EXHIBIT 2
Management's Responsibility
The management of Norske Skog Canada Limited is responsible for the preparation,
integrity and fair presentation of the accompanying consolidated financial
statements and other information contained in this Annual Report. The
consolidated financial statements and related notes were prepared in accordance
with accounting principles generally accepted in Canada and reflect management's
best judgments and estimates. Financial information provided elsewhere in this
Annual Report is consistent with that in the consolidated financial statements.
Management maintains a system of internal controls over financial
reporting which encompasses policies, procedures and controls to provide
reasonable assurance that assets are safeguarded against loss or unauthorized
use, transactions are executed and recorded in accordance with management's
authorization, and financial records are accurate and reliable.
The Board of Directors is responsible for satisfying itself that
management fulfills its responsibilities for financial reporting and internal
control. The Audit Committee, which is comprised of five non-management members
of the Board of Directors, provides oversight to the financial reporting
process. The Audit Committee meets periodically with management, the internal
auditors and the external auditors to review the consolidated financial
statements, the adequacy of financial reporting, accounting systems and controls
and internal and external auditing functions.
The consolidated financial statements have been reviewed by the Audit
Committee, which has recommended their approval by the Board of Directors. These
consolidated financial statements have been audited by KPMG LLP, the external
auditors, whose report follows.
/s/ Russell J. Horner /s/ Ralph Leverton
- --------------------------- ---------------------------
Russell J. Horner Ralph Leverton
President and Vice-President, Finance
Chief Executive Officer and Chief Financial Officer
Vancouver, Canada
February 1, 2005
Norske Skog Canada Limited [60]
Auditors' Report to the Shareholders
We have audited the consolidated balance sheets of Norske Skog Canada Limited as
at December 31, 2004 and 2003 and the consolidated statements of earnings,
retained earnings and cash flows for each of the years in the three-year period
ended December 31, 2004. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted
auditing standards. Those standards require that we plan and perform an audit to
obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation.
In our opinion, these consolidated financial statements present fairly,
in all material respects, the financial position of the Company as at December
31, 2004 and 2003 and the results of its operations and its cash flows for each
of the years in the three-year period ended December 31, 2004 in accordance with
Canadian generally accepted accounting principles.
/s/ KPMG LLP
- ---------------------------------------
Chartered Accountants
Vancouver, Canada
January 21, 2005
Norske Skog Canada Limited [61]
Consolidated Statements of Earnings
(In millions of Canadian dollars, except where otherwise stated) Years ended December 31,
------------------------------------------
2004 2003 2002
--------- --------- ---------
Sales (note 3(a)) $ 1,878.2 $ 1,820.5 $ 1,704.0
Operating expenses
Cost of sales (note 3(a)) 1,674.9 1,687.5 1,582.1
Selling, general and administrative 50.5 54.7 65.3
Amortization 184.1 189.9 178.5
--------- --------- ---------
1,909.5 1,932.1 1,825.9
--------- --------- ---------
Operating earnings (loss) (31.3) (111.6) (121.9)
Foreign exchange gain on translation of long-term debt 53.5 58.2 12.3
Loss on repayment of long-term debt (note 13) (5.2) - -
Write-down of property, plant and equipment (note 10) - (14.2) -
Other income (expense), net (note 5) 1.2 (3.9) (13.3)
Interest expense, net (note 6) (74.9) (75.0) (76.2)
--------- --------- ---------
Earnings (loss) before income taxes (56.7) (146.5) (199.1)
Income tax recovery (note 7) (28.1) (62.0) (75.8)
--------- --------- ---------
Net earnings (loss) $ (28.6) $ (84.5) $ (123.3)
========= ========= =========
Basic and diluted earnings (loss) per share (note 8) (in dollars) $ (0.13) $ (0.41) $ (0.64)
Weighted average number of common shares outstanding (in millions) 214.6 206.6 193.4
--------- --------- ---------
Consolidated Statements of Retained Earnings
(In millions of Canadian dollars) Years ended December 31,
---------------------------------------
2004 2003 2002
------- ------- -------
Balance, beginning of year - as previously reported $ 155.6 $ 240.1 $ 363.4
Effect of change in accounting policy (note 3(b)) (2.6) - -
------- ------- -------
Balance, beginning of year - as restated 153.0 240.1 363.4
Net earnings (loss) (28.6) (84.5) (123.3)
------- ------- -------
Balance, end of year $ 124.4 $ 155.6 $ 240.1
======= ======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
Norske Skog Canada Limited [62]
Consolidated Balance Sheets
(In millions of Canadian dollars) As at December 31,
--------------------------
2004 2003
--------- ---------
Assets
Current assets
Cash and cash equivalents $ 26.0 $ -
Accounts receivable 236.8 238.2
Inventories (note 9) 258.1 235.9
Prepaids and other 24.6 21.9
--------- ---------
545.5 496.0
Property, plant and equipment (note 10) 2,172.9 2,290.2
Other assets (note 11) 27.5 30.2
--------- ---------
$ 2,745.9 $ 2,816.4
========= =========
Liabilities
Current liabilities
Accounts payable and accrued liabilities (note 12) $ 285.5 $ 267.3
Long-term debt (note 13) 823.6 845.8
Other long-term obligations (note 14) 233.6 249.8
Future income taxes (note 7) 332.9 363.3
Deferred credits (note 15) 27.5 21.0
--------- ---------
1,703.1 1,747.2
--------- ---------
Shareholders' Equity
Share capital (note 16) 913.6 913.6
Contributed surplus (note 3(b)) 4.8 -
Retained earnings 124.4 155.6
--------- ---------
1,042.8 1,069.2
--------- ---------
$ 2,745.9 $ 2,816.4
========= =========
Commitments and Guarantees and Indemnities (notes 23 and 24)
Contingent liabilities (note 25)
The accompanying notes are an integral part of the consolidated financial
statements.
