SEC Company Response from TEMBEC INDUSTRIES INC (CIK 0000925559) — Dec 8, 2005
TEMBEC INDUSTRIES INC (CIK 0000925559)
Date: Dec. 8, 2005 · CIK: 0000925559 · Accession: 0001204459-05-000724
AI Filing Summary & Sentiment
Letter
United States Securities and Exchange Commission Division of Corporate Finance Washington D.C. 20549-7010 Attention: Nilima Sha, Accounting Branch Chief RE: Form 40-F for Fiscal Year Ended September 25, 2004 File no: 33-80178
Dear Mr. Sha,
Thank you for yours of October 28th. To facilitate the treatment of your queries, we have reproduced them below and included our response thereto.
Form 40-F for the Year Ended September 25, 2004
Ql. We have reviewed your response to comment two. Please clarify your response regarding the financial indicators discussed in SFAS 52. Specifically, please tell us why the presence of mill-specific operating loan facilities that are secured by inventories and/or receivables precludes your US and French operations from obtaining and servicing long-term loan facilities on a stand-alone basis. In this regard, please clarify whether your US and French operations would be able to service existing and normally expected debt obligations if they were each an independent business, unrelated to you and unaffected by the restrictions associated with your financing.
-2-
Al. The presence of mill-specific operating loan facilities that are secured by inventories and/or receivables does not preclude our US and French operations from obtaining and servicing long-term loan facilities on a stand-alone basis. It is the restrictions imposed by the Parent Company's high yield debt indentures that preclude subsidiaries from obtaining long-term loan facilities. However, even if this were not the case, we do not believe our US and French operations would be able to obtain and service existing and normally expected debt obligations if they were independent businesses, unrelated to us.
The Company acquired a 50% interest in its first French pulp mill in 1994. The previous owners actually paid the Company and its partner to acquire the facility in order to avoid shutdown related costs. The Company acquired the remaining 50% interest from its partner in 1999 for C$39M. The other two French pulp mills were acquired in 2000 for C$161M. The seller was in financial difficulty and sold the mills to generate liquidity to reduce its bank debt. The US paper mill was purchased out of bankruptcy in 2001. It should be noted that at the time of purchase, all of the above operations had been part of larger entities and were not operating as stand-alone operations. Their financial situation precluded any form of stand-alone financing. Parent Company financing was set-up to compensate and ensure a reasonable capital structure. The following table summarizes loan balances to our US and French operations for fiscal year ends to September 2004 in Canadian dollars:
US Operations
French Operations
Fiscal Periods
Loans O/S
Recapitalization
Loans O/S
x.x x.x x.x
x.x x.x x.x
x.x x.x x.x
The US operations have continued to struggle financially, forcing the Parent Company to convert portions of the initial debt to equity to maintain adequate balance sheet capitalization. Although the French operations had a reasonable year in 2001, recent financial performance has also deteriorated. Parent Company debt actually increased in fiscal 2005 to compensate for negative cash flow from operations and fairly full utilization of mill operating loans.
The fundamental problem in securing stand-alone long-term financing for these types of operations is that they are relatively small units, producing a single commodity product that must compete against much larger diversified pulp and paper companies. Their small size does not permit them to access public debt capital markets. They are limited to traditional bank financing with shorter maturities and relatively onerous principal repayment schedules. They do not have the financial "reserves" to deal with the "trough" periods of the industry cycle when cash flow diminishes and is insufficient for the servicing of debt, especially required amortization payments.
Q2. We also note that your US and French operations have incurred ongoing losses. Please tell us the amount and duration of these losses. Please also tell us whether the operating cash flows from your US and French subsidiaries are negative or positive.
-3-
A2. Pretax operating income (loss) and operating cash flows in millions of Canadian dollars relating to our US and French operations are as follows for each of the fiscal year ends to September 2004:
Fiscal Periods
US Operations
French Operations
Pretax Income (Loss)
x.x x.x
x.x x.x
x.x x.x
x.x
x.x
Total
x.x
x.x
Operating Cash Flows
x.x x.x
x.x x.x
x.x x.x
x.x
x.x
Total
x.x
x.x
Operating Cash Flows Net of CAPEX
x.x x.x
x.x x.x
x.x x.x
x.x
x.x
Total
x.x
x.x
We have also provided operating cash flows net of capital expenditures as we believe this to be a more relevant measure of the US and French operations' ability to service debt. It should be noted that capital expenditures shown represent only "maintenance" spending i.e. no major projects or capacity expansions during the 2001-2004 period.
