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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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SCHEDULE 14D-1F/A
TENDER OFFER STATEMENT
PURSUANT TO RULE 14d-1(b) UNDER THE SECURITIES EXCHANGE ACT OF 1934
AMENDMENT NO. 2
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,
CHICAGO, IL 60622 SUITE 3000
(312) 701-7032 BOX 270, TD CENTRE
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
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TRANSACTION VALUATION AMOUNT OF FILING FEE
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US$1,062,468,215 (1) US$97,748 (2)(3)
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(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) The entire amount of this fee has been paid pursuant to a filings dated
October 28, 2002 and December 18, 2002.
/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 and Schedule 14D-1F/A filed on December 18, 2002.
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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*
Document 5: Notice of Variation and Extension to Offer to Purchase and
Circular, dated January 6, 2003
ITEM 2. INFORMATIONAL LEGENDS
See "Notice to Shareholders in the United States" in the Offer to Purchase.
------------------------
* Previously filed
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 UNDER THE AMENDED ENHANCED OFFER AND IT IS AN
OFFENCE TO CLAIM OTHERWISE.
NOTICE OF VARIATION AND EXTENSION
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, as amended)
OR
ONE EXCHANGE RIGHT EXCHANGEABLE INTO A TRUST UNIT
(subject to proration, as amended)
OR
A COMBINATION OF CASH AND EXCHANGE RIGHTS
(subject to proration, as amended)
By notice delivered to CIBC Mellon Trust Company (the "Depositary") on
January 6, 2003, Sherritt Coal Acquisition Inc. (the "Offeror") has varied and
extended its offer dated October 25, 2002 (the "Original Offer"), as varied and
restated by a notice of variation dated December 16, 2002 (the "First Notice",
and the Original Offer as varied and restated by the First Notice, the "Enhanced
Offer"). The Enhanced Offer, as further varied and extended in the manner
described in this notice of variation and extension (the "Second Notice"), is
referred to herein as the "Amended Enhanced Offer". The take-over bid circular
which accompanied the Enhanced Offer is referred to herein as the "Circular".
THE ENHANCED OFFER HAS BEEN VARIED BY:
- INCREASING THE AGGREGATE MAXIMUM AMOUNT OF CASH AVAILABLE TO SHAREHOLDERS FROM
$850 MILLION TO $965 MILLION;
- DECREASING THE AGGREGATE MAXIMUM AMOUNT OF EXCHANGE RIGHTS AVAILABLE TO
SHAREHOLDERS FROM APPROXIMATELY 42,405,000 EXCHANGE RIGHTS TO APPROXIMATELY
38,625,000 EXCHANGE RIGHTS;
- INCREASING THE AMOUNT OF THE SUBORDINATION BY THE PARTNERSHIP IN 2003 TO $1.14
PER UNIT PER QUARTER FROM $1.05 PER UNIT PER QUARTER AND EXTENDING THE
SUBORDINATION PERIOD TO THE END OF 2004 AT A NEW SUBORDINATION AMOUNT TARGETED
AT $1.30 PER UNIT PER QUARTER IN 2004, SUBJECT TO ADJUSTMENT AND A MAXIMUM
SUBORDINATION AMOUNT;
- PROVIDING ADDITIONAL INFORMATION AND GIVING NOTICE OF CERTAIN CHANGES TO THE
ENHANCED OFFER; AND
- EXTENDING THE TIME FOR ACCEPTANCE OF THE ENHANCED OFFER UNTIL 8:00 P.M.
(TORONTO TIME) ON JANUARY 23, 2003, UNLESS WITHDRAWN OR FURTHER EXTENDED.
EXCEPT AS OTHERWISE SET FORTH IN THIS SECOND NOTICE, THE TERMS AND
CONDITIONS CONTAINED IN THE ENHANCED OFFER, INCLUDING THE PURCHASE PRICE OF THE
FORDING SHARES, CONTINUE TO BE APPLICABLE IN ALL RESPECTS AND THIS SECOND NOTICE
SHOULD BE READ IN CONJUNCTION WITH THE ENHANCED OFFER.
IF THE FORDING-TECK COMBINATION IS APPROVED BY FORDING SHAREHOLDERS, THE
AMENDED ENHANCED OFFER WILL BE TERMINATED.
As at the date of the Amended Enhanced Offer, Ontario Teachers' Pension Plan
Board ("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
Amended 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.
SHAREHOLDERS WHO WISH TO ACCEPT THE AMENDED ENHANCED OFFER: (I) SHOULD VOTE
AGAINST THE FORDING-TECK COMBINATION, AND (II) MUST COMPLETE AND EXECUTE THE
LETTER OF TRANSMITTAL AND ELECTION FORM (PRINTED ON PINK PAPER) THAT ACCOMPANIES
THIS AMENDED ENHANCED OFFER, 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
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
Amended 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 -- Procedure for
Guaranteed Delivery", using the Notice of Guaranteed Delivery (printed on orange
paper) that accompanies this Amended Enhanced Offer.
Questions and requests for assistance may be directed to National Bank
Financial Inc. or BMO Nesbitt Burns Inc. (the "Dealer Managers"), the
Depositary, the U.S. Forwarding Agent or Innisfree M&A Incorporated (the
"Information Agent") and additional copies of this Second Notice, the Enhanced
Offer, the Circular, 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 Second Notice. 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 Amended Enhanced Offer.
THE AMENDED ENHANCED OFFER 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 AMENDED 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 AMENDED 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 THE AMENDED ENHANCED OFFER TO BE MADE BY A
LICENSED BROKER OR DEALER, THE AMENDED 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 THIS SECOND NOTICE ARE IN CANADIAN DOLLARS, UNLESS
OTHERWISE INDICATED. ON JANUARY 3, 2003, THE INVERSE OF THE NOON BUYING RATE OF
EXCHANGE, AS REPORTED BY THE BANK OF CANADA, WAS CDN.$1.00 = U.S.$0.6384.
FOR A DISCUSSION OF THE RISK FACTORS YOU SHOULD CONSIDER IN EVALUATING THE
EXCHANGE RIGHTS OFFERED UNDER THE AMENDED ENHANCED OFFER AND, ULTIMATELY, THE
UNITS, SEE "RISK FACTORS" IN EACH OF APPENDIX A AND APPENDIX B TO THE
ENHANCED OFFER.
THE CANADIAN DEALER MANAGERS FOR THE AMENDED ENHANCED OFFER ARE:
National Bank Financial Inc. BMO Nesbitt
Burns Inc.
THE INFORMATION AGENT FOR THE AMENDED ENHANCED OFFER IS:
Innisfree M&A Incorporated
January 6, 2003
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 entities.
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 International Corporation ("Sherritt"), the issuer of the Exchange
Rights, 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
Amended Enhanced Offer and registration statement relating to the Enhanced Offer
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 AMENDED 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 Amended 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 CANADIAN COAL TRUST, TO MAKE
CASH PAYMENT TO THE DEPOSITARY ON BEHALF OF SUCH PERSONS.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Second Notice and its appendices 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 this Second Notice reflect the current beliefs
of the Offeror and 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 in the Enhanced Offer and Circular. Although the
forward-looking statements contained in this Second Notice are based on what the
Offeror 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. The Offeror has no 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.
COMPARISON OF AMENDED ENHANCED OFFER TO
FORDING-TECK COMBINATION PROPOSAL
THE FOLLOWING IS A SUMMARY ONLY AND IS QUALIFIED IN ITS ENTIRETY BY THE
DETAILED PROVISIONS CONTAINED IN THE AMENDED ENHANCED OFFER AND THE APPENDICES.
SHAREHOLDERS SHOULD READ THE AMENDED ENHANCED OFFER AND THE APPENDICES IN THEIR
ENTIRETY. INFORMATION CONCERNING FORDING, TECK AND WESTSHORE (INCLUDING
FORWARD-LOOKING STATEMENTS) CONTAINED IN THE AMENDED ENHANCED OFFER 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.