On behalf of the Board:
/s/ Russell J. Horner /s/ Thomas S. Chambers
- ---------------------------------- ----------------------------------
Russell J. Horner Thomas S. Chambers
Director Director
Norske Skog Canada Limited [63]
Consolidated Statements of Cash Flows
(In millions of Canadian dollars) Years ended December 31,
------------------------------------
2004 2003 2002
-------- -------- --------
Cash flows provided (used) by:
Operations
Net earnings (loss) $ (28.6) $ (84.5) $ (123.3)
Items not requiring (providing) cash
Amortization 184.1 189.9 178.5
Future income taxes (31.3) (67.9) (91.5)
Increase in other long-term obligations 23.5 17.5 19.8
Foreign exchange gain on translation of long-term debt (53.5) (58.2) (12.3)
Loss on repayment of long-term debt 5.2 - -
Write-down of property, plant and equipment (note 10) - 14.2 -
Write-off of deferred financing costs - - 15.8
Other (10.5) (10.9) (7.6)
-------- -------- --------
88.9 0.1 (20.6)
-------- -------- --------
Changes in non-cash working capital
Accounts receivable (18.1) 57.5 34.7
Inventories (22.2) 10.2 (13.0)
Prepaids and other (0.9) 2.6 (4.9)
Accounts payable and accrued liabilities 16.8 (47.9) 9.0
-------- -------- --------
(24.4) 22.4 25.8
-------- -------- --------
Cash flows provided by operations 64.5 22.5 5.2
-------- -------- --------
Investing
Acquisition of paper recycling business (note 4) - (32.1) -
Additions to property, plant and equipment (68.0) (81.4) (82.2)
Proceeds from sale of property, plant and equipment 0.5 0.4 1.5
Proceeds from sale of marketable securities - - 39.2
Proceeds from termination of interest rate swaps (note 14) - 15.9 3.4
Purchase price adjustment (note 21) 26.6 - -
Decrease (increase) in other assets (0.9) 1.1 (4.4)
-------- -------- --------
Cash flows used by investing activities (41.8) (96.1) (42.5)
-------- -------- --------
Financing
Issue of common shares, net of share issue costs (note 16) - (0.1) 208.1
Increase (decrease) in revolving loan (note 13) (12.5) (105.7) 119.1
Issue of long-term debt (note 13) 333.1 212.7 -
Repayment of long-term debt (266.1) - (386.7)
Premium and expenses on repayment of long-term debt (15.0) - -
Deferred financing costs (6.2) (5.6) -
Decrease in other long-term obligations (30.0) (27.7) (8.0)
-------- -------- --------
Cash flows provided (used) by financing activities 3.3 73.6 (67.5)
-------- -------- --------
Cash and cash equivalents, increase (decrease) during year 26.0 - (104.8)
Cash and cash equivalents, beginning of year - - 104.8
-------- -------- --------
Cash and cash equivalents, end of year $ 26.0 $ - $ -
======== ======== ========
Supplemental information:
Income taxes paid $ 4.3 $ 7.1 $ 12.8
Net interest paid 79.0 79.1 72.9
Common shares issued for acquisition of paper recycling business (note 4) - 29.1 -
-------- -------- --------
The accompanying notes are an integral part of the consolidated financial
statements.
Norske Skog Canada Limited [64]
Consolidated Business Segments
(In millions of Canadian dollars) Year ended December 31, 2004
----------------------------------------------------------------------
Corporate
Specialties Newsprint Pulp Adjustments Consolidated
----------- --------- -------- ----------- ------------
Sales to external customers (note 3(a)) $ 1,037.2 $ 553.1 $ 287.9 $ - $ 1,878.2
Inter-segment sales - - 127.2 (127.2) -
Operating earnings (loss) 1.9 (4.3) (28.9) - (31.3)
Amortization 101.5 49.5 33.1 - 184.1
Total assets 1,406.0 741.3 576.9 21.7 2,745.9
Additions to property, plant and equipment 28.5 10.1 29.4 - 68.0
Year ended December 31, 2003
----------------------------------------------------------------------
Corporate
Specialties Newsprint Pulp Adjustments Consolidated
----------- --------- -------- ----------- ------------
Sales to external customers (note 3(a)) $ 1,002.7 $ 539.2 $ 278.6 $ - $ 1,820.5
Inter-segment sales - - 171.5 (171.5) -
Operating earnings (loss) (32.5) (56.6) (22.5) - (111.6)
Amortization 98.5 61.7 29.7 - 189.9
Total assets 1,441.8 773.4 575.8 25.4 2,816.4
Additions to property, plant and equipment 28.1 25.6 27.7 - 81.4
Year ended December 31, 2002
----------------------------------------------------------------------
Corporate
Specialties Newsprint Pulp Adjustments Consolidated
----------- --------- -------- ----------- ------------
Sales to external customers (note 3(a)) $ 947.9 $ 518.2 $ 237.9 $ - $ 1,704.0
Inter-segment sales - - 193.1 (193.1) -
Operating earnings (loss) (1.3) (86.0) (34.6) - (121.9)
Amortization 91.2 63.4 23.9 - 178.5
Total assets 1,380.0 851.8 629.1 36.2 2,897.1
Additions to property, plant and equipment 43.9 19.5 18.8 - 82.2
See accompanying note 22 to the consolidated financial statements.