Q3. With respect to the cash flow indicators in paragraph 42(a) of SFAS 52, please clarify how frequently, if at all, cash flows from your US and French subsidiaries are dividend-ed or loaned to the Canadian parent.
A3. Since their acquisitions, dividends from the US and French operations have not been declared or paid to the Parent Company. As noted previously, both operations have required Parent Company financial support over the past few years.
Q4. In addition, please provide us with your analysis of the intercompany transactions and arrangement indicators discussed in paragraph 42(f) of SFAS 52. Please specifically discuss the inter-relationship of operations between your US and French subsidiaries and the Canadian parent. Please note that this is distinct from decision-making autonomy. Please also provide us with quantitative information regarding the volume of intercompany transactions. Further, please provide us with total sales and operating expenses for your US and French subsidiaries.
-4-
A4. The Parent Company provides primarily managerial support to our US and French operations. The French Pulp mills are integrated into the managerial structure of our pulp segment. The US paper mill is integrated into the reporting structure of our paper segment. The Parent Company receives a management fee from the French operations. The amount received in fiscal 2004 was C$x.x million. The US operations have historically not been charged a management fee, although this has more to do with their poor financial performance than the actual support provided by the Parent Company. Indeed, actual support has been higher due to the difficulties being experienced by the paper mill.
Although, the operations utilize standard Company MIS systems, this does not result in significant intercompany activity as these systems are decentralized and costs are incurred and paid directly by the individual mills. All other intercompany transactions are reimbursed to the Parent Company at cost. A summary of financial statements, in Canadian dollars, for these foreign operations are submitted herewith.
Q5. We note your response to comment three. We note that the prices of your products are driven by US dollar reference prices. However, paragraph 15(b) of SFAS 133 provide an exception from the requirement to separate embedded foreign currency derivatives from a host contract only if the host contract is not a financial instrument and if it requires payments denominated in the currency in which the price of the related good or service that is acquired or delivered is routinely denominated in international commerce. Accordingly, please support your assertion that the exception in paragraph 15(b) applies to your situation by demonstrating to us that the prices of forest, paper and pulp products are routinely denominated in US dollars in international commerce. If forest, paper, and pulp products are sold by you, your competitors or others in currencies other than the US dollar, the exception in paragraph 15(b) would not apply. See footnote 6(b) to paragraph 15(b) of SFAS 133.
A5. Based on our industry experience, forest, pulp and paper products are sold on a worldwide basis in prices which are derived from US $ reference prices. For purposes of invoicing, the local price is determined by applying the local foreign exchange rate to the US $ reference price.
The functional currency of our Canadian operations is the Canadian $. They bill their Canadian, US and European customers in the local currency. Shipments of pulp to Asia are primarily billed in US $. While there is no certainty that the functional currency of the buyer is the US $, several of our largest pulp customers are effectively financed in the United States capital markets.
The functional currency of our French operations is the Canadian dollar. The French operations invoice their customers, essentially all located in Europe, in Euros and the customers remit in Euros.
The functional currency of our US operations is the Canadian $. The US operations invoice their customers, essentially all US based, in US dollars and the customers remit US dollars.
There may occur from time to time, a customer request that our European operations invoice in US dollars. This has occurred with certain subsidiaries of US companies. In these rare instances, it would be reasonable to assume that the functional currency of the customer is the US dollar, although it is not possible to confirm absolutely.
-5-
Finally, any embedded derivative that could exist would be outstanding for a very short time, as noted in our response to question 6 below. The possible financial statement implications at a particular period end would be negligible, if any.
Q6. In addition, please tell us the following regarding your sales process:
The length of time your sales contracts cover. For example, please clarify whether you enter into long-term sales contracts with your customers or whether your customers order products on an as-needed basis. Please tell us the length of time between when your customer orders your product and when you recognize revenue.
