AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 18, 2002
REGISTRATION NO. 333-101765
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
AMENDMENT NO. 1 TO
FORM F-10
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
DOMTAR INC.
(Exact name of registrant as specified in its charter)
CANADA 2621 NOT APPLICABLE
(Province or other jurisdiction (Primary Standard Industrial Classification (I.R.S. Employer Identification
of incorporation or Code Number, if applicable) Number if applicable)
organization)
395 DE MAISONNEUVE BLVD. WEST
MONTREAL, QUEBEC, CANADA H3A 1L6
(514) 848-5400
(Address and telephone number of Registrant's principal executive offices)
---------------------
CT CORPORATION SYSTEM
111 EIGHTH AVENUE
NEW YORK, NEW YORK 10011
(212) 894-8690
(Name, address (including zip code) and telephone number (including area code)
of agent for service in the United States)
COPIES OF ALL COMMUNICATIONS TO:
ALAN H. PALEY, ESQ. GILLES PHARAND, ESQ. BRICE T. VORAN, ESQ.
PETER J. LOUGHRAN, ESQ. GENERAL COUNSEL SHEARMAN & STERLING
DEBEVOISE & PLIMPTON DOMTAR INC. COMMERCE COURT WEST
919 THIRD AVENUE 395 DE MAISONNEUVE BLVD. WEST SUITE 4405, P.O. BOX 247
NEW YORK, NEW YORK 10022 MONTREAL, QUEBEC TORONTO, ONTARIO
(212) 909-6000 CANADA H3A 1L6 CANADA M5L 1E8
(514) 848-5400 (416) 360-8484
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
PROVINCE OF QUEBEC, CANADA
(Principal jurisdiction regulating this offering)
It is proposed that this filing shall become effective (check appropriate
box):
A. [X] upon filing with the Commission, pursuant to Rule 467(a) (if in
connection with an offering being made contemporaneously in the
United States and Canada).
B. [ ] at some future date (check the appropriate box below).
1. [ ] pursuant to Rule 467(b) on (date) at (time) (designate a time not
sooner than 7 calendar days after filing).
2. [ ] pursuant to Rule 467(b) on (date) at (time) (designate a time 7
calendar days or sooner after filing) because the securities
regulatory authority in the review jurisdiction has issued a receipt
or notification of clearance on (date).
3. [ ] pursuant to Rule 467(b) as soon as practicable after notification
of the Commission by the Registrant or the Canadian securities
regulatory authority of the review jurisdiction that a receipt or
notification of clearance has been issued with respect hereto.
4. [ ] after the filing of the next amendment to this Form (if
preliminary material is being filed).
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to the home jurisdiction's shelf
prospectus offering procedures, check the following box. [ ]
---------------------
CALCULATION OF REGISTRATION FEE
-------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------
TITLE OF EACH CLASS OF PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE REGISTERED AGGREGATE OFFERING PRICE(1) REGISTRATION FEE(1)
-------------------------------------------------------------------------------------------------------------
Units(2).................................................... US $81,911,487 US $7,536(4)
Common Shares(3)............................................
Common Share Purchase Warrants(3)...........................
Common Shares Underlying Warrants(5)........................ US $86,126,985 US $7,924(4)
-------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------
(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(o) under the Securities Act of 1933, as amended.
(2) Each Unit consists of one common share and one common share purchase
warrant. Each common share purchase warrant entitles the holder to purchase
one common share.
(3) The common shares and the common share purchase warrants are offered as
components of the Units for no additional consideration. Accordingly no
separate registration fee has been paid in respect thereof.
(4) Previously paid.
(5) The fee paid in respect of these common shares relates to the offering of
the common shares to be registered subsequently under a separate
registration statement of the registrant (File No. 333-101874).
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
PART I
INFORMATION REQUIRED TO BE DELIVERED TO OFFEREES OR PURCHASERS
I-1
PROSPECTUS
LOGO
DOMTAR INC.
18,170,249 UNITS
US$10.58 PER UNIT
------------------------
The units offered by this prospectus consist of one common share of Domtar
Inc. sold by the selling shareholder and one common share purchase warrant
entitling its holder to purchase one common share.
Each unit will be separated into one common share and one warrant at the
closing of this offering. Each warrant will entitle its holder to purchase one
common share at a price of Cdn$17.55 (or its U.S. dollar equivalent at the date
preceding the date of exercise, as determined in accordance with the warrant
agreement) at any time on or prior to one year from the closing of this
offering, after which date such warrant will become null and void. The warrant
agreement requires us to issue, or cause to be delivered, to the holders of
warrants upon the due exercise of the warrants, that number of common shares to
which such holder of warrants is entitled. Under a separate agreement, the
delivery agreement, the selling shareholder has irrevocably committed and agreed
to deliver common shares from its holding of common shares for delivery to the
holders of warrants upon the due exercise of the warrants. To secure this
obligation, the selling shareholder agreed, among other things, to pledge, upon
the closing of this offering, certificates representing a total of 18,170,249
common shares, or the pledged shares, in our favor.
Our common shares are listed on the New York Stock Exchange and the Toronto
Stock Exchange under the symbol "DTC". The Toronto Stock Exchange has
conditionally approved the listing of the warrants offered hereby under the
symbol "DTC.WT". The listing is subject to us fulfilling all of the requirements
of the Toronto Stock Exchange on or before March 10, 2003. We will not apply to
have the warrants listed on the New York Stock Exchange. On December 17, 2002,
the closing price of the common shares on the New York Stock Exchange and the
Toronto Stock Exchange was US$10.57 and Cdn$16.35, respectively.
------------------------
INVESTING IN THE UNITS INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 17.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
WE ARE PERMITTED TO PREPARE THIS PROSPECTUS IN ACCORDANCE WITH CANADIAN
DISCLOSURE REQUIREMENTS, WHICH ARE DIFFERENT FROM THOSE OF THE UNITED STATES. WE
PREPARE OUR CONSOLIDATED FINANCIAL STATEMENTS IN ACCORDANCE WITH CANADIAN
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES, AND THEY ARE SUBJECT TO CANADIAN
AUDITING AND AUDITOR INDEPENDENCE STANDARDS. THEY MAY NOT BE COMPARABLE TO
FINANCIAL STATEMENTS OF UNITED STATES COMPANIES.
OWNING THE UNITS MAY SUBJECT YOU TO TAX CONSEQUENCES BOTH IN THE UNITED
STATES AND CANADA. THIS PROSPECTUS MAY NOT DESCRIBE THESE TAX CONSEQUENCES
FULLY. YOU SHOULD READ THE TAX DISCUSSION CONTAINED IN THIS PROSPECTUS.
YOUR ABILITY TO ENFORCE CIVIL LIABILITIES UNDER UNITED STATES FEDERAL
SECURITIES LAWS MAY BE AFFECTED ADVERSELY BECAUSE WE ARE INCORPORATED UNDER THE
LAWS OF CANADA, MOST OF OUR OFFICERS AND DIRECTORS AND SOME OF THE EXPERTS NAMED
IN THIS PROSPECTUS ARE CANADIAN RESIDENTS, AND CERTAIN OF OUR ASSETS AND THE
ASSETS OF THOSE OFFICERS, DIRECTORS AND EXPERTS ARE LOCATED IN CANADA.
------------------------
PRICE TO UNDERWRITERS' NET PROCEEDS TO
THE PUBLIC COMMISSION SELLING SHAREHOLDER
-------------- ------------- -------------------
Per common share........................... US$9.94 US$0.398 US$9.542
Per warrant................................ US$0.64 US$0.025 US$0.615
Total...................................... US$192,241,234 US$7,689,649 US$184,551,585
The underwriters expect to deliver the units to purchasers on or about
December 23, 2002, or on such other date as may be agreed upon, but not later
than December 31, 2002.
------------------------
PUTNAM LOVELL NBF CIBC WORLD MARKETS MERRILL LYNCH & CO.
BMO NESBITT BURNS CORP. SCOTIA CAPITAL (USA) INC.
UBS WARBURG
TD SECURITIES (USA) INC.
December 18, 2002
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN OR INCORPORATED BY
REFERENCE IN THIS SHORT FORM PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO
PROVIDE YOU WITH DIFFERENT INFORMATION. WE ARE NOT MAKING AN OFFER OF THESE
SECURITIES IN ANY JURISDICTION WHERE THE OFFER IS NOT PERMITTED. YOU SHOULD NOT
ASSUME THAT THE INFORMATION CONTAINED IN THIS SHORT FORM PROSPECTUS IS ACCURATE
AS OF ANY DATE OTHER THAN THE DATE ON THE FRONT OF THIS SHORT FORM PROSPECTUS.
------------------
TABLE OF CONTENTS
PAGE
----
DOCUMENTS INCORPORATED BY REFERENCE......................... 3
FORWARD-LOOKING STATEMENTS.................................. 4
EXCHANGE RATE INFORMATION................................... 4
RECENT DEVELOPMENTS......................................... 4
CORPORATE INFORMATION....................................... 5
OUR BUSINESS................................................ 5
SELLING SHAREHOLDER......................................... 6
USE OF PROCEEDS............................................. 6
DESCRIPTION OF SHARE CAPITAL................................ 7
PLAN OF DISTRIBUTION........................................ 7
DETAILS OF THE OFFERING..................................... 9
CERTAIN INCOME TAX CONSIDERATIONS........................... 11
RISK FACTORS................................................ 17
LEGAL MATTERS............................................... 19
EXPERTS..................................................... 19
TRANSFER AGENT AND REGISTRAR................................ 19
WHERE YOU CAN FIND MORE INFORMATION......................... 20
DOCUMENTS TO BE FILED AS PART OF REGISTRATION STATEMENT..... 20
INDEX TO FINANCIAL STATEMENTS............................... F-1
In this short form prospectus, "Domtar", "we", "us" and "our" refer to
Domtar Inc., its subsidiaries and its 50% investment interest in Norampac Inc.
In accordance with industry practice, in this short form prospectus we use the
term "ton" when referring to a short ton, an imperial unit of measurement which
equals 0.9072 metric tonnes, and the term "tonne" when referring to a metric
tonne. In this short form prospectus, unless otherwise indicated, all dollar
amounts are expressed in, and the term "dollars" and the symbol "$" refer to,
Canadian dollars. The term "US dollars" and the symbol "US$" refer to the United
States dollars. Except as otherwise indicated, all financial statements and
financial data contained in this prospectus and in the documents incorporated by
reference in this prospectus have been prepared in accordance with Canadian
generally accepted accounting principles, or Canadian GAAP, which may differ
from United States generally accepted accounting principles, or US GAAP.
2
DOCUMENTS INCORPORATED BY REFERENCE
The following documents of Domtar, filed with the various securities
commissions or similar authorities in each of the provinces and territories of
Canada and with the Securities and Exchange Commission, or SEC, are specifically
incorporated by reference into and form an integral part of this short form
prospectus:
- the Annual Information Form dated May 1, 2002 for the year ended
December 31, 2001;
- the audited consolidated financial statements for the fiscal years ended
December 31, 2001, 2000 and 1999, together with the related notes
thereto and the auditors' report to the audited consolidated financial
statements;
- the Management Proxy Circular dated March 27, 2002 relating to the
meeting of shareholders held on May 1, 2002;
- the Management's Discussion and Analysis for the fiscal year ended
December 31, 2001; and
- the unaudited consolidated financial statements for the nine months
ended September 30, 2002 (including Management's Discussion and Analysis
relating thereto) and September 30, 2001.
Any documents of the type referred to in the preceding paragraph, any
interim financial statements and any material change reports (excluding
confidential material change reports) filed by us with the securities
commissions or similar authorities in the provinces and territories of Canada,
subsequent to the date of this short form prospectus and prior to the
termination of this distribution, shall be deemed to be incorporated by
reference in this short form prospectus.
We also incorporate by reference all future annual reports and any other
information we file with the SEC pursuant to Section 13(a), 13(c) or 15(d) of
the US Securities Exchange Act of 1934, as amended, during such period.
ANY STATEMENT CONTAINED IN THIS SHORT FORM PROSPECTUS OR IN A DOCUMENT
INCORPORATED OR DEEMED TO BE INCORPORATED BY REFERENCE IN THIS SHORT FORM
PROSPECTUS SHALL BE DEEMED TO BE MODIFIED OR SUPERSEDED FOR PURPOSES OF THIS
SHORT FORM PROSPECTUS, TO THE EXTENT THAT A STATEMENT CONTAINED IN THIS SHORT
FORM PROSPECTUS OR IN ANY OTHER SUBSEQUENTLY FILED DOCUMENT THAT ALSO IS OR IS
DEEMED TO BE INCORPORATED BY REFERENCE IN THIS SHORT FORM PROSPECTUS MODIFIES OR
REPLACES SUCH STATEMENT. THE MODIFYING OR SUPERSEDING STATEMENT NEED NOT STATE
THAT IT HAS MODIFIED OR SUPERSEDED A PRIOR STATEMENT OR INCLUDE ANY OTHER
INFORMATION SET FORTH IN THE DOCUMENT THAT IT MODIFIES OR SUPERSEDES. THE MAKING
OF A MODIFYING OR SUPERSEDING STATEMENT 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 IN ITS UNMODIFIED OR
SUPERSEDED FORM TO CONSTITUTE A PART OF THIS SHORT FORM PROSPECTUS.
3
FORWARD-LOOKING STATEMENTS
This short form prospectus, and the documents incorporated herein by
reference, contain forward-looking statements which reflect management's
expectations regarding Domtar's future growth, results of operations,
performance and business prospects and opportunities. Wherever possible, words
such as "anticipate", "believe", "expect", "intend" and similar expressions have
been used to identify these forward-looking statements. These statements reflect
management's current beliefs and are based on information currently available to
management. Forward-looking statements involve significant risk, uncertainties
and assumptions. A number of factors could cause actual results, performance or
achievements to differ materially from the results discussed or implied in the
forward-looking statements. These factors should be considered carefully and
prospective investors should not place undue reliance on the forward-looking
statements. Although the forward-looking statements contained in this short form
prospectus, and the documents incorporated herein by reference, are based upon
what management believes to be reasonable assumptions, Domtar cannot assure
prospective purchasers that actual results will be consistent with these
forward-looking statements. These forward-looking statements are made as of the
date of this short form prospectus, and Domtar assumes no obligation to update
or revise them to reflect new events or circumstances. These risks,
uncertainties and other factors include, among other things, those listed under
"Risk Factors" as well as those included elsewhere in this prospectus.
EXCHANGE RATE INFORMATION
The following table sets forth, for each period indicated, the low and high
exchange rates, the average of the exchange rates during the period indicated
and the exchange rate at the end of each period indicated for one US dollar
expressed in Canadian dollars, based on the Bank of Canada noon rate:
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- -------------------
1999 2000 2001 2001 2002
------- ------- ------- ------- -------
Low............................... $1.4433 $1.4341 $1.4936 $1.4936 $1.5110
High.............................. 1.5298 1.5593 1.6021 1.5793 1.6132
Average........................... 1.4858 1.4854 1.5484 1.5380 1.5705
Period End........................ 1.4433 1.5002 1.5926 1.5790 1.5858
On December 17, 2002, the Bank of Canada noon rate was $1.5509 per US$1.00.
RECENT DEVELOPMENTS
NEW FOREST PRODUCTS GROUP
On September 9, 2002, we announced the creation of a new Forest Products
Group, which combines both our timber and lumber operations. This initiative is
intended to further increase productivity, reduce costs and improve service to
customers in difficult market conditions.
TEMPORARY PRODUCTION HALT AND EXTENDED SHUTDOWN AT SAWMILLS
On November 14, 2002, we announced that we will temporarily halt production
at the Lebel-sur-Quevillon pulp mill from December 21, 2002 until January 19,
2003 and that the usual holiday shutdowns at our sawmills from December 20, 2002
to January 6, 2003 will be extended for an additional two weeks at our
Lebel-sur-Quevillon, Matagami and Malartic sawmills. These decisions were made
in order to avoid producing for inventory and were due to declining prices for
both softwood pulp and softwood lumber.
CLOSURE OF REMANUFACTURING FACILITY AND HARDWOOD OPERATION
On November 29, 2002, we announced the permanent closure of our wood
products remanufacturing facility in Daveluyville, Quebec and our only hardwood
lumber operation in Sault-Ste-Marie, Ontario. A provision of $18 million has
been established to cover costs relating to the closures. We decided to exit
these businesses in order to focus our efforts on improving the efficiency of
our softwood lumber mills.
4
CORPORATE INFORMATION
Domtar was formed in 1929 under the laws of Canada. Domtar was continued
under the Canada Business Corporations Act by a certificate of continuance dated
December 30, 1977 and subsequently amalgamated with certain wholly-owned
subsidiaries by certificates of amalgamation dated December 31, 1977, October
31, 1978 and July 31, 1979. The first two of these certificates of amalgamation
were issued in the course of the consolidation of substantially all of our
Canadian operations into a single corporation. The July 31, 1979 certificate of
amalgamation confirmed our amalgamation with two wholly-owned subsidiaries. On
January 1, 2000, we amalgamated with our wholly-owned subsidiary E.B. Eddy
Forest Products Ltd., to continue under the name of Domtar Inc.
Our significant subsidiaries are Domtar Industries Inc., Domtar A.W. Corp.,
Domtar Maine Corp. and Ris Paper, all of which are 100% owned. Domtar Industries
Inc., Domtar A.W. Corp. and Domtar Maine Corp. are incorporated in the State of
Delaware and Ris Paper is incorporated in the State of New York. We do not hold
any non-voting shares in these subsidiaries.
Our head and principal office is located at 395 de Maisonneuve Boulevard
West, Montreal, Quebec H3A 1L6 and our telephone number is (514) 848-5400.
OUR BUSINESS
Domtar's reporting segments correspond to the following business
activities: Papers, Paper Merchants, Wood and Packaging. Since 1997, under the
leadership of our current senior management team, we have implemented a series
of strategic initiatives designed to reposition our company to meet our
customers' quality and service needs, thereby increasing our customers' loyalty
to us and enhancing shareholder value. The most recent strategic initiative was
the acquisition on August 7, 2001 of four integrated pulp and paper mills for
US$1.65 billion ($2.53 billion) in cash. The four mills, located in Ashdown,
Arkansas; Nekoosa and Port Edwards, Wisconsin; and Woodland, Maine, have an
aggregate annual production capacity of approximately 1.35 million tons of
uncoated freesheet paper and a long net market pulp position, on an annual
basis, of approximately 400,000 tons. We refer to this transaction as the
Acquisition and to the four mills as the Acquired Mills. The Acquisition doubled
the size of our annual paper production capacity, consolidated our position in
the uncoated freesheet market and gave us critical mass in a rapidly
consolidating industry.
For the year ended December 31, 2001, our consolidated net sales were $4.4
billion, including the net sales from the Acquired Mills. If the Acquisition had
occurred on January 1, 2001, our pro forma consolidated net sales would have
been $5.5 billion.
We are now the third largest integrated manufacturer and marketer of
uncoated freesheet paper in North America. We operate five paper mills in Canada
and five in the United States, with an annual production capacity of
approximately 2.7 million tons of paper, which are complemented by strategically
located warehouses and sales offices. More than 50% of our paper production
capacity is located, and approximately 85% of our paper sales were made during
the first nine months of 2002, in the United States. Uncoated and coated
freesheet paper, our principal products, are used for business, printing and
publishing, and technical and specialty applications. We sell paper principally
through a large network of owned and independent merchants that distribute our
paper products from over 350 locations throughout North America. Sales are made
also to a variety of customers that include business offices, office equipment
manufacturers, retail outlets, commercial printers, publishers and converters.