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REASONS SCAI'S PROPOSAL
SCAI'S PROPOSAL FORDING-TECK COMBINATION PROPOSAL
IS SUPERIOR
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MORE CASH + $35.00 per Share x $34.00 per Share
+ Maximum cash proration: $20.00 cash x Maximum cash proration: $15.60 cash
plus 0.429 of an Exchange Right (OTPP plus 0.541 of a trust unit (OTPP will
will elect Units) elect cash, not trust units)
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MORE DISTRIBUTIONS PER UNIT + Estimated $3.42 in 2001 and $2.88 for x Pro forma $2.75 in 2001 and $2.30 for
the nine months ending September 30, the nine months ending September 30,
2002 2002
+ $1.14 in the first quarter of 2003 x $1.05 in the first quarter of 2003
+ Greater growth potential in
distributable cash flow per Unit given
more cost savings opportunities,
improved production at the Line Creek
mine and the development of the Cheviot
mine project
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TWO-YEAR SUBORDINATION + Subordination level raised to $1.14 per x None
Unit per quarter in 2003
+ Subordination level of $1.30 per Unit
per quarter in 2004, subject to upward
and downward adjustment based on
relative coal pricing in 2004 vs. 2003
+ Subordination of distributions for the
first two years up to $11.25 million in
each quarter for an aggregate maximum
of $90 million over two years
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LESS DEBT + Approximately $300 million of debt, x Approximately $425 million of debt,
excluding working capital excluding working capital
+ Approximately 1.1x pro forma x Approximately 2.0x pro forma
annualized EBITDA, no hedging liability annualized EBITDA
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REASONS SCAI'S PROPOSAL
SCAI'S PROPOSAL FORDING-TECK COMBINATION PROPOSAL
IS SUPERIOR
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NO HEDGE EXPOSURE + Hedge eliminated x Estimated mark-to-market hedge
liability of approximately $95 million
as of January 3, 2003 based on the
forward exchange rate curve
x Significant potential volatility in
distributable cash flow per trust unit
due to remaining hedge risk
x Based on exchange rates as of
January 3, 2003, the impact on 2003
distributable cash flow per trust unit
would be approximately $0.25 per
Fording trust unit
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MORE COST SAVINGS AND + $50 million of cost synergies x $50 million of combined cost AND
SYNERGIES alone marketing synergies
+ Additional marketing and coal blending
synergies
+ Enhanced synergies driven by:
- Geographic proximity of mines
- $2.50/tonne estimated savings at
Neptune Terminals
- Expected mineral tax savings
+ Subordination demonstrates the x No subordination to back up synergy
Partnership's confidence in achieving claims
synergies
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LOWER CORPORATE OVERHEAD COSTS + Annual corporate overhead is capped at x No commitment to reduce or maintain
2002 levels, adjusted to exclude base corporate overhead costs
unusual and one-time expenses
+ Management's incentive based on ability x Lucrative management option plan driven
to cut costs; adds no additional costs primarily by coal prices
to the Trust
+ Additional public issuer costs to x Additional public issuer costs to
manage the Trust estimated to be manage the trust estimated to be
$2 million $2 million
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SUPERIOR GOVERNANCE + All of the Trustees will be independent x A majority of the trustees and board
of the Partnership, Sherritt and OTPP members are appointed by Teck and
Westshore
+ A majority of the operating company
board will be independent of the
Partnership, Sherritt and OTPP
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NO DILUTION + None x Teck is able to convert its 38%
partnership stake into trust units on a
basis which could result in a material
dilution to distributable cash flow per
trust unit depending on the market
price of trust units at the time of
conversion and net liability levels in
the trust (including mark-to-market
hedge liabilities)
x Trust units may trade at a discount
given potential dilution risk
x Potential additional 9% dilution from
lucrative management option plan
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REASONS SCAI'S PROPOSAL
SCAI'S PROPOSAL FORDING-TECK COMBINATION PROPOSAL
IS SUPERIOR
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RELATIVE VALUATION OF ASSETS + The Line Creek mine, the Cheviot mine x Elkview mine contributed at an
project and a 46% interest in Neptune estimated $750 million implied
Terminals (the Met Coal Assets) valuation (approximately $125 per tonne
contributed at a $207 million implied produced)
valuation (approximately $58 per tonne
produced at the Line Creek mine)
+ Number of Units issued to Luscar and x Number of trust units issued to Teck
CONSOL fixed at 5.9 million for the for the Elkview mine is undetermined;
Met Coal Assets (plus 0.5 million if would result in 51% ownership of the
the Luscan Put is exercised) trust at $34 per trust unit valuation
+ Met Coal Assets have greater upside x No meaningful upside potential at the
potential: Elkview mine since the asset is
- The Line Creek mine is poised for relatively mature
significant reduction in operating
costs
- Upside from development of the
Cheviot mine project, which is
already permitted for 3.2 million
tonnes
- The Cheviot mine project cost
structure is expected to be in line
with the existing Luscar mine
+ Fair value being paid for Prairie x Mature Prairie assets with limited
assets at approximately 5.0 - 5.5x upside potential and significant
EBITDA: capital requirements associated with
- No cash flow growth over last three the Highvale and Genesee contracts
years (approximately $50 million)
- Low margin, low return Highvale and
Genesee contracts
- Substantial capital requirement for
the Highvale and Genesee contracts
(approximately $50 million)
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MORE FLEXIBLE AND LESS COSTLY + Access to two west coast coal ports x Port alternatives restricted by 10-year
ACCESS TO TERMINAL FACILITIES exclusive contract with Westshore
+ Terminal services at Neptune Terminals x Non-arms length contract with
provided for at cost resulting in undisclosed pricing
estimated savings of at least
$2.50/tonne (including rail switching
costs)
x Reliance on one west coast port
facility increases risk of disruption
if unforeseen events impact throughput
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NOTICE OF VARIATION AND EXTENSION
January 6, 2003
TO: THE HOLDERS OF SHARES OF FORDING INC.
By notice to CIBC Mellon Trust Company (the "Depositary"), Sherritt Coal
Acquisition Inc. (the "Offeror" or "SCAI") has varied and extended its offer
dated October 25, 2002 (the "Original Offer"), as varied and restated by a
notice of variation dated December 16, 2002 (the "First Notice", and the
Original Offer as varied and restated by the First Notice, the "Enhanced
Offer"). The Enhanced Offer, as further varied and extended in the manner
described in this notice of variation and extension (the "Second Notice"), is
referred to herein as the "Amended Enhanced Offer". The take-over bid circular
which accompanied the Enhanced Offer is referred to herein as the "Circular".
Except as otherwise set forth in this Second Notice, the terms and
conditions contained in the Enhanced Offer continue to be applicable in all
respects and this Second Notice should be read in conjunction with the Enhanced
Offer. Unless the context otherwise requires, capitalized terms used but not
defined in this Second Notice have the respective meanings set forth in the
Enhanced Offer and Circular.
1. COMPARISON OF AMENDED ENHANCED OFFER TO FORDING-TECK COMBINATION PROPOSAL
The chart above under the heading "Comparison of Amended Enhanced Offer to
Fording-Teck Combination Proposal" which compares the key aspects of the Amended
Enhanced Offer with those of the Fording-Teck Combination replaces a similar
chart in the summary of the Enhanced Offer.
2. INCREASE IN THE MAXIMUM CASH AMOUNT AND DECREASE IN THE MAXIMUM EXCHANGE
RIGHT AMOUNT
Pursuant to the Amended Enhanced Offer, the Offeror is offering to purchase,
on and subject to the terms and conditions set forth in the Amended Enhanced
Offer, the Letter of Transmittal and Election Form (as defined below) and the
Notice of Guaranteed Delivery (as defined below), all of the outstanding common
shares (the "Shares") of Fording Inc. ("Fording"), including Shares that may
become outstanding on the exercise of options, in exchange for each Share
deposited under the Amended Enhanced Offer, at the election of the Shareholder
tendering to the Amended Enhanced Offer:
- $35.00 cash per Share to a maximum of $965 million (subject to proration
as described in the Enhanced Offer) (the "Cash Option"), or
- one Exchange Right to a maximum of approximately 38,625,000 Exchange
Rights (subject to proration as described in the Enhanced Offer) (the
"Exchange Right Option"), or
- a combination of cash and Exchange Rights (subject to proration as
described in the Enhanced Offer) (the "Combination Option").
The Offeror has varied the Enhanced Offer by increasing the maximum amount
of cash available to Fording Shareholders electing the Cash Option or
Combination Option from $850 million under the Enhanced Offer to $965 million
under the Amended Enhanced Offer and by decreasing the aggregate maximum number
of Exchange Rights available to Fording Shareholders electing the Exchange Right
Option or Combination Option from approximately 42,405,000 Exchange Rights under
the Enhanced Offer to approximately 38,625,000 Exchange Rights under the Amended
Enhanced Offer. If either of these limits is exceeded in the elections made by
Shareholders tendering their Shares under the Amended Enhanced Offer, the amount
of cash paid and the number of Exchange Rights issued and distributed to Fording
Shareholders will be adjusted on a pro rata basis.
Pursuant to the Amended Enhanced Offer, if all Shareholders (other than
OTPP, which has indicated that it will elect to receive Exchange Rights for the
3,150,260 Shares it holds) elect to receive cash, then such Shareholders will
receive approximately $20.00 in cash and 0.429 of an Exchange Right per Share
under the Amended Enhanced Offer, rather than approximately $17.63 in cash and
0.496 of an Exchange Right under the Enhanced Offer. If all Shareholders elect
to receive Exchange Rights, then such Shareholders will receive
1
approximately $8.69 in cash and 0.752 of an Exchange Right per Share under the
Amended Enhanced Offer, rather than approximately $6.13 in cash and 0.825 of an
Exchange Right under the Enhanced Offer.
The total number of Units that will be issued to Fording Shareholders and
issuable to the Partnership upon exchange of its interest in SCAI into Units
will be approximately 46.8 million Units under the Amended Enhanced Offer,
rather than approximately 51.4 million Units under the Enhanced Offer. Including
the Units to be issued to CONSOL and Luscar associated with the acquisition of
the Met Coal Assets (5.9 million Units) and assuming the exercise of the Luscar
Put (0.5 million Units), the total number of Units outstanding for the Canadian
Coal Trust will be approximately 53.2 million Units under the Amended Enhanced
Offer, rather than approximately 57.8 million Units under the Enhanced Offer.
The definitions of "Maximum Cash Amount" and "Maximum Exchange Right Amount"
in the Enhanced Offer have been amended to read in full as follows:
"Maximum Cash Amount" means $965 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 Shareholders electing the Exchange Right Option
or the Combination Option, which will be not more than 75.2% of the
outstanding Shares (calculated on a diluted basis).