Whether your sales contracts or customer orders represent firm commitments as defined in paragraph 540 of SFAS 133.
A6. Sales contracts can range in duration from 1 year to 3 years. Typically they will specify annual volumes and product specification. The prices are not established. Rather they are set periodically when a purchase order is finalized for the exact volumes and prices for the period covered by the purchase order. The product is then shipped, normally in xxxx weeks, and revenue is recognized at time of shipment. Payment terms vary from xx to xx days.
The contracts are not considered to be firm commitments. The monthly purchase orders are considered to be firm commitments.
The Company acknowledges that (i) it is responsible for the adequacy and accuracy of the disclosure in the filing, (ii) Commission staff comments or changes to disclosure in response to staff comments do not foreclose the Commission from taking any action with respect to the filing; and (iii) the Company will not assert staff comments as a defense in any proceeding initiated by the Commission or any person under the federal securities laws of the United States.
Should you have any questions or additional comments with respect to these responses, please do not hesitate to contact the undersigned.
Sincerely,
Michel J. Dumas
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CORRESP
1
filename1.htm
Tembec: Correspondence
Edifice WHITE OAKS
10, chemin Gatineau
C.P. 5000
Temiscaming (Quebec) J0Z 3RD
December 2, 2005
"CONFIDENTIAL TREATMENT HAS BEEN REQUESTED PURSUANT TO RULE 83. THIS LETTER
OMITS CONFIDENTIAL INFORMATION, OTHERWISE INCLUDED IN THE UNREDACTED VERSION OF
THIS LETTER THAT WAS DELIVERED TO THE SECURITIES AND EXCHANGE COMMISSION,
DIVISION OF CORPORATION FINANCE"
Via courier
United States Securities and Exchange Commission
Division of Corporate Finance
450 Fifth Street, N.W.
Washington D.C. 20549-7010
Attention: Nilima Sha, Accounting Branch Chief
RE: Form 40-F for Fiscal Year
Ended September 25, 2004
File no: 33-80178
Dear Mr. Sha,
Thank you for yours of October 28th. To facilitate the treatment
of your queries, we have reproduced them below and included our response
thereto.
Form 40-F for the Year Ended September 25, 2004
Ql. We have
reviewed your response to comment two. Please clarify your response regarding
the financial indicators discussed in SFAS 52. Specifically, please tell us
why the presence of mill-specific operating loan facilities that are secured
by inventories and/or receivables precludes your US and French operations from
obtaining and servicing long-term loan facilities on a stand-alone basis. In
this regard, please clarify whether your US and French operations would be
able to service existing and normally expected debt obligations if they were
each an independent business, unrelated to you and unaffected by the
restrictions associated with your financing.
-2-
Al. The presence
of mill-specific operating loan facilities that are secured by inventories
and/or receivables does not preclude our US and French operations from
obtaining and servicing long-term loan facilities on a stand-alone basis. It
is the restrictions imposed by the Parent Company's high yield debt indentures
that preclude subsidiaries from obtaining long-term loan facilities. However,
even if this were not the case, we do not believe our US and French operations
would be able to obtain and service existing and normally expected debt
obligations if they were independent businesses, unrelated to us.
The Company acquired a 50% interest in its first French
pulp mill in 1994. The previous owners actually paid the Company and its
partner to acquire the facility in order to avoid shutdown related costs. The
Company acquired the remaining 50% interest from its partner in 1999 for
C$39M. The other two French pulp mills were acquired in 2000 for C$161M. The
seller was in financial difficulty and sold the mills to generate liquidity to
reduce its bank debt. The US paper mill was purchased out of bankruptcy in
2001. It should be noted that at the time of purchase, all of the above
operations had been part of larger entities and were not operating as
stand-alone operations. Their financial situation precluded any form of
stand-alone financing. Parent Company financing was set-up to compensate and
ensure a reasonable capital structure. The following table summarizes loan
balances to our US and French operations for fiscal year ends to September
2004 in Canadian dollars:
US
Operations
French Operations
Fiscal Periods
Loans O/S
Recapitalization
Loans O/S
2002
x.x
x.x
x.x
2003
x.x
x.x
x.x
2004
x.x
x.x
x.x
The US operations have continued to struggle financially,
forcing the Parent Company to convert portions of the initial debt to equity
to maintain adequate balance sheet capitalization. Although the French
operations had a reasonable year in 2001, recent financial performance has
also deteriorated. Parent Company debt actually increased in fiscal 2005 to
compensate for negative cash flow from operations and fairly full utilization
of mill operating loans.