In addition, we sell pulp that we produce in excess of our internal
requirements. Our net market pulp position is approximately 625,000 tons. Our
Papers business is our most important segment representing approximately 58% of
our consolidated net sales during the first nine months of 2002.
The Paper Merchants business involves the purchasing, warehousing, sale and
distribution of business and printing papers, graphic arts supplies and
industrial products made by us as well by other manufacturers. The Paper
Merchants segment represented approximately 22% of our consolidated net sales
during the first nine months of 2002.
5
The Wood segment is composed of the manufacture and distribution of lumber
and wood-based value-added products as well as the management of forest
resources. The Wood segment represented approximately 9% of our consolidated net
sales during the first nine months of 2002.
Our Packaging business is comprised of our 50% ownership interest in
Norampac Inc., a joint venture between Domtar Inc. and Cascades Inc. We do not
manage Norampac Inc. and its debt is non-recourse to us. Norampac Inc. accounted
for approximately 11% of our consolidated net sales during the first nine months
of 2002.
We seek to be one of the most profitable companies in our industry by
continuously improving our operations. In this respect, the Acquisition is
enabling us, through synergies, to achieve significant operating improvements
and cost reductions in our Papers business that are expected to reach an
annualized run rate of US$65 million by the end of 2002. In addition, we have in
place a goal to further improve our profitability by $100 million over the two
year period ending in 2003 through a new Quality and Profitability Program.
Because the imbalance between supply and demand and the negative impact of
countervailing and antidumping duties on lumber exports to the United States
have negatively affected our overall profitability, we are currently evaluating
strategic alternatives for our Wood business. In this regard, we are engaged, or
may in the foreseeable future engage, in discussions with third parties.
However, no decision has been made and no agreement has been reached in this
regard.
Our overall strategic objective is to be a world leader in the paper
industry, particularly in the fine paper segment. We have developed our business
strategies around meeting and anticipating the everchanging needs of our
customers, providing our shareholders with attractive returns, fostering a
dynamic and creative environment in which shared human values and personal
commitment prevail, and providing our shareholders with an appealing alternative
investment vehicle for basic materials exposure. It is our intention to pursue
business opportunities that will allow us to broaden our appeal to customers and
provide a superior return to shareholders while maintaining a solid balance
sheet.
SELLING SHAREHOLDER
The selling shareholder beneficially owns 36,340,498 common shares of
Domtar Inc. representing 15.96% of the outstanding common shares of Domtar Inc.
The selling shareholder is Dofor Inc., an indirect wholly owned subsidiary of
Societe generale de financement du Quebec, or SGF, an economic development
agency of the Government of the Province of Quebec. The selling shareholder has
agreed to sell to the underwriters an aggregate of 18,170,249 common shares for
a price of $15.50 per share. The selling shareholder has not acquired any common
shares of Domtar Inc. during the last twelve months. After the sale of the
common shares under this offering, the selling shareholder will beneficially own
18,170,249 common shares of Domtar Inc. representing 7.98% of the outstanding
common shares of Domtar Inc., which will be delivered to the warrant agent upon
closing in connection with Domtar's obligation to deliver, or cause to be
delivered, common shares to holders of warrants upon due exercise of the
warrants.
The selling shareholder has agreed to pay the expenses of this offering,
including the underwriters' commission, and to reimburse Domtar Inc. for
expenses incurred in connection therewith. We will not be entitled to any of the
proceeds from the sale of the units.
We have been advised by SGF that it is party to an agreement with Caisse de
depot et placement du Quebec, or Caisse, under which SGF and Caisse have agreed,
inter alia, to vote their shares in favor of the election to the board of
directors of Domtar of a number of representatives of SGF and Caisse.
USE OF PROCEEDS
We will not be entitled to any of the proceeds from the sale of the units.
The estimated net proceeds to the selling shareholder from the sale of the units
will be $287,816,744.16 after deducting the underwriters' commission and prior
to the estimated expenses of this offering which will be paid by the selling
shareholder. See "Details of the Offering".
6
DESCRIPTION OF SHARE CAPITAL
Our authorized share capital consists of an unlimited number of common
shares, Series A preferred shares and Series B preferred shares. As at December
17, 2002, we had 227,663,628 common shares, 69,576 Series A preferred shares and
1,710,000 Series B preferred shares outstanding.
Holders of our common shares are entitled to one vote at any meeting of our
shareholders. Holders of our common shares are, subject to the rights of the
holders of our preferred shares, entitled to receive any dividend declared by
our board of directors. Cash dividends on the common shares of $0.035 per share
have been paid quarterly since January 1996. No dividend may at any time be paid
or declared and set apart for payment on common shares unless all accumulated
dividends, where applicable, on the Series A preferred shares and the Series B
preferred shares have been paid or declared and set apart, including the current
quarterly instalment of dividends. In the event of our liquidation, dissolution
or winding-up or other distribution of our assets among our shareholders for the
purpose of winding-up our affairs, our remaining assets and funds will be
distributed among the holders of common shares, subject to the rights of the
holders of preferred shares. All outstanding common shares are fully paid and
non-assessable.
PLAN OF DISTRIBUTION
Under an agreement dated December 10, 2002 among the selling shareholder,
SGF and SGF Rexfor Inc., or SGF Rexfor, and us, on the one part, and National
Bank Financial Inc., CIBC World Markets Inc., Merrill Lynch Canada Inc., BMO
Nesbitt Burns Inc., Scotia Capital Inc., UBS Bunting Warburg Inc., Desjardins
Securities Inc. and TD Securities Inc., as underwriters on the other part, the
selling shareholder has agreed to sell the common shares, we have agreed to
deliver the warrants and the underwriters have agreed to purchase on or about
December 23, 2002, but in no event later than December 31, 2002, 18,170,249
units of Domtar Inc. at a price of $16.50 per unit, payable in cash to the
selling shareholder against delivery. The obligations of the underwriters under
the underwriting agreement may be terminated at their discretion upon the
occurrence of certain stated events including, without limiting the generality
of the foregoing, those described in a "disaster-out" and a "material
change-out" clause. The underwriters are, however, obligated to take up and pay
for all of the units if any of the units are purchased under the underwriting
agreement. The obligations of the underwriters to purchase the units are joint
and not solidary. The underwriting agreement provides that the underwriters will
be paid a commission by the selling shareholder of $0.66 per unit offered and
sold, in consideration of services performed in connection with this offering.
The offering price of $16.50 per unit was determined by negotiation among the
selling shareholder and the underwriters. The units are being offered in the
United States in US dollars at the approximate equivalent of the Canadian dollar
price calculated based on the US-Canadian dollar rate of exchange on the date of
this prospectus. The underwriters may offer some of the units to dealers at the
public offering price less a concession not to exceed $0.33 per unit.
The underwriters have agreed to sell the common shares and the warrants
only as units. Each unit will be separated into one common share and one warrant
at the closing of this offering.
Under the underwriting agreement, the selling shareholder, SGF and its
subsidiaries have agreed that without the prior written consent of the
underwriters, for a period of 90 days following the date of closing of this
offering, they will not sell or offer for sale, directly or indirectly, any
common shares or securities convertible into or exchangeable for common shares,
except to satisfy its delivery obligations upon the due exercise of warrants
pursuant to the delivery agreement described under "Details of the Offering".
Under the delivery agreement, the selling shareholder has agreed to pledge to us
the balance of common shares it will hold after the closing of this offering.
Under the underwriting agreement, we have agreed that without the prior written
consent of the underwriters, for a period of 90 days following the date of
closing of the offering, we will not issue, sell or offer for sale, directly or
indirectly, any of our common shares or securities convertible into or
exchangeable for our common shares other than pursuant to the issue or exercise
of options under our stock option or stock purchase plans or the satisfaction of
outstanding instruments or contractual commitments. Under the underwriting
agreement, we, the selling shareholder, SGF and its
7
subsidiaries have agreed not to purchase in the market, by invitation to tender,
by private contract or otherwise, all or any of the warrants.
Pursuant to policy statements of the Ontario Securities Commission and the
Commission des valeurs mobilieres du Quebec, the underwriters may not,
throughout the period of distribution, bid for or purchase common shares or
warrants. The foregoing restriction is subject to certain exceptions, on the
condition that the bid or purchase not be engaged in for the purpose of creating
actual or apparent active trading in, or raising the price of the common shares
or warrants. These exceptions include (i) a bid or purchase permitted under the
by-laws and rules of the Toronto Stock Exchange, or TSX, relating to market
stabilization and passive market activities, and (ii) a bid or purchase made for
and on behalf of a customer where the order was not solicited during the period
of the distribution, provided that the bid or purchase was not engaged in for
the purpose of creating actual or apparent active trading in, or raising the
price of such securities. Such transactions, if commenced, may be discontinued
at any time.
In connection with this offering, the underwriters may purchase and sell
common shares or warrants in the open market. These transactions may include
short sales, syndicate covering transactions and stabilizing transactions. Short
sales involve syndicate sales of common shares or warrants in excess of the
number of shares or warrants to be purchased by the underwriters in this
offering, which creates a syndicate short position. Stabilizing transactions
consist of bids for or purchases of common shares or warrants in the open market
while this offering is in progress. The underwriters also may impose a penalty
bid. Penalty bids permit the underwriters to reclaim a selling concession from a
syndicate member when an underwriter repurchases common shares or warrants
originally sold by that syndicate member in order to cover syndicate short
position or make stabilizing purchases.
Any of these activities may have the effect of preventing or retarding a
decline in the market price of the common shares or the warrants. They may also
cause the price of the common shares or the warrants to be higher than the price
that would otherwise exist in the open market in the absence of these
transactions. The underwriters may conduct these transactions on the TSX in
relation to the common shares and the warrants, the New York Stock Exchange, or
NYSE, in relation to the common shares or in the over-the-counter market, or
otherwise. If the underwriters commence any of these transactions, they may
discontinue them at any time. We will not apply to have the warrants listed on
the NYSE.
The offering is being made concurrently in the United States and Canada
pursuant to the multijurisdictional disclosure system implemented by the
securities regulatory authorities in the United States and Canada. Each of the
underwriters that is not registered as a broker-dealer under the US Securities
Exchange Act of 1934, as amended, or the Exchange Act, has agreed that, in
connection with this offering of units and with specific exceptions, it will not
offer or sell any units in, or to persons who are nationals or residents of, the
United States other than through one of its United States registered
broker-dealer affiliates. Offers and sales in Canada or to Canadian persons will
be made by the Underwriters or their affiliates that are investment dealers or
brokers duly registered under the applicable laws of the provinces and
territories in Canada in which the offer or sale is made through or with a
prospectus filed with the applicable Canadian securities regulatory authorities.
We, the selling shareholder, SGF and SGF Rexfor have agreed to indemnify
the underwriters against certain liabilities, including liabilities under the US
Securities Act of 1933, as amended, or the Securities Act, and Canadian
provincial securities legislation, or to contribute to payments the underwriters
may be required to make in respect of any of those liabilities.
Each of National Bank Financial Inc., CIBC World Markets Inc., BMO Nesbitt
Burns Inc., Scotia Capital Inc., Desjardins Securities Inc. and TD Securities
Inc. is a wholly-owned subsidiary of a financial institution that, as member of
a lending syndicate, has provided Domtar with credit facilities. As at December
16, 2002, the indebtedness of Domtar to such financial institutions under these
facilities was, in the aggregate, approximately $372,000,000. Domtar is in
compliance with the terms governing such indebtedness. Consequently, under
certain circumstances, Domtar Inc. may be considered a "connected issuer" to
those underwriters under applicable securities legislation. The decision of each
underwriter which is a subsidiary of such aforesaid financial institution, to
underwrite this offering was made independently of such financial institution.
None of the underwriters will receive any benefit from this offering, other than
its respective portion of the commission payable by the selling shareholder.
8
It is a condition of closing of this offering that a shelf registration
statement be declared effective by the SEC regarding the offering of common
shares to be delivered upon the exercise of the warrants in the United States.
See "Details of the Offering".
DETAILS OF THE OFFERING
The offering consists of 18,170,249 units at a price of $16.50 per unit,
each unit consisting of one common share and one warrant. The selling
shareholder will allocate $15.50 for the common share and $1.00 for the warrant
which comprise the unit. The summary of the provisions relating to our common
shares is set forth under "Description of Share Capital".
The units will be separated into common shares and warrants at the closing
of this offering. Certificates in definitive form for the warrants and the
common shares comprising the units will be available at the closing of this
offering. Only certificates evidencing whole warrants will be issued and
subscribers of units will not be entitled to any cash payment or other
compensation with respect to any fraction of a warrant which might otherwise
have been issued.
The exercise price for the warrants is payable in Canadian dollars.
However, holders of warrants may elect to pay the exercise price in US dollars.
In such an event, the warrant exercise price payable shall be the US dollar
equivalent of the warrant exercise price payable in Canadian dollars as
calculated using the Bank of Canada noon rate, or if such exchange rate is not
quoted or published, such other exchange rate as may be reasonably determined by
us, on the business day immediately preceding the relevant exercise date,
rounded to the nearest tenth of a cent, and subject to confirmation by us within
two business days.
The warrants will be issued in registered form only under an agreement, the
warrant agreement, to be dated as of the closing date of this offering, between
us and Computershare Trust Company of Canada, or the warrant agent, as warrant
agent.
Each whole warrant will entitle the holder of the warrant to purchase one
common share at a price of $17.55, at any time on or prior to 5:00 p.m.
(Montreal time) on the date which is one year from the closing of this offering,
after which date the warrant will become null and void.
The warrant agreement requires us to issue, or cause to be delivered, to
the holders of warrants upon the due exercise of the warrants, that number of
common shares to which such holder of warrants is entitled.
Under a separate agreement, the delivery agreement, to be dated as of the
closing date of this offering, between us, the selling shareholder, SGF, SGF
Rexfor, and the warrant agent, as depository and delivery agent, the selling
shareholder has irrevocably committed and agreed to deliver common shares from
its holding of common shares for delivery to the holders of warrants upon the
due exercise of the warrants. To secure this obligation, the selling shareholder
agreed, among other things, to pledge, upon the closing of this secondary
offering, certificates representing a total of 18,170,249 common shares, or the
pledged shares, in our favour.
Upon the due exercise of the warrants, the warrant agent will deliver to
the holders of warrants that number of pledged shares or other common shares
delivered by the selling shareholder to which the holders of warrants are
entitled. The warrant agent will remit to the selling shareholder the funds
received in payment of the exercise price of the warrants. In the event the
warrant agent is unable to deliver to the holders of warrants that number of
pledged shares to which the holders of warrants are entitled and the selling
shareholder does not deliver other common shares to the warrant agent to permit
such delivery, we will issue the required number of common shares to the warrant
agent at a price per share equal to the exercise price of each warrant and an
equivalent number of pledged shares will automatically be cancelled at that same
price per share. The warrant agent will credit us the full amount of the funds
received in payment of the exercise price of the warrants, debit us the full
amount of the purchase price for the pledged shares cancelled and remit that
amount to the selling shareholder.
Until the due exercise of the warrants, dividends and other distributions,
if any, in respect of the pledged shares will be paid to, or to the order of the
warrant agent, as registered holder of the pledged shares. The warrant agent
will remit such dividends and other distributions to the selling shareholder.
Dividends declared on the pledged shares will not accrue to holders who exercise
their warrants after the record date in respect
9
of such dividends. The right to vote attached to the pledged shares will be
exercised by the warrant agent in accordance with the written instructions of
the selling shareholder.
In the event that any pledged shares remain with the warrant agent after
5:00 p.m. (Montreal time) on the date which is one year from the closing of this
offering, or the expiry date, the warrant agent will deliver to the selling
shareholder certificates representing any such remaining pledged shares. Under
the delivery agreement, if the remaining pledged shares represent 20% or more of
the originally pledged shares, SGF and its subsidiaries have agreed that,
without our prior written consent, for a period of 15 months following the
expiry date, they will not sell or offer for sale, directly or indirectly, such
remaining pledged shares.
The delivery agreement provides that each of the selling shareholder, SGF
Rexfor and SGF will indemnify us and hold us harmless against any and all
losses, damages or liabilities to which we may become subject arising out of or
based upon any default of the selling shareholder under the delivery agreement
and any additional losses, damages or liabilities to which we may become subject
arising specifically out of or based upon the issue of the warrants or the
warrant agreement. The obligations of the selling shareholder under the delivery
agreement will be irrevocably and unconditionally guaranteed by SGF and SGF
Rexfor.
The warrant agreement will provide for adjustments to the exercise price or
to the number of common shares deliverable upon the exercise of the warrants
upon the occurrence of certain events, including:
(a) the issuance of common shares as an extraordinary dividend on the
common shares;
(b) subdivisions, consolidations, or certain reclassifications of the
common shares;
(c) the issuance, to the holders of common shares generally, of rights,
options or warrants (expiring within 45 days after the record date
for determining shareholders entitled to receive them) to subscribe
for common shares at less than 95% of the current market price; or
(d) the distribution, by way of an extraordinary dividend, to the holders
of common shares generally, of shares other than common shares, or
evidences of indebtedness, or cash, or assets, or rights, options or
warrants (other than those mentioned above) to subscribe for common
shares or to acquire assets from us.
The warrant agreement will also provide for adjustment in the class and/or
number of securities issuable on the exercise of the warrants and/or exercise
price per security in the event of the following additional events: (i)
reorganization, reclassification or other change of the common shares into other
securities; (ii) consolidation, amalgamation, arrangement or merger of Domtar
with or into another entity (other than consolidations, amalgamations,
arrangements or mergers which do not result in any reclassification of the
common shares or a change of the common shares into other shares); or (iii)
sale, conveyance or transfer of our undertakings or assets as an entirety or
substantially as an entirety to another corporation or other entity in which the
holders of common shares are entitled to receive shares, other securities or
property, including cash.
No adjustment will be required to be made with respect to the warrants
until the cumulative adjustments amount to 1% or more of the exercise price or
of the number of common shares which may be purchased upon the exercise of the
warrants; however, any such adjustment which does not have to be made will be
carried forward and will be taken into account should there be any subsequent
adjustment.
No fractional common shares will be issued upon the exercise of any
warrant. In lieu of any fractional share, the holder will receive a cash payment
based upon the then current market price of the common shares. Holders of
warrants will have no voting rights or pre-emptive rights or any other rights
which a holder of common shares or a holder of other shares of our capital would
have.
From time to time, Domtar and the warrant agent, without the consent of the
holders of warrants, may amend or supplement the warrant agreement for certain
purposes, including curing defects or inconsistencies or making any change that,
in the opinion of the warrant agent, does not prejudice the rights of the
warrant agent or the holders of the warrants. Any amendment or supplement to the
warrant agreement that so prejudices the interests of the holders of the
warrants may only be made by "extraordinary resolution", which will be defined
in the warrant agreement as a resolution either (i) passed at a meeting of the
holders of
10
warrants at which there are holders of warrants present in person or represented
by proxy representing at least 25% of the then outstanding warrants (at least
50% for any amendment that would increase the exercise price per security,
decrease the number of securities issuable upon the exercise of warrants or
shorten the term of the warrants), or such lesser percentage constituting a
quorum for this purpose under the warrant agreement, and passed by the
affirmative vote of holders of warrants representing not less than 66 2/3% of
the then outstanding warrants represented at the meeting and voted on the poll
on such resolution; or (ii) adopted by an instrument in writing signed by the
holders of warrants representing not less than 66 2/3% of the then outstanding
warrants.