EFFECTS OF INCREASE IN THE MAXIMUM CASH AMOUNT AND DECREASE IN THE MAXIMUM
EXCHANGE RIGHT AMOUNT
The total consideration paid by the Canadian Coal Trust and the Partnership
for their interest in SCAI will be allocated between the SCAI Shares and SCAI
Series A Notes and SCAI Series B Notes. If elections are made by Fording
Shareholders for the Maximum Cash Amount of $965 million, the Partnership would
acquire 49.1% of the SCAI Shares and all of the SCAI Series B Notes for an
aggregate consideration of $805.0 million, of which $103.5 million is expected
to be allocated to the SCAI Shares and $701.5 million is expected to be
allocated to the SCAI Series B Notes, and the Canadian Coal Trust would acquire
50.9% of the SCAI Shares and all of the SCAI Series A Notes for an aggregate
consideration of $834.0 million, of which $107.2 million is expected to be
allocated to the SCAI Shares and $726.8 million is expected to be allocated to
the SCAI Series A Notes, prior to the acquisition of the Met Coal Assets and
excluding the exercise of the Luscar Put. However, if elections are made by
Fording Shareholders for the Maximum Exchange Right Amount, the Partnership
would acquire 17.5% of the SCAI Shares and all of the SCAI Series B Notes for an
aggregate consideration of $286.8 millon, of which $36.8 million is expected to
be allocated to the SCAI Shares and $250.0 million is expected to be allocated
to the SCAI Series B Notes, and the Canadian Coal Trust would acquire 82.5% of
the SCAI Shares and all of the SCAI Series A Notes for an aggregate
consideration of $1,352.2 million, of which $173.9 million is expected to be
allocated to the SCAI Shares and $1,178.3 million is expected to be allocated to
the SCAI Series A Notes. The effect of the Amended Enhanced Offer is that if the
Partnership exercised its right to exchange all of its SCAI Shares and SCAI
Series B Notes for Units in the Canadian Coal Trust pursuant to the Conversion
Agreement, the effective cost per Unit to the Partnership would be $35.00 in all
cases.
As disclosed in the Enhanced Offer, under an agreement in principle between
the Offeror, Luscar and CONSOL, the MetCoal Company is to acquire the Met Coal
Assets. As partial consideration for selling the Met Coal Assets, each of Luscar
and CONSOL is entitled to receive 2.95 million Units. The Partnership has also
agreed in principle that it or one of its affiliates would purchase the Units
received by CONSOL, if CONSOL so elects. This agreement in principle also
provides Luscar and CONSOL with the right to require the MetCoal Company to
acquire their 100% interest in the Luscar Mine (excluding pre-existing
reclamation liabilities) for 250,000 additional Units each (the "Luscar Put").
Following the acquisition of the Met Coal Assets by the MetCoal Company and
assuming the exercise of the Luscar Put (which cannot be assured), each of
Luscar and CONSOL would own 3.2 million Units. The Units to be acquired by
Luscar and CONSOL will each represent approximately 6% 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 pursuant to the Conversion
Agreement) which is an increase from the 5.5% of the outstanding Units to be
acquired by Luscar and CONSOL under the Enhanced Offer. This is as a result of
the decrease in the Maximum Exchange Right Amount under the Amended Enhanced
Offer.
2
The proportionate interest of each 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 as
consideration for their Shares deposited under the Amended Enhanced Offer and
initially for the Canadian Coal Trust will not be less than 50.9% or more than
82.5% and for the Partnership will not be less than 17.5% and not more than
49.1%, before the acquisition of the Met Coal Assets or the 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 not be less than 56.4% and not more than 84.5% and for
the Partnership will not be less than 15.5% and not more than 43.6%.
3. VARIATION OF SUBORDINATION TERMS OF SCAI SERIES B NOTES
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 quarter of 2004 to the extent described below.
On each quarterly interest payment date during the period to December 31,
2003, 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 $1.14 times the number of Units outstanding on
the Date of Exchange (the difference being the "Quarterly 2003 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 SCAI Series B Notes on that interest payment date but for
the subordination provision;
- the amount of the Quarterly 2003 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.
Cash interest payments on the SCAI Series B Notes will continue to be
subordinated to cash interest payments on the SCAI Series A Notes during each of
the quarters in 2004 by an amount that will vary depending upon the extent that
the average coal price realized by SCAI during each of the quarters in 2004
differs from the average coal price realized by SCAI for the year ended
December 31, 2003. To the extent that the average coal price realized by SCAI
during any of the quarters in 2004 equals the average coal price realized by
SCAI for the year ended December 31, 2003, 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 $1.30 times
the number of Units outstanding on the Date of Exchange (the difference being
the "Quarterly 2004 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 SCAI Series B Notes on that interest payment date but for
the subordination provision;
- the amount of the Quarterly 2004 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.
The actual amount of the Quarterly 2004 Unit Distribution Deficiency in each
of the quarters in 2004, if any, will be adjusted to reflect the amount by which
the average coal price realized by SCAI during each of the quarters in 2004
differs from the average coal price realized by SCAI for the year ended
December 31, 2003. For every $1.00 increase or decrease in the average coal
price realized by SCAI during a quarter in 2004 compared to the average coal
price realized by SCAI for the year ended December 31, 2003, the $1.30 amount
referred to
3
above would be adjusted by $0.10 per Unit per quarter. Average realized coal
price is calculated to be SCAI's consolidated coal sales revenue divided by coal
sales volume.
To the extent that, for whatever reason, interest on the SCAI Series A Notes
is insufficient to satisfy a distribution in an amount equivalent to the
subordination amount, the deficiency will be paid to the Canadian Coal Trust by
means of a distribution on SCAI Shares. If necessary, the Partnership has agreed
to waive its entitlement to any distribution on the SCAI Shares to the extent
required to achieve the subordination entitlement.
As a result of the extension of the subordination period to the end of the
2004 year, the Enhanced Offer has been varied to provide that under the
Conversion Agreement, the Partnership will be prohibited from exercising its
rights to exchange its SCAI Shares and SCAI Series B Notes for Units to the end
of the fourth quarter of 2004, rather than to the end of the fourth quarter of
2003 under the Enhanced Offer; provided, however, that the Conversion Agreement
will also permit the Partnership to exercise its rights of exchange in respect
of a portion of its SCAI Shares and SCAI Series B Notes, but only if either:
(a) the SCAI Series B Notes which it retains after such a partial exchange are
entitled to interest payments in each quarter of 2003 and 2004 of at least the
maximum amount required to support the subordination to the SCAI Series A Notes;
or (b) to the extent that, in any quarter, the SCAI Series B Notes which it
retains after such a partial exchange are entitled to interest payments in that
quarter which are less than the maximum amount required to support the
subordination to the SCAI Series A Notes (such difference being the
"Subordination Shortfall"), the Partnership undertakes to either waive its
entitlement to distributions, if any, on SCAI Shares, to the extent necessary,
and/or pay in cash to the Canadian Coal Trust the amount of the Subordination
Shortfall. In either case, in the event of any such partial exchange, the
maximum quarterly subordination amount will be increased above $11.25 million,
to such higher amount as is required to ensure that the per Unit per quarter,
pro rata entitlement to subordination support is the same after such partial
exchange as it was before. This is designed to ensure that the entitlement of
Unitholders to the benefits of subordination will not be diluted by any partial
exchange effected by the Partnership.
As a consequential amendment to the increase in the subordination per Unit
per quarter for 2003 from $1.05 per Unit per quarter to $1.14 per Unit per
quarter, due to the decrease in the total number of Units that will be
outstanding under the Amended Enhanced Offer, in respect of the period from the
first Take Up and Pay Date up to and including the Date of Exchange, an amount
accruing daily at a rate of $1.14 per calendar quarter per Unit (rather than at
a rate of $1.05 per calendar quarter per Unit under the Enhanced Offer)
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. 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.
On January 4, 2003, the media reported that Westshore had suffered
significant damage from violent windstorms, which have disabled two of its three
mechanical shiploading towers, reportedly for at least three months. At the time
of printing this Second Notice, neither Westshore nor Fording has as yet made
any disclosure as to the effect these events may have on Fording's ability to
ship its coal through Westshore. The Partnership will monitor and carefully
consider any disclosure Fording or Westshore may make in this regard, and
reserves the right to vary the provisions of its superior offer relating to the
$1.14 per Unit per quarter payment accruing while the Exchange Rights are
outstanding, and the quantum of subordination thereafter, to reflect any
material adverse change to Fording's realized revenues that results from the
inability of Westshore to meet Fording's shipping needs.
4. SUMMARY OF DISTRIBUTABLE CASH OF CANADIAN COAL TRUST
The disclosure and table under the heading "Summary of Distributable Cash of
Canadian Coal Trust" in Appendix A to the Enhanced Offer has been varied to
reflect the lower number of Units to be issued and take into account certain
additional disclosure provided by Fording. The following analysis has been
prepared by the
4
Offeror to assist Shareholders of Fording, who are considering electing to
receive Exchange Rights (and therefore an entitlement to Units) for their
Fording Shares and compares distributable cash per Unit estimated by the Offeror
to pro forma distributable cash provided by Fording in its supplements dated
December 8, 2002 and December 30, 2002 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 coal assets have been
completed at the beginning of such periods. See "Funding, Acquisition and
Related Transactions -- MetCoal Company and Related Matters" in Appendix A
to the Enhanced Offer.
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.
5
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 Appendix A
to the Enhanced Offer for a discussion of factors that may cause 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 of the Canadian Coal Trust.
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 2002 DECEMBER 31, 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) (81.4)
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.................................................. 9.1 4.2
------ ------
Canadian Coal Trust distributable cash...................... $153.4 $182.0
====== ======
Number of units (in millions)(7)............................ 53.2 53.2
CANADIAN COAL TRUST DISTRIBUTABLE CASH PER UNIT............. $ 2.88 $ 3.42
------------
(1) Amounts in respect of Fording Income Trust were extracted from the
supplements 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 exchange of its interest in SCAI to Units of
Canadian Coal Trust of 46.8 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).
