exist after the acquisition will determine
the actual method of accounting for the interest in SCAI.
C-32
SHERRITT COAL ACQUISITION INC. ("SCAI") AND
CANADIAN COAL TRUST ("CANADIAN COAL")
NOTES TO PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(ALL TABULAR AMOUNTS IN MILLIONS OF DOLLARS)
3. PRO FORMA ADJUSTMENTS -- OTHER ADJUSTMENTS
A) SCAI
(i) Depletion and amortization expense has been adjusted to reflect the
amortization of deferred financing costs relating to the financing
associated with the Fording transaction.
(ii) Interest and other expenses have been adjusted to reflect the
following:
Nine months ended Year ended
September 30, 2002 December 31, 2001
----------------------- -----------------------
Maximum Maximum Maximum Maximum
Cash Trust Units Cash Trust Units
--------- ----------- --------- -----------
Interest on bridge financing................................ 13.8 3.0 22.0 4.9
Interest on SCAI Notes 87.2 98.0 125.8 142.9
----- ----- ----- -----
101.0 101.0 147.8 147.8
===== ===== ===== =====
Interest on the SCAI Notes is calculated as 15% of the principal
outstanding per annum, limited to an estimate of available distributable
cash calculated based on Fording's publicly available documents.
(iii) Income taxes have been adjusted for the impact of the above items.
B) CANADIAN COAL TRUST
(i) Interest expense has been adjusted to eliminate the interest paid by
SCAI to SCP II on the Series B Notes.
(ii) Minority interest has been adjusted to reflect the share of SCAI's
net loss attributable to the Partnership.
In the pro forma balance sheet, minority interest is calculated to be
47.2% and 17.5% of SCAI's capital stock in the maximum cash and maximum
trust units scenarios, respectively.
4. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
The pro forma consolidated financial statements of SCAI and Canadian Coal
have been prepared in accordance with Canadian generally accepted accounting
principles ("Canadian GAAP") which, in most respects, conform to United
States generally accepted accounting principles ("U.S. GAAP"). Fording does
not provide information regarding differences between Canadian and
U.S. GAAP in its quarterly financial statements and as such no pro forma
information is provided for differences between Canadian and U.S. GAAP that
may exist for pro forma information presented under Canadian GAAP as at and
for the nine months ended September 30, 2002. Readers are cautioned that
differences from U.S. GAAP for the nine months ended September 30, 2002, if
any, could be material. Significant differences between Canadian and
U.S. GAAP for the year ended December 31, 2001 are as follows:
A. Pro forma Statement of Income
Year ended December 31, 2001
-----------------------------------------------
Pro Forma
Canadian Coal
-----------------------
Maximum
Pro forma Maximum Trust
Fording SCAI Cash Units
-------- ---------- ---------- ----------
Net income (loss) under Canadian GAAP....................... 94.6 (15.3) 58.3 107.9
Derivative financial instruments -- foreign exchange forward
contracts (a)............................................. (88.6) (88.6) (46.8) (73.1)
Income tax recovery......................................... 32.8 32.8 17.3 27.1
Stock based compensation (b)................................ (3.2) (3.2) (1.7) (2.6)
----- ----- ----- -----
Net income (loss) under U.S. GAAP........................... 35.6 (74.3) 27.1 59.3
===== ===== ===== =====
The U.S. GAAP adjustments are shown net of the impact on net income of
the minority interest.
C-33
SHERRITT COAL ACQUISITION INC. ("SCAI") AND
CANADIAN COAL TRUST ("CANADIAN COAL")
NOTES TO PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(ALL TABULAR AMOUNTS IN MILLIONS OF DOLLARS)
4. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
B. Pro forma Statement of Comprehensive Income
Comprehensive income is measured in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income." This standard defines comprehensive income as all changes in
equity other than those resulting from investments by owners and
distributions to owners. The concept of comprehensive income does not
exist under Canadian GAAP.
Year ended December 31, 2001
-----------------------------------------------
Pro Forma
Canadian Coal
-----------------------
Maximum
Pro forma Maximum Trust
Fording SCAI Cash Units
-------- ---------- ---------- ----------
Net income (loss) under U.S. GAAP........................... 35.6 (74.3) 27.1 59.3
Other comprehensive income, net of tax
Cumulative translation adjustment (c)..................... 14.4 14.4 7.6 11.9
Minimum pension liability (d)............................. (3.3) (3.3) (1.7) (2.7)
----- ----- ---- ----
Comprehensive income (loss) under U.S. GAAP................. 46.7 (63.2) 33.0 68.5
===== ===== ==== ====
C. Balance Sheet
Insufficient information is included in Fording's financial statements to
provide a September 30, 2002 balance sheet in accordance with U.S. GAAP.
(A) DERIVATIVE FINANCIAL INSTRUMENTS
Under United States GAAP, SFAS No. 133 and related pronouncements
require that all derivative instruments be recorded on the balance sheet
at fair value. Derivatives that are not designated as hedges for
accounting purposes must be adjusted to fair value through income. If
the derivative is designated and is effective as a hedge for accounting
purposes, depending on the nature of the hedge, changes in the fair
value of derivatives are either offset against the change in the fair
value of hedged underlying assets, liabilities, or firm commitments
through earnings or recognized in other comprehensive income until the
hedged item is recognized in earnings. The ineffective portion of a
hedging derivative's change in fair value is recognized in earnings
immediately. Neither Sherritt nor Fording has designated any instruments
as hedges for the purposes of U.S. GAAP.
(B) STOCK-BASED COMPENSATION
Under U.S. GAAP, a compensation expense must be recorded if the
intrinsic value of stock options is not exactly the same immediately
before and after an equity restructuring. As a result of a prior
restructuring, Fording had stock options outstanding which had a
different intrinsic value after the restructuring than prior to the
restructuring. Canadian GAAP does not require revaluation of these
options.
(C) CUMULATIVE FOREIGN CURRENCY TRANSLATION
Under U.S. GAAP, changes in the cumulative foreign currency translation
accounts are considered to be a component of other comprehensive income.
(D) MINIMUM PENSION LIABILITY
Under U.S. GAAP, an additional minimum pension liability is recorded
that represents the excess of unfunded accumulated benefit obligations
over previously recorded pension cost liabilities for underfunded plans.
The increase in liabilities is charged to other comprehensive income,
net of related income taxes.
C-34
SHERRITT INTERNATIONAL CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
C-35
INDEPENDENT AUDITORS' REPORT
To the Directors of Sherritt International Corporation:
We have audited the consolidated balance sheets of Sherritt International
Corporation as at December 31, 2001 and 2000 and the consolidated statements of
operations, retained earnings (deficit) and cash flow for each of the years in
the three year period ended December 31, 2001. These financial statements are
the responsibility of the Corporation's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted
auditing standards and auditing standards generally accepted in the United
States of America. 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. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of the Corporation as at
December 31, 2001 and 2000 and the results of its operations and its cash flows
for each of the years in the three year period ended December 31, 2001, in
accordance with Canadian generally accepted accounting principles.
Deloitte & Touche LLP
Chartered Accountants
Toronto, Canada
February 28, 2002 (except for Note 24
which is as of December 16, 2002)
COMMENTS BY AUDITOR FOR U.S. READERS ON CANADA -- U.S. REPORTING DIFFERENCES
In the United States of America, reporting standards for auditors require
the addition of an explanatory paragraph (following the opinion paragraph) where
there are changes in the accounting principles that have a material effect on
the comparability of the Corporation's financial statements such as the changes
described in Note 2 to the consolidated financial statements. Our report to the
directors dated February 28, 2002 (except for Note 24 which is as of December
16, 2002) is expressed in accordance with Canadian reporting standards which do
not require a reference to such a change in accounting principles in the
Auditors' Report when the change is properly accounted for and adequately
disclosed in the financial statements.
Deloitte & Touche LLP
Chartered Accountants
Toronto, Canada
February 28, 2002 (except for Note 24
which is as of December 16, 2002)
C-36
SHERRITT INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF CANADIAN DOLLARS)
As at As at December 31
September 30 -----------------------
2002 2001 2000
------------- ---------- ----------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................. $ 232,643 $ 109,003 $ 189,794
Restricted cash (note 17)................................. 15,441 23,829 --
Short-term investments (note 17).......................... 4,959 15,075 71,549
Advances and loans receivable (note 8).................... 42,432 42,181 5,027
Accounts receivable....................................... 224,323 257,614 176,602
Inventories (note 5)...................................... 114,772 111,430 76,759
Overburden removal costs.................................. 15,608 14,113 --
Prepaid expenses.......................................... 8,936 9,402 9,059
Future income taxes....................................... 3,693 1,954 5,938
---------- ---------- ----------
662,807 584,601 534,728
CAPITAL ASSETS (note 6)..................................... 1,118,944 1,139,007 507,406
INVESTMENTS (note 7)........................................ 100,965 143,407 178,407
FUTURE INCOME TAXES......................................... 29,662 27,736 19,896
OTHER ASSETS (note 8)....................................... 98,337 103,663 101,213
---------- ---------- ----------
$2,010,715 $1,998,414 $1,341,650
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term debt (note 17)................................. $ 32,213 $ 36,027 $ 8,000
Accounts payable and accrued liabilities.................. 109,585 103,097 77,419
Current portion of long-term debt (note 11)............... 12,890 1,607 --
Site restoration and abandonment (note 10)................ 10,501 10,501 --
Future income taxes....................................... 1,400 1,400 --
Swaps and forward contracts (note 17)..................... 1,847 2,162 --
---------- ---------- ----------
168,436 154,794 85,419
LONG-TERM DEBT (note 11).................................... 244,154 259,254 --
SITE RESTORATION AND ABANDONMENT (note 10).................. 43,838 44,325 26,649
FUTURE INCOME TAXES......................................... 203,899 217,783 18,608
SWAPS AND FORWARD CONTRACTS (note 17)....................... 137 1,411 --
MINORITY INTEREST........................................... 4,736 3,989 2,865
---------- ---------- ----------
665,200 681,556 133,541
---------- ---------- ----------
SHAREHOLDERS' EQUITY
Convertible debentures (note 12).......................... 587,314 587,314 587,314
Capital stock (note 13)................................... 450,957 450,716 349,840
Contributed surplus (notes 12 and 13)..................... 199,787 199,787 199,787
Retained earnings......................................... 107,457 79,041 71,168
---------- ---------- ----------
1,345,515 1,316,858 1,208,109
---------- ---------- ----------
$2,010,715 $1,998,414 $1,341,650
========== ========== ==========
COMMITMENTS AND CONTINGENCIES -- NOTE 19
C-37
SHERRITT INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(THOUSANDS OF CANADIAN DOLLARS EXCEPT PER SHARE AMOUNTS)
Nine Months Ended Year Ended
September 30 December 31
------------------------- ------------------------------
2002 2001 2001 2000 1999
----------- ----------- -------- -------- --------
(Unaudited) (Unaudited)
REVENUE...................................... $609,471 $447,642 $636,618 $480,355 $372,346
Operating, selling, general and
administrative............................. 387,289 296,906 431,933 285,310 250,701
-------- -------- -------- -------- --------
EARNINGS BEFORE UNDERNOTED ITEMS............. 222,182 150,736 204,685 195,045 121,645
Depletion and amortization................. 109,758 81,067 118,768 71,228 50,379
Write-down of investment (note 7).......... 37,000 -- 23,441 -- --
Amortization of goodwill................... -- 1,014 1,357 1,286 1,236
Provision for site restoration and
abandonment (note 10).................... 7,098 5,117 7,462 3,513 4,181
Share of loss (earnings) of equity
investments.............................. 1,657 44 679 (788) 1,275
Net financing expense (income)
(note 15)................................ 10,023 (8,256) (4,437) (29,045) (26,924)
Minority interest.......................... 747 848 1,124 1,130 1,178
-------- -------- -------- -------- --------
EARNINGS BEFORE INCOME TAXES................. 55,899 70,902 56,291 147,721 90,320
-------- -------- -------- -------- --------
INCOME TAXES (note 16)
Current.................................... 14,184 4,587 5,379 26,594 17,592
Future..................................... (4,101) 5,498 (683) 5,557 6,127
-------- -------- -------- -------- --------
10,083 10,085 4,696 32,151 23,719
-------- -------- -------- -------- --------
NET EARNINGS................................. $ 45,816 $ 60,817 $ 51,595 $115,570 $ 66,601
======== ======== ======== ======== ========
EARNINGS PER RESTRICTED VOTING SHARE
(note 13)
Basic...................................... $ 0.29 $ 0.52 $ 0.34 $ 1.38 $ 0.60
Diluted.................................... 0.28 0.40 0.33 0.84 0.45
======== ======== ======== ======== ========
C-38
SHERRITT INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (DEFICIT)
(THOUSANDS OF CANADIAN DOLLARS)
Nine Months Ended Year Ended
September 30 December 31
------------------------- ------------------------------
2002 2001 2001 2000 1999
----------- ----------- -------- -------- --------
(Unaudited) (Unaudited)
Beginning of period........................... $ 79,041 $ 71,168 $ 71,168 $ (6,899) $(49,886)
Elimination of deficit at January 1, 2000
through a reduction in stated capital
(note 13)................................... -- -- -- 6,899 --
Net earnings.................................. 45,816 60,817 51,595 115,570 66,601
Interest on convertible debentures
(note 12)................................... (17,400) (16,408) (21,938) (22,675) (23,614)
Dividends on restricted voting shares......... -- (21,784) (21,784) (21,727) --
-------- -------- -------- -------- --------
End of period................................. $107,457 $ 93,793 $ 79,041 $ 71,168 $ (6,899)
======== ======== ======== ======== ========
C-39
SHERRITT INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
(THOUSANDS OF CANADIAN DOLLARS)
Nine Months Ended Year Ended
September 30 December 31
------------------------- ---------------------------------
2002 2001 2001 2000 1999
----------- ----------- --------- --------- ---------
(Unaudited) (Unaudited)
OPERATING ACTIVITIES
Net earnings............................. $ 45,816 $ 60,817 $ 51,595 $ 115,570 $ 66,601
Items not affecting cash
Depletion and amortization............. 109,758 81,067 118,768 71,228 50,379
Write-down of investment............... 37,000 -- 23,441 -- --
Amortization of goodwill............... -- 1,014 1,357 1,286 1,236
Site restoration and abandonment....... (487) 108 (234) 3,513 4,181
Future income taxes.................... (4,101) 5,498 (683) 5,557 6,127
Foreign exchange gains (losses)........ (5,114) (4,602) (5,364) (3,424) 4,997
Other items............................ (9,502) (3,656) 6,188 (516) (5,938)
-------- -------- --------- --------- ---------
173,370 140,246 195,068 193,214 127,583
Changes in non-cash working capital
(note 20).............................. 35,408 (28,371) (42,531) (64,045) (37,604)
-------- -------- --------- --------- ---------
Cash provided by operating activities.... 208,778 111,875 152,537 129,169 89,979
-------- -------- --------- --------- ---------
INVESTING ACTIVITIES
Capital expenditures..................... (92,857) (84,920) (113,567) (116,343) (87,818)
Net proceeds from sale of capital
assets................................. 7,723 7,848 7,848 4,150 --
Italy site restoration payments
(note 10).............................. -- -- -- (8,383) --
Acquisition of business (note 3)......... -- (136,039) (136,039) -- --
Investments.............................. 3,874 10,065 11,255 (7,836) (62,480)
Short-term investments and restricted
cash................................... 18,504 52,339 32,645 151,811 59,954
Other assets............................. 2,018 (14,757) (38,299) (7,638) (24,227)
-------- -------- --------- --------- ---------
Cash provided by (used for) investing
activities............................. (60,738) (165,464) (236,157) 15,761 (114,571)
-------- -------- --------- --------- ---------
FINANCING ACTIVITIES
Short-term debt.......................... (3,814) 14,660 (156,821) (1,283) 2,240
Long-term debt........................... (2,827) (620) 216,558 -- --
Convertible debenture interest
(note 12).............................. (18,000) (18,000) (36,000) (37,500) (40,500)
Dividends on restricted voting shares.... -- (21,784) (21,784) (21,727) --
Dividend paid to minority shareholder.... -- -- -- -- (1,957)
Issue of restricted voting shares........ 241 876 876 843 390
Repurchase of convertible debentures
(note 12).............................. -- -- -- (58,127) --
-------- -------- --------- --------- ---------
Cash provided by (used for) financing
activities............................. (24,400) (24,868) 2,829 (117,794) (39,827)
-------- -------- --------- --------- ---------
INCREASE (DECREASE) IN CASH................ 123,640 (78,457) (80,791) 27,136 (64,419)
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD................................... 109,003 189,794 189,794 162,658 227,077
-------- -------- --------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD... $232,643 $111,337 $ 109,003 $ 189,794 $ 162,658
======== ======== ========= ========= =========
C-40
SHERRITT INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS AT SEPTEMBER 30, 2002 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2002 AND 2001 IS UNAUDITED)
(ALL DOLLAR TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF CANADIAN DOLLARS EXCEPT
PER SHARE AMOUNTS)
1. NATURE OF OPERATIONS
Sherritt International Corporation (the "Corporation") is a diversified
Canadian resource corporation that operates in Canada and internationally.
The Corporation's operations comprise, either directly or through
subsidiaries, a 50% interest in Luscar Ltd., a Canadian coal producer; a 50%
interest in a vertically-integrated commodity nickel/cobalt metals business;
the exploration, development and production of oil and natural gas reserves
worldwide; and investments in power generation, communications, soybean
processing, tourism and agriculture in Cuba.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These consolidated financial statements have been prepared in accordance
with Canadian generally accepted accounting principles. A summary of the
significant differences between Canadian generally accepted accounting
principles and accounting principles generally accepted in the United States
of America is contained in note 23 to these statements.
(A) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the financial position,
results of operations and cash flow of the Corporation, its controlled
subsidiaries and its proportionate interest in joint ventures. Other
entities which are not controlled but over which the Corporation has the
ability to exercise significant influence are accounted for using the
equity method of accounting. Investments in which the Corporation does
not have significant influence are accounted for using the cost method of
accounting.
(B) ACCOUNTING CHANGES
During the first quarter of 2002, the Corporation adopted new
recommendations of the Canadian Institute of Chartered Accountants
("CICA") on accounting for stock-based compensation and goodwill and
intangible assets. Under the new accounting policy for stock-based
compensation, grants of participation units under the stock-linked
compensation plan which are awards that call for settlement in cash, are
accounted for in accordance with the fair-value based methodology,
whereby the difference between the market price and the exercise price is
included in compensation expense over the period in which the
participation units vest. Previously, compensation expense was recognized
for stock-linked compensation when participation units vested. No other
changes were required and no adjustments were required to opening
retained earnings as a result of the adoption of this new accounting
policy. Under the new accounting policy for goodwill and intangible
assets, the Corporation ceased amortization of goodwill on January 1,
2002 and now tests for impairment on an annual basis. Previously,
goodwill was amortized over its estimated useful life of 15 years. This
change in policy has been applied prospectively. The Corporation
completed the required transitional impairment tests during the second
quarter of 2002 and concluded that there was no impairment of goodwill.
In the fourth quarter of 2001, the Corporation retroactively adopted the
new recommendations of the Canadian Institute of Chartered Accountants on
foreign currency translation. The new rules require unrealized gains and
losses on the translation of long term monetary assets and liabilities to
be included in income. Previously, such gains and losses were deferred
and amortized over the life of the respective asset or liability.
Retroactive adoption of this policy had no impact on income from previous
years.
In the fourth quarter of 2000, the Corporation retroactively adopted new
recommendations of the Canadian Institute of Chartered Accountants on
earnings per share. All prior year earnings per share information has
been restated to conform to the new recommendations. Under the new
standard, differences between the cost and carrying amount of convertible
debentures repurchased are included in the calculation of basic and
diluted earnings per share. In addition, the diluted earnings per share
calculation uses the treasury stock method to account for employee stock
options instead of the imputed earnings approach. The effect of these new
recommendations was a $0.10 increase in basic earnings per share for the
year ended December 31, 2000 (1999 -- no change) and a $0.07 increase in
diluted earnings per share for the year ended December 31, 2000
(1999 -- $0.02 increase). A detailed calculation for basic and diluted
earnings per share is included in note 13.
(C) REVENUE RECOGNITION
Revenue is recognized upon transfer of title to the customer based on
contractual agreements and selling prices. For domestic coal sales to
power-generating utilities, this occurs when the coal is delivered to the
generating station; for other domestic customers, this occurs when the
coal is loaded at the mine. Export coal revenue is generally recognized
when the coal has been loaded and the vessel has departed the shipping
location. Metals revenue is recognized when the product is shipped from
the warehouse. Oil revenue is recognized upon production based on the
Corporation's working interest.
C-41
SHERRITT INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS AT SEPTEMBER 30, 2002 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2002 AND 2001 IS UNAUDITED)
(ALL DOLLAR TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF CANADIAN DOLLARS EXCEPT
PER SHARE AMOUNTS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(D) TRANSLATION OF FOREIGN CURRENCIES
The functional currency of the Corporation is Canadian dollars.
Transactions in foreign currencies are translated into Canadian dollars
at rates of exchange at the time of such transactions. Monetary assets
and liabilities are translated at current rates of exchange with the
resultant gains or losses included in income. All of the Corporation's
foreign operations are considered integrated and are translated into
Canadian dollars using current rates of exchange for monetary assets and
liabilities, historical rates of exchange for non-monetary assets and
liabilities, and average rates of exchange for revenues and expenses,
except depletion and amortization which are translated at the rates of
exchange applicable to the related assets. Gains or losses resulting from
these translation adjustments are included in income.
(E) INVENTORY VALUATION
Finished products, raw materials and materials in process are valued at
the lower of average production cost and net realizable value. Spare
parts and operating materials are valued at the lower of average cost and
replacement cost.
(F) OVERBURDEN REMOVAL COSTS
In the Coal business, costs incurred for overburden removal related to
future coal production are recorded as current assets. Overburden removal
costs are charged to earnings at average cost when the coal is produced.
(G) CAPITAL ASSETS
(i) Capitalization
Capital assets are stated at cost, which includes capitalized interest.
In mining operations, costs of exploring for new ore occurrences are
charged to earnings in the period in which they are incurred. When it
has been established that a mineral property has development potential,
which occurs upon completion of a bankable feasibility study detailing
proven and probable reserves of the mineral property, the costs incurred
to develop a mine on the property and further development costs prior to
the start of mining operations are capitalized. The carrying value of
deferred development costs is periodically reviewed using undiscounted
cash flows.
In the Oil and Gas business, the Corporation follows the full cost
method of accounting, whereby all costs associated with the exploration
and development of oil and gas reserves are capitalized in cost centres
on a country-by-country basis. These costs include land acquisitions,
drilling of productive, non-productive and dry or abandoned wells,
geological and geophysical surveys, and overhead expenses related to
exploration and development activities. Costs associated with dry or
abandoned wells on proved properties in producing cost centres are
charged to the full cost pool and subjected to depletion.
Oil and Gas expenditures, net of revenues, incurred in cost centres
which are in the preproduction stage of development are capitalized
until such time as planned significant operations commence. The recovery
of the Corporation's investments in pre-production stage cost centres is
subject to finding and producing oil and gas reserves in economic
quantities. The Corporation periodically reviews the costs associated
with unproved properties and pre-production stage cost centres to
determine whether they are likely to be recovered. When costs are not
likely to be recovered, an impairment allowance is made.
Proceeds from the disposition of oil and gas properties are accounted
for as a reduction in capitalized costs, with no gain or loss recognized
unless such disposition would alter the depletion rate by more than 20%.
(ii) Ceiling Test
Under the full cost method of accounting, the net carrying cost of oil
and gas properties is limited to an estimated recoverable amount. This
amount is the aggregate of future net revenues from the proved reserves
and the costs of undeveloped properties less impairment allowances,
costs to develop proved undeveloped properties, future general and
administrative costs, site restoration and abandonment costs, financing
costs, and income taxes. Future net revenues are calculated using
current or contracted prices, where applicable. Independent engineers
have evaluated estimates of proved developed and undeveloped reserves
and related future net revenues and development costs.
C-42
SHERRITT INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS AT SEPTEMBER 30, 2002 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2002 AND 2001 IS UNAUDITED)
(ALL DOLLAR TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF CANADIAN DOLLARS EXCEPT
PER SHARE AMOUNTS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(iii) Depletion and amortization
Processing, refining, and other manufacturing facilities are amortized
using the straight-line method based on estimated useful lives. Such
lives are generally limited to a maximum of 40 years.
Mine reserves are depleted over their estimated reserve life using the
unit of production method based on proven and probable reserves that do
not require additional capital costs in order to access them. Oil and
gas properties and equipment are depleted using the unit of production
method for proved properties. Management periodically reviews its
estimates of proved reserves and reflects the appropriate adjustments in
the depletion calculations.
(H) SITE RESTORATION AND ABANDONMENT COSTS
Site restoration and abandonment costs are provided for by a systematic
charge to earnings when reasonably determinable. Provisions are
calculated on an undiscounted basis and are based upon engineering
estimates of costs, taking into consideration the anticipated method and
extent of remediation consistent with legal requirements, industry
practices, current technology and the possible uses of the site.
(I) INTANGIBLE ASSET
The cellular telephone concession is amortized over its estimated useful
life of 15 years. Management periodically assesses the value of the
cellular telephone concession by considering current operating results,
trends and prospects.
(J) FINANCIAL INSTRUMENTS
Options, futures, swaps and forward exchange contracts may be used to
hedge the impact of changes in prices of commodities produced or used or
foreign currencies expected to be received or expended. Gains or losses
on these financial instruments that are designated as hedges by the
Corporation are recorded on settlement of the financial instrument and
reported as a component of the related transactions. To the extent that
these financial instruments are not designated as hedges, the value of
these financial instruments is marked to market with the resulting gains
and losses included in income. The Corporation may be exposed to losses
if the counterparties to the above contracts fail to perform. The
Corporation manages this risk by dealing with financially sound
counterparties and by establishing dollar and term limitations for each
counterparty.
Cash and cash equivalents represent cash and short-term deposits with
original maturity dates of three months or less. For purposes of these
financial statements certain amounts, subject to an insignificant amount
of risk of change in value, previously disclosed as cash and cash
equivalents have been reclassified to short-term investments.
Short-term investments are primarily liquid government treasury bills,
bankers' acceptances and bearer deposit notes of authorized banks and
other appropriately rated commercial paper. Investment guidelines limit
investment exposure to any one entity.
(K) INCOME TAXES
The Corporation follows the liability method of accounting for income
taxes. Future income taxes reflect the tax effect of differences between
the book and tax basis of assets and liabilities.
(L) STOCK-BASED COMPENSATION PLANS
The Corporation has chosen to disclose the impact of accounting for all
awards issued under these plans subsequent to January 1, 2002, using the
fair value based method described in the notes to the financial
statements. The Corporation's stock-based compensation plans are
described in note 14. No compensation expense is recognized when stock
options are issued under the Employee and Director Stock Option Plan or
stock issued under the Employee Share Purchase Plan. Any consideration
paid by employees on the exercise of stock options or the purchase of
stock is credited to capital stock. Shares issued under the Incentive
Savings Plan are included as part of compensation expense. Participation
units granted after January 1, 2002 under the stock-linked compensation
plan are awards that call for settlement in cash. Compensation expense is
recognized over the vesting period, and is determined based on the
difference between the market price of the unit and the exercise price at
the end of each reporting period. Compensation expense was recognized
when the units vested for participation units granted prior to
January 1, 2002.
C-43
SHERRITT INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS AT SEPTEMBER 30, 2002 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2002 AND 2001 IS UNAUDITED)
(ALL DOLLAR TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF CANADIAN DOLLARS EXCEPT
PER SHARE AMOUNTS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(M) POST RETIREMENT BENEFITS
Certain employees are covered under defined benefit pension plans, which
provide pensions based on length of service and final average earnings.
These pension plans are accounted for using the projected benefits method
prorated on service to account for the cost of defined benefit pension
plans. Pension costs are based on management's best estimate of expected
plan investment performance, salary escalation and retirement age of
employees. The discount rate used to determine the accrued benefit
obligation is based on market interest rates as at the measurement date
on high quality debt instruments with cash flows that match the timing
and amount of expected benefit payments. For purposes of calculating the
expected return on plan assets, those assets are valued at market-related
value. Valuation allowances are calculated using a five-year average
value. The net actuarial gain (loss) over 10% of the greater of the
benefit obligation and the market-related value of plan assets is
amortized over the remaining service life of active employees.
(N) ESTIMATES
Financial statements prepared in accordance with Canadian generally
accepted accounting principles require management to make estimates and
assumptions that affect the reported amounts of 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.
(O) COMPARATIVE AMOUNTS
Certain comparative amounts have been reclassified to conform to the
current period's presentation.
3. ACQUISITION OF BUSINESS
On May 11, 2001, Sherritt Coal Partnership ("the Partnership"), a
partnership between the Corporation and a subsidiary of Ontario Teachers'
Pension Plan Board, acquired a majority of the outstanding Trust Units
("Units") and Convertible Debentures ("Debentures") of Luscar Coal Income
Fund ("the Fund"). By June 29, 2001, the Partnership had acquired the
remaining Units and Debentures of the Fund. The Fund is an open-ended trust,
which has invested in the securities of Luscar Coal Ltd. ("Luscar Coal") and
Luscar Ltd., a Canadian coal producer. On September 14, 2001, the
Partnership changed its name to Luscar Energy Partnership. On October 5,
2001, the Corporation transferred its interest in Luscar Energy Partnership
to a wholly-owned subsidiary.
Under the terms of the purchase, unitholders of the Fund chose to receive
either cash of $4.00 per Unit or one restricted voting share of the
Corporation for each Unit, provided that the aggregate number of the
Corporation's shares issued was limited to 25 million shares. The Fund's
Debentures were acquired for $1,050 cash per $1,000 principal amount of
debentures plus accrued interest. The Corporation's share of the total
acquisition cost was $236 million, comprising cash consideration of
$136 million and the issue of 25 million restricted voting shares at a value
of $4.00 per share.
The acquisition was accounted for by the Partnership using the purchase
method of accounting. The Partnership's financial statements for the year
ended December 31, 2001 include the combined financial statements of the
Fund from May 12 to December 31, 2001. The Corporation proportionately
consolidates its 50% interest in the results of the Partnership.
C-44
SHERRITT INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS AT SEPTEMBER 30, 2002 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2002 AND 2001 IS UNAUDITED)
(ALL DOLLAR TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF CANADIAN DOLLARS EXCEPT
PER SHARE AMOUNTS)
3. ACQUISITION OF BUSINESS (CONTINUED)
The Corporation's share of the net assets acquired at their fair value was:
Assets acquired
Accounts receivable....................................... $ 45,154
Inventories............................................... 31,203
Overburden removal costs.................................. 14,546
Other current assets...................................... 3,515
Capital assets............................................ 640,829
Other long term assets.................................... 6,312
---------
741,559
Liabilities assumed
Accounts payable and accrued liabilities.................. (32,643)
Debt...................................................... (228,996)
Site restoration and abandonment.......................... (28,411)
Future income taxes....................................... (211,928)
Swaps and forward contracts............................... (3,542)
---------
Net assets acquired......................................... $ 236,039
=========
The following pro forma information provides the summarized consolidated
results of operations as though the acquisition had been completed at the
beginning of each of the fiscal years:
Nine Months Ended Year Ended December 31
September 30, ------------------------------
2001 2001 2000 1999
------------------ -------- -------- --------
(Unaudited)
Pro forma revenues.......................................... $562,784 $751,760 $808,881 $730,564
Pro forma net earnings...................................... 68,259 59,037 86,688 20,490
Pro forma basic earnings (loss) per restricted voting
share..................................................... 0.53 0.38 0.73 (0.03)
4. INTEREST IN JOINT VENTURES
Joint ventures comprise the Corporation's 50% indirect interest in Luscar
Energy Partnership; a 50% indirect interest in the Metals Enterprise,
comprising a mining and processing facility in Moa, Cuba, a metals refinery
in Fort Saskatchewan, Alberta and a metals marketing operation; a
subsidiary's 40% indirect interest in Telefonos Celulares de Cuba S.A.
("Cubacel"), a business providing cellular telephone services in Cuba; and a
49% indirect interest in Procesadora de Soya S.A. ("PDS"), a soybean-based
food processing facility located in Santiago de Cuba, Cuba.
C-45
SHERRITT INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS AT SEPTEMBER 30, 2002 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2002 AND 2001 IS UNAUDITED)
(ALL DOLLAR TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF CANADIAN DOLLARS EXCEPT
PER SHARE AMOUNTS)
4. INTEREST IN JOINT VENTURES (CONTINUED)
The Corporation's interest in joint ventures is summarized below:
As at and for the nine months ended
September 30, 2002
-----------------------------------------
Coal Metals Other Total
-------- -------- -------- --------
(Unaudited)
BALANCE SHEET
Current assets............................................ $129,524 $100,583 $11,658 $241,765
Long-term assets.......................................... 622,987 159,183 38,995 821,165
Current liabilities....................................... 46,672 28,868 16,112 91,652
Long-term liabilities..................................... 454,100 29,921 21,715 505,736
STATEMENT OF OPERATIONS
Revenue................................................... 229,200 152,560 25,931 407,691
Expenses.................................................. 224,020 133,964 24,821 382,805
Net earnings.............................................. 5,180 18,596 1,110 24,886
STATEMENT OF CASH FLOW
Cash provided by (used for):
Operating activities.................................... 25,509 29,230 (3,339) 51,400
Investing activities.................................... (17,249) (5,185) 532 (21,902)
Financing activities.................................... (4,325) -- 5,356 1,031
For the nine months ended
September 30, 2001
-----------------------------------------
Coal Metals Other Total
-------- -------- -------- --------
(Unaudited)
STATEMENT OF OPERATIONS
Revenue................................................... $124,177 $136,648 $16,923 $277,748
Expenses.................................................. 114,867 131,295 15,720 261,882
Net earnings.............................................. 9,310 5,353 1,203 15,866
STATEMENT OF CASH FLOW
Cash provided by (used for):
Operating activities.................................... 17,563 14,475 12,344 44,382
Investing activities.................................... (5,323) (8,163) (6,404) (19,890)
Financing activities.................................... (6,471) (8,000) (2,751) (17,222)
C-46
SHERRITT INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS AT SEPTEMBER 30, 2002 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2002 AND 2001 IS UNAUDITED)
(ALL DOLLAR TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF CANADIAN DOLLARS EXCEPT
PER SHARE AMOUNTS)
4. INTEREST IN JOINT VENTURES (CONTINUED)
As at and for the year ended
December 31, 2001
-----------------------------------------
Coal Metals Other Total
-------- -------- -------- --------
BALANCE SHEET
Current assets............................................ $132,220 $101,304 $12,694 $246,218
Long-term assets.......................................... 637,465 165,877 80,650 883,992
Current liabilities....................................... 50,353 36,674 12,147 99,174
Long-term liabilities..................................... 473,214 27,984 21,714 522,912
STATEMENT OF OPERATIONS
Revenue................................................... 204,450 180,613 25,225 410,288
Expenses.................................................. 196,053 175,804 25,334 397,191
Net earnings (loss)....................................... 8,397 4,809 (109) 13,097
STATEMENT OF CASH FLOW
Cash provided by (used for):
Operating activities.................................... 29,358 33,440 12,509 75,307
Investing activities.................................... (9,498) (14,828) (7,077) (31,403)
Financing activities.................................... 31,780 (8,000) (3,390) 20,390
As at and for the year ended
December 31, 2000
------------------------------
Metals Other Total
-------- -------- --------
BALANCE SHEET
Current assets............................................ $106,214 $ 5,795 $112,009
Long-term assets.......................................... 164,555 80,733 245,288
Current liabilities....................................... 44,131 3,771 47,902
Long-term liabilities..................................... 22,271 -- 22,271
STATEMENT OF OPERATIONS
Revenue................................................... 230,556 16,154 246,710
Expenses.................................................. 187,023 14,726 201,749
Net earnings.............................................. 43,533 1,428 44,961
STATEMENT OF CASH FLOW
Cash provided by (used for):
Operating activities.................................... 46,872 3,017 49,889
Investing activities.................................... (35,610) (16,822) (52,432)
Financing activities.................................... 2,501 (8,162) (5,661)
For the year ended
December 31, 1999
------------------------------
Metals Other Total
-------- -------- --------
STATEMENT OF OPERATIONS
Revenue................................................... $189,982 $ 13,529 $203,511
Expenses.................................................. 161,785 12,702 174,487
Net earnings.............................................. 28,197 827 29,024
STATEMENT OF CASH FLOW
Cash provided by (used for):
Operating activities.................................... 52,766 5,550 58,316
Investing activities.................................... (14,287) (11,994) (26,281)
Financing activities.................................... (1,544) (1,018) (2,562)
C-47
SHERRITT INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS AT SEPTEMBER 30, 2002 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2002 AND 2001 IS UNAUDITED)
(ALL DOLLAR TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF CANADIAN DOLLARS EXCEPT
PER SHARE AMOUNTS)
5. INVENTORIES
December 31
September 30, -------------------
2002 2001 2000
-------------- -------- --------
(Unaudited)
Raw materials............................................... $ 3,442 $ 6,662 $ 6,354
Materials in process........................................ 28,931 22,397 22,280
Finished product............................................ 38,758 39,430 21,986
Spare parts and operating materials......................... 43,641 42,941 26,139
-------- -------- --------
$114,772 $111,430 $ 76,759
======== ======== ========
6. CAPITAL ASSETS
September 30, 2002
--------------------------------------------
Accumulated
Amortization and Net Book
Cost Depletion Value
---------- ------------------ ----------
(Unaudited)
Coal........................................................ $ 667,881 $ 59,461 $ 608,420
Metals...................................................... 282,310 97,087 185,223
Oil and Gas................................................. 878,432 612,015 266,417
Other....................................................... 96,436 37,552 58,884
---------- -------- ----------
$1,925,059 $806,115 $1,118,944
========== ======== ==========
December 31, 2001
--------------------------------------------
Accumulated
Amortization and Net Book
Cost Depletion Value
---------- ------------------ ----------
Coal........................................................ $ 650,432 $ 27,425 $ 623,007
Metals...................................................... 276,691 81,590 195,101
Oil and Gas................................................. 809,321 557,317 252,004
Other....................................................... 100,358 31,463 68,895
---------- -------- ----------
$1,836,802 $697,795 $1,139,007
========== ======== ==========
December 31, 2000
--------------------------------------------
Accumulated
Amortization and Net Book
Cost Depletion Value
---------- ------------------ ----------
Metals...................................................... $ 256,918 $ 62,195 $ 194,723
Oil and Gas................................................. 730,337 495,387 234,950
Other....................................................... 95,478 17,745 77,733
---------- -------- ----------
$1,082,733 $575,327 $ 507,406
========== ======== ==========
The carrying value of unproved oil and gas properties in producing cost
centres at September 30, 2002 was $8.4 million (December 31,
2001 -- $4.2 million; December 31, 2000 -- $2.0 million). The carrying value
of pre-production cost centres at September 30, 2002 was $3.2 million
(December 31, 2001 -- $5.7 million; December 31, 2000 -- $8.9 million). The
amount of general and administrative expenses capitalized for the nine
months ended September 30, 2002 was $7.5 million (2001 -- $9.2 million) and
for the year ended December 31, 2001 was $11.3 million
(2000 -- $13.8 million; 1999 -- $9.2 million).
C-48
SHERRITT INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS AT SEPTEMBER 30, 2002 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2002 AND 2001 IS UNAUDITED)
(ALL DOLLAR TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF CANADIAN DOLLARS EXCEPT
PER SHARE AMOUNTS)
6. CAPITAL ASSETS (CONTINUED)
Included in capital assets at September 30, 2002 is $15.2 million related to
assets under construction (December 31, 2001 -- $10.5 million; December 31,
2000 -- $37.8 million). These assets are not subject to amortization. The
cost of assets under capital lease totalled $6.3 million at September 30,
2002 (December 31, 2001 -- $6.6 million; December 31, 2000 -- nil), less
accumulated amortization of $2.7 million (December 31,
2001 -- $2.1 million; December 31, 2000 -- nil).
7. INVESTMENTS
December 31
September 30, -------------------
2002 2001 2000
-------------- -------- --------
(Unaudited)
Power generation(a)......................................... $ 70,919 $ 72,638 $ 89,021
Tourism(b).................................................. 21,492 22,460 21,910
Mining(c)................................................... 6,401 47,234 65,354
Other....................................................... 2,153 1,075 2,122
-------- -------- --------
$100,965 $143,407 $178,407
======== ======== ========
-------------------
(a) The Corporation owns 49.7% of the common shares of Sherritt Power
Corporation ("Sherritt Power"), a Corporation that constructs and
operates gas-fired power plants in Cuba. This investment is accounted for
using the equity method of accounting. At December 31, 2000 the
Corporation held $75 million principal amount of 11.5% Senior Unsecured
Amortizing Notes ("Notes"), due 2004. The Corporation entered into an
agreement with Sherritt Power (the "Cash Flow Assurances Agreement") in
1998 whereby the Corporation agreed to advance funds to Sherritt Power
under certain circumstances to enable it to fund its obligations to
holders of the Notes, to a maximum of U.S.$12.5 million. These advances
bear interest at LIBOR plus 6% and rank pari passu with the Notes, and
are repayable no later than March 31, 2005.
On March 21, 2001, Sherritt Power Corporation's Noteholders approved an
Extraordinary Resolution to amend the trust indenture governing
$225 million of its Notes. The amendment resulted in the following
changes to the Notes:
(i) an acceleration of the first amortization of $198 per $1,000
principal amount to March 31, 2001 from March 31, 2002;
(ii) a revision to the remaining amortization schedule such that $200
per $1,000 principal amount is amortized on March 31 in each of
2003, 2004 and 2005 and $101 per $1,000 principal amount is
amortized on each of March 31, 2006 and 2007. The original terms
specified amortization payments of $401 per $1,000 principal amount
on each of March 31, 2003 and 2004;
(iii) an increase in the interest rate from 11.50% to 12.125% effective
April 1, 2001; and
(iv) the payment of a consent premium of $15 per $1,000 principal amount
of the Notes.
As a result of this amendment, the Corporation received approximately
$20.3 million from Sherritt Power on April 2, 2001 representing the
payment of the first amortization, the consent premium and accrued
interest. The Corporation also advanced Sherritt Power $19.6 million on
April 2, 2001 under the Cash Flow Assurances Agreement for the purposes
of funding the accelerated amortization. This advance is included in
current advances and loans receivable. The consent premium was deferred
and is being amortized over the remaining term of the Notes.
Accordingly, the Corporation now holds $60.2 million principal amount of
Notes.
(b) The Corporation has a 25% indirect interest in a hotel complex in
Varadero, Cuba, and a 12.5% indirect interest in a hotel complex in
Havana, Cuba. Both investments are accounted for as long-term investments
using the equity method of accounting.