THE FOREGOING SUMMARY OF CERTAIN OF THE PRINCIPAL PROVISIONS OF THE WARRANT
AGREEMENT, THE WARRANTS AND THE DELIVERY AGREEMENT DOES NOT PURPORT TO BE
COMPLETE AND IS SUBJECT TO, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO,
THE PROVISIONS OF THE WARRANT AGREEMENT AND THE DELIVERY AGREEMENT.
It is a condition of the closing of this offering that a shelf registration
statement be declared effective by the SEC regarding the offering of common
shares to be delivered upon the exercise of the warrants in the United States.
For technical reasons, we are applying to the applicable securities regulatory
authorities in Canada for discretionary orders to confirm the exemption from
Canadian prospectus and dealer registration requirements relating to the
delivery of common shares upon exercise of the warrants. It is a condition of
closing that such exemption be granted. We have agreed to use our reasonable
best efforts to maintain the shelf registration statement or another
registration statement relating to these common shares effective until the
earlier of the expiration date of the warrants and the date on which no warrants
remain outstanding. We will covenant in the warrant agreement to use our best
efforts to maintain the listing of the warrants on the TSX. No U.S. person or
person holding warrants for the account of a U.S. person will be permitted to
exercise warrants during any period prior to the expiration time of the warrants
when no such registration statement is effective. If no such registration
statement is effective, we will notify the holders of warrants in the United
States in accordance with the provisions of the warrant agreement.
CERTAIN INCOME TAX CONSIDERATIONS
CANADIAN FEDERAL INCOME TAX CONSIDERATIONS
In the opinion of Ogilvy Renault, a general partnership, counsel to Domtar,
Osler, Hoskin & Harcourt LLP, counsel to the underwriters and Fasken Martineau
DuMoulin LLP, counsel to the selling shareholder, the following is a summary of
the principal Canadian federal income tax considerations generally applicable to
prospective purchasers of the Units offered by this short form prospectus who,
within the meaning of the Income Tax Act (Canada), or the Act, and at all
relevant times, are residents of Canada, deal at arm's length with the selling
shareholder, and hold or will hold their common shares and warrants as capital
property.
The Act contains certain provisions (the "Mark-to-Market Rules") relating
to securities held by certain financial institutions, registered securities
dealers and corporations controlled by one or more of the foregoing. This
summary does not take into account the Mark-to-Market Rules or any proposed
amendments thereto, and taxpayers that are "financial institutions" as defined
for the purpose of the Mark-to-Market Rules should consult their own tax
advisors.
This summary is based upon the current provisions of the Act and
regulations thereunder in force as at the date hereof, specific proposals to
amend the Act thereunder that have been publicly announced by the Minister of
Finance of Canada prior to the date hereof (the "Proposed Amendments") and
counsels' understanding of the current administrative policies and assessing
practices of the Canada Customs and Revenue Agency, or the Agency. Except as
otherwise indicated, this summary does not take into account or anticipate any
changes in the applicable law, nor does it take into account provincial,
territorial or foreign tax laws or considerations, which might differ
significantly from those discussed herein. No assurance can be given that the
Proposed Amendments will be enacted or that they will be enacted in the form
announced by the Minister of Finance of Canada.
THIS SUMMARY IS OF A GENERAL NATURE ONLY AND IS NOT INTENDED TO BE, NOR
SHOULD IT BE CONSTRUED TO BE, LEGAL OR TAX ADVICE TO ANY PARTICULAR INVESTOR.
THIS SUMMARY IS NOT EXHAUSTIVE OF ALL POSSIBLE INCOME TAX CONSIDERATIONS UNDER
THE ACT THAT MAY AFFECT AN INVESTOR. ACCORDINGLY, PROSPECTIVE PURCHASERS OF
11
UNITS OFFERED BY THIS SHORT FORM PROSPECTUS SHOULD CONSULT THEIR OWN TAX
ADVISORS WITH RESPECT TO THEIR PARTICULAR CIRCUMSTANCES.
RESIDENTS OF CANADA
The following summary is applicable to prospective purchasers who, for the
purposes of the Act and any applicable bilateral tax convention, and at all
relevant times, are residents of Canada (a "Resident Purchaser").
Allocation of Purchase Price
The administrative practice of the Agency is that a Resident Purchaser of a
Unit offered by this short form prospectus will be required to allocate the
price paid for a Unit on a reasonable basis between the common shares and the
warrant in order to determine their respective costs to the Resident Purchaser
for purposes of the Act and that the allocation made by the selling shareholder
and by the Resident Purchaser must be the same. The selling shareholder will
allocate $15.50 to each common share and $1.00 to each warrant. Although the
selling shareholder believes this allocation to be reasonable, it is not binding
upon the Agency.
Taxation of Dividends
Dividends received by an individual Resident Purchaser on common shares
will be included in the individual's income and be subject to the normal
gross-up and dividend tax credit rules normally applicable to taxable dividends
received by an individual from taxable Canadian corporations. Taxable dividends
received by an individual may be subject to alternative minimum tax under the
Act, depending on the individual's circumstances.
Dividends received by a corporate Resident Purchaser will be deductible in
computing such corporate Resident Purchaser's taxable income under Part I of the
Act. However, although Part I tax may not be exigible on the amount of such
dividends, the Act will generally impose a 33 1/3 per cent refundable Part IV
tax on such dividends received by a corporation that was at any time in the
taxation year in which such dividends were received a "private corporation" as
defined in the Act, or a corporation resident in Canada that is controlled, by
or for the benefit of an individual or a related group of individuals, to the
extent that such dividends are deductible in computing the corporation's taxable
income.
Exercise of Warrants
No gain or loss will be realized by a Resident Purchaser upon exercise of a
warrant. When a warrant is exercised, the cost to the Resident Purchaser of the
common shares thus acquired will be the aggregate of the adjusted cost base, for
that Resident Purchaser, of the warrant and the price paid for the common share
upon exercise of the warrant.
To the extent that a Resident Purchaser receives a cash payment in lieu of
a fractional share as a result of the exercise of a warrant, the Agency
generally allows a shareholder who receives cash not exceeding $200 in lieu of a
fractional share to recognize a capital gain or capital loss on the disposition
of the fractional share in the taxation year in which the cash payment was
received in lieu of the fractional share or, alternatively, to reduce the
adjusted cost base of the shares received by such shareholder by the cash
amount.
Expiry of Warrants
The expiry of an unexercised warrant will generally result in a capital
loss to the Resident Purchaser equal to the adjusted cost base of the warrant
immediately before its expiry.
Disposition of Common Shares and Warrants
In general, a disposition, or a deemed disposition, of a common share or of
a warrant will give rise to a capital gain (or a capital loss) equal to the
amount by which the proceeds of disposition of the common share or the warrant,
net of the costs of disposition, if any, exceed (or are less than) the adjusted
cost base to the holder of the common share or the warrant. In the event a
Resident Purchaser who acquires common shares also holds other common shares of
Domtar, the adjusted cost base will be determined by averaging the adjusted cost
base of all the common shares of that Resident Purchaser. The adjusted cost base
of a warrant will generally be equal to the cost of the warrant to the Resident
Purchaser and will be averaged with the cost of any other warrants acquired by
the Resident Purchaser.
12
Generally, one-half of a capital gain must be included in income as a
taxable capital gain and one-half of a capital loss is an allowable capital
loss. An allowable capital loss for a year normally may be deducted by the
Resident Purchaser in computing income to the extent of any taxable capital
gains for the year. Any allowable capital loss not deductible in the year may be
deducted against taxable capital gains in computing taxable income for any of
the three preceding years or any subsequent year (in accordance with the rules
contained in the Act). Capital gains realized by an individual will be relevant
in computing possible liability under the alternative minimum tax.
Additional Refundable Tax
A Resident Purchaser that is a "Canadian-controlled private corporation"
(as defined in the Act) may be liable to pay an additional refundable tax of
6 2/3 per cent on certain investment income, including amounts in respect of
interest and taxable capital gains (but not dividends or deemed dividends
deductible in computing taxable income).
NON-RESIDENTS OF CANADA
The following summary is applicable to prospective purchasers who, for
purposes of the Act and any applicable bilateral tax convention, and at all
relevant times, are not residents of Canada (a "Non-Resident Purchaser").
Allocation of Purchase Price
The tax consequences of the Allocation of Purchase Price under the Act to
Non-Resident Purchasers will be the same as for Resident Purchasers.
Taxation of Dividends
A Non-Resident Purchaser, whether an individual or corporation, who
receives a dividend on common shares will, pursuant to Part XIII of the Act, be
subject to a Canadian withholding tax at a rate of 25 per cent. The 25 per cent
Canadian withholding tax rate may be reduced if the recipient of the dividend is
resident in a country with which Canada has a bilateral tax convention.
Exercise of Warrants
The tax consequences of the Exercise of Warrants under the Act to
Non-Resident Purchasers will be the same as for Resident Purchasers.
Expiry of Warrants
The expiry of an unexercised warrant will generally result in a capital
loss to the Non-Resident Purchaser equal to the adjusted cost base of the
warrant immediately before its expiry provided that such warrant consisted of
"taxable Canadian property" under the Act to such Non-Resident Purchaser.
Disposition of Common Shares and Warrants
A Non-Resident Purchaser will not be subject to tax under the Act in
respect of any capital gain realized on the disposition of common shares or of
warrants provided that such common shares or warrants do not constitute "taxable
Canadian property" of the Non-Resident Purchaser at the time of the disposition
for purposes of the Act. So long as the common shares are listed on the TSX, the
NYSE or another prescribed stock exchange within the meaning of the Act, the
common shares will not generally constitute "taxable Canadian property" of a
Non-Resident Purchaser unless, at any time during the five-year period
immediately preceding the disposition, the Non-Resident Purchaser, persons with
whom the Non-Resident Purchaser did not deal at arm's length, or any combination
thereof, owned or had an interest in or the right to acquire, 25 per cent or
more of the issued shares of any series or class of the capital stock of Domtar.
If the common shares are considered "taxable Canadian property" to a particular
Non-Resident Purchaser, any resulting capital gain may be exempt from Canadian
tax if the recipient of the proceeds is resident in a country with which Canada
has a bilateral tax convention provided the value of the common shares purchased
by the Non-Resident Purchaser is not derived principally from real property
situated in Canada.
13
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
This discussion summarizes the principal US federal income tax
considerations applicable to the acquisition, ownership and disposition of the
warrants and common shares composing the units (including the common shares that
may be acquired on exercise of the warrants) by US holders. This discussion
assumes that the common shares and the warrants are or will be held as capital
assets (as defined in section 1221 of the US Internal Revenue Code of 1986, as
amended) by the US holders. This discussion is the opinion of Debevoise &
Plimpton insofar as it relates to matters of US federal income tax law. This
discussion does not apply to a US holder that is a member of a special class of
holders subject to special rules including a dealer in securities or currencies,
a trader in securities that elects to use a mark-to-market method of accounting
for securities holdings, a tax-exempt organization, a bank, a life insurance
company, a person liable for alternative minimum tax, a person that actually or
constructively owns 10% or more of our voting stock, a person that holds
warrants or common shares as part of a straddle or a hedging, conversion,
constructive sale or other integrated transaction, or a person whose functional
currency is not the US dollar.
This discussion is based on the US Internal Revenue Code of 1986, as
amended (the "US Tax Code"), its legislative history, existing and proposed
treasury regulations promulgated thereunder, published rulings and court
decisions as well as on the Canada-United States Income Tax Convention (the
"Treaty"), all as currently in effect and all of which may be repealed, revoked
or modified (possibly with retroactive effect) so as to result in US federal
income tax consequences different from those discussed below. This discussion
does not consider US state, local or foreign tax laws that may be applicable to
particular US holders.
As used herein, the term "US holder" means a beneficial owner of units who
is for US federal income tax purposes:
- an individual citizen or resident of the United States,
- a corporation, partnership (other than a partnership that is not treated
as a US person under applicable treasury regulations) or other entity
created or organized in or under the laws of the United States or any
political subdivision thereof,
- an estate whose income is subject to US federal income tax regardless of
its source, or
- a trust if either (i) it is eligible to elect and has validly elected to
continue to be treated as a US person under prior law or (ii) a US court
can exercise primary supervision over the trust's administration and one
or more US persons are authorized to control all substantial decisions of
the trust.
THE FOLLOWING DISCUSSION IS FOR GENERAL INFORMATION ONLY. EACH HOLDER
SHOULD CONSULT ITS OWN TAX ADVISORS REGARDING THE US FEDERAL, STATE AND LOCAL
AND THE CANADIAN AND OTHER TAX CONSEQUENCES OF THE ACQUISITION, OWNERSHIP AND
DISPOSITION OF THE UNITS, THE WARRANTS OR THE COMMON SHARES.
ALLOCATION OF PURCHASE PRICE
A US holder of a unit offered by this short form prospectus will be
required to allocate the purchase price paid for a unit between the common share
and the warrant on the basis of the fair market value of such common share and
such warrant. The amounts so allocated will be the US holder's initial tax basis
in such holder's common share and warrant. The selling shareholder will allocate
$15.50 to each common share and $1.00 to each warrant. No assurance can be given
that the US Internal Revenue Service will accept this allocation.
WARRANTS
Exercise of Warrants
No gain or loss will be recognized for US federal income tax purposes by US
holders of warrants upon the exercise thereof in exchange for common shares
(except if cash is received in lieu of the issuance of fractional common
shares). A US holder's tax basis in the common shares received on the exercise
of the warrants will generally equal the sum of such holder's tax basis in the
warrants (which in the case of an initial holder, will equal the portion of the
purchase price of the unit allocated to the warrant, as described
14
above) plus the exercise price paid on the exercise thereof. The holding period
of the common shares received on the exercise of the warrants generally will not
include the holding period of the warrants.
Expiration of Warrants
Upon the expiration of a warrant, a US holder will recognize a loss equal
to its adjusted tax basis in the warrant. In general, such loss will be a
short-term capital loss if the warrant is held for one year or less.
Disposition of Warrants
Subject to the discussion under "-- Passive Foreign Investment Company
Considerations" below, and except as otherwise provided herein, the sale or
exchange of a warrant generally will result in the recognition of gain or loss
to the US holder in an amount equal to the difference between the amount
realized on such sale or exchange and the US holder's adjusted tax basis in the
warrant. The adjusted tax basis in the warrant will generally equal the
acquisition cost thereof or the portion of the purchase price for the unit
properly allocable to the warrant. In general, such gain or loss will be a
short-term capital gain or loss if the holding period for the warrant is one
year or less. Such gain or loss generally will be income or loss from sources
within the United States for foreign tax credit limitation purposes.
Adjustments to the Conversion Ratio or Exercise Price of Warrants
Adjustments to the conversion ratio or exercise price of the warrants
pursuant to the anti-dilution provisions (see "Details of the Offering") may
result in a taxable deemed distribution to the US holders of warrants pursuant
to section 305 of the US Tax Code if such change has the effect of increasing
the holder's proportionate interest in our earnings and profits or our assets.
In general, anti-dilution adjustments are not treated as resulting in deemed
distributions. However, if, for example, the adjustment were considered an
adjustment to compensate for taxable cash or property distribution to other
shareholders, a taxable deemed distribution could result.
COMMON SHARES
Taxation of Dividends
Subject to the discussion under "Passive Foreign Investment Company
Considerations" below, a US holder must include in gross income the gross amount
of any dividend paid by us out of current or accumulated earnings and profits
(as determined for US federal income tax purposes). A US holder must include any
Canadian tax withheld from the dividend payment in this gross amount even though
the US holder does not in fact receive the amount withheld. Such a dividend is
ordinary income that a US holder must include in income when the US holder
receives the dividend, actually or constructively, and generally will be treated
as income from sources outside the United States for foreign tax credit purposes
(but generally classified as "passive" or, in some cases, "financial services"
income which is treated separately from other types of income for purposes of
computing the foreign tax credit allowable to a US holder).
The dividend will not be eligible for the dividends-received deduction
generally allowed to US corporations in respect of dividends received from other
US corporations. Distributions in excess of current and accumulated earnings and
profits, as determined for US federal income tax purposes, will be treated as a
non-taxable return of capital to the extent of a US holder's basis in the common
shares and thereafter as capital gain (which will generally be treated as income
from sources within the United States for foreign tax credit limitation
purposes).
The amount of a distribution that a US holder must include in income will
be the US dollar value of the payments made, determined by reference to the
Canadian dollar/US dollar exchange rate on the date the distribution is
includible in income, regardless of whether the payment is in fact converted
into US dollars. Generally, any gain or loss resulting from currency exchange
fluctuations during the period from the date the dividend payment is includible
in the income of the US holder to the date the payment is converted into US
dollars will be treated as ordinary income or loss. Such gain or loss generally
will be income or loss from sources within the United States for foreign tax
credit limitation purposes.
15
Subject to certain limitations, including certain minimum holding period
requirements, the US dollar value of any Canadian tax withheld from any
distribution in accordance with the Treaty and paid over to Canada will be
creditable against the US holder's US federal income tax liability.
Alternatively, a US holder may claim a deduction for such amount of Canadian tax
withheld.
Disposition of Common Shares
Subject to the discussion under "Passive Foreign Investment Company
Considerations" below, a US holder who sells or otherwise disposes of common
shares will recognize capital gain or loss for US federal income tax purposes.
The gain or loss will generally be income or loss from sources within the United
States for foreign tax credit limitation purposes. Capital gains recognized by a
noncorporate US holder (including an individual) are generally taxed at a
maximum rate of 20% when the property is held more than one year. The
deductibility of capital losses is subject to limitations.
PASSIVE FOREIGN INVESTMENT COMPANY CONSIDERATIONS
We believe that we will not be treated as a passive foreign investment
company (a "PFIC") for US federal income tax purposes for our current taxable
year or for future taxable years. However, an actual determination of PFIC
status is factual in nature and generally cannot be made until the close of the
applicable taxable year. We will be a PFIC if either:
- 75% or more of our gross income in a taxable year is passive income, which
includes dividends, interest, royalties, rents, commodities gains and some
types of other gains; or
- the average percentage of the value of our assets that produce or are held
for the production of passive income is at least 50%.
Under proposed treasury regulations, if a US holder owns an option (such as
a warrant) to acquire shares of a PFIC, the option itself is treated as shares
of a PFIC.
Upon exercise of such option, the holding period of the shares acquired
upon such exercise would, for purposes of the special tax rules discussed below,
include the period that the US holder held such option. Such regulations are
proposed to be effective as of April 11, 1992. No assurances can be given,
however, as to whether such regulations will be adopted in substantially the
same form as the proposed regulations or whether any such final regulations will
retain the effective date of the proposed regulations. If such proposed
regulations were applicable to a US holder of a warrant, such US holder would be
subject to the special tax rules discussed below upon disposition of a warrant
but not upon exercise of such warrant. Furthermore, common shares acquired upon
exercise of a warrant would be treated as shares of a PFIC even if we no longer
satisfy the income or asset tests discussed above at the time such warrant is
exercised.
If common shares or warrants held by a US holder were treated as shares of
a PFIC, such US Holder would be subject to certain adverse US tax consequences,
including the possible characterization of gain as ordinary income and an
interest charge at the time of the disposition of such common shares or
warrants.
US holders are urged to consult their own tax advisers concerning the
potential application of the PFIC rules.