6
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 increased its targeted distributable cash for the quarter ending
March 31, 2003 from $1.05 per Unit per quarter to $1.14 per Unit per quarter.
This target takes into account the lower number of Units that will be
outstanding under the Amended Enhanced Offer, 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 addition, the Enhanced Offer has been varied to extend the subordination
feature to the 2004 year, such that the Partnership will now subordinate its
right to receive any distribution in respect of its holdings of SCAI Series B
Notes in the 2003 and 2004 years until the Canadian Coal Trust first receives
cash interest on its SCAI Series A Notes, subject to certain limitations. See
Section 3 of this Second Notice, "Variation of Subordination Terms of SCAI
Series B Notes".
5. VARIATION TO SOURCES OF FUNDS
As a result of the increased Maximum Cash Amount available to Shareholders
in respect of the Cash Option or the Combination Option, if all outstanding
Shares are deposited under the Amended Enhanced Offer, the maximum amount of
cash required by the Offeror to purchase all Shares will now be $965 million,
increased from $850 million. The Offeror estimates that the amount required to
pay the break fee in connection with the Fording-Teck Combination, to repay debt
facilities and to terminate certain foreign exchange arrangements is
$312 million as of the date hereof. As a result, references in the Enhanced
Offer and Circular to certain sources of funds are amended, as outlined below.
Of the total funds required, up to $400 million will continue to be funded
in equal amounts by the Partners from funds on hand and injected by way of
equity contribution to, and SCAI Series B Notes of, the Offeror.
The Offeror still expects to draw approximately $300 million under a bridge
loan facility which has been committed by 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 and $50 million
will be used to pay for the Offeror's portion of the transaction fees. The
remaining $160 million expected to be drawn will be applied towards the purchase
of Shares.
The subordinated loan facility which OTPP has agreed to provide to the
Partnership will be available in an amount, if any, equal to the balance
required to complete the Amended Enhanced Offer.
The Enhanced Offer included a special distribution that would have been
available to Unitholders only if more than 69% of Shareholders elected to
receive Exchange Rights. This special distribution would have been funded by a
special distribution by the Offeror to the Partnership and the Canadian Coal
Trust, utilizing proceeds of the Offeror's bridge loan facility or funds
available under its other credit facilities. In order to remove valuation
uncertainty associated with the Exchange Rights, this special distribution has
been eliminated. The funds previously allocated from the Offeror's debt
facilities to fund this special distribution will now be applied towards the
purchase of Shares, as noted above.
The benefit of this amendment to Shareholders electing to receive Exchange
Rights will be that the aggregate number of Units issued by the Canadian Coal
Trust, upon the Exchange, and issuable to the Partnership upon the exchange of
its SCAI Shares and SCAI Series B Notes for Units pursuant to the Conversion
Agreement, will be reduced to 53.2 million under the Amended Enhanced Offer from
57.8 million under the Enhanced Offer (including in each case Units issued upon
acquisition of the Met Coal Assets and also including the 0.5 million Units that
would be issued if the Luscar Put were exercised by Luscar and CONSOL).
Irrespective of the nature of elections made by Shareholders, the effective
cost to the Partnership for each Unit, issuable on exchange of SCAI Shares and
SCAI Series B Notes will be $35.00.
7
6. CONSOLIDATED CAPITALIZATION OF THE CANADIAN COAL TRUST
The consolidated capitalization table of the Canadian Coal Trust under the
heading "Consolidated Capitalization of the Canadian Coal Trust" in Appendix A
to the Enhanced Offer has been varied as follows. 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 (ASSUMING
TO THE EXCHANGE (ASSUMING MAXIMUM TENDER FOR
DESIGNATION AUTHORIZED DECEMBER 16, 2002 MAXIMUM TENDER FOR CASH) EXCHANGE RIGHTS)
----------- ---------- ------------------ ------------------------- -------------------------
(audited) (millions of dollars)
Term debt(1)............... N/A $ -- $ 300.0 $ 300.0
SCAI Series B Notes........ N/A -- 701.5 250.0
$ 10(1
Units(2)................... Unlimited Unit) 1,040.5 1,558.7
-------- --------
$2,042.0 $2,108.7
======== ========
------------
(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 29.7 million under the maximum tender for
cash scenario and 44.5 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.
7. EXTENSION OF THE ENHANCED OFFER
On December 23, 2002, the Offeror announced its intention to extend the time
during which Shareholders could accept the Enhanced Offer. The Offeror has
amended the Enhanced Offer by extending the time during which the Enhanced Offer
is open for acceptance from 8:00 p.m. (Toronto time) on January 6, 2003 to
8:00 p.m. (Toronto time) on January 23, 2003, or until such later time and date
or times and dates to which this Enhanced Offer may be further extended from
time to time (the "Expiry Time"), unless withdrawn by the Offeror. Accordingly,
THE EXPIRY TIME SHALL BE 8:00 P.M. (TORONTO TIME) ON JANUARY 23, 2003.
8. RECENT DEVELOPMENTS
FORDING ORDERED TO POSTPONE SHAREHOLDERS' MEETING
On December 23, 2002, Fording was ordered by the Alberta Court of Queen's
Bench to postpone the date of its special meeting of shareholders being held to
consider the Fording-Teck Combination. The meeting was originally scheduled to
be held on December 20, 2002, then postponed to January 3, 2003, and now as a
result of the court order, is scheduled to occur on January 22, 2003, which is
one day prior to the new Expiry Time of the Amended Enhanced Offer. IF THE
FORDING-TECK COMBINATION IS APPROVED, THE CONDITIONS OF THE AMENDED ENHANCED
OFFER WILL NOT HAVE BEEN SATISFIED AND THE AMENDED ENHANCED OFFER WILL BE
TERMINATED.
COMPETITION ACT (CANADA)
On December 23, 2002, the Commissioner issued a "no-action letter" in
respect of the Enhanced Offer advising the Offeror that the Commissioner did not
at that time have grounds on which to make an application under Part VIII of the
COMPETITION ACT (Canada) in respect of the purchase of the Shares under the
Enhanced Offer or the acquisition by the MetCoal Company of the Met Coal Assets
from Luscar and CONSOL.
UNITED STATES HART-SCOTT-RODINO ACT
On December 13, 2002, early termination of the waiting period requirements
applicable to the consummation of the Amended Enhanced Offer imposed by the
United States HART-SCOTT-RODINO ANTITRUST IMPROVEMENTS ACT OF 1976, as amended,
was granted.
8
DAMAGE TO WESTSHORE FACILITIES
On January 4, 2003, the media reported that Westshore had suffered
significant damage from violent windstorms, which have disabled two of its three
mechanical shiploading towers, reportedly for at least three months. At the time
of printing of this Second Notice, neither Westshore nor Fording has as yet made
any disclosure as to the effect these events may have on Fording's ability to
ship its coal through Westshore.
INTENTIONS WITH RESPECT TO THE ELKVIEW MINE
The Offeror agrees that the Elkview mine assets currently owned by Teck
would present certain additional synergy opportunities if added to the assets of
the Canadian Coal Trust. If the Fording-Teck Combination is not approved, and
the Amended Enhanced Offer is completed, the Offeror intends to initiate
discussions with Teck with a view to the Offeror or an affiliate acquiring the
Elkview mine assets from Teck.
9. PAYMENT FOR DEPOSITED 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 Amended 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 Amended Enhanced Offer after the date on which it first
takes up Shares deposited under the Amended 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 Amended
Enhanced Offer as, if and when the Offeror gives written notice to the
Depositary to that effect.
Reference is made to Section 6 of the Enhanced Offer, "Payment for Deposited
Fording Shares" for a complete description of the obligations of the Offeror.
10. WITHDRAWAL OF DEPOSITED SHARES
Any Shares deposited in acceptance of the Amended Enhanced Offer may be
withdrawn by or on behalf of the depositing Shareholder (unless otherwise
required or permitted under applicable law):
(i) at any time prior to 8:00 p.m. (Toronto time) on January 23, 2003;
(ii) at any time before the Shares are taken up by the Offeror; and
(iii) at any time if the Offeror has not paid for the Shares within three
Business Days after taking them up.
Any withdrawals must conform to the procedure for withdrawal set out in
Section 7 of the Enhanced Offer, "Withdrawal of Deposited Fording Shares".
11. CONSEQUENTIAL AMENDMENTS TO ENHANCED OFFER, CIRCULAR, LETTER OF TRANSMITTAL
AND ELECTION FORM AND NOTICE OF GUARANTEED DELIVERY
The Letter of Transmittal and Election Form (printed on pink paper) and the
Notice of Guaranteed Delivery (printed on orange paper), as amended to give
effect to the specified amendments set forth in this Second Notice are referred
to herein as the "Letter of Transmittal and Election Form" and the "Notice of
Guaranteed Delivery" and accompany this Second Notice. The Enhanced Offer and
the Circular shall be read as amended in order to give effect to the specified
amendments set forth in this Second Notice. Except as varied hereby, all terms
and conditions of the Enhanced Offer remain in effect, unamended.
Any statement contained in the Amended Enhanced Offer or in a document
incorporated or deemed to be incorporated by reference herein shall be deemed to
be modified or superseded for the purposes of the Amended Enhanced Offer to the
extent that a statement contained herein, or in any other subsequently filed
document that also is 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
9
of a modifying or superseding statement shall 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 Second Supplement.