(c) Mining investments comprise the Corporation's investment in Anaconda
Nickel Limited ("Anaconda"), a mining corporation listed on the
Australian Stock Exchange. This investment is accounted for using the
cost method of accounting. During 2001, this investment was written-down
by $23.4 million ($18.8 million after tax) to the Corporation's estimate
of its long-term net realizable value based on available information. In
the third quarter of 2002, this investment was written-down by a further
$37.0 million ($29.8 million after tax) to reflect developments in
Anaconda's financial restructuring.
C-49
SHERRITT INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS AT SEPTEMBER 30, 2002 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2002 AND 2001 IS UNAUDITED)
(ALL DOLLAR TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF CANADIAN DOLLARS EXCEPT
PER SHARE AMOUNTS)
8. OTHER ASSETS
December 31
September 30, -------------------
2002 2001 2000
-------------- -------- --------
(Unaudited)
Advances receivable(a)...................................... $ 26,987 $ 30,332 $ 13,868
Loans receivable(b)......................................... 39,124 37,811 19,355
Cellular telephone concession(c)............................ 22,704 24,333 26,509
Goodwill(c)................................................. 15,098 15,098 16,455
Deposits(d)................................................. -- -- 5,137
Deferred debenture interest (note 12)....................... 7,979 9,401 11,303
Asset held for resale(e).................................... 8,847 8,847 8,847
Deferred financing costs(f)................................. 9,254 9,345 --
Pension plans asset (note 9)................................ 2,226 3,074 --
Other....................................................... 8,550 7,603 4,766
-------- -------- --------
140,769 145,844 106,240
Current portion of advances and loans receivable............ 42,432 42,181 5,027
-------- -------- --------
$ 98,337 $103,663 $101,213
======== ======== ========
-------------------
(a) Advances receivable comprise a $19.6 million advance to Sherritt Power
(note 7(a)) and an advance by a subsidiary of the Corporation to an
agency of the Cuban Government to finance construction of facilities for
the gathering, storage, treatment and transportation of crude oil from
fields in which the Corporation is currently producing oil. Future
obligations of the Corporation to this Cuban agency for treatment and
transportation costs for production from these fields will be offset
against this advance.
(b) A subsidiary of the Corporation has entered into, as lender, an
interest-bearing financing agreement and interest bearing revolving
credit facilities for a combined total of U.S. $32.0 million with PDS for
the construction of a new soybean-based food processing facility in Cuba
and to fund working capital requirements. At September 30, 2002, the
proportionate amount outstanding under these agreements was approximately
$26.2 million (December 31, 2001 -- $24.8 million; December 30,
2000 -- $19.3 million). The loans are repayable from the cash flows of
PDS. Title to the plant remains with the subsidiary of the Corporation
until repayment of the loans. Loans receivable also include working
capital advances to certain joint venture operations.
(c) The cellular telephone concession of $22.7 million as at September 30,
2002 (December 31, 2001 -- $24.3 million; December 31,
2000 -- $26.5 million) and goodwill of $15.1 million as at September 30,
2002 (December 31, 2001 -- $15.1 million; December 31,
2000 -- $16.5 million) are net of amortization of $9.5 million as at
September 30, 2002 (December 31, 2001 -- $7.9 million; December 31,
2000 -- $5.7 million) and $4.9 million as at September 30, 2002
(December 31, 2001 -- $4.9 million; December 31, 2000 -- $3.5 million)
respectively. In July 2000, the Corporation increased its effective
ownership in Cubacel from 37.5% to 40% for a cash consideration of
$4.4 million, of which $1.5 million was allocated to goodwill and
$2.3 million was allocated to the cellular telephone concession.
(d) The Corporation had a term deposit with a Spanish bank to cover the
estimated abandonment costs of oil production facilities in Spain. During
the year ended December 31, 2001, this term deposit was replaced with a
letter of credit in the amount of $6.9 million.
(e) In 2000, the Corporation acquired equipment for a proposed construction
project. This project was subsequently cancelled and the equipment
transferred to assets held for resale. In 2000, a portion of these assets
was sold for a gain of $0.4 million. The remaining asset held for resale
is expected to be disposed of within one year. The asset is recorded at
cost, which is less than the expected net realizable value. The
Corporation has not amortized this asset.
(f) Deferred financing costs comprise costs incurred by Luscar Coal as a
result of the issue of U.S.$275 million, 9.75% Unsecured Senior Notes
(note 11).
C-50
SHERRITT INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS AT SEPTEMBER 30, 2002 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2002 AND 2001 IS UNAUDITED)
(ALL DOLLAR TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF CANADIAN DOLLARS EXCEPT
PER SHARE AMOUNTS)
9. POST RETIREMENT BENEFITS
The Corporation and its affiliates sponsor defined benefit and defined
contribution pension arrangements covering substantially all of its
employees. Defined benefit pension plans relate primarily to the Coal
business acquired in 2001; accordingly, comparative figures have not been
provided. The majority of the remaining employees are members of defined
contribution plans.
The following table summarizes the significant actuarial assumptions used to
calculate the pension expense and obligations under the defined benefit
pension plans as at December 31, 2001:
Expected long-term rate of return on plan assets............ 4.0 - 8.0%
Discount rate on pension obligations........................ 6.5 - 7.0%
Rate of compensation increases.............................. 3.5 - 5.0%
Average remaining service period of active employees........ 3 - 15 years
Actuarial reports and updates are prepared by independent actuaries for
funding and accounting purposes. Net pension plan expense is:
Year ended
December 31, 2001
-------------------
Current service cost
-- defined benefit....................................... $ 921
-- defined contribution.................................. 5,633
Interest cost............................................... 1,654
Expected return on plan assets.............................. (1,821)
Amortization of net transitional obligation................. 305
Increase in valuation allowance at end of year.............. 466
Amortization of net actuarial loss.......................... 666
-------
Net pension plan expense.................................... $ 7,824
=======
During the year ended December 31, 2000, the current service cost of defined
contribution plans was $1.6 million (1999 -- nil).
C-51
SHERRITT INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS AT SEPTEMBER 30, 2002 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2002 AND 2001 IS UNAUDITED)
(ALL DOLLAR TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF CANADIAN DOLLARS EXCEPT
PER SHARE AMOUNTS)
9. POST RETIREMENT BENEFITS (CONTINUED)
Information on the defined benefit pension benefit plans, in aggregate, is
set out below:
Year ended
December 31, 2001
-------------------
ACCRUED BENEFIT OBLIGATION
Balance, beginning of year.................................. $33,291
Current service costs....................................... 921
Interest cost............................................... 1,654
Benefits paid............................................... (3,716)
Employee contributions...................................... 62
Actuarial loss.............................................. 2,299
-------
Balance, end of year........................................ $34,511
-------
PLAN ASSETS
Fair value, beginning of year............................... $34,513
Actual return on plan assets................................ 2,010
Employer contributions...................................... 2,336
Employee contributions...................................... 62
Benefits paid............................................... (3,716)
-------
Fair value, end of year..................................... $35,205
-------
FUNDED STATUS -- SURPLUS.................................... $ 694
Unamortized net actuarial losses............................ 2,063
Unamortized net transitional obligation..................... 783
Valuation allowance......................................... (466)
-------
Net pension asset........................................... $ 3,074
=======
The accrued benefit obligations and fair value of plan assets for pension
plans with accrued benefit obligations in excess of plan assets were
$20.0 million and $15.9 million, respectively, as at December 31, 2001.
10. SITE RESTORATION AND ABANDONMENT
December 31
September 30, ---------------------
2002 2001 2000
-------------- --------- ---------
(Unaudited)
Balance, beginning of year.................................. $54,826 $26,649 $31,519
Provision................................................... 7,098 7,462 3,513
Coal business acquisition (note 3).......................... -- 28,411 --
Paid during the year........................................ (7,585) (7,696) (8,383)
------- ------- -------
Balance, end of year........................................ 54,339 54,826 26,649
Payable within one year..................................... 10,501 10,501 --
------- ------- -------
$43,838 $44,325 $26,649
======= ======= =======
Site restoration payments in 2001 relate primarily to the Coal business.
Site restoration payments during 2000 primarily comprise the Corporation's
payment to the purchaser upon disposition of its interest in the Vega
concession and platform in Italy, as a contribution of future well plugging
and decommissioning costs. Under the terms of the agreement, the Corporation
is indemnified against all future environmental liabilities, including the
decommissioning of the Vega platform.
The Corporation has estimated future site restoration obligations, which it
believes will meet current regulatory requirements, to be $95.9 million
(including amounts already accrued). The Corporation expects to spend
$53.3 million within the next five years. Future changes, if any, in
regulations and cost estimates may be significant and will be recognized
when known.
C-52
SHERRITT INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS AT SEPTEMBER 30, 2002 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2002 AND 2001 IS UNAUDITED)
(ALL DOLLAR TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF CANADIAN DOLLARS EXCEPT
PER SHARE AMOUNTS)
11. LONG-TERM DEBT
September 30, 2002 December 31, 2001
------------------- ------------------
(Unaudited)
Senior Notes(a)............................................. $218,048 $219,038
-------- --------
Promissory Notes(b)
12.75% promissory note, due May 18, 2003.................. 22,500 22,500
less: sinking fund........................................ (11,293) (10,607)
-------- --------
11,207 11,893
-------- --------
9.625% promissory note, due December 30, 2004............. 44,650 44,650
less: sinking fund........................................ (20,539) (19,079)
-------- --------
24,111 25,571
-------- --------
Capital lease obligations(c)................................ 3,678 4,359
-------- --------
257,044 260,861
Current portion of long-term debt........................... (12,890) (1,607)
-------- --------
$244,154 $259,254
======== ========
(a) On October 10, 2001, Luscar Coal issued at par U.S.$275 million of 9.75%
unsecured senior notes ("Senior Notes"), due October 15, 2011. Interest
on the Senior Notes is payable semi-annually on April 15 and October 15
in each year, beginning April 15, 2002. Approximately $349 million of the
$417 million in net proceeds from the issue was used to repay borrowings
and terminate the existing credit facility.
Luscar Energy Partnership, the Fund and Luscar Coal's material
subsidiaries have guaranteed the principal and interest obligations on
the Senior Notes and the bank credit facility. The terms of the Senior
Notes include covenants which restrict the ability of Luscar Coal and the
guarantors to incur additional indebtedness, issue equity, make
investments, declare or pay distributions, incur payment restrictions
that other parties may impose, conduct transactions with affiliates, sell
assets or use proceeds from permitted asset sales, incur liens, and
consolidate or merge with, or into, or transfer all or substantially all
of an entity's assets, to another person.
(b) The promissory notes were issued to finance the acquisition of a
dragline and mine in conjunction with long-term coal supply agreements
with a Crown corporation. The 12.75% promissory note is secured by a
mortgage on the dragline and the 9.625% promissory note is secured by the
assets, rights and agreements related to the mine. Amounts paid to
Luscar Ltd. under the terms of the coal supply agreements with the Crown
corporation include a component intended to substantially reimburse
Luscar Ltd. for the interest and sinking fund payments made in respect of
the promissory notes. At maturity, Luscar Ltd. is obligated to repay the
promissory notes, net of related sinking funds. The coal supply
agreements require the Crown corporation to immediately reimburse
Luscar Ltd. for any net repayment required above the sinking fund
proceeds.
(c) Obligations under capital leases bear interest at fixed rates ranging
from 6.17% to 7.25% and mature between 2002 and 2006.
Long-term debt repayments in each of the next five fiscal years and
thereafter are as follows:
Long-Term Debt Capital Leases
--------------- --------------
2002........................................................ $ 671 $1,217
2003........................................................ 12,116 1,217
2004........................................................ 24,677 1,308
2005........................................................ -- 1,039
2006........................................................ -- 88
and thereafter.............................................. 219,038 --
-------- ------
256,502 4,869
Interest included therein................................... -- (510)
-------- ------
$256,502 $4,359
======== ======
C-53
SHERRITT INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS AT SEPTEMBER 30, 2002 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2002 AND 2001 IS UNAUDITED)
(ALL DOLLAR TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF CANADIAN DOLLARS EXCEPT
PER SHARE AMOUNTS)
11. LONG-TERM DEBT (CONTINUED)
Interest on long-term debt for the nine months ended September 30, 2002 was
$19.7 million (2001 -- $2.0 million) and for the year ended December 31,
2001 was $8.0 million (2000 and 1999 -- nil).
12. CONVERTIBLE DEBENTURES
As at September 30, 2002, convertible debentures comprise $600 million
(December 31, 2001 and 2000 -- $600 million) of 6% convertible unsecured
subordinated debentures issued in November 1996. The debentures have a
maturity date of December 15, 2006, and are convertible at the option of the
holder into restricted voting shares of the Corporation at a conversion
price of $8.775 per restricted voting share. Interest payments on the
debentures are made on June 15 and December 15. The convertible debentures
are redeemable, provided that the trading price of the Corporation's
restricted voting shares reaches certain levels. Subject to regulatory
approval, the Corporation may, at its option, satisfy the obligation to pay
interest on the convertible debentures or repay the principal amount of the
convertible debentures on redemption or at maturity in restricted voting
shares. The convertible debentures are included as part of shareholders'
equity and are stated net of issue costs less applicable tax relief.
The convertible debentures were distributed on an instalment basis with the
final instalment of $338 million received on December 1, 1997. Interest
payable to debenture holders was determined on the $675 million outstanding
from the date of issue. Deferred debenture interest included in other assets
as at September 30, 2002 of $8.0 million (December 31,
2001 -- $9.4 million; December 31, 2000 -- $11.3 million) represents the
portion of interest relating to the final instalment of outstanding
debentures, which was deferred and is being amortized through retained
earnings over the term of the debentures. Accordingly, the effective
interest rate of the debentures is 6.32%.
During the year ended December 31, 2000, the Corporation repurchased for
cancellation through substantial issuer bids, a total of $75.0 million
principal amount of debentures at prices ranging from $710 to $830 per
$1,000 principal amount of debentures, for a total cost (including accrued
interest and expenses) of $58.1 million. The difference between the cost and
carrying amount of the debentures repurchased, net of related future taxes
and deferred debenture interest, of $6.7 million is included in
shareholders' equity as part of contributed surplus. No convertible
debentures were repurchased during the year ended December 31, 2001 or the
nine-month period ended September 30, 2002.
Interest on the convertible debentures for the nine month period ended
September 30, 2002 is stated net of tax relief of $10.9 million
(2001 -- $11.9 million) and $16.0 million for the year ended December 31,
2001 (2000 -- $17.8 million; 1999 -- $19.0 million).
13. CAPITAL STOCK
The Corporation's authorized share capital consists of an unlimited number
of restricted voting shares plus 100 multiple voting shares.
Ian W. Delaney, the Chairman of the Board, holds all of the multiple voting
shares, giving him sufficient votes to elect a majority of the directors to
the Board, subject to limitations contained in the articles of incorporation
of the Corporation. These limitations include provisions that the multiple
voting shares are non-transferable, are not entitled to any dividends or
distributions of assets and are automatically converted into restricted
voting shares on a share-per-share basis upon the occurrence of certain
events.
C-54
SHERRITT INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS AT SEPTEMBER 30, 2002 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2002 AND 2001 IS UNAUDITED)
(ALL DOLLAR TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF CANADIAN DOLLARS EXCEPT
PER SHARE AMOUNTS)
13. CAPITAL STOCK (CONTINUED)
Holders of the restricted voting shares are entitled to receive dividends
and distributions of assets. The Corporation's outstanding restricted voting
shares are as follows:
Nine months ended Year ended
September 30, 2002 December 31, 2001
----------------------------- ---------------------------
Number Stated capital Number Stated capital
------------ -------------- ---------- --------------
(Unaudited) (Unaudited)
Beginning of period......................................... 97,711,764 $450,716 72,496,036 $349,840
Shares issued:
Acquisition of Luscar....................................... -- -- 25,000,087 100,000
Exercise of stock options................................... -- -- 40,000 122
Other stock compensation plans.............................. 50,125 241 175,641 754
Reduction in stated value................................... -- -- -- --
---------- -------- ---------- --------
End of period............................................... 97,761,889 $450,957 97,711,764 $450,716
========== ======== ========== ========
Year ended Year ended
December 31, 2000 December 31, 1999
--------------------------- ---------------------------
Number Stated capital Number Stated capital
---------- -------------- ---------- --------------
Beginning of period......................................... 72,269,069 $548,997 72,139,236 $548,607
Shares issued:
Exercise of stock options................................... -- -- -- --
Other stock compensation plans.............................. 226,967 843 129,833 390
Reduction in stated value................................... -- (200,000) -- --
---------- -------- ---------- --------
End of period............................................... 72,496,036 $349,840 72,269,069 $548,997
========== ======== ========== ========
On May 25, 2000, the shareholders approved the elimination of the
Corporation's December 31, 1999 accumulated deficit of $6.9 million and the
creation of a contributed surplus in the amount of $193 million by way of a
$200 million reduction in the stated value of the Corporation's restricted
voting shares. This contributed surplus may be utilized to eliminate or
reduce any deficit which may arise as a result of the future payment or
distribution of dividends or other distributions from time to time to
holders of the restricted voting shares.
If all of the convertible debentures are converted into shares at the option
of the holders, up to 68,376,068 additional restricted voting shares may be
issued on or before December 14, 2006.
C-55
SHERRITT INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS AT SEPTEMBER 30, 2002 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2002 AND 2001 IS UNAUDITED)
(ALL DOLLAR TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF CANADIAN DOLLARS EXCEPT
PER SHARE AMOUNTS)
13. CAPITAL STOCK (CONTINUED)
The following table presents the calculation of basic and diluted earnings
per restricted voting share. In the table, the number of shares is stated in
thousands.
Nine months ended Year ended
September 30 December 31
------------------------- ------------------------------
2002 2001 2001 2000 1999
----------- ----------- -------- -------- --------
(Unaudited) (Unaudited)
Net earnings.............................................. $ 45,816 $ 60,817 $ 51,595 $115,570 $ 66,601
Interest on convertible debentures........................ (17,400) (16,408) (21,938) (22,675) (23,614)
Effect of repurchase of convertible debentures
(note 12)............................................... -- -- -- 6,685 --
-------- -------- -------- -------- --------
Net earnings applicable to restricted voting shareholders
and after repurchase of convertible debentures.......... 28,416 44,409 29,657 99,580 42,987
Interest on convertible debentures...................... 17,400 16,408 21,938 22,675 23,614
-------- -------- -------- -------- --------
Net earnings applicable to restricted voting shareholders
plus assumed conversions................................ $ 45,816 $ 60,817 $ 51,595 $122,255 $ 66,601
======== ======== ======== ======== ========
Weighted average number of restricted voting
shares -- basic......................................... 97,729 85,278 88,412 72,378 72,215
Weighted average effect of dilutive securities:
Employee stock options.................................. 251 245 229 203 12
Convertible debentures.................................. 68,376 68,376 68,376 73,015 76,923
-------- -------- -------- -------- --------
Weighted average number of restricted voting shares for
diluted calculation..................................... 166,356 153,899 157,017 145,596 149,150
======== ======== ======== ======== ========
Earnings per restricted voting share -- basic............. $ 0.29 $ 0.52 $ 0.34 $ 1.38 $ 0.60
Earnings per restricted voting share -- diluted........... 0.28 0.40 0.33 0.84 0.45
======== ======== ======== ======== ========
The calculation of diluted earnings per share assumes that employee stock
options were exercised at the beginning of the year or time of issuance, if
later. Employee stock options with an exercise price greater than the
average market price of the restricted voting shares were not included in
the calculation of diluted earnings per share as the impact was
anti-dilutive. The average market price of the restricted voting shares
during the nine months ended September 30, 2002 was $4.75 (2001 -- $4.64)
and was $4.50 during the year ended December 31, 2001 (2000 -- $4.18;
1999 -- $3.09).
14. STOCK COMPENSATION PLANS
The Corporation established an Employee and Director Stock Option Plan (the
"Option Plan") in 1995 to govern the granting of certain options to purchase
restricted voting shares in the Corporation. The current maximum number of
options which may be issued under the Option Plan is 6,784,670. Under the
Option Plan, the exercise price of each option equals the closing market
price of the Corporation's stock on the day prior to the date the option is
granted and an option's maximum term is ten years. Options vest on such
terms as the Compensation Committee of the Board of Directors determines,
generally in three equal instalments on the first, second and third
anniversaries of the date the options are granted.
A summary of the status of the Corporation's Option Plan is presented below:
Nine months ended Year ended
September 30, 2002 December 31, 2001
---------------------------- ----------------------------
Weighted average Weighted average
Options exercise price Options exercise price
--------- ---------------- --------- ----------------
(Unaudited)
Outstanding, beginning of period.......................... 6,425,000 $6.64 6,465,000 $6.61
Exercised................................................. -- -- (40,000) 3.05
--------- ----- --------- -----
Outstanding, end of period................................ 6,425,000 6.64 6,425,000 6.64
========= ===== ========= =====
C-56
SHERRITT INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS AT SEPTEMBER 30, 2002 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2002 AND 2001 IS UNAUDITED)
(ALL DOLLAR TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF CANADIAN DOLLARS EXCEPT
PER SHARE AMOUNTS)
14. STOCK COMPENSATION PLANS (CONTINUED)
Year ended Year ended
December 31, 2000 December 31, 1999
---------------------------- ----------------------------
Weighted average Weighted average
Options exercise price Options exercise price
--------- ---------------- --------- ----------------
Outstanding, beginning of period.......................... 6,405,000 $6.63 6,385,000 $6.64
Granted................................................... 60,000 5.05 20,000 2.70
--------- ----- --------- -----
Outstanding, end of period................................ 6,465,000 6.61 6,405,000 6.63
========= ===== ========= =====
The following table summarizes information on stock options outstanding at
December 31, 2001:
Options outstanding Options exercisable
------------------------------------------------- ------------------------------
Weighted-average
Number remaining Weighted-average Number Weighted-average
Range of exercise prices outstanding contractual life exercise price exercisable exercise price
------------------------ ----------- ---------------- ---------------- ----------- ----------------
$2.70 - $4.70....................... 700,000 6.8 years $3.04 693,333 $3.04
4.71 - 6.70....................... 3,385,000 4.0 years 6.53 3,345,000 6.55
6.71 - 8.30....................... 2,340,000 4.4 years 7.86 2,340,000 7.86
Under the Employee Share Purchase Plan ("ESPP"), the Corporation is
authorized to issue up to 400,000 restricted voting shares to its full time
employees who are eligible to participate after one year of continuous
service. Under the terms of the ESPP, employees may elect to have an amount
(up to 5% of their previous year's base earnings) withheld by payroll
deduction over a two year period to purchase restricted voting shares of the
Corporation. The purchase price of the restricted voting shares is the lower
of the share price at the beginning of the two year period and the share
price at the end of the period. The Corporation issued 102,745 restricted
voting shares to employees during the year ended December 31, 2001 under the
ESPP and has, since its inception in 1996, issued an aggregate of 194,850
restricted voting shares to employees.
On September 21, 2000, the Corporation established a stock-linked
compensation plan (the "Plan"). Under the terms of the Plan, participation
units may be issued to directors, senior management and other employees. The
participation units represent a right to receive a cash amount from the
Corporation equivalent to the amount by which the market price of the
Corporation's restricted voting shares at time of exercise exceeds the
market price of such shares at the time of the grant. The Corporation
granted 160,000 participation units during the year ended December 31, 2001
(December 31, 2000 -- nil) at a price of $5.5559. The participation units
vest in three equal instalments on the first, second and third anniversaries
of the date the participation units are granted. No participation units were
granted during the nine months ended September 30, 2002.
During the year ended December 31, 2001, the Corporation issued 72,896
restricted voting shares (2000 -- 190,202 restricted voting shares) to the
Trustees under the Incentive Savings Plan and subsequently wound-up this
plan.
15. NET FINANCING INCOME (EXPENSE)
Nine months ended Year ended
September 30 December 31
--------------------------- ------------------------------
2002 2001 2001 2000 1999
------------ ------------ -------- -------- --------
(Unaudited) (Unaudited)
Interest on cash, short-term investments and loans........ $ 2,016 $ 6,216 $ 8,020 $17,576 $25,688
Interest income from affiliates........................... 5,455 5,763 7,602 8,625 8,625
Interest expense on debt.................................. (21,015) (8,204) (16,781) -- --
Other interest income (expense)........................... (1,593) (121) 232 (580) (2,392)
Foreign exchange gains (losses)........................... 5,114 4,602 5,364 3,424 (4,997)
-------- ------- -------- ------- -------
$(10,023) $ 8,256 $ 4,437 $29,045 $26,924
======== ======= ======== ======= =======
C-57
SHERRITT INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS AT SEPTEMBER 30, 2002 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2002 AND 2001 IS UNAUDITED)
(ALL DOLLAR TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF CANADIAN DOLLARS EXCEPT
PER SHARE AMOUNTS)
16. INCOME TAXES
The following table reconciles income taxes calculated at a combined
Canadian federal/provincial income tax rate with the income tax expense in
the consolidated financial statements for the three years ended
December 31:
Year ended December 31
-------------------------------
2001 2000 1999
-------- --------- --------
Earnings before taxes....................................... $ 56,291 $ 147,721 $ 90,320
-------- --------- --------
Combined basic income tax rate.............................. 42.1% 44.0% 44.6%
Income tax at the combined basic rate....................... $ 23,710 $ 64,923 $ 40,301
Increase (decrease) in taxes resulting from:
Large Corporation Tax..................................... 1,183 1,108 1,834
Difference between Canadian and foreign tax rates......... (32,552) (34,996) (20,251)
Reduction in future income tax rates...................... (1,858) (3,942) --
Untaxed portion of capital losses......................... 5,247 -- --
Future tax assets not recognized.......................... 12,498 3,347 --
Recognition of unrecorded future income tax assets from
previous years.......................................... -- -- (4,578)
Resource allowance........................................ (3,721) -- --
Other items............................................... 189 1,711 6,413
-------- --------- --------
Income tax expense.......................................... $ 4,696 $ 32,151 $ 23,719
======== ========= ========
Total income tax expense is included in the consolidated statements of
operations and retained earnings as follows:
Year ended December 31
------------------------------
2001 2000 1999
-------- -------- --------
Income tax expense.......................................... $ 4,696 $ 32,151 $ 23,719
Tax benefit on convertible debenture interest............... (15,964) (17,780) (19,026)
-------- -------- --------
$(11,268) $ 14,371 $ 4,693
======== ======== ========
The current and future income taxes for each of the years ended December 31
are as follows:
2001 2000 1999
-------- -------- --------
Current income tax expense
Canada.................................................... $ 2,183 $ 1,007 $ 1,694
Cuba...................................................... 890 23,741 14,839
Other..................................................... 2,306 1,846 1,059
------- ------- -------
5,379 26,594 17,592
------- ------- -------
Future income tax expense (recovery)
Canada.................................................... 390 5,557 3,050
Cuba...................................................... -- -- --
Other..................................................... (1,073) -- 3,077
------- ------- -------
(683) 5,557 6,127
------- ------- -------
Income tax expense.......................................... $ 4,696 $32,151 $23,719
======= ======= =======
C-58
SHERRITT INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS AT SEPTEMBER 30, 2002 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2002 AND 2001 IS UNAUDITED)
(ALL DOLLAR TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF CANADIAN DOLLARS EXCEPT
PER SHARE AMOUNTS)
16. INCOME TAXES (CONTINUED)
Future income taxes consisted of the following temporary differences:
December 31
--------------------
2001 2000
--------- --------
Future income tax assets:
Capital assets............................................ $ 922 $ 7,656
Tax loss carryforwards.................................... 46,919 24,840
--------- -------
47,841 32,496
Valuation allowance....................................... (18,151) (6,662)
--------- -------
29,690 25,834
--------- -------
Future income tax liabilities:
Capital assets............................................ 213,712 9,329
Deferred debenture interest............................... 3,960 4,968
Other..................................................... 1,511 4,311
--------- -------
219,183 18,608
--------- -------
Net future income tax asset (liability)..................... $(189,493) $ 7,226
========= =======
At December 31, 2001, the Corporation had income tax losses of approximately
$115 million (December 31, 2000 -- $77.9 million), which may be used to
reduce future taxable income. Substantially all of these income tax losses,
which expire between 2002 and 2008, are located in Canada. The Corporation
also had $1.4 million of capital losses at December 31, 2001 (December 31,
2000 -- $1.4 million). The benefit relating to $16.1 million (December 31,
2000 -- $14.7 million) of tax losses was not recognized in the financial
statements.
17. FINANCIAL INSTRUMENTS
As at September 30, 2002, the estimated fair value of the Anaconda
investment was approximately $6.7 million (December 31, 2001 --
$20.3 million; December 31, 2000 -- $62.7 million). The estimated fair value
of the Sherritt Power common shares and Notes was $77.5 million
(December 31, 2001 -- $69.5 million; December 31, 2000 -- $76.3 million).
The Corporation expects to hold the Notes until maturity. Fair values of
investments are determined based on market quotes at the balance sheet date
or the last trade closest to the balance sheet date. As at September 30,
2002, the estimated fair value of loans and advances receivable was
$68.9 million (December 31, 2001 -- $65.7 million; December 31,
2000 -- $33.2 million) and the estimated fair value of long-term debt was
approximately $267 million (December 31, 2001 -- $266 million; December 31,
2000 -- nil). Fair values of loans and advances are estimated based on
discounted cash flows. The fair values of other financial instruments
approximate carrying value. Due to the use of subjective judgment and
uncertainties in the determination of estimated fair values, these values
should not be interpreted as being realizable in an immediate settlement of
the respective financial instruments.
During the period ended September 30, 2002, the Corporation's cash
equivalents and short-term investments had a weighted average interest rate
of 2.3% (December 31, 2001 -- 4.4%; December 31, 2000 -- 5.5%; December 31,
1999 -- 4.8%).
Cash subject to restrictions on use at September 30, 2002 was $15.4 million
(December 31, 2001 -- $23.8 million).
Unutilized lines of credit at September 30, 2002 were $39.8 million
(December 31, 2001 -- $43.2 million; December 31, 2000 -- $45.3 million). At
September 30, 2002, the Corporation had outstanding letters of credit of
approximately $52.2 million (December 31, 2001 -- approximately
$49.4 million; December 31, 2000 -- $4.9 million).
Short-term debt comprises unsecured obligations and other obligations
secured by receivables and inventory of certain joint venture operations and
a charge on a dragline. These obligations bear interest at floating rates.
During the period ended September 30, 2002, the effective interest rate on
short-term indebtedness was 4.6% (December 31, 2001 -- 7.1%; December 31,
2000 -- 8.2%; December 31, 1999 -- 7.4%).
The Coal business, under forward currency exchange contracts entered into
with Canadian chartered banks, will sell U.S. currency that it expects to
receive pursuant to long-term sales agreements, thereby reducing the impact
on export revenues caused by fluctuations in
C-59
SHERRITT INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS AT SEPTEMBER 30, 2002 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2002 AND 2001 IS UNAUDITED)
(ALL DOLLAR TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF CANADIAN DOLLARS EXCEPT
PER SHARE AMOUNTS)
17. FINANCIAL INSTRUMENTS (CONTINUED)
the rate of exchange between U.S. and Canadian currencies. The Corporation's
proportionate share of outstanding forward currency exchange contracts was
as follows:
September 30, 2002 December 31, 2001
------------------- ------------------
(Unaudited)
Contract amount............................................. US$ 2,500 US$ 10,000
Settlement dates............................................ 2002 2002
Exchange rate............................................... 0.6779 0.6761
Book value.................................................. 207 752
Unrealized loss............................................. 84 369
The Coal business is also obligated under an interest rate swap agreement,
which fixes the interest rate of a notional amount of $50 million of
floating rate debt at 5.72% plus the applicable interest rate margin. This
swap expires in December 2003 and was originally established to hedge Luscar
Coal's exposure to its floating interest rate debt, which was repaid in
October 2001. The Corporation's share of the unrealized loss on this
contract at the date of acquisition of $3.5 million was recognized as part
of the purchase equation and was being amortized over the remaining term of
the respective contract.
Upon the repayment in October 2001 of the long-term bank debt for which the
interest rate swap was associated, the interest rate swap was restated to
its fair value at that date with the change in fair value from the date of
acquisition applied against interest expense. Subsequent changes in the fair
value and net settlements under the interest rate swap are recorded as other
interest expense.
The Corporation's share of the fair market value of the interest rate swap
was $1.8 million at September 30, 2002 (December 31, 2001 -- $2.8 million).
The fair value of derivative contracts is estimated by the amount the
Corporation would need to pay to terminate the contracts at that date.
The Corporation has equity investments, current assets, loans and advances
located in Cuba as at September 30, 2002 of approximately $346 million
(December 31, 2001 -- approximately $357 million; December 31,
2000 -- approximately $301 million). The Cuban Government's future policies
relating to foreign investors and foreign exchange payments could be
affected by the political environment and economic pressure resulting from
the Cuban Government's limited access to foreign exchange.
As at September 30, 2002, accounts receivable included approximately
$30.4 million (December 31, 2001 -- approximately $42.9 million;
December 31, 2000 -- approximately $31.4 million) of unbilled revenue
primarily related to cost recovery oil production in Cuba. Under the terms
of the production sharing contracts, cost recovery oil production becomes
billable after certification of accumulated development and operating costs.
18. RELATED PARTY TRANSACTIONS
Subsidiaries of the Corporation provide goods, labour, advisory and other
administrative services to affiliates at cost, commercial rates, and other
various contractual terms. The Corporation and its subsidiaries also market
all of the cobalt, a portion of the nickel, and certain by-products produced
by the Metals Enterprise, pursuant to sales agreements.
The total value of all goods and services, including labour services, that
the Corporation and its subsidiaries provided to affiliates during the nine
months ended September 30, 2002 amounted to $82.5 million
(2001 -- $72.4 million) and $96.4 million during the year ended
December 31, 2001 (2000 -- $96.2 million; 1999 -- $63.4 million). The total
value of goods and services purchased from affiliates during the nine months
ended September 30, 2002 was $10.3 million (2001 -- $10.7 million) and
during the year ended December 31, 2001 was $14.0 million
(2000 -- $9.0 million; 1999 -- $8.3 million).
Accounts receivable from affiliates at September 30, 2002, totalled
$3.0 million (December 31, 2001 -- $6.3 million; December 31,
2000 -- $6.3 million). Accounts payable to affiliates at September 30, 2002
totalled $0.9 million (December 31, 2001 -- $1.7 million; December 31,
2000 -- $1.7 million).
C-60
SHERRITT INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS AT SEPTEMBER 30, 2002 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2002 AND 2001 IS UNAUDITED)
(ALL DOLLAR TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF CANADIAN DOLLARS EXCEPT
PER SHARE AMOUNTS)
19. COMMITMENTS AND CONTINGENCIES
The Corporation is committed to annual payments under operating leases as
follows: 2002 -- $3.0 million; 2003 -- $1.0 million; 2004 -- $0.6 million;
2005 and thereafter -- $0.3 million.
On April 2, 2001, the Corporation advanced $19.6 million to Sherritt Power
pursuant to the Cash Flow Assurances Agreement dated March 1998. The
Corporation also committed under this agreement to reimburse Sherritt Power
for amounts deducted from distributions by the project on account of Cuban
income taxes up to an aggregate maximum of U.S.$5.0 million, in exchange for
an assignment to the Corporation of Sherritt Power's rights to investment
credits arising on payment of this tax. If required, the Corporation will
also provide bridge financing to Sherritt Power on commercial terms.
The Corporation had other outstanding commitments aggregating $1.3 million
at September 30, 2002 (December 31, 2001 -- $5.3 million) which comprise
power purchase commitments.
The Metals Enterprise intends to continue investing in capital projects over
the next three years to ensure that the Moa, Cuba operations meet applicable
national and international environmental standards. It is anticipated that
the Metals Enterprise will generate sufficient funds from internal sources
to finance these expenditures.
The agreements establishing the Metals Enterprise require the unanimous
consent of its shareholders to pay dividends. It is not expected that this
restriction will have a material impact on the ability of the Corporation to
meet its obligations.
A number of the Corporation's subsidiaries and affiliates have operations
located in Cuba. The Corporation will continue to be affected by the
difficult political relationship between the United States and Cuba. The
Corporation does not, directly or indirectly, hold any assets in the United
States. The Corporation has received letters from U.S. citizens claiming
ownership of certain Cuban properties or rights in which the Corporation has
an indirect interest, and explicitly or implicitly threatening litigation.
Having regard to legal and other developments in the United States, and
remedies available in Canada and in Europe, the Corporation believes that
the impact of any claims against it will not be material.
In May 2000, Deutsche Bank Canada ("DBC") delivered an Application and
supporting materials, filed with the Court of Queen's Bench of
New Brunswick, seeking a declaration that DBC had been "oppressed" by the
Corporation in its capacity as a holder of Sherritt debentures, and seeking
a variety of relief. During the third quarter of 2001, DBC discontinued its
claim with no settlement, payment by, or admission of wrongdoing by the
Corporation. The court order approving the discontinuance also provided that
it shall be a complete defense to any subsequent proceeding that might arise
out of the same subject matter.
In October 2001, the Corporation received a statement of claim setting out a
claim against it and Dynatec Corporation, brought in the Supreme Court of
Victoria, Australia, by Fluor Australia Pty. Ltd. ("Fluor"). The claim
relates to alleged deficiencies in the facilities of Anaconda Nickel
Limited's ("Anaconda Nickel") Murrin Murrin mine development in Australia.
The alleged deficiencies are the subject of an ongoing arbitration commenced
by Anaconda Nickel against Fluor, which was retained by Anaconda Nickel to
provide engineering, procurement and construction services. In the
arbitration proceedings, Anaconda Nickel alleges that Fluor breached the
services contract between them. The Corporation believes Fluor's claim is
without merit and intends to defend it vigorously.
20. STATEMENTS OF CASH FLOW
The net changes in non-cash working capital balances related to operations
are as follows:
Nine Months Ended Year Ended
September 30 December 31
--------------------------- ------------------------------
2002 2001 2001 2000 1999
------------ ------------ -------- -------- --------
(Unaudited) (Unaudited)
Decrease (increase) in non-cash working capital
Accounts receivable.................................... $33,291 $(34,232) $(35,858) $(49,789) $(49,322)
Inventories............................................ (3,342) (8,364) (3,468) (628) 3,051
Overburden removal costs............................... (1,495) 36 433 -- --
Prepaid expenses....................................... 466 5,775 3,172 (2,659) 1,816
Accounts payable and accrued liabilities............... 6,488 8,414 (6,810) (10,969) 6,851
------- -------- -------- -------- --------
$35,408 $(28,371) $(42,531) $(64,045) $(37,604)
======= ======== ======== ======== ========
C-61
SHERRITT INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS AT SEPTEMBER 30, 2002 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2002 AND 2001 IS UNAUDITED)
(ALL DOLLAR TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF CANADIAN DOLLARS EXCEPT
PER SHARE AMOUNTS)
20. STATEMENTS OF CASH FLOW (CONTINUED)
The supplemental cash flow information is as follows:
Nine Months Ended Year Ended
September 30 December 31
--------------------------- ------------------------------
2002 2001 2001 2000 1999
------------ ------------ -------- -------- --------
(Unaudited) (Unaudited)
Interest received.......................................... $10,517 $13,608 $20,760 $22,380 $37,379
Interest paid.............................................. 17,411 5,120 17,505 569 566
Income taxes paid.......................................... 1,825 6,271 6,958 26,194 10,904
21. SEGMENTED INFORMATION
Business Segments
The Corporation's reportable operating segments are business units that
offer distinct products and services. The Coal segment comprises the sale of
coal primarily for use as fuel to generate electricity and for use in steel
making. These activities are performed through the Corporation's 50%
indirect interest in Luscar Energy Partnership. The Metals segment comprises
mainly the mining, processing and marketing of commodity nickel and cobalt
and includes the production and sale of agricultural fertilizers from its
facilities in Alberta, Canada. These activities are performed primarily
through the Corporation's 50% indirect interest in the Metals Enterprise.
The Oil and Gas segment includes exploration and production of oil and gas
outside Canada. The Other Businesses segment includes investments in
power-generation, communications, tourism, soybean-based food processing,
agriculture and other activities in Cuba. The Corporate segment comprises
management of cash and short-term investments, general corporate activities
and the investment in other mining companies, including Anaconda. All sales
generated by the Corporation's oil and gas operations in Cuba are made to an
agency of the Government of Cuba.