INFORMATION REPORTING AND BACKUP WITHHOLDING
In general, information reporting requirements will apply to certain
payments of dividends on common shares and proceeds of certain sales of warrants
or common shares in respect of US holders. Backup withholding tax will apply
under certain circumstances to those payments (i) at the fourth-lowest rate of
tax applicable to unmarried individual US persons on payments made before
calendar year 2011 (30.0% in 2002 and 2003, 29.0% in 2004 and 2005, and 28.0% in
2006 through 2010) and (ii) at the rate of 31% on payments made after calendar
year 2010. Backup withholding tax will generally not apply to a US holder who
furnishes a correct taxpayer identification number or certificate of foreign
status and makes any other required certification or who is otherwise exempt
from backup withholding. Generally, a US holder will provide such certification
on Form W-9, Request for Taxpayer Identification Number and Certification.
16
RISK FACTORS
You should carefully consider the risks described below and the other
information in this short form prospectus before investing in our units. The
risks and uncertainties described below are not the only ones we may face.
Additional risks and uncertainties that we are unaware of, or that we currently
deem to be immaterial, may also become important factors that affect us. If any
of the following risks actually occurs, our business, financial condition or
results of operations could be materially adversely affected, with the result
that the trading price of our common shares could decline and you could lose all
or part of your investment.
PRODUCT PRICES
Our financial performance is dependent on the selling prices of our
products. The markets for most paper, pulp, lumber and packaging products are
cyclical and are influenced by a variety of factors beyond our control. These
factors include periods of excess product supply due to industry capacity
additions, periods of decreased demand due to weak general economic activity in
North America or international markets, inventory de-stocking by customers and
fluctuations in currency exchange rates. During periods of low prices, we have
experienced in the past, and could experience in the future, reduced revenues
and margins, resulting in substantial declines in profitability and sometimes
net losses.
OPERATING COSTS
Operating costs for our businesses can be affected by increases or
decreases in energy and other raw material prices as a result of changing
economic conditions or due to particular supply and demand considerations.
COMPETITION
The uncoated freesheet market has undergone substantial consolidation, with
the top five producers representing approximately 75% of the North American
market. We are currently the third largest North American integrated
manufacturer and marketer of uncoated freesheet paper. We compete with a number
of substantial companies operating in the paper market. The markets for our wood
and market pulp are also large and highly fragmented. The packaging products
market in which Norampac Inc. competes has undergone significant consolidation
in the past several years resulting in the creation of a number of substantial
competitors. While the principal basis for competition in all our businesses is
price, competition can also be based upon quality and customer service,
including, in some cases, providing technical advice to customers. For example,
the highly technical nature of specialty papers limits competition since not all
paper mills can produce the required papers. Competition in this market is
generally based more on quality and service than on price.
FOREIGN EXCHANGE
Our revenues for many of our products are affected by fluctuations in the
exchange rate between the Canadian dollar and the US dollar. The prices for many
of our products, including those we sell in Canada, are principally driven by US
prices of similar products. As a result, any decrease in the value of the US
dollar relative to the Canadian dollar reduces the amount of Canadian dollar
revenues we realize on sales. Exchange rate fluctuations are beyond our control
and the US dollar may depreciate against the Canadian dollar in the future,
which would result in lower revenues and margins.
ENVIRONMENTAL REGULATIONS
The United States and Canadian environmental regulations to which we are
subject relate to, among other matters, air emissions, timber cutting,
wastewater discharges, waste management, groundwater quality, plant and wildlife
protection, landfill sites, employee health and safety and the discharge of
materials into the environment. These regulations require us to obtain and
operate in compliance with the conditions of permits and authorizations from the
appropriate governmental authorities. Regulatory authorities exercise
considerable discretion in whether or not to issue permits and the timing of
permit issuances. If we fail to comply with applicable requirements, our
operations at the affected facilities could be interrupted and we could be
required
17
to incur significant additional expenditures, which could harm our financial
results and financial condition. In addition, changes in environmental laws and
regulations or their application could require us to make further significant
expenditures.
Failure to comply with applicable environmental laws, regulations or permit
requirements may result in fines or penalties or enforcement actions by the
regulators, including regulatory or judicial orders enjoining or curtailing
operations or requiring corrective measures, installation of pollution control
equipment or remedial actions, any of which could entail significant
expenditures.
We expect to continue to incur ongoing capital and operating expenses to
achieve and maintain compliance with new environmental requirements and to
upgrade existing equipment.
ENVIRONMENTAL LIABILITIES
We are continuing to take remedial action at a number of current and former
sites, due in part to soil and some groundwater contamination at these sites. As
of September 30, 2002, we had a provision of $48 million for known and
determinable site-rehabilitation costs (including remediation costs), primarily
in connection with our former wood-preserving business, which we sold in 1993,
and relating to sites in various provinces of Canada. The process of
investigation and remediation can be lengthy and is subject to the uncertainties
of changing legal requirements, developing technologies, the allocation of
liability among potentially responsible parties and the discretion of
regulators. Accordingly, we cannot estimate with certainty the actual amount and
timing of costs associated with site remediation. Our costs for site remediation
may ultimately exceed the amount of the provision we have established. In
addition, we are party to environmental claims and lawsuits which are being
contested. We may incur costs in excess of amounts we have reserved to cover
such claims and lawsuits.
LUMBER EXPORT DUTIES
Our sales of wood represented approximately 9% of our net sales in the
first nine months of 2002 and we exported approximately 56% of our softwood
lumber products to the United States during the first nine months of 2002.
The United States Department of Commerce announced that it had assessed the
Canadian softwood lumber industry with final aggregate countervailing and
antidumping duties at an average rate of 27.22%. Since May 22, 2002, cash
deposits of 27.72% have been applied on Canadian exports of softwood lumber to
the United States based upon a final decision of the United States International
Trade Commission. The Canadian government has challenged the duties with the
World Trade Organization and under the North American Free Trade Agreement.
We are currently experiencing, and may continue to experience, reduced
revenues and margins in our Wood business as a result of antidumping and
countervailing duty applications or as a result of any new arrangement between
the US and Canada.
NO PUBLIC MARKET FOR THE WARRANTS
Prior to this offering, there was no public market for the warrants. The
TSX has conditionally approved the listing of the warrants. Listing on the TSX,
however, is subject to us fulfilling all of the listing requirements of the TSX,
including distribution of the warrants to a minimum number of public holders. We
will not apply to have the warrants listed on the NYSE. Moreover, there cannot
be any assurance as to the liquidity of the public market for the warrants or
that an active public market for the warrants will develop. If an active public
market does not develop, the market price and liquidity of the warrants may be
adversely affected.
18
LEGAL MATTERS
Certain legal matters in connection with this offering will be passed upon
on our behalf by Ogilvy Renault, a general partnership, and Debevoise &
Plimpton, on behalf of the selling shareholder by Fasken Martineau DuMoulin LLP,
and on behalf of the underwriters by Osler, Hoskin & Harcourt LLP and Shearman &
Sterling. Claude Fontaine, Senior Partner of Ogilvy Renault and Brian M. Levitt,
Co-Chair of Osler, Hoskin & Harcourt LLP, are both directors of Domtar. As of
December 17, 2002, the partners and associates of the firms who are providing
legal advice in this offering beneficially owned, directly or indirectly, less
than 1% of our issued and outstanding securities or of any associate or
affiliate of ours.
EXPERTS
Our auditors are PricewaterhouseCoopers LLP, Chartered Accountants, 1250
Rene-Levesque Boulevard West, Suite 2800, Montreal, Quebec, H3B 2G4 and Raymond
Chabot Grant Thornton, Chartered Accountants, a general partnership, Suite 1900,
National Bank Tower, 600 de La Gauchetiere Street West, Montreal, Quebec, H3B
4L8. Our consolidated financial statements as of December 31, 2001 and 2000 and
for each of the three years in the three-year period ended December 31, 2001
incorporated by reference in this prospectus have been so included in reliance
upon the report of PricewaterhouseCoopers LLP and Raymond Chabot Grant Thornton,
given on the authority of said firms as experts in auditing and accounting.
The financial statements of the Acquired Mills as of December 30, 2000 and
January 1, 2000 and for each of the three years in the period ended December 30,
2000 included in this prospectus have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in accounting and auditing in giving said reports. We are not able to
obtain the consent of Arthur Andersen LLP to include their reports in this
prospectus. As a result of Arthur Andersen LLP not having provided that consent,
you will not be able to recover against Arthur Andersen LLP under applicable
Canadian securities laws or under Section 11 of the Securities Act with respect
to their audit report.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common shares, the warrants and
the units is Computershare Trust Company of Canada at its principal offices in
Montreal and Toronto and The Bank of New York is our co-transfer agent for the
common shares at its principal offices in New York.
19
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC, 450 Fifth Street, N.W., Washington, D.C. 20549,
a registration statement on Form F-10 under the Securities Act relating to the
units offered by this prospectus. This prospectus, which forms part of the
registration statement, does not contain all the information included in the
registration statement. Some information is omitted and you should refer to the
registration statement and its exhibits.
You may review a copy of the registration statement, including exhibits and
documents filed with it, as well as any reports, statements or other information
we file in the future with the SEC at the SEC's public reference facilities in
Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. You
may also obtain copies of these materials from the Public Reference Section of
the SEC, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. You may call the SEC at 1-800-SEC-0330 for further
information on the public reference rooms. These filings are also electronically
available from the SEC's Electronic Document Gathering and Retrieval System
(http://www.sec.gov), which is commonly known by the acronym "EDGAR", as well as
from commercial document retrieval services.
We are required to file reports under the Exchange Act, and other
information with the SEC. Under a multijurisdictional disclosure system adopted
by the United States, such reports and other information may be prepared in
accordance with the disclosure requirements of Canada, which requirements are
different from those of the United States. In addition, we are subject to the
filing requirements prescribed by the securities legislation of all Canadian
provinces or territories. You are invited to read and copy any reports,
statements or other information that we file with the Canadian provincial
securities commissions or other similar regulatory authorities at their
respective public reference rooms. These filings are also electronically
available from the Canadian System for Electronic Document Analysis and
Retrieval (http://www.sedar.com), which is commonly known by the acronym
"SEDAR". The Canadian System for Electronic Document Analysis and Retrieval is
the Canadian equivalent of the SEC's EDGAR system. Reports and other information
about us should also be available for inspection at the offices of the Toronto
Stock Exchange and the New York Stock Exchange.
As a "foreign private issuer" under the Exchange Act, we intend to provide
to our shareholders proxy statements and annual reports prepared in accordance
with applicable Canadian law. Our annual reports will be available within 140
days of the end of each fiscal year and will contain our audited consolidated
financial statements. We will also make available quarterly reports containing
unaudited summary consolidated financial information for each of the first three
fiscal quarters. We intend to prepare these financial statements in accordance
with Canadian GAAP and to include a reconciliation to US GAAP in the notes to
the annual consolidated financial statements. We are exempt from provisions of
the Exchange Act which require us to provide proxy statements in prescribed form
to shareholders and which relate to short swing profit reporting and liability.
DOCUMENTS TO BE FILED AS PART OF REGISTRATION STATEMENT
The following documents have been filed with the SEC as part of or
incorporated by reference to the registration statement of which this prospectus
forms a part:
- the documents referred to under "Documents Incorporated By Reference";
- the underwriting agreement;
- form of warrant agreement;
- consent of Ogilvy Renault;
- consent of Debevoise & Plimpton;
- consent of Osler, Hoskin & Harcourt LLP;
- consent of Fasken Martineau DuMoulin LLP;
- consent of PricewaterhouseCoopers LLP and Raymond Chabot Grant Thornton;
and
- powers of attorney.
20
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Unaudited Reconciliation of Canadian and United States
Generally Accepted Accounting Principles relating to the
Unaudited Consolidated Financial Statements for the nine
months ended September 30, 2002 and September 30, 2001.... F-2
Unaudited Pro Forma Consolidated Statement of Earnings...... F-9
Financial Statements of the Acquired Mills.................. F-15
F-1
DOMTAR INC.
UNAUDITED RECONCILIATION OF CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES RELATING TO THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND SEPTEMBER 30, 2001
(In millions of Canadian dollars, unless otherwise noted)
The unaudited consolidated financial statements for the nine months ended
September 30, 2002 and September 30, 2001 have been prepared in accordance with
Canadian GAAP which, in the case of Domtar, conform in all material respects
with U.S. GAAP, except as set forth below.
The unaudited consolidated financial statements for the nine months ended
September 30, 2002 and September 30, 2001 are expressed in Canadian dollars and,
solely for the convenience of the reader, the 2002 financial statements and the
tables of certain related notes have been translated into U.S. dollars at the
September 2002 month-end rate of CAN$1.5858 = US$1.00. This translation should
not be construed as an application of the recommendations relating to the
accounting for foreign currency translation, but rather as supplemental
information for the reader.
(A) NET EARNINGS AND BALANCE SHEET ADJUSTMENTS
NINE MONTHS ENDED
SEPTEMBER 30
-----------------------------------
2002 2002 2001
--------- --------- ---------
Unaudited Unaudited Unaudited
US$ $ $
NET EARNINGS ADJUSTMENTS
NET EARNINGS IN ACCORDANCE WITH CANADIAN GAAP............... 65 103 122
Adjustments with respect to the following items:
Net periodic pension benefit cost (1)....................... (3) (5) (1)
Post-retirement and post-employment benefit costs other than
pension (2)............................................... 1 1 1
Unrealized exchange gain (loss) on translation of long-term
debt (3).................................................. -- -- --
Unrealized gain (loss) on currency hedging contracts (4).... 36 57 (70)
Unrealized gain (loss) on commodity hedging contracts (5)... (3) (4) 3
Unrealized loss on interest rate swap contracts (6)......... (6) (10) --
Amortization of deferred gain (7)........................... (3) (4) (3)
Acquisition of E.B. Eddy (8)................................ (3) (4) (8)
Formation of Norampac (9)................................... (1) (2) (2)
Tax effect of the above adjustments......................... (5) (8) 30
Loss from discontinued operations (net of income taxes of
$16 million ($US10 million)) (10)......................... 21 33 --
---- ---- ----
Earnings from continuing operations in accordance with U.S.
GAAP...................................................... 99 157 72
Loss from discontinued operations (net of income taxes of
$16 million ($US10 million)) (10)......................... (21) (33) --
---- ---- ----
NET EARNINGS IN ACCORDANCE WITH U.S. GAAP................... 78 124 72
Dividend requirements of preferred shares................... -- 1 1
---- ---- ----
NET EARNINGS APPLICABLE TO COMMON SHARES IN ACCORDANCE WITH
U.S. GAAP................................................. 78 123 71
==== ==== ====
EARNINGS FROM CONTINUING OPERATIONS PER COMMON SHARE IN
ACCORDANCE WITH U.S. GAAP
Basic..................................................... 0.44 0.69 0.39
Diluted................................................... 0.43 0.68 0.39
NET EARNINGS PER COMMON SHARE IN ACCORDANCE WITH U.S. GAAP
Basic..................................................... 0.34 0.54 0.39
Diluted................................................... 0.34 0.54 0.39
F-2
DOMTAR INC.
UNAUDITED RECONCILIATION OF CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES
RELATING TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS
ENDED
SEPTEMBER 30, 2002 AND SEPTEMBER 30, 2001
(In millions of Canadian dollars, unless otherwise noted)
SEPTEMBER 30 SEPTEMBER 30 DECEMBER 31
2002 2002 2001
--------------------- --------------------- -----------------------
CANADIAN U.S. CANADIAN U.S. CANADIAN U.S.
GAAP GAAP GAAP GAAP GAAP GAAP
--------- --------- --------- --------- -------- ------------
Restated Reclassified
Unaudited Unaudited Unaudited Unaudited $ $
US$ US$ $ $ (3) (b)(i)
BALANCE SHEET ADJUSTMENTS
Property, plant and equipment
(8 & 9)....................... 3,431 3,497 5,441 5,546 5,612 5,723
Goodwill (8).................... 51 114 79 181 62 164
Other assets (1,5 & 6).......... 108 97 172 154 213 149
Trade and other payables (4).... 486 510 771 809 719 814
Long-term debt (6).............. 1,649 1,689 2,615 2,678 2,872 2,853
Future income taxes
(1,2,4,5,7 & 8)............... 347 345 551 547 528 516
Other liabilities and deferred
credits (1,2,6 & 7)........... 223 207 353 328 408 398
Shareholders' equity
(1,2,4,5 & 7 to 9)............ 1,592 1,665 2,524 2,641 2,426 2,521
Amounts presented under both Canadian and U.S. GAAP account for joint
ventures using the proportionate consolidation method as explained in (7) below.
(1) NET PERIODIC PENSION BENEFIT COST
On January 1, 2000, Domtar adopted the Canadian accounting recommendations
for employee future benefit costs. The recommendations essentially harmonize
Canadian GAAP with U.S. GAAP and were applied retroactively without restating
prior years. Differences between Canadian and U.S. GAAP remain with respect to
the amortization of actuarial gains and losses and past service costs arising
prior to January 1, 2000. Furthermore, under U.S. GAAP, an additional minimum
pension liability is recorded for plans where the accumulated benefit obligation
exceeds the plan assets. For these plans, an intangible asset is recorded up to
the extent of unrecognized past service costs. The balance is recorded in "Other
comprehensive income", net of applicable income taxes. The concept of additional
minimum liability does not exist under Canadian GAAP.
(2) POST-RETIREMENT AND POST-EMPLOYMENT BENEFIT COSTS OTHER THAN PENSION
On January 1, 2000, Domtar adopted the Canadian accounting recommendations
for employee future benefit costs. The recommendations essentially harmonize
Canadian GAAP with U.S. GAAP and were applied retroactively without restating
prior years. Differences between Canadian and U.S. GAAP remain with respect to
the amortization of actuarial gains and losses arising prior to January 1, 2000.
(3) UNREALIZED EXCHANGE GAIN (LOSS) ON TRANSLATION OF LONG-TERM DEBT
On January 1, 2002, Domtar adopted the Canadian accounting recommendations
relating to the accounting for foreign currency translation. These
recommendations eliminate the requirement to defer and amortize unrealized
exchange gains and losses on foreign currency denominated monetary items that
have a fixed or ascertainable life extending beyond the end of the fiscal year
following the current reporting period. The recommendations essentially
harmonize Canadian GAAP with U.S. GAAP and were applied retroactively with
restatement of prior years.
F-3
DOMTAR INC.
UNAUDITED RECONCILIATION OF CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES
RELATING TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS
ENDED
SEPTEMBER 30, 2002 AND SEPTEMBER 30, 2001
(In millions of Canadian dollars, unless otherwise noted)
(4) UNREALIZED GAIN (LOSS) ON CURRENCY HEDGING CONTRACTS
Under Canadian GAAP, gains and losses on currency hedging contracts are
included in earnings only at maturity. In connection with the adoption of SFAS
133 and 138 mentioned under (b)(i) below, Domtar has elected not to designate
the contracts as hedging instruments for U.S. GAAP reporting purposes.
Accordingly, these contracts are marked to market and resulting unrealized gains
and losses are recorded to earnings. Prior to January 1, 2001, under U.S. GAAP,
these contracts did not qualify as hedging instruments and accordingly were
marked to market, and the resulting unrealized gains and losses were recorded to
earnings.
(5) UNREALIZED GAIN (LOSS) ON COMMODITY HEDGING CONTRACTS
Under Canadian GAAP, gains and losses on commodity hedging contracts are
included in earnings only at maturity. In connection with the adoption of SFAS
133 and 138 mentioned under (b)(i) below, Domtar has not designated these
contracts as hedging instruments for U.S. GAAP reporting purposes. Accordingly,
these contracts are marked to market and the resulting unrealized gains and
losses are recorded to earnings.