12. REVISED PRO FORMA FINANCIAL STATEMENTS
Attached as Appendix A to this Second Notice are revised PRO FORMA financial
statements relating to SCAI, the Canadian Coal Trust and Sherritt, replacing
pages C-3 to C-34 of Appendix C to the Enhanced Offer.
13. SUPPLEMENT TO NORWEST OPINION
Norwest Corporation ("Norwest"), a well recognized coal mine engineering
consulting firm was engaged by the Offeror to review the geology, mine plans and
cost estimates pertaining to the Line Creek mine, part of the Met Coal Assets.
Norwest's opinion was included as Appendix D to the Enhanced Offer. In the
second supplement to the Fording Management Circular dated December 30, 2002,
Fording included an opinion of Anderson & Schwab, Inc. ("A&S") which also made
statements concerning the Line Creek mine. Norwest has reviewed the A&S opinion,
and by way of comment has prepared a supplement to its previous opinion. A copy
of the supplement to the Norwest Opinion is included as Appendix B to this
Second Notice.
14. STATUTORY RIGHTS
Securities legislation in certain of the provinces and territories of Canada
provides Shareholders 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 notice that is required to be delivered to
Shareholders. However, such rights must be exercised within prescribed time
limits. Shareholders 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.
10
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 "Supplement to Prior Opinion
Letter re: Line Creek Mine and Related Matters" appearing in Appendix B to the
notice of variation and extension dated January 6, 2003 made by Sherritt Coal
Acquisition Inc. to its offer dated October 25, 2002, as varied and restated by
notice of variation dated December 16, 2002, to the holders of common shares of
Fording Inc., which is also part of Amendment No. 1 to 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
January 6, 2003
11
APPROVAL AND CERTIFICATE OF SHERRITT COAL ACQUISITION INC.
DATED: January 6, 2003
The contents of this Second Notice 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, together with the Enhanced Offer and Circular and the First Notice,
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, together with the Enhanced Offer and Circular and
the First Notice, does not contain any misrepresentation likely to affect the
value or the market price of the Shares which are the subject of the Amended
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
12
APPENDIX A
REVISED PRO FORMA FINANCIAL STATEMENTS
A-1
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A-2
SHERRITT INTERNATIONAL CORPORATION
PRO FORMA CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS
(UNAUDITED)
A-3
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A-4
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 Amended Enhanced Offer
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
January 6, 2003
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
January 6, 2003
A-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 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) 135.3
(1.7) 3(a)(ii)
1.0 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 -- -- 3.7 3(a)(i) 4.3
Interest income on SCAI Notes........... -- -- -- (30.8) 3(a)(iii) (30.8)
Interest and other expenses............. (4.4) 7.3 12.6 (12.6) 3(a)(i) 38.8
1.9 3(a)(iv)
34.0 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 (165.8) 42.9
Income taxes (recovery)................. 4.7 (16.0) 69.2 (67.9) 3(a)(vii) (10.0)
----- ----- ------- -------- -------
NET EARNINGS............................ 51.6 4.6 94.6 (97.9) 52.9
===== ===== ======= ======== =======
NET EARNINGS PER RESTRICTED VOTING SHARE
Basic................................... 0.34 0.35
Diluted................................. 0.33 0.34
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.
A-6
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 -- -- 1.3 3(b)(i) 1.9
Interest income on SCAI Notes.......... -- -- -- (11.0) 3(b)(iii) (11.0)
Interest and other expenses............ (4.4) 7.3 12.6 (12.6) 3(b)(i) 8.7
1.9 3(b)(iv)
3.9 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 (152.2) 56.5
Income taxes (recovery)................ 4.7 (16.0) 69.2 (63.3) 3(b)(vii) (5.4)
----- ----- ------- -------- -----
NET EARNINGS........................... 51.6 4.6 94.6 (88.9) 61.9
===== ===== ======= ======== =====
NET EARNINGS PER RESTRICTED VOTING
SHARE
Basic.................................. 0.34 0.45
Diluted................................ 0.33 0.39
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.
A-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 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) 110.5
0.7 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 -- 6.0 3(a)(i) 7.7
Interest income on SCAI Notes.................... -- -- (21.4) 3(a)(iii) (21.4)
Interest and other expenses...................... 10.0 4.2 (4.2) 3(a)(i) 35.5
25.5 3(a)(v)
Minority interest................................ 0.7 -- -- 0.7
----- ----- ------ -----
EARNINGS BEFORE INCOME TAXES..................... 55.9 99.1 (109.9) 45.1
Income taxes..................................... 10.1 50.8 (52.8) 3(a)(vii) 8.1
----- ----- ------ -----
NET EARNINGS..................................... 45.8 48.3 (57.1) 37.0
===== ===== ====== =====
NET EARNINGS PER RESTRICTED VOTING SHARE
Basic............................................ 0.29 0.20
Diluted.......................................... 0.28 0.20
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.
A-8
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.................... -- -- (7.6) 3(b)(iii) (7.6)
Interest and other expenses...................... 10.0 4.2 (4.2) 3(b)(i) 12.9
2.9 3(b)(v)
Minority interest................................ 0.7 -- -- 0.7
----- ----- ------ -----
EARNINGS BEFORE INCOME TAXES..................... 55.9 99.1 (96.7) 58.3
Income taxes..................................... 10.1 50.8 (48.9) 3(b)(vii) 12.0
----- ----- ------ -----
NET EARNINGS..................................... 45.8 48.3 (47.8) 46.3
===== ===== ====== =====
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.
A-9
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 (216.4) 2(d)(i) 43.4
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 (454.9) 453.2
CAPITAL ASSETS.................................. 1,118.9 789.3 (789.3) 2(d)(iii) 1,118.9
INVESTMENTS..................................... 101.0 -- 51.7 2(d)(iv) 152.7
SCAI SERIES B NOTES............................. -- -- 350.8 2(d)(v) 350.8
FUTURE INCOME TAXES............................. 29.7 -- -- 29.7
OTHER ASSETS.................................... 98.3 10.5 (10.5) 2(d)(iii) 107.9
-- -- 9.6 2(d)(iii) --
------- ------- ------- -------
2,010.7 1,045.1 (842.6) 2,213.2
======= ======= ======= =======
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 66.5 2(d)(vii) 446.7
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 (267.6) 867.7
------- ------- ------- -------
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 (842.6) 2,213.2
======= ======= ======= =======
------------
(1) Represents the consolidated balance sheet of Fording Inc. as at
September 30, 2002.
A-10
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 (151.7) 2(d)(i) 108.1
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 (390.2) 517.9
CAPITAL ASSETS.................................. 1,118.9 789.3 (789.3) 2(d)(iii) 1,118.9
INVESTMENTS..................................... 101.0 -- 18.4 2(d)(iv) 119.4
SCAI SERIES B NOTES............................. -- -- 125.0 2(d)(v) 125.0
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.
A-11
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 Notice of
Variation and Extension dated January 6, 2003 (the "Amended Enhanced Offer")
relating to the offer of Sherritt Coal Acquisition Inc. ("SCAI") to purchase
all of the outstanding shares of Fording Inc. ("Fording"). SCAI had varied
and restated its offer dated October 25, 2002 (the "Original Offer"), by a
notice of variation dated December 16, 2002 (the "Enhanced Offer"). The
Enhanced Offer has been further varied and extended in the manner described
in the Amended Enhanced Offer.
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 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 and the Amended 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,
A-12
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)
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.
- SCP II will not receive any distribution in respect of its interest in
SCAI during any quarter in 2003 and 2004 unless Canadian Coal has first
received interest on Notes of SCAI equivalent to $1.14 per Unit in respect
of each calendar quarter in 2003 and $1.30 per Unit in respect of each
calendar quarter in 2004, for a maximum quarterly subordination amount of
$11.25 million. The 2004 subordination is subject to certain adjustments,
as described in the Amended Enhanced Offer. 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 and the Amended 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 Amended 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 27.6 million Fording shares are elected for the
cash offer, the Amended Enhanced Offer provides a pool of cash of
$965 million and a pool of approximately 23.8 million Exchange Rights, with
an ascribed value of $834 million. In this event, Fording shareholders will
receive a pro rata amount of cash and Exchange Rights, such that the total
consideration equals $965 million of cash and approximately 23.8 million
Exchange Rights.
A maximum amount of up to approximately 38.6 million 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.
A-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)
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.
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 $202.5 million.
(B) SCAI
The initial capitalization of SCAI is as follows:
Maximum Maximum
Cash Trust Units
--------- ------------
Common shares issued to Sherritt and SCP II................. 210.7 210.7
Series A Notes issued to Sherritt........................... 726.8 1,178.3
Series B Notes issued to SCP II............................. 701.5 250.0
Short-term debt............................................. 210.0 210.0
------- -------
1,849.0 1,849.0
======= =======
In exchange for:
Exchange Rights............................................. 834.0 1,352.2
Cash........................................................ 805.0 286.8
Proceeds from debt issue.................................... 210.0 210.0
------- -------
1,849.0 1,849.0
======= =======
A-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)
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....................................... 965.0 446.8
Consideration in Exchange Rights............................ 834.0 1,352.2
Transaction costs incurred by SCAI.......................... 33.7 33.7
------- -------
1,832.7 1,832.7
======= =======
ALLOCATION OF ACQUISITION COST
Capital assets.............................................. 789.3 789.3
Goodwill.................................................... 1,406.5 1,406.5
Net working capital......................................... 78.8 78.8
Long-term debt.............................................. (136.0) (136.0)
Future income taxes......................................... (101.6) (101.6)
Foreign exchange arrangements............................... (151.9) (151.9)
Other assets and liabilities................................ (52.4) (52.4)
------- -------
1,832.7 1,832.7
======= =======
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 9.7
Other assets................................................ 6.6 6.6
----- -----
16.3 16.3
===== =====
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. The related future tax
benefit of $16.3 million 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.............................. 834.0 1,352.2
======= =======
In exchange for:
Common shares of SCAI held by Sherritt...................... 107.2 173.9
Series A Notes held by Sherritt............................. 726.8 1,178.3
------- -------
834.0 1,352.2
======= =======
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.