Norske Skog Canada Limited [65]
Notes to Consolidated Financial Statements
| Amounts expressed in millions of Canadian dollars, except
where otherwise stated |
1. Nature of Operations
Norske Skog Canada Limited, together with its subsidiaries (collectively, the
"Company") is a significant newsprint and specialty groundwood paper producer in
North America. The Company operates four manufacturing divisions, and one paper
recycling division in British Columbia, Canada. The Company operates in three
business segments.
Specialties - Manufacture and sale of groundwood specialty printing
paper and kraft paper.
Newsprint - Manufacture and sale of newsprint.
Pulp - Manufacture and sale of softwood pulps.
The primary markets for the Company's paper products are North America, Latin
America and the Pacific Rim. The primary markets for the Company's pulp products
are Europe and the Pacific Rim.
2. Summary of Significant Accounting Policies
The consolidated financial statements of the Company are expressed in millions
of Canadian dollars and are prepared in accordance with Canadian generally
accepted accounting principles ("Canadian GAAP"). These financial statements
differ in certain respects from those prepared in accordance with United States
generally accepted accounting principles ("U.S. GAAP"). These measurement
differences are described in note 26 "Differences between United States and
Canadian generally accepted accounting principles".
(a) Basis of presentation
The consolidated financial statements include the accounts of the
Company and from their respective dates of acquisition of control or
formation, its wholly-owned subsidiaries and partnership. The Company's
50.0% proportionate share of Powell River Energy Inc. ("PREI"), a joint
venture between Great Lakes Hydro Income Fund and the Company, is
accounted for using the proportionate consolidation method. All
inter-company transactions and amounts have been eliminated on
consolidation.
(b) Use of estimates
The consolidated financial statements have been prepared in conformity
with Canadian GAAP, which require management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
the disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses
during the year. On an ongoing basis, management reviews its estimates,
including those related to environmental and legal liabilities,
impairment of long-lived assets, pension and post-retirement benefits,
bad debt and doubtful accounts, and income taxes, based on currently
available information. Actual amounts could differ from those
estimates.
(c) Revenue recognition
The Company recognizes revenues upon shipment when the significant
risks and rewards of ownership are transferred to the customer. Title
of the products is typically transferred to the customers at the time
of shipment, and payment is based on agreed prices and credit terms
contained in sales invoices. Customers have no contractual right of
return.
(d) Translation of foreign currencies
The majority of the Company's sales are denominated in foreign
currencies, principally the U.S. dollar. Revenue and expense items
denominated in foreign currencies are translated at exchange rates
prevailing during the period. Monetary assets and liabilities of the
Company's operations denominated in foreign currencies are translated
at the period-end exchange rates. Non-monetary assets and liabilities
are translated at exchange rates in effect when the assets are acquired
or the obligations are incurred. Foreign exchange gains and losses are
reflected in net earnings (loss) for the period.
Norske Skog Canada Limited [66]
Notes to Consolidated Financial Statements
| Amounts expressed in millions of Canadian dollars, except
where otherwise stated |
(e) Derivative financial instruments
The Company uses derivative financial instruments in the management of
foreign currency, interest rate and commodity price exposures. The
Company's policy is not to use derivatives for trading or speculative
purposes but only to manage existing financial exposures. Risk
management strategies and relationships are assessed on a regular,
ongoing basis to ensure the derivatives are achieving the intended
hedging objectives. Derivative financial instruments that are
designated as hedges for accounting purposes are subject to quarterly
effectiveness tests to ensure they remain highly effective. The Company
uses hedge accounting to account for the derivative financial
instruments designated as hedging instruments, and the fair value
method to account for derivative financial instruments not designated
as hedging instruments.
Foreign exchange exposure to foreign currency revenue and
related receivables, primarily in U.S. currency, is managed through the
use of foreign exchange forward contracts and options to sell foreign
currencies. Realized foreign exchange translation gains and losses from
transactions formally designated as hedges are recognized concurrently
with the hedged revenue in "Sales". Instruments that are not designated
as hedges are included in "Prepaids and other" or "Accounts payable and
accrued liabilities" on the consolidated balance sheet at their fair
value. Gains and losses, both realized and unrealized, from such
instruments that are not designated as hedges are also recorded in
"Sales".
Price risk associated with the sale of products or purchase of
certain inputs, primarily oil and gas, is managed from time to time
through the use of commodity swaps. Realized gains and losses from
transactions formally designated as hedges are recognized concurrently
with the hedged item in "Cost of sales". Instruments that are not
designated as hedges are included in "Prepaids and other" or "Accounts
payable and accrued liabilities" on the consolidated balance sheet at
their fair value. Changes in fair value are recognized in "Cost of
sales".
Foreign currency exposure on long-term debt denominated in
U.S. currency is managed through the use of forward contracts and
options to purchase U.S. dollars. These instruments are reported under
"Other assets" or "Other long-term obligations" on the consolidated
balance sheet at their fair value with changes in fair value recognized
in "Foreign exchange gain (loss) on translation of long-term debt",
offsetting the respective translation gains and losses on the
underlying foreign currency long-term debt.