(6) UNREALIZED LOSS ON INTEREST RATE SWAP CONTRACTS
Under Canadian GAAP, unrealized gains and losses on interest rate swaps
designated as hedges are not recognized in the financial statements. Under U.S.
GAAP, the interest rate swaps held by Domtar are comprised of two components.
The first component swaps the right to receive fixed amounts for an obligation
to pay variable amounts until October 2006. This is a fair value hedge of
designated interest payments. Accordingly, the $63 million (US$40 million)
unrealized gain as at September 30, 2002 is recorded under "Other assets". As at
December 31, 2001, an unrealized loss of $19 million (US$12 million) was
recorded under "Other liabilities and deferred credits". For both period ends,
due to the component's perfect effectiveness an amount equal to the unrealized
gain (loss) has been recorded as an increase (reduction) of "Long-term debt".
The second component swaps a right to receive variable amounts for an obligation
to pay fixed amounts until October 2002 and 2003. This cannot be designated as a
hedge of the variable interest paid on the first component and therefore any
fluctuations of its fair value are recorded to earnings.
(7) AMORTIZATION OF DEFERRED GAIN
Interests in joint ventures are accounted for using the proportionate
consolidation method for Canadian GAAP. Under U.S. GAAP, joint ventures are
accounted for using the equity method. This difference does not affect the
reported earnings or shareholders' equity, and no adjustment is required to the
consolidated financial statements as a result of information disclosed in
(b)(vii) below. However, under Canadian GAAP, a portion of the gain on the
contribution to Norampac is deferred and amortized. Under U.S. GAAP, this gain
was fully recognized upon the formation of Norampac.
(8) ACQUISITION OF E.B. EDDY
The E.B. Eddy acquisition has been accounted for under Canadian GAAP, which
at the time differed from U.S. GAAP in the accounting for income taxes, pension
benefits and accounting for business integration costs. As at September 30,
2002, under U.S. GAAP, these differences would have increased "Property, plant,
and equipment" by $81 million ($85 million as at December 31, 2001), "Goodwill"
by $102 million ($102 million as at December 31, 2001) and "Future income taxes"
by $25 million ($26 million as at December 31, 2001).
(9) FORMATION OF NORAMPAC
On January 1, 2000, Domtar adopted the Canadian accounting recommendations
for income taxes. These recommendations essentially harmonize Canadian and U.S.
GAAP and were applied retroactively without
F-4
DOMTAR INC.
UNAUDITED RECONCILIATION OF CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES
RELATING TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS
ENDED
SEPTEMBER 30, 2002 AND SEPTEMBER 30, 2001
(In millions of Canadian dollars, unless otherwise noted)
restating prior years. Accordingly, certain property, plant and equipment
acquired at the formation of Norampac remained recorded at a lower value under
Canadian GAAP.
(10) LOSS FROM DISCONTINUED OPERATIONS
Effective January 1, 2002, Domtar has adopted SFAS 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets" for U.S. GAAP purposes. SFAS 144
establishes one accounting model to be used for long-lived assets to be disposed
of by sale and broadens the presentation of discontinued operations to include
more disposal transactions. SFAS 144 supersedes SFAS 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and
certain provisions of Opinion No. 30.
Pursuant to SFAS 144, Domtar's closure of its St. Catharines, Ontario,
paper mill which occured on September 30, 2002 qualifies as a discontinued
operations. The impact on sales and net earnings of prior years is not
significant.
(B) SUPPLEMENTARY DISCLOSURES
(I) ACCOUNTING CHANGES
STOCK-BASED COMPENSATION AND OTHER STOCK-BASED PAYMENTS
Effective January 1, 2002, and concurrently with the adoption of Section
3870 "Stock -based compensation and other stock-based payments" for Canadian
purposes, Domtar has adopted the fair value method defined in SFAS 123 to
measure its stock-based compensation and other stock-based payments. SFAS 123
indicates that the fair value method is the preferable method of accounting and
requires that the fair value method be adopted prospectively.
Prior to January 1, 2002, Domtar had elected to measure stock-based
compensation and other stock-based payments using the intrinsic value base
method of accounting. In this instance, however, under SFAS 123, Domtar is
required to make pro forma disclosures of net earnings, basic earnings per share
and diluted earnings per share as if the fair value based method of accounting
had been applied for stock-based compensation and other stock-based payments
granted prior to January 1, 2002.
Accordingly, Domtar's net earnings, basic earnings per share and diluted
earnings per share for the nine months ended September 30, 2002 would have been
reduced, on a pro forma basis, by $2 million, $0.01 per share and $0.01 per
share, respectively (September 30, 2001 -- $2 million, $0.01 per share and $0.01
per share, respectively) for stock-based compensation and other stock-based
payments granted prior to January 1, 2002.
GOODWILL AND INTANGIBLE ASSETS
Effective January 1, 2002, and concurrently with the adoption of Section
3062 "Goodwill and intangible assets" for Canadian purposes, Domtar has adopted
SFAS 142 "Goodwill and Other Intangible Assets". SFAS 142 requires that goodwill
be tested for impairment and prohibits the amortization of goodwill. Under U.S.
GAAP, as at December 31, 2001, Domtar had goodwill of $102 million arising from
the acquisition of E.B. Eddy (see (a) (8) above) in addition to the goodwill
under Canadian GAAP. Amortization thereof amounted to $5 million during the year
2001. Pursuant to SFAS 142, Domtar has tested its goodwill for impairment and
has determined that no write-down for impairment was necessary. Also, the
Corporation reclassified, from goodwill to timber limits and timberlands,
presented under "Property, plant and equipment," an amount of $12 million,
resulting from prior years' acquisitions, that meets the criteria for
recognition apart from goodwill.
F-5
DOMTAR INC.
UNAUDITED RECONCILIATION OF CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES
RELATING TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS
ENDED
SEPTEMBER 30, 2002 AND SEPTEMBER 30, 2001
(In millions of Canadian dollars, unless otherwise noted)
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Effective January 1, 2001, Domtar adopted SFAS 133 "Accounting for
Derivative Instruments and Hedging Activities" and SFAS 138 "Accounting for
Certain Derivative Instruments and Certain Hedging Activities". These standards
require all derivative financial instruments to be recorded on the balance sheet
as assets or liabilities at their fair value. Changes in fair value of
derivatives that are not hedges are recognized in the earnings as they arise. If
the derivative is a hedge, depending on the nature of the hedge, a change in the
fair value of the derivative is either offset in income against the change in
the fair value of the hedged asset, liability or firm commitment or is
recognized in other comprehensive income until the hedged item is recognized in
earnings. In adopting these standards, Domtar incurred a transition adjustment
of $1 million resulting from the net unrealized loss on commodity hedging
contracts. As these contracts constituted cash flow hedges, this transitional
adjustment has been recorded in "Other comprehensive income" and is transferred
to earnings as the contracts mature.
(II) COST OF DELIVERY
Domtar records delivery costs as a reduction of gross sales to determine
net sales. Under U.S. GAAP, the delivery costs are included in cost of sales.
For the nine months ended September 30, 2002, delivery costs amounted to $269
million ($171 million for the nine months ended September 30, 2001).
(III) ALLOWANCE FOR DOUBTFUL ACCOUNTS
As at September 30, 2002, receivables include an allowance for doubtful
accounts of $24 million ($19 million as at December 31, 2001).
(IV) INVENTORIES
SEPTEMBER 30 SEPTEMBER 30 DECEMBER 31
2002 2002 2001
------------ ------------ -----------
Unaudited Unaudited $
US$ $
Work in process and finished goods.................... 250 396 430
Raw materials......................................... 87 139 166
Operating and maintenance supplies.................... 111 176 183
--- --- ---
448 711 779
=== === ===
(V) LONG-TERM DEBT
As at September 30, 2002, the fair value of the long-term debt was $2,993
million ($3,004 million as at December 31, 2001).
For the nine months ended September 30, 2002 and September 30, 2001, the
interest on the long-term debt amounted to $127 million and $87 million,
respectively.
(VI) COMMITMENTS AND CONTINGENCIES
ENVIRONMENT
As at September 30, 2002, Domtar had a $48 million provision ($47 million
as at December 31, 2001) to cover site remediation costs known and determinable,
of which the long-term portion of $41 million ($39 million as at December 31,
2001) was included in "Other liabilities and deferred credits". However,
additional costs, not yet identified, could be incurred for site remediation.
Based on policies and procedures
F-6
DOMTAR INC.
UNAUDITED RECONCILIATION OF CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES
RELATING TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS
ENDED
SEPTEMBER 30, 2002 AND SEPTEMBER 30, 2001
(In millions of Canadian dollars, unless otherwise noted)
in place to monitor environmental exposure, management believes that any
additional site remediation costs will not have a material adverse effect on
Domtar's financial position, earnings or cash flows.
E.B. EDDY ACQUISITION
On July 31, 1998, Domtar acquired all of the issued and outstanding shares
of E.B. Eddy Limited and E.B. Eddy Paper, Inc. (E.B. Eddy), an integrated
producer of specialty paper and wood products. The purchase agreement includes a
purchase price adjustment whereby, in the event of the acquisition by a third
party of more than 50% of the shares of the Corporation in specified
circumstances, the Corporation may have to pay up to a maximum of $120 million,
an amount which will gradually decline over a 25-year period.
(VII) INTEREST IN JOINT VENTURES
The following amounts represent the Corporation's proportionate interest in
its joint ventures (Norampac and Anthony-Domtar Inc.):
SEPTEMBER 30 SEPTEMBER 30 DECEMBER 31
2002 2002 2001
------------ ------------ -----------
Unaudited Unaudited $
US$ $
ASSETS
Current assets........................................ 122 194 156
Long-term assets...................................... 309 490 483
LIABILITIES
Current liabilities................................... 64 101 98
Long-term liabilities................................. 194 307 271
NINE MONTHS ENDED
SEPTEMBER 30
-----------------------------------
2002 2002 2001
--------- --------- ---------
Unaudited Unaudited Unaudited
US$ $ $
EARNINGS
Net sales................................................... 286 454 407
Operating profit............................................ 34 54 65
Financing expenses.......................................... 9 14 18
Net earnings................................................ 18 28 33
CASH FLOWS
Cash flows provided from operating activities............... 8 13 29
Cash flows used for investing activities.................... (23) (36) (66)
Cash flows provided from financing activities............... 19 30 20
F-7
DOMTAR INC.
UNAUDITED RECONCILIATION OF CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES
RELATING TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS
ENDED
SEPTEMBER 30, 2002 AND SEPTEMBER 30, 2001
(In millions of Canadian dollars, unless otherwise noted)
(VIII) COMPREHENSIVE INCOME AND ACCUMULATED OTHER COMPREHENSIVE INCOME
NINE MONTHS ENDED SEPTEMBER 30
-----------------------------------
2002 2002 2001
--------- --------- ---------
Unaudited Unaudited Unaudited
US$ $ $
COMPREHENSIVE INCOME
Net earnings in accordance with U.S. GAAP................... 78 124 72
Cumulative effect of adopting SFAS 133 and 138 (see (i)
above).................................................... 1 1 (1)
Foreign currency translation adjustments.................... 1 2 2
-- --- --
COMPREHENSIVE INCOME........................................ 80 127 73
== === ==
ACCUMULATED OTHER COMPREHENSIVE INCOME
Additional minimum liability of defined benefit plans....... (6) (9) (8)
Unrealized loss on derivative financial instruments......... -- -- (1)
Foreign currency translation adjustments.................... 3 4 1
-- --- --
ACCUMULATED OTHER COMPREHENSIVE INCOME...................... (3) (5) (8)
== === ==
(IX) IMPACT OF ACCOUNTING PRONOUNCEMENTS NOT YET IMPLEMENTED
COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES
In June 2002, the FASB issued SFAS 146 "Accounting for Costs Associated
with Exit or Disposal Activities" which requires that a liability for a cost
associated with an exit or disposal activity be recognized and measured
initially at fair value only when a liability is incurred. Domtar will adopt
SFAS 146 on January 1, 2003 for U.S. GAAP purposes. Domtar does not anticipate
any immediate financial statement impact with the adoption of this standard.
ASSET RETIREMENT OBLIGATIONS
In June 2001, the FASB issued SFAS 143, "Accounting for Asset Retirement
Obligations". Domtar must adopt this standard for U.S. GAAP reporting at the
beginning of fiscal year 2003. This standard requires that the fair value of a
liability for an asset retirement obligation be recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made. Domtar
is currently assessing the impact that this standard will have on its results of
operations and financial position.
F-8
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS
We have set forth below our unaudited pro forma consolidated statement of
earnings for the year ended December 31, 2001 which gives effect to the
acquisition of four integrated pulp and paper mills and related assets completed
on August 7, 2001 (the 'Acquisition') and are further adjusted to reflect the
common share and the 7.875% notes issuances done in October 2001 (the
'Financing') as if they had occurred on January 1, 2001. For information as to
the basis on which the unaudited pro forma consolidated statement of earnings is
presented, see note 1 to the financial statement.
The pro forma consolidated statement of earnings is presented for
illustrative purposes only and does not purport to represent what our actual
performance would have been if the Acquisition and the Financing had occurred at
an earlier date. The pro forma adjustments are based upon currently available
information and our estimates and assumptions. Actual adjustments will differ
from the pro forma adjustments. Our future operating results may differ
materially from the unaudited pro forma financial data presented below due to
various factors, including those described under "Risk Factors" included
elsewhere in this prospectus.
You should read the unaudited pro forma consolidated statement of earnings
(including the notes thereto) in conjunction with our audited consolidated
financial statements, our unaudited interim consolidated financial statements,
the financial statements of the Acquired Mills and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere or
incorporated by reference in this prospectus.
F-9
COMPILATION REPORT
To the Board of Directors of
DOMTAR INC.
We have reviewed, as to compilation only, the accompanying pro forma
consolidated statement of earnings for the year ended December 31, 2001 which
have been prepared for inclusion in the short form prospectus relating to the
secondary offering of common shares of Domtar Inc. In our opinion, the pro forma
consolidated statement of earnings has been properly compiled to give effect to
the completed transactions and assumptions described in the notes thereto.
(signed) PRICEWATERHOUSECOOPERS LLP (signed) RAYMOND CHABOT GRANT THORNTON
Chartered Accountants Chartered Accountants
General Partnership
Montreal, Quebec
December 18, 2002
COMMENTS FOR UNITED STATES READERS ON CANADA AND
UNITED STATES REPORTING DIFFERENCE
The above report, provided solely pursuant to Canadian requirements, is
expressed in accordance with standards of reporting generally accepted in
Canada. Such standards contemplated the expression of an opinion with respect to
the compilation of pro forma consolidated financial information. United States
standards do not provide for the expression of an opinion on the compilation of
pro forma consolidated financial information. To report in conformity with
United States standards on the reasonableness of the pro forma adjustments and
their application to the pro forma consolidated financial information requires
an examination or review substantially greater in scope than the review we have
conducted. Consequently, we are unable to express an opinion in accordance with
standards of reporting generally accepted in the United States with respect to
the compilation of the accompanying pro forma consolidated financial
information.
(signed) PRICEWATERHOUSECOOPERS LLP (signed) RAYMOND CHABOT GRANT THORNTON
Chartered Accountants Chartered Accountants
General Partnership
Montreal, Quebec
December 18, 2002
F-10
DOMTAR INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS
YEAR ENDED DECEMBER 31, 2001
ACQUIRED MILLS,
7 MONTHS
DOMTAR ENDED ACQUISITION FINANCING
AS REPORTED JULY 31, 2001 ADJUSTMENTS ADJUSTMENTS PRO FORMA
----------- --------------- ----------- ----------- ---------
Note 1 Note 1 Note 2 Note 3
(in millions of dollars, except per share amounts)
NET SALES............................. 4,377 1,151 (77) (f) -- 5,451
OPERATING EXPENSES
Cost of sales....................... 3,514 900 1 (a)
21 (b)
(77) (f) -- 4,359
Selling, general and
administrative................... 256 71 -- -- 327
Amortization........................ 294 134 (72) (c) -- 356
----- ----- --- --- -----
OPERATING PROFIT...................... 313 46 50 -- 409
Financing expenses.................. 152 1 78 (d) 19
(19) 231
Amortization of deferred gain....... (5) -- -- -- (5)
----- ----- --- --- -----
EARNINGS BEFORE INCOME TAXES.......... 166 45 (28) -- 183
Income tax expense.................. 14 23 (17) (e) -- 20
----- ----- --- --- -----
NET EARNINGS.......................... 152 22 (11) -- 163
Dividend requirements of preferred
shares........................... 2 -- -- -- 2
----- ----- --- --- -----
NET EARNINGS APPLICABLE TO COMMON
SHARES.............................. 150 22 (11) -- 161
===== ===== === === =====
Net earnings per common share
Basic............................... 0.78 0.71
Diluted............................. 0.78 0.71
Weighted average number of common
shares outstanding (millions)
Basic............................... 191.2 225.9
Diluted............................. 191.9 226.6
F-11
DOMTAR INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS
(in millions of dollars, unless otherwise noted)
1. BASIS OF PRESENTATION
The unaudited pro forma consolidated statement of earnings has been
prepared in accordance with Canadian GAAP to give effect to the acquisition by
Domtar Inc. of four integrated pulp and paper mills and related assets from
Georgia-Pacific Corporation (the "Acquired Mills"), which was completed on
August 7, 2001 for US$1.65 billion ($2.53 billion) excluding transaction costs
(the "Acquisition"), and are further adjusted to give effect to the sale and
issuance in October 2001 of 45.2 million common shares of Domtar Inc. at a
public offering price of $11.44 per common share and the sale and issuance of
US$600 million ($937 million) aggregate principal amount of notes with an
interest rate of 7.875% (the "Financing").
The Acquisition and the Financing are reflected in the pro forma
consolidated statement of earnings for the year ended December 31, 2001 as if
they had occurred on January 1, 2001.
The pro forma consolidated statement of earnings is based on the historical
consolidated financial information of Domtar Inc. and the Acquired Mills,
adjusted as explained below, and should be read in conjunction with the audited
consolidated financial statements of Domtar Inc. for the year ended December 31,
2001, the unaudited financial statements of the Acquired Mills for the six
months ended June 30, 2001, and the notes thereto. The statement of earnings of
the Acquired Mills has been summarized and reclassified so that it is presented
on a consistent basis with those of Domtar Inc. for the purposes of this pro
forma consolidated statement of earnings. To the financial information for the
six months ended June 30, 2001, management has added the financial information
available from the four mills for their results of operation of July 2001 in
order to obtain a statement of earnings for the seven months ended July 31,
2001.
The historical financial statements of the Acquired Mills have been
prepared and presented in US dollars. The statement of earnings has been
translated into Canadian dollars using the average exchange rate of 1.5341 for
the period.
The Acquisition of the Acquired Mills by Domtar Inc. has been accounted for
under the purchase method of accounting, under which the purchase price is
allocated to the assets acquired and liabilities assumed based on their
estimated fair market values at the date of acquisition. The pro forma
acquisition adjustments described below are based on the current allocation made
by management and the assigned values may be modified once the ongoing study on
the integration and restructuring of assets acquired is completed and a formal
plan is approved. Accordingly, the final allocation of purchase price and the
resulting effect on the consolidated statement of earnings will differ from
those set forth in the unaudited pro forma consolidated statement of earnings.