Nine months ended September 30, 2002
-----------------------------------------------------------------------
Coal Metals Oil and Gas Other Corporate Consolidated
-------- -------- ----------- -------- --------- ------------
(Unaudited)
Revenue from external customers.............. $229,200 $192,690 $161,649 $ 25,932 $ -- $ 609,471
-------- -------- -------- -------- -------- ----------
Intersegment revenues........................ -- -- -- 851 -- 851
-------- -------- -------- -------- -------- ----------
Depletion and amortization................... 32,036 14,929 54,613 5,559 2,621 109,758
Provision for site restoration and
abandonment................................ 5,166 782 1,150 -- -- 7,098
-------- -------- -------- -------- -------- ----------
Operating earnings (loss).................... 13,224 31,506 76,717 32 (16,153) 105,326
Write-down of investment..................... -- -- -- -- (37,000) (37,000)
Share of loss of equity investments.......... -- -- -- (1,657) -- (1,657)
Financing income (expense)................... (19,918) 2,496 (567) 3,979 3,987 (10,023)
Minority interest............................ -- -- -- (747) -- (747)
-------- -------- -------- -------- -------- ----------
Earnings (loss) before taxes................. (6,694) 34,002 76,150 1,607 (49,166) 55,899
-------- -------- -------- -------- -------- ----------
Capital expenditures......................... 16,839 5,619 68,909 1,097 393 92,857
-------- -------- -------- -------- -------- ----------
Assets....................................... 752,141 337,358 550,209 209,088 161,919 2,010,715
-------- -------- -------- -------- -------- ----------
C-62
SHERRITT INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS AT SEPTEMBER 30, 2002 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2002 AND 2001 IS UNAUDITED)
(ALL DOLLAR TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF CANADIAN DOLLARS EXCEPT
PER SHARE AMOUNTS)
21. SEGMENTED INFORMATION (CONTINUED)
Nine months ended September 30, 2001
-----------------------------------------------------------------------
Coal Metals Oil and Gas Other Corporate Consolidated
-------- -------- ----------- -------- --------- ------------
(Unaudited)
Revenue from external customers.............. $124,177 $174,889 $131,652 $ 16,924 $ -- $ 447,642
-------- -------- -------- -------- -------- ----------
Intersegment revenues........................ -- -- -- 833 -- 833
-------- -------- -------- -------- -------- ----------
Depletion and amortization................... 16,548 13,875 42,399 5,157 3,088 81,067
Provision for site restoration and
abandonment................................ 2,544 1,317 1,256 -- -- 5,117
-------- -------- -------- -------- -------- ----------
Operating earnings (loss).................... 10,817 7,117 59,888 1,056 (14,326) 64,552
Amortization of goodwill..................... -- -- -- (1,014) -- (1,014)
Share of loss of equity investments.......... -- -- -- (44) -- (44)
Financing income (expense)................... (8,098) 1,246 5,809 (3,929) 13,228 8,256
Minority interest............................ -- -- -- (848) -- (848)
-------- -------- -------- -------- -------- ----------
Earnings (loss) before taxes................. 2,719 8,363 65,697 (4,779) (1,098) 70,902
-------- -------- -------- -------- -------- ----------
Capital expenditures......................... 4,870 9,957 65,027 4,873 193 84,920
-------- -------- -------- -------- -------- ----------
Assets....................................... 731,319 326,063 464,414 204,110 264,071 1,989,977
-------- -------- -------- -------- -------- ----------
Year ended December 31, 2001
-----------------------------------------------------------------------
Coal Metals Oil and Gas Other Corporate Consolidated
-------- -------- ----------- -------- --------- ------------
Revenue from external customers.............. $204,450 $230,253 $176,689 $ 25,226 $ -- $ 636,618
-------- -------- -------- -------- -------- ----------
Intersegment revenues........................ -- -- -- 1,118 -- 1,118
-------- -------- -------- -------- -------- ----------
Depletion and amortization................... 27,425 18,524 62,016 6,864 3,939 118,768
Provision for site restoration and
abandonment................................ 4,850 982 1,630 -- -- 7,462
-------- -------- -------- -------- -------- ----------
Operating earnings (loss).................... 20,153 3,731 73,987 420 (19,836) 78,455
Write-down of investment..................... -- -- -- -- (23,441) (23,441)
Amortization of goodwill..................... -- -- -- (1,357) -- (1,357)
Share of loss of equity investments.......... -- -- -- (679) -- (679)
Financing income (expense)................... (19,941) 1,052 10,264 (5,549) 18,611 4,437
Minority interest............................ -- -- -- (1,124) -- (1,124)
-------- -------- -------- -------- -------- ----------
Earnings (loss) before taxes................. 212 4,783 84,251 (8,289) (24,666) 56,291
-------- -------- -------- -------- -------- ----------
Capital expenditures......................... 8,303 19,772 78,984 5,024 1,484 113,567
-------- -------- -------- -------- -------- ----------
Assets....................................... 769,288 332,453 471,895 211,733 213,045 1,998,414
-------- -------- -------- -------- -------- ----------
C-63
SHERRITT INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS AT SEPTEMBER 30, 2002 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2002 AND 2001 IS UNAUDITED)
(ALL DOLLAR TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF CANADIAN DOLLARS EXCEPT
PER SHARE AMOUNTS)
21. SEGMENTED INFORMATION (CONTINUED)
Year ended December 31, 2000
------------------------------------------------------------
Metals Oil and Gas Other Corporate Consolidated
-------- ----------- -------- --------- ------------
Revenue from external customers......................... $299,018 $165,183 $ 16,154 $ -- $ 480,355
-------- -------- -------- -------- ----------
Intersegment revenues................................... -- -- 1,073 -- 1,073
-------- -------- -------- -------- ----------
Depletion and amortization.............................. 15,287 47,308 4,847 3,786 71,228
Provision for site restoration and abandonment.......... 2,098 1,415 -- -- 3,513
-------- -------- -------- -------- ----------
Operating earnings (loss)............................... 61,851 79,571 3,832 (24,950) 120,304
Amortization of goodwill................................ -- -- (1,286) -- (1,286)
Share of earnings of equity investments................. -- -- 788 -- 788
Financing income (expense).............................. (1,766) 3,120 (2,910) 30,601 29,045
Minority interest....................................... -- -- (1,130) -- (1,130)
-------- -------- -------- -------- ----------
Earnings (loss) before taxes............................ 60,085 82,691 (706) 5,651 147,721
-------- -------- -------- -------- ----------
Capital expenditures.................................... 26,779 66,263 11,423 11,878 116,343
-------- -------- -------- -------- ----------
Assets.................................................. 336,520 382,205 215,153 407,772 1,341,650
-------- -------- -------- -------- ----------
Year ended December 31, 1999
------------------------------------------------------------
Metals Oil and Gas Other Corporate Consolidated
-------- ----------- -------- --------- ------------
Revenue from external customers......................... $250,473 $106,511 $ 15,362 $ -- $ 372,346
-------- -------- -------- -------- ----------
Intersegment revenues................................... -- -- 2,088 -- 2,088
-------- -------- -------- -------- ----------
Depletion and amortization.............................. 11,523 31,318 3,490 4,048 50,379
Provision for site restoration and abandonment.......... 1,943 2,238 -- -- 4,181
-------- -------- -------- -------- ----------
Operating earnings (loss)............................... 46,257 39,143 3,561 (21,876) 67,085
Amortization of goodwill................................ -- -- (1,236) -- (1,236)
Share of loss of equity investments..................... -- -- (1,275) -- (1,275)
Financing income (expense).............................. (1,826) (1,006) (3,181) 32,937 26,924
Minority interest....................................... -- -- (1,178) -- (1,178)
-------- -------- -------- -------- ----------
Earnings (loss) before taxes............................ 44,431 38,137 (3,309) 11,061 90,320
-------- -------- -------- -------- ----------
Capital expenditures.................................... 21,171 51,718 14,310 619 87,818
-------- -------- -------- -------- ----------
Assets.................................................. 349,973 335,983 187,519 469,480 1,342,955
-------- -------- -------- -------- ----------
GEOGRAPHIC SEGMENTS
As at and for the nine months
ended September 30, 2002
----------------------------------
Capital
Revenues(1) Assets and Goodwill
------------ -------------------
(Unaudited)
Canada...................................................... $241,483 $ 729,583
Cuba........................................................ 182,269 390,035
Europe...................................................... 83,969 7,743
Asia........................................................ 60,783 6,681
Other foreign countries..................................... 40,967 --
-------- ----------
$609,471 $1,134,042
======== ==========
C-64
SHERRITT INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS AT SEPTEMBER 30, 2002 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2002 AND 2001 IS UNAUDITED)
(ALL DOLLAR TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF CANADIAN DOLLARS EXCEPT
PER SHARE AMOUNTS)
21. SEGMENTED INFORMATION (CONTINUED)
As at and for the nine months
ended September 30, 2001
----------------------------------
Capital
Revenues(1) Assets and Goodwill
------------ -------------------
(Unaudited)
Canada...................................................... $106,630 $ 760,931
Cuba........................................................ 141,425 380,745
Europe...................................................... 111,192 17,156
Asia........................................................ 59,645 6,526
Other foreign countries..................................... 28,750 5
-------- ----------
$447,642 $1,165,363
======== ==========
As at and for the year ended
December 31, 2001
----------------------------------
Capital
Revenues(1) Assets and Goodwill
------------ -------------------
Canada...................................................... $187,212 $ 753,767
Cuba........................................................ 192,968 384,539
Europe...................................................... 146,139 9,270
Asia........................................................ 89,187 6,526
Other foreign countries..................................... 21,112 3
-------- ----------
$636,618 $1,154,105
======== ==========
As at and for the year ended
December 31, 2000
----------------------------------
Capital
Revenues(1) Assets and Goodwill
------------ -------------------
Canada...................................................... $ 84,961 $ 140,889
Cuba........................................................ 168,474 354,024
Europe...................................................... 162,113 22,078
Asia........................................................ 62,494 6,857
Other foreign countries..................................... 2,313 13
-------- ----------
$480,355 $ 523,861
======== ==========
As at and for the year ended
December 31, 1999
----------------------------------
Capital
Revenues(1) Assets and Goodwill
------------ -------------------
Canada...................................................... $ 71,037 $ 126,602
Cuba........................................................ 103,511 322,843
Europe...................................................... 132,812 19,634
Asia........................................................ 64,798 7,637
Other foreign countries..................................... 188 37
-------- ----------
$372,346 $ 476,753
======== ==========
-------------------
(1) Revenues are attributed to geographical locations based on location of
customer.
C-65
SHERRITT INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS AT SEPTEMBER 30, 2002 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2002 AND 2001 IS UNAUDITED)
(ALL DOLLAR TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF CANADIAN DOLLARS EXCEPT
PER SHARE AMOUNTS)
22. GOODWILL TRANSITIONAL DISCLOSURE
The earnings and earnings per share impact of adopting the new CICA
recommendations on goodwill and intangible assets are as follows:
Nine months ended Year ended
September 30 December 31
------------------------- ------------------------------
2002 2001 2001 2000 1999
----------- ----------- -------- -------- --------
(Unaudited) (Unaudited)
Net earnings, as reported................................... $45,816 $60,817 $51,595 $115,570 $66,601
Add back: goodwill amortization............................. -- 1,014 1,357 1,286 1,236
------- ------- ------- -------- -------
Adjusted net earnings....................................... $45,816 $61,831 $52,952 $116,856 $67,837
======= ======= ======= ======== =======
ADJUSTED BASIC EARNINGS PER RESTRICTED VOTING SHARE
Reported net earnings....................................... $ 0.29 $ 0.52 $ 0.34 $ 1.38 $ 0.60
Goodwill amortization....................................... -- 0.01 0.01 0.01 0.01
------- ------- ------- -------- -------
$ 0.29 $ 0.53 $ 0.35 $ 1.39 $ 0.61
======= ======= ======= ======== =======
ADJUSTED FULLY DILUTED EARNINGS PER RESTRICTED VOTING SHARE
Reported net earnings....................................... $ 0.28 $ 0.40 $ 0.33 $ 0.84 $ 0.45
Goodwill amortization....................................... -- -- 0.01 0.01 --
------- ------- ------- -------- -------
$ 0.28 $ 0.40 $ 0.34 $ 0.85 $ 0.45
======= ======= ======= ======== =======
23. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
The consolidated financial statements of the Corporation have been prepared
in accordance with Canadian generally accepted accounting principles
("Canadian GAAP"), which in most respects, conform to United States
generally accepted accounting principles ("U.S. GAAP"). Significant
differences between Canadian and U.S. GAAP are as follows:
A. STATEMENTS OF OPERATIONS
Nine months ended Year ended
September 30 December 31
------------------------- ------------------------------
2002 2001 2001 2000 1999
----------- ----------- -------- -------- --------
(Unaudited) (Unaudited)
NET EARNINGS UNDER CANADIAN GAAP...................... $ 45,816 $ 60,817 $ 51,595 $115,570 $ 66,601
Impact of U.S. GAAP
Convertible debentures (f).......................... (29,885) (29,893) (40,015) (32,466) (45,017)
Derivative financial instruments (a)................ 2,862 (7,289) (1,810) -- --
Pension valuation allowance (e)..................... -- -- 466 -- --
Full cost accounting (g)............................ 2,488 (4,927) (7,007) 2,577 (6,546)
Income tax rate changes (h)......................... (466) (410) 2,936 167 --
Capitalized interest (i)............................ (82) 485 457 986 605
Income taxes........................................ 9,050 18,484 16,462 17,211 17,896
-------- -------- -------- -------- --------
NET EARNINGS UNDER U.S. GAAP.......................... $ 29,783 $ 37,267 $ 23,084 $104,045 $ 33,539
======== ======== ======== ======== ========
EARNINGS PER SHARE UNDER U.S. GAAP:
Basic............................................... $ 0.30 $ 0.44 $ 0.26 $ 1.44 $ 0.46
Diluted............................................. 0.28 0.35 0.26 0.82 0.38
======== ======== ======== ======== ========
C-66
SHERRITT INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS AT SEPTEMBER 30, 2002 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2002 AND 2001 IS UNAUDITED)
(ALL DOLLAR TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF CANADIAN DOLLARS EXCEPT
PER SHARE AMOUNTS)
23. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
B. STATEMENTS OF COMPREHENSIVE INCOME
Comprehensive income is measured in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income." This standard defines comprehensive income as all changes in
equity other than those resulting from investments by owners and
distributions to owners. Comprehensive income is comprised of net
earnings and other comprehensive income where other comprehensive income
is the change in equity during the period that arises from transactions
and other events that are related to non-owner sources. The concept of
comprehensive income does not exist under Canadian GAAP.
Nine months ended Year ended
September 30 December 31
------------------------- ------------------------------
2002 2001 2001 2000 1999
----------- ----------- -------- -------- --------
(Unaudited) (Unaudited)
NET EARNINGS UNDER U.S. GAAP........................... $29,783 $ 37,267 $ 23,084 $104,045 $33,539
------- -------- -------- -------- -------
Other comprehensive income (loss):
Investments (c)
Unrealized gains (losses).......................... (9,794) (38,127) (39,645) (15,877) 15,181
Reclassification to net earnings of realized losses
and write-downs.................................. 31,078 -- 19,026 -- --
------- -------- -------- -------- -------
21,284 (38,127) (20,619) (15,877) 15,181
------- -------- -------- -------- -------
COMPREHENSIVE INCOME (LOSS) UNDER U.S. GAAP............ $51,067 $ (860) $ 2,465 $ 88,168 $48,720
======= ======== ======== ======== =======
The amounts presented for other comprehensive income (loss) are net of
tax of ($5.6) million, $10.0 million, $5.4 million, $7.7 million and
($7.5) million respectively.
C. STATEMENTS OF RETAINED EARNINGS (DEFICIT)
Nine months ended Year ended
September 30 December 31
------------------------- ------------------------------
2002 2001 2001 2000 1999
----------- ----------- -------- -------- --------
(Unaudited) (Unaudited)
BALANCE UNDER U.S. GAAP, BEGINNING OF PERIOD.......... $27,878 $ 26,578 $ 26,578 $(55,740) $(89,279)
Net earnings under U.S. GAAP.......................... 29,783 37,267 23,084 104,045 33,539
Dividends on restricted voting shares................. -- (21,784) (21,784) (21,727) --
------- -------- -------- -------- --------
BALANCE UNDER U.S. GAAP, END OF PERIOD................ $57,661 $ 42,061 $ 27,878 $ 26,578 $(55,740)
======= ======== ======== ======== ========
The following table reconciles the deficit as at January 1, 1999 under
Canadian GAAP versus U.S. GAAP:
JANUARY 1, 1999 DEFICIT UNDER CANADIAN GAAP................. $(49,886)
Impact of U.S. GAAP:
Convertible debentures (f).................................. 2,568
Full cost accounting (g).................................... (42,008)
Capitalized interest (i).................................... 47
--------
JANUARY 1, 1999 DEFICIT UNDER U.S. GAAP..................... $(89,279)
========
C-67
SHERRITT INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS AT SEPTEMBER 30, 2002 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2002 AND 2001 IS UNAUDITED)
(ALL DOLLAR TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF CANADIAN DOLLARS EXCEPT
PER SHARE AMOUNTS)
23. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
D. BALANCE SHEETS
The following table indicates the significant items in the consolidated
balance sheet had the consolidated financial statements been prepared
under U.S. GAAP:
As at December 31
September 30, -----------------------
2002 2001 2000
-------------- ---------- ----------
(Unaudited)
ASSETS
Current assets............................................ $ 662,807 $ 583,677 $ 534,728
Capital assets (a, g, h, i)............................... 1,082,559 1,100,748 461,985
Investments (c)........................................... 100,926 116,496 177,683
Future income taxes (c, f, h, i).......................... 25,358 29,011 19,389
Other assets (b, e, f).................................... 139,439 144,205 113,716
---------- ---------- ----------
$2,011,089 $1,974,137 $1,307,501
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities (a)................................... $ 169,454 $ 157,519 $ 85,419
Long-term debt (b, f)..................................... 875,985 888,940 600,000
Site restoration and site abandonment..................... 43,838 44,325 26,649
Future income taxes (a, e, g, h).......................... 208,352 220,674 16,846
Derivative financial instruments (a)...................... 137 1,411 --
Minority interest......................................... 4,736 3,989 2,865
Convertible debentures (f)................................ -- -- --
Capital stock (d)......................................... 650,957 650,716 549,840
Contributed surplus (d, f)................................ -- -- --
Retained earnings......................................... 57,661 27,878 26,578
Accumulated other comprehensive loss (c).................. (31) (21,315) (696)
---------- ---------- ----------
$2,011,089 $1,974,137 $1,307,501
========== ========== ==========
E. STATEMENTS OF CASH FLOW
The following table indicates the significant differences in the
consolidated statement of cash flows had the consolidated financial
statements been prepared under U.S. GAAP:
Nine months ended Year ended
September 30 December 31
------------------------- --------------------------------
2002 2001 2001 2000 1999
----------- ----------- --------- -------- ---------
(Unaudited) (Unaudited)
CASH PROVIDED BY (USED IN):
Operating activities (f, g)....................... $184,115 $ 84,817 $ 104,680 $ 81,585 $ 42,056
Investing activities (g).......................... (54,075) (156,406) (224,300) 25,845 (107,148)
Financing activities (f).......................... (6,400) (6,868) 38,829 (80,294) 673
(A) DERIVATIVE FINANCIAL INSTRUMENTS
Under U.S. GAAP, the Corporation is required to adopt SFAS No. 133
and its related amendments SFAS No. 137 and SFAS No. 138. SFAS No. 133
requires that all derivative instruments be recorded on the balance sheet
at fair value. Derivatives that are not designated as hedges for
accounting purposes must be adjusted to fair value through income. If the
derivative is designated and is effective as a hedge for accounting
purposes, depending on the nature of the hedge, changes in the fair value
of derivatives are either offset against the change in the fair value of
hedged underlying assets, liabilities, or firm commitments through
earnings or recognized in other comprehensive income until the hedged
item is recognized in earnings. The ineffective portion of a hedging
derivative's change in fair value is recognized in earnings immediately.
C-68
SHERRITT INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS AT SEPTEMBER 30, 2002 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2002 AND 2001 IS UNAUDITED)
(ALL DOLLAR TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF CANADIAN DOLLARS EXCEPT
PER SHARE AMOUNTS)
23. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
Because it did not anticipate the need to prepare its financial
statements in accordance with U.S. GAAP, the Corporation has not prepared
the documentation required to qualify these instruments for hedge
accounting. As a result, changes in fair value of all financial
instruments and purchase contracts that met the definition of a
derivative under SFAS No. 133 are recorded in the Statement of Operations
under U.S. GAAP.
The Corporation has outstanding fixed price energy purchase contracts
covering future committed and anticipated energy requirements. Also,
effective May 11, 2001, the date of acquisition of a 50% interest in the
Luscar Coal Income Fund by the Corporation (note 3), the hedging
activities and other derivative financial instruments of the Fund are
included in the consolidated financial results of the Corporation. This
included an interest rate swap contract used to manage interest rate risk
on long-term debt, forward currency exchange contracts, which are
utilized to manage the economic risk associated with future revenue flows
denominated in United States dollars, and additional fixed price energy
purchase contracts.
Under Canadian GAAP, the Corporation recorded a liability of
$3.5 million as at May 11, 2001 for the purchase of its 50% interest in
the Fund that represented the Corporation's share of the fair value of
the interest rate swap and the forward currency exchange contracts that
were accounted for as hedges under Canadian GAAP. Under U.S. GAAP, the
fair value assigned to liabilities and capital assets acquired were each
increased by $1.7 million which represented the Corporation's share of
the fair value of certain fixed price energy purchase contracts that met
the definition of a derivative under SFAS No. 133.
On September 30, 2002, the Corporation's share of the fair value of all
financial instruments and purchase contracts that met the definition of a
derivative under SFAS No. 133 was a fair value loss of $2.5 million
recorded in liabilities (December 31, 2001 -- $7.0 million). The impact
of changes in fair value of all financial instruments and purchase
contracts that met the definition of a derivative under SFAS No. 133,
after considering the amortization impact of the purchase price
adjustment, was an increase in net earnings of $1.7 million for the nine
months ended September 30, 2002 (year ended December 31, 2001 -- decrease
$1.0 million; nine months ended September 30, 2001 -- decrease
$4.1 million).
The Corporation's electricity power and natural gas purchase strategy is
based on diversification of price for its energy requirements. Its
objective is to acquire a reliable supply of electrical power and natural
gas in a manner that minimizes volatility without undue risk. The
Corporation has entered into these energy contracts with Canadian
corporations, and these contracts are intended to hedge the future cost
of the committed and anticipated power requirements for certain of its
Canadian operations. The Corporation enters into such fixed price
contracts to reduce price risk, not for speculative purposes. The
Corporation's proportionate share of fixed price contracts is as follows:
As at As at
September 30, 2002 December 31, 2001
------------------------- -------------------
Purchase Contract Purchase Contract
Price Volume Price Volume
----------- ----------- -------- --------
(Unaudited) (Unaudited)
Natural gas (gigajoules).................................... $-- -- $ 4.78 90
Natural gas (gigajoules).................................... 4.55 17 4.55 118
Natural gas (gigajoules).................................... 4.44 20 4.44 190
Electricity (megawatt hours)................................ 48.50 13 48.50 53
Electricity (megawatt hours)................................ 46.25 12 46.25 48
Electricity (megawatt hours)................................ 67.50 20 67.50 79
(B) PROMISSORY NOTES
Under U.S. GAAP, the offsetting of assets and liabilities in the balance
sheet is not permitted except when a right of setoff exists. A right of
setoff requires that each of two parties owes the other determinable
amounts and that the reporting party has the right to set off the amount
owed with the amount owed by the other party. The sinking funds, which
have been setoff against the promissory notes under Canadian GAAP, do not
qualify for offsetting under U.S. GAAP. The sinking funds are therefore
reflected as other assets under U.S. GAAP. As at September 30, 2002,
other assets and long-term debt would have each increased by
$31.8 million (December 31, 2001 -- $29.7 million; December 31,
2000 -- nil).
C-69
SHERRITT INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS AT SEPTEMBER 30, 2002 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2002 AND 2001 IS UNAUDITED)
(ALL DOLLAR TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF CANADIAN DOLLARS EXCEPT
PER SHARE AMOUNTS)
23. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
(C) INVESTMENTS
U.S. GAAP requires that certain long-term investments not held for
trading be recorded at fair value, with unrealized holding gains and
losses excluded from the determination of earnings and reported as a
separate component of other comprehensive income. Amounts are
reclassified from other comprehensive income to earnings when an
impairment is considered other than temporary and when gains or losses
are realized. The Corporation's sole investment that is classified under
U.S. GAAP as not held for trading is its investment in Anaconda Nickel
(note 7). As at September 30, 2002, the cost base of this investment
approximated its fair value (December 31, 2001 -- unrealized loss of
$26.9 million; December 31, 2000 -- unrealized loss of $0.9 million).
(D) REDUCTION IN STATED CAPITAL
Canadian GAAP allows for the reduction of the stated capital of
outstanding common shares with a corresponding offset to deficit and
contributed surplus upon shareholder approval. This reclassification,
which the Corporation made in 2000, is not permitted by U.S. GAAP and
would result in an increase in capital stock of $200 million and a
decrease in retained earnings and contributed surplus of $6.9 million and
$193.1 million, respectively, as at each of September 30, 2002 and
December 31, 2001 and 2000.
(E) PENSION ASSET VALUATION ALLOWANCE
Under Canadian GAAP, when a company recognizes a pension surplus as an
asset, the asset must be tested for impairment based upon the expected
future benefit to be derived by the company. A valuation allowance is
recorded against the asset when such impairment exists. U.S. GAAP does
not provide for valuation allowances against pension assets and thus the
effects of recognizing a pension valuation allowance should be recorded
as a difference between U.S. and Canadian GAAP.
(F) CONVERTIBLE DEBENTURES
The Corporation accounts for the convertible debentures in accordance
with their substance and, as such, they are presented in the financial
statements as a separate component of shareholders' equity net of the
associated financing costs. Under U.S. GAAP, the entire face value of the
convertible debentures is treated as debt, the interest payments and the
amortization of deferred debenture interest are recorded as an expense,
the financing costs are recorded as a deferred charge and amortized on a
straight-line basis over the term of the convertible debentures, the gain
on repurchase of convertible debentures is recorded in earnings and the
cash flows related to the interest payments are reflected as an operating
activity.
(G) FULL COST ACCOUNTING
There are certain differences between the full cost method of accounting
for oil and gas assets as applied under Canadian GAAP and as applied
under U.S. GAAP. Under Canadian GAAP, it is permissible, under certain
circumstances, to allocate a portion of general and administrative costs
to exploration and development activities, whereas under U.S. GAAP this
allocation is not permitted. In addition, there are differences related
to the method of performing ceiling test evaluations under the full cost
accounting rules. Under Canadian GAAP, non-discounted future net revenues
from oil and gas production, less an estimate for future general and
administrative expenses, financing costs and income taxes are compared
with the carrying value of the properties with proved reserves, whereas
for U.S. GAAP, future net revenues are discounted to present value at 10%
per annum and compared with the carrying value of the properties with
proved reserves. The resulting differences in the recorded carrying
values of the Corporation's oil and gas properties under Canadian and
U.S. GAAP further results in differences in depletion expense in
subsequent years.
(H) INCOME TAX RATE CHANGES
Under Canadian GAAP, the effects of changes in income tax rates are
recorded when the income tax rate is substantively enacted whereas under
U.S. GAAP the effect is recorded when the income tax rate is enacted. The
most significant difference is the result of a reduction in income tax
rates that was substantively enacted in the period January 1, 2001 to
May 11, 2001 (i.e. prior to the acquisition of the 50% interest in the
Fund) and was enacted in the period May 12, 2001 to September 30, 2001
(i.e. in the period following the acquisition of the 50% interest in the
Fund). Under Canadian GAAP, the reduction in income tax rates has been
reflected in the purchase price equation (Note 3). However, under
U.S. GAAP the recorded amount of capital assets acquired increased by
$12.5 million and future income tax liabilities acquired increased by
$5.6 million. Net earnings under U.S. GAAP for
C-70
SHERRITT INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS AT SEPTEMBER 30, 2002 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2002 AND 2001 IS UNAUDITED)
(ALL DOLLAR TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF CANADIAN DOLLARS EXCEPT
PER SHARE AMOUNTS)
23. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
the nine months ended September 30, 2001 include $6.9 million related to
the benefit of this tax rate reduction. As a result of the differences in
the carrying amount of the acquired capital assets under Canadian and
U.S. GAAP, there are differences in amortization expense in periods
subsequent to the acquisition.
(I) CAPITALIZED INTEREST
The Corporation capitalizes interest that can be identified with major
projects until the project achieves commercial production. Under
U.S. GAAP, interest is capitalized as it arises from indebtedness
incurred to finance major projects, either directly or indirectly, until
the project is available for its intended use. As a result of the
differences in the carrying amount of capital assets under Canadian and
U.S. GAAP, there are differences in amortization expense in subsequent
periods.
(J) EMPLOYEE TERMINATION BENEFITS
U.S. GAAP requires additional disclosure regarding employee termination
provisions. The information provided below relates to the Corporation's
proportionate share of provisions for employee terminations, which were
assumed as part of the Luscar acquisition. The employee terminations are
primarily a result of an anticipated mine closure.
Coal
---------------------
Employees Amount
---------- --------
Balance, May 11, 2001....................................... 371 $2,421
Paid during 2001............................................ (11) (47)
Adjustment in 2001.......................................... (92) (950)
--- ------
Balance, December 31, 2001.................................. 268 $1,424
Paid during 2002............................................ (8) (310)
--- ------
Balance, September 30, 2002................................. 260 $1,114
=== ======
During 2001, the Corporation adjusted the estimated provisions for
employee termination benefits to reflect resignations and transfers of
employees to other mining operations within the Coal business.
(K) STOCK-BASED COMPENSATION
Until the implementation of Section 3870 of the CICA Handbook, which
established standards for the recognition, measurement and disclosure of
stock-based compensation to be adopted for fiscal years beginning on or
after January 1, 2002 and applied to awards granted on or after the date
of adoption, the cost of stock-based compensation was not recognized
under Canadian GAAP. Therefore, as of December 31, 2001, the Corporation
did not record any compensation cost in connection with its stock option
plans.
For purposes of the pro forma disclosures required by SFAS No. 123 under
U.S. GAAP, the fair value of each option grant is estimated at the date
of grant using the Black-Scholes option pricing model and the estimated
fair value is amortized over the options' vesting period. Under
U.S. GAAP, the pro forma cost of stock-based compensation for the years
ended December 31, 2001, 2000 and 1999 would be $0.4 million,
$0.6 million and $1.3 million, respectively and for the nine months ended
September 30, 2002 and 2001 would be nil and $0.3 million, respectively.
On a pro forma basis, basic earnings per share would have decreased by
nil, $0.01 and $0.02 per share and diluted earnings per share would have
decreased by nil, nil and $0.01 per share respectively for the years
ended December 31, 2001, 2000 and 1999 and there would have been no
change in the basic or diluted earnings per share for the nine months
ended September 30, 2002 and 2001.
C-71
SHERRITT INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS AT SEPTEMBER 30, 2002 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2002 AND 2001 IS UNAUDITED)
(ALL DOLLAR TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF CANADIAN DOLLARS EXCEPT
PER SHARE AMOUNTS)
23. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
(L) ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
U.S. GAAP requires that amounts totaling 5% or more of accounts payable
and accrued liabilities be disclosed separately and they are as follows:
As at December 31
September 30, -------------------
2002 2001 2000
-------------- -------- --------
(Unaudited)
Trade accounts payable...................................... $ 78,228 $ 82,282 $57,253
Interest.................................................... 10,666 1,740 1,740
Income and other taxes...................................... 9,014 7,360 6,348
Payroll..................................................... 7,517 6,413 7,471
Other....................................................... 4,160 5,302 4,607
-------- -------- -------
$109,585 $103,097 $77,419
======== ======== =======
(M) ALLOWANCE FOR DOUBTFUL ACCOUNTS
U.S. GAAP requires disclosure of the amount of the allowance for doubtful
accounts that has been netted against accounts receivable on the balance
sheet. As at September 30, 2002 the allowance for doubtful accounts was
$5.1 million (December 31, 2001 -- $5.1 million; December 31,
2000 -- $4.0 million).
(N) JOINT VENTURES
U.S. GAAP requires investments in joint ventures to be accounted for
under the equity method, while under Canadian GAAP, the accounts of joint
ventures are proportionately consolidated. However, under rules
promulgated by the Securities and Exchange Commission, a foreign
registrant may, subject to the provision of additional information,
continue to follow proportionate consolidation for the purposes of
registration and other filings notwithstanding the departure from
U.S. GAAP, where the joint venture is an operating entity, the
significant financial and operating policies of which are, by contractual
agreement, jointly controlled by all parties having an equity interest in
the entity. Consequently, the consolidated financial statements have not
been adjusted to restate the accounting for joint ventures under
U.S. GAAP. Additional information concerning the Corporation's interests
in joint ventures is presented in note 4. There are no material
differences between the information in note 4 prepared under Canadian
GAAP and U.S. GAAP.
(O) OTHER DISCLOSURES
U.S. GAAP does not permit the disclosure of the subtotals of operating
earnings before depreciation and amortization and earnings before
interest and foreign exchange loss in the consolidated statements of
earnings. The determination of operating earnings, as denoted in note 21
(Segmented Information), is not intended to comply with the definition of
operating earnings under U.S. GAAP, but rather to be the measure of
segment profitability used by the chief decision maker of the
Corporation. U.S. GAAP also requires that minority interest be presented
on the balance sheet as a separate line between liabilities and before
shareholders' equity. SFAS No. 142, Goodwill and Other Intangibles
requires disclosure of adjusted basic and fully diluted earnings per
restricted voting share for prior periods as if the new standard had been
adopted at the beginning of the earliest period presented. The disclosure
under U.S. GAAP would be similar to that as presented in Note 22 except
that net earnings under U.S. GAAP would be substituted for net earnings,
as reported.
(P) NEW ACCOUNTING STANDARDS
CANADIAN GAAP
CICA ACCOUNTING GUIDELINE NO. 13 -- HEDGING RELATIONSHIPS. In
November 2001, the Accounting Standards Board issued a new Accounting
Guideline, "Hedging Relationships" (AcG No. 13) to provide guidance for
applying hedge accounting principles. AcG No. 13's scope is mainly
limited to providing rules for determining when hedge accounting can be
used. A key feature of the guideline is the need to have documentation of
hedging relationships in place in order to achieve hedge accounting. AcG
No. 13 is
C-72
SHERRITT INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS AT SEPTEMBER 30, 2002 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2002 AND 2001 IS UNAUDITED)
(ALL DOLLAR TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF CANADIAN DOLLARS EXCEPT
PER SHARE AMOUNTS)
23. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
applicable for years beginning on or after July 1, 2003. The Corporation
does not expect the adoption of AcG No. 13 to have a material effect on
its financial statements.
U.S. GAAP
SFAS NO. 143 -- ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS. In
June 2001, the Financial Accounting Standards Board ("FASB") approved
SFAS No. 143 "Accounting for Asset Retirement Obligations". That standard
requires entities to record the fair value of a liability for an asset
retirement obligation in the period in which it is incurred. When the
liability is initially recorded, the entity capitalizes a cost by
increasing the carrying amount of the related long-lived asset. Over
time, the liability is accreted to its present value each period, and the
capitalized cost is depreciated over the useful life of the related
asset. Upon settlement of the liability, an entity either settles the
obligation for its recorded amount or incurs a gain or loss upon
settlement. SFAS No. 143 is applicable for years beginning after
June 15, 2002. The Corporation has not yet determined the effects of the
new standard, if any, on its financial statements.
SFAS NO. 145 -- RESCISSION OF FASB STATEMENTS NO. 4, 44, AND 64,
AMENDMENT OF FASB STATEMENT NO. 13, AND TECHNICAL CORRECTIONS In
April 2002, the FASB approved SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13,
and Technical Corrections." Among other things, this SFAS rescinds SFAS
No. 4, "Reporting Gains and Losses from Extinguishment of Debt." SFAS
No. 4 allowed gains and losses from early extinguishment of debt to be
reported as an extraordinary item, net of its related tax effect. The
effect of SFAS No. 145 is to apply the criteria of Accounting Principles
Board Opinion No. 30 "Reporting the Results of Operations -- Reporting
the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transaction" to early
extinguishments of debt to determine whether the resulting gain or loss
is extraordinary.
Based on this determination, the extinguishment could be reported as part
of normal operations, as an unusual or infrequent item before income
taxes or an extraordinary item. The provisions of SFAS No. 145 are
required to be applied to all fiscal years beginning after May 15, 2002.
The Corporation elected to early adopt SFAS No. 145, and, accordingly,
reported its gain on the repurchase of convertible debentures during the
year ended December 31, 2000 as part of normal operations.
SFAS NO. 146 -- ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL
ACTIVITIES In July 2002, FASB issued Statement 146 "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 addresses
financial accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force Issue
No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs
incurred in a Restructuring)." The principal difference between this
Statement and Issue 94-3 relates to its requirements for recognition of a
liability for a cost associated with an exit or disposal activity. This
statement requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred. Under
Issue 94-3, a liability for an exit cost as defined in Issue 94-3 was
recognized at the date of an entity's commitment to an exit plan. The
provisions of this statement are effective for exit or disposal
activities that are initiated after December 31, 2002. There is no
significant impact of this statement on the Corporation's consolidated
financial statements.
(Q) SUPPLEMENTARY OIL AND GAS INFORMATION (UNAUDITED)
The following unaudited supplemental oil and gas information is provided
in accordance with the SFAS No. 69, "Disclosures About Oil and Gas
Producing Properties".
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS FROM PROVED OIL
AND NATURAL GAS RESERVES AND CHANGES THEREIN
The following standardized measure of discounted future net cash flows
has been computed using year-end prices and cost assumptions from proved
oil and natural gas reserves to determine cash inflows. Future income
taxes are calculated by applying the year-end statutory tax rates to
future pre-tax cash flows based upon existing laws and regulations. The
discount was computed by application of a 10 per cent discount factor to
the future net cash flows that may not appropriately reflect future
interest rates. The calculations assume the continuation of existing
economic, operating and regulatory conditions. Such arbitrary assumptions
have not proven to be the case in the past and other assumptions of equal
validity could give rise to substantially different results.
Management does not believe that the standardized measure of discounted
future net cash flows will be representative of actual future net cash
flows and should not be considered to represent the current economic
value of the oil and gas producing properties
C-73
SHERRITT INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS AT SEPTEMBER 30, 2002 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2002 AND 2001 IS UNAUDITED)
(ALL DOLLAR TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF CANADIAN DOLLARS EXCEPT
PER SHARE AMOUNTS)
23. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
or the present value of estimated future cash flows. Actual net cash
flows will differ from the presented estimated future net cash flows in
that:
- Future production will include production not only from proved
properties, but may also include production from probable and possible
reserves;
- Future production of oil and natural gas from proved properties will
differ from reserves estimated;
- Future production rates will vary from those estimated;
- Future rather than year-end prices and costs will apply;
- Economic factors such as interest rates, regulatory and fiscal
environments and operating conditions will change;
- Future estimated income taxes do not take into account the effects of
future exploration expenditures; and
- Future estimated petroleum profits tax may differ from that estimated.
The following tables summarize the Corporation's future net cash flows
relating to proved oil and natural gas reserves based on the standardized
measure as prescribed in SFAS No. 69:
2001
----------------------------------------------------
Cuba Spain Italy Pakistan Total
-------- -------- -------- -------- --------
Future cash inflows......................................... $364,726 $19,714 $ -- $13,621 $398,061
Future production costs..................................... (78,126) (6,811) -- (5,838) (90,775)
Future development and restoration costs.................... (13,792) (6,965) -- (1,258) (22,015)
Future taxes................................................ (6,820) (1,963) -- -- (8,783)
-------- ------- ------- ------- --------
Future net cash flows....................................... 265,988 3,975 -- 6,525 276,488
10% annual discount for timing of future cash flows......... (62,024) (91) -- (3,444) (65,559)
-------- ------- ------- ------- --------
Standardized measure of future net cash flows............... $203,964 $ 3,884 $ -- $ 3,081 $210,929
======== ======= ======= ======= ========
2000
----------------------------------------------------
Cuba Spain Italy Pakistan Total
-------- -------- -------- -------- --------
Future cash inflows......................................... $372,774 $34,793 $ -- $13,581 $421,148
Future production costs..................................... (85,697) (7,443) -- (4,522) (97,662)
Future development and restoration costs.................... (11,252) (1,751) -- -- (13,003)
Future taxes................................................ (6,896) (4,898) -- -- (11,794)
-------- ------- ------- ------- --------
Future net cash flows....................................... 268,929 20,701 -- 9,059 298,689
10% annual discount for timing of future cash flows......... (70,354) (3,274) -- (4,254) (77,882)
-------- ------- ------- ------- --------
Standardized measure of future net cash flows............... $198,575 $17,427 $ -- $ 4,805 $220,807
======== ======= ======= ======= ========
C-74
SHERRITT INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS AT SEPTEMBER 30, 2002 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2002 AND 2001 IS UNAUDITED)
(ALL DOLLAR TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF CANADIAN DOLLARS EXCEPT
PER SHARE AMOUNTS)
23. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
1999
------------------------------------------------------
Cuba Spain Italy Pakistan Total
--------- -------- -------- -------- ---------
Future cash inflows......................................... $ 500,071 $ 91,747 $ 5,341 $13,065 $ 610,224
Future production costs..................................... (86,426) (21,088) (2,610) (4,296) (114,420)
Future development and restoration costs.................... (8,133) (9,761) (2,125) -- (20,019)
Future taxes................................................ (10,138) (9,296) (295) -- (19,729)
--------- -------- ------- ------- ---------
Future net cash flows....................................... 395,374 51,602 311 8,769 456,056
10% annual discount for timing of future cash flows......... (108,336) (10,363) (343) (4,131) (123,173)
--------- -------- ------- ------- ---------
Standardized measure of future net cash flows............... $ 287,038 $ 41,239 $ (32) $ 4,638 $ 332,883
========= ======== ======= ======= =========
The principal sources of change in the standardized measure of discounted
future net cash flows are summarized in the following table:
2001 2000 1999
--------- --------- ---------
Sales of oil and natural gas produced (net of production
costs).................................................... $(124,045) $(112,801) $ (65,084)
Changes in estimated future development costs............... (34,336) (24,878) 9,911
Net changes in prices and production costs.................. 780 (89,194) 410,218
Extensions, discoveries and improved recovery, less related
costs..................................................... 25,074 43,449 66,187
Development costs incurred during the period................ 41,130 44,834 30,875
Revisions of previous quantity estimates.................... 43,280 (381) (240,917)
Accretion of discount....................................... 22,942 34,684 9,880
Purchases of proved reserves in place....................... -- -- --
Sales of proved reserves in place........................... -- -- --
Timing and other............................................ 13,715 (13,138) 28,855
Net change in income taxes.................................. 1,582 5,349 (12,271)
--------- --------- ---------
Net change.................................................. (9,878) (112,076) 237,654
Balance -- beginning of year................................ 220,807 332,883 95,229
--------- --------- ---------
Balance -- end of year...................................... $ 210,929 $ 220,807 $ 332,883
========= ========= =========
CAPITALIZED COSTS RELATED TO OIL AND NATURAL GAS ACTIVITIES
2001
-------------------------------------------------------
Cuba Spain Italy Pakistan Total
--------- --------- -------- -------- ---------
Proved Properties......................................... $ 423,621 $ 171,159 $ -- $ -- $ 594,780
Unproved Properties....................................... 385 -- -- 12,561 12,946
--------- --------- -------- -------- ---------
424,006 171,159 -- 12,561 607,726
Less: accumulated depletion and depreciation.............. (233,706) (165,732) -- (9,480) (408,918)
--------- --------- -------- -------- ---------
Net Capitalized Costs..................................... $ 190,300 $ 5,427 $ -- $ 3,081 $ 198,808
========= ========= ======== ======== =========
C-75
SHERRITT INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS AT SEPTEMBER 30, 2002 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2002 AND 2001 IS UNAUDITED)
(ALL DOLLAR TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF CANADIAN DOLLARS EXCEPT
PER SHARE AMOUNTS)
23. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
2000
------------------------------------------------------
Cuba Spain Italy Pakistan Total
--------- --------- -------- -------- --------
Proved Properties.......................................... $ 360,122 $ 170,452 $ -- $ -- $530,574
Unproved Properties........................................ 78 -- -- 12,520 12,598
--------- --------- -------- ------- --------
360,200 170,452 -- 12,520 543,172
Less: accumulated depletion and depreciation............... (193,737) (152,203) -- (7,983) (353,923)
--------- --------- -------- ------- --------
Net Capitalized Costs...................................... $ 166,463 $ 18,249 $ -- $ 4,537 $189,249
========= ========= ======== ======= ========
1999
--------------------------------------------------------
Cuba Spain Italy Pakistan Total
--------- --------- --------- -------- ---------
Proved Properties........................................ $ 310,647 $ 164,466 $ 149,599 $ -- $ 624,712
Unproved Properties...................................... 359 -- -- 12,452 12,811
--------- --------- --------- ------- ---------
311,006 164,466 149,599 12,452 637,523
Less: accumulated depletion and depreciation............. (163,417) (148,097) (149,066) (7,983) (468,563)
--------- --------- --------- ------- ---------
Net Capitalized Costs.................................... $ 147,589 $ 16,369 $ 533 $ 4,469 $ 168,960
========= ========= ========= ======= =========
COSTS INCURRED IN OIL AND NATURAL GAS ACTIVITIES
2001
----------------------------------------------------
Cuba Spain Italy Pakistan Total
-------- -------- -------- -------- --------
Property Acquisitions
Proved.................................................... $ -- $ -- $ -- $-- $ --
Unproved.................................................. -- -- -- -- --
Exploration................................................. 13,663 114 -- 41 13,818
Development................................................. 50,143 593 -- -- 50,736
------- ---- ------ --- -------
$63,806 $707 $ -- $41 $64,554
======= ==== ====== === =======
2000
----------------------------------------------------
Cuba Spain Italy Pakistan Total
-------- -------- -------- -------- --------
Property Acquisitions
Proved.................................................... $ -- $ -- $ -- $-- $ --
Unproved.................................................. -- -- -- -- --
Exploration................................................. 16,713 3,850 -- 68 20,631
Development................................................. 32,481 2,136 -- -- 34,617
------- ------ ------ --- -------
$49,194 $5,986 $ -- $68 $55,248
======= ====== ====== === =======
1999
----------------------------------------------------
Cuba Spain Italy Pakistan Total
-------- -------- -------- -------- --------
Property Acquisitions
Proved.................................................... $ -- $ -- $ -- $ -- $ --
Unproved.................................................. -- -- -- -- --
Exploration................................................. 12,552 8,818 -- 298 21,668
Development................................................. 20,489 903 942 -- 22,334
------- ------ ---- ---- -------
$33,041 $9,721 $942 $298 $44,002
======= ====== ==== ==== =======
C-76
SHERRITT INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS AT SEPTEMBER 30, 2002 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2002 AND 2001 IS UNAUDITED)
(ALL DOLLAR TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF CANADIAN DOLLARS EXCEPT
PER SHARE AMOUNTS)
23. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
RESULTS OF OPERATIONS FROM OIL AND NATURAL GAS PRODUCING PROPERTIES
2001
----------------------------------------------------
Cuba Spain Italy Pakistan Total
-------- -------- -------- -------- --------
Oil and natural gas revenue................................. $162,668 $ 9,982 $ -- $ -- $172,650
Operating expenses.......................................... 45,556 2,796 -- -- 48,352
Exploration expenses........................................ -- -- -- -- --
Depletion, depreciation and amortization.................... 39,969 13,898 -- 1,497 55,364
Tax expense (recovery)...................................... 2,737 (2,156) -- -- 581
-------- ------- ------ ------- --------
Results of Operations....................................... $ 74,406 $(4,556) $ -- $(1,497) $ 68,353
======== ======= ====== ======= ========
2000
----------------------------------------------------
Cuba Spain Italy Pakistan Total
-------- -------- -------- -------- --------
Oil and natural gas revenue................................. $148,888 $12,408 $1,572 $ -- $162,868
Operating expenses.......................................... 45,463 3,600 914 -- 49,977
Exploration expenses........................................ -- -- -- -- --
Depletion, depreciation and amortization.................... 28,730 4,510 25 -- 33,265
Tax expense (recovery)...................................... 4,932 (303) -- -- 4,629
-------- ------- ------ ------ --------
Results of Operations....................................... $ 69,763 $ 4,601 $ 633 $ -- $ 74,997
======== ======= ====== ====== ========
1999
----------------------------------------------------
Cuba Spain Italy Pakistan Total
-------- -------- -------- -------- --------
Oil and natural gas revenue................................. $86,254 $10,974 $8,533 $ -- $105,761
Operating expenses.......................................... 32,166 3,848 4,845 -- 40,859
Exploration expenses........................................ -- -- -- -- --
Depletion, depreciation and amortization.................... 23,832 3,504 3,107 -- 30,443
Tax expense................................................. 933 2,812 -- -- 3,745
------- ------- ------ ------ --------
Results of Operations....................................... $29,323 $ 810 $ 581 $ -- $ 30,714
======= ======= ====== ====== ========
NET PROVED OIL AND NATURAL GAS RESERVES
The Corporation retains independent petroleum engineering consultants to
evaluate the Corporation's proved oil and natural gas reserves.