Exposure to interest rates on long-term debt is managed
through the use of interest swaps. These swap agreements require the
periodic exchange of payments without the exchange of the notional
principal amount on which the payments are based. Settlement amounts
under interest swap agreements formally designated as hedges are
recognized in interest expense, offsetting the interest expense
otherwise incurred.
When the Company discontinues its designation of a hedging
relationship, or when a hedging relationship is no longer effective,
hedge accounting is discontinued. When the Company discontinues hedge
accounting, the derivative financial instrument is recorded on the
consolidated balance sheet at fair value. Gains and losses that had
previously been deferred are carried forward for recognition in the
statement of earnings in the same period that the hedged item is
recognized.
Cash flows from derivative financial instruments that are
designated as hedges are classified in "Operations" on the consolidated
statement of cash flows consistent with the hedged transaction.
Derivatives not designated as hedges are also classified in
"Operations".
(f) Cash and cash equivalents
Cash and cash equivalents include cash and short-term investments with
original maturities of less than three months and are presented at
cost, which approximates market value.
(g) Inventories
Inventories, other than supplies which are valued at cost, are valued
at the lower of average cost and net realizable value.
Norske Skog Canada Limited [67]
Notes to Consolidated Financial Statements
| Amounts expressed in millions of Canadian dollars, except
where otherwise stated |
(h) Property, plant and equipment
Property, plant and equipment is recorded at cost, including
capitalized interest.
Buildings, machinery and equipment are amortized on a straight-line
basis at rates that reflect estimates of the economic lives of the
assets. The rates for major classes of assets are:
Buildings 2.5 - 5.0%
Pulp and paper machinery and equipment 5.0%
During periods of major production interruption, an obsolescence amount
of 10% of normal amortization is charged on manufacturing equipment.
No amortization is charged on capital projects during the period of
construction. Start-up costs incurred in achieving normal operating
capacity on major capital projects are deferred and amortized over a
five-year period.
(i) Environmental costs
Environmental expenditures are expensed or capitalized depending upon
their future economic benefit. Expenditures that prevent future
environmental contamination are capitalized as part of "Property, plant
and equipment", and amortization is subsequently charged to income over
the estimated future benefit period of the assets. Expenditures that
relate to an existing condition caused by past operations are expensed.
Liabilities are recorded on an undiscounted basis when rehabilitation
efforts are likely to occur and the costs can be reasonably estimated.
(j) Deferred financing costs
Deferred financing costs included in "Other assets" on the consolidated
balance sheet represent the issuance costs of the Company's long-term
debt. Related amortization is included in interest expense on a
straight-line basis over the term of the debt.
(k) Share issue costs
Direct costs of issuing shares, net of income tax recoveries thereon,
are applied to reduce the value of consideration assigned to such
shares.
(l) Income taxes
Income taxes are accounted for using the liability method. Future
income tax assets and liabilities are based on temporary differences
(differences between the accounting basis and the tax basis of the
assets and liabilities) and non-capital loss carry-forwards and are
measured using the enacted or substantively enacted tax rates and laws
expected to apply when these differences reverse. Future tax benefits,
including non-capital loss carry-forwards, are recognized to the extent
that realization of such benefits is considered more likely than not.
The effect on future tax assets and liabilities of a change in tax
rates is recognized in earnings in the period that substantive
enactment occurs.
(m) Deferred credits
Deferred credits represent the excess of amounts assigned to future
income tax assets for tax losses acquired in other than business
combinations over the consideration paid. Deferred credits are
amortized to "Income tax recovery" in the consolidated statement of
earnings in proportion to the net reduction in the future income tax
asset that gave rise to the deferred credit.
Norske Skog Canada Limited [68]
Notes to Consolidated Financial Statements
| Amounts expressed in millions of Canadian dollars, except
where otherwise stated |
(n) Employee future benefits - pensions and other employee future benefits
The estimated cost for pensions provided to employees by the Company is
accrued using actuarial techniques and assumptions during the
employees' active years of service. The net periodic benefit cost
includes:
-- the cost of pension benefits provided in exchange for
employees' services rendered during the year,
-- the interest cost of pension obligations,
-- the expected long-term return on pension fund assets based on
the fair value for all asset classes,
-- gains or losses on settlements or curtailments,
-- the straight-line amortization of past service costs and plan
amendments over the average remaining service period of the
active employee group covered by the plans, unless the period
is less than five years, in which case such costs are
amortized over five years, and
-- the amortization of cumulative unrecognized net actuarial
gains and losses in excess of 10% of the greater of the
accrued benefit obligation and the fair value of plan assets
at the beginning of the year over the average remaining
service period of the active employee group covered by the
plans, unless the period is less than five years, in which
case such costs are amortized over five years.
(o) Earnings per share
Basic earnings (loss) per share are computed by dividing net earnings
(loss) for the period by the weighted average shares outstanding during
the reporting period. Diluted earnings (loss) per share are computed
using the treasury stock method.
(p) Marketable securities
Marketable securities are valued at the lower of cost or quoted market
value.
(q) Comparative figures
Certain comparative figures disclosed in the consolidated financial
statements have been reclassified to conform with the presentation
adopted for the current year.