The pro forma consolidated statement of earnings is prepared for
illustrative purposes only and is based on the assumptions set forth in the
notes to such statement. This statement is not necessarily indicative of the
results of operations that might have occurred had the applicable transactions
actually taken place on the dates indicated, or of future results of operations
of the stand-alone or combined entities. In preparing this pro forma
consolidated statement of earnings, no adjustments have been made to reflect the
additional costs, savings or synergies that could result from combining the
operations of Domtar Inc. and the Acquired Mills. The pro forma adjustments are
based upon currently available information and management's estimates and
assumptions. Actual adjustments will differ from the pro forma adjustments.
F-12
DOMTAR INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS
(in millions of dollars, unless otherwise noted)
2. PRO FORMA ACQUISITION ADJUSTMENTS TO THE CONSOLIDATED STATEMENT OF EARNINGS
(a) An increase of $1 million to cost of sales to eliminate from the historical
results of the Acquired Mills the effect of using the LIFO reserve, in
order to conform with the accounting policies of Domtar Inc.
(b) An increase of $21 million to cost of sales to replace the existing pension
income with the pension cost for the employees assumed according to the
purchase agreement.
(c) A decrease of $72 million to amortization to replace the existing
amortization expense of the Acquired Mills with the new amortization
expense resulting from the elimination of the existing goodwill, the
revaluation of property, plant and equipment and the revaluation of the
estimated remaining useful lives of the property, plant and equipment to an
average of 20 years.
(d) An increase of $78 million to financing expenses to replace the existing
interest expense of the Acquired Mills with the new interest expense
estimated at the rate of 5% on the total new debt and the amortization of
the financing expenses.
(e) The income tax effect of $17 million on the above adjustments has been
estimated at the statutory tax rate of 37% except on the elimination of the
goodwill amortization for which there was no tax effect.
(f) In addition to the above adjustments, an amount of $77 million for the
seven months ended July 31, 2001, representing the freight cost on sales of
the Acquired Mills, has been reclassified against net sales to conform with
the presentation adopted by Domtar Inc.
3. PRO FORMA FINANCING ADJUSTMENTS
The pro forma financing adjustments give effect to the sale and issuance of
45.2 million common shares of Domtar Inc. at a public offering price of $11.44
per common share for proceeds of $499 million, net of issue costs of $26 million
and related income taxes of $8 million, as if the issuance had occurred on
January 1, 2001. The proceeds were used to repay the outstanding balance of the
equity bridge loan incurred to finance in part the Acquisition. The pro forma
financing adjustments also give effect to the sale and issuance of US$600
million ($937 million) aggregate principal amount of notes at an issue price of
US$592 million ($925 million) as if the issuance had occurred on January 1,
2001. The proceeds were used to repay the outstanding balance of the bond bridge
loan also incurred to finance in part the Acquisition.
As a result of the repayment of the equity bridge loan, interest expense is
reduced by $19 million. As a result of the replacement of the bond bridge loan
with the issuance of US$600 million ($937 million) aggregate principal amount of
notes with an interest rate of 7.875%, interest expense is increased by $19
million. The corresponding income tax effect is calculated at the rate of 37%.
F-13
DOMTAR INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS
(in millions of dollars, unless otherwise noted)
4. US GAAP FINANCIAL INFORMATION
The unaudited pro forma consolidated statement of earnings have been
prepared in accordance with Canadian GAAP which, in the case of Domtar Inc.,
conform in all material respects with US GAAP, except as set forth in note 22 to
the consolidated financial statements of Domtar Inc. incorporated by reference
in this prospectus. The financial statements of the Acquired Mills have been
prepared in accordance with US GAAP which, in the case of the Acquired Mills,
conform in all material respects with Canadian GAAP.
NET EARNINGS ADJUSTMENTS:
YEAR ENDED
DECEMBER 31,
2001
------------
Pro forma net earnings in accordance with Canadian GAAP..... $ 163
Adjustments in respect of:
Net pension benefit cost.................................. (2)
Post-retirement and post-employment benefit costs other
than pension........................................... 1
Unrealized exchange gain (loss) on translation of
long-term debt......................................... (15)
Unrealized gain (loss) on currency hedging contracts...... (52)
Unrealized gain on commodities hedging contracts.......... 3
Amortization of deferred gain............................. (5)
Acquisition of E.B. Eddy.................................. (11)
Formation of Norampac..................................... (2)
Tax effect of the above adjustments....................... 28
-----
Pro forma net earnings in accordance with US GAAP........... 108
Dividend requirements of preferred shares................... 2
-----
Pro forma net earnings applicable to common shares in
accordance with US GAAP................................... $ 106
=====
Pro forma net earnings per common share
Basic..................................................... $0.47
Diluted................................................... $0.47
For a description of the material differences between US GAAP and Canadian
GAAP, please refer to note 22 to the consolidated financial statements of Domtar
Inc. incorporated by reference in this prospectus.
F-14
FINANCIAL STATEMENTS OF THE ACQUIRED MILLS
Arthur Andersen LLP, Atlanta, Georgia, independent public accountants, or
the US Auditor, had audited the financial statements of the Acquired Mills as of
December 30, 2000 and January 1, 2000 and for each of the three years in the
period ended December 30, 2000 presented hereinafter in this short form
prospectus in connection with our October 2001 offerings described below. The
report of the US Auditor on the foregoing audited financial statements was dated
June 15, 2001, except with respect to the matter discussed in Note 7 thereof as
to which the date was August 7, 2001, and the report of the US Auditor on
supplementary information -- differences between United States and Canadian
generally accepted accounting principles, was dated June 15, 2001. We refer to
the foregoing audited financial statements and the aforesaid reports of the US
Auditor as the audited financial statements of the Acquired Mills. Consent
letters provided by the US Auditor for the audited financial statements of the
Acquired Mills were filed with the Canadian securities regulatory authorities
and the SEC in accordance with applicable securities laws. In the context of
these October 2001 offerings, the US Auditor had also provided the required
comfort letters with respect to the unaudited financial statements of the
Acquired Mills for the six months ended June 30, 2001 and July 1, 2000, or the
unaudited interim financial statements of the Acquired Mills, also presented
hereinafter in this short form prospectus, which comfort letters were filed with
the Canadian securities regulatory authorities in accordance with applicable
Canadian securities laws. The audited financial statements of the Acquired Mills
and the unaudited interim financial statements of the Acquired Mills, or
collectively the financial statements of the Acquired Mills, had been prepared
for us in connection with our offering of common shares for which we filed a
final supplemented short form PREP prospectus dated October 2, 2001 and our
offering of 7.875% Notes due 2011 for which we filed a final supplemented short
form PREP prospectus dated October 11, 2001, and had been included in these
prospectuses.
In connection with this short form prospectus, consent letters from the US
Auditor relating to the audited financial statements of the Acquired Mills and a
comfort letter from the US Auditor relating to the unaudited interim financial
statements of the Acquired Mills are technically required to be filed with
Canadian securities regulatory authorities under applicable Canadian securities
laws. Domtar has not been able to obtain the aforesaid consent and comfort
letters; accordingly, the audited financial statements of the Acquired Mills are
accompanied by the auditor's reports which were originally included in our
aforementioned October 2001 prospectuses, which reports have not been re-issued
for purposes of this short form prospectus. As a result, you will not be able to
recover against Arthur Andersen LLP under Canadian securities laws or under
Section 11 of the Securities Act with respect to their audit report on the
financial statements of the Acquired Mills set forth herein. It does not
otherwise, however, affect or limit the legal rights of purchasers of units
under certain Canadian securities laws, to withdrawal or rescission.
Furthermore, Arthur Andersen LLP may not possess sufficient assets to satisfy
any claims that may arise out of Arthur Andersen LLP's audit.
F-15
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Georgia-Pacific Corporation:
We have audited the accompanying balance sheets of the PAPER AND PULP
OPERATIONS AT ASHDOWN, ARKANSAS; NEKOOSA AND PORT EDWARDS, WISCONSIN; AND
WOODLAND, MAINE, a portion of a segment of Georgia-Pacific Corporation (Note 1),
as of December 30, 2000 and January 1, 2000 and the related statements of
income, parent's investment, and cash flows for each of the three years in the
period ended December 30, 2000. These financial statements are the
responsibility of Georgia-Pacific Corporation's management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Paper and Pulp
Operations as of December 30, 2000 and January 1, 2000 and the results of its
operations and its cash flows for each of the three years in the period ended
December 30, 2000 in conformity with accounting principles generally accepted in
the United States.
(signed) ARTHUR ANDERSEN LLP
Atlanta, Georgia
June 15, 2001 (except with respect to the matter discussed in Note 7, as to
which the date is August 7, 2001)
F-16
PAPER AND PULP OPERATIONS AT ASHDOWN, ARKANSAS;
NEKOOSA AND PORT EDWARDS, WISCONSIN;
AND WOODLAND, MAINE
(A PORTION OF A SEGMENT OF GEORGIA-PACIFIC CORPORATION)
BALANCE SHEETS
(IN THOUSANDS OF US DOLLARS)
JUNE 30, DECEMBER 30, JANUARY 1,
2001 2000 2000
----------- ------------ -----------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash............................................. $ 89 $ 396 $ 1,449
----------- ----------- -----------
Receivables, less allowances of $500 in 2000 and
1999 and on June 30, 2001 (unaudited)......... 92,531 87,057 92,877
Receivables, Unisource........................... 23,711 39,181 36,389
----------- ----------- -----------
Total receivables........................... 116,242 126,238 129,266
----------- ----------- -----------
Inventories:
Raw materials................................. 34,136 31,500 33,477
Finished goods................................ 101,941 107,933 101,179
Supplies...................................... 42,621 40,918 42,276
LIFO reserve.................................. (4,692) (5,057) 5,766
----------- ----------- -----------
Total inventories........................... 174,006 175,294 182,698
----------- ----------- -----------
Other current assets............................. 4,908 4,231 3,520
----------- ----------- -----------
Total current assets........................ 295,245 306,159 316,933
----------- ----------- -----------
PROPERTY, PLANT, AND EQUIPMENT:
Land and improvements............................ 45,316 45,245 44,898
Buildings........................................ 154,489 154,758 153,719
Machinery and equipment.......................... 2,240,002 2,233,937 2,175,960
Construction in progress......................... 16,517 10,257 35,656
----------- ----------- -----------
Property, plant, and equipment, at cost..... 2,456,324 2,444,197 2,410,233
Accumulated depreciation......................... (1,592,082) (1,531,072) (1,416,724)
----------- ----------- -----------
Property, plant, and equipment, net......... 864,242 913,125 993,509
----------- ----------- -----------
GOODWILL, NET...................................... 632,318 643,347 665,405
----------- ----------- -----------
OTHER ASSETS....................................... 98,519 89,148 73,286
----------- ----------- -----------
Total assets................................ $ 1,890,324 $ 1,951,779 $ 2,049,133
=========== =========== ===========
LIABILITIES AND PARENT'S INVESTMENT
CURRENT LIABILITIES:
Accounts payable................................. $ 67,421 $ 62,628 $ 58,017
Accrued compensation............................. 26,621 29,658 29,610
Accrued property and other taxes................. 10,970 5,963 5,951
Deferred income tax liabilities.................. 2,484 596 598
Other current liabilities........................ 1,636 15,033 14,685
----------- ----------- -----------
Total current liabilities................... 109,132 113,878 108,861
OTHER LONG-TERM LIABILITIES........................ 87,994 88,250 91,338
DEFERRED INCOME TAX LIABILITIES.................... 189,962 196,433 202,867
COMMITMENTS AND CONTINGENCIES (NOTE 6)
PARENT'S INVESTMENT................................ 1,503,236 1,553,218 1,646,067
----------- ----------- -----------
Total liabilities and parent's investment... 1,890,324 $ 1,951,779 $ 2,049,133
=========== =========== ===========
The accompanying notes are an integral part of these statements.
F-17
PAPER AND PULP OPERATIONS AT ASHDOWN, ARKANSAS;
NEKOOSA AND PORT EDWARDS, WISCONSIN;
AND WOODLAND, MAINE
(A PORTION OF A SEGMENT OF GEORGIA-PACIFIC CORPORATION)
STATEMENTS OF INCOME
(IN THOUSANDS OF US DOLLARS)
SIX MONTHS ENDED YEAR ENDED
-------------------- -------------------------------------------
JUNE 30, JULY 1, DECEMBER 30, JANUARY 1, DECEMBER 31,
2001 2000 2000 2000 1998
-------- -------- ------------ ----------- ------------
(unaudited)
NET SALES:
Third parties............. $411,807 $410,678 $ 878,038 $ 972,211 $1,169,423
Georgia-Pacific
Corporation............ 223,045 244,119 454,089 222,834 37,665
-------- -------- ---------- ----------- ----------
Net sales.............. 634,852 654,797 1,332,127 1,195,045 1,207,088
-------- -------- ---------- ----------- ----------
COSTS AND EXPENSES:
Cost of sales, excluding
depreciation and
amortization shown
below.................. 485,303 447,862 935,501 902,398 944,703
Selling and
distribution........... 18,086 20,957 43,148 32,577 42,287
Depreciation and
amortization........... 78,352 77,554 155,454 150,431 152,559
General and
administrative......... 25,232 27,266 54,019 63,175 42,850
Interest.................. 807 1,257 3,419 1,870 0
Other expense............. 247 882 3,555 819 1,695
-------- -------- ---------- ----------- ----------
Total costs and
expenses............. 608,027 575,778 1,195,096 1,151,270 1,184,094
-------- -------- ---------- ----------- ----------
INCOME BEFORE INCOME
TAXES..................... 26,825 79,019 137,031 43,775 22,994
PROVISION FOR INCOME
TAXES..................... 14,024 33,334 58,893 25,721 17,625
-------- -------- ---------- ----------- ----------
NET INCOME.................. $ 12,801 $ 45,685 $ 78,138 $ 18,054 $ 5,369
======== ======== ========== =========== ==========
The accompanying notes are an integral part of these statements.
F-18
PAPER AND PULP OPERATIONS AT ASHDOWN, ARKANSAS;
NEKOOSA AND PORT EDWARDS, WISCONSIN;
AND WOODLAND, MAINE
(A PORTION OF A SEGMENT OF GEORGIA-PACIFIC CORPORATION)
STATEMENTS OF PARENT'S INVESTMENT
(IN THOUSANDS OF US DOLLARS)
SIX MONTHS ENDED YEAR ENDED
----------------------- ----------------------------------------
JUNE 30, JULY 1, DECEMBER 30, JANUARY 1, DECEMBER 31,
2001 2000 2000 2000 1998
---------- ---------- ------------ ---------- ------------
(unaudited)
PARENT'S INVESTMENT, BEGINNING
OF PERIOD..................... $1,553,218 $1,646,067 $1,646,067 $1,639,373 $1,712,431
Net income.................... 12,801 45,685 78,138 18,054 5,369
Net transactions with
Georgia-Pacific
Corporation................ (62,783) (61,400) (170,987) (11,360) (78,427)
---------- ---------- ---------- ---------- ----------
PARENT'S INVESTMENT, END OF
PERIOD........................ $1,503,236 $1,630,352 $1,553,218 $1,646,067 $1,639,373
========== ========== ========== ========== ==========
The accompanying notes are an integral part of these statements.
F-19
PAPER AND PULP OPERATIONS AT ASHDOWN, ARKANSAS;
NEKOOSA AND PORT EDWARDS, WISCONSIN;
AND WOODLAND, MAINE
(A PORTION OF A SEGMENT OF GEORGIA-PACIFIC CORPORATION)
STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF US DOLLARS)
SIX MONTHS ENDED YEAR ENDED
------------------- -----------------------------------------
JUNE 30, JULY 1, DECEMBER 30, JANUARY 1, DECEMBER 31,
2001 2000 2000 2000 1998
-------- -------- ------------ ----------- ------------
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................... $ 12,801 $ 45,685 $ 78,138 $ 18,054 $ 5,369
Adjustments to reconcile net income
to cash provided by operations:
Depreciation.................. 65,730 65,022 130,391 127,554 130,501
Deferred income taxes......... (4,583) (5,542) (6,436) (8,002) 2,246
Amortization of goodwill and
other intangibles.......... 12,622 12,532 25,063 22,877 22,058
Changes in assets and
liabilities:
Receivables................ 9,996 8,993 3,028 (23,695) 5,739
Inventories, excluding LIFO
reserve.................. 1,653 (19,616) (3,419) (2,652) 9,396
LIFO reserve............... (365) (157) 10,823 (3,790) (5,531)
Total current
liabilities.............. (6,634) (11,355) 5,019 (12,285) (13,373)
Changes in other working
capital.................. (677) 2,325 (711) 835 (1,293)
Change in other assets and
other long-term
liabilities.............. (11,220) (11,345) (21,955) (33,938) (16,795)
-------- -------- --------- -------- --------
Cash provided by
operating
activities............ 79,323 86,542 219,941 84,958 138,317
-------- -------- --------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property, plant, and equipment
investments..................... (16,935) (26,137) (50,123) (76,482) (60,503)
Proceeds from sales of assets...... 88 770 116 3,136 1,441
-------- -------- --------- -------- --------
Cash used for investing
activities............ (16,847) (25,367) (50,007) (73,346) (59,062)
-------- -------- --------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net transactions with
Georgia-Pacific................. (62,783) (61,400) (170,987) (11,360) (78,427)
-------- -------- --------- -------- --------
(DECREASE) INCREASE IN CASH.......... (307) (225) (1,053) 252 828
BALANCE, BEGINNING OF PERIOD......... 396 1,449 1,449 1,197 369
-------- -------- --------- -------- --------
BALANCE, END OF PERIOD............... $ 89 $ 1,224 $ 396 $ 1,449 $ 1,197
======== ======== ========= ======== ========
The accompanying notes are an integral part of these statements.
F-20
PAPER AND PULP OPERATIONS AT ASHDOWN, ARKANSAS;
NEKOOSA AND PORT EDWARDS, WISCONSIN;
AND WOODLAND, MAINE
(A PORTION OF A SEGMENT OF GEORGIA-PACIFIC CORPORATION)
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 2001 AND FOR THE SIX MONTHS ENDED
JUNE 30, 2001 AND JULY 1, 2000 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Paper and Pulp Operations at Ashdown, Arkansas; Nekoosa and Port Edwards,
Wisconsin; and Woodland, Maine (the "Paper and Pulp Operations") consist of
Georgia-Pacific Corporation's (the "Corporation" or "Georgia-Pacific")
free-sheet paper mills at Ashdown, Arkansas; Nekoosa and Port Edwards,
Wisconsin; and Woodland, Maine; the associated pulp facilities at Ashdown and
Woodland as well as certain wood procurement assets in Wisconsin. The financial
statements of the Paper and Pulp Operations, a portion of a segment of
Georgia-Pacific include the assets, liabilities, revenues, and expenses related
to the operations conducted by the Paper and Pulp Operations. The separate
financial statements of the Paper and Pulp Operations have been prepared on a
basis that management believes to be reasonable and appropriate and include the
historical balance sheets, results of operations, and cash flows for the Paper
and Pulp Operations, including allocated portions of the Corporation's
centralized functions, as described below. The separate financial statements are
not necessarily indicative of the balance sheets, results of operations, and
cash flows that might have occurred had the Paper and Pulp Operations been a
stand-alone business not fully integrated into Georgia-Pacific's other pulp and
paper operations, or the actual financial position that might have otherwise
resulted, or of future results of operation or financial position of the Paper
and Pulp Operations. All significant transactions within the Paper and Pulp
Operations have been eliminated.