The fundamental problem in securing stand-alone long-term
financing for these types of operations is that they are relatively small
units, producing a single commodity product that must compete against much
larger diversified pulp and paper companies. Their small size does not permit
them to access public debt capital markets. They are limited to traditional
bank financing with shorter maturities and relatively onerous principal
repayment schedules. They do not have the financial "reserves" to deal with
the "trough" periods of the industry cycle when cash flow diminishes and is
insufficient for the servicing of debt, especially required amortization
payments.
Q2. We also note
that your US and French operations have incurred ongoing losses. Please tell
us the amount and duration of these losses. Please also tell us whether the
operating cash flows from your US and French subsidiaries are negative or
positive.
-3-
A2. Pretax operating
income (loss) and operating cash flows in millions of Canadian dollars
relating to our US and French operations are as follows for each of the fiscal
year ends to September 2004:
Fiscal Periods
US Operations
French Operations
Pretax Income (Loss)
2001
x.x
x.x
2002
x.x
x.x
2003
x.x
x.x
2004
x.x
x.x
Total
x.x
x.x
Operating Cash Flows
2001
x.x
x.x
2002
x.x
x.x
2003
x.x
x.x
2004
x.x
x.x
Total
x.x
x.x
Operating Cash Flows Net of
CAPEX
2001
x.x
x.x
2002
x.x
x.x
2003
x.x
x.x
2004
x.x
x.x
Total
x.x
x.x
We have also provided operating cash flows net of capital
expenditures as we believe this to be a more relevant measure of the US and
French operations' ability to service debt. It should be noted that capital
expenditures shown represent only "maintenance" spending i.e. no major
projects or capacity expansions during the 2001-2004 period.
Q3. With respect
to the cash flow indicators in paragraph 42(a) of SFAS 52, please clarify how
frequently, if at all, cash flows from your US and French subsidiaries are
dividend-ed or loaned to the Canadian parent.
A3. Since their
acquisitions, dividends from the US and French operations have not been
declared or paid to the Parent Company. As noted previously, both operations
have required Parent Company financial support over the past few years.
Q4. In addition,
please provide us with your analysis of the intercompany transactions and
arrangement indicators discussed in paragraph 42(f) of SFAS 52. Please
specifically discuss the inter-relationship of operations between your US and
French subsidiaries and the Canadian parent. Please note that this is distinct
from decision-making autonomy. Please also provide us with quantitative
information regarding the volume of intercompany transactions. Further, please
provide us with total sales and operating expenses for your US and French
subsidiaries.
-4-
A4. The Parent Company provides
primarily managerial support to our US and French operations. The French Pulp
mills are integrated into the managerial structure of our pulp segment. The US
paper mill is integrated into the reporting structure of our paper segment.
The Parent Company receives a management fee from the French operations. The
amount received in fiscal 2004 was C$x.x million. The US operations have
historically not been charged a management fee, although this has more to do
with their poor financial performance than the actual support provided by the
Parent Company. Indeed, actual support has been higher due to the difficulties
being experienced by the paper mill.
Although, the operations utilize standard Company MIS
systems, this does not result in significant intercompany activity as these
systems are decentralized and costs are incurred and paid directly by the
individual mills. All other intercompany transactions are reimbursed to the
Parent Company at cost. A summary of financial statements, in Canadian
dollars, for these foreign operations are submitted herewith.