3. Change in Accounting Policies
(a) Generally accepted accounting principles
Effective January 1, 2004, the Company adopted the new Canadian
Institute of Chartered Accountants ("CICA") Handbook ("the Handbook")
Section 1100, "Generally Accepted Accounting Principles"
recommendations. Among other recommendations, the section more clearly
defines alternate sources of Canadian GAAP when a matter is not
explicitly addressed by primary sources of Canadian GAAP. Historically,
the Company, consistent with other issuers in the forest industry,
recorded distribution costs as a deduction from sales. The Company now
relies on the alternate source of Canadian GAAP and records
distribution costs as operating expenses. As a result, distribution
costs have been reclassified from "Net sales" to "Cost of sales" which
resulted in an increase in "Sales" and "Cost of sales" for the years
ended December 31, 2003 and 2002 by $229.3 million and $221.7 million,
respectively. The application of Section 1100 had no impact on the
Company's net earnings.
(b) Stock-based compensation
Effective January 1, 2004, the Company adopted the CICA amended
recommendations of Handbook Section 3870, "Stock-based Compensation and
Other Stock-based Payments". These recommendations require the use of a
fair-value based approach for the accounting of stock-based
compensation awards granted to employees. Under the fair-value based
method, compensation cost is measured at fair value at the date of
grant, and is expensed over the award's
Norske Skog Canada Limited [69]
Notes to Consolidated Financial Statements
| Amounts expressed in millions of Canadian dollars, except
where otherwise stated |
vesting period. The standard has been applied retroactively without
restatement of prior periods, and resulted in an adjustment of $2.6
million to the opening balance of retained earnings and contributed
surplus of the current year to reflect the cumulative effect of
applying the fair-value based method to all employee stock options
granted on or after January 1, 2002. For the year ended December 31,
2004, the Company recorded $2.2 million as an expense for the
stock-based compensation plans. The pro forma disclosures with respect
to the years ended December 31, 2003, and 2002 are provided in note 17
of these consolidated financial statements.
(c) Impairment of long-lived assets
Effective January 1, 2004, the Company adopted the new CICA
recommendations of Handbook Section 3063, "Impairment of Long-lived
Assets". These recommendations require an entity to recognize an
impairment loss when an event or change in circumstances occurs that
results in the carrying amount of a long-lived asset exceeding the sum
of the undiscounted cash flows expected to result from its use and
eventual disposition. The impairment loss is measured as the amount by
which the long-lived assets' carrying amount exceeds its fair value.
The adoption of this new standard had no impact on the consolidated
financial statements for the year ended December 31, 2004.
(d) Asset retirement obligations
Effective January 1, 2004, the Company adopted the new CICA
recommendations of Handbook Section 3110, "Asset Retirement
Obligations", with respect to recording the fair value of a liability
for an asset retirement obligation in the period in which it is
incurred, and a corresponding increase in the carrying amount of the
related long-lived asset. The adoption of this new standard had no
material impact on the consolidated financial statements for the year
ended December 31, 2004.
(e) Hedging relationships and accounting for trading, speculative, or
non-derivative financial instruments
Effective January 1, 2004, the Company adopted the CICA's Accounting
Guideline 13, "Hedging Relationships", on the requirements related to
the identification, designation, documentation and effectiveness of
hedging relationships. The new standard has been applied on a
prospective basis to all instruments existing on, or entered into
after, January 1, 2004.
The Company also applied the accounting treatment prescribed
by the CICA's Emerging Issues Committee ("EIC") 128 with respect to the
accounting for trading, speculative or non-hedging derivative financial
instruments. Under EIC 128, derivative financial instruments for which
hedge accounting is not applied are recorded on the consolidated
balance sheet at fair value, with unrealized changes in fair value
recorded in the consolidated statement of earnings. Upon adoption, the
Company discontinued hedge accounting for certain derivative
instruments which were either no longer eligible for hedge accounting
under the new guideline, or which the Company has elected not to
formally designate as hedges.
(f) Revenue recognition
Effective January 1, 2004, the Company applied the accounting
treatments of EIC-141, "Revenue Recognition", ("EIC-141"), EIC-142,
"Revenue Arrangements with Multiple Deliverables", ("EIC-142") and
EIC-143, "Accounting for Separately Priced Extended Warranty and
Product Maintenance Contracts", ("EIC-143"). EIC-141 summarizes the
principles set as interpretative guidance on the application of
Handbook Section 3400, "Revenue". Specifically, EIC-141 presents the
criteria that must be met before revenue can be recognized. EIC-142
addresses certain aspects of the accounting by a vendor for
arrangements under which it will perform multiple revenue-generating
activities for a given customer. Finally, EIC-143 considers the issue
of how revenue and costs from a separately priced extended warranty or
product maintenance contract should be recognized. The application of
these accounting treatments had no impact on the consolidated financial
statements for the year ended December 31, 2004.
Norske Skog Canada Limited [70]
Notes to Consolidated Financial Statements
| Amounts expressed in millions of Canadian dollars, except
where otherwise stated |
(g) Employee future benefits - additional disclosures
In March 2004, CICA Handbook Section 3461, "Employee Future Benefits",
was amended for fiscal years ending on or after June 30, 2004. The
amendments prescribe additional disclosure requirements for defined
benefit pension plans and other employee future benefits. Effective
June 30, 2004, the Company adopted the new disclosure requirements of
Section 3461. The Company's consolidated financial statements for the
year ended December 31, 2004, reflect these new disclosures prescribed
by Section 3461.
4. Business Acquisition
On December 1, 2003, the Company completed the acquisition of a paper recycling
business from Newstech Recycling Partnership (the "Acquisition") for a total
purchase price of $61.1 million, including working capital.