Proved oil and natural gas reserves are the estimated quantities of crude
oil, natural gas and natural gas liquids that geological and engineering
data demonstrate with reasonable certainty to be commercially recoverable
in future years from known reservoirs under existing economic conditions,
operating methods, and government regulations. Proved developed reserves
are reserves that can be expected to be recovered from existing wells
with existing equipment and operating methods.
Estimates of oil and natural gas reserves are subject to uncertainty and
will change as additional information regarding producing fields and
technology become available and as future economic and operating
conditions change.
C-77
SHERRITT INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS AT SEPTEMBER 30, 2002 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2002 AND 2001 IS UNAUDITED)
(ALL DOLLAR TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF CANADIAN DOLLARS EXCEPT
PER SHARE AMOUNTS)
23. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
The following table summarizes the Corporation's proved developed and
undeveloped oil and natural gas reserves. Oil reserves are in thousands
of barrels ("MBBLS") and natural gas reserves in millions of cubic feet
("MMCF").
TOTAL CUBA SPAIN ITALY PAKISTAN
---------------- ---------------- ---------------- ---------------- ----------------
Oil Gas Oil Gas Oil Gas Oil Gas Oil Gas
2001 ------- ------ ------- ------ ------- ------ ------- ------ ------- ------
(MBBLS) (MMCF) (MBBLS) (MMCF) (MBBLS) (MMCF) (MBBLS) (MMCF) (MBBLS) (MMCF)
PROVED DEVELOPED AND
UNDEVELOPED RESERVES
Beginning of Year..... 21,557 7,707 20,505 -- 1,052 -- -- -- -- 7,707
Revisions........... 4,301 -- 4,430 -- (129) -- -- -- -- --
Improved Recovery... -- -- -- -- -- -- -- -- -- --
Purchases........... -- -- -- -- -- -- -- -- -- --
Extensions &
Discoveries....... 2,183 -- 2,183 -- -- -- -- -- -- --
Production.......... (7,834) -- (7,568) -- (266) -- -- -- -- --
Sales............... -- -- -- -- -- -- -- -- -- --
End of Year........... 20,207 7,707 19,550 -- 657 -- -- -- -- 7,707
PROVED DEVELOPED
RESERVES
Beginning of Year..... 19,181 -- 18,129 -- 1,052 -- -- -- -- --
End of Year........... 20,207 -- 19,550 -- 657 -- -- -- -- --
TOTAL CUBA SPAIN ITALY PAKISTAN
---------------- ---------------- ---------------- ---------------- ----------------
Oil Gas Oil Gas Oil Gas Oil Gas Oil Gas
2000 ------- ------ ------- ------ ------- ------ ------- ------ ------- ------
(MBBLS) (MMCF) (MBBLS) (MMCF) (MBBLS) (MMCF) (MBBLS) (MMCF) (MBBLS) (MMCF)
PROVED DEVELOPED AND
UNDEVELOPED RESERVES
Beginning of Year..... 24,182 9,068 23,082 -- 1,100 -- -- 1,361 -- 7,707
Revisions........... (193) -- (342) -- 149 -- -- -- -- --
Improved Recovery... -- -- -- -- -- -- -- -- -- --
Purchases........... -- -- -- -- -- -- -- -- -- --
Extensions &
Discoveries....... 4,221 -- 4,125 -- 96 -- -- -- -- --
Production.......... (6,653) (264) (6,360) -- (293) -- -- (264) -- --
Sales............... -- (1,097) -- -- -- -- -- (1,097) -- --
End of Year........... 21,557 7,707 20,505 -- 1,052 -- -- -- -- 7,707
PROVED DEVELOPED
RESERVES
Beginning of Year..... 21,032 1,361 19,932 -- 1,100 -- -- 1,361 -- --
End of Year........... 19,181 -- 18,129 -- 1,052 -- -- -- -- --
C-78
SHERRITT INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS AT SEPTEMBER 30, 2002 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2002 AND 2001 IS UNAUDITED)
(ALL DOLLAR TABULAR AMOUNTS EXPRESSED IN THOUSANDS OF CANADIAN DOLLARS EXCEPT
PER SHARE AMOUNTS)
23. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
TOTAL CUBA SPAIN ITALY PAKISTAN
---------------- ---------------- ---------------- ---------------- ----------------
Oil Gas Oil Gas Oil Gas Oil Gas Oil Gas
1999 ------- ------ ------- ------ ------- ------ ------- ------ ------- ------
(MBBLS) (MMCF) (MBBLS) (MMCF) (MBBLS) (MMCF) (MBBLS) (MMCF) (MBBLS) (MMCF)
PROVED DEVELOPED AND
UNDEVELOPED RESERVES
Beginning of Year..... 43,306 10,702 41,403 -- 1,875 -- 28 2,995 -- 7,707
Revisions........... (18,864) (1,251) (18,695) -- (346) -- 177 (1,251) -- --
Improved Recovery... -- -- -- -- -- -- -- -- -- --
Purchases........... -- -- -- -- -- -- -- -- -- --
Extensions &
Discoveries....... 5,171 -- 5,171 -- -- -- -- -- -- --
Production.......... (5,431) (383) (4,797) -- (429) -- (205) (383) -- --
Sales............... -- -- -- -- -- -- -- -- -- --
End of Year........... 24,182 9,068 23,082 -- 1,100 -- -- 1,361 -- 7,707
PROVED DEVELOPED
RESERVES
Beginning of Year..... 25,122 1,935 23,247 -- 1,875 -- -- 1,935 -- --
End of Year........... 21,032 1,361 19,932 -- 1,100 -- -- 1,361 -- --
24. SUBSEQUENT EVENTS
(a) On October 25, 2002 Sherritt Coal Acquisition Inc. ("SCAI"), a
corporation wholly-owned by Sherritt Coal Partnership II, the partners of
which are two wholly-owned subsidiaries of Sherritt and Ontario Teachers'
Pension Plan Board, respectively, made an offer to purchase all of the
outstanding common shares of Fording at a price of $29 per share. The
offer was subject to a number of conditions including there being validly
deposited and not withdrawn at the Expiry Time at least 66 2/3% of the
outstanding common shares of Fording (calculated on a diluted basis) and
the receipt of customary regulatory approvals, including under the
COMPETITION ACT (Canada). SCAI and SCP II have agreed to pay certain
advisory and other fees in connection with this transaction. A revised
offer was subsequently made, which increased the offer to $35 cash per
share and added an alternative of receiving exchange rights in an income
trust to be established.
(b) In June, 2002, the Corporation entered into an agreement with a third
party, which provides the Corporation with the right, at any time prior
to April 30, 2003, to sell special warrants to the third party for cash
by way of private placement, subject to regulatory approval. Each special
warrant would be exercisable by the holder to acquire one restricted
voting share of the Corporation for no additional consideration. The
maximum number of special warrants issuable under the option agreement is
the lesser of $30 million divided by the purchase price and 5% of the
aggregate number of restricted voting shares that would be outstanding
after giving effect to the exercise of the special warrants. Upon
exercise of the option, the Corporation is obliged to, among other
things, file a prospectus qualifying the issuance of restricted voting
shares upon exercise of the special warrants. The special warrants would
be automatically exercised upon receipt of regulatory approval of this
prospectus.
C-79
(This page has been left blank intentionally.)
C-80
SHERRITT COAL ACQUISITION INC.
BALANCE SHEET
OCTOBER 24, 2002
C-81
INDEPENDENT AUDITORS' REPORT
To the Directors of Sherritt Coal Acquisition Inc.:
We have audited the balance sheet of Sherritt Coal Acquisition Inc. as at
October 24, 2002. This balance sheet is the responsibility of the Corporation's
management. Our responsibility is to express an opinion on the balance sheet
based on our audit.
We conducted our audit in accordance with Canadian generally accepted
auditing standards and auditing standards generally accepted in the United
States of America. Those standards require that we plan and perform an audit to
obtain reasonable assurance whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall balance sheet presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, this balance sheet presents fairly, in all material
respects, the financial position of the Corporation as at October 24, 2002 in
accordance with Canadian generally accepted accounting principles.
Deloitte & Touche LLP
Chartered Accountants
Toronto, Canada
December 16, 2002
C-82
SHERRITT COAL ACQUISITION INC.
BALANCE SHEET
(IN CANADIAN DOLLARS)
As at
October 24, 2002
-----------------
ASSETS
Cash........................................................ $ 1
---
$ 1
===
SHAREHOLDER'S EQUITY
Capital stock (note 3)...................................... $ 1
---
$ 1
===
SEE ACCOMPANYING NOTES
C-83
SHERRITT COAL ACQUISITION INC.
NOTES TO THE BALANCE SHEET
(IN CANADIAN DOLLARS)
1. NATURE OF OPERATIONS
Sherritt Coal Acquisition Inc. (the "Corporation") is a Canadian corporation
formed on October 24, 2002 under the Canada Business Corporations Act and is
wholly-owned by Sherritt Coal Partnership II (the "Partnership"). The
Partnership is an Ontario partnership, the two partners of which are
wholly-owned subsidiaries of Sherritt International Corporation and Ontario
Teachers' Pension Plan Board respectively (collectively the "Partners").
As at October 24, 2002, operations had not commenced.
2. ACCOUNTING POLICIES
This balance sheet has been prepared in accordance with Canadian generally
accepted accounting principles, which are the same in all applicable
material respects as United States generally accepted accounting principles.
The Corporation had no revenues, expenses or cash flows, and consequently,
statements of earnings and cash flows have not been presented.
3. CAPITAL STOCK
Authorized: an unlimited number of common shares
Outstanding: 1 common share has been issued for cash of $1
4. SUBSEQUENT EVENTS
On October 25, 2002, the Corporation made an offer to purchase all of the
outstanding common shares of Fording at a price of $29 per share. The offer
was subject to a number of conditions including there being validly
deposited and not withdrawn at the Expiry Time at least 66 2/3% of the
outstanding common shares of Fording (calculated on a diluted basis) and the
receipt of customary regulatory approvals, including under the COMPETITION
ACT (Canada). A revised offer was subsequently made, which increased the
offer to $35 cash per share and added an alternative of receiving exchange
rights in an income trust to be established.
C-84
CANADIAN COAL TRUST
BALANCE SHEET
DECEMBER 16, 2002
C-85
INDEPENDENT AUDITORS' REPORT
To the Trustees of Canadian Coal Trust:
We have audited the balance sheet of Canadian Coal Trust as at December 16,
2002. This balance sheet is the responsibility of the Trust's management. Our
responsibility is to express an opinion on the balance sheet based on our audit.
We conducted our audit in accordance with Canadian generally accepted
auditing standards and auditing standards generally accepted in the United
States of America. Those standards require that we plan and perform an audit to
obtain reasonable assurance whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall balance sheet presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, this balance sheet presents fairly, in all material
respects, the financial position of the Trust as at December 16, 2002 in
accordance with Canadian generally accepted accounting principles.
Deloitte & Touche LLP
Chartered Accountants
Toronto, Canada
December 16, 2002
C-86
CANADIAN COAL TRUST
BALANCE SHEET
(IN CANADIAN DOLLARS)
As at
December 16, 2002
------------------
ASSETS
Cash........................................................ $10
---
$10
===
TRUST UNITHOLDER'S EQUITY
Trust Units (note 3)........................................ $10
---
$10
===
SEE ACCOMPANYING NOTES
C-87
CANADIAN COAL TRUST
NOTES TO THE BALANCE SHEET
(IN CANADIAN DOLLARS)
1. NATURE OF OPERATIONS
Canadian Coal Trust is an unincorporated, open-ended limited purpose trust
established under the laws of the Province of Ontario pursuant to a
Declaration of Trust dated December 16, 2002. Canadian Coal Trust is
administered by the Trustees.
The purpose of the Trust is to invest in the securities of Sherritt Coal
Acquisition Inc. ("SCAI").
2. ACCOUNTING POLICIES
This balance sheet has been prepared in accordance with Canadian generally
accepted accounting principles, which are the same in all applicable
material respects as United States generally accepted accounting principles.
The Trust had no revenues, expenses or cash flows, and consequently,
statements of earnings and cash flows have not been presented.
3. TRUST UNITS
Authorized: an unlimited number of trust units
Outstanding: 1 trust unit has been issued for cash of $10
C-88
LUSCAR COAL INCOME FUND
FINANCIAL STATEMENTS
C-89
AUDITORS' REPORT
To the Trustees of Luscar Coal Income Fund
We have audited the balance sheets of Luscar Coal Income Fund as at
December 31, 2000 and 1999 and the statements of earnings, unitholders' equity
and cash flows for each of the years in the three year period ended
December 31, 2000. These financial statements are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with Canadian and United States
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 financial statements present fairly, in all material
respects, the financial position of the Fund as at December 31, 2000 and 1999
and the results of its operations and its cash flows for each of the years in
the three year period ended December 31, 2000 in accordance with Canadian and
United States generally accepted accounting principles.
Edmonton, Canada (Signed) Ernst & Young LLP
February 16, 2001 Chartered Accountants
COMMENT FOR US READERS ON CANADA -- US REPORTING DIFFERENCES
In the United States, reporting standards for auditors require the addition
of an explanatory paragraph (following the opinion paragraph) outlining changes
in accounting principles that have been implemented in the financial statements.
As discussed in Note 1 to the financial statements, in 2000 the Fund implemented
a change in the method of accounting for income taxes to conform to the new
Canadian Institute of Chartered Accountants Handbook, Section 3465, and in 2001
implemented a change in revenue recognition and coal inventory and exploration
and development cost accounting policies.
Edmonton, Canada (Signed) Ernst & Young LLP
February 16, 2001 Chartered Accountants
C-90
LUSCAR COAL INCOME FUND
BALANCE SHEETS
(IN THOUSANDS)
March 31, 2001 December 31, 2000 December 31, 1999
--------------- ------------------ ------------------
(restated) (restated) (restated)
(note 1) (note 1) (note 1)
(Unaudited)
ASSETS
Cash.............................................. $ 3,288 $ 809 $ 313
Due from Luscar (note 7).......................... 246 246 645
Investment in Luscar (note 3)..................... 570,334 565,607 625,540
Deferred financing costs.......................... 2,640 2,795 3,417
-------- -------- --------
$576,508 $569,457 $629,915
======== ======== ========
LIABILITIES AND EQUITY
LIABILITIES
Accounts payable and accrued charges.............. $ 8,874 $ 350 $ 527
Accrued interest on convertible debentures........ 2,495 -- --
Convertible debentures, net of equity portion
(note 4)........................................ 33,928 35,539 41,532
-------- -------- --------
45,297 35,889 42,059
-------- -------- --------
EQUITY
Convertible debentures (note 4)................... 66,072 64,461 58,468
Unitholders' equity (note 5)...................... 465,139 469,107 529,388
-------- -------- --------
531,211 533,568 587,856
-------- -------- --------
$576,508 $569,457 $629,915
======== ======== ========
SEE ACCOMPANYING NOTES
C-91
LUSCAR COAL INCOME FUND
STATEMENTS OF EARNINGS
(IN THOUSANDS)
Three Months Ended Year Ended
Mar. 31 Dec. 31
------------------------- ------------------------------------
2001 2000 2000 1999 1998
----------- ----------- ---------- ---------- ----------
(restated) (restated) (restated) (restated) (restated)
(note 1) (note 1) (note 1) (note 1) (note 1)
(Unaudited) (Unaudited)
INCOME
Interest on Luscar subordinated notes
(note 3).................................. $ 2,762 $ 2,785 $ 11,200 $ 59,593 $54,336
Other....................................... 8 1 84 67 11
Interest on instalments receivable.......... -- -- -- -- 1,454
------- ------- -------- --------- -------
2,770 2,786 11,284 59,660 55,801
------- ------- -------- --------- -------
EXPENSES
Administration costs (note 7)............... 285 237 1,010 1,234 886
Take over response costs (note 8)........... 8,526 -- -- -- --
Interest
Convertible debentures (note 4)........... 888 1,174 4,007 4,564 1,260
Luscar loans to finance acquisition
(note 7)................................ -- -- -- -- 5,844
Amortization of deferred financing
costs................................... 50 60 240 276 76
------- ------- -------- --------- -------
9,749 1,471 5,257 6,074 8,066
------- ------- -------- --------- -------
EARNINGS (LOSS) BEFORE THE UNDERNOTED....... (6,979) 1,315 6,027 53,586 47,735
Equity in net earnings (loss) of Luscar..... 4,727 (4,047) (59,933) (143,608) (7,040)
------- ------- -------- --------- -------
NET EARNINGS (LOSS) FOR THE PERIOD.......... $(2,252) $(2,732) $(53,906) $ (90,022) $40,695
======= ======= ======== ========= =======
SEE ACCOMPANYING NOTES
C-92
LUSCAR COAL INCOME FUND
STATEMENTS OF UNITHOLDERS' EQUITY
(IN THOUSANDS)
Three Months Ended Year Ended
Mar. 31 Dec. 31
------------------------- ------------------------------------
2001 2000 2000 1999 1998
----------- ----------- ---------- ---------- ----------
(restated) (restated) (restated) (restated) (restated)
(note 1) (note 1) (note 1) (note 1) (note 1)
(Unaudited) (Unaudited)
BALANCE, BEGINNING OF PERIOD, AS ORIGINALLY
STATED.................................... $475,056 $536,425 $536,425 $688,573 $506,945
Adjustment to reflect adoption of liability
method of accounting for income taxes by
Luscar (note 1)........................... -- (1,176) (1,176) 148 --
Adjustment to reflect change of accounting
policies for revenue recognition and coal
inventory by Luscar (note 1).............. 3,155 2,917 2,917 971 669
Adjustment to reflect change of accounting
policy for exploration and development
expenditures by Luscar (note 1)........... (9,104) (8,778) (8,778) (15,748) (15,510)
-------- -------- -------- -------- --------
BALANCE, BEGINNING OF PERIOD, AS RESTATED... 469,107 529,388 529,388 673,944 492,104
Trust units issued on acquisition of Manalta
(note 2).................................. -- -- -- -- 207,060
Net earnings (loss) for the period.......... (2,252) (2,732) (53,906) (90,022) 40,695
Amortization of deferred financing costs.... (105) (96) (382) (347) (78)
Accretion charge to increase carrying amount
of convertible debentures in equity
(note 4).................................. (1,611) (1,326) (5,993) (5,436) (1,288)
Distributions paid.......................... -- -- -- (48,751) (64,549)
-------- -------- -------- -------- --------
BALANCE, END OF PERIOD...................... $465,139 $525,234 $469,107 $529,388 $673,944
======== ======== ======== ======== ========
SEE ACCOMPANYING NOTES
C-93
LUSCAR COAL INCOME FUND
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Three Months Ended Year Ended
Mar. 31 Dec. 31
------------------------- ------------------------------------
2001 2000 2000 1999 1998
----------- ----------- ---------- ---------- ----------
(restated) (restated) (restated) (restated) (restated)
(note 1) (note 1) (note 1) (note 1) (note 1)
(Unaudited) (Unaudited)
OPERATING ACTIVITIES
Net earnings (loss) for the period........... $(2,252) $(2,732) $(53,906) $(90,022) $ 40,695
Non-cash items:
Dividends from Luscar...................... -- -- -- -- 25,066
Equity in net (earnings) loss of Luscar.... (4,727) 4,047 59,933 143,608 7,040
Interest on convertible debentures not
included in interest expense............. (1,611) (1,326) (5,993) (5,436) (1,902)
Repayment of advances from Luscar for
acquisition costs.......................... -- -- -- -- (4,533)
Interest on instalments receivable........... -- -- -- -- (1,454)
------- ------- -------- -------- --------
DISTRIBUTABLE CASH........................... (8,590) (11) 34 48,150 64,912
Accrued interest on convertible debentures... 2,495 2,500 -- -- --
Accrued take-over response costs (note 8).... 8,526 -- -- -- --
Other items not affecting cash............... 48 (77) 63 515 219
------- ------- -------- -------- --------
2,479 2,412 97 48,665 65,131
------- ------- -------- -------- --------
INVESTING ACTIVITIES
Acquisition of Manalta (note 2).............. -- -- -- (659) (348,000)
Investment in Luscar (note 3)................ -- -- -- -- (37,598)
------- ------- -------- -------- --------
-- -- -- (659) (385,598)
------- ------- -------- -------- --------
FINANCING ACTIVITIES
Repayment of amount due from Luscar.......... -- 200 399 639 --
Distributions to unitholders................. -- -- -- (48,751) (64,549)
Issue of convertible debentures.............. -- -- -- -- 100,000
Issue costs on convertible debentures........ -- -- -- -- (3,000)
Loan from Luscar............................. -- -- -- -- 250,445
Instalments receivable collected............. -- -- -- -- 37,525
------- ------- -------- -------- --------
-- 200 399 (48,112) 320,421
------- ------- -------- -------- --------
CHANGE IN CASH POSITION...................... 2,479 2,612 496 (106) (46)
Cash position, beginning of period........... 809 313 313 419 465
------- ------- -------- -------- --------
CASH POSITION, END OF PERIOD................. $ 3,288 $ 2,925 $ 809 $ 313 $ 419
------- ------- -------- -------- --------
Cash distributions per unit.................. $ -- $ -- $ -- $ 0.537 $ 1.0215
Interest paid................................ $ -- $ -- $ 10,000 $ 10,000 $ 8,392
======= ======= ======== ======== ========
SEE ACCOMPANYING NOTES
C-94
LUSCAR COAL INCOME FUND
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS AT MARCH 31, 2001 AND FOR THE THREE MONTH PERIODS ENDED
MARCH 31, 2001 AND 2000 IS UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Luscar Coal Income Fund ("LCIF") prepares its financial statements following
Canadian generally accepted accounting principles. The following significant
accounting policies are presented to assist the reader in evaluating these
financial statements and, together with the following notes, should be
considered an integral part of the financial statements.
ORGANIZATION
LCIF is an open ended trust, created by a Declaration of Trust under the
laws of the Province of Alberta, which holds securities in Luscar Coal Ltd.
("Luscar") and its subsidiary Luscar Ltd. Income derived by LCIF from these
investments, net of expenses, is distributed to unitholders of LCIF on a
quarterly basis. The beneficiaries of LCIF are the holders of the trust
units.
BASIS OF PRESENTATION
Effective October 1, 1998, LCIF acquired all the outstanding instalment
receipts and trust units of Manalta Coal Income Trust ("MCIT"), the owner of
all of the common shares and certain notes payable of Manalta Coal Ltd.
("Manalta"), a major western Canadian coal producer.
As contemplated in the acquisition, the following transactions took place to
effect the integration of the acquisition:
- on October 1, 1998, MCIT distributed all the common shares and
substantially all of the subordinated notes of Manalta to LCIF;
- the sole common shareholder of Luscar Ltd., Luscar Management Corporation,
incorporated a new holding company, Luscar Coal Ltd., on December 11, 1998
and on December 31, 1998 transferred the common shares of Luscar Ltd. to
Luscar Coal Ltd. in exchange for common shares of Luscar Coal Ltd.;
- on January 1, 1999, LCIF transferred the common shares of Manalta to
Luscar Coal Ltd. in exchange for special shares of Luscar Coal Ltd; and
- on January 1, 1999, Luscar Ltd. and Manalta were amalgamated to form a new
company named Luscar Ltd. in which LCIF holds subordinated notes and
special shares.
As a result of these transactions, LCIF acquired ownership of Manalta on
October 1, 1998 and transferred this ownership to Luscar Coal Ltd on
January 1, 1999. Therefore, the accounts of Manalta have not been
consolidated because ownership was temporary as the terms of the financing
required that Manalta be transferred to Luscar Coal Ltd. The consolidated
financial statements of Luscar Coal Ltd., including the accounts of Manalta
with effect from October 1, 1998, are presented as a supplement to these
financial statements. Therefore, these financial statements have been
prepared on the basis that LCIF invested in additional special shares and
subordinated notes in Luscar Coal Ltd. and Luscar Ltd. to facilitate the
acquisition of Manalta by Luscar Coal Ltd effective October 1, 1998 at a
purchase price equivalent to LCIF's cost of acquiring Manalta.
USE OF ESTIMATES
The measurement of certain assets and liabilities is dependent upon future
events whose outcome will not be fully known until future periods. Therefore
the preparation of these financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses. In particular, future cash flows from
Luscar and other information used to assess the carrying value of LCIF's
investment in Luscar are subject to measurement uncertainty and the impact
on the financial statements of future periods could be material.
These financial statements include financial statements for interim periods,
which have been prepared without audit. Such interim financial statements
and the accompanying notes include estimates necessary to fairly present the
financial position and results of operations, which may not be indicative of
results of operations for other periods.
SPECIAL SHARES OF LUSCAR AND SUBORDINATED NOTES
LCIF accounts for its investment in special shares of Luscar using the
equity method of accounting. Under this method, the cost of the investment
is increased (decreased) by the portion of Luscar's earnings (loss)
attributable to the special shares, and reduced by the dividends paid by
Luscar on the shares. Should LCIF's cumulative share of Luscar losses and
dividends received exceed its investment in special shares of Luscar, such
excess is applied to reduce the carrying value of LCIF's investment in
subordinated notes of Luscar.
C-95
LUSCAR COAL INCOME FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS AT MARCH 31, 2001 AND FOR THE THREE MONTH PERIODS ENDED
MARCH 31, 2001 AND 2000 IS UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Interest income on the notes is recorded on an accrual basis as earned.
Interest is receivable quarterly on March 31, June 30, September 30 and
December 31.
DEFERRED FINANCING COSTS
Deferred financing costs are being amortized on a straight-line basis over
the term of the convertible debentures. The amortization of these costs is
included in interest expense and as a charge to unitholders' equity in
proportion to the amounts of the convertible debentures classified as debt
and equity respectively.
INCOME TAXES
LCIF is a unit trust for income tax purposes and as such is only taxable on
any taxable income not allocated to the unitholders. As any taxable income
is allocated to the unitholders, no provision for income taxes on the
earnings of LCIF is required. Income tax obligations relating to
distributions from LCIF are the obligations of the unitholders.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of LCIF's financial assets and liabilities are considered
to approximate fair values except as otherwise disclosed in these financial
statements. Cash is comprised of bank balances held with a major Canadian
financial institution and earns interest at rates relative to bank prime
rates.
CHANGES IN ACCOUNTING POLICIES
(A) INCOME TAXES
Effective January 1, 2000, Luscar changed its method of accounting for
income taxes from the deferral method to the liability method as required
by The Canadian Institute of Chartered Accountants' Handbook
Section 3465, Accounting for Income Taxes. As permitted under these
rules, the change has been adopted retroactively and Luscar has restated
its consolidated balance sheets at December 31, 1999 and 1998 and its
consolidated statements of loss, deficit and cash flows for the year
ended December 31, 1999 and 1998 accordingly.
The effect of Luscar's adoption of the liability method on LCIF's
financial statements was to increase LCIF's investment in Luscar and
unitholders' equity at December 31, 1998 by $148, increase LCIF's equity
in the loss of Luscar for the year ended December 31, 1999 by $1,324 and
decrease the investment in Luscar and unitholders' equity at
December 31, 1999 by $1,176.
(B) REVENUE RECOGNITION AND COAL INVENTORY VALUATION
During 2001, Luscar reviewed its revenue recognition and coal inventory
valuation accounting policies in the context of U.S. SEC Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"). In accordance with the guidance of SAB 101 and the February 2001
Ontario Securities Commission Staff Notice 52-701 regarding revenue
recognition, Luscar changed its revenue recognition and coal inventory
valuation accounting policies. Previously, Luscar recognized revenue when
coal was shipped from the minesite, either directly to the customer or to
port facilities, provided that contractual sales commitments were in
place.
Luscar now recognizes revenue when title passes to the customer.
Furthermore, Luscar previously recorded coal inventory at production cost
including direct variable overhead, and in the case of coal inventory
held at port terminal facilities, at its net realizable value. Luscar now
records coal inventory at production cost which includes direct and
allocable indirect overhead and in the case of coal inventory held at
port terminal facilities, rail transportation and applicable wharfage
costs.
These changes in policy have been adopted retroactively and Luscar has
restated its consolidated balance sheets at March 31, 2001, December 31,
2000 and December 31, 1999 and its consolidated statements of earnings,
deficit and cash flows for the periods ended March 31, 2001,
December 31, 2000, March 31, 2000, December 31, 1999 and December 31,
1998 accordingly.
The effect of these changes in accounting policy on LCIF's financial
statements was to decrease LCIF's equity in the loss of Luscar by $302,
$1,946 and $238 for the years ended December 31, 1998, 1999 and 2000
respectively and to increase LCIF's equity in the loss of Luscar by $398
and $2,033 for the three months ended March 31, 2000 and March 31, 2001
respectively. This change
C-96
LUSCAR COAL INCOME FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS AT MARCH 31, 2001 AND FOR THE THREE MONTH PERIODS ENDED
MARCH 31, 2001 AND 2000 IS UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
increased the investment in Luscar and unitholders' equity at March 31,
2001 and December 31, 2000 by $1,122 and $3,155 respectively.
(C) EXPLORATION AND DEVELOPMENT COSTS
During 2001, Luscar changed its accounting policies for exploration and
development costs related to exploration properties. Previously, Luscar
capitalized all costs related to exploration properties including
property acquisition costs, lease payments, drilling and other
exploration related costs. Such costs were reclassified as mining
properties when mine development commenced. Costs related to uneconomic
exploration properties were charged to earnings in the year of
determination.
Costs related to exploration properties held for future development are
expensed as incurred, including property carrying costs, lease payments,
drilling and other exploration costs, and other pre-development costs.
Acquisition costs for exploration properties are initially capitalized
until management can determine whether development of the property would
be economic. In the year of determination, costs related to uneconomic
exploration properties are charged to earnings while costs related to
economic exploration properties are reclassified as mining properties.
This change in accounting policy has been adopted retroactively and
Luscar has restated its consolidated balance sheets at March 31, 2001,
December 31, 2000 and December 31, 1999 and its consolidated statements
of earnings, deficit and cash flows for the periods ended March 31, 2001,
December 31, 2000, March 31, 2000, December 31, 1999 and December 31,
1998 accordingly.
The effect of the change in accounting policy on LCIF's financial
statements was to increase LCIF's equity in the loss of Luscar by $238
for the year ended December 31, 1998, decrease its equity in the loss of
Luscar by $6,970 for the year ended December 31, 1999, increase its
equity in the loss of Luscar by $326 for the year ended December 31, 2000
and decrease the investment in Luscar and unitholders' equity at
December 31, 2000 by $9,104. This change increased LCIF's equity in the
loss of Luscar by $51 and $213 for the three months ended March 31, 2001
and March 31, 2000 respectively and decreased the investment in Luscar
and unitholders' equity at March 31, 2001 by $9,154.
2. ACQUISITION OF MANALTA COAL INCOME TRUST
Effective October 1, 1998, LCIF acquired all of the outstanding instalment
receipts and trust units of MCIT for $562,647, including acquisition costs
of $7,587. The purchase price was comprised of cash of $348,000, costs of
$7,587 which were paid directly by Luscar and 34,800 trust units of LCIF
valued at $207,060 based on the closing trading value of the trust units on
the Toronto Stock Exchange for the day preceding the acquisition date.
As indicated in Note 1, LCIF acquired MCIT and subsequently transferred
MCIT's ownership of Manalta to Luscar on January 1, 1999 in exchange for
special shares of Luscar. LCIF did not consolidate the accounts of Manalta
for the period from October 1, 1998 to December 31, 1998 because LCIF's
ownership of Manalta was temporary as the terms of the financing required
that Manalta be transferred to Luscar Coal Ltd.. Since LCIF can
significantly influence Luscar, LCIF accounts for its investment in Luscar,
including the special shares received in exchange for the common shares of
Manalta, using the equity method.
Because LCIF acquired and retained ownership of the outstanding trust units
of MCIT, MCIT's accounts (excluding those of Manalta as described above) are
consolidated effective October 1, 1998. The identifiable net assets of MCIT
included subordinated notes due from Manalta to MCIT and other amounts
payable to Manalta by MCIT that were eliminated upon consolidation in MCIT's
consolidated financial statements as at September 30, 1998. The following
table presents the adjustments made upon the acquisition of MCIT, the
C-97
LUSCAR COAL INCOME FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS AT MARCH 31, 2001 AND FOR THE THREE MONTH PERIODS ENDED
MARCH 31, 2001 AND 2000 IS UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
2. ACQUISITION OF MANALTA COAL INCOME TRUST (CONTINUED)
transfer of ownership of Manalta to Luscar Coal Ltd. effective October 1,
1998 and the residual net assets of MCIT retained by LCIF on October 1,
1998.
Manalta
MCIT Transferred to Net Assets
September 30, Acquisition MCIT as Luscar Retained by
1998 Adjustments(a) Acquired Coal Ltd. LCIF
-------------- -------------- ---------- -------------- -----------
Current assets............................ $100,750 $ 14,126 $ 114,876 $ 126,420 $(11,544)
Capital assets............................ 750,574 387,450 1,138,024 1,138,024 --
Pension surplus........................... 7,162 1,701 8,863 8,863 --
Investment in 7.5% subordinated notes of
Manalta................................. -- -- -- -- 560,000
Investment in Manalta common shares
(subsequently exchanged for special
shares of Luscar)....................... -- -- -- -- 14,191
-------- -------- ---------- ---------- --------
Total assets.............................. $858,486 $403,277 $1,261,763 $1,273,307 $562,647
======== ======== ========== ========== ========
Current liabilities....................... $109,699 $ 992 $ 110,691 $ 110,691 $ --
7.5% subordinated notes due to MCIT....... -- -- -- 560,000 --
Long-term debt............................ 113,977 -- 113,977 113,977 --
Future income taxes....................... -- 404,291 404,291 404,291 --
Foreign currency forward contracts........ -- 44,397 44,397 44,397 --
Accrued reclamation costs................. 28,163 (2,403) 25,760 25,760 --
-------- -------- ---------- ---------- --------
Total liabilities......................... 251,839 447,277 699,116 1,259,116 --
Equity.................................... 606,647 (44,000) 562,647 14,191 562,647
-------- -------- ---------- ---------- --------
Total liabilities and equity.............. $858,486 $403,277 $1,261,763 $1,273,307 $562,647
======== ======== ========== ========== ========
-------------------
(a) Acquisition adjustments reflect fair value adjustments to acquired
assets and liabilities and the adoption of the liability method of
accounting for income taxes.
The identifiable net assets of MCIT acquired at assigned values accounted
for as a purchase were as follows:
7.5% subordinated notes of Manalta.......................... $560,000
Common shares of Manalta (subsequently exchanged for special
shares of Luscar)......................................... 14,191
Accounts payable and accrued liabilities.................... (11,544)
--------
Purchase price.............................................. $562,647
========
Subsequent to the acquisition, and upon the reorganization and integration
of the businesses of Luscar Ltd. and Manalta as described in Note 1, the
subordinated notes of Manalta were reduced to $292,969 (see Note 3) by
offsetting $267,031 in respect of indebtedness owed to Luscar Ltd. by LCIF.
C-98
LUSCAR COAL INCOME FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS AT MARCH 31, 2001 AND FOR THE THREE MONTH PERIODS ENDED
MARCH 31, 2001 AND 2000 IS UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
3. INVESTMENT IN LUSCAR
As at December 31
As at March 31, -----------------------
2001 2000 1999
---------------- ---------- ----------
(restated) (restated) (restated)
(note 1) (note 1) (note 1)
(Unaudited)
EQUITY INVESTMENT
Special shares, at cost
Luscar Ltd. (9,000 shares)................................ $ 180,534 $ 180,534 $ 180,534
Luscar Coal Ltd. (7,600 shares)........................... 14,850 14,850 14,850
Accumulated equity in losses applied to special shares...... (148,105) (148,105) (148,105)
Accumulated dividends received.............................. (47,279) (47,279) (47,279)
--------- --------- ---------
-- -- --
--------- --------- ---------
SUBORDINATED NOTES
12.5% due December 31, 2026................................. 350,000 350,000 350,000
7.5% due October 1, 2027.................................... 292,969 292,969 292,969
--------- --------- ---------
Subordinated notes, at cost................................. 642,969 642,969 642,969
Accumulated equity in losses applied to subordinated
notes..................................................... (72,635) (77,362) (17,429)
--------- --------- ---------
570,334 565,607 625,540
--------- --------- ---------
$ 570,334 $ 565,607 $ 625,540
========= ========= =========
In 1998, LCIF received 7,600 special shares in Luscar Coal Ltd. in exchange
for the common shares of Manalta Coal Ltd.
The 19,363 Luscar Ltd. special shares owned by LCIF at September 30, 1998
were exchanged for 9,000 special shares in Luscar Ltd. created upon the
amalgamation of Luscar Ltd. and Manalta Coal Ltd.
Net proceeds of $37,525 received September 30, 1998 from the collection of
instalments receivable, plus $73 of funds from the initial instalment not
required for costs of the issue, were used to acquire additional special
shares of Luscar Ltd. at a price of $9.57 per share, as determined by
negotiation between LCIF and Luscar.
The special shares of Luscar Coal Ltd. and Luscar Ltd. are non-voting. The
provisions relating to these shares result in LCIF being entitled to 98% of
the total dividends paid by Luscar. In the event of dissolution of LCIF, the
special shares are convertible into common shares of the issuer on a one for
one basis. The holders of special shares are entitled to share equally with
the holders of the common shares in any distribution of the assets of the
issuer upon the liquidation, dissolution or winding-up of the issuer or
other distribution of its assets among its shareholders.
Luscar has the option to elect to satisfy its obligation to repay the notes
on maturity by the issue of equity securities of Luscar having a value equal
to the outstanding notes. From time to time, beginning in 2017, Luscar and
LCIF will jointly review Luscar's remaining coal resources, the economic
conditions relating to the coal industry and the business prospects of
Luscar. If either party is of the opinion that Luscar would be unable to
refinance the subordinated notes upon maturity on similar terms and
conditions, then Luscar shall commence principal repayments such that the
subordinated notes are fully repaid upon maturity. In that event, Luscar's
available cash shall be utilized to the extent required to fund such
repayments in lieu of dividends on its common and special shares. Otherwise,
the notes are not redeemable at the option of Luscar or the holders thereof
prior to maturity.
Effective October 1, 1999 LCIF entered into an agreement with Luscar to
temporarily reduce the interest rates on the subordinated notes until
Luscar's ratio of senior debt to earnings before interest, income taxes,
depreciation and amortization ("EBITDA") reaches targeted levels of less
than 3.0 to 1 for two consecutive quarters. This is expected to allow Luscar
to increase the principal repayments of its bank indebtedness by $15,000
annually until the targeted senior debt to EBITDA ratio is reached.