A-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)
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 49.1% 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 49.1% ownership interest in SCAI for $805.0 million,
comprising $103.5 million in share capital and $701.5 million in
Series B Notes. Canadian Coal Trust acquires a 50.9% ownership interest
in SCAI for $834.0 million, comprising $107.2 million in equity and
$726.8 million in Series A Notes.
MAXIMUM TRUST UNITS
SCP II acquires a 17.5% ownership interest in SCAI for $286.8 million,
comprising $36.8 million in share capital and $250.0 million Series B
Notes. Canadian Coal Trust acquires an 82.5% ownership interest in SCAI
for $1,352.2 million, comprising $173.9 million in equity and
$1,178.3 million in Series A Notes.
(D) PRO FORMA ADJUSTMENTS -- BALANCE SHEET
Maximum Maximum
Cash Trust Units
--------- ------------
(i) CASH
Capitalization of SCP II.................................... (200.0) (143.4)
Financing costs............................................. (9.6) (1.5)
Fording elimination......................................... (6.8) (6.8)
------ ------
(216.4) (151.7)
====== ======
(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................................. 9.6 1.5
====== ======
(iv) INVESTMENTS
Shares of SCAI.............................................. 51.7 18.4
====== ======
(v) SCAI SERIES B NOTES
Investment in Notes......................................... 350.8 125.0
====== ======
(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.............................................. 202.5 --
------ ------
66.5 (136.0)
====== ======
A-16
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
--------- ------------
(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 49.1% 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 Maximum
Cash Trust Units Cash Trust Units
--------- ----------- --------- -----------
Interest on financing of the acquisition.................... 21.3 -- 28.3 --
Reduction in interest income from cash used in the
acquisitions.............................................. 4.2 2.9 5.7 3.9
---- --- ---- ---
25.5 2.9 34.0 3.9
==== === ==== ===
(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.
(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.
A-17
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)
(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
Sherritt Luscar Fording Cash Trust Units
-------- -------- -------- --------- -----------
NET INCOME UNDER CANADIAN GAAP............................. 51.6 4.6 94.6 52.9 61.9
Impact of U.S. GAAP, net of tax
Derivative financial instruments (a)..................... (1.1) (2.9) (55.8) (17.7) (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 8.5 26.8
===== ===== ===== ===== =====
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
A-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)
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
Sherritt Luscar Fording Cash Trust Units
-------- -------- -------- --------- -----------
NET INCOME UNDER U.S. GAAP.................................. 23.1 3.2 35.6 8.5 26.8
Other comprehensive income, net of tax
Cumulative translation adjustment (c)..................... -- -- 14.4 3.5 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 (17.9) (19.6)
----- ----- ----- ----- -----
COMPREHENSIVE INCOME (LOSS) UNDER U.S. GAAP................. 2.5 3.2 46.7 (9.4) 7.2
===== ===== ===== ===== =====
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. Amounts are
reclassified from other comprehensive income to earnings when an
impairment is considered other than temporary and when gains or losses
are realized.
A-19
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)
(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.
A-20
SHERRITT COAL ACQUISITION INC. AND
CANADIAN COAL TRUST
PRO FORMA CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS
(UNAUDITED)
A-21
(This page has been left blank intentionally.)
A-22
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 Amended
Enhanced Offer 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
January 6, 2003
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
January 6, 2003
A-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 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 (63.9) 3(b)(i) 96.5
Minority interest.............. -- -- -- -- (7.5) 3(b)(ii) (7.5)
------- ------- ------ ------- ------ -------
INCOME BEFORE INCOME TAXES..... -- 163.8 (157.9) 5.9 71.4 77.3
------- ------- ------ ------- ------ -------
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) 71.4 56.1
======= ======= ====== ======= ====== =======
Net income per unit............ 2.36
=======
Weighted average number of
outstanding units
(millions)................... 23.8
=======
------------
(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.
A-24
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 10.1 3(a)(i) 79.9 -- 79.9
Interest and other expenses.... -- 12.6 147.8 3(a)(ii) 160.4 (103.6) 3(b)(i) 56.8
Minority interest.............. -- -- -- -- (2.7) 3(b)(ii) (2.7)
------- ------- ------ ------- ------ -------
INCOME BEFORE INCOME TAXES..... -- 163.8 (157.9) 5.9 106.3 112.2
------- ------- ------ ------- ------ -------
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) 106.3 91.0
======= ======= ====== ======= ====== =======
Net income per unit............ 2.36
=======
Weighted average number of
outstanding units
(millions)................... 38.6
=======
------------
(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.
A-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 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 (44.4) 3(b)(i) 60.8
Minority interest.............. -- -- -- -- (12.1) 3(b)(ii) (12.1)
------- ----- ------ ----- ----- -----
INCOME (LOSS) BEFORE INCOME
TAXES........................ -- 99.1 (101.3) (2.2) 56.5 54.3
------- ----- ------ ----- ----- -----
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) 56.5 31.9
======= ===== ====== ===== ===== =====
Net income per unit............ 1.34
=====
Weighted average number of
outstanding units
(millions)................... 23.8
=====
------------
(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.
A-26
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 (71.9) 3(b)(i) 33.3
Minority interest.............. -- -- -- -- (4.3) 3(b)(ii) (4.3)
----- ----- ------ ----- ----- -----
INCOME (LOSS) BEFORE INCOME
TAXES........................ -- 99.1 (101.3) (2.2) 76.2 74.0
----- ----- ------ ----- ----- -----
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) 76.2 51.6
===== ===== ====== ===== ===== =====
Net income per unit............ 1.34
=====
Weighted average number of
outstanding units
(millions)................... 38.6
=====
------------
(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.
A-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 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........... -- -- 84.1 2(a) 84.1 -- 84.1
OTHER ASSETS.................. -- 10.5 6.6 2(a) 17.1 -- 17.1
GOODWILL...................... -- -- 1,406.5 2(a) 1,406.5 -- 1,406.5
------- ------- ------- ------- -------- -------
-- 1,045.1 1,506.9 2,552.0 -- 2,552.0
======= ======= ======= ======= ======== =======
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........... -- -- 701.5 2(a) 701.5 -- 701.5
LONG-TERM DEBT................ -- 136.0 726.8 2(a) 862.8 (726.8) 2(b) 136.0
FUTURE INCOME TAXES........... -- 185.7 -- 185.7 -- 185.7
MINORITY INTEREST............. -- -- -- -- 103.5 2(b) 103.5
------- ------- ------- ------- -------- -------
-- 470.1 1,871.2 2,341.3 (623.3) 1,718.0
------- ------- ------- ------- -------- -------
EQUITY
Capital stock -- Fording.... -- 122.1 (122.1) 2(a) -- -- --
Capital stock -- SCAI....... -- -- 210.7 2(a) 210.7 (210.7) 2(b) --
Unitholders' equity......... -- -- -- -- 834.0 2(b) 834.0
Retained earnings........... -- 418.6 (418.6) 2(a) -- -- --
Foreign currency translation
adjustment................ -- 34.3 (34.3) 2(a) -- -- --
------- ------- ------- ------- -------- -------
-- 575.0 (364.3) 210.7 623.3 834.0
------- ------- ------- ------- -------- -------
-- 1,045.1 1,506.9 2,552.0 -- 2,552.0
======= ======= ======= ======= ======== =======
------------
(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.
A-28
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 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........... -- -- 84.1 2(a) 84.1 -- 84.1
OTHER ASSETS.................. -- 10.5 6.6 2(a) 17.1 -- 17.1
GOODWILL...................... -- -- 1,406.5 2(a) 1,406.5 -- 1,406.5
------- ------- ------- ------- -------- -------
-- 1,045.1 1,506.9 2,552.0 -- 2,552.0
======= ======= ======= ======= ======== =======
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........... -- -- 250.0 2(a) 250.0 -- 250.0
LONG-TERM DEBT................ -- 136.0 1,178.3 2(a) 1,314.3 (1,178.3) 2(b) 136.0
FUTURE INCOME TAXES........... -- 185.7 -- 185.7 -- 185.7
MINORITY INTEREST............. -- -- -- -- 36.8 2(b) 36.8
------- ------- ------- ------- -------- -------
-- 470.1 1,871.2 2,341.3 (1,141.5) 1,199.8
------- ------- ------- ------- -------- -------
EQUITY
Capital stock -- Fording.... -- 122.1 (122.1) 2(a) -- -- --
Capital stock -- SCAI....... -- -- 210.7 2(a) 210.7 (210.7) 2(b) --
Unitholders' equity......... -- -- -- -- 1,352.2 2(b) 1,352.2
Retained earnings........... -- 418.6 (418.6) 2(a) -- -- --
Foreign currency translation
adjustment................ -- 34.3 (34.3) 2(a) -- -- --
------- ------- ------- ------- -------- -------
-- 575.0 (364.3) 210.7 1,141.5 1,352.2
------- ------- ------- ------- -------- -------
-- 1,045.1 1,506.9 2,552.0 -- 2,552.0
======= ======= ======= ======= ======== =======
------------
(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.