The Company's consideration comprised of $31.5 million in cash, $29.0
million in equity and $0.6 million in transaction costs. The value of the
8,693,988 common shares issued was determined by the weighted average trading
price of the Company's common shares over the two-day period before December 1,
2003, which was the date the terms of the Acquisition were agreed to and
announced.
The Acquisition has been accounted for using the purchase method of
accounting and the results of the operations of the business have been
consolidated from the date of acquisition. The following amounts have been
assigned to the assets and liabilities acquired, based on their fair-values as
at December 1, 2003.
Assets acquired:
Net working capital $ 4.5
Fixed assets 84.3
-------
88.8
-------
Liabilities assumed:
Future income taxes 27.7
-------
Fair-value of net assets acquired $ 61.1
=======
Under the terms of the Acquisition, the Company will lease land and
buildings housing the operations for an initial term of 20 years, with a 10-year
renewal option.
5. Other Income (Expense), net
Other income (expense), net, for the years ended December 31 was as follows:
2004 2003 2002
----- ----- -------
Write-off of deferred financing costs $ - $ - $ (15.8)
Gain on sale of marketable securities - - 4.8
Other 1.2 (3.9) (2.3)
----- ----- -------
$ 1.2 $(3.9) $ (13.3)
===== ===== =======
Norske Skog Canada Limited [71]
Notes to Consolidated Financial Statements
| Amounts expressed in millions of Canadian dollars, except
where otherwise stated |
6. Interest Expense, net
Interest expense, net, for the years ended December 31 was as follows:
2004 2003 2002
------- ------- -------
Interest on long-term debt $ 79.0 $ 80.7 $ 80.0
Fixed-to-floating interest rate swaps (6.8) (8.5) (6.4)
Amortization of deferred financing costs 3.7 4.3 5.0
Capitalized interest (0.3) (0.9) -
Interest income (0.4) (0.5) (1.7)
Other (0.3) (0.1) (0.7)
------- ------- -------
$ 74.9 $ 75.0 $ 76.2
======= ======= =======
7. Income Taxes
The components of income tax recovery for the years ended December 31 were as
follows:
2004 2003 2002
--------- --------- ---------
Current $ 3.2 $ 5.9 $ 15.7
Future (31.3) (67.9) (91.5)
--------- --------- ---------
$ (28.1) $ (62.0) $ (75.8)
========= ========= =========
The reconciliation of income taxes calculated at the statutory rate to
the actual income tax provision for the years ended December 31 was as follows:
2004 2003 2002
-------------- -------------- ---------------
Income tax recovery at Canadian
statutory income tax rates $(20.1) 35.5% $(52.1) 35.5% $(70.7) 35.5%
Increase (decrease) in income
taxes for:
Non-taxable income and expenses (8.1) 14.3 (8.9) 6.1 (1.9) 1.0
Difference in foreign tax rate (2.3) 4.0 (2.4) 1.6 - -
Change in the future income tax
estimate for prior years - - - - (9.7) 4.9
Release of deferred credits - - (5.3) 3.6 - -
Large corporations tax 4.3 (7.6) 5.2 (3.5) 5.7 (2.9)
Other (1.9) 3.3 1.5 (1.0) 0.8 (0.4)
------ ---- ------ ---- ------ ----
Income tax recovery $(28.1) 49.5% $(62.0) 42.3% $(75.8) 38.1%
====== ==== ====== ==== ====== ====
Norske Skog Canada Limited [72]
Notes to Consolidated Financial Statements
| Amounts expressed in millions of Canadian dollars,
except where otherwise stated |
The tax effects of temporary differences that give rise to significant future
tax liabilities (assets) at December 31 were as follows:
2004 2003
------- -------
Future income tax liability
Property, plant and equipment $ 535.9 $ 557.6
Other 86.8 49.0
------- -------
622.7 606.6
------- -------
Future income tax assets
Non-capital loss carry-forwards (206.5) (154.3)
Employee future benefits (67.3) (65.5)
Other (22.3) (34.5)
------- -------
(296.1) (254.3)
Valuation allowance 6.3 11.0
------- -------
(289.8) (243.3)
------- -------
Net future income tax liability $ 332.9 $ 363.3
======= =======
8. Earnings Per Share
The following weighted average number of shares for the years ended December 31
were used for computation of earnings per share:
2004 2003 2002
------ ------ -------
Net earnings (loss) reported $(28.6) $(84.5) $(123.3)
Weighted average shares used in computation
of basic earnings per share (in millions) 214.6 206.6 193.4
Weighted average shares from assumed conversion
of dilutive options (in millions) - - -
Weighted average shares used in computation
of diluted earnings per share (in millions) 214.6 206.6 193.4
Basic and diluted earnings (loss) per share
(in dollars) $(0.13) $(0.41) $(0.64)
Norske Skog Canada Limited [73]
Notes to Consolidated Financial Statements
| Amounts expressed in million of Canadian dollars,
excerpt where otherwise stated |
9. Inventories
Inventories at December 31 were as follows:
2004 2003
------- -------
Specialties $ 53.7 $ 47.4
Newsprint 28.5 28.0
Pulp 25.3 16.0
------ ------
Total finished goods and work in progress 107.5 91.4
Wood chips, pulp logs and other raw materials 56.1 50.2
Operating and maintenance supplies 94.5 94.3
------ ------
$258.1 $235.9
====== ======
10. Property, Plant and Equipment
Property, plant and equipment at December 31 were as follows:
2004
Accumulated Net Book
Cost Amortization Value
-------- ------------ ---------
Buildings and land
Specialties and newsprint $ 406.6 $ 135.3 $ 271.3
Pulp 105.0 42.0 63.0
-------- -------- --------
Machinery and equipment
Specialties and newsprint $2,432.7 $ 966.5 $1,466.2
Pulp 850.4 478.0 372.4
-------- -------- --------
$3,794.7 $1,621.8 $2,172.9
======== ======== ========
2003
Accumulated Net Book
Cost Amortization Value
-------- ------------ --------
Buildings and land
Specialties and newsprint $ 399.8 $ 121.5 $ 278.3
Pulp 105.0 41.4 63.6
------- -------- --------
Machinery and equipment
Specialties and newsprint $2,403.4 $ 847.4 $1,556.0
Pulp 821.2 428.9 392.3
-------- -------- --------
$3,729.4 $1,439.2 $2,290.2
======== ======== ========
In December 2003, the Company recorded a write-down of $14.2 million relating to
the permanent closure of a portion of its pulp producing capacity at its Elk
Falls mill, in early 2004. There were no such amounts recorded in 2004.