The interim financial information included herein is unaudited; however,
such information reflects all adjustments which are, in the opinion of
management, necessary for a fair presentation of the Paper and Pulp Operations'
financial position, results of operations, and cash flows for the interim
periods. All such adjustments are of a normal, recurring nature.
NATURE OF OPERATIONS
The Paper and Pulp Operations are engaged in the manufacture of uncoated
free-sheet paper used in office copy machines and printers, commercial printing,
business forms, stationery, tablets, books, envelopes, labels, and checks. In
addition, the Paper and Pulp Operations manufacture market pulp used for the
production of many paper grades. Sales to the Paper and Pulp Operations' largest
external customer, Xerox Corporation, were approximately 13%, 13%, and 12% of
net sales in 2000, 1999, and 1998, respectively.
ALLOCATION OF SHARED SERVICES
A portion of the Corporation's shared general and administrative expenses
(such as human resources, legal, accounting, and information systems support)
and selling and distribution expenses have been allocated to the Paper and Pulp
Operations based on identification of such services specifically used by the
Paper and Pulp Operations. Where determinations based on specific usage alone
have been impracticable or are reflected in a general charge that is not
specific to the Paper and Pulp Operations, other methods and criteria were used
that management believes are equitable and provide a reasonable estimate of the
cost attributable to the Paper and Pulp Operations. These methods primarily
consisted of allocating costs based on (i) number of employees, (ii) percentage
of office space, (iii) estimated percentage of staff time used, or (iv)
percentage of tons sold. The total of these allocations was $62 million, $67
million, and $47 million in 2000, 1999, and 1998, respectively. It is not
practicable to provide a detailed estimate of the expenses that would have been
recognized if the Paper and Pulp Operations were operated on a stand-alone
basis.
F-21
PAPER AND PULP OPERATIONS AT ASHDOWN, ARKANSAS;
NEKOOSA AND PORT EDWARDS, WISCONSIN;
AND WOODLAND, MAINE
(A PORTION OF A SEGMENT OF GEORGIA-PACIFIC CORPORATION)
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 2001 AND FOR THE SIX MONTHS ENDED
JUNE 30, 2001 AND JULY 1, 2000 IS UNAUDITED)
ALLOCATION OF EMPLOYEE BENEFIT COSTS
A portion of the Corporation's employee benefit costs, including pension
and postretirement health care and life insurance benefits, has been allocated
to the Paper and Pulp Operations. The Paper and Pulp Operations' pension cost
related to its participation in the Corporation's noncontributory defined
benefit pension plan, and other employee benefit costs related to its
participation in the Corporation's postretirement health care and life insurance
benefit plans, are actuarially determined based on the number of its employees
and an allocable share of the plan assets and are calculated in accordance with
Statements of Financial Accounting Standards ("SFAS") No. 87, "Employers'
Accounting for Pensions," and SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions," respectively. Management believes
such method of allocation is equitable and provides a reasonable estimate of the
costs attributable to the Paper and Pulp Operations.
FINANCIAL ACTIVITIES
None of Georgia-Pacific's consolidated debt has been allocated to the Paper
and Pulp Operations.
The Paper and Pulp Operations participate in the Corporation's accounts
receivable secured borrowing program. Interest is allocated to the Paper and
Pulp Operations based on its proportion of eligible receivables in the program.
The allocated portion of interest expense was approximately $3.4 million, $1.9
million and nil in 2000, 1999, and 1998, respectively, and approximately $0.8
million and $1.3 million for the six months ended June 30, 2001 and July 1,
2000, respectively.
ALLOCATION OF FEDERAL AND STATE INCOME TAXES
The Paper and Pulp Operations have been included in the consolidated
federal income tax returns of the Corporation. The Paper and Pulp Operations'
provisions for income taxes in the accompanying financial statements reflect the
federal and state income taxes calculated on the Paper and Pulp Operations'
separate income.
The Paper and Pulp Operations record deferred income taxes using enacted
tax laws and rates for the years in which taxes are expected to be paid.
Deferred income tax assets and liabilities are recorded based on the differences
between the financial reporting and income tax bases of assets and liabilities.
REVENUE RECOGNITION
The Paper and Pulp Operations recognize revenue when the following criteria
are met: persuasive evidence of an agreement exists, delivery has occurred or
services have been rendered, the price to the buyer is fixed and determinable,
and collectibility is reasonably assured.
SHIPPING AND HANDLING
Amounts billed to customers in sales transactions related to shipping and
handling are classified as revenue. Shipping and handling costs incurred by the
Paper and Pulp Operations and included in selling and distribution expenses were
$19.1 million, $14.7 million, and $19.2 million in 2000, 1999, and 1998,
respectively, and approximately $10 million for each of the six months ended
June 30, 2001 and July 1, 2000.
F-22
PAPER AND PULP OPERATIONS AT ASHDOWN, ARKANSAS;
NEKOOSA AND PORT EDWARDS, WISCONSIN;
AND WOODLAND, MAINE
(A PORTION OF A SEGMENT OF GEORGIA-PACIFIC CORPORATION)
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 2001 AND FOR THE SIX MONTHS ENDED
JUNE 30, 2001 AND JULY 1, 2000 IS UNAUDITED)
INVENTORY VALUATION
Inventories are valued at the lower of year-to-date average cost or market
and include the costs of materials, labor, and manufacturing overhead. Storeroom
supplies are valued using the first-in, first-out method. The last-in, first-out
(LIFO) method was used to determine the cost of approximately 77% and 76% of
inventories at December 30, 2000 and January 1, 2000, respectively.
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are recorded at cost. Replacements of major
units of property are capitalized and the replaced properties are retired.
Replacements of minor components of property and repair and maintenance costs
are charged to expense as incurred. There are no reserves for planned shutdown
costs at the end of any fiscal year.
Depreciation is computed using the straight-line method over the estimated
useful lives of the related assets. Useful lives are 25 years for land
improvements, 20 to 45 years for buildings, and 7 to 20 years for machinery and
equipment. Upon retirement or disposition of assets, cost and accumulated
depreciation are removed from the related accounts, and any gain or loss is
included in income.
The Paper and Pulp Operations are allocated interest on projects when
construction takes considerable time and entails major expenditures. Such
interest is charged to the property, plant, and equipment accounts and amortized
over the approximate lives of the related assets. During 2000, 1999, and 1998,
the Pulp and Paper Business were allocated capitalized interest totaling $1.3
million, $.3 million, and $.5 million, respectively.
GOODWILL
The Paper and Pulp Operations amortize costs in excess of fair value of net
assets of businesses acquired using the straight-line method over 40 years.
Goodwill amortization expense was $22 million in each of the years 2000, 1999,
and 1998. Accumulated amortization at December 30, 2000 and January 1, 2000 was
$241 million and $219 million, respectively.
IMPAIRMENT OF GOODWILL AND OTHER LONG-LIVED ASSETS
The Paper and Pulp Operations review the recorded value of goodwill and
other long-lived assets annually or sooner if events or changes in circumstances
indicate that the carrying amount may exceed fair value. Recoverability is then
determined by comparing the undiscounted net cash flows of the related assets to
the net book value of those assets. If the carrying amount exceeds the
undiscounted cash flows, an impairment loss would be recognized for the
difference between the carrying amount and the estimated fair value.
LANDFILLS AND LAGOONS
The Paper and Pulp Operations accrue for landfill closure costs over the
periods that benefit from the use of the landfill and accrue for lagoon
clean-out costs over the useful period between clean-outs.
ENVIRONMENTAL MATTERS
The Paper and Pulp Operations recognize a liability for environmental
remediation costs when management believes it is probable a liability has been
incurred and the amount can be reasonably estimated.
F-23
PAPER AND PULP OPERATIONS AT ASHDOWN, ARKANSAS;
NEKOOSA AND PORT EDWARDS, WISCONSIN;
AND WOODLAND, MAINE
(A PORTION OF A SEGMENT OF GEORGIA-PACIFIC CORPORATION)
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 2001 AND FOR THE SIX MONTHS ENDED
JUNE 30, 2001 AND JULY 1, 2000 IS UNAUDITED)
The liabilities are developed based on currently available information and
reflect the participation of other potentially responsible parties, depending on
the parties' financial condition and probable contribution. The accruals are
recorded at undiscounted amounts and are reflected as other long-term
liabilities in the accompanying balance sheets.
Environmental costs are generally capitalized when the costs improve the
condition of the property or the costs prevent or mitigate future contamination.
All other costs are expensed.
COMPREHENSIVE INCOME
The Paper and Pulp Operations' total comprehensive income was $78 million,
$18 million, and $5 million for the years ended December 30, 2000, January 1,
2000 and December 31, 1998, respectively, and consisted of only net income.
The Paper and Pulp Operations' total comprehensive income was approximately
$12.8 million for the six months ended June 30, 2001 and was approximately $45.7
million for the six months ended July 1, 2000 and consisted only of net income.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions. These estimates and assumptions affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements as well as reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from these estimates.
ACCOUNTING STANDARDS CHANGE
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended, issued by the Financial Accounting Standards Board
establishes the accounting and reporting of derivative instruments and hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities on its balance sheet and measure those instruments at fair
value. The accounting for changes in the fair value of a derivative depends on
the intended use of the derivative and the resulting designation. The Paper and
Pulp Operations adopted SFAS No. 133 in 2001, and there was no impact on the
Paper and Pulp Operations upon adoption.
CHANGE IN FISCAL YEAR
In 1999, the Paper and Pulp Operations changed its fiscal year from
December 31 to end on the Saturday closest to December 31. The impact of one
additional day on the year ended January 1, 2000 was not material.
2. TRANSACTIONS WITH GEORGIA-PACIFIC
The Paper and Pulp Operations purchase wood fiber, packaging materials, and
chemicals from Georgia-Pacific and sell paper and pulp to Georgia-Pacific. Such
transactions are in the ordinary course of business at negotiated prices
comparable to transactions with unaffiliated customers and suppliers. Purchases
from Georgia-Pacific were $227 million, $234 million, and $246 million in 2000,
1999, and 1998, respectively.
F-24
PAPER AND PULP OPERATIONS AT ASHDOWN, ARKANSAS;
NEKOOSA AND PORT EDWARDS, WISCONSIN;
AND WOODLAND, MAINE
(A PORTION OF A SEGMENT OF GEORGIA-PACIFIC CORPORATION)
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 2001 AND FOR THE SIX MONTHS ENDED
JUNE 30, 2001 AND JULY 1, 2000 IS UNAUDITED)
Sales to Georgia-Pacific were $454 million, $223 million, and $38 million in
2000, 1999, and 1998, respectively.
Purchases from and sales to Georgia-Pacific were $71 million and $223
million, respectively, during the six months ended June 30, 2001 and $78 million
and $244 million, respectively, during the six months ended July 1, 2000.
Georgia-Pacific purchased Unisource Worldwide, Inc. ("Unisource") in July
of 1999. Sales to Unisource subsequent to that date are included in
Georgia-Pacific Corporation sales on the statement of income. Prior to the
acquisition, sales to Unisource were $144 million and $299 million in 1999 and
1998, respectively, and are included in third-party sales in the statement of
income.
3. INCOME TAXES
The provisions for income taxes include the Paper and Pulp Operations'
allocated portion of income taxes currently payable and those deferred because
of temporary differences between the financial statement and tax bases of assets
and liabilities. The Paper and Pulp Operations' provision for income taxes
consists of the following:
DECEMBER 30, JANUARY 1, DECEMBER 31,
2000 2000 1998
------------ ---------- ------------
(In Thousands)
Federal income taxes:
Current............................................ $60,161 $28,401 $12,953
Deferred........................................... (5,950) (7,398) 2,077
State income taxes:
Current............................................ 5,168 5,322 2,426
Deferred........................................... (486) (604) 169
------- ------- -------
Provision for income taxes........................... $58,893 $25,721 $17,625
======= ======= =======
The federal statutory income tax rate was 35%. The Paper and Pulp
Operations' provision for income taxes is reconciled to the federal statutory
amount as follows:
DECEMBER 30, JANUARY 1, DECEMBER 31,
2000 2000 1998
------------ ---------- ------------
(In Thousands)
Provision for income taxes computed at the federal
statutory tax rate................................. $47,961 $15,321 $ 8,048
State income taxes, net of federal benefit........... 2,741 1,751 920
Goodwill amortization................................ 8,161 8,603 8,603
Other................................................ 30 46 54
------- ------- -------
Provision for income taxes........................... $58,893 $25,721 $17,625
======= ======= =======
F-25
PAPER AND PULP OPERATIONS AT ASHDOWN, ARKANSAS;
NEKOOSA AND PORT EDWARDS, WISCONSIN;
AND WOODLAND, MAINE
(A PORTION OF A SEGMENT OF GEORGIA-PACIFIC CORPORATION)
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 2001 AND FOR THE SIX MONTHS ENDED
JUNE 30, 2001 AND JULY 1, 2000 IS UNAUDITED)
The components of the Paper and Pulp Operations' net deferred income tax
liabilities are as follows:
DECEMBER 30, JANUARY 1,
2000 2000
------------ ----------
(In Thousands)
Deferred income tax assets:
Compensation-related accruals............................. $ 40,023 $ 42,001
Other accruals and reserves............................... 913 358
Other..................................................... 617 545
--------- ---------
41,553 42,904
--------- ---------
Deferred income tax liabilities:
Property, plant, and equipment............................ (199,610) (214,874)
Employee benefits......................................... (28,747) (21,270)
Inventories............................................... (10,225) (10,225)
--------- ---------
(238,582) (246,369)
--------- ---------
Deferred income tax liabilities, net........................ $(197,029) $(203,465)
========= =========
Included on the balance sheets:
Short-term deferred income tax liabilities*............... $ (596) $ (598)
Long-term deferred income tax liabilities**............... (196,433) (202,867)
--------- ---------
$(197,029) $(203,465)
========= =========
---------------
* Net of short-term assets of $9,629,000 at December 30, 2000 and $9,627,000
at January 1, 2000.
** Net of long-term assets of $32,454,000 at December 30, 2000 and $33,793,000
at January 1, 2000.
4. EMPLOYEE BENEFIT PLANS
DEFINED BENEFIT PENSION PLANS
Most of the Paper and Pulp Operations' employees participate in
noncontributory defined benefit pension plans administered solely by the
Corporation and union-administered multiemployer plans. The funding policy for
the plans administered by the Corporation is based on actuarial calculations and
the applicable requirements of federal law. Contributions to multiemployer plans
are generally based on negotiated labor contracts. Benefits under the plans are
primarily related to compensation and/or years of service. An officers' plan is
unfunded and is nonqualified for federal income tax purposes.
Plan assets consist principally of common stocks, bonds, mortgage
securities, interests in limited partnerships, cash equivalents, and real
estate. At December 30, 2000 and January 1, 2000, $74 million and $55 million,
respectively, of noncurrent prepaid pension cost was included in other assets on
the accompanying balance sheets. There was no accrued pension liability at
December 30, 2000 and January 1, 2000.
F-26
PAPER AND PULP OPERATIONS AT ASHDOWN, ARKANSAS;
NEKOOSA AND PORT EDWARDS, WISCONSIN;
AND WOODLAND, MAINE
(A PORTION OF A SEGMENT OF GEORGIA-PACIFIC CORPORATION)
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 2001 AND FOR THE SIX MONTHS ENDED
JUNE 30, 2001 AND JULY 1, 2000 IS UNAUDITED)
The following tables set forth the change in projected benefit obligation
and the change in plan assets for the plans administered by the Corporation:
DECEMBER 30, JANUARY 1,
2000 2000
------------ ----------
(In Thousands)
Change in projected benefit obligation:
Projected benefit obligation at beginning of year......... $241,899 $258,897
Service cost.............................................. 7,527 6,521
Interest cost............................................. 18,146 16,828
Actuarial (gains) losses.................................. 8,178 (25,921)
Benefits paid............................................. (13,412) (14,426)
-------- --------
Projected benefit obligation at end of year................. $262,338 $241,899
======== ========
Change in plan assets:
Fair value of assets at beginning of year................. $408,515 $354,107
Actual return on plan assets.............................. 13,258 68,834
Benefits paid............................................. (13,412) (14,426)
-------- --------
Fair value of assets at end of year......................... $408,361 $408,515
======== ========
The funded status and the amounts recognized on the accompanying balance
sheets for the plans administered by the Corporation are set forth in the
following table:
DECEMBER 30, JANUARY 1,
2000 2000
------------ ----------
(In Thousands)
Funded status............................................... $146,023 $166,616
Unrecognized actuarial gain................................. (71,091) (110,473)
Unrecognized prior service cost............................. (1,223) (1,604)
-------- --------
Net prepaid benefit cost.................................... $ 73,709 $ 54,539
======== ========
Amounts recognized on the balance sheets consist of:
Prepaid pension cost...................................... $ 73,709 $ 54,539
======== ========
F-27
PAPER AND PULP OPERATIONS AT ASHDOWN, ARKANSAS;
NEKOOSA AND PORT EDWARDS, WISCONSIN;
AND WOODLAND, MAINE
(A PORTION OF A SEGMENT OF GEORGIA-PACIFIC CORPORATION)
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 2001 AND FOR THE SIX MONTHS ENDED
JUNE 30, 2001 AND JULY 1, 2000 IS UNAUDITED)
Net periodic pension benefit for plans administered by the Corporation and
union-administered pension plans included the following:
YEAR ENDED
------------------------------------------
DECEMBER 30, JANUARY 1, DECEMBER 31,
2000 2000 1998
------------ ---------- ------------
(In Thousands)
Service cost of benefits earned...................... $ 7,527 $ 6,521 $ 6,515
Interest cost on projected benefit obligation........ 18,146 16,828 16,264
Expected return on plan assets....................... (38,809) (33,640) (31,132)
Amortization of actuarial gains...................... (5,641) (1,208) (2,392)
Amortization of prior service cost................... (381) (381) (381)
Amortization of net transition obligation............ 0 2 2
Contributions to multiemployer pension plans......... 1,786 1,637 1,663
-------- -------- --------
Net periodic pension benefit......................... $(17,372) $(10,241) $ (9,461)
======== ======== ========
The following assumptions were used for the pension plans:
YEAR ENDED
------------------------------------------
DECEMBER 30, JANUARY 1, DECEMBER 31,
2000 2000 1998
------------ ---------- ------------
Discount rate used to determine the projected benefit
obligation......................................... 7.5% 7.5% 6.5%
Rate of increase in future compensation levels used
to determine the projected benefit obligation...... 6.0% 6.0% 5.0%
Expected long-term rate of return on plan assets used
to determine net periodic pension cost............. 9.5% 9.5% 9.5%
DEFINED CONTRIBUTION PLANS
The Paper and Pulp Operations' employees also participate in several
defined contribution plans sponsored by the Corporation. The Corporation's
contributions to the plans are based on employee contributions and compensation.
The portion of the Corporation's contributions related to the Paper and Pulp
Operations totaled $4.6 million in 2000, $3.4 million in 1999 and $3.2 million
in 1998.
HEALTH CARE AND LIFE INSURANCE BENEFITS
The Paper and Pulp Operations provide certain health care and life
insurance benefits to certain eligible retired employees. Salaried participants
generally become eligible for retiree health care benefits after reaching age 55
with ten years of service or after reaching age 65. Benefits, eligibility, and
cost-sharing provisions for hourly employees vary by location and/or bargaining
unit. Generally, the medical plan pays a stated percentage of most medical
expenses, reduced for any deductibles and payments made by government programs
and other group coverage. The plans are funded through a trust established for
the payment of active employee and retiree benefits. The Paper and Pulp
Operations contribute to the trust in the amounts necessary to fund current
obligations of the plans.