Additional bank indebtedness repayments for the period from January 1, 2001
to March 31, 2001 amounted to $6,500 ($15,000 in 2000 and $3,750 in 1999).
The effective interest rate of the subordinated notes is determined by
multiplying the coupon interest rate by an interest rate adjustment factor
which is determined by dividing Luscar's forecast distributable cash for the
year by the amount of interest otherwise payable under the subordinated
notes. The interest rate adjustment factor was 0.1704 from January 1, 2000
to March 31, 2001, and 0.6269 from October 1, 1999 to December 31, 1999.
C-99
LUSCAR COAL INCOME FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS AT MARCH 31, 2001 AND FOR THE THREE MONTH PERIODS ENDED
MARCH 31, 2001 AND 2000 IS UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
3. INVESTMENT IN LUSCAR (CONTINUED)
In the event Luscar is unable to distribute its available cash by way of
reduction of capital or payment of dividends due to restrictions contained
in the Business Corporations Act (Alberta), Luscar may make principal
repayments on the 7.5% notes not to exceed the amounts Luscar would have
distributed were it not for such restrictions. In addition, Luscar may
redeem certain of the 7.5% subordinated notes before maturity if the holder
of such notes is indebted to Luscar, by offsetting the amount of such
indebtedness against the principal amount of the 7.5% subordinated notes
redeemed.
The subordinated notes and special shares are not traded in public markets
and therefore their fair values are not readily available. However, the
collective fair value of LCIF's investment in these financial assets can be
estimated by reference to the market capitalization of the units and
convertible debentures since LCIF's principal asset is its investment in the
notes and special shares. At December 31, 2000 the market capitalization of
the units and convertible debentures based on the closing quoted trading
price was $251,923. The comparable value at December 31, 1999 was $342,611.
4. CONVERTIBLE DEBENTURES
LCIF issued $100,000 of 10% convertible unsecured senior subordinated
debentures in September 1998 to partially fund the Manalta acquisition.
The debentures mature June 30, 2005 and bear interest at an annual rate of
10% payable semi-annually on June 30 and December 31 in each year. The
debentures are unsecured senior subordinated obligations and are
subordinated in right of payment to all existing and future senior
indebtedness of LCIF.
The debentures are convertible into trust units of LCIF at the option of the
holder at any time prior to maturity at a conversion price of $6.75 per unit
and may be redeemed by LCIF after June 30, 2000 and prior to maturity under
certain conditions. LCIF also has the option to satisfy its obligation to
pay the principal amount of the debentures either upon redemption or at
maturity by the issuance of trust units.
The convertible debentures are being accounted for as a compound financial
instrument as LCIF has the right to redeem the debentures by issuing trust
units. The liability component of the debentures at the date of issue was
calculated as the net present value of the interest payments at 10% to
maturity. The remaining principal amount of the debentures was classified as
equity. Interest expense is determined on the liability component with such
component being reduced by future interest payments. The equity component of
the convertible debentures is increased each year over the term to full face
value by charges to unitholders' equity.
The convertible debentures are listed on The Toronto Stock Exchange and at
December 31, 2000, were trading at 80.50% of par value and at December 31,
1999 at 95.0% of par value. Subsequent to March 31, 2001 substantially all
of the convertible debentures were acquired by LEP and the remaining
convertible debentures were redeemed with cash advanced by LEP (see
Note 8).
5. TRUST UNITS
AUTHORIZED
The Declaration of Trust provides that an unlimited number of units may be
issued. Each unit represents an equal undivided beneficial interest in any
distributions from LCIF and in the net assets in the event of termination or
wind-up. All units are the same class with equal rights and privileges.
Units may be issued for consideration payable in instalments with such units
being held as security for unpaid instalments.
Units are redeemable at the holder's option at amounts related to market
prices at the time, subject to a maximum of $250 in cash redemptions in any
particular calendar month. The Trustees may waive this limitation at their
sole discretion. Redemptions in excess of this amount shall be paid by way
of a distribution in specie of a pro rata number of Luscar subordinated
notes and special shares of Luscar. Subsequent to March 31, 2001, all of the
trust units were acquired by LEP (see Note 8).
ISSUED
The issued and outstanding trust units of LCIF are comprised of 90,700 units
issued for aggregate consideration of $735,728.
C-100
LUSCAR COAL INCOME FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS AT MARCH 31, 2001 AND FOR THE THREE MONTH PERIODS ENDED
MARCH 31, 2001 AND 2000 IS UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
6. DISTRIBUTIONS TO UNITHOLDERS
Distributions to unitholders on a per unit basis were as follows:
2000 1999 1998
------------------- ------------------- -------------------
Units $/Units Units $/Units Units $/Unit
-------- -------- -------- -------- -------- --------
March 31.................................................... 90,700 0.00 90,700 0.1500 55,900 0.2500
June 30..................................................... 90,700 0.00 90,700 0.1500 55,900 0.2600
September 30................................................ 90,700 0.00 90,700 0.1500 55,900 0.2975
December 31................................................. 90,700 0.00 90,700 0.0875 90,700 0.2140
There were no distributions made in the period from January 1, 2001 to
March 31, 2001.
LCIF is able to deduct, for income tax purposes, costs of the issue of units
and convertible debentures on a straight-line basis over a five-year period.
At December 31, 2000 LCIF has available approximately $4,597 of such
amounts, which are deductible over the next two years, plus approximately
$6,339 of tax losses available for carry forward until 2007. These
deductions and tax losses are eligible to reduce the taxable portion of
distributions to unitholders.
7. RELATED PARTY TRANSACTIONS
Amounts due from Luscar are non-interest bearing and have no set term of
repayment. All amounts due from Luscar relate to costs associated with the
Manalta acquisition (see Note 2) that were paid by LCIF on Luscar's behalf.
Amounts receivable from Luscar at March 31, 2001, December 31, 2000 and
December 31, 1999 were $246, $246 and $645 respectively.
LCIF had an administrative services agreement with MC Management Inc., a
company controlled by one of the Trustees of LCIF, to administer LCIF. The
fees were $125 per year for 2000 and 1999 and $115 for 1998. For the period
from January 1, 2001 to March 31, 2001 fees of $49 were paid. The contract
was terminated on May 11, 2001.
Luscar advanced funds to LCIF during 1998 to finance a portion of the
Manalta acquisition costs. Interest, based on Luscar's borrowing rates,
amounting to $5,844 was paid by LCIF to Luscar in 1998. The advances were
repaid on December 31, 1998.
LCIF reimburses Luscar for investor relations activities performed on behalf
of LCIF in the amount of $100 per annum plus disbursements. Such costs
amounted to $96 and $66 for the three month periods ended March 31, 2001 and
2000 respectively, $113 for the year ended December 31, 2000, $108 for 1999,
and $108 for 1998. These transactions are recorded at their exchange
amounts.
8. SUBSEQUENT EVENTS
On March 8, 2001, Luscar Energy Partnership ("LEP", formerly known as
Sherritt Coal Partnership) made a formal offer to acquire 100% of the trust
units and convertible debentures of LCIF. During the three month period
ended March 31, 2001 LCIF incurred $8,526 in responding to the take-over
bid, which is included in accounts payable and accrued charges at March 31,
2001. Subsequent to March 31, 2001, Luscar advanced $11,930 to LCIF to pay
these and further take-over response costs, which were incurred after
March 31, 2001. These advances have subsequently been repaid. On May 11,
2001, LEP held sufficient trust units and convertible debentures to enable
LEP to acquire the remaining trust units and cause LCIF to redeem the
remaining convertible debentures. During the course of the acquisition, LCIF
acquired the common shares of Luscar for one dollar pursuant to a unanimous
shareholders' agreement. Accordingly, the acquisition of LCIF was effective
for accounting purposes May 11, 2001 and subsequent future financial
statements for LCIF and its wholly owned subsidiary, Luscar, will be
consolidated in the financial statements of LEP.
C-101
LUSCAR COAL INCOME FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS AT MARCH 31, 2001 AND FOR THE THREE MONTH PERIODS ENDED
MARCH 31, 2001 AND 2000 IS UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
9. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
These financial statements have been prepared in accordance with Canadian
generally accepted accounting principles ("GAAP"), which in most respects,
conform to United States GAAP. Canadian GAAP differs from US GAAP in the
following respects:
STATEMENTS OF EARNINGS
The following table reconciles net earnings (loss) as reported in the
accompanying statements of earnings to net earnings (loss) that would have
been reported had the financial statements been prepared in accordance with
US GAAP.
Three Months Year Ended
Ended March 31 December 31
------------------- --------------------
2001 2000 2000 1999
-------- -------- -------- ---------
(Unaudited)
NET EARNINGS (LOSS) UNDER CANADIAN GAAP..................... $(2,252) $(2,732) $(53,906) $ (90,022)
Impact of US GAAP:
Interest on convertible debentures (a).................... (1,611) (1,326) (5,993) (5,436)
Amortization of deferred financing charges on convertible
debentures (a).......................................... (105) (96) (382) (347)
LCIF's equity in net earnings (loss) of Luscar measured
under US GAAP (b)....................................... (1,038) 544 7,908 (13,442)
------- ------- -------- ---------
NET EARNINGS (LOSS) AND COMPREHENSIVE INCOME FOR THE PERIOD
IN ACCORDANCE WITH US GAAP................................ $(5,006) $(3,610) $(52,373) $(109,247)
======= ======= ======== =========
Balance sheet items which vary, in conformity with US GAAP and SEC
requirements:
Year Ended
Three Months December 31
Ended March 31, ---------------------
2001 2000 1999
-------------------- --------- ---------
(Unaudited)
ASSETS
Investment in Luscar (b).................................... $ 562,720 $ 559,031 $ 611,126
LIABILITIES
Convertible debentures (a)................................ 100,000 100,000 100,000
Redeemable trust units (c)................................ 735,728 735,728 735,728
EQUITY
Convertible debentures (a)................................ -- -- --
Unitholders' equity (deficit) (b) (c)..................... $(278,203) $(273,197) $(220,754)
(A) CONVERTIBLE DEBENTURES
In accordance with US GAAP, the convertible debentures are required to be
accounted for as a debt obligation with related interest charges
reflected in income. Accordingly, the portion of the convertible
debentures reflected as equity, the amortization of deferred financing
charges recorded in equity and the accretion charge to increase the
carrying amount of convertible debentures recorded in equity under
Canadian GAAP are reclassified as a debt obligation, amortization of
deferred financing expenses and interest expense respectively.
(B) EQUITY IN EARNINGS (LOSSES) OF LUSCAR
The measurement of LCIF's equity investment in Luscar would differ as a
result of measuring the earnings of Luscar in accordance with US GAAP.
The summarized effect of these individual differences and their effect on
LCIF's financial statements are reflected in the tables above.
C-102
LUSCAR COAL INCOME FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS AT MARCH 31, 2001 AND FOR THE THREE MONTH PERIODS ENDED
MARCH 31, 2001 AND 2000 IS UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
9. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
(C) UNITHOLDERS' EQUITY
Under US GAAP and the requirements of the SEC, redeemable preferred
shares whose redemption is outside the control of the issuer are required
to be presented outside shareholders' equity. These requirements have
been applied to the issued and outstanding trust units and accordingly,
the effect of this difference on LCIF's liabilities and equity is
included in the balance sheet table presented above.
(D) OTHER DISCLOSURES
United States GAAP does not permit the disclosure of the subtotal of
distributable cash in the statements of cash flows.
(E) NEW ACCOUNTING STANDARDS
SFAS NO. 141 -- BUSINESS COMBINATIONS; SFAS NO. 142 -- GOODWILL AND OTHER
INTANGIBLE ASSETS. In June 2001, the Financial Accounting Standards
Board approved Statement No. 141, Business Combinations (SFAS 141), and
Statement No. 142, Goodwill and Other Intangible Assets (SFAS 142). Those
statements will change the accounting for business combinations and
goodwill. SFAS 141 requires that the purchase method of accounting be
used for all business combinations initiated after June 30, 2001. Use of
the pooling-of-interests method will be prohibited. SFAS 142 changes the
accounting for goodwill from an amortization method to an impairment only
approach. Thus, amortization of goodwill, including goodwill recorded in
past business combinations, will cease upon adoption of that Statement.
SFAS 142 will be applicable for fiscal years beginning after
December 15, 2001; however earlier adoption is permitted for companies
with fiscal years beginning on or after March 15, 2001. LCIF has not yet
determined the effects of the new standards, if any, on its financial
statements.
SFAS NO. 143 -- ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS. In
June 2001, the Financial Accounting Standards Board approved Statement
No. 143 (SFAS 143), Accounting for Asset Retirement Obligations. That
standard requires entities to record the fair value of a liability for an
asset retirement obligation in the period in which it is incurred. When
the liability is initially recorded, the entity capitalizes a cost by
increasing the carrying amount of the related long-lived asset. Over
time, the liability is accreted to its present value each period, and the
capitalized cost is depreciated over the useful life of the related
asset. Upon settlement of the liability, an entity either settles the
obligation for its recorded amount or incurs a gain or loss upon
settlement. SFAS 143 is applicable for years beginning after June 15,
2002. LCIF has not yet determined the effects of the new standard, if
any, on its financial statements.
10. COMPARATIVE FIGURES
Certain comparative figures for prior periods have been reclassified to
conform to the presentation in the current period financial statements.
C-103
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C-104
LUSCAR COAL LTD.
CONSOLIDATED FINANCIAL STATEMENTS
C-105
AUDITORS' REPORT
To the Directors of
LUSCAR COAL LTD.
We have audited the consolidated balance sheets of LUSCAR COAL LTD. as at
December 31, 2000 and 1999 and the consolidated statements of deficit, earnings
and cash flows for each of the years in the three year period ended
December 31, 2000. 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 Canadian and United States
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,
2000 and 1999 and the results of its operations and its cash flows for each of
the years in the three year period ended December 31, 2000 in accordance with
Canadian and United States generally accepted accounting principles.
Edmonton, Canada (Signed) ERNST & YOUNG LLP
February 5, 2001 Chartered Accountants
COMMENT FOR US READERS ON CANADA-US REPORTING DIFFERENCES
In the United States, reporting standards for auditors require the addition
of an explanatory paragraph (following the opinion paragaph) outlining changes
in accounting principles that have been implemented in the consolidated
financial statements. As discussed in Note 2 to the consolidated financial
statements, in 2000 the Company implemented a change in the method of accounting
for income taxes to conform to the new Canadian Institute of Chartered
Accountants Handbook, Section 3465 and a change in the method of accounting for
post employment benefits to conform to the new Canadian Institute of Chartered
Accountants Handbook, Section 3461 and in 2001 implemented a change in revenue
recognition and coal inventory and exploration and development cost accounting
policies.
Edmonton, Canada (Signed) ERNST & YOUNG LLP
February 5, 2001 Chartered Accountants
C-106
LUSCAR COAL LTD.
CONSOLIDATED BALANCE SHEETS
As at December
As at March 31, -----------------------
2001 2000 1999
---------------- ---------- ----------
(restated) (restated) (restated)
(note 2) (note 2) (note 2)
(Unaudited)
(in thousands)
ASSETS
CURRENT
Cash and cash equivalents................................. $ 9 $ 9 $ 526
Accounts receivable....................................... 78,898 69,894 80,087
Income taxes recoverable.................................. 8,583 7,352 8,014
Inventories (note 4)...................................... 69,919 75,472 84,303
Overburden removal costs.................................. 29,089 29,459 35,195
Prepaid expenses.......................................... 6,018 8,927 7,518
---------- ---------- ----------
192,516 191,113 215,643
Capital assets (note 5)..................................... 1,451,823 1,471,381 1,650,575
Other assets (note 6)....................................... 18,603 19,000 20,859
---------- ---------- ----------
$1,662,942 $1,681,494 $1,887,077
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT
Operating line of credit (note 7)......................... $ 22,208 $ 45,434 $ 44,190
Trade accounts payable and accrued charges................ 51,740 33,075 56,549
Accrued payroll and employee benefits..................... 6,680 15,836 14,518
Due to LCIF (note 14)..................................... 246 246 645
Income taxes payable...................................... -- 142 392
Current portion of long-term debt (note 7)................ 31,275 30,460 27,917
Accrued reclamation costs (note 8)........................ 21,002 21,002 12,478
Future income taxes (note 13)............................. 5,118 6,160 13,258
---------- ---------- ----------
138,269 152,355 169,947
---------- ---------- ----------
Long-term debt (note 7)..................................... 397,469 406,357 478,069
Accrued reclamation costs (note 8).......................... 35,707 35,243 39,828
Subordinated notes due to LCIF (note 9)..................... 642,969 642,969 642,969
Foreign currency forward contracts.......................... -- -- 11,290
Future income taxes (note 13)............................... 523,845 524,614 565,085
---------- ---------- ----------
1,738,259 1,761,538 1,907,188
---------- ---------- ----------
NON-CONTROLLING INTEREST (note 10).......................... -- -- 32,813
---------- ---------- ----------
COMMITMENTS AND CONTINGENCIES (note 18)
SHAREHOLDERS' EQUITY
Share capital (note 11)................................... 14,191 14,191 14,191
Deficit................................................... (89,508) (94,235) (67,115)
---------- ---------- ----------
(75,317) (80,044) (52,924)
---------- ---------- ----------
$1,662,942 $1,681,494 $1,887,077
========== ========== ==========
SEE ACCOMPANYING NOTES
C-107
LUSCAR COAL LTD.
CONSOLIDATED STATEMENTS OF DEFICIT
Three Months Ended Year Ended
March 31 December 31
------------------------- ------------------------------------
2001 2000 2000 1999 1998
----------- ----------- ---------- ---------- ----------
(restated) (restated) (restated) (restated) (restated)
(note 2) (note 2) (note 2) (note 2) (note 2)
(Unaudited) (Unaudited)
(in thousands)
DEFICIT, BEGINNING OF PERIOD AS PREVIOUSLY
REPORTED................................... $94,161 $69,843 $69,843 $ 9,363 $ 23,067
Adjustment to reflect adoption of liability
method of accounting for income taxes
(note 2)................................... -- 380 380 (148) --
Adjustment to reflect change in accounting
policy for revenue recognition and coal
inventory (note 2)......................... (1,016) (921) (921) (143) 217
Adjustment to reflect change in accounting
policy for exploration and development
expenditures (note 2)...................... 1,090 (2,187) (2,187) 601 15,302
------- ------- ------- ------- --------
DEFICIT, BEGINNING OF PERIOD, AS RESTATED.... 94,235 67,115 67,115 9,673 38,586
Net (earnings) loss for the period........... (4,727) 1,619 27,120 57,442 2,079
Deficit allocated to non-controlling interest
(note 10).................................. -- -- -- -- (49,234)
Dividends
Common shares.............................. -- -- -- -- 586
Special shares............................. -- -- -- -- 17,656
------- ------- ------- ------- --------
DEFICIT, END OF PERIOD....................... $89,508 $68,734 $94,235 $67,115 $ 9,673
======= ======= ======= ======= ========
SEE ACCOMPANYING NOTES
C-108
LUSCAR COAL LTD.
CONSOLIDATED STATEMENTS OF EARNINGS
Three Months Ended Year Ended
March 31 December 31
------------------------- ------------------------------------
2001 2000 2000 1999 1998
----------- ----------- ---------- ---------- ----------
(restated) (restated) (restated) (restated) (restated)
(note 2) (note 2) (note 2) (note 2) (note 2)
(Unaudited) (Unaudited)
(in thousands)
REVENUE..................................... $157,912 $166,099 $657,052 $716,435 $443,860
Cost of sales............................... 119,239 126,133 534,286 561,554 319,886
-------- -------- -------- -------- --------
OPERATING MARGIN............................ 38,673 39,966 122,766 154,881 123,974
Selling, general and administrative
expenses.................................. 4,256 3,400 14,733 16,465 14,185
Other (income) expenses..................... (1,352) (9) (1,953) (1,663) 3,530
-------- -------- -------- -------- --------
OPERATING EARNINGS BEFORE DEPRECIATION AND
AMORTIZATION.............................. 35,769 36,575 109,986 140,079 106,259
Depreciation and amortization (notes 5 &
6)........................................ 23,830 28,118 105,941 118,161 66,389
Write-down and loss on disposal of capital
assets (note 5)........................... -- -- 45,808 172,824 --
-------- -------- -------- -------- --------
OPERATING EARNINGS (LOSS) BEFORE INTEREST... 11,939 8,457 (41,763) (150,906) 39,870
Interest on subordinated notes due to LCIF
(note 12)................................. 2,762 2,785 11,200 59,593 54,336
Other interest (note 12).................... 8,000 15,094 52,442 41,784 4,471
-------- -------- -------- -------- --------
EARNINGS (LOSS) BEFORE INCOME TAXES AND
NON-CONTROLLING INTEREST.................. 1,177 (9,422) (105,405) (252,283) (18,937)
Income tax recovery (note 13)............... 3,550 5,375 45,472 108,675 11,948
-------- -------- -------- -------- --------
EARNINGS (LOSS) BEFORE NON-CONTROLLING
INTEREST.................................. 4,727 (4,047) (59,933) (143,608) (6,989)
Non-controlling interest (note 10).......... -- 2,428 32,813 86,166 4,910
-------- -------- -------- -------- --------
NET EARNINGS (LOSS) FOR THE PERIOD.......... $ 4,727 $ (1,619) $(27,120) $(57,442) $ (2,079)
======== ======== ======== ======== ========
SEE ACCOMPANYING NOTES
C-109
LUSCAR COAL LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended Year Ended
March 31 December 31
------------------------- ------------------------------------
2001 2000 2000 1999 1998
----------- ----------- ---------- ---------- ----------
(restated) (restated) (restated) (restated) (restated)
(note 2) (note 2) (note 2) (note 2) (note 2)
(Unaudited) (Unaudited)
(in thousands)
OPERATING ACTIVITIES
Net earnings (loss) for the period.......... $ 4,727 $(1,619) $(27,120) $(57,442) $ (2,079)
Non-cash items:
Foreign currency forward contracts........ -- (3,022) (11,290) (26,037) (7,070)
Depreciation and amortization............. 23,830 28,118 105,941 118,161 66,389
Write-down and loss on disposal of capital
assets.................................. -- -- 45,808 172,824 --
Future income taxes....................... (1,811) (6,207) (47,569) (111,920) (13,037)
Accrued reclamation costs................. 464 (762) 5,669 76 (439)
Non-controlling interest.................. -- (2,428) (32,813) (86,166) (4,910)
Interest income earned on sinking funds... (857) (616) (3,813) (4,306) (654)
Other..................................... 110 31 182 263 769
-------- ------- -------- -------- --------
CASH PROVIDED BY OPERATING ACTIVITIES BEFORE
CHANGE IN NON-CASH WORKING CAPITAL........ 26,463 13,495 34,995 5,453 38,969
Change in non-cash working capital
(note 17)................................. 7,964 (2,154) (16,442) (5,329) (38,498)
-------- ------- -------- -------- --------
34,427 11,341 18,553 124 471
-------- ------- -------- -------- --------
INVESTING ACTIVITIES
Capital asset purchases..................... (3,788) (2,901) (17,822) (47,447) (77,503)
Proceeds on sale of interest in Line Creek
mine...................................... -- -- 56,726 -- --
Proceeds on disposal of capital assets...... 161 359 3,349 937 1,985
Deferred financing costs.................... -- -- -- (1,052) (11,338)
Other investments........................... (360) (182) (1,172) (1,181) (303)
-------- ------- -------- -------- --------
(3,987) (2,724) 41,081 (48,743) (87,159)
-------- ------- -------- -------- --------
FINANCING ACTIVITIES
Operating line of credit.................... (23,226) (5,166) 1,244 6,471 (18,494)
Increase in long-term debt.................. -- -- 13,341 53,159 349,248
Repayment of long-term debt................. (7,214) (3,450) (74,736) (11,009) --
Subordinated notes.......................... -- -- -- -- (256,013)
Share capital............................... -- -- -- -- 37,598
Dividends
-- special shares......................... -- -- -- -- (17,656)
-- common shares.......................... -- -- -- -- (586)
-- non-controlling interest (note 10)..... -- -- -- -- (7,410)
-------- ------- -------- -------- --------
(30,440) (8,616) (60,151) 48,621 86,687
-------- ------- -------- -------- --------
CHANGE IN CASH POSITION..................... -- 1 (517) 2 (1)
Cash position, beginning of period.......... 9 526 526 524 525
-------- ------- -------- -------- --------
CASH POSITION, END OF PERIOD................ $ 9 $ 527 $ 9 $ 526 $ 524
======== ======= ======== ======== ========
SEE ACCOMPANYING NOTES
C-110
LUSCAR COAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS AT MARCH 31, 2001 AND FOR THE THREE MONTH PERIODS ENDED
MARCH 31, 2001 AND 2000 IS UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
1. ORGANIZATION AND FINANCIAL STATEMENT PRESENTATION
Luscar Coal Ltd. ("Luscar") is wholly owned by the Luscar Coal Income Fund
("LCIF"). Prior to the acquisition of LCIF by the Luscar Energy Partnership
("LEP"), referred to in Note 19, the common shares of Luscar had been owned
by Luscar Management Corporation ("LMC"), a company owned by the senior
management of Luscar. LCIF was a broadly distributed, publicly traded income
fund. Luscar, LCIF and LMC were parties to a unanimous shareholders
agreement that governed the operation of Luscar and provided that
98 percent of its free cash flow after debt servicing costs and replacement
capital needs was paid to LCIF and that LCIF had representation on the
Luscar Board of Directors.
Luscar owns and operates surface coal mines in western Canada and also
operates a surface coal mine owned by a third party.
In 1998 LCIF, together with the former Luscar Ltd., launched a hostile
take-over bid for the Manalta Coal Income Trust ("MCIT") which owned Manalta
Coal Ltd. ("Manalta"). The intention was to combine the former Luscar Ltd.
and Manalta under the management of the former Luscar Ltd. and to continue
to operate with control being held by LMC and significant economic interest
being held by LCIF, the same structure that LCIF and the former Luscar Ltd.
operated under. The acquisition was successful and effective October 1, 1998
the operations of Manalta and the former Luscar Ltd. were combined under the
management of the former Luscar Ltd.. The legal reorganization to combine
Manalta and the former Luscar Ltd. was not completed until January 1, 1999.
Luscar is a holding company, created on December 11, 1998 as part of that
legal reorganization to own Luscar Ltd. ("LL"), the successor company to the
amalgamation of the former Luscar Ltd. and Manalta Coal Ltd. In essence the
transaction was an acquisition of Manalta by the former Luscar Ltd. and a
combination of LCIF and MCIT and these financial statements have been
prepared on the basis that Luscar is a continuation of the former
Luscar Ltd. and that it acquired Manalta effective October 1, 1998. The
acquisition of MCIT by LCIF was completed for a purchase price of $562,647
(see Note 3).
Prior to the acquisition of MCIT, LCIF held all the special shares and
subordinated notes of Luscar Ltd. and LMC held all of the common shares of
Luscar Ltd. MCIT held all the common shares and subordinated notes of
Manalta. Subsequent to the acquisition of MCIT, the following transactions
took place to effect the legal reorganization of the former Luscar Ltd. and
Manalta:
(i) on October 1, 1998, MCIT distributed all the common shares and
substantially all the subordinated notes of Manalta to LCIF;
(ii) on December 31, 1998, Luscar issued common shares to LMC in exchange
for all the common shares of Luscar Ltd., and, on January 1, 1999,
issued special shares to LCIF in exchange for all the common shares of
Manalta; and
(iii) on January 1, 1999, Luscar Ltd. and Manalta were amalgamated to form a
new company named LL in which LCIF holds subordinated notes and special
shares (see Notes 9 and 10).
As a result of these transactions, LCIF acquired ownership of Manalta on
October 1, 1998 and transferred this ownership to Luscar on January 1, 1999.
Therefore, LCIF's ownership of Manalta was temporary and control of Manalta
was considered to have been acquired by Luscar effective October 1, 1998.
Therefore, these consolidated financial statements have been prepared on a
continuity of interests basis whereby:
(i) Luscar is a continuation of the operations of Luscar Ltd.;
(ii) the integration transactions described above and the acquisition of
Manalta are reflected effective October 1, 1998 at a purchase price
equivalent to LCIF's cost of acquiring the common shares of Manalta
(see Note 3); and
(iii) transactions and balances described in these financial statements prior
to October 1, 1998 are those of the former Luscar Ltd.
2. ACCOUNTING POLICIES
Luscar's financial statements have been prepared following Canadian
generally accepted accounting principles. The following significant
accounting policies are presented to assist the reader in evaluating these
financial statements and, together with the following notes, should be
considered an integral part of the financial statements.
USE OF ESTIMATES
The measurement of certain assets and liabilities is dependent upon future
events whose outcome will not be fully known until future periods. Therefore
the preparation of these financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses. Actual results may vary from those
estimated.
C-111
LUSCAR COAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS AT MARCH 31, 2001 AND FOR THE THREE MONTH PERIODS ENDED
MARCH 31, 2001 AND 2000 IS UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
2. ACCOUNTING POLICIES (CONTINUED)
In particular, the amounts recorded for depreciation and amortization of
mining properties and for reclamation, site restoration and mine closure are
based on estimates of coal reserves and future costs. These estimates, and
those related to the cash flows used to assess impairment of capital assets,
are subject to measurement uncertainty and the impact on the financial
statements of future periods could be material. Such estimates and
assumptions have been made using careful judgements, which, in management's
opinion, are within reasonable limits of materiality.
These financial statements include financial statements for interim periods,
which have been prepared without audit. Such interim financial statements
and the accompanying notes include estimates necessary to fairly present the
financial position and results of operations, which may not be indicative of
results of operations for other periods.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Luscar and its
subsidiaries. Interests in joint ventures are accounted for using the
proportionate consolidation method, whereby consolidated accounts include
Luscar's share of joint venture assets, liabilities, revenues, expenses and
cash flows.
REVENUE RECOGNITION
Revenue is recognized when title to the coal passes to the customer. For
domestic coal sales to power generating utility customers this occurs when
the coal is delivered to the generating station; for other domestic
customers, this generally occurs when the coal is loaded at the mine. For
export coal sales, this generally occurs when coal is loaded onto marine
vessels at terminal locations.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand and in banks as well as all
highly liquid short-term securities with original maturities of three months
or less.
OVERBURDEN REMOVAL COSTS
Costs of removing overburden are charged to earnings at average cost when
the coal is produced. Costs incurred related to future production are
recorded as current assets.
INVENTORIES
Coal inventories are valued at the lower of average production cost and net
realizable value. Average production cost includes labour, supplies,
equipment costs, direct and allocable indirect operating overhead and, in
the case of coal inventory held at port terminal facilities, rail
transportation and applicable wharfage costs.
Mine supplies are recorded at the lower of average cost and replacement
cost.
RECLAMATION
Estimated future expenditures for reclamation, site restoration and mine
closure are charged to earnings on a unit of production basis over the
expected life of each mine's reserves. Amounts charged to earnings but not
yet paid are included in accrued reclamation costs. Reclamation expenditures
expected to be incurred within the next year are included in current
liabilities.
CAPITAL ASSETS
Capital assets are recorded at cost less accumulated depreciation and
amortization, calculated using the straight-line method over the estimated
life of the asset, ranging from three to forty years as follows:
Mining properties........................................... 3 - 40 years
Plant and buildings......................................... 5 - 40 years
Equipment................................................... 3 - 35 years
C-112
LUSCAR COAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS AT MARCH 31, 2001 AND FOR THE THREE MONTH PERIODS ENDED
MARCH 31, 2001 AND 2000 IS UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
2. ACCOUNTING POLICIES (CONTINUED)
Mining properties include acquisition costs, lease payments, development
costs and major expansion costs related to producing mines and properties
under development. Mine development costs incurred to access reserves on
producing mines are capitalized as incurred.
Costs related to exploration properties held for future development are
expensed as incurred, including property carrying costs, lease payments,
drilling and other exploration costs, and other pre-development costs.
Acquisition costs for exploration properties are initially capitalized until
management can determine whether development of the property would be
economic. In the year of determination, costs related to uneconomic
exploration properties are charged to earnings while costs related to
economic exploration properties are reclassified as mining properties.
Amounts capitalized in respect of coal reserves located on mining properties
upon which there are no current mining operations and which are not being
amortized are insignificant. Amounts capitalized in respect of exploration
properties pending further economic evaluation are disclosed in Note 5.
Interest on funds borrowed to construct capital assets is capitalized if the
construction period exceeds one year. Repair and maintenance costs related
to capital assets are expensed as incurred.
DEFERRED FINANCING COSTS
Financing costs incurred to arrange credit facilities are deferred and
amortized on a straight-line basis over the period to maturity of the
related debt.
INCOME TAXES
Luscar follows the liability method of tax allocation in accounting for
income taxes. Under this method, future income taxes are recognized for
future income tax consequences attributable to differences between the
financial statement carrying values of assets and liabilities and their
respective income tax basis. Future income tax assets and liabilities are
measured using substantively enacted income tax rates expected to apply to
taxable income in the years in which temporary differences are expected to
be recovered or settled. The effect on future income tax assets and
liabilities of a change in tax rates is included in income in the period in
which the change occurs.
FOREIGN CURRENCY
Transactions and balances denominated in a foreign currency are translated
using the temporal method, whereby monetary balances are translated at the
rate of exchange at the balance sheet date; non-monetary balances are
translated at historic exchange rates; and revenues and expenses are
translated at prevailing exchange rates. The resulting gains and losses are
included in income in the current year.
POST EMPLOYMENT BENEFITS
The majority of employees are covered under defined contribution pension
plans, the cost of which is recognized at the time services are rendered by
the employees.
Luscar uses the projected benefit method prorated on service to account for
the cost of defined benefit pension plans. Pension costs are based on
management's best estimate of expected plan investment performance, salary
escalation and retirement age of employees. The discount rate used to
determine the accrued benefit obligation is based on market interest rates
as at the measurement date on high quality debt instruments with cash flows
that match the timing and amount of expected benefit payments. For purposes
of calculating the expected return on plan assets, those assets are valued
at market-related value. Valuation allowances are calculated using a five
year average value. The net actuarial gain (loss) over 10% of the greater of
the benefit obligation and the market-related value of plan assets is
amortized over the remaining service life of active employees.
Effective January 1, 2000, Luscar adopted the requirements of The Canadian
Institute of Chartered Accountants' Handbook Section 3461, Employee Future
Benefits in accounting for its post employment benefit programs. As
permitted under these rules, these requirements have been adopted on a
prospective basis. Transitional assets and liabilities which arose from such
prospective application are being amortized on a straight line basis:
- in the case of active defined benefit pension plans, over the average
remaining service period of active employees;
- in the case of inactive defined benefit pension plans, over the average
remaining life expectancy of the plan members; and
- in the case of defined benefit plans, other than pensions, over a ten-year
period from the transition date.
C-113
LUSCAR COAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS AT MARCH 31, 2001 AND FOR THE THREE MONTH PERIODS ENDED
MARCH 31, 2001 AND 2000 IS UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
2. ACCOUNTING POLICIES (CONTINUED)
Prior to January 1, 2000, pension costs included the amortization of past
service costs, experience gains and losses, and pension surplus recorded on
the acquisition of Manalta. These amounts were being amortized over the
estimated remaining service lives of the active members of such plans.
FINANCIAL INSTRUMENTS
Unless otherwise disclosed, the fair value of financial instruments
approximates their carrying value in these financial statements.
Forward currency exchange contracts are utilized to manage the risk
associated with future revenue flows denominated in U.S. dollars. Revenue
matched to such forward currency exchange contracts is recorded at the
related contract exchange rates in the period the contracts are settled.
CHANGES IN ACCOUNTING POLICIES
(A) INCOME TAXES
Effective January 1, 2000, Luscar changed its method of accounting for
income taxes from the deferral method to the liability method of tax
allocation as required by The Canadian Institute of Chartered
Accountants' Handbook Section 3465, Accounting for Income Taxes. As
permitted under these rules, the change has been adopted retroactively
and the consolidated balance sheets at December 31, 1999 and 1998 and the
consolidated statements of earnings, deficit, and cash flows for the
years ended December 31, 1999 and 1998 have been restated accordingly.
The effect of adopting the liability method is summarized as follows:
1999 1998
-------- --------
BALANCE SHEETS
Increase (decrease) in:
Capital assets............................................ $598,128 $598,128
Accumulated depreciation and amortization................. 116,442 26,839
Future income taxes....................................... 482,862 571,141
Non-controlling interest.................................. (796) --
Deficit................................................... 380 (148)
1999 1998
-------- --------
STATEMENTS OF EARNINGS
Increase (decrease) in earnings:
Depreciation and amortization............................. $(28,356) $(13,454)
Write-down of capital assets.............................. (61,247) --
Income tax recovery....................................... 88,279 13,602
Non-controlling interest.................................. 796 --
Loss for the year......................................... (528) 148
(B) REVENUE RECOGNITION AND COAL INVENTORY VALUATION
During 2001, Luscar reviewed its revenue recognition and coal inventory
valuation accounting policies in the context of U.S. SEC Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"). In accordance with the guidance of SAB 101 and the February 2001
Ontario Securities Commission Staff Notice 52-701 regarding revenue
recognition, Luscar changed its revenue recognition and coal inventory
valuation accounting policies. Previously, Luscar recognized revenue when
coal was shipped from the minesite, either directly to the customer or to
port facilities, provided that contractual sales commitments were in
place.
Luscar recognizes revenue when title passes to the customer. Furthermore,
Luscar previously recorded coal inventory at production cost including
direct variable overhead, and in the case of coal inventory held at port
terminal facilities, at its net realizable value in accordance with its
previous revenue recognition policy. Luscar now records coal inventory at
production cost which includes direct
C-114
LUSCAR COAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS AT MARCH 31, 2001 AND FOR THE THREE MONTH PERIODS ENDED
MARCH 31, 2001 AND 2000 IS UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
2. ACCOUNTING POLICIES (CONTINUED)
and allocable indirect overhead and in the case of coal inventory held at
port terminal facilities, rail transportation and applicable wharfage
costs.
These changes in policy have been adopted retroactively and the
consolidated balance sheets at March 31, 2001, December 31, 2000 and
December 31, 1999 and the consolidated statements of earnings, deficit
and cash flows for the periods ended March 31, 2001, December 31, 2000,
March 31, 2000, December 31, 1999 and December 31, 1998 have been
restated accordingly. The effect of these changes in accounting policies
is summarized as follows:
December 31
March 31, -------------------
2001 2000 1999
------------ -------- --------
(Unaudited)
BALANCE SHEETS
Increase (decrease) in:
Coal settlements receivable............................... $(21,652) $(24,247) $(24,281)
Inventory................................................. 23,378 29,046 28,723
Future income taxes....................................... 582 1,624 1,503
Non-controlling interest.................................. 939 2,159 2,018
Deficit................................................... (205) (1,016) (921)
Three Months Ended Year Ended
March 31 December 31
--------------------------- ----------------------------------
2001 2000 2000 1999 1998
------------ ------------ -------- ------------ --------
(Unaudited) (Unaudited)
STATEMENTS OF EARNINGS
Increase (decrease) in earnings:
Revenue.......................................... $ 2,352 $(2,657) $ 38 $ 23,379 $(32,163)
Cost of sales.................................... (5,426) 2,055 320 (20,439) 33,992
Income tax recovery.............................. 1,041 204 (121) (995) (619)
Non-controlling interest......................... 1,220 239 (142) (1,167) (181)
Loss for the period.............................. (813) (159) 95 778 1,029
(C) EXPLORATION AND DEVELOPMENT COSTS
During 2001, Luscar changed its accounting policies for exploration and
development costs related to exploration properties. Previously, Luscar
capitalized all costs related to exploration properties including
property acquisition costs, lease payments, drilling and other
exploration related costs. Such costs were reclassified as mining
properties when mine development commenced. Costs related to uneconomic
exploration properties were charged to earnings in the year of
determination.
Costs related to exploration properties held for future development are
expensed as incurred, including property carrying costs, lease payments,
drilling and other exploration costs, and other pre-development costs.
Acquisition costs for exploration properties are initially capitalized
until management can determine whether development of the property would
be economic. In the year of determination, costs related to uneconomic
exploration properties are charged to earnings while costs related to
economic exploration properties are reclassified as mining properties.
This change in accounting policy has been adopted retroactively and the
consolidated balance sheets at March 31, 2001, December 31, 2000 and
December 31, 1999 and the consolidated statements of earnings, deficit
and cash flows for the periods
C-115
LUSCAR COAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS AT MARCH 31, 2001 AND FOR THE THREE MONTH PERIODS ENDED
MARCH 31, 2001 AND 2000 IS UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
2. ACCOUNTING POLICIES (CONTINUED)
ended March 31, 2001, December 31, 2000, March 31, 2000, December 31,
1999 and December 31, 1998 have been restated accordingly. The effect of
this change in accounting policy is summarized as follows:
December 31
March 31, -------------------
2001 2000 1999
------------ -------- --------
(Unaudited)
BALANCE SHEETS
Increase (decrease) in:
Capital assets -- deferred exploration.................... $(20,006) $(19,913) $(17,560)
Capital assets -- exploration property.................... 1,760 1,760 --
Future income taxes....................................... (8,586) (8,544) (8,276)
Non-controlling interest.................................. (11,384) (8,519) (11,471)
Deficit................................................... (1,724) 1,090 (2,187)
Three Months Ended Year Ended
March 31 December 31
--------------------------- ------------------------------
2001 2000 2000 1999 1998
------------ ------------ -------- -------- --------
(Unaudited) (Unaudited)
STATEMENTS OF EARNINGS
Increase (decrease) in earnings:
Cost of sales......................................... $ (93) $(388) $(1,528) $(2,044) $(1,771)
Write-down and loss on disposal of capital assets..... -- -- 935 14,733 --
Income tax recovery................................... 42 175 268 (5,719) 819
Non-controlling interest.............................. 2,865 128 (2,952) (4,182) 143
Loss for the period................................... 2,814 (85) (3,277) 2,788 (809)
3. BUSINESS ACQUISITION
These consolidated financial statements reflect the acquisition of Manalta,
which was accounted for as a purchase, at a purchase price of $14,191, the
value assigned by LCIF to the Manalta common shares as a result of LCIF's
acquisition of MCIT (see Note 1).
The assigned fair values of the underlying net assets acquired by Luscar are
summarized as follows:
1998
----------
(restated)
(note 2)
IDENTIFIABLE NET ASSETS ACQUIRED
Working capital............................................. $ 15,729
Capital assets.............................................. 1,138,024
Pension surplus............................................. 8,863
----------
1,162,616
----------
7.5% subordinated notes due to LCIF (NOTE 9)................ 560,000
Long-term debt.............................................. 113,977
Future income taxes......................................... 404,291
Foreign currency forward contracts.......................... 44,397
Accrued reclamation costs................................... 25,760
----------
1,148,425
----------
PURCHASE PRICE.............................................. $ 14,191
==========
Luscar issued special shares to LCIF in exchange for the common shares of
Manalta at an amount equal to the purchase price (see Note 11).