Norske Skog Canada Limited [74]
Notes to Consolidated Financial Statements
| Amounts expressed in millions of Canadian dollars,
except where otherwise stated |
11. Other Assets
Other assets at December 31 were as follows:
2004 2003
------- -------
Deferred financing costs $ 21.5 $ 25.2
Deferred charges and other 6.0 5.0
------ ------
$ 27.5 $ 30.2
====== ======
12. Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities at December 31 were as follows:
2004 2003
------- -------
Trade accounts payable $141.8 $127.7
Accrued payroll and related liabilities 86.4 82.4
Pension plans (note 18) 18.1 17.8
Post-retirement benefit plans (note 18) 5.6 5.3
Accrued interest 10.6 11.5
Other 23.0 22.6
------ ------
$285.5 $267.3
====== ======
13. Long-term Debt
The Company's long-term debt, all of which matures beyond one year, at December
31 was as follows:
2004 2003
------- -------
Recourse
Senior notes, 10% due March 2009 (US$200.0 million) $ - $ 274.5
Senior notes, 8.625% due June 2011 (US$400.0 million) 485.1 521.2
Senior notes, 7.375% due March 2014 (US$250.0 million) 300.9 -
------ -------
786.0 795.7
Revolving operating facility of up to $350.0 million
due July 2007 - 12.5
------ -------
786.0 808.2
Non-recourse (PREI)
First Mortgage Bonds, 6.387% due July 2009 37.6 37.6
------ -------
$823.6 $845.8
====== ======
Norske Skog Canada Limited [75]
Notes to Consolidated Financial Statements
| Amounts expressed in millions of Canadian dollars, except
where otherwise stated |
On March 23, 2004, the Company issued, at par, US$250.0 million 7.375% senior
notes due March 1, 2014 for cash proceeds of $333.1 million. The net proceeds
were used to redeem the 10% senior notes and for general corporate purposes. The
Company recorded a loss of $5.2 million on repayment of the 10% senior notes.
During the year ended December 31, 2004, the maturity of the $350.0 million
revolving operating facility (the "Facility") was extended by one year, to July
2007. Borrowings under the Facility bear interest at a rate based on Canadian
dollar prime/banker's acceptance or U.S. dollar base/LIBOR rates, plus a margin
that varies with the Company's credit rating. A commitment fee, representing a
percentage of the margin, applies to the undrawn portion of the Facility.
Substantially all of the assets of the Company are pledged as security under the
Facility. Its availability is determined by a borrowing base, calculated based
on accounts receivable and inventory balances, and includes covenants to
maintain the funded debt/capitalization ratio below 60%, secured
debt/capitalization ratio below 30% and shareholders' equity above $779.3
million as at December 31, 2004. At December 31, 2004, the Facility was undrawn
and after outstanding letters of credit of $22.6 million, $318.5 million was
available to the Company. An interest coverage covenant is applicable in certain
circumstances if the Company incurs secured debt other than under the Facility.
As of December 31, 2004, no such debt has been incurred.
The indentures and agreements governing the Company's senior notes and the
Facility contain customary restrictive covenants, including restrictions on the
incurrence of additional indebtedness, certain payments including dividends and
investments in other persons, the creation of liens, sale and leaseback
transactions, certain amalgamations, mergers, consolidations and the use of
proceeds arising from certain sales of assets and certain transactions with
affiliates. At December 31, 2004 and 2003, the Company remained in compliance
with the covenants under both its Facility and bond indentures. The Company's
Consolidated Fixed Charge Ratio of the bond indentures, calculated on a trailing
twelve month basis, exceeded the 2.0:1 threshold as at December 31, 2004,
whereas it was below the 2.0:1 threshold as at December 31, 2003. While not
constituting a default, remaining below this threshold prohibited the issuance
of additional debt that could be incurred outside of the existing Facility.
The Company continues to be subject to restrictions on paying dividends
under its senior notes. The restriction on certain payments, defined in the note
indentures, is principally based on changes in shareholders' equity. With the
Company's accumulated losses since 2002, the Company is not currently permitted,
under its 8.625% senior note indenture, to pay dividends.