Q5. We note your
response to comment three. We note that the prices of your products are driven
by US dollar reference prices. However, paragraph 15(b) of SFAS 133 provide an
exception from the requirement to separate embedded foreign currency
derivatives from a host contract only if the host contract is not a financial
instrument and if it requires payments denominated in the currency in which
the price of the related good or service that is acquired or delivered is
routinely denominated in international commerce. Accordingly, please support
your assertion that the exception in paragraph 15(b) applies to your situation
by demonstrating to us that the prices of forest, paper and pulp products are
routinely denominated in US dollars in international commerce. If forest,
paper, and pulp products are sold by you, your competitors or others in
currencies other than the US dollar, the exception in paragraph 15(b) would
not apply. See footnote 6(b) to paragraph 15(b) of SFAS 133.
A5. Based on
our industry experience, forest, pulp and paper products are sold on a
worldwide basis in prices which are derived from US $ reference prices. For
purposes of invoicing, the local price is determined by applying the local
foreign exchange rate to the US $ reference price.
The functional currency of our Canadian operations is the
Canadian $. They bill their Canadian, US and European customers in the local
currency. Shipments of pulp to Asia are primarily billed in US $. While there
is no certainty that the functional currency of the buyer is the US $, several
of our largest pulp customers are effectively financed in the United States
capital markets.
The functional currency of our French operations is the
Canadian dollar. The French operations invoice their customers, essentially
all located in Europe, in Euros and the customers remit in Euros.
The functional currency of our US operations is the Canadian $. The US
operations invoice their customers, essentially all US based, in US dollars
and the customers remit US dollars.
There may occur from time to time, a customer request that
our European operations invoice in US dollars. This has occurred with certain
subsidiaries of US companies. In these rare instances, it would be reasonable
to assume that the functional currency of the customer is the US dollar,
although it is not possible to confirm absolutely.
-5-
Finally, any embedded derivative that could exist would be
outstanding for a very short time, as noted in our response to question 6
below. The possible financial statement implications at a particular period
end would be negligible, if any.
Q6. In addition, please tell us
the following regarding your sales process:
The length of time your sales contracts cover. For
example, please clarify whether you enter into long-term sales contracts
with your customers or whether your customers order products on an as-needed
basis. Please tell us the length of time between when your customer orders
your product and when you recognize revenue.
Whether your sales contracts or customer orders represent
firm commitments as defined in paragraph 540 of SFAS 133.
A6. Sales
contracts can range in duration from 1 year to 3 years. Typically they will
specify annual volumes and product specification. The prices are not
established. Rather they are set periodically when a purchase order is
finalized for the exact volumes and prices for the period covered by the
purchase order. The product is then shipped, normally in xxxx weeks, and
revenue is recognized at time of shipment. Payment terms vary from xx to xx
days.
The contracts are not considered to be firm commitments. The monthly
purchase orders are considered to be firm commitments.
The Company acknowledges that (i) it is responsible for the
adequacy and accuracy of the disclosure in the filing, (ii) Commission staff
comments or changes to disclosure in response to staff comments do not foreclose
the Commission from taking any action with respect to the filing; and (iii) the
Company will not assert staff comments as a defense in any proceeding initiated
by the Commission or any person under the federal securities laws of the United
States.
Should you have any questions or additional comments with respect to these
responses, please do not hesitate to contact the undersigned.
Sincerely,
Michel J. Dumas
Executive Vice-President, Finance
and Chief Financial Officer
cc. Scott
Watkinson, SEC
Tony Fratianni, Tembec
SEC Response
US Operations
French Operations
SALES & EARNINGS ($millions)
2001
2002
2003
2004
2005
2001
2002
2003
2004
2005
Sales
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
Freight and sales deductions
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
Cost of sales
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
Selling, general & administrative
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
EBITDA
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
Depreciation & amortization
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
Unusual items
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
Intercompany interest
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
Interest on debt and other exchange items
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
Income taxes (recovery)- current
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
Income taxes (recovery)- deferred
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
Minority interests
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
Net earnings (loss)
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
ASSETS & CAPITALIZATION ($millions)
Cash (operating loans)
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
Working capital (excluding intercompany
accounts & cash)
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
Investments
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
Fixed assets
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
Accumulated depreciation
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
Other assets
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
Net assets
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
Intercompany payable
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
External debt
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
Intercompany debt
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
Other long-term liabilities
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
Future income taxes
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
Share Capital
xxx
xx