C-116
LUSCAR COAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS AT MARCH 31, 2001 AND FOR THE THREE MONTH PERIODS ENDED
MARCH 31, 2001 AND 2000 IS UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
4. INVENTORIES
December 31
March 31, -----------------------
2001 2000 1999
------------ ---------- ----------
(restated) (restated) (restated)
(note 2) (note 2) (note 2)
(Unaudited)
Coal........................................................ $42,025 $47,880 $48,147
Mine supplies............................................... 27,894 27,592 36,156
------- ------- -------
$69,919 $75,472 $84,303
======= ======= =======
5. CAPITAL ASSETS
December 31
March 31, -----------------------------------------------------
2001 2000 1999
------------------------- ------------------------- -------------------------
Accumulated Accumulated Accumulated
Cost Depreciation Cost Depreciation Cost Depreciation
---------- ------------ ---------- ------------ ---------- ------------
(restated - note 2) (restated - note 2) (restated - note 2)
(Unaudited)
Mining properties.................... $1,520,659 $382,423 $1,505,514 $354,100 $1,556,961 $310,284
Plant and buildings.................. 69,541 29,776 66,070 21,121 106,094 18,474
Equipment............................ 381,344 117,225 378,270 114,565 368,330 67,564
Equipment under capital lease........ 10,407 2,473 12,803 3,250 18,616 3,104
Exploration property................. 1,769 -- 1,760 -- -- --
---------- -------- ---------- -------- ---------- --------
$1,983,720 $531,897 $1,964,417 $493,036 $2,050,001 $399,426
---------- -------- ---------- -------- ---------- --------
$1,451,823 $1,471,381 $1,650,575
========================= ========================= =========================
Depreciation and amortization provided in the accounts amounted to $23,230
for the three months ended March 31, 2001, $27,518 for the three months
ended March 31, 2000, and $103,537, $115,780 and $63,057 for the years ended
December 31, 2000, 1999 and 1998 respectively.
Luscar periodically reviews the carrying value of mining properties using
projected undiscounted cash flows. During 1999, the carrying values of
certain mining properties and related plant and buildings were reduced by
$172,824 due to reductions in export coal prices. The Gregg River mine was
closed during 2000 and a write-down of $25,266 was recorded in that year to
reduce the carrying value of capital assets at the mine to net realizable
value.
On December 31, 2000, Luscar sold a 50% interest in the assets of Line Creek
mine for approximately $68,000 and a royalty interest in future production
once current proven reserves have been mined. Future consideration from the
royalty interest will be recorded in the period it becomes reasonably
determinable. Cash proceeds of $56,726 were received together with the
assumption of approximately $11,277 of capital lease obligations and other
current liabilities by the purchaser. A loss on disposal of approximately
$20,542 is included in write-down and loss on disposal of capital assets for
the year ended December 31, 2000.
6. OTHER ASSETS
December 31
March 31, -------------------
2001 2000 1999
------------ -------- --------
(Unaudited)
Deferred financing costs, net of accumulated amortization... $ 6,608 $ 7,208 $ 9,612
Defined benefit pension plans............................... 7,201 7,358 7,985
Investments and other assets................................ 4,794 4,434 3,262
------- ------- -------
$18,603 $19,000 $20,859
======= ======= =======
C-117
LUSCAR COAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS AT MARCH 31, 2001 AND FOR THE THREE MONTH PERIODS ENDED
MARCH 31, 2001 AND 2000 IS UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
6. OTHER ASSETS (CONTINUED)
Deferred financing costs are amortized over the term of the bank credit
facilities which, because of the modification of the facilities described in
Note 19, expire on October 15, 2001. Amortization in the amount of $600 and
$600 for the three months ended March 31, 2001 and March 31, 2000
respectively; and $2,404, $2,381, and $3,332 for the years ended
December 31, 2000, 1999 and 1998 respectively has been provided against
deferred financing costs.
Investments and other assets include real estate properties, prepaid
royalties and amounts recoverable from domestic customers in future years.
Luscar sponsors defined benefit and defined contribution pension
arrangements covering substantially all of its employees. The majority of
its employees are members of defined contribution plans, however unionized
employees at two mines are members of active defined benefit pension plans.
Luscar has several other defined benefit pension plans, in which most
members have elected to convert their entitlement to defined contribution
plans. Luscar uses actuarial reports and updates prepared by independent
actuaries for funding and accounting purposes.
The following is a summary of the significant actuarial assumptions used to
calculate periodic pension expense and obligations under the defined benefit
pension plans as at December 31, 2000:
Expected long-term rate of return on plan assets............ 7.00 - 7.50%
Discount rate on pension obligations........................ 7.00 - 7.50%
Rate of compensation increases.............................. 3.50 - 4.50%
Average remaining service period of active employees........ 4 - 15 years
Luscar's net pension plan expense is as follows:
Year ended
December 31
2000
------------
Current service cost
-- defined benefit........................................ $ 2,480
-- defined contribution................................... 6,215
Interest cost............................................... 4,134
Expected return on plan assets.............................. (4,560)
Amortization of net transitional asset...................... (76)
Increase in valuation allowance at end of year.............. 111
-------
Net pension plan expense.................................... $ 8,304
=======
C-118
LUSCAR COAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS AT MARCH 31, 2001 AND FOR THE THREE MONTH PERIODS ENDED
MARCH 31, 2001 AND 2000 IS UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
6. OTHER ASSETS (CONTINUED)
Information about Luscar's defined pension benefit plans, in aggregate, is
as follows:
As at
December 31,
2000
-------------
ACCRUED BENEFIT OBLIGATION
Balance, beginning of year.................................. $ 56,751
Current service costs....................................... 2,480
Interest cost............................................... 4,134
Benefits paid............................................... (1,212)
Sale of interest in Line Creek mine......................... (12,842)
--------
Balance, end of year........................................ 49,311
--------
PLAN ASSETS
Fair value, beginning of year............................... 64,252
Actual return on plan assets................................ 6,629
Employer contributions...................................... 1,156
Benefits paid............................................... (1,212)
Sale of interest in Line Creek mine......................... (12,842)
--------
Fair value, end of year..................................... 57,983
--------
FUNDED STATUS -- SURPLUS.................................... 8,672
Unamortized net actuarial gains............................. (1,958)
Unamortized net transitional liability...................... 755
--------
Accrued benefit pension asset............................... 7,469
Valuation allowance......................................... (111)
--------
Net accrued benefit pension asset........................... $ 7,358
========
As at December 31, 2000, one of Luscar's defined benefit pension plans had
accrued benefit obligations of $4,674 (1999 -- $4,177) which exceeded plan
assets with a fair value of $2,192 (1999 -- $990). During the quarter ended
March 31, 2001, Luscar fully funded this plan based on updated actuarial
information.
7. LONG-TERM DEBT
March 31 December 31
------------ -------------------
2001 2000 1999
------------ -------- --------
(Unaudited)
Non-revolving five year term credit facility................ $125,000 $125,000 $111,659
Non-revolving term credit facility.......................... 214,750 221,250 292,250
-------- -------- --------
Long-term bank debt......................................... 339,750 346,250 403,909
Promissory notes............................................ 80,201 81,283 86,439
Capital lease obligations................................... 8,793 9,284 15,638
-------- -------- --------
Long-term debt.............................................. 428,744 436,817 505,986
Current portion of long-term debt........................... 31,275 30,460 27,917
-------- -------- --------
$397,469 $406,357 $478,069
======== ======== ========
C-119
LUSCAR COAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS AT MARCH 31, 2001 AND FOR THE THREE MONTH PERIODS ENDED
MARCH 31, 2001 AND 2000 IS UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
7. LONG-TERM DEBT (CONTINUED)
BANK CREDIT FACILITIES
Luscar's bank credit facilities include an operating line of credit for
$150,000, which matures on October 15, 2001 with provision for renewal
subject to consent of the bank. The operating line had been utilized to
issue letters of credit totalling $62,211 at March 31, 2001 (December 31,
2000 -- $59,944; December 31, 1999 -- $81,207). Total letters of credit
issued under the operating line of credit may not exceed $110,000.
The maximum amount available under the non-revolving five year term credit
facility is $125,000, which matures on January 4, 2004, at which time the
remaining balance is due. If repaid prior to maturity, the facility will be
available to finance future expansion projects, subject to consent by the
bank.
The non-revolving credit facility is repayable by quarterly instalments of
$6,500 increasing by $750 on September 30th of each year. This includes
Luscar's commitment to make additional payments of $3,750 per quarter until
the ratio of senior debt to operating earnings before depreciation and
amortization is less than 3 to 1 for two consecutive calendar quarters. The
facility matures on January 5, 2004, at which time the remaining balance is
due.
Interest rates applicable under the credit facilities are based on prime
lending rates (6.75% at March 31, 2001; 7.5% at December 31, 2000; and 6.5%
at December 31, 1999) plus interest rate margins which range from nil to
2.5% (2.5% at March 31, 2001, December 31, 2000, and December 31, 1999)
depending on the ratio of senior debt to earnings from operations before
depreciation and amortization.
The bank credit facilities are collateralized by a first floating charge
over the assets of Luscar Ltd. and include normal covenants for such
facilities including the maintenance of certain financial ratios. As at
March 31, 2001 Luscar Ltd. was in compliance with all such covenants.
Subsequent to March 31, 2001, the bank credit facilities were repaid as
described in Note 19.
PROMISSORY NOTES
December 31
March 31, -------------------
2001 2000 1999
----------- -------- --------
(Unaudited)
12.75% promissory note due May 18, 2003..................... $45,000 $45,000 $45,000
Less: sinking fund.......................................... (19,877) (19,527) (17,762)
------- ------- -------
25,123 25,473 27,238
------- ------- -------
9.625% promissory note due December 30, 2004................ 89,300 89,300 89,300
Less: sinking fund.......................................... (34,222) (33,490) (30,099)
------- ------- -------
55,078 55,810 59,201
------- ------- -------
$80,201 $81,283 $86,439
======= ======= =======
The promissory notes were issued to finance the acquisition of a dragline
and the Poplar River mine in conjunction with long term coal supply
agreements with a Crown corporation. The 12.75% promissory note is secured
by a chattel mortgage on the dragline and the 9.625% promissory note is
secured by the assets, rights and agreements related to the Poplar River
mine. The promissory notes and the acquired assets are integral to the coal
supply agreements and amounts paid to Luscar for coal supplied include
reimbursement for substantially all of the semi-annual interest and sinking
fund payments made in respect of the promissory notes. At maturity, Luscar
is obligated to repay the promissory notes, net of related sinking funds.
Under the provisions of the coal supply agreements, the Crown corporation
will immediately reimburse Luscar for the net repayment as a component of
the coal price.
Luscar is required to make annual sinking fund payments of $450 on the
12.75% note and $893 on the 9.625% note. The sinking funds, which are held
by the note trustee as collateral for the promissory notes, are invested in
fixed income securities issued by federal and provincial governments that
mature at or near the maturity date of the related promissory notes. The
carrying values of the sinking funds are based on cumulative annual
contributions plus accrued investment income. The fair value of the assets
held by the sinking funds as at March 31, 2001 was $57,935 (December 31,
2000 -- $57,596; December 31, 1999 -- $51,012).
C-120
LUSCAR COAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS AT MARCH 31, 2001 AND FOR THE THREE MONTH PERIODS ENDED
MARCH 31, 2001 AND 2000 IS UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
7. LONG-TERM DEBT (CONTINUED)
CAPITAL LEASE OBLIGATIONS
Obligations under capital leases on specific mining equipment bear interest
at rates ranging from 6.17% to 7.10%. These capital leases mature between
2004 and 2005 and are repayable by blended monthly payments of principal and
interest.
SCHEDULED LONG-TERM DEBT REPAYMENTS
Scheduled debt repayment requirements for the next five calendar years (for
the nine months to December 31, 2001 and 12 month periods thereafter in
respect of the March 31, 2001 table) are as follows:
March 31, 2001 December 31, 2000
---------------------------------- ----------------------------------
Long-Term Long-Term
Bank Promissory Capital Bank Promissory Capital
Debt Notes Leases Debt Notes Leases
---------- ---------- -------- ---------- ---------- --------
(Unaudited)
2001............................................ $ 21,000 $ 1,343 $ 1,679 $ 27,500 $ 1,343 $ 2,239
2002............................................ 30,500 1,343 2,201 30,500 1,343 2,201
2003............................................ 33,500 25,120 2,201 33,500 25,465 2,201
2004............................................ 254,750 52,395 2,381 254,750 53,132 2,381
2005............................................ -- -- 1,844 -- -- 1,845
-------- ------- ------- -------- ------- -------
$339,750 $80,201 10,306 $346,250 $81,283 10,867
======== ======= ------- ======== ======= -------
Less: interest included therein................. 1,513 1,583
------- -------
Present value of minimum capital lease
payments...................................... $ 8,793 $ 9,284
======= =======
8. ACCRUED RECLAMATION COSTS
December 31
March 31, -------------------
2001 2000 1999
----------- -------- --------
(Unaudited)
Balance, beginning of period................................ $56,245 $52,306 $52,230
Reclamation cost provision.................................. 3,191 20,493 13,588
Expenditures incurred....................................... (2,727) (14,824) (13,512)
Obligations transferred on sale of Line Creek mine.......... -- (1,730) --
------- ------- -------
Balance, end of period...................................... 56,709 56,245 52,306
Current portion............................................. 21,002 21,002 12,478
------- ------- -------
$35,707 $35,243 $39,828
======= ======= =======
9. SUBORDINATED NOTES DUE TO LCIF
December 31
March 31, -------------------
2001 2000 1999
----------- -------- --------
(Unaudited)
7.5% subordinated notes, due October 1, 2027................ $292,969 $292,969 $292,969
12.5% subordinated notes, due December 31, 2026............. 350,000 350,000 350,000
-------- -------- --------
$642,969 $642,969 $642,969
======== ======== ========
Interest on the subordinated notes is payable quarterly. Effective
October 1, 1999, Luscar and LCIF agreed to reduce the interest rate on the
subordinated notes until Luscar's ratio of senior debt to operating earnings
before depreciation and amortization is less than
C-121
LUSCAR COAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS AT MARCH 31, 2001 AND FOR THE THREE MONTH PERIODS ENDED
MARCH 31, 2001 AND 2000 IS UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
9. SUBORDINATED NOTES DUE TO LCIF (CONTINUED)
3 to 1 for two consecutive calendar quarters. The effective interest rate
under the subordinated notes is determined by multiplying the coupon
interest rate by an interest rate adjustment factor. This factor is
calculated by dividing Luscar's forecast distributable cash for the year by
the interest amount otherwise payable under the subordinated notes. The
interest rate adjustment factor was 0.1704 from January 1, 2000 to
March 31, 2001 and 0.6269 from October 1, 1999 to December 31, 1999.
The 7.5% subordinated notes were reduced from the amount outstanding at the
date of the acquisition of Manalta by amounts advanced to LCIF by
Luscar Ltd.
Except as otherwise provided, the subordinated notes are not redeemable or
repayable prior to maturity. Luscar has the option to elect to satisfy its
obligation to repay the subordinated notes on maturity by the issue of
equity securities of Luscar having a value equal to the outstanding
subordinated notes.
From time to time beginning in 2017, Luscar and LCIF will jointly review
Luscar's remaining coal resources, the economic conditions relating to the
coal industry and the business prospects of Luscar. If either party is of
the opinion that Luscar would be unable to refinance the subordinated notes
upon maturity on similar terms and conditions, then Luscar shall commence
principal repayments such that the subordinated notes are fully repaid upon
maturity. In that event, Luscar's available cash shall be utilized to the
extent required to fund such repayments in lieu of dividends on its common
and special shares.
In the event that restrictions under the Business Corporations Act (Alberta)
preclude Luscar from distributing its available cash in the form of
dividends or return of capital, Luscar may make principal repayments on the
7.5% subordinated notes. Such principal repayments may not exceed the
amounts Luscar would have distributed in the form of dividends or return of
capital were it not for such restrictions.
The note indenture enables Luscar to redeem certain of the 7.5% subordinated
notes before maturity if the holder of such notes is indebted to Luscar by
offsetting the amount of such indebtedness against the principal amount of
the 7.5% subordinated notes redeemed.
As discussed in Note 19, Luscar became a wholly owned subsidiary of LCIF,
which acquired all of Luscar's common shares pursuant to a unanimous
shareholders' agreement.
10. NON-CONTROLLING INTEREST
Non-controlling interest relates entirely to LCIF's holding of 9,000 special
shares of Luscar's subsidiary, Luscar Ltd., and includes:
(i) the investment in special shares of Luscar Ltd., including amounts paid
for the special shares and allocated to contributed surplus;
(ii) the share of Luscar Ltd.'s deficit to the effective date of the
acquisition of Manalta; and
(iii) the share of Luscar Ltd.'s deficit occurring after the acquisition of
Manalta.
Details of the non-controlling interest are as follows:
December 31
-----------------------
2000 1999
---------- ----------
(restated) (restated)
(note 2) (note 2)
Investment in special shares of Luscar Ltd. including amount
allocated to contributed surplus.......................... $180,534 $180,534
Share of Luscar Ltd.'s deficit.............................. (49,234) (49,234)
-------- --------
Non-controlling interest at the effective date of the
acquisition of Manalta.................................... 131,300 131,300
Share of Luscar Ltd. deficit after acquisition of Manalta
Cumulative share of Luscar Ltd.'s loss.................... (123,890) (91,077)
Cumulative dividends paid to LCIF......................... (7,410) (7,410)
-------- --------
Non-controlling interest.................................... $ -- $ 32,813
======== ========
Subsequent to March 31, 2001 Luscar became a wholly owned subsidiary of LCIF
as described in Note 19.
C-122
LUSCAR COAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS AT MARCH 31, 2001 AND FOR THE THREE MONTH PERIODS ENDED
MARCH 31, 2001 AND 2000 IS UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
11. SHARE CAPITAL
AUTHORIZED
Authorized share capital consists of an unlimited number of common shares
and an unlimited number of non-voting special shares. Special shares are
entitled to receive a dividend per share equal to 2.5 times the amount of
any dividend paid per common share. In the event of dissolution of LCIF, the
special shares are convertible into common shares on a one for one basis.
The holders of special shares are entitled to share equally with the holders
of common shares in any distribution of assets upon liquidation, dissolution
or winding up of Luscar or other distribution of Luscar's assets among its
shareholders.
ISSUED
As described in Note 1, these consolidated financial statements have been
prepared on a continuity of interests basis whereby Luscar Coal Ltd. is a
continuation of the operations of Luscar Ltd. and transactions and balances
prior to the creation of Luscar Coal Ltd. are those of the former
Luscar Ltd. Accordingly, issued share capital prior to the acquisition of
Manalta is that of Luscar Ltd.
Common Shares Special Shares
------------------- ------------------- Contributed
Number Amount Number Amount Surplus
-------- -------- -------- -------- -----------
Balance, December 31, 1997.................................. 1,000 $ -- 15,434 $ -- $142,936
Issued on September 30, 1998................................ -- -- 3,929 -- 37,598
----- ------- ------- ------- --------
Balance before effective date of acquisition of Manalta..... 1,000 -- 19,363 -- 180,534
Special shares in Luscar Ltd. held by LCIF reclassified as
non-controlling interest.................................. -- -- (19,363) -- (180,534)
Special shares issued to LCIF on acquisition of Manalta
(note 3).................................................. -- -- 7,600 14,191 --
----- ------- ------- ------- --------
Balance, December 31, 1998, 1999, 2000 and March 31, 2001... 1,000 $ -- 7,600 $14,191 $ --
===== ======= ======= ======= ========
On September 30, 1998, LCIF acquired additional special shares of
Luscar Ltd. on receipt of the balance of the proceeds from a September 1997
public financing. The special shares were issued at a price of $9.57 per
share, as negotiated by the parties. The 19,363 special shares in
Luscar Ltd. held by LCIF at the date of the acquisition of Manalta were
exchanged for 9,000 special shares of LL upon the amalgamation of
Luscar Ltd. and Manalta. LCIF's holding of 9,000 special shares of LL
represents a non-controlling interest in LL with the controlling interest
being represented by Luscar's holding of all of LL's common shares. The
1,000 common shares of Luscar Ltd. held by LMC at the date of the
acquisition of Manalta were exchanged for 1,000 common shares of Luscar. All
of the common shares were issued for nominal consideration. Except for the
7,600 special shares issued to LCIF in connection with the acquisition of
Manalta, consideration received from the issue of special shares to LCIF was
allocated to contributed surplus, net of a nominal amount allocated to share
capital.
C-123
LUSCAR COAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS AT MARCH 31, 2001 AND FOR THE THREE MONTH PERIODS ENDED
MARCH 31, 2001 AND 2000 IS UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
12. INTEREST EXPENSE
Interest expense consists of the following:
Three Months Ended Year Ended
March 31 December 31
------------------------- ----------------------------------
2001 2000 2000 1999 1998
----------- ----------- -------- ------------ --------
(Unaudited) (Unaudited)
Operating line of credit............................... $ 632 $ 1,992 $ 2,319 $ 4,046 $ 3,957
Long-term bank debt.................................... 8,116 9,590 40,255 31,074 790
Promissory notes....................................... 2,724 2,959 10,520 9,777 2,717
Capital leases......................................... 110 234 1,105 1,344 231
------- ------- ------- -------- -------
11,582 14,775 54,199 46,241 7,695
Income tax reassessments............................... (646) 5 77 109 (110)
Other.................................................. (2,936) 314 (1,834) 932 (535)
Capitalized interest................................... -- -- -- (5,498) (2,579)
------- ------- ------- -------- -------
Other interest expense................................. 8,000 15,094 52,442 41,784 4,471
Subordinated notes..................................... 2,762 2,785 11,200 59,593 54,336
------- ------- ------- -------- -------
Interest expense....................................... $10,762 $17,879 $63,642 $101,377 $58,807
======= ======= ======= ======== =======
Interest expense on promissory notes for the three months ended March 31,
2001 is net of income of $857 earned on the related sinking fund assets
($616 for the three months ended March 31, 2000, $3,813, $4,306 and $654 for
the years ended December 31, 2000, 1999 and 1998).
13. INCOME TAXES
The components of the net future income tax liability are as follows:
December 31
March 31, -----------------------
2001 2000 1999
----------- ---------- ----------
(restated) (restated) (restated)
(note 2) (note 2) (note 2)
(Unaudited)
FUTURE INCOME TAX LIABILITIES
Capital assets.............................................. $555,961 $556,499 $605,495
Overburden removal costs.................................... 10,037 9,980 11,908
-------- -------- --------
565,998 566,479 617,403
-------- -------- --------
FUTURE INCOME TAX ASSETS
Accrued reclamation and other items not currently
deductible................................................ 19,807 18,477 22,304
Net operating losses carried forward........................ 17,228 17,228 16,756
-------- -------- --------
37,035 35,705 39,060
-------- -------- --------
Net future income tax liability............................. $528,963 $530,774 $578,343
======== ======== ========
C-124
LUSCAR COAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS AT MARCH 31, 2001 AND FOR THE THREE MONTH PERIODS ENDED
MARCH 31, 2001 AND 2000 IS UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
13. INCOME TAXES (CONTINUED)
The provisions for income taxes differ from the result which would be
obtained by applying the combined Canadian federal and provincial statutory
income tax rates to loss before income taxes and non-controlling interest.
This difference is explained below:
Three Months Ended Year Ended
March 31 December 31
------------------------- ------------------------------------
2001 2000 2000 1999 1998
----------- ----------- ---------- ---------- ----------
(restated) (restated) (restated) (restated) (restated)
(note 2) (note 2) (note 2) (note 2) (note 2)
(Unaudited) (Unaudited)
(Loss) before income taxes and non-controlling
interest............................................. $ 1,177 $ (9,422) $(105,405) $(252,283) $(18,937)
Statutory income tax rate.............................. 45.18% 45.17% 45.17% 45.07% 44.91%
-------- -------- --------- --------- --------
Expected income tax (recovery)......................... $ 532 $ (4,256) $ (47,611) $(113,704) $ (8,505)
Effect on income tax of:
Excess of statutory resource allowance over
non-deductible Crown charges....................... (2,343) (1,916) (2,045) (8,336) (5,635)
Large corporation's tax.............................. 705 832 2,992 3,245 2,012
Other................................................ (2,444) (35) 1,192 10,120 180
-------- -------- --------- --------- --------
Income tax (recovery).................................. $ (3,550) $ (5,375) $ (45,472) $(108,675) $(11,948)
======== ======== ========= ========= ========
Current................................................ (1,740) 832 2,097 3,245 1,089
Future................................................. (1,810) (6,207) (47,569) (111,920) (13,037)
-------- -------- --------- --------- --------
Income tax (recovery).................................. $ (3,550) $ (5,375) $ (45,472) $(108,675) $(11,948)
======== ======== ========= ========= ========
Included in the other line item in the reconciliation table above are tax
provisions and tax recoveries in respect of potential and actual income tax
reassessments.
At December 31, 2000, the following deductions were available to claim
against future taxable income:
Max. Annual
Rate of Claim
-------------
Underappreciated capital cost............................... 25% $209,904
Canadian development expense................................ 30% 5,965
Canadian exploration expense................................ 100% 4,611
Other....................................................... 10% 7,200
--------
$227,680
========
At December 31, 2000, Luscar had the following non-capital losses carried
forward:
2004........................................................ $16,027
2005........................................................ 1,576
2006........................................................ 20,538
-------
$38,141
=======
As a result of the change in control of Luscar described in Note 19, these
non-capital losses will expire in 2003, 2004 and 2005.
C-125
LUSCAR COAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS AT MARCH 31, 2001 AND FOR THE THREE MONTH PERIODS ENDED
MARCH 31, 2001 AND 2000 IS UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
14. RELATED PARTY TRANSACTIONS
Luscar advanced funds to LCIF during 1998 to finance a portion of the
Manalta acquisition costs and other associated costs. Interest, based on
Luscar's borrowing rates, amounting to $5,844 was paid by LCIF to Luscar in
1998. The advances were repaid on December 31, 1998.
LCIF reimburses Luscar for investor relations activities performed on behalf
of LCIF in the amount of $100 per annum plus disbursements. Such costs
amounted to $96 and $66 for the three month periods ended March 31, 2001 and
2000 respectively and $113, $108 and $108 for the years ended December 31,
2000, 1999 and 1998 respectively. These transactions are recorded at their
exchange amounts.
15. SEGMENT INFORMATION
Luscar owns and operates surface mines located in western Canada, producing
coal for consumption by domestic and foreign customers. Luscar's mining
operations have similar economic and operating characteristics, customers
and products and have been aggregated for the purposes of segment reporting.
PRODUCTS
Three Months Ended March 31 Year Ended December 31
--------------------------------------------- ---------------------
2001 2000 2000
--------------------- --------------------- ---------------------
Revenue Sales Revenue Sales Revenue Sales
--------- --------- --------- --------- --------- ---------
(tonnes) (tonnes) (tonnes)
(restated -- note 2) (restated -- note 2) (restated -- note 2)
(Unaudited) (Unaudited)
Metallurgical........ $ 41,642 732 $ 55,809 1,047 $246,628 4,405
Thermal.............. 116,270 8,747 110,290 8,883 410,424 32,978
-------- ----- -------- ----- -------- ------
$157,912 9,479 $166,099 9,930 $657,052 37,383
======== ===== ======== ===== ======== ======
Year Ended December 31
---------------------------------------------
1999 1998
--------------------- ---------------------
Revenue Sales Revenue Sales
--------- --------- --------- ---------
(tonnes) (tonnes)
(restated -- note 2) (restated -- note 2)
Metallurgical........ $316,554 5,153 $135,853 1,882
Thermal.............. 399,881 33,824 308,007 19,109
-------- ------ -------- ------
$716,435 38,977 $443,860 20,991
======== ====== ======== ======
GEOGRAPHIC AREAS
Three Months Ended March 31 Year Ended December 31
--------------------------------------------- ---------------------
2001 2000 2000
--------------------- --------------------- ---------------------
Revenue Sales Revenue Sales Revenue Sales
--------- --------- --------- --------- --------- ---------
(tonnes) (tonnes) (tonnes)
(restated -- note 2) (restated -- note 2) (restated -- note 2)
(Unaudited) (Unaudited)
Japan................ $ 20,241 381 $ 38,953 830 $148,797 3,019
Korea................ 22,343 462 20,096 520 62,656 1,586
United States........ 5,478 42 6,831 70 52,887 642
South America........ 8,645 210 14,081 365 49,030 1,264
Other................ 13,626 247 14,122 309 32,794 676
-------- ----- -------- ----- -------- ------
Total Export......... 70,333 1,342 94,083 2,094 346,164 7,187
Canada............... 87,579 8,137 72,016 7,836 310,888 30,196
-------- ----- -------- ----- -------- ------
$157,912 9,479 $166,099 9,930 $657,052 37,383
======== ===== ======== ===== ======== ======
Year Ended December 31
---------------------------------------------
1999 1998
--------------------- ---------------------
Revenue Sales Revenue Sales
--------- --------- --------- ---------
(tonnes) (tonnes)
(restated -- note 2) (restated -- note 2)
Japan................ $218,017 3,864 $152,705 2,909
Korea................ 68,061 1,629 82,317 1,666
United States........ 41,232 542 21,778 255
South America........ 54,105 1,367 11,225 297
Other................ 42,595 885 11,945 201
-------- ------ -------- ------
Total Export......... 424,010 8,287 279,970 5,328
Canada............... 292,425 30,690 163,890 15,663
-------- ------ -------- ------
$716,435 38,977 $443,860 20,991
======== ====== ======== ======
Export coal sales are generally denominated in U.S. currency.
C-126
LUSCAR COAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS AT MARCH 31, 2001 AND FOR THE THREE MONTH PERIODS ENDED
MARCH 31, 2001 AND 2000 IS UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
15. SEGMENT INFORMATION (CONTINUED)
MAJOR CUSTOMERS
Revenues are derived from significant customers and in some cases
substantially all production from a particular mine is sold to one customer.
The number of customers, each accounting for more than 10% of revenue by
type of coal, is as follows:
Three Months Ended March 31 Year Ended December 31
--------------------------------------------- ---------------------
2001 2000 2000
--------------------- --------------------- ---------------------
Revenue Number Revenue Number Revenue Number
--------- --------- --------- --------- --------- ---------
(restated -- note 2) (restated -- note 2) (restated -- note 2)
(Unaudited) (Unaudited)
Metallurgical........ $27,771 3 $ 7,298 1 $ 56,497 2
Thermal.............. $94,610 4 $79,305 4 $317,679 4
Year Ended December 31
---------------------------------------------
1999 1998
--------------------- ---------------------
Revenue Number Revenue Number
--------- --------- --------- ---------
(restated -- note 2) (restated -- note 2)
Metallurgical........ $ 81,777 2 $ 57,634 3
Thermal.............. $291,516 4 $212,344 4
Credit risks are minimized to the extent that customers include major
domestic utilities and accounts receivable on export sales are generally
insured under government export development programs or secured by letters
of credit.
16. JOINT VENTURES
Luscar conducts a portion of its exploration, development and mining
operations through its 50% interests in the Cardinal River joint venture
(which operates the Luscar mine and Cheviot project) and the Line Creek
joint venture (formed on December 31, 2000 to operate the Line Creek mine).
A portion of Luscar's cash flow from operations, operating margin and
capital expenditures is derived from the joint ventures. Coal production is
allocated to each of the joint venture participants who are separately
responsible for marketing their share of the coal production, and therefore
the joint ventures do not derive revenues from the sale of coal. Luscar's
share of operating expenses related to mining activities is included in the
cost of inventories and charged to operations as revenues are recognized.
Luscar's share of the assets and liabilities and expenses and cash flow
operated by the joint ventures is:
March 31 December 31
--------------------------- -----------------------
2001 2000 2000 1999
------------ ------------ ---------- ----------
(Unaudited) (Unaudited) (restated) (restated)
Current assets.............................................. $ 53,386 $33,206 $ 56,724 $37,579
Current liabilities......................................... (15,512) (4,999) (12,885) (5,156)
-------- ------- -------- -------
Working Capital............................................. 37,874 28,207 43,839 32,423
Capital assets, net of accumulated
depreciation and amortization............................. 73,199 14,810 74,012 13,493
Accrued reclamation costs................................... (8,090) (5,543) (8,400) (5,403)
Obligations under capital lease............................. (3,812) -- (3,961) --
-------- ------- -------- -------
$ 99,171 $37,474 $105,490 $40,513
======== ======= ======== =======
Share of expenses and cash flows of joint ventures are as follows:
Three Months Ended Year Ended
March 31 December 31
--------------------------- ------------------------------
2001 2000 2000 1999 1998
------------ ------------ -------- -------- --------
(Unaudited) (Unaudited)
Expenses................................................. $ 40,101 $ 18,197 $ 68,232 $ 77,057 $ 70,251
Cash flow from operations................................ (34,396) (15,184) (63,866) (62,389) (70,401)
Cash flow from investing activities...................... (1,393) (412) (825) (1,560) (1,738)
C-127
LUSCAR COAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS AT MARCH 31, 2001 AND FOR THE THREE MONTH PERIODS ENDED
MARCH 31, 2001 AND 2000 IS UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
17. STATEMENTS OF CASH FLOWS
The consolidated statements of cash flows have been prepared to reflect only
cash flows from operating, investing and financing activities and exclude
certain non-cash transactions, which are disclosed elsewhere in these
financial statements.
The change in non-cash working capital is as follows:
Three Months Ended Year Ended
March 31 December 31
--------------------------- ------------------------------------
2001 2000 2000 1999 1998
------------ ------------ ---------- ---------- ----------
(restated) (restated) (restated) (restated) (restated)
(note 2) (note 2) (note 2) (note 2) (note 2)
(Unaudited) (Unaudited)
Accounts receivable................................. $(9,004) $ 1,362 $ 1,939 $ (156) $ (6,413)
Income taxes recoverable and payable................ (1,373) 535 412 2,818 (2,101)
Inventories......................................... 5,553 (4,966) 44 19,543 (17,596)
Overburden removal costs............................ 370 (45) (229) (87) (3,321)
Prepaid expenses.................................... 2,909 1,787 (1,409) (5,163) 899
Accounts payable and accrued charges................ 9,509 (627) (16,800) (21,645) (11,534)
Due to LCIF......................................... -- (200) (399) (639) 1,568
------- ------- -------- -------- --------
$ 7,964 $(2,154) $(16,442) $ (5,329) $(38,498)
======= ======= ======== ======== ========
Interest and income taxes paid (recovered) are as follows:
Three Months Ended Year Ended
March 31 December 31
--------------------------- ------------------------------
2001 2000 2000 1999 1998
------------ ------------ -------- -------- --------
(Unaudited) (Unaudited)
Interest................................................... $5,982 $18,667 $69,750 $110,925 $54,878
Income taxes............................................... 651 651 2,604 2,455 1,040
18. COMMITMENTS AND CONTINGENCIES
Luscar has entered into an interest rate swap with a Canadian chartered
bank, which effectively fixes the rate of interest on $100,000 of long term
bank debt at 5.72% per annum plus the applicable interest rate margin. As at
December 31, 2000 and March 31, 2001, the unrealized loss on the interest
rate swap contract based on dealer quotes was $1,136 and $2,234
respectively.
Luscar has entered into forward currency exchange contracts with Canadian
chartered banks to sell U.S. currency which it expects to receive pursuant
to long-term sales agreements, thereby reducing the impact on export
revenues caused by fluctuations in the rate of exchange between U.S. and
Canadian currencies. Luscar does not trade in derivative securities for
profit therefore gains and losses relating to these hedging activities are
recognized as revenues as at the settlement dates. The unrealized loss on
such contracts at March 31, 2001 and December 31, 2000 follows:
As at March 31, 2001 As at December 31, 2000
-------------------------------------- -----------------------------------
Exchange Contract Unrealized Exchange Contract Unrealized
Rate Amount Loss Rate Amount Loss
$U.S. $U.S. $CAD $U.S. $U.S. $CAD
--------- ------------ ----------- --------- --------- -----------
(Unaudited)
YEAR OF SETTLEMENT:
2001...................................... 0.6811 60,000 5,964 0.6807 80,000 1,874
2002...................................... 0.6761 20,000 1,733 0.6761 20,000 267
------ ----- ------- -----
80,000 7,697 100,000 2,141
====== ===== ======= =====
Unrealized losses are based on forward contract rates available on
December 31, 2000 and March 31, 2001.
C-128
LUSCAR COAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS AT MARCH 31, 2001 AND FOR THE THREE MONTH PERIODS ENDED
MARCH 31, 2001 AND 2000 IS UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
19. SUBSEQUENT EVENTS
On March 8, 2001, Luscar Energy Partnership ("LEP", formerly known as
Sherritt Coal Partnership) made a formal offer to acquire 100% of the trust
units and convertible debentures of LCIF. On May 11, 2001, LEP held
sufficient trust units and convertible debentures to enable LEP to acquire
the remaining trust units and cause LCIF to redeem the remaining convertible
debentures. During the course of the acquisition, LCIF acquired the common
shares of Luscar for one dollar pursuant to a unanimous shareholders'
agreement. Accordingly, the acquisition of LCIF was effective for accounting
purposes May 11, 2001 and subsequent future financial statements for Luscar
will be consolidated in the financial statements of LEP.
Luscar's bank credit facilities are governed by an agreement that defines
change of control as an event of default. The bank has agreed not to
exercise its rights to demand repayment under this provision before
October 15, 2001. On October 10, 2001, Luscar issued US$275,000 of 9.75%
senior notes due October 15, 2011. The proceeds were used to repay all of
Luscar's existing bank credit facilities.
20. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
The consolidated financial statements of Luscar have been prepared in
accordance with Canadian GAAP, which in most respects, conform to United
States GAAP. Canadian GAAP differs from United States GAAP in the following
respects:
A. STATEMENTS OF EARNINGS
Three Months Ended Year Ended
March 31 December 31
--------------------------- -------------------
2001 2000 2000 1999
------------ ------------ -------- --------
(Unaudited) (Unaudited)
NET EARNINGS (LOSS) UNDER
CANADIAN GAAP............................................. $ 4,727 $(1,619) $(27,120) $(57,442)
Impact of United States GAAP:
Write-down of mining properties(a).......................... -- -- 7,557 (11,017)
Reduction of depreciation of mining properties(b)........... 175 172 691 --
Additional pension expense(c)............................... -- (26) (102) (479)
Change in accounting policies(d)............................ 3,176 398 (238) (1,946)
Derivative financial instruments(e)......................... (4,389) -- -- --
Share of adjustments attributable to non-controlling
interest.................................................. -- (326) (8,246) 8,065
------- ------- -------- --------
NET EARNINGS (LOSS) UNDER UNITED STATES GAAP................ $ 3,689 $(1,401) $(27,458) $(62,819)
======= ======= ======== ========
EARNINGS (LOSS) PER SHARE:
Common shares............................................... 0.07 (0.03) (1.04) (3.14)
Special shares.............................................. 0.48 (0.18) (6.71) (20.25)
B. STATEMENTS OF COMPREHENSIVE INCOME
Comprehensive income is measured in accordance with Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
(SFAS 130). This standard defines comprehensive income as all changes in
equity other than those
C-129
LUSCAR COAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS AT MARCH 31, 2001 AND FOR THE THREE MONTH PERIODS ENDED
MARCH 31, 2001 AND 2000 IS UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
20. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
resulting from investments by owners and distributions to owners. The
concept of comprehensive income does not exist under Canadian GAAP.
Luscar's comprehensive earnings determined in accordance with United
States GAAP would be as follows:
Three Months Ended Year Ended
March 31 December 31
--------------------------- -------------------
2001 2000 2000 1999
------------ ------------ -------- --------
(Unaudited) (Unaudited)
(I) CURRENT PERIODS
NET EARNINGS (LOSS) UNDER UNITED STATES GAAP............ $3,689 $(1,401) $(27,458) $(62,819)
Other comprehensive income net of tax:
Minimum pension liability (c)......................... 543 47 188 957
Derivative financial instruments (e).................. (499) -- -- --
------ ------- -------- --------
COMPREHENSIVE INCOME (LOSS)............................. $3,733 $(1,354) $(27,270) $(61,862)
====== ======= ======== ========
(II) ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
BALANCE, BEGINNING OF PERIOD............................ (543) (731) (731) (1,688)
Cumulative effect of adoption of SFAS 133 (e)........... (17) -- -- --
Change for the period................................... 44 47 188 957
------ ------- -------- --------
BALANCE, END OF PERIOD.................................. $ (516) $ (684) $ (543) $ (731)
====== ======= ======== ========
C. CONSOLIDATED BALANCE SHEETS
As at December 31
As at March 31, -----------------------
2001 2000 1999
---------------- ---------- ----------
(Unaudited)
ASSETS
Current assets.............................................. $ 193,618 $ 186,313 $ 211,201
Capital assets.............................................. 1,447,901 1,467,197 1,633,926
Other assets................................................ 72,702 72,017 68,720
---------- ---------- ----------
$1,714,221 $1,725,527 $1,913,847
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities......................................... $ 145,143 $ 152,408 $ 170,249
Long-term debt.............................................. 1,094,538 1,102,343 1,168,899
Other liabilities........................................... 35,707 35,243 51,118
Future income taxes......................................... 522,231 522,646 558,858
Non-controlling interest.................................... -- -- 24,567
Share capital............................................... 14,191 14,191 14,191
Deficit..................................................... (97,073) (100,761) (73,304)
Accumulated other comprehensive income (loss)............... (516) (543) (731)
---------- ---------- ----------
$1,714,221 $1,725,527 $1,913,847
========== ========== ==========
(A) WRITE-DOWN OF MINING PROPERTIES
Under Canadian GAAP, when conditions indicate that the estimated future
net cash flow from a group of mining properties may be less than its net
carrying amount less related accumulated provision for future removal
and site restoration costs and future income taxes, an impairment test
is applied to determine whether the assets should be written-down. The
impairment test ensures that the carrying value of mining properties
does not exceed the sum of estimated undiscounted future net cash flows
from the related assets.
In 1999, Luscar recorded a $172,824 write-down of certain of its mining
properties and a related tax savings of $70,257 under Canadian GAAP.
Under United States GAAP, impairment provisions are calculated based on
estimated discounted future cash flows. An additional write-down of
$16,649 and a related tax savings of $5,632 is required under United
States GAAP.
C-130
LUSCAR COAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS AT MARCH 31, 2001 AND FOR THE THREE MONTH PERIODS ENDED
MARCH 31, 2001 AND 2000 IS UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
20. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
During the quarter ended June 30, 2000, Luscar recorded a write-down of
its Gregg River mining assets of $25,266 and a related tax savings of
$8,560 under Canadian GAAP. Under United States GAAP, $7,557 (net of
tax) of this write-down was provided for in the 1999 impairment
provision.