In 1991, the Paper and Pulp Operations began transferring its share of the
cost of post-age 65 health care benefits to future salaried retirees. The Paper
and Pulp Operations reduced the percentage of the cost of
F-28
PAPER AND PULP OPERATIONS AT ASHDOWN, ARKANSAS;
NEKOOSA AND PORT EDWARDS, WISCONSIN;
AND WOODLAND, MAINE
(A PORTION OF A SEGMENT OF GEORGIA-PACIFIC CORPORATION)
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 2001 AND FOR THE SIX MONTHS ENDED
JUNE 30, 2001 AND JULY 1, 2000 IS UNAUDITED)
post-age 65 benefits that it pays on behalf of salaried employees who retire in
each of the years 1995 though 1999 and no longer pays any of the post-age 65
cost for salaried employees who retire after 1999. The Paper and Pulp Operations
have continued to share the pre-age 65 cost with future retirees.
The following tables set forth the change in accumulated benefit
obligations and the amounts recognized on the accompanying balance sheets:
DECEMBER 30, JANUARY 1,
2000 2000
------------ ----------
(In Thousands)
Change in accumulated benefit obligation:
Accumulated benefit obligation at beginning of year....... $54,976 $55,817
Service cost........................................... 157 176
Interest cost.......................................... 3,623 3,195
Benefits paid.......................................... (6,435) (5,125)
Actuarial losses....................................... 3,133 913
------- -------
Accumulated benefit obligation at end of year............. 55,454 54,976
Unrecognized prior service cost........................ 26,472 29,136
Unrecognized actuarial gains........................... (836) 2,297
------- -------
Net accrued benefit cost.................................... $81,090 $86,409
======= =======
Net periodic postretirement benefit cost included the following components:
DECEMBER 30, JANUARY 1, DECEMBER 31,
2000 2000 1998
------------ ---------- ------------
(In Thousands)
Service cost of benefits earned...................... $ 157 $ 176 $ 158
Interest cost on accumulated postretirement benefit
obligation......................................... 3,623 3,195 3,286
Amortization of prior service cost................... (2,664) (2,664) (2,664)
Amortization of actuarial gains...................... -- -- (173)
------- ------- -------
Net periodic postretirement benefit cost............. $ 1,116 $ 707 $ 607
======= ======= =======
For measuring the expected postretirement benefit obligation for 2000, the
Paper and Pulp Operations assumed separate annual rates of increase in the per
capita claims cost of its pre-age 65 and age 65 and older claims of 7.5% and
10%, respectively. An annual rate of increase in the per capita claims cost of
7% and 8% was assumed for 1999 and 1998, respectively, for measuring the
expected postretirement benefit obligation. The rates were assumed to decrease
gradually to 5.5% in 2006 and remain level thereafter. The weighted average
discount rate used in determining the accumulated postretirement benefit
obligation was 7% at December 30, 2000 and January 1, 2000 and 6% at December
31, 1998.
If the annual health care cost trend rate were increased by 1%, the
accumulated postretirement benefit obligation would have increased by 10% as of
December 30, 2000, 10% as of January 1, 2000, and 10% as of December 31, 1998.
The effect of this change on the aggregate of service and interest costs would
be an increase of 12% for 2000, 12% for 1999, and 11% for 1998.
F-29
PAPER AND PULP OPERATIONS AT ASHDOWN, ARKANSAS;
NEKOOSA AND PORT EDWARDS, WISCONSIN;
AND WOODLAND, MAINE
(A PORTION OF A SEGMENT OF GEORGIA-PACIFIC CORPORATION)
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 2001 AND FOR THE SIX MONTHS ENDED
JUNE 30, 2001 AND JULY 1, 2000 IS UNAUDITED)
If the annual health care cost trend rate were decreased by 1%, the
accumulated postretirement benefit obligation would have decreased by 8% as of
December 30, 2000, 9% as of January 1, 2000, and 9% as of December 31, 1998. The
effect of this change on the aggregate of service and interest costs would be a
decrease of 10% for 2000, 11% for 1999, and 10% for 1998.
5. EQUITY COMPENSATION PLANS
Employees of the Paper and Pulp Operations participate in various equity
compensation plans sponsored by the Corporation. The Corporation's plans
authorize grants of stock options, restricted stock, and performance awards with
respect to Georgia-Pacific Group common stock, a separate class of stock of the
Corporation. As of December 30, 2000, employees of the Paper and Pulp Operations
held options to purchase 330,521 shares of Georgia-Pacific Group common stock at
exercise prices ranging from $25.84 to $41.59 per share.
EMPLOYEE STOCK OPTIONS
The Paper and Pulp Operations have elected to continue to account for its
participation in the Corporation's stock-based compensation plans under
Accounting Principles Board Opinion No. 25 and disclose pro forma effects on net
income as provided by SFAS No. 123. Accordingly, no compensation cost has been
recognized for stock options held by employees of the Paper and Pulp Operations
because the exercise price is equal to the underlying stock price at the grant
date. Had compensation cost for these awards been determined based on the fair
value at the grant dates in 2000, 1999, and 1998, consistent with the method of
SFAS No. 123, the pro forma net income would have been as follows:
DECEMBER 30, JANUARY 1, DECEMBER 31,
2000 2000 1998
------------ ---------- ------------
(In Thousands)
Net income:
As reported......................................... $78,138 $18,054 $ 5,369
Pro forma........................................... 77,388 17,346 4,865
The fair-value-based method of accounting for stock-based compensation
under SFAS No. 123 recognizes the value of options granted as compensation cost
over the option's vesting period and has not been applied to options granted
prior to January 1, 1995. Accordingly, the resulting pro forma compensation cost
is not representative of what compensation cost will be in future years.
Following are the weighted average assumptions used in connection with the
Black-Scholes option pricing model to estimate the fair value of options granted
in 2000, 1999, and 1998:
DECEMBER 30, JANUARY 1, DECEMBER 31,
2000 2000 1998
OPTIONS OPTIONS OPTIONS
------------ ---------- ------------
Risk-free interest rate............................... 6.7% 4.9% 5.8%
Expected dividend yield............................... 1.2 1.6 1.8
Expected life......................................... 10 years 10 years 10 years
Expected volatility................................... 0.42 0.46 0.39
Option forfeiture rate................................ 3% 3% 3%
F-30
PAPER AND PULP OPERATIONS AT ASHDOWN, ARKANSAS;
NEKOOSA AND PORT EDWARDS, WISCONSIN;
AND WOODLAND, MAINE
(A PORTION OF A SEGMENT OF GEORGIA-PACIFIC CORPORATION)
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 2001 AND FOR THE SIX MONTHS ENDED
JUNE 30, 2001 AND JULY 1, 2000 IS UNAUDITED)
The weighted average grant date fair value per share of the options granted
to the Paper and Pulp Operations' employees during the year using the
Black-Scholes option pricing model was $23.26, $16.81, and $13.43 for 2000,
1999, and 1998, respectively.
6. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
Total rental expense was approximately $2.1 million, $1.2 million, and $1.7
million in 2000, 1999, and 1998, respectively.
At December 30, 2000, total commitments of the Paper and Pulp Operations
under long-term, noncancelable contracts, including operating leases, were as
follows (in thousands):
2001..................................................... $ 9,793
2002..................................................... 9,437
2003..................................................... 8,943
2004..................................................... 7,730
2005..................................................... 6,865
After 2005............................................... 32,979
-------
$75,747
=======
LEGAL AND ENVIRONMENTAL MATTERS
The Paper and Pulp Operations are subject to various legal proceedings and
claims that arise in the ordinary course of business. As is the case with other
companies in similar industries, the Paper and Pulp Operations face exposure
from actual or potential claims and legal proceedings involving environmental
matters. Liability insurance in effect during the last several years provides
very limited coverage for environmental matters.
Although the ultimate outcome of these legal proceedings cannot be
determined with certainty, based on presently available information, management
believes that adequate reserves have been established for probable losses and
defense costs with respect thereto. Management further believes that the
ultimate outcome of such legal proceedings could be material to operating
results in any given quarter or year but will not have a material adverse effect
on the long-term results of operations, liquidity, or financial position of the
Paper and Pulp Operations.
7. SUBSEQUENT EVENT
On June 1, 2001, the Corporation executed a definitive agreement to sell
the Paper and Pulp Operations to Domtar, Inc. The sale, which was contingent
upon receipt of necessary regulatory approvals, was completed on August 7, 2001.
F-31
INDEPENDENT PUBLIC ACCOUNTANTS' REPORT ON SUPPLEMENTARY INFORMATION --
DIFFERENCES BETWEEN UNITED STATES AND CANADIAN GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES
To Domtar Inc.:
We have audited the attached supplementary information to financial
statements -- differences between United States and Canadian generally accepted
accounting principles for the PAPER AND PULP OPERATIONS AT ASHDOWN, ARKANSAS;
NEKOOSA AND PORT EDWARDS, WISCONSIN; AND WOODLAND, MAINE (THE "PAPER AND PULP
OPERATIONS"), a portion of a segment of Georgia-Pacific Corporation, as of
December 30, 2000 and January 1, 2000 and for each of the three years in the
period ended December 30, 2000. This financial information is the responsibility
of the Company's management. Our responsibility is to express an opinion on this
financial information based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States and Canada. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
information is free of material misstatement and includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
information. An audit also includes assessing the accounting principles used and
significant estimates made by management as well as evaluating the overall
presentation of the financial information.
In our opinion, the supplementary information to financial statements
presents fairly, in all material respects, the effects of the differences
between the application of United States and Canadian generally accepted
accounting principles on the financial statements of the Paper and Pulp
Operations as of December 30, 2000 and January 1, 2000 and for each of the three
years in the period ended December 30, 2000, as described in the supplementary
information to financial statements.
(signed) ARTHUR ANDERSEN LLP
June 15, 2001
Atlanta, Georgia
F-32
PAPER AND PULP OPERATIONS AT ASHDOWN, ARKANSAS;
NEKOOSA AND PORT EDWARDS, WISCONSIN;
AND WOODLAND, MAINE
(A PORTION OF A SEGMENT OF GEORGIA-PACIFIC CORPORATION)
SUPPLEMENTARY INFORMATION TO FINANCIAL STATEMENTS
DIFFERENCES BETWEEN UNITED STATES AND CANADIAN GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES
DECEMBER 30, 2000, JANUARY 1, 2000 AND DECEMBER 31, 1998
AND JUNE 30, 2001 AND JULY 1, 2000 (UNAUDITED)
These financial statements have been prepared in accordance with generally
accepted accounting principles ("GAAP") in the United States. There are no
significant differences in accounting principles between U.S. GAAP and Canadian
GAAP. New standards of accounting for income taxes and for employee pension and
postretirement benefits under Canadian GAAP came into effect January 1, 2000,
which essentially harmonized Canadian GAAP with U.S. GAAP. The new standards
allowed for retroactive application with restatement of prior years.
F-33
(LOGO)
PRINTED IN CANADA
M08537
PART II
INFORMATION NOT REQUIRED TO BE DELIVERED
TO OFFEREES OR PURCHASERS
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Section 124 of the Canada Business Corporations Act, the Registrant
may indemnify a present or former director or officer or a person who acts or
acted at the Registrant's request as a director or officer of another
corporation of which such Registrant is or was a shareholder or creditor, and
his heirs and legal representatives, against all costs, charges and expenses,
including an amount paid to settle an action or satisfy a judgment, reasonably
incurred by him in respect of any civil, criminal or administrative action or
proceeding to which he is made a party by reason of his position with the
Registrant or such other corporation, as the case may be, provided that such
person acted honestly and in good faith with a view to the best interests of the
Registrant and, in the case of a criminal or administrative action or proceeding
that is enforced by a monetary penalty, such person had reasonable grounds for
believing that his conduct was lawful. Such indemnification may be made in
connection with an action by or on behalf of the Registrant or such other
corporation, as the case may be, only with court approval. A director or officer
referred to above is entitled to such indemnification from the Registrant as a
matter of right if he or she was substantially successful on the merits and
fulfilled the conditions set forth above.
In accordance with the Canada Business Corporations Act, the by-laws of the
Registrant indemnify a director or officer, a former director or officer, a
person who acts or acted at the Registrant's request as a director or officer of
a body corporate of which the Registrant is or was a shareholder or creditor (or
a person who undertakes or had undertaken any liability on behalf of the
Registrant or any such body corporate), or such person's heirs and legal
representatives, against all costs, charges and expenses, including an amount
paid to settle an action or satisfy a judgment, reasonably incurred by such
person in respect of any civil, criminal or administrative action or proceeding
to which such person is made a party by reason of being or having been a
director or officer of the Registrant or a director, officer or other similar
executive of such other corporation or other organization, to the fullest extent
permitted by law, if: (a) the person acted honestly and in good faith with a
view to the best interests of the Registrant and (b) in the case of criminal or
administrative action or proceeding that is enforced by a monetary penalty, the
person had reasonable grounds for believing that their conduct was lawful. The
Registrant is authorized to enter into agreements evidencing its indemnity in
favour of the foregoing persons to the full extent permitted by law and may
purchase and maintain insurance against the risk of its liability to indemnify
pursuant to the foregoing provisions.
The Registrant participates in the purchase of directors' and officers'
liability insurance, which, subject to the provisions contained in the policy,
protects the directors and officers against all claims made during each year of
the applicable policy period (currently January, 2001 to January, 2003, with a
new policy period beginning January, 2003 to January, 2004). This policy does
not provide coverage for losses arising from the breach of fiduciary
responsibilities under statutory or common law or from the violation or
enforcement of pollutant laws and regulations.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Securities Act"), may be permitted to directors,
officers or persons controlling the Registrant pursuant to the foregoing
provisions, the Registrant has been informed that in the opinion of the U.S.
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act and is therefore unenforceable.
II-1
EXHIBITS
The following exhibits have been filed as part of this Registration Statement on
Form F-10:
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.1 Underwriting Agreement
4.1 Annual Information Form of Domtar Inc. dated May 1, 2002 for
the year ended December 31, 2001 (incorporated by reference
to Domtar Inc.'s Form 40-F filed on April 5, 2002)
4.2 Audited Consolidated Financial Statements of Domtar Inc. for
the fiscal years ended December 31, 2001, 2000 and 1999
together with the related notes thereto and the auditors'
reports thereon (incorporated by reference to Domtar Inc.'s
Form 40-F filed on April 5, 2002)
4.3 Management's Discussion and Analysis for the fiscal year
ended December 31, 2001 (incorporated by reference to Domtar
Inc.'s Form 40-F filed on April 5, 2002)
4.4 Management Proxy Circular dated March 27, 2002 (incorporated
by reference to Domtar Inc.'s Form 6-K filed on May 22,
2002)
4.5 Unaudited Consolidated Financial Statements of Domtar Inc.
for the nine months ended September 30, 2002 (including
Management's Discussion and Analysis relating thereto) and
September 30, 2001 (incorporated by reference to Domtar
Inc.'s Form 6-K filed on November 13, 2002)
5.1 Consent of PricewaterhouseCoopers LLP and Raymond Chabot
Grant Thornton
5.2 Consent of Ogilvy Renault, s.e.n.c.
5.3 Consent of Debevoise & Plimpton
5.4 Consent of Osler, Hoskin & Harcourt LLP
5.5 Consent of Fasken Martineau DuMoulin LLP
6.1* Powers of Attorney
7.1 Form of Warrant Agreement between Domtar Inc. and
Computershare Trust Company of Canada, as warrant agent
---------------
* Previously filed
II-2
PART III
UNDERTAKING AND CONSENT TO SERVICE OF PROCESS
ITEM 1. UNDERTAKING
The Registrant 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 the securities registered pursuant to this Form F-10 or to
transactions in such securities.
ITEM 2. CONSENT TO SERVICE OF PROCESS
Concurrently with the filing of this Registration Statement on Form F-10 on
December 10, 2002, the Registrant filed with the Commission a written
irrevocable consent and power of attorney on Form F-X.
Concurrently with the filing of this Registration Statement on Form F-10 on
December 10, 2002, Computershare Trust Company of Canada, the Warrant Agent,
pursuant to the Warrant Agreement, filed with the Commission a written
irrevocable consent and power of attorney on Form F-X.
III-1
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form F-10 and has duly caused this Amendment No. 1 to
the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the Province of Quebec, Canada, on December 18,
2002.
DOMTAR INC.
By: /s/ RAYMOND ROYER
------------------------------------
Name: Raymond Royer
Title: President, Chief Executive
Officer, and Director
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons on the
18th day of December, 2002.
SIGNATURE TITLE
--------- -----
/s/ RAYMOND ROYER President, Chief Executive Officer, and Director
--------------------------------------------- (Principal Executive Officer)
Raymond Royer
/s/ CHRISTIAN DUBE Chief Financial Officer (Principal Financial Officer
--------------------------------------------- and Principal Accounting Officer)
Christian Dube
* Director and Chairman of the Board
---------------------------------------------
Jacques Girard
* Director
---------------------------------------------
Gilles Blondeau
* Director
---------------------------------------------
Paul-Henri Couture
* Director
---------------------------------------------
Claude Fontaine
* Director
---------------------------------------------
Louis P. Gignac
* Director
---------------------------------------------
Claude R. Lamoureux
III-2
SIGNATURE TITLE
--------- -----
* Director
---------------------------------------------
Jacques Laurent
* Director
---------------------------------------------
Andre L'Ecuyer
* Director
---------------------------------------------
Brian M. Levitt
* Director
---------------------------------------------
Louiselle Paquin
* Director
---------------------------------------------
Louise Roy
* Director
---------------------------------------------
Edward J. Waters
* Authorized U.S. Representative for Service of Process
---------------------------------------------
Roger Brear
*By: /s/ GILLES PHARAND
---------------------------------------
Gilles Pharand, Attorney-in-Fact
III-3
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.1 Underwriting Agreement
4.1 Annual Information Form of Domtar Inc. dated May 1, 2002 for
the year ended December 31, 2001 (incorporated by reference
to Domtar Inc.'s Form 40-F filed on April 5, 2002)
4.2 Audited Consolidated Financial Statements of Domtar Inc. for
the fiscal years ended December 31, 2001, 2000 and 1999
together with the related notes thereto and the auditors'
reports thereon (incorporated by reference to Domtar Inc.'s
Form 40-F filed on April 5, 2002)
4.3 Management's Discussion and Analysis for the fiscal year
ended December 31, 2001 (incorporated by reference to Domtar
Inc.'s Form 40-F filed on April 5, 2002)
4.4 Management Proxy Circular dated March 27, 2002 (incorporated
by reference to Domtar Inc.'s Form 6-K filed on May 22,
2002)
4.5 Unaudited Consolidated Financial Statements of Domtar Inc.
for the nine months ended September 30, 2002 (including
Management's Discussion and Analysis relating thereto) and
September 30, 2001 (incorporated by reference to Domtar
Inc.'s Form 6-K filed on November 13, 2002)
5.1 Consent of PricewaterhouseCoopers LLP and Raymond Chabot
Grant Thornton
5.2 Consent of Ogilvy Renault, s.e.n.c.
5.3 Consent of Debevoise & Plimpton
5.4 Consent of Osler, Hoskin & Harcourt LLP
5.5 Consent of Fasken Martineau DuMoulin LLP
6.1* Powers of Attorney
7.1 Form of Warrant Agreement between Domtar Inc. and
Computershare Trust Company of Canada, as warrant agent
---------------
* Previously filed