A-29
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 Notice of Variation and
Extension dated January 6, 2003 (the "Amended Enhanced Offer") relating to
the offer of SCAI to purchase all of the outstanding shares of Fording Inc.
("Fording"). SCAI had varied and restated its offer dated October 25, 2002
(the "Original Offer"), by a notice of variation dated December 16, 2002
(the "Enhanced Offer"). The Enhanced Offer has been further varied and
extended in the manner described in the Amended Enhanced Offer.
As part of the Amended 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 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 and the Amended 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
A-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)
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 and 2004 unless Canadian Coal has first
received interest on Notes of SCAI equivalent to $1.14 per Unit in respect
of each calendar quarter in 2003 and $1.30 per Unit in respect of each
calendar quarter in 2004, for a maximum quarterly subordination amount of
$11.25 million. The 2004 subordination is subject to certain adjustments,
as described in the Amended Enhanced Offer. 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 and the Amended 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 Amended 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 27.6 million Fording shares are elected for the
cash offer, the Amended Enhanced Offer provides a pool of cash of
$965 million and a pool of approximately 23.8 million Exchange Rights, with
an ascribed value of $834 million. In this event, Fording shareholders will
receive a pro rata amount of cash and Exchange Rights, such that the total
consideration equals $965 million of cash and approximately 23.8 million
Exchange Rights.
A maximum amount of up to approximately 38.6 million 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,
A-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)
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.
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................. 210.7 210.7
Series A Notes issued to Sherritt........................... 726.8 1,178.3
Series B Notes issued to SCP II............................. 701.5 250.0
Short-term debt............................................. 210.0 210.0
------- -------
1,849.0 1,849.0
======= =======
In exchange for:
Exchange Rights............................................. 834.0 1,352.2
Cash........................................................ 805.0 286.8
Proceeds from debt issue.................................... 210.0 210.0
------- -------
1,849.0 1,849.0
======= =======
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....................................... 965.0 446.8
Consideration in Exchange Rights............................ 834.0 1,352.2
Transaction costs incurred by SCAI.......................... 33.7 33.7
------- -------
1,832.7 1,832.7
======= =======
ALLOCATION OF ACQUISITION COST
Capital assets.............................................. 789.3 789.3
Goodwill.................................................... 1,406.5 1,406.5
Net working capital......................................... 78.8 78.8
Long-term debt.............................................. (136.0) (136.0)
Future income taxes......................................... (101.6) (101.6)
Foreign exchange arrangements............................... (151.9) (151.9)
Other assets and liabilities................................ (52.4) (52.4)
------- -------
1,832.7 1,832.7
======= =======
A-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)
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 9.7
Other assets................................................ 6.6 6.6
---- ----
16.3 16.3
==== ====
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. The related future tax
benefit of $16.3 million 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.............................. 834.0 1,352.2
======= =======
In exchange for:
Common shares of SCAI held by Sherritt...................... 107.2 173.9
Series A Notes held by Sherritt............................. 726.8 1,178.3
------- -------
834.0 1,352.2
======= =======
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 49.1% ownership interest in SCAI for $805.0 million,
comprising $103.5 million in share capital and $701.5 million in
Series B Notes. Canadian Coal acquires a 50.9% ownership interest in SCAI
for $834.0 million, comprising $107.2 million in equity and
$726.8 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.
MAXIMUM TRUST UNITS
SCP II acquires a 17.5% ownership interest in SCAI for $286.8 million,
comprising $36.8 million in share capital and $250.0 million in Series B
Notes. Canadian Coal Trust acquires an 82.5% ownership interest in SCAI
for $1,352.2 million, comprising $173.9 million in equity and
$1,178.3 million in Series A Notes.
In the Maximum Trust Units scenario, Canadian Coal will own 82.5% of SCAI
and in the Maximum Cash scenario, Canadian Coal will own 50.9% 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.
A-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)
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 13.8 22.2 22.2
Interest on SCAI Notes...................................... 87.2 87.2 125.6 125.6
----- ----- ----- -----
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
49.1% 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
------------------------
Pro forma Maximum Maximum
Fording SCAI Cash Trust Units
-------- ---------- ---------- -----------
Net income (loss) under Canadian GAAP....................... 94.6 (15.3) 56.1 91.0
Derivative financial instruments -- foreign exchange forward
contracts (a)............................................. (88.6) (88.6) (45.1) (73.1)
Income tax recovery......................................... 32.8 32.8 16.7 27.1
Stock based compensation (b)................................ (3.2) (3.2) (1.6) (2.6)
----- ----- ----- -----
Net income (loss) under U.S. GAAP........................... 35.6 (74.3) 26.1 42.4
===== ===== ===== =====
The U.S. GAAP adjustments are shown net of the impact on net income of
the minority interest.
A-34
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
------------------------
Pro forma Maximum Maximum
Fording SCAI Cash Trust Units
-------- ---------- ---------- -----------
Net income (loss) under U.S. GAAP........................... 35.6 (74.3) 26.1 42.4
Other comprehensive income, net of tax
Cumulative translation adjustment (c)..................... 14.4 14.4 7.3 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) 31.7 51.6
===== ===== ==== ====
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.
A-35
APPENDIX B
SUPPLEMENT TO NORWEST OPINION
B-1
(This page has been left blank intentionally.)
B-2
[GRAPHIC]
SUITE 400, 205 - 9TH AVE SE
CALGARY, ALBERTA CANADA T2G 0R3
TEL (403) 237-7763
FAX (403) 263-4086
January 5, 2003
SHERRITT COAL ACQUISITION INC.,
a corporation wholly owned by,
SHERRITT COAL PARTNERSHIP II
5th Floor, 1133 Yonge Street
Toronto, Ontario
M4T 2Y7
Supplement to Prior Opinion Letter re: Line Creek Mine and Related Matters
We have been requested by Sherritt Coal Acquisition Inc. (SCAI) to prepare a
supplementary report addressing in more detail certain matters discussed in our
firm's report dated December 02, 2002 and certain matters discussed in an
opinion provided to Fording Inc. by the consulting firm, Anderson &
Schwab, Inc. (A&S). The principal conclusions of this supplementary report can
be summarized as follows:
- The report of Norwest Corporation (Norwest) on the Line Creek mine was
prepared based upon actual mine data and with the benefit of extensive
site visits and in-depth knowledge of the actual Line Creek mine, as well
as knowledge of all of the other Canadian coal mines held by the
respective companies. In contrast, the A&S report discloses that "A&S has
not been provided with or reviewed any non-public information" and that
"A&S has not visited any of their respective mine sites" nor has it
"interviewed any of their employees". Based upon our analysis, Norwest is
of the view that the Line Creek mine plan is relatively conservative and
with additional engineering has the potential to be optimized for further
cost reductions.
- The mine life of the Line Creek mine is forecast to extend well beyond the
formal ten-year mine plan, and well beyond the 15 year life (to 2017)
estimated in the A&S report. It is necessary to consider the coal reserves
that will remain after the current mine plan is implemented, as well as
additional resources that can be advanced to the reserve category with
further drilling and mine planning, in evaluating the ultimate reserve
potential of the Line Creek mine.
- The primary factors which are projected to lower the Line Creek mine
operating costs by $5.50-$6.50 per clean metric tonne (cmt) over the life
of the mine plan, and concomitant increases in the margins realized, are:
a substantial reduction in the "strip ratio" over time (i.e. the ratio of
the quantity of overburden to the quantity of coal mined); additional
sustaining and mine development capital expenditures; and tighter control
of the maintenance costs of major mining equipment.
- The feed rates for the preparation plant at the Line Creek mine have been
forecasted based upon the actual rates which were achieved in
December 2002 and based upon the projected reduction of constraints
previously arising from the rate of coal production, rather than from the
plant's capacity.
CALGARY \ SALT LAKE WWW.NORWESTCORP.COM
CITY \ VANCOUVER \ BRISBANE \ ASHLAND \ LONDON \ JAKARTA \ CALCUTTA
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SHERRITT COAL ACQUISITION INC
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- Mine maintenance costs at the Line Creek mine are forecast to be reduced
in the future through: the substantial reduction in the backlog of repairs
and component replacements which occurred in 2002; the engagement of
external advisors to identify opportunities to further reduce maintenance
costs; and an increase in the proportion of planned maintenance versus
break-down maintenance.
- The trade-off between capital equipment replacement costs and operating
costs has been fully recognized in the Line Creek mine plan. While the
plan currently envisions extending the useful life of equipment and
allowing operating costs to rise, it is likely that the replacement of
capital equipment, which can be justified through higher productivity and
lower cost, will occur in the normal course of operating the mine.
- There are a number of potential pit areas within the Line Creek property
that could be economically and synergistically developed as an extension
of the Greenhills operation of Fording Inc. (Fording), within the Canadian
Coal Trust proposed by SCAI. These are in contrast to the less defined
opportunities to possibly extend the life of Fording's Coal Mountain
operation, through melding it with the Elkview mine proposed to be
contributed by Teck Cominco Limited (Teck Cominco) to the Fording Coal
Partnership.
- As required by Canadian securities regulations governing experts' reports
and disclosure regarding mines, the Norwest report explicitly deals with
coal RESERVES, and does not attempt to quantify the value of additional
RESOURCES which may be advanced to reserves over time. The A&S report
references a value for coal resources of Fording, in addition to its
reserve disclosure.
- Neptune Terminals provides added reliability to Line Creek by allowing the
mine to increase coal exports from one port at times of disruption at the
other. This is particularly important in light of the recently reported
accident at Westshore Terminals that has ceased operations at one of its
two coal loading berths.