(B) DEPRECIATION OF MINING PROPERTIES
As a result of the additional write-down of mining properties under
United States GAAP in 1999 indicated in (a), the depreciation and
amortization of mining properties was reduced by $261, $1,044 and $261
($172, $691 and $175 net of tax) respectively for the three months ended
March 31, 2000, the year ended December 31, 2000 and the three months
ended March 31, 2001.
(C) PENSION EXPENSE
Under United States GAAP, Luscar is required to present its results for
1999 and subsequent periods as if the pension requirements of Statement
of Financial Accounting Standards No. 87 (SFAS 87) had been applied for
the 1999 year with effect from January 1, 1999. Accordingly, Luscar has
adjusted its earnings for 1999 and 2000 to reflect the application of
SFAS 87 with effect from January 1, 1999. The following table summarizes
the additional pension disclosure for the year ended December 31, 1999
in accordance with United States GAAP.
1999
--------
PENSION EXPENSE
Current service cost -- defined benefit..................... $ 2,383
-- defined contribution.................. 7,498
Interest cost............................................... 3,815
Expected return on plan assets.............................. (4,271)
Amortization of net transitional asset...................... (506)
Increase in valuation allowance at end of year.............. 404
-------
Net pension plan expense.................................... 9,323
=======
ACCRUED BENEFIT OBLIGATION
Balance, beginning of year.................................. $51,765
Current service costs....................................... 2,383
Interest cost............................................... 3,815
Benefits paid............................................... (1,212)
-------
Balance, end of year........................................ $56,751
=======
PLAN ASSETS
Fair value, beginning of year............................... $60,621
Actual return on plan assets................................ 4,055
Employer contributions...................................... 788
Benefits paid............................................... (1,212)
-------
Fair value, end of year..................................... $64,252
=======
Funded status -- surplus.................................... $ 7,501
Unamortized net actuarial gains............................. (359)
Unamortized net transitional asset.......................... (1,070)
-------
Net accrued benefit pension asset........................... 6,072
Valuation allowance......................................... (404)
-------
Net carrying value.......................................... $ 5,668
=======
United States GAAP also requires the recognition of a minimum pension
liability for defined benefit plans that are unfunded. The initial
recognition and subsequent adjustments to the minimum pension liability
are required to be reflected in comprehensive income.
C-131
LUSCAR COAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS AT MARCH 31, 2001 AND FOR THE THREE MONTH PERIODS ENDED
MARCH 31, 2001 AND 2000 IS UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
20. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
(D) CHANGE IN ACCOUNTING POLICIES
In fiscal 2001, Luscar changed its accounting policy for revenue
recognition and coal inventory valuation. Under United States GAAP, a
change in accounting policy resulting from the guidance of SAB 101 is
required to be accounted for as an adjustment to earnings in the year of
the change. The change was accounted for retroactively under Canadian
GAAP resulting in an increase in shareholders' equity at December 31,
1998 of $143 and a restatement of earnings for 1999 and 2000. The
cumulative effect of this change in accounting policy is reflected as a
change in earnings for the three month period ended March 31, 2001 under
United States GAAP.
(E) DERIVATIVE FINANCIAL INSTRUMENTS
Under United States GAAP, Luscar is required to adopt Statement of
Financial Accounting Standards No. 133 (SFAS 133) and its related
amendments SFAS 137 and SFAS 138, with effect from January 1, 2001.
SFAS 133 requires that all derivative instruments be recorded on the
balance sheet at fair value. Subsequent to January 1, 2001, derivatives
that are not designated as hedges for accounting purposes must be
adjusted to fair value through income. If the derivative is designated
and is effective as a hedge for accounting purposes, depending on the
nature of the hedge, changes in the fair value of derivatives are either
offset against the change in the fair value of hedged underlying assets,
liabilities, or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings.
The ineffective portion of a hedging derivative's change in fair value
is recognized in earnings immediately.
At January 1, 2001 Luscar had an interest rate swap contract to manage
interest rate risk on long-term debt. Luscar also had forward currency
exchange contracts, which are utilized to manage the economic risk
associated with future revenue flows denominated in United States
dollars, and fixed price energy purchase contracts covering future
committed and anticipated energy requirements.
In accordance with the transition provisions of SFAS 133, Luscar
recorded a cumulative-effect type adjustment of $30 ($17 net of tax) in
accumulated other comprehensive income to recognize the effective
portion of the fair value of all derivatives that were designated as
cash-flow type hedges as at December 31, 2000. For the three months
ended March 31, 2001, Luscar reclassified a gain of $892 ($499 net of
tax) to earnings as an adjustment from accumulated other comprehensive
income. Luscar expects to reclassify a gain of $855 ($479 net of tax) to
earnings during the next twelve months, and the balance thereafter, from
the transition adjustment that was recorded in accumulated other
comprehensive income.
Luscar uses derivative financial instruments to manage the economic
risks associated with debt, foreign currency forecasted transactions and
forecasted energy requirements. Because Luscar did not anticipate the
need to prepare its financial statements in accordance with United
States GAAP, Luscar has not documented these instruments to qualify them
for hedge accounting. Subsequent to January 1, 2001 and the adoption of
SFAS 133, Luscar has not made a determination whether the use of these
instruments will qualify for hedge accounting in the future. For the
three months ended March 31, 2001, Luscar recorded the fair value of
these economic hedging instruments as other assets or other liabilities.
Luscar recorded a loss resulting from the changes in fair value of these
derivative instruments of $8,727 ($4,889 net of tax) in earnings, which
does not include reclassifications of other comprehensive income
discussed above.
Luscar's energy purchase strategy is to acquire a reliable supply of
electricity and natural gas in a manner that minimizes volatility
without undue risk. Luscar has entered into energy purchase contracts to
hedge the future cost of the committed and anticipated energy
requirements for its mining operations. Luscar enters into these fixed
price contracts to reduce price risk, not for speculative purposes.
As at As at
March 31 2001 December 31 2000
--------------------- ---------------------
Purchase Contract Purchase Contract
Price Volume Price Volume
--------- --------- --------- ---------
Natural gas (gigajoules).................................... $3.17 304 $3.17 500
(F) PROMISSORY NOTES
Under United States GAAP, the offsetting of assets and liabilities in
the balance sheet is not permitted except when a right of setoff exists.
A right of setoff requires that each of two parties owes the other
determinable amounts and that the reporting party has the right to set
off the amount owed with the amount owed by the other party. The sinking
funds, which have been
C-132
LUSCAR COAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS AT MARCH 31, 2001 AND FOR THE THREE MONTH PERIODS ENDED
MARCH 31, 2001 AND 2000 IS UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
20. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
setoff against the promissory notes under Canadian GAAP, do not qualify
for offsetting under United States GAAP. The sinking funds are therefore
reflected as other assets under United States GAAP.
(G) EMPLOYEE TERMINATION BENEFITS
United States GAAP requires additional disclosure regarding employee
termination provisions. The information provided below relates to
provisions for employee terminations made by Luscar. The provision
related to the Manalta acquisition was included as a liability in the
acquisition and the other provisions were charged to cost of sales.
Manalta Acquisition Gregg River Closure Luscar Mine Closure
---------------------- ---------------------- ----------------------
Employees Amounts Employees Amounts Employees Amounts
---------- --------- ---------- --------- ---------- ---------
Accrued during 1998................. 106 $ 18,500 -- $ -- -- $ --
Paid during 1998.................... (86) (5,745) -- -- -- --
--- -------- ---- ------- --- -------
Balance, December 31, 1998.......... 20 12,755 -- -- -- --
Paid during 1999.................... (11) (1,241) -- -- -- --
--- -------- ---- ------- --- -------
Balance, December 31, 1999.......... 9 11,514 -- -- -- --
Accrued during 2000................. -- -- 287 5,225 360 3,947(1)
Paid during 2000.................... (9) (10,969) (194) (3,295) -- --
Adjustments 2000.................... -- (545) (16) (394) -- --
--- -------- ---- ------- --- -------
Balance, December 31, 2000.......... -- -- 77 1,536 360 3,947(1)
Paid during 2001.................... -- -- (34) (358) (31) (236)(1)
--- -------- ---- ------- --- -------
Balance, March 31, 2001............. -- $ -- 43 $ 1,178 329 $ 3,711
=== ======== ==== ======= === =======
-----------------------
(1) Luscar's 50% share
(H) OTHER DISCLOSURES
United States GAAP does not permit the disclosure of the subtotals of
operating earnings before depreciation and amortization and before
interest in the consolidated statements of earnings. Furthermore, United
States GAAP does not permit the disclosure of the subtotal of the cash
provided by operating activities before change in non-cash working
capital in the consolidated statements of cash flows.
(I) NEW ACCOUNTING STANDARDS
SFAS NO. 141 -- BUSINESS COMBINATIONS; SFAS NO. 142 -- GOODWILL
AND OTHER INTANGIBLE ASSETS. In June 2001, the Financial Accounting
Standards Board approved Statement No. 141, Business Combinations
(SFAS 141), and Statement No. 142, Goodwill and Other Intangible Assets
(SFAS 142). Those statements will change the accounting for business
combinations and goodwill. SFAS 141 requires that the purchase method of
accounting be used for all business combinations initiated after
June 30, 2001. Use of the pooling-of-interests method will be
prohibited. SFAS 142 changes the accounting for goodwill from an
amortization method to an impairment only approach. Thus, amortization
of goodwill, including goodwill recorded in past business combinations,
will cease upon adoption of that Statement. SFAS 142 will be applicable
for fiscal years beginning after December 15, 2001; however earlier
adoption is permitted for companies with fiscal years beginning on or
after March 15, 2001. Luscar has not yet determined the effects of the
new standards, if any, on its financial statements.
SFAS NO. 143 -- ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS. In
June 2001, the Financial Accounting Standards Board approved Statement
No. 143 (SFAS 143), Accounting for Asset Retirement Obligations. That
standard requires entities to record the fair value of a liability for
an asset retirement obligation in the period in which it is incurred.
When the liability is initially recorded, the entity capitalizes a cost
by increasing the carrying amount of the related long-lived asset. Over
time, the liability is accreted to its present value each period, and
the capitalized cost is depreciated over the useful life of the related
asset. Upon settlement of the liability, an entity either settles the
obligation for its recorded amount or incurs a gain or loss upon
settlement. SFAS 143 is applicable for years beginning after June 15,
2002. Luscar has not yet determined the effects of the new standard, if
any, on its financial statements.
21. COMPARATIVE FIGURES
Certain comparative figures for prior periods have been reclassified to
conform to the presentation in the current period financial statements.
C-133
APPENDIX D
INDEPENDENT OPINION OF NORWEST CORPORATION
REGARDING LINE CREEK MINE PLAN
AND COST ESTIMATES
[GRAPHIC]
SUITE 400, 205 - 9TH AVE SE
CALGARY, ALBERTA CANADA T2G 0R3
TEL (403) 237-7763
FAX (403) 263-4086
December 02, 2002
SHERRITT COAL ACQUISITION INC.,
a corporation wholly owned by,
SHERRITT COAL PARTNERSHIP II
5th Floor, 1133 Yonge Street
Toronto, Ontario
M4T 2Y7
OPINION REGARDING LINE CREEK MINE MINING PLANS AND COST ESTIMATES
Norwest Corporation ("Norwest") is an established international engineering
consulting company within the energy and mineral resource industry. Norwest
specializes in providing services ranging from resource assessment, mine and
geotechnical engineering to emissions engineering and management. Norwest
operates out of offices in Canada, United States, Australia, United Kingdom,
Indonesia and India.
Norwest was retained by Sherritt Coal Acquisition Inc. ("SCAI") to review the
geology, mine plans and cost estimates pertaining to the Line Creek Mine for a
ten year period commencing January 1, 2003. The Line Creek Mine is located
approximately 25 kilometres north of Sparwood, British Columbia. The mine is
owned as to 50%, indirectly, by Luscar Energy Partnership ("Luscar") and 50%,
indirectly, by CONSOL Energy Inc. ("CONSOL").
The scope of the review by Norwest included, among other things, the following:
(i) review of information concerning the historical performance of the Line
Creek Mine disclosed in Appendix A of the Notice of Variation by SCAI in
respect of its offer to purchase all of the outstanding common shares of
Fording Inc.;
(ii) inspection of the site;
(iii) review of mine engineering, scheduling and planning basis and the
resulting schedules and mine equipment requirement estimates;
(iv) review of the mine cost model for reasonableness and completeness and
validation of the resulting cost of clean coal, free on board, rail
car;
(v) review of the geological models used in the ten-year mine plan to
confirm their adequacy and suitability for planning purposes; and
(vi) identification of principal risks associated with cost estimates of
coal production in the future.
In conducting its review Norwest worked with the staff of SCAI and Luscar
including representatives from the Line Creek Mine site management. In addition,
throughout the review, Norwest relied upon reviews completed
CALGARY \ SALT LAKE WWW.NORWESTCORP.COM
CITY \ VANCOUVER \ BRISBANE \ ASHLAND \ LONDON \ JAKARTA \ CALCUTTA
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[GRAPHIC] PAGE 2 OF 8
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by its staff on the Line Creek Mine on behalf of Luscar and CONSOL. Norwest
believes that the staff responsible for the operations of the Line Creek Mine is
competent and capable of executing the ten year mine plan reviewed herein.
Norwest also understands that the mine operating personnel are involved in a
continuous improvement program designed to improve upon the ten year mine plan
assumptions. This review does not take into account optimizations beyond the
cost savings anticipated in the cost estimates as a result of the continuous
improvement program.
GEOLOGY AND RESERVES
Norwest reviewed the coal reserves of the Line Creek Mine that will be mined
during the ten year mine plan period. This included coal supplied from the
following pit areas: (i) North Line Creek, (ii) Horseshoe Ridge, (iii) MSAW;
(iv) MSAW Extension; (v) South Pit; and (vi) Saddle.
Norwest reviewed in detail the methodology used in developing reserve estimates
including geological interpretations, quality parameters and geological
modeling.
As part of Norwest's review, geophysical logs and seam thicknesses were checked
on a random basis, to confirm that the appropriate geophysical logs were
utilized and to ensure that systematic errors, such as persistent optimistic
picks of the coal seam contacts were not occurring. The hole locations, angles,
and deviations were also checked in two areas.
Norwest also reviewed the drilling spacing at the mine for exploration and pit
development purposes. In most areas, drillhole spacing along strike is
approximately at a 50 metre-section. This is generally in filled to 25 metre
prior to mining. Hole spacing along each section averages approximately 50
metres, but can be tighter in geologically complex areas.
The existing exploration practices at the Line Creek Mine meet or exceed the
accepted standards for drill density as outlined in "Paper 88-21, A Standardized
Coal Resource/Reserve Reporting System for Canada" (Geological Survey of
Canada). The exploration drilling program is augmented by in-pit drilling and
regular in-pit surveys. This occurs once the benches have been established and
access is possible. Geological interpretations are generated in section and
rationalized to plan. These are also digitized and stored electronically, making
updates easy.
Coal sampling is conducted on recovered drill cores or recovered chip samples at
1 meter intervals for exploration drilling. Coal washabilities are performed on
45 gallon drum samples collected from the raw coal piles, trench samples from
within the pit and occasionally from larger truck samples. The results are used
to determine seam quality parameters and determine the pit recoveries. External
commercial labs check the results produced by the mine laboratory.
The geology department maintains a record of the major quality parameters for
each seam or seam package. These parameters include such items as "Ro Max",
"FSI", raw coal proximate analysis and are used to help determine blending
practices for required feed to the preparation plant.
The metallurgical/thermal cutoff determination is estimated utilizing the ASTM
Light Transmittance ("LT") test. Raw coals with an LT less than about 90-95 are
classified as thermal coals. The plant laboratory does the raw coal analysis
(ash, FSI, Sulfur, LT, calorific value). CONSOL conducts the carbonization and
petrographic analysis for the train shipments.
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The Line Creek Mine uses computerized modeling and planning software to generate
geological models and generate mine plans. Separate geological models have been
generated for each of the mining areas within the ten year mine plan.
To validate the models and the model building process, Norwest reconstructed the
Horseshoe Ridge model using in house software that utilizes an entirely
different technique. The results of calculations of overall coal volumes and
total material between the two systems were within 2% indicating very close
agreement between the two estimates. Each of the other mining area models were
reviewed by examining cross-sections with drill hole information and block model
values on the computer. Individual blocks were selected randomly and block
values were checked for reasonableness.
Coal recovery assumptions at the Line Creek Mine are based on several factors,
including past performance, structural complexities and confidence. Each seam
modeled has a unique recovery factor. This approach is very practical and is
realistic in Norwest's opinion.
Total coal resources within the geological models that are contained within
preliminary or detailed pit designs is greater than 80 million tonnes. Coal
required to complete the ten year mine plan is approximately 36 million tonnes.
SCAI reports proven reserves in Appendix A of the Notice of Variation of
57.0 million tonnes.
CONCLUSIONS
Based upon its review of the geology and reserves, Norwest is of the opinion
that: (i) the integrity of the geological information is sound; (ii) the
geological interpretations and data, which form the basis of future reserves are
reasonable, (iii) the coal quality program at the Line Creek Mine is appropriate
to provide adequate controls for planning and marketing; (iv) the geological
models used at Line Creek to develop the ten year mine plan were constructed
with a high degree of technical competence; and (v) the coal required for the
ten year mine plan is available with sufficient surplus to ensure no short falls
in tonnages.
MINE ENGINEERING, MINE PLANS AND SCHEDULES
Norwest completed a review of the Line Creek Mine ten year mine plan which was
developed for the period 2003 through 2012. The basic approach to the plan was
to maximize coal deliveries while maintaining sustainable stripping ratios over
the life of the reserve. The starting point for the plan was based on the actual
mining positions recorded at Line Creek Mine on October 1st, 2002. A three month
plan to the end of 2002 was completed and the starting point for the 2003 budget
and the ten year mine plan was taken as the end-point of this three month plan.
In the ten year mine plan the coal production level is based upon a number of
factors including the maximum preparation plant capacities of 3.26 million clean
metric tonnes ("cmt") per annum for metallurgical production and 0.6 million cmt
per annum for thermal coal. Overall mine production is also constrained by
production capacity of the major mining equipment, specifically the capacity of
the mine haul truck fleet.
There are a number of factors that control the development of the pit sequence
for long range plans. The overriding criteria that guided this process were the
raw coal blending constraints and the levelling of the long term stripping
ratio. Other factors that also controlled the sequencing of the pits included
the time requirements for permitting of future mining areas, ensuring proper
mine access and dump development as well as maintaining flexibility in the
placement of the major loading equipment to ensure adequate operating space and
alternate mining areas.
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[GRAPHIC] PAGE 4 OF 8
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The production schedule that has been developed for the ten year period is
provided in the following table.
LINE CREEK LONG RANGE MINE PLAN PRODUCTION SCHEDULE (MILLIONS)
---------------------------------------------------------------------------------------------------------------------------
YEAR 2003 2004 2005 2006 2007 2008 2009 2010 2011
---------------------------------------------------------------------------------------------------------------------------
WASTE (BCM) 39.51 39.08 39.51 39.99 40.82 39.93 38.51 38.57 38.48
---------------------------------------------------------------------------------------------------------------------------
THERMAL (RMT) 0.50 0.52 0.59 0.60 0.51 0.51 0.43 0.53 0.61
MET (RMT) 4.56 4.66 4.75 4.80 4.95 5.00 5.04 4.99 4.99
TOTAL (RMT) 5.06 5.18 5.34 5.40 5.47 5.51 5.47 5.52 5.60
---------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------
THERMAL (CMT) 0.37 0.41 0.46 0.47 0.40 0.40 0.34 0.42 0.48
MET (CMT) 2.89 3.02 3.07 3.10 3.20 3.23 3.26 3.23 3.23
TOTAL (CMT) 3.26 3.42 3.53 3.58 3.61 3.64 3.60 3.64 3.71
---------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------
RAW RATIO 7.81 7.54 7.40 7.40 7.46 7.24 7.04 6.98 6.86
CLEAN RATIO 12.13 11.41 11.18 11.18 11.31 10.98 10.71 10.59 10.38
---------------------------------------------------------------------------------------------------------------------------
------------------------- --------
YEAR 2012
-------------------------
WASTE (BCM) 35.68
-------------------------
THERMAL (RMT) 0.45
MET (RMT) 5.00
TOTAL (RMT) 5.45
-------------------------
-------------------------
THERMAL (CMT) 0.35
MET (CMT) 3.24
TOTAL (CMT) 3.59
-------------------------
-------------------------
RAW RATIO 6.55
CLEAN RATIO 9.94
-------------------------
Note: 2003 reported does not include raw coal hauled to inventory.
As indicated in the above table, the metallurgical clean coal production
increases gradually through 2009 before levelling off, while the total coal
production increases through 2011 to 3.71 million cmt per year. Waste production
climbs through the year 2007 as coal volumes increase, but thereafter the lower
stripping ratios result in reduced waste requirements.
The schedule was generated using a program developed by the Line Creek Mine site
personnel. The scheduler incorporates the individual block waste and coal volume
data generated from the underlying geological model. This data includes coal
volumes on a "by seam" basis, providing a more detailed schedule than could be
developed using a bench by bench methodology.
The truck cycle time requirements for coal and waste are also included in the
block data, allowing the scheduler to develop a detailed picture of the truck
requirements for the scheduled period. The truck cycle times are generated using
an in-house program that mimics commercial haulage simulation software. The
calculations were reviewed by Norwest to ensure the overall cycle times and
associated truck productivities were reasonable. To this end, the reported
haulage distances were checked for reasonableness and the speed limits on
downhill runs, especially important on the coal hauls, were confirmed to be
included. The internal program also has the capability to adjust the loading
times to account for the assigned loading machine, thereby ensuring that the
fixed times will simulate actual loading conditions. As a final check on the
system, the annual truck productivity forecast was reviewed in comparison to the
year to date 2002 actual fleet performance.
The major equipment hour requirements of the ten year mine plan were compared
with the recent historical availability and productivity data reported by the
Line Creek Mine, and were found consistent with the 2002 actual performance. The
shovel productivity rates are consistent with those applied in the 2003 budget,
but it should be noted that there is a projected increase in the shovel
productivities relative to recent historical values. However, it is Norwest's
opinion that these increases are justified given the incorporation of four
additional haulage units in late 2002 and early 2003. Support equipment hour
requirements were assigned as a function of truck operating hours, shovel
operating hours, or other historically proven activity based drivers.
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In addition to the used trucks presently being acquired, the ten year mine plan
also includes purchase of two additional units. The additional units are
necessary to provide the production capacity outlined in the schedule. These are
the only equipment additions included in the mine plan. The major equipment
requirements are a key component of both capital and operating costs.
CONCLUSIONS
Based upon the review of mine engineering, mine plans and schedules, Norwest is
of the opinion that the (i) the pit sequencing is addressed adequately for long
range planning purposes; (ii) The projected productivity values in the ten year
mine plan are consistent with historical data; and (iii) the mine planning and
equipment estimate methodologies employed by the Line Creek Mine are consistent
with industry standards and are adequate for planning purposes.
CAPITAL AND OPERATING COST ESTIMATES FOR THE TEN YEAR MINE PLAN
Norwest has reviewed the overall mining costs of Line Creek Mine's ten year mine
plan. Norwest estimates that costs will generally be in the $33.00 to $34.00
/cmt range until 2009/10. A lower strip ratio in the last two years should
reduce the cost to approximately $30.00/cmt. Norwest believes that these costs
are generally higher than mines utilizing larger shovels and trucks under more
favorable geological and mining conditions. Since Line Creek Mine's unit cost
would place it at the high end of Canadian production costs for export mines,
maintaining and improving productivity will be important for the mine to be
competitive in the longer term.
Clean coal production is maximized under the ten year mine plan. This has a
direct impact on the final unit cost. As is typical for all mines, there is a
high fixed cost component. Any shortfall in raw coal production or the plant
feed rate would adversely impact the unit cost. If the plant feed rate dropped
to 650 feed tonnes/hour instead of the planned 688 tonnes/hour, the cost could
increase by $0.75/cmt. Year to date feed rates for October 2002 have averaged
606 feed tonnes/hour (compared to 555 tonnes/hour in 2001), with 678 tonnes/hour
being achieved in the month of October 2002. Achieving the planned rate is a key
factor in optimizing the plant operating cost.
Since 1999, the mine site cost on a clean basis has increased from $27.99/cmt to
$39.48/cmt year to date October 2002. This follows a direct increase in the
strip ratio and also an increasing cost on a per bank cubic metre ("bcm") of
earth moved basis for labour, maintenance and energy. Although waste removal
productivity has also been increasing, it has not been enough to offset the
strip ratio and absolute cost increase.
Major cost components in the pit, such as diesel fuel, explosives, and labour
rates correlate with past experience and potential increases expected in 2003.
Maintenance costs depend on the component change-out schedule, and can therefore
vary significantly on a yearly basis. For all equipment hours and maintenance
costs, the cost has increased each year since 1999, going from $37.57 per
operating hour to $57.66 per operating hour by October 2002. The 2003 budget
estimate is $50.69 per operating hour and this lower cost reflects the lower
number of component change-outs anticipated in 2003.
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In the preparation plant, commodity cost estimates are consistent with prior
period results, with the following exceptions: (i) magnetite and dust
suppressant costs are lower than previous years and (ii) kerosene and natural
gas costs are higher than previous years. Norwest has determined that the
magnetite system has been changed and that as a result lower consumption will
result. Dust suppressant cost projections are also reduced over prior period
results as the Line Creek Mine will use a different product in the future.
Natural gas prices were estimated by Luscar and are projected to be 20% higher
than prior period results. Kerosene cost assumptions were the same as in
previous periods but the rate of consumption is projected to increase. In
general the administration costs for the ten year plan were consistent with the
past results.
In respect of mining costs in the long range mine plan, the waste cost in 2003
is budgeted at $1.49/bcm. This increases to $1.55/bcm in 2004 and averages about
$1.57/bcm through 2010. The cost drops to $1.48/bcm in 2011 and $1.44/bcm in
2012. The increase in 2004 is due to a 25% increase in bulk explosives costs.
Maintenance costs are also higher in 2004. The drop in unit cost in 2011 and
2012 is on account of maintenance supplies. The equipment and maintenance
workforce varies with the material moved. Labour costs vary between $0.78/bcm
and $0.82/bcm during the ten year mine plan period and are consistent with
$0.78/bcm in the 2003 budget.
In respect of preparation plant costs in the long range mine plan, by 2005, the
unit cost drops to $6.40/cmt from $6.62/cmt previously, as the clean coal
production increases to the 3.5 to 3.6 million tonnes per year range. The cost
again increases in 2008 and 2009 due to proposed major repairs to the cable belt
conveyor in these years.
In respect of capital expenditures, except for the two used Caterpillar 789 haul
truck additions in 2006 and 2007, there are no truck replacements identified in
the ten year mine plan. This is in line with the maintenance philosophy of
utilizing major rebuilds to maximize truck life and minimize replacement
capital. Hence operating costs for trucks and cable shovels would typically be
higher than mines which follow a replacement policy at an economic life ranging
from 60,000 to 72,000 hours (7 to 10 years) for trucks and 100,000 to
140,000 hours for cable shovels.
Front end loaders, backhoes, dozers and graders are replaced in the ten year
mine plan. For these equipment fleets, economic replacements with new or factory
rebuilt units is typically practiced by most mines, and the Line Creek Mine also
follows this practice. The ten year mine plan includes significant development
capital expenditures of $4.5 million in 2004 and $13.8 million in 2007 and 2008
for new pits.
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Average operating and capital expenditures for the two five year periods of the
ten year mine plan are provided in the following table:
LINE CREEK TEN YEAR PLAN -- AVERAGE COSTS AND CAPITAL EXPENDITURES
-------------------------------------------------------------------------------------------------------------
PERIOD 2003 - 2007 PERIOD 2008 - 2012
FIVE YEAR AVERAGE OPERATING COSTS $/CLEAN METRIC TONNE $/CLEAN METRIC TONNE
-------------------------------------------------------------------------------------------------------------
Waste Removal $17.82 $15.57
-------------------------------------------------------------------------------------------------------------
Coal Recovery 1.61 1.91
-------------------------------------------------------------------------------------------------------------
Support Services 2.32 2.29
-------------------------------------------------------------------------------------------------------------
Reclamation 0.08 0.07
-------------------------------------------------------------------------------------------------------------
Coal Preparation 6.46 6.45
-------------------------------------------------------------------------------------------------------------
General Site 1.87 1.79
-------------------------------------------------------------------------------------------------------------
Administration 3.99 3.82
-------------------------------------------------------------------------------------------------------------
G&A 0.30 0.28
-------------------------------------------------------------------------------------------------------------
Continuous Improvement Savings (0.68) (0.64)
-------------------------------------------------------------------------------------------------------------
ANNUAL AVERAGE TOTAL COST $/T $33.75 $31.55
-------------------------------------------------------------------------------------------------------------
ANNUAL AVERAGE CAPITAL EXPENDITURE $M $10.885 $6.823
-------------------------------------------------------------------------------------------------------------
CONCLUSIONS
Based upon the review of operating and capital cost estimates for the ten year
mine plan, Norwest is of the opinion that (i) the overall mine site costs
reflect the mining situation going forward when compared to costs that have been
achieved in the past or achievable based on reasonable productivity
improvements; and (ii) such costs are based on a component change-out and
maintenance schedule which is reasonable.
RISKS
Norwest believes that Luscar has presented a realistic and achievable ten year
mine plan and associated cost estimates. However, it should be noted that some
uncertainties are inherent in any forward looking estimates for the cost of coal
production. The primary risks are in the following areas:
(i) Geological Risk. Actual mining conditions may differ materially from
those anticipated following exploration and development drilling
programs and the associated geological interpretation. This can lead to
variances in raw coal feed quality and/or variances in strip ratio and
the resulting cost of mining. The Line Creek Mine is planning to
mitigate some of these risks by increasing the drilling density in areas
of near term development.
(ii) Commodity Risk. The mine operations consume significant quantities of
explosives, diesel fuel, natural gas, electric power and other
consumables. The cost estimates for these items are based on long term
experience but it must be recognized that these can fluctuate
significantly with varying market conditions.
(iii) Labour Conditions. The mine operates in a relatively stable labour
market in an area of historical mine production. The availability of
qualified operators and maintenance personnel is a key concern for all
the area mines and can be influenced by new mine developments in the
Fort McMurray area and elsewhere in western Canada. Managing labour
cost and productivity will be an ongoing concern for all of the
southeast British Columbia coal producers.
D-8
SHERRITT COAL ACQUISITION INC
[GRAPHIC] PAGE 8 OF 8
------------------------------------------------------------------------------------------------
(iv) Implementation. The mine plans and cost estimates presented by the
Line Creek Mine are considered achievable and realistic. Meeting the
plan and budget objectives will require the retention of the capable
management team in place or substitution with personnel of equivalent
skills and experience. Norwest believes that this is one of the most
important factors in the Line Creek Mine's ability to achieve the plan
objectives.
SUMMARY CONCLUSIONS
In summary, it is Norwest's opinion that:
(i) the ten year mine plan has been prepared in accordance with industry
standards and is suitable for the intended purposes;
(ii) the calculation of the geological reserves intended for mining in the
plan period has been completed to acceptable professional standards and
there are sufficient reserves to achieve the production objectives; and
(iii) the capital and operating cost estimates have been completed on a sound
basis and represent a realistic projection of future costs.
On Behalf of NORWEST CORPORATION
(Signed) Howard Lutley (Signed) Craig Acott (Signed) Brian McEwen (Signed) Ken Shinya
Howard Lutley, P. Eng. Craig Acott, P. Eng. Brian McEwen, P. Geol Ken Shinya, MBA
President VP Surface Mining Manager, Minerals Senior Economist
Projects
D-9
Document 3: Letter of Transmittal
THIS AMENDED LETTER OF TRANSMITTAL AND ELECTION FORM IS FOR USE ONLY IN
CONJUNCTION WITH THE ENHANCED OFFER BY SHERRITT COAL ACQUISITION INC. FOR ALL
OUTSTANDING COMMON SHARES OF FORDING INC.
THE INSTRUCTIONS ACCOMPANYING THIS AMENDED LETTER OF TRANSMITTAL AND ELECTION
FORM SHOULD BE READ CAREFULLY BEFORE THIS AMENDED LETTER OF TRANSMITTAL AND
ELECTION FORM IS COMPLETED.
AMENDED
LETTER OF TRANSMITTAL AND ELECTION FORM
FOR
DEPOSIT OF COMMON SHARES
OF
FORDING INC.
--------------------------------------------------------------------
THE ENHANCED OFFER WILL BE OPEN FOR ACCEPTANCE UNTIL 8:00 P.M. (TORONTO
TIME) ON JANUARY 6, 2003, UNLESS WITHDRAWN, EXTENDED OR VARIED.
--------------------------------------------------------------------------------
THE DEPOSITARY, THE U.S. FORWARDING AGENT, ANY OF THE DEALER MANAGERS (SEE BACK
COVER PAGE FOR ADDRESSES AND TELEPHONE NUMBERS) OR YOUR BROKER OR OTHER
FINANCIAL ADVISOR WILL ASSIST YOU IN COMPLETING THIS AMENDED LETTER OF
TRANSMITTAL AND ELECTION FORM.
This Amended Letter of Transmittal and Election Form (the "Letter of
Transmittal and Election Form"), or a manually executed facsimile thereof, in
each case properly completed and duly executed, together with all other required
documents, must accompany certificates representing common shares (the "Shares")
of Fording Inc. ("Fording") deposited pursuant to the offer dated October 25,
2002, as varied and restated by a notice of variation and the accompanying
amended and restated offer (the "Offer") and take-over bid circular dated
December 16, 2002 (collectively, the "Enhanced Offer") made by Sherritt Coal
Acquisition Inc. (the "Offeror"). Shareholders whose share certificate(s) are
not immediately available or who cannot deliver their share certificate(s) and
all other required documents to the Depositary or the U.S. Forwarding Agent at
or prior to the Expiry Time may deposit those Shares in accordance with the
guaranteed delivery procedures described in Section 3 of the Offer, "Manner of
Acceptance -- Procedure for Guaranteed Delivery".
The terms and conditions of the Enhanced Offer are incorporated by reference
in this Letter of Transmittal and Election Form. Capitalized terms used and not
defined in this Letter of Transmittal and Election Form which are defined in the
Enhanced Offer shall have the respective meanings set out in the Enhanced Offer.
TO: SHERRITT COAL ACQUISITION INC.
AND TO: CIBC MELLON TRUST COMPANY (THE "DEPOSITARY")
OR TO: MELLON INVESTOR SERVICES, LLC (THE "U.S. FORWARDING AGENT")
The undersigned acknowledges that deposits of Shares under the Enhanced
Offer will not be accepted from or on behalf of Shareholders in any jurisdiction
outside of Canada and the United States in which the acceptance of the Enhanced
Offer would not be in compliance with the laws of such jurisdiction. The
undersigned hereby declares that it is not acting for the account or benefit of
a person from any such jurisdiction and is not in, or delivering this Letter of
Transmittal and Election Form from, any such jurisdiction.
The undersigned hereby deposits with the Offeror, upon the terms and subject
to the conditions set forth in the Enhanced Offer and this Letter of Transmittal
and Election Form, receipt of which are hereby acknowledged, the Shares listed
below, represented by the enclosed certificate(s) for Shares listed below,
pursuant to the letter of transmittal and election procedures set forth in
Section 3 of the Enhanced Offer, "Manner of Acceptance -- Letter of Transmittal
and Election Form" and the Instructions below.
-------------------------------------------------------------------------------------------------------
NUMBER OF
SHARE CERTIFICATE SHARES
NAME(S) AND ADDRESS(ES) OF SHAREHOLDER(S) NUMBER REPRESENTED BY NUMBER OF
(PLEASE PRINT) (IF AVAILABLE) CERTIFICATE SHARES DEPOSITED
-------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------
TOTAL
--------------------------------
(IF SPACE IS INSUFFICIENT ATTACH A LIST IN THE ABOVE FORM.)
2
ELECTION ALTERNATIVES FOR SHAREHOLDERS
YOU MAY ELECT TO ALLOCATE YOUR SHARES AS FOLLOWS: (1) ALL YOUR SHARES TO THE
CASH OPTION OR (2) ALL YOUR SHARES TO THE EXCHANGE RIGHT OPTION OR (3) SOME OF
YOUR SHARES TO THE CASH OPTION AND THE REMAINDER OF YOUR SHARES TO THE EXCHANGE
RIGHT OPTION PURSUANT TO THE COMBINATION OPTION. SHAREHOLDERS WISHING TO ENSURE
THAT THEY WILL RECEIVE BOTH CASH AND EXCHANGE RIGHTS MUST ALLOCATE THEIR SHARES
TO THE COMBINATION OPTION. EACH OF THESE OPTIONS IS SUBJECT TO PRORATION.
Under the Enhanced Offer, the undersigned hereby elects to receive the
following consideration for the deposited Shares represented by the above share
certificate(s):
ONLY ONE OF THE FOLLOWING OPTIONS MAY BE SELECTED. Please place an "X" in one of
the boxes below and fill in the blanks as required.
----------------------------------------------------------------------------------
THE CASH OPTION
/ / The undersigned hereby deposits all of its Shares identified
in the box on page 2 in exchange for cash in the amount of
$35.00 for each Share deposited by the undersigned in
accordance with this Letter of Transmittal and Election
Form.
The undersigned acknowledges that there is an aggregate
maximum amount of cash available to Shareholders under the
Enhanced Offer. The undersigned further acknowledges that if
there is insufficient cash available to satisfy this
election, the undersigned will receive the remainder of its
consideration in the form of the Exchange Right Option.
----------------------------------------------------------------------------------
OR
----------------------------------------------------------------------------------
THE EXCHANGE RIGHT OPTION
/ / The undersigned hereby deposits all of its Shares identified
in the box on page 2 in exchange for one Exchange Right for
each Share deposited by the undersigned in accordance with
this Letter of Transmittal and Election Form.
The undersigned acknowledges that Exchange Rights will not
be given in exchange for more than the Maximum Exchange
Right Amount. The undersigned further acknowledges that if
there are insufficient Exchange Rights available to satisfy
this election, the undersigned will receive the remainder of
its consideration in the form of the Cash Option.
----------------------------------------------------------------------------------
OR
----------------------------------------------------------------------------------
THE COMBINATION OPTION
/ / The undersigned hereby deposits ----------------* (FILL IN
NUMBER) Shares out of the total number of Shares identified
in the box on page 2 in exchange for $35.00 per Share
(the Cash Option).
The undersigned hereby deposits ----------------* (FILL IN
NUMBER) Shares out of the total number of Shares identified
in the box on page 2 in exchange for one Exchange Right per
Share (the Exchange Right Option).
The undersigned acknowledges that these elections are
subject to proration as described in the boxes for the Cash
Option and the Exchange Right Option above.
* Please ensure that the total number of Shares filled in matches the total number
of Shares identified in the box on page 2.
----------------------------------------------------------------------------------
3
IF THE NUMBER OF SHARES IN RESPECT OF WHICH ELECTIONS ARE MADE IN THE
COMBINATION OPTION EXCEEDS THE NUMBER OF SHARES IDENTIFIED ON PAGE 2 AS BEING
DEPOSITED, THEN THE ELECTIONS WILL BE SATISFIED IN THE ORDER OF THE EXCHANGE
RIGHT OPTION AND THEN THE CASH OPTION, TO THE AGGREGATE MAXIMUM OF SHARES
PROPERLY IDENTIFIED AS BEING DEPOSITED ON PAGE 2.
IF ONE OF THE FOREGOING ELECTIONS IS NOT MADE, OR IS NOT OTHERWISE PROPERLY
MADE, THE UNDERSIGNED WILL BE DEEMED TO HAVE ELECTED TO HAVE DEPOSITED ALL
SHARES PROPERLY IDENTIFIED AS BEING DEPOSITED ON PAGE 2 IN EXCHANGE FOR THE
EXCHANGE RIGHT OPTION.
NO FRACTIONAL EXCHANGE RIGHTS WILL BE DELIVERED IN EXCHANGE FOR SHARES
PURSUANT TO THE ENHANCED OFFER. RATHER, EACH SHAREHOLDER ENTITLED TO A
FRACTIONAL EXCHANGE RIGHT WILL RECEIVE A CASH PAYMENT DETERMINED ON THE BASIS OF
$35.00 FOR EACH WHOLE EXCHANGE RIGHT.
THE UNDERSIGNED ACKNOWLEDGES THAT THE CONSIDERATION PAYABLE UNDER THE
ENHANCED OFFER AND ACCORDINGLY, THE ELECTION(S) MADE BY THE UNDERSIGNED, ARE
SUBJECT TO THE PROVISIONS SET FORTH IN SECTION 1 OF THE ENHANCED OFFER WITH
RESPECT TO THE MAXIMUM CASH AMOUNT AND THE MAXIMUM EXCHANGE RIGHT AMOUNT PAYABLE
UNDER THE ENHANCED OFFER. THE MAXIMUM CASH AMOUNT AVAILABLE TO SHAREHOLDERS WHO
ELECT TO RECEIVE CASH PURSUANT TO THE CASH OPTION OR THE COMBINATION OPTION IS
$850 MILLION. THE MAXIMUM EXCHANGE RIGHT AMOUNT MEANS THAT EXCHANGE RIGHTS WILL
NOT BE GIVEN IN EXCHANGE FOR MORE THAN 82.5% OF THE OUTSTANDING SHARES
(CALCULATED ON A DILUTED BASIS).
The undersigned acknowledges receipt of the Enhanced Offer, and represents
and warrants that the undersigned has good and sufficient authority to deposit,
sell, assign and transfer the Shares represented by the enclosed certificate(s)
(the "Deposited Shares") and that when the Deposited Shares are accepted for
payment by the Offeror, the Offeror will acquire good title to the Deposited
Shares free and clear of all liens, restrictions, charges, encumbrances, claims
and equities or rights of others of any nature or kind, and will acquire all
rights and benefits arising therefrom, including the right to all dividends,
distributions, payments, securities, rights, warrants, assets or other interests
which may be declared, paid, issued, accrued, distributed, made or transferred
on or after the date hereof on or in respect of the Deposited Shares and in
accordance with the following:
IN CONSIDERATION OF THE ENHANCED OFFER AND FOR VALUE RECEIVED, the
undersigned irrevocably assigns to the Offeror all of the right, title and
interest of the undersigned in and to the Deposited Shares and in and to any and
all dividends, distributions, payments, securities, rights, warrants, assets or
other interests (collectively, "Distributions") which may be declared, paid,
accrued, issued, distributed, made or transferred on or in respect of the
Deposited Shares or any of them on or after December 16, 2002 (the date of the
Enhanced Offer), other than the dividend of $0.15 per Share that has been
declared payable on December 16, 2002 (the "December Distribution") to
Shareholders of record on November 20, 2002, as well as the right of the
undersigned to receive any and all such Distributions. If, notwithstanding such
assignment, any Distributions other than the December Distribution are received
by or made payable to or to the order of the undersigned, then: (a) in the case
of any Distribution that does not exceed the purchase price per Share payable by
the Offeror pursuant to the Enhanced Offer, the amount of the Distribution shall
be received and held by the undersigned for the account of the Offeror until the
Offeror pays for such Shares and the consideration payable per Share pursuant to
the Enhanced Offer will be reduced by the amount of any such Distribution; and
(b) in the case of any Distribution that exceeds the purchase price per Share
payable by the Offeror pursuant to the Enhanced Offer, or in the case of any
non-cash Distribution, the whole of any such Distribution will be received and
held by the undersigned for the account of the Offeror and shall be promptly
remitted and transferred by the undersigned to the Depositary or the
U.S. Forwarding Agent for the account of the Offeror, accompanied by appropriate
documentation of transfer. Pending such remittance, the Offeror will be entitled
to all rights and privileges as owner of any such Distribution and may withhold
the entire purchase price payable by the Offeror pursuant to the Enhanced Offer
or deduct from the purchase price payable by the Offeror pursuant to the
Enhanced Offer the amount or value thereof, as determined by the Offeror in its
sole discretion.
Shareholders whose share certificate(s) are not immediately available or who
cannot deliver their share certificate(s) and all other required documents to
the Depositary or the U.S. Forwarding Agent at or prior to the Expiry Time must
deposit those Shares in accordance with the guaranteed delivery procedures set
forth in Section 3 of the Enhanced Offer, "Manner of Acceptance -- Procedure for
Guaranteed Delivery".
4
The undersigned irrevocably constitutes and appoints the Depositary, the
U.S. Forwarding Agent and each senior officer of the Offeror, and any other
person designated by the Offeror in writing, the true and lawful agent, attorney
and attorney-in-fact of the undersigned with respect to the Deposited Shares
taken up and paid for under the Enhanced Offer by the Offeror and any
Distributions on such Deposited Shares, other than the December Distribution,
with full power of substitution (such power of attorney, being coupled with an
interest, being irrevocable), in the name of and on behalf of the undersigned,
to: (a) register or record the transfer or cancellation of such Deposited Shares
and Distributions, other than the December Distribution, consisting of
securities on the appropriate registers maintained by or on behalf of Fording;
(b) for as long as any of such Deposited Shares are registered or recorded in
the name of the undersigned (whether or not they are now so registered or
recorded), vote, execute and deliver (provided the same is not contrary to
applicable law), as and when requested by the Offeror, any instruments of proxy,
voting instruction forms, authorizations or consents in form and on terms
satisfactory to the Offeror in respect of any such Deposited Shares and
Distributions, other than the December Distribution, to revoke any such
instruments, forms, authorizations or consents given prior to, on or after the
date the Offeror takes up and pays for the Deposited Shares, and to designate in
any such instruments of proxy any person or persons as the proxyholder of the
undersigned in respect of such Deposited Shares and Distributions, other than
the December Distribution; (c) execute, endorse and negotiate any cheques or
other instruments representing any such Distribution, other than the December
Distribution, payable to or to the order of, or endorsed in favour of, the
undersigned; and (d) exercise any rights of the undersigned with respect to such
Deposited Shares and Distributions, other than the December Distribution.
NOTWITHSTANDING THE FOREGOING, IF THE UNDERSIGNED WAS A BENEFICIAL OR
REGISTERED SHAREHOLDER OF FORDING ON THE RECORD DATE (CURRENTLY NOVEMBER 19,
2002) SET BY FORDING FOR A SPECIAL MEETING OF THE SHAREHOLDERS AND OPTIONHOLDERS
OF FORDING WHICH WAS ORIGINALLY SCHEDULED TO BE HELD ON DECEMBER 20, 2002 AND
IS, ON THE DATE HEREOF, TO BE HELD ON JANUARY 3, 2003, AND ANY AND ALL
ADJOURNMENTS OR FURTHER POSTPONEMENTS THEREOF (THE "SPECIAL MEETING"), THEN THE
UNDERSIGNED WILL RETAIN, WITH RESPECT TO THE SPECIAL MEETING, TO THE EXTENT IT
HAD SUCH RIGHTS ON THE RECORD DATE FOR THE SPECIAL MEETING, THE RIGHT TO VOTE,
TO EXECUTE AND DELIVER (PROVIDED THE SAME IS NOT CONTRARY TO APPLICABLE LAW) ANY
INSTRUMENTS OF PROXY OR VOTING INSTRUCTION FORMS, AS APPLICABLE, IN RESPECT OF
THE DEPOSITED SHARES, TO REVOKE ANY SUCH INSTRUMENTS OF PROXY OR VOTING
INSTRUCTION FORMS, AS APPLICABLE, GIVEN PRIOR TO, ON OR AFTER THE DATE THE
OFFEROR TAKES UP AND PAYS FOR THE DEPOSITED SHARES, AND TO DESIGNATE IN ANY SUCH
INSTRUMENTS OF PROXY OR VOTING INSTRUCTION FORMS, ANY PERSON OR PERSONS, WHICH
PERSON OR PERSONS MAY INCLUDE, WITHOUT LIMITATION, THE OFFEROR AND/OR A
REPRESENTATIVE OF THE OFFEROR, AS THE PROXYHOLDER OF THE UNDERSIGNED IN RESPECT
OF SUCH DEPOSITED SHARES.
Except as provided above in respect of the Special Meeting, the undersigned
revokes any and all other authority, whether as agent, attorney-in-fact,
attorney, proxy or otherwise, previously conferred or agreed to be conferred by
the undersigned at any time with respect to the Deposited Shares or any
Distributions, other than the December Distribution. Except as provided above in
respect of the Special Meeting, no subsequent authority, whether as agent,
attorney-in-fact, attorney, proxy or otherwise, will be granted with respect to
the Deposited Shares or any Distributions, other than the December Distribution,
by or on behalf of the undersigned, unless the Deposited Shares are not taken up
and paid for under the Enhanced Offer.
Except as provided above in respect of the Special Meeting, the undersigned
agrees not to vote any of the Deposited Shares taken up and paid for under the
Enhanced Offer, or any securities distributed on such Deposited Shares, at any
meeting and not to exercise any of the other rights or privileges attaching to
any of such Deposited Shares or distributed securities, or otherwise act with
respect thereto. Except as provided above in respect of the Special Meeting, the
undersigned agrees further to execute and deliver to the Offeror, provided such
execution and delivery is not contrary to any applicable law, at any time and
from time to time, as and when requested by, and at the expense of, the Offeror,
any and all instruments of proxy, voting instruction forms, authorization or
consent, in form and on terms satisfactory to the Offeror, in respect of any
such Deposited Shares or Distributions consisting of securities.
Except as provided above in respect of the Special Meeting, the undersigned
agrees further to designate in any such instruments of proxy the person or
persons specified by the Offeror as the proxyholder of the undersigned in
respect of such Deposited Shares or Distributions consisting of securities.
5
The undersigned covenants and agrees to execute all such documents,
transfers and other assurances as may be necessary or desirable to convey the
Deposited Shares and Distributions, other than the December Distribution,
effectively to the Offeror.
Each authority conferred or agreed to be conferred by the undersigned in
this Letter of Transmittal and Election Form shall survive and may be exercised
during any subsequent death, legal incapacity, bankruptcy or insolvency of the
undersigned and all obligations of the undersigned in this Letter of Transmittal
and Election Form shall be binding upon the heirs, personal representatives,
successors and assigns of the undersigned. Except as stated in the Enhanced
Offer, the deposit of Shares pursuant to this Letter of Transmittal and Election
Form is irrevocable.
The undersigned instructs the Offeror, the Depositary and the
U.S. Forwarding Agent, upon the Offeror taking up the Deposited Shares, to
deliver in each case by first class mail, postage prepaid, or to hold for
pick-up, in accordance with the instructions given below: (a) for Deposited
Shares in respect of which cash is payable, a cheque or cheques, payable in
Canadian funds, representing the cash to which the undersigned is entitled as
payment for such Deposited Shares; and (b) for Deposited Shares in respect of
which Exchange Rights are payable, a certificate or certificates representing
the Exchange Rights to which the undersigned is entitled as payment for such
Deposited Shares. Should any Deposited Shares not be purchased, the deposited
certificates and other relevant documents shall be returned to the address
indicated below, and if no name, address or delivery instructions are indicated,
returned to the registered holder at the address of the registered holder as
shown on the register of the holders of Shares obtained from Fording. The
undersigned acknowledges that the Offeror has no obligation pursuant to the
instructions given below to transfer any Shares from the name of the registered
holder thereof if the Offeror does not purchase any of the Deposited Shares.
The undersigned agrees that all questions as to validity, form, illegibility
(including timely receipt) and acceptance of any Shares deposited pursuant to
the Enhanced Offer and of any notice of withdrawal will be determined by the
Offeror in its sole discretion and that such determination will be final and
binding and acknowledges that there is no duty or obligation of the Offeror, the
Depositary or the U.S. Forwarding Agent or any other person to give notice of
any defect or irregularity in any deposit or notice of withdrawal and no
liability will be incurred by any of them for failure to give any such notice.
6
NOTE: PLEASE CAREFULLY REVIEW THE INSTRUCTIONS AND RULES BEGINNING ON PAGE 10
BEFORE COMPLETING THE FOLLOWING INFORMATION.
---------------------------------------------
BOX A
(See Instructions 3 and 4)
ISSUE CHEQUE(S) AND/OR CERTIFICATE(S) FOR EXCHANGE RIGHTS IN THE NAME OF
(please print or type):
____________________________________________________________________________
(Name)
__________________________________________________________________________
(Street Address and Number)
__________________________________________________________________________
(City and Province or State)
__________________________________________________________________________
(Country and Postal (Zip) Code)
__________________________________________________________________________
(Telephone -- Business Hours)
__________________________________________________________________________
(Tax Identification, Social Insurance or Social Security Number)
-----------------------------------------------------------------
-----------------------------------------------------------------
BOX B
(See Instructions 3 and 4)
SEND CHEQUE(S) AND/OR CERTIFICATE(S) FOR EXCHANGE RIGHTS (UNLESS BOX C IS
CHECKED) TO (please print or type):
/ / Same address as Box A or to:
____________________________________________________________________________
(Name)
__________________________________________________________________________
(Street Address and Number)
__________________________________________________________________________
(City and Province or State)
__________________________________________________________________________
(Country and Postal (Zip) Code)
-----------------------------------------------------
---------------------------------------------------------
BOX C
/ / HOLD CHEQUE(S) AND/OR CERTIFICATE(S) FOR EXCHANGE RIGHTS FOR PICK UP
---------------------------------------------
---------------------------------------------
BOX D
/ / Check here if U.S. Residents/Citizens and complete Box G
---------------------------------------------
Signature guaranteed by
(if required under Instruction 4): Dated:
-------------------------------------------
---------------------------------------------------------- ----------------------------------------------------------
Authorized Signature Signature of Shareholder or Authorized
Representative -- see Instruction 5
---------------------------------------------------------- ----------------------------------------------------------
Name of Guarantor (please print or type) Name of Shareholder (please print or type)
---------------------------------------------------------- ----------------------------------------------------------
Address (please print or type) Name of Authorized Representative, if applicable
(please print or type)
7
--------------------------------------------------------------------------------
BOX E
(See Instruction 2)
/ / CHECK HERE IF SHARES ARE BEING DEPOSITED PURSUANT TO AN AMENDED NOTICE
OF GUARANTEED DELIVERY PREVIOUSLY SENT TO THE TORONTO OFFICE OF THE
DEPOSITARY AND COMPLETE THE FOLLOWING (Please print or type):
Name of Registered Shareholder: ____________________________________________
Date of Guaranteed Delivery: _______________________________________________
Name of Institution which Guaranteed Delivery: _____________________________
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
BOX F
(See Instruction 7)
FOR HOLDERS RESIDENT IN CANADA ONLY
INVESTMENT DEALER OR BROKER SOLICITING ACCEPTANCE OF THE ENHANCED OFFER
THE OWNER SIGNING ABOVE REPRESENTS THAT THE MEMBER OF THE SOLICITING DEALER
GROUP
WHO SOLICITED AND OBTAINED THIS DEPOSIT IS:
-------------------------------------------- --------------------------------------------
(Firm) (Telephone Number) (Fax Number)
--------------------------------------------- -----------------------------------------------
(Registered Representative) (Address)
/ / CHECK HERE IF LIST OF BENEFICIAL HOLDERS IS ATTACHED
--------------------------------------------------------------------------------
8
----------------------------------------------------------------------------------------------
BOX G
TO BE COMPLETED BY ALL UNITED STATES SHAREHOLDERS
----------------------------------------------------------------------------------------------
SUBSTITUTE Part I: -- Please provide the TIN:
FORM W-9 Taxpayer Identification Number Social Security Number
("TIN") of the person or Employer Identification
submitting this Letter of Number
Transmittal and Election Form
in the box.
--------------------------------------------------------------
DEPARTMENT OF THE TREASURY Part II: TIN applied for / /
INTERNAL REVENUE SERVICE
--------------------------------------------------------------
CERTIFICATION. Under penalties of perjury, I certify that:
(1) The number shown on this form is my correct Taxpayer
Identification Number (or I am waiting for a number to be
issued to me);
(2) I am not subject to backup withholding either because:
(a) I am exempt from backup withholding, or (b) I have not
been notified by the Internal Revenue Service (the "IRS")
that I am subject to backup withholding as a result of a
failure to report all interest or dividends, or (c) the
PAYER'S REQUEST FOR IRS has notified me that I am no longer subject to backup
TAXPAYER IDENTIFICATION
NUMBER ("TIN")
AND CERTIFICATION withholding; and
(3) Any other information provided on this form is true and
correct.
Signature Date
----------------------------------------------------------------------------------------------
You must cross out item (2) of the above certification if you have been notified by the IRS
that you are subject to backup withholding because of underreporting of interest or dividends
on your tax return and you have not been notified by the IRS that you are no longer subject to
backup withholding.
----------------------------------------------------------------------------------------------
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX
IN PART II OF SUBSTITUTE FORM W-9
--------------------------------------------------------------------------------
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a Taxpayer Identification Number
has not been issued to me, and either (a) I have mailed or delivered an
application to receive a Taxpayer Identification Number to the appropriate
Internal Revenue Service Center or Social Security Administration Office
or (b) I intend to mail or deliver an application in the near future. I
understand that if I do not provide a Taxpayer Identification Number by
the time of the exchange, 30% of all reportable payments made to me
thereafter will be withheld until I provide a number.
Signature Date
--------------------------------------------------------------------------------
9
INSTRUCTIONS AND RULES
1. USE OF LETTER OF TRANSMITTAL AND ELECTION FORM
(a) This Letter of Transmittal and Election Form, or a manually signed
facsimile thereof, in each case properly completed and duly executed in
accordance with the instructions set forth below, together with
accompanying certificate(s) representing the Deposited Shares and any
other documents required by this Letter of Transmittal and Election Form,
must be received by the Depositary or the U.S. Forwarding Agent at their
respective offices specified on the back cover page, at or prior to the
Expiry Time, being 8:00 p.m. (Toronto time) on January 6, 2003 (the
"Expiry Time"), unless the Enhanced Offer is withdrawn, extended or
varied or unless the procedure for guaranteed delivery set out in
Instruction 2 below is employed.
(b) The method used to deliver this Letter of Transmittal and Election Form
and any accompanying certificate(s) representing Deposited Shares and all
other required documents is at the option and risk of the holder and
delivery will be deemed effective only when such documents are actually
received by the Depositary or the U.S. Forwarding Agent at their
respective offices specified below. The Offeror recommends that the
necessary documentation be hand delivered to the Depositary or the
U.S. Forwarding Agent, at their respective offices specified below, and a
receipt obtained; otherwise the use of registered mail with return
receipt requested, properly insured, is recommended. Shareholders whose
Shares are registered in the name of a broker, investment dealer, bank,
trust company or other nominee should contact that broker, investment
dealer, bank, trust company or other nominee for assistance in depositing
those Shares.
2. PROCEDURE FOR GUARANTEED DELIVERY
If a Shareholder wishes to deposit Shares pursuant to the Enhanced Offer and
(i) the certificate(s) representing such Shares are not immediately available or
(ii) the certificate(s) and all other required documents cannot be provided to
the Depositary or the U.S. Forwarding Agent at or prior to the Expiry Time, the
Shares may nevertheless be validly deposited by the Shareholder under the
Enhanced Offer, provided that all of the following conditions are met:
(a) the deposit is made by or through an Eligible Institution (as defined
below);
(b) an Amended Notice of Guaranteed Delivery (printed on orange paper) in
the form accompanying the Enhanced Offer, or a manually executed
facsimile thereof, in each case properly completed and duly executed,
together with a guarantee by an Eligible Institution in the form set
forth in the Amended Notice of Guaranteed Delivery, is received by the
Depositary at or prior to the Expiry Time at its Toronto office as set
forth in the Amended Notice of Guaranteed Delivery; and
(c) the certificate(s) representing the Deposited Shares in proper form for
transfer, together with this Letter of Transmittal and Election Form
(printed on pink paper) or a manually executed facsimile thereof, in each
case properly completed and duly executed, and all other documents
required by this Letter of Transmittal and Election Form are received by
the Depositary at its Toronto office at or before 5:00 p.m. (Toronto
time) on the third trading day on the Toronto Stock Exchange after the
Expiry Time. Delivery to any office other than the office of the
Depositary in Toronto does not constitute delivery for purposes of
satisfying guaranteed delivery.
To be effective, the Notice of Guaranteed Delivery must be delivered by
hand, transmitted by facsimile transmission or delivered by mail to the
Depositary at its Toronto office specified in the Notice of Guaranteed Delivery
no later than the Expiry Time and must include a guarantee by an Eligible
Institution, in the form set forth in the Notice of Guaranteed Delivery.
An "Eligible Institution" means a Canadian Schedule I chartered bank, a
major trust company in Canada, a commercial bank or trust company in the United
States, a member of the Securities Transfer Association Medallion Program
(STAMP), a member of the Stock Exchange Medallion Program (SEMP) or a member of
the New York Stock Exchange Inc. Medallion Signature Program (MSP). Members of
these programs are
10
usually members of or participating organizations in a recognized stock exchange
in Canada and/or the United States, members of the Investment Dealers
Association of Canada, members of the National Association of Securities Dealers
or banks and trust companies in the United States.
3. SIGNATURES
(a) This Letter of Transmittal and Election Form must be filled in and
signed by the Shareholder accepting the Enhanced Offer described above or
by such Shareholder's duly authorized representative (in accordance with
Instruction 5).
(b) If this Letter of Transmittal and Election Form is signed by the
registered owner(s) of the accompanying certificate(s), such signature(s)
on this Letter of Transmittal and Election Form must correspond with the
name(s) as registered or as written on the face of such certificate(s)
without any change whatsoever, and the certificate(s) need not be
endorsed. If such transmitted certificate(s) are owned of record by two
or more joint owners, all such owners must sign this Letter of
Transmittal and Election Form.
(c) If this Letter of Transmittal and Election Form is signed by a person
other than the registered owner(s) of the accompanying certificate(s):
(i) such deposited certificate(s) must be endorsed or be accompanied by
an appropriate share transfer power of attorney duly and properly
completed by the registered owner(s); and
(ii) the signature(s) on such endorsement or share transfer power of
attorney must correspond exactly to the name(s) of the registered
owner(s) as registered or as appearing on the certificate(s) and
must be guaranteed as noted in Instruction 4 below.
4. GUARANTEE OF SIGNATURES
If this Letter of Transmittal and Election Form is executed by a person
other than the registered owner(s) of the Deposited Shares, if the cheque(s)
and/or certificate(s) to be issued to a person other than such registered
owner(s) (see Box A) or if Deposited Shares not purchased are to be returned to
a person other than such registered Shareholder or if the cheque(s),
certificate(s) or Deposited Shares are to be sent to an address other than the
address of the registered owner(s) (see Box B) as shown on the register of
Shareholders maintained by or on behalf of Fording, such signature must be
guaranteed by an Eligible Institution, or in some other manner satisfactory to
the Depositary (except that no guarantee is required if the signature is that of
an Eligible Institution).
5. FIDUCIARIES, REPRESENTATIVES AND AUTHORIZATIONS
Where this Letter of Transmittal and Election Form or any certificate or
share transfer power of attorney is executed by a person on behalf of or acting
as an executor, administrator, trustee or guardian or on behalf of a
corporation, partnership or association or is executed by any other person
acting in a representative capacity, such person should so indicate when signing
and this Letter of Transmittal and Election Form must be accompanied by evidence
satisfactory to the Offeror, in its sole discretion, of the authority to act.
Any of the Offeror, the Depositary or the U.S. Forwarding Agent, in their
discretion, may require additional evidence of authority or additional
documentation.
6. PARTIAL TENDERS
If less than the total number of Shares evidenced by any certificate
submitted is to be deposited under the Enhanced Offer, fill in the number of
Shares to be deposited in the appropriate box on this Letter of Transmittal and
Election Form. In such case, new certificate(s) for the number of Shares not
deposited will be sent to the registered holder, as soon as practicable
following the Expiry Time, unless otherwise provided in the appropriate box on
this Letter of Transmittal and Election Form. Unless otherwise indicated, the
total number of Shares evidenced by all certificates delivered will be deemed to
have been deposited. If certificates representing Shares
11
not taken up and paid for are to be returned other than in the name and address
of the registered owner(s) as shown on the share register of Fording, please
complete Box B.
7. SOLICITATION
Identify the investment dealer or broker, if any, who solicited acceptance
of the Enhanced Offer by completing Box F on this Letter of Transmittal and
Election Form and attach a list of beneficial holders, if applicable.
8. SUBSTITUTE FORM W-9
Each U.S. holder is required to provide the Depositary with a correct
Taxpayer Identification Number ("TIN") on the Substitute Form W-9 which is
provided in Box G, and to certify whether such holder is subject to backup
withholding of United States federal income tax. If a U.S. holder has been
notified by the Internal Revenue Service that such holder is subject to backup
withholding, such holder must cross out item 2 of the Substitute Form W-9,
unless such holder has since been notified by the Internal Revenue Service that
such holder is no longer subject to backup withholding. Failure to provide the
information in the Substitute Form W-9 may subject a U.S. holder to 30% United
States federal income tax withholding on the payment of the purchase price of
all Shares purchased from such holder. If a U.S. holder has not been issued a
TIN and has applied for one or intends to apply for one in the near future, such
holder should complete the Certificate of Awaiting Taxpayer Identification
Number, and sign and date the Substitute Form W-9. If the Certificate of
Awaiting Taxpayer Identification Number is completed and the Depositary or the
U.S. Forwarding Agent, as applicable, is not provided with a TIN, payment for
the purchase price of Shares from a holder who has not provided the information
in the Substitute Form W-9 will be withheld by the Depositary for 60 days. After
60 days the Depositary or the U.S. Forwarding Agent, as applicable, will make
such payment but will withhold 30% of all payments to such holder until a TIN is
provided to the Depositary or U.S. Forwarding Agent, as applicable.
9. COMMISSIONS AND STOCK TRANSFER TAXES
No brokerage fees or commissions will be payable if the Enhanced Offer is
accepted by depositing Shares directly with the Depositary or the
U.S. Forwarding Agent or if the services of a Dealer Manager are used to accept
the Enhanced Offer. The Offeror will pay any stock transfer taxes with respect
to the transfer and sale of Deposited Shares to the Offeror by the registered
owner pursuant to the Enhanced Offer. If, however, the certificate(s) for
Deposited Shares not deposited or purchased are to be registered in the name of
any person other than the registered holder, or if certificate(s) for Deposited
Shares are registered in the name of any person other than the person signing
this Letter of Transmittal and Election Form, the amount of any stock transfer
taxes (whether imposed on the registered holder or such other person) payable on
account of the transfer to such person will be payable by the seller which may
result in a deduction from the purchase price unless satisfactory evidence of
the payment of such taxes or an exemption therefrom is submitted.
10. MISCELLANEOUS
(a) If the space on this Letter of Transmittal and Election Form is
insufficient to list all certificates for Shares, additional certificate
numbers and numbers of Shares may be included on a separate signed list
affixed to this Letter of Transmittal and Election Form.
(b) If Shares are registered in different forms (e.g. "John Doe" and "J.
Doe") a separate Letter of Transmittal and Election Form should be signed
for each different registration.
(c) No alternative, conditional or contingent deposits will be acceptable.
All depositing Shareholders by execution of this Letter of Transmittal
and Election Form (or a manually executed facsimile hereof) waive any
right to receive any notice of the acceptance of Deposited Shares for
payment.
12
(d) The Enhanced Offer and any agreement resulting from the acceptance of
the Enhanced Offer will be construed in accordance with and governed by
the laws of the Province of Ontario and the laws of Canada applicable
therein.
(e) Additional copies of the Enhanced Offer, this Letter of Transmittal and
Election Form and the Amended Notice of Guaranteed Delivery may be
obtained from the Depositary, the U.S. Forwarding Agent or a Dealer
Manager at the addresses listed on the back page hereof.
(f) By reason of the use by the undersigned of an English language form of
Letter of Transmittal and Election Form, the undersigned and each of you
shall be deemed to have required that any contract evidenced by an offer
as accepted through this Letter of Transmittal and Election Form, as well
as all documents related thereto, be drawn exclusively in the English
language. En raison de l'usage d'une version anglaise de la presente
lettre d'envoi et formulaire de choix par le soussigne, ce dernier et les
destinataires sont reputes avoir demande que tout contrat atteste par
l'offre, telle qu'elle est acceptee au moyen de cette lettre d'envoi et
formulaire de choix, de meme que tous les documents qui s'y rapportent,
soient rediges exclusivement en anglais.
11. LOST CERTIFICATES
If a share certificate has been lost or destroyed, this Letter of
Transmittal and Election Form should be completed as fully as possible and
forwarded, together with a letter describing the loss, to the Depositary or the
U.S. Forwarding Agent, as applicable. The Depositary or the U.S. Forwarding
Agent, as applicable, will advise the holder of the steps to be taken with the
registrar and transfer agent for the Shares regarding the requirements for lost
or destroyed certificates. Please ensure that you provide your telephone number
to the Depositary or the U.S. Forwarding Agent so that they may contact you if
required.
13
DEPOSITARY:
CIBC MELLON TRUST COMPANY
BY MAIL
P.O. Box 1036
Adelaide Street Postal Station
Toronto, Ontario
M5C 2K4
BY HAND OR BY COURIER
199 Bay Street
Commerce Court West
Securities Level
Toronto, Ontario
M5L 1G9
BY FACSIMILE
(416) 643-3148
Telephone: (416) 643-5500
Toll Free: 1-800-387-0825
E-mail: inquiries@cibcmellon.com
HALIFAX MONTREAL
1660 Hollis Street 2001 University Street
Centennial Building, Suite 406 16th Floor
Halifax, Nova Scotia Montreal, Quebec
B3J 1V7 H3A 2A6
CALGARY VANCOUVER
600 The Dome Tower 1066 West Hastings Street
333-7th Ave. S.W., 6th Floor 16th Floor
Calgary, Alberta Vancouver, British Columbia
T2P 2Z1 V6E 3X1
U.S. FORWARDING AGENT:
MELLON INVESTOR SERVICES, LLC
BY HAND OR BY COURIER
120 Broadway Street
13th Floor
New York, New York
10271
DEALER MANAGERS
IN CANADA:
National Bank Financial Inc. BMO Nesbitt Burns Inc.
Telephone: (416) 869-3707 Telephone: (416) 359-8137
ANY QUESTIONS AND REQUESTS FOR ASSISTANCE MAY BE DIRECTED TO THE DEPOSITARY, THE
U.S. FORWARDING AGENT OR THE DEALER MANAGERS AT THEIR RESPECTIVE TELEPHONE
NUMBERS AND LOCATIONS SET OUT ABOVE.
Document 4: Notice of Guaranteed Delivery
THIS IS NOT A LETTER OF TRANSMITTAL
AMENDED
NOTICE OF GUARANTEED DELIVERY
FOR
DEPOSIT OF COMMON SHARES
OF
FORDING INC.
THE ENHANCED OFFER WILL BE OPEN FOR ACCEPTANCE UNTIL 8:00 P.M. (TORONTO
TIME)
ON JANUARY 6, 2003, UNLESS WITHDRAWN, EXTENDED OR VARIED.
This Amended Notice of Guaranteed Delivery must be used by holders of common
shares (the "Shares") of Fording Inc. ("Fording") who wish to deposit their
Shares under the offer dated October 25, 2002, as varied and restated by a
notice of variation and the accompanying amended and restated offer (the
"Offer") and take-over bid circular dated December 16, 2002 (collectively, the
"Enhanced Offer") made by Sherritt Coal Acquisition Inc. (the "Offeror") to
purchase Shares of Fording, IF certificate(s) for Shares are not immediately
available or time will not permit all required documents to reach the Depositary
at or prior to the Expiry Time of the Enhanced Offer (which is 8:00 p.m.
(Toronto time) on January 6, 2003). The terms and conditions of the Enhanced
Offer are incorporated by reference in this Amended Notice of Guaranteed
Delivery. Capitalized terms used and not defined in this Amended Notice of
Guaranteed Delivery which are defined in the Enhanced Offer shall have their
respective meanings set out in the Enhanced Offer.
THIS AMENDED NOTICE OF GUARANTEED DELIVERY MAY BE DELIVERED BY HAND, MAILED
OR TRANSMITTED BY FACSIMILE TO THE OFFICE OF THE DEPOSITARY SET FORTH BELOW.
DELIVERY OF THIS AMENDED NOTICE OF GUARANTEED DELIVERY TO AN ADDRESS, OR
TRANSMISSION OF THIS AMENDED NOTICE OF GUARANTEED DELIVERY VIA A FACSIMILE
NUMBER, OTHER THAN AS SET FORTH BELOW WILL NOT CONSTITUTE A VALID DELIVERY.
TO: CIBC MELLON TRUST COMPANY, AS DEPOSITARY
BY MAIL BY HAND OR BY COURIER
P.O. Box 1036 199 Bay Street
Adelaide Street Postal Station Commerce Court West
Toronto, Ontario Securities Level
M5C 2K4 Toronto, Ontario
M5L 1G9
BY FACSIMILE
(416) 643-3148
FOR MORE INFORMATION, CALL:
Telephone: 416-643-5500
Toll Free: 1-800-387-0825
INQUIRIES BY E-MAIL:
inquiries@cibcmellon.com
THIS AMENDED NOTICE OF GUARANTEED DELIVERY IS NOT TO BE USED TO GUARANTEE
SIGNATURES. If a signature on the Amended Letter of Transmittal and Election
Form is required to be guaranteed by an Eligible Institution, such signature
must appear in the applicable space in the Amended Letter of Transmittal and
Election Form.
Deposits of Shares will not be accepted from or on behalf of Shareholders in
any jurisdiction outside of Canada and the United States in which the acceptance
of the Enhanced Offer would not be in compliance with the laws of such
jurisdiction. The undersigned hereby declares that it is not acting for the
account or benefit of a person from such jurisdiction and is not in, or
delivering this Amended Notice of Guaranteed Delivery from, such jurisdiction.
DO NOT SEND CERTIFICATE(S) FOR SHARES WITH THIS AMENDED NOTICE OF GUARANTEED
DELIVERY. CERTIFICATE(S) FOR SHARES SHOULD BE SENT WITH YOUR AMENDED LETTER OF
TRANSMITTAL AND ELECTION FORM.
The undersigned hereby deposits with the Offeror, upon the terms and subject
to the conditions set forth in the Enhanced Offer and the Amended Letter of
Transmittal and Election Form, receipt of which are hereby acknowledged, the
Shares listed below, pursuant to the guaranteed delivery procedure set forth in
Section 3 of the Enhanced Offer, "Manner of Acceptance -- Procedure for
Guaranteed Delivery" and Instruction 2 of the Amended Letter of Transmittal and
Election Form.
Number of
Share Certificate Shares
Name(s) and Address(es) of Shareholder(s) Number Represented by Number of
(please print) (if available) Certificate Shares Deposited
-------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------
TOTAL
----------------
(IF SPACE IS INSUFFICIENT ATTACH A LIST IN THE ABOVE FORM.)
2
ELECTION ALTERNATIVES FOR SHAREHOLDERS
YOU MAY ELECT TO ALLOCATE YOUR SHARES AS FOLLOWS: (1) ALL YOUR SHARES TO THE
CASH OPTION OR (2) ALL YOUR SHARES TO THE EXCHANGE RIGHT OPTION OR (3) SOME OF
YOUR SHARES TO THE CASH OPTION AND THE REMAINDER OF YOUR SHARES TO THE EXCHANGE
RIGHT OPTION PURSUANT TO THE COMBINATION OPTION. SHAREHOLDERS WISHING TO ENSURE
THAT THEY WILL RECEIVE BOTH CASH AND EXCHANGE RIGHTS MUST ALLOCATE THEIR SHARES
TO THE COMBINATION OPTION. EACH OF THESE OPTIONS IS SUBJECT TO PRORATION.
Under the Enhanced Offer, the undersigned hereby elects to receive the
following consideration for the deposited Shares represented by the above share
certificate(s):
ONLY ONE OF THE FOLLOWING OPTIONS MAY BE SELECTED. Please place an "X" in one of
the boxes below and fill in the blanks as required.
----------------------------------------------------------------------------------
THE CASH OPTION
/ / The undersigned hereby deposits all of its Shares identified
in the box on page 2 in exchange for cash in the amount of
$35.00 for each Share deposited by the undersigned in
accordance with this Amended Notice of Guaranteed Delivery.
The undersigned acknowledges that there is an aggregate
maximum amount of cash available to Shareholders under the
Enhanced Offer. The undersigned further acknowledges that if
there is insufficient cash available to satisfy this
election, the undersigned will receive the remainder of its
consideration in the form of the Exchange Right Option.
----------------------------------------------------------------------------------
OR
----------------------------------------------------------------------------------
THE EXCHANGE RIGHT OPTION
/ / The undersigned hereby deposits all of its Shares identified
in the box on page 2 in exchange for one Exchange Right for
each Share deposited by the undersigned in accordance with
this Amended Notice of Guaranteed Delivery.
The undersigned acknowledges that Exchange Rights will not
be given in exchange for more than the Maximum Exchange
Right Amount. The undersigned further acknowledges that if
there are insufficient Exchange Rights available to satisfy
this election, the undersigned will receive the remainder of
its consideration in the form of the Cash Option.
----------------------------------------------------------------------------------
OR
----------------------------------------------------------------------------------
THE COMBINATION OPTION
/ / The undersigned hereby deposits * (FILL IN NUMBER) Shares
out of the total number of Shares identified in the box on
page 2 in exchange for $35.00 per Share (the Cash Option).
The undersigned hereby deposits * (FILL IN NUMBER) Shares
out of the total number of Shares identified in the box on
page 2 in exchange for one Exchange Right per Share
(the Exchange Right Option).
The undersigned acknowledges that these elections are
subject to proration as described in the boxes for the Cash
Option and the Exchange Right Option above.
* Please ensure that the total number of Shares filled in matches the total number
of Shares identified in the box on page 2.
----------------------------------------------------------------------------------
IF THE NUMBER OF SHARES IN RESPECT OF WHICH ELECTIONS ARE MADE IN THE
COMBINATION OPTION EXCEEDS THE NUMBER OF SHARES IDENTIFIED ON PAGE 2 AS BEING
DEPOSITED, THEN THE ELECTIONS WILL BE SATISFIED IN THE ORDER OF THE EXCHANGE
RIGHT OPTION AND THEN THE CASH OPTION, TO THE AGGREGATE MAXIMUM OF SHARES
PROPERLY IDENTIFIED AS BEING DEPOSITED ON PAGE 2.
3
IF ONE OF THE FOREGOING ELECTIONS IS NOT MADE, OR IS NOT OTHERWISE PROPERLY
MADE, THE UNDERSIGNED WILL BE DEEMED TO HAVE ELECTED TO HAVE DEPOSITED ALL
SHARES PROPERLY IDENTIFIED AS BEING DEPOSITED ON PAGE 2 IN EXCHANGE FOR THE
EXCHANGE RIGHT OPTION.
NO FRACTIONAL EXCHANGE RIGHTS WILL BE DELIVERED IN EXCHANGE FOR SHARES
PURSUANT TO THE ENHANCED OFFER. RATHER, EACH SHAREHOLDER ENTITLED TO A
FRACTIONAL EXCHANGE RIGHT WILL RECEIVE A CASH PAYMENT DETERMINED ON THE BASIS OF
$35.00 FOR EACH WHOLE EXCHANGE RIGHT.
THE UNDERSIGNED ACKNOWLEDGES THAT THE CONSIDERATION PAYABLE UNDER THE
ENHANCED OFFER AND ACCORDINGLY, THE ELECTION(S) MADE BY THE UNDERSIGNED, ARE
SUBJECT TO THE PROVISIONS SET FORTH IN SECTION 1 OF THE ENHANCED OFFER WITH
RESPECT TO THE MAXIMUM CASH AMOUNT AND THE MAXIMUM EXCHANGE RIGHT AMOUNT PAYABLE
UNDER THE ENHANCED OFFER. THE MAXIMUM CASH AMOUNT AVAILABLE TO SHAREHOLDERS WHO
ELECT TO RECEIVE CASH PURSUANT TO THE CASH OPTION OR THE COMBINATION OPTION IS
$850 MILLION. THE MAXIMUM EXCHANGE RIGHT AMOUNT MEANS THAT EXCHANGE RIGHTS WILL
NOT BE GIVEN IN EXCHANGE FOR MORE THAN 82.5% OF THE OUTSTANDING SHARES
(CALCULATED ON A DILUTED BASIS).
ANY ELECTION OR DEEMED ELECTION AS TO THE CONSIDERATION TO BE RECEIVED BY A
SHAREHOLDER OF FORDING MADE IN THIS AMENDED NOTICE OF GUARANTEED DELIVERY WILL
SUPERSEDE ANY ELECTION MADE BY THAT SHAREHOLDER IN ANY LETTER OF TRANSMITTAL
WITH RESPECT TO SUCH SHAREHOLDER'S FORDING SHARES.
( )
--------------------------------------------- ---------------------------------------------
Telephone Number during business hours Signature(s) of Shareholder
Date: _______________________________________ _____________________________________________
Please print name of Shareholder
GUARANTEE
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
The undersigned, a Canadian Schedule I chartered bank, a major trust company
in Canada, a member of the Securities Transfer Association Medallion Program
(STAMP), a member of the Stock Exchange Medallion Program (SEMP) or a member of
the New York Stock Exchange Inc. Medallion Signature Program (MSP), guarantees
delivery to the Toronto office of the Depositary set forth herein of
certificate(s) representing Shares tendered hereby, in proper form for transfer,
with delivery of a properly completed and duly executed Amended Letter of
Transmittal and Election Form in the form enclosed herewith or a manually
executed facsimile thereof, and all other documents required by the Amended
Letter of Transmittal and Election Form, all at or prior to 5:00 p.m. (Toronto
time) on the third trading day on the Toronto Stock Exchange after the Expiry
Time (the Expiry Time is 8:00 p.m. (Toronto time) on January 6, 2003, unless the
Enhanced Offer is withdrawn, extended or varied).
Dated: _______________________________________ _____________________________________________
Firm
----------------------------------------------
Authorized Signatory (please sign)
----------------------------------------------
Name and Title (please print)
----------------------------------------------
Address
----------------------------------------------
Area Code and Telephone Number
DO NOT SEND SHARE CERTIFICATES WITH THIS FORM.
SHARE CERTIFICATES SHOULD BE SENT WITH YOUR
AMENDED LETTER OF TRANSMITTAL AND ELECTION FORM.
4
PART II
INFORMATION NOT REQUIRED TO BE SENT TO SHAREHOLDERS
(1) Exhibit 1: Sherritt Coal Proxy Circular, dated December 13,
2002, Solicitation Of Proxies By And On Behalf Of
Sherritt Coal Partnership II, 1546261 Ontario
Limited, 1448972 Ontario Limited, Sherritt
International Corporation, Ontario Teachers' Pension
Plan Board and Sherritt Coal Acquisition Inc.
Exhibit 2: Form of Shareholder Proxy
Exhibit 3: Form of Optionholder Proxy
Exhibit 4: Declaration of Trust of Canadian Coal Trust
(2) Exhibit 5: Sherritt International Corporation Annual Information
Form dated March 15, 2002
Exhibit 6: Sherritt International Corporation management
information circular dated April 15, 2002 in
connection with the May 30, 2002 Annual and Special
Meeting of Shareholders, other than the sections
entitled "Composition of the Compensation Committee
in 2001", "Report on Executive Compensation",
"Performance Graph" and "Corporate Governance."
(3) Not applicable.
PART III
UNDERTAKINGS AND CONSENT TO SERVICE OF PROCESS
1. UNDERTAKINGS
a. Sherritt Coal Acquisition Inc. undertakes to make available, in person or
by telephone, representatives to respond to inquiries made by the Commission
staff, and to furnish promptly, when requested to do so by the Commission staff,
information relating to this Schedule or to transactions in said securities.
b. Sherritt Coal Acquisition Inc. undertakes to disclose in the United
States, on the same basis as it is required to make such disclosure pursuant to
applicable Canadian federal and/or provincial or territorial laws, regulations
or policies, or otherwise discloses, information regarding purchases of the
issuer's securities in connection with the cash tender or exchange offer covered
by this Schedule. Such information shall be set forth in amendments to this
Schedule.
2. CONSENT TO SERVICE OF PROCESS
(a) On October 28, 2002, Sherritt Coal Acquisition Inc. filed with the
Commission a written irrevocable consent and power of attorney on Form F-X.
(b) Any change to the name or address of a registrant's agent for service
shall be communicated promptly to the Commission by amendment to Form F-X
referencing the file number of the registrant.
PART IV
SIGNATURES
By signing this Schedule, Sherritt Coal Acquisition Inc. consents without
power of revocation that any administrative subpoena may be served, or any
administrative proceeding, civil suit or civil action where the cause of action
arises out of or relates to or concerns any offering made or purported to be
made in connection with the filing on Schedule 14D-1F or any purchases or sales
of any security in connection therewith, may be commenced against it in any
administrative tribunal or in any appropriate court in any place subject to the
jurisdiction of any state or of the United States by service of said subpoena or
process upon the registrant's designated agent.
After due inquiry and to the best of my knowledge and belief, I certify that
the information set forth in this statement is true, complete and correct.
SHERRITT COAL ACQUISITION INC.
By: /s/ SAMUEL W. INGRAM, Q.C.
------------------------------------
Name: Samuel W. Ingram, Q.C.
Title: Senior Vice President
Dated: December 16, 2002