- It is very important, when making comparisons of assets such as the Line
Creek mine (proposed to be indirectly contributed by SCAI to the Canadian
Coal Trust) and the Elkview mine (proposed to be contributed by Teck
Cominco to the Fording Coal Partnership, in which the Fording Income Trust
will hold an interest), to recognize the substantially different
attributed values of the mines. Comparisons of the Elkview mine and the
Line Creek mine cannot be meaningful without placing such comparisons in
the contexts of the respective proposed transactions, including with
reference to the substantial differences in the values attributed in each
case.
QUALIFICATIONS OF NORWEST
As previously disclosed, Norwest is an established international engineering
consulting firm within the energy and mineral resource industry. Norwest was
engaged by SCAI to review the geology, mine plans and cost estimates pertaining
to the Line Creek mine. Norwest staff have been working with detailed data
including the drill-hole data base, geological cross sections, mine plans,
manpower and equipment schedules, maintenance data bases and mine cost
information in the conduct of the work. Norwest staff members have spent in
excess of 500 man-hours in the analysis of the geology and plans for Line Creek,
much of that time at the mine site.
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SHERRITT COAL ACQUISITION INC
[GRAPHIC] PAGE 3 OF 5
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Norwest's senior staff members are very familiar with the mine operations
conducted by the various coal companies in southeast British Columbia and many
of these staff have held technical and managerial positions at these mines.
In addition to its work for SCAI, Norwest's reputation and expertise are
recognized by both Teck Cominco and Fording, as both companies have retained
Norwest in the past for technical reviews of their reserves and/or mine plans,
as can be seen in various corporate filings available through SEDAR. Norwest's
senior staff members are properly qualified under the requirements of Canadian
Securities legislation to provide the technical analysis required to support the
valuations considered in this transaction. It is a requirement of the
legislation that the Qualified Persons providing opinions relating to the
technical and economic feasibility of mining projects are identified and can
certify their qualifications.
Norwest has been compensated for its services in respect of this supplementary
report and our firm's original report on an hourly basis. Norwest's fee is in no
way contingent upon the successful completion of the SCAI offer or any other
matter.
SPECIFIC COMMENTS RE: LINE CREEK MINE
(REFERENCES TO PAGE NUMBERS RELATE TO APPENDIX F TO THE SECOND SUPPLEMENT TO THE
MANAGEMENT INFORMATION CIRCULAR FOR THE SPECIAL MEETING OF FORDING INC.)
MINE LIFE (PAGE F-3)
The A&S report suggests that the Line Creek mine will be mined out in 2017, for
a life of 15 years. This conclusion is drawn upon the reserves reported for
inclusion in the ten-year mine plan and the remainder of reserves not mined in
the ten-year plan. In addition to those identified reserves, there are
substantial resources that are expected to be advanced to the reserve category
with further drilling and mine planning, that will extend the life of the mine
well beyond the current planning window.
MINE COST REDUCTION (PAGE F-3)
The A&S report notes that the current cost of production at Line Creek is $39.48
per cmt and is expected to fall by $5.50-$6.50 per cmt over the life of the plan
"without explanation". The A&S report does not consider the fact that the clean
coal strip ratio declines from a high of 12.1:1 in 2003 to a low of 9.9:1
bcm:cmt in 2012, which materially affects the direct operating cost. The A&S
report similarly implies that there will be no capital expenditures during the
ten-year plan period, whereas Norwest's second table shows sustaining and mine
development capital planned over the ten year period. The mine cost reduction is
also achieved through tighter control on maintenance costs of major mining
equipment.
PREPARATION PLANT FEED RATE (PAGE F-3)
The historical preparation plant feed rates are identified by the A&S report as
being substantially below those anticipated in the ten year plan. The planned
rate was achieved in December 2002 and, more importantly, it should be noted
that in the past the plant throughput has been constrained by the ability of the
mine to supply coal, rather than the capacity of the plant to process coal. The
coal supply issue has been addressed in the new mine plan and will allow the
plant production rates to be achieved.
MINE MAINTENANCE COSTS (PAGE F-3)
Mine maintenance costs peaked in 2002 on an hourly basis due to an effort on the
part of the maintenance department to catch up on a back-log of repairs and
component replacements. This effort will be rewarded in 2003 and subsequent
years by lower maintenance costs on an ongoing basis. Furthermore, Line Creek
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SHERRITT COAL ACQUISITION INC
[GRAPHIC] PAGE 4 OF 5
------------------------------------------------------------------------------------------------
engaged external advisors to identify areas in which maintenance costs could be
further reduced. A key conclusion of these advisors, which has been adopted by
Line Creek, has been to increase the proportion of planned maintenance versus
break-down maintenance through better planning and control. This will further
contribute to the maintenance cost reduction and overall lower mine operating
costs.
CAPITAL EQUIPMENT REPLACEMENTS (PAGE F-3)
The A&S report correctly points out that major mining equipment is not
anticipated to be replaced over the life of the plan and will result in "reduced
availability" and "higher maintenance costs". While this is true, it is also
acknowledged in the high operating costs and modest mechanical availability
planned for the equipment. If new equipment was purchased, the maintenance costs
would drop substantially. Luscar management has stated that if major equipment
replacements could be justified economically through higher productivity and
lower cost, then such replacements would be made.
SUMMARY (PAGE F-3)
Norwest's detailed analysis has shown that the Line Creek plan uses industry
standard assumptions and engineering practices throughout all aspects of the
plan preparation. The plan is relatively conservative and with additional
engineering has the potential to be optimized for further cost reductions.
Luscar has committed the necessary technical and managerial resources to ensure
that the plan will be implemented.
SYNERGY ISSUES (PAGE F-4)
There are a number of potential pit areas within the Line Creek property that
could be economically and synergistically developed as an extension of Fording's
Greenhills operations, should the companies be combined. The A&S report notes
the proximity of the Elkview resources south of Highway 3 to Fording's Coal
Mountain Mine, as a potential to extend the life of Coal Mountain. While this
may be theoretically true, the A&S report presents no information on how
undeveloped resources within the Elkview property could be economically
developed in association with the Coal Mountain facilities.
ADDITIONAL COMMENTS
PRAIRIE RESOURCES (PAGE F-5)
The A&S report refers to "...undeveloped reserves containing probable and
inferred resources of 7 billion tonnes of coal. Fording has stated that based on
comparable transactions these resources have a value of at least $100 million."
The A&S report utilizes the terms "reserves" and "resources" to describe the
same coal in the same sentence, which is not in accord with the requirements of
Canadian securities regulators, and particularly with NI 43-101.
CSA Staff Notice 43-302 (October 19, 2001) states: "NI 43-101 prohibits the
inclusion of inferred resources in an economic evaluation in a preliminary
feasibility or feasibility study. The prohibition is based on the guidance under
the CIM definition of Inferred Mineral Resource that reads, in part:
"... Confidence in the estimate is insufficient to allow the meaningful
application of technical and economic parameters or to enable an evaluation
of economic viability worthy of public disclosure. Inferred Mineral
resources must be excluded from estimates forming the basis of feasibility
or other economic studies."
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SHERRITT COAL ACQUISITION INC
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PAGE F-6: Age of Luscar Mine Infrastructure -- The Fording River mine, the
Elkview mine (aka Balmer) and the Luscar Mine were all developed in the same
time period in the early 1970's and therefore have comparable-aged plant and
infrastructure, even considering latter day upgrades by all owners.
ASSET VALUE COMPARISONS (PAGES F-1, F-2, F-4)
The A&S report uses terms such as: "assets... are significantly better than...";
"compare the assets..."; "not an opinion as to comparative value..."; "To
reflect the difference in the quality of the Elkview Mine asset compared to the
Line Creek mine asset...". The comparison of the two mines is incomplete if it
does not compare the attributed values of the assets in their respective
contexts. The financial valuations in the two proposed transactions reflect the
different scales of the resource bases and production levels. The comparison
table on page F-4 of the A&S report is not meaningful without an associated
discussion of the substantial differences in the attributed values of the assets
in each case.
CONCLUSION
The foregoing is the supplementary report of Norwest addressing in more detail
certain matters discussed in our firm's report dated December 02, 2002 and
certain matters discussed in an opinion provided to Fording by the consulting
firm, A&S.
On Behalf of NORWEST CORPORATION
(Signed) Howard Lutley
Howard Lutley, P. Eng.
President
B-7
FOR FURTHER INFORMATION OR ADDITIONAL COPIES OF THIS SECOND NOTICE, THE
ENHANCED OFFER AND CIRCULAR, THE LETTER OF TRANSMITTAL AND ELECTION FORM OR THE
NOTICE OF GUARANTEED DELIVERY PLEASE CONTACT:
THE DEPOSITARY FOR THE AMENDED 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 AMENDED THE INFORMATION AGENT FOR THE AMENDED
ENHANCED OFFER IS: ENHANCED OFFER IS:
MELLON INVESTOR SERVICES, LLC INNISFREE M&A INCORPORATED
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)
1-877-750-9499 (Francais)
Banks and Brokers Call Collect: (212) 750-5833
THE CANADIAN DEALER MANAGERS FOR THE AMENDED ENHANCED OFFER ARE:
National Bank Financial Inc. BMO Nesbitt Burns Inc.
Telephone: (416) 869-7811 Telephone: (416) 359-8137
1-800-636-3675 1-888-355-6634
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.
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.
------------------------
* Previously filed
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: January 6, 2003