Scheduled long-term debt repayments
Recourse Non-recourse
Debt Debt
-------- ------------
2005 $ - $ -
2006 - -
2007 - -
2008 - -
2009 - 37.6
Thereafter 786.0 -
------- ------
$786.0 $37.6
======= ======
Norske Skog Canada Limited [76]
Notes to Consolidated Financial Statements
| Amounts expressed in millions of Canadian dollars,
except where otherwise stated |
Fair value of long-term debt
The following estimated fair values of the Company's long-term debt at December
31 have been determined based on management's best estimate of the fair value to
refinance debt with similar terms at the respective year-end dates:
2004 2003
------ ------
Recourse $830.0 $845.4
Non-recourse 39.8 39.2
------ ------
$869.8 $884.6
====== ======
14. Other Long-term Obligations
Other long-term obligations at December 31 were as follows:
2004 2003
------ ------
Post-retirement benefit plans (note 18) $132.1 $120.4
Pension plans (note 18) 33.2 40.2
Forward foreign currency contracts hedging long-term debt 44.1 55.4
Deferred gain on termination of interest rate swaps 4.2 10.2
Environmental, remedial and other 20.0 23.6
------ ------
$233.6 $249.8
====== ======
During the year ended December 31, 2003, fixed-to-floating interest rate
swaps on US$105.0 million were terminated for proceeds of $15.9 million. The
proceeds are being amortized as a reduction of interest expense based on the
U.S. swap curve at the time of termination. The deferred gain on termination of
interest rate swaps represents the unamortized portion of the proceeds.
15. Deferred Credits
Deferred credits at December 31 were as follows:
2004 2003
------ ------
Beginning of year $ 21.0 $ 8.5
Net price adjustment related to acquired tax losses 6.5 17.8
Adjustment related to release of deferred credits - (5.3)
------ ------
End of year $ 27.5 $ 21.0
====== ======
Norske Skog Canada Limited [77]
Notes to Consolidated Financial Statements
| Amounts expressed in millions of Canadian dollars,
except where otherwise stated |
In prior years, the Company acquired from wholly owned subsidiaries of
Fletcher Challenge Limited ("FCL"), a major shareholder up to July 28, 2000,
companies with available tax losses. The purchase price of these companies is
subject to adjustment under certain conditions. During the year, the Company
recorded a downward adjustment of $6.5 million (net of taxes of $0.8 million on
the interest component), reflecting a reduction to the purchase price (2003:
$17.8 million). This adjustment has been recorded as an increase to deferred
credits.
16. Share Capital
(a) Authorized
The Company is authorized to issue 100,000,000 preferred shares and an
unlimited number of common shares.
(b) Issued and outstanding
2004 2003
----------------------- -----------------------
Shares $ Shares $
----------- ------ ----------- -----
Issued and outstanding:
Common shares 214,604,120 913.6 214,604,120 913.6
----------- ------ ----------- -----
Continuity of common shares:
Beginning of year 214,604,120 913.6 205,910,132 884.6
Issued for business acquisition (note 4) - - 8,693,988 29.1
Share issue costs (2003-net of income
tax recovery of $0.1 million) - - - (0.1)
----------- ------ ----------- -----
End of year 214,604,120 913.6 214,604,120 913.6
=========== ====== =========== =====
17. Stock-based Compensation Plans
(a) Stock option plans
The Company has an employee share option plan for its key officers,
directors and employees. Options granted prior to January 31, 2003 have a
term of five years and the options granted thereafter have a term of ten
years. These options are exercisable as to 1/3 on and after the first
anniversary date, as to 2/3 on and after the second anniversary date and as
to all on and after the third anniversary date, unless the market price of
the common shares exceeds a specified acceleration price, in which case all
of the options are exercisable at that date. Market price is determined by
the weighted average price per share for all sales of the shares on The
Toronto Stock Exchange ("TSX") during the ten consecutive trading days
preceding the date on which a determination of Market Price is required
under the plan. The stock option plan provides for the issuance of up to a
maximum of 10.0 million common shares.
Norske Skog Canada Limited [78]
Notes to Consolidated Financial Statements
| Amounts expressed in millions of Canadian dollars,
except where otherwise stated |
In accordance with the Section 3870 of the CICA Handbook, the Company
applies the fair-value method for recording share options granted to directors,
officers and employees. The pro forma effect on net earnings (loss) and net
earnings (loss) per common share if the fair-value method had been used in the
prior periods to determine compensation cost for share options is as follows:
2003 2002
------- -------
Net loss:
As reported $(84.5) $(123.3)
Pro forma (86.5) (123.9)
Net loss per common share (in dollars)
As reported $(0.41) $(0.64)
Pro forma (0.42) (0.64)
The fair value of share options was estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions:
2004 2003 2002
------- ------- -------
Risk-free interest rate 4.5% 4.9% 5.0%
Annual dividends per share Nil Nil Nil
Expected stock price volatility 28.3% 27.3% 27.3%
Expected option life (in years) 4.0 4.0 4.0
Average fair value of options granted (in dollars) $1.50 $1.73 $1.75
Changes during the years ended December 31, in the number of options
outstanding, were as follows:
2004 2003 2002
----------------------- -------------------------- ------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Number of Price Number of Price Number of Price
Options (in dollars) Options (in dollars) Options (in dollars)
--------- ------------ --------- ------------ -------- ------------
Beginning of year 4,495,500 $6.07 4,722,000 $6.08 1,330,000 $6.60
Granted 1,637,500 4.39 100,000 5.81 3,412,000 5.89
Exercised - - - - - -
Expired or cancelled (181,667) 5.67 (326,500) 6.20 (20,000) 7.13
--------- ----- --------- ----- --------- -----
End of year 5,951,333 $5.62 4,495,500 $6.07 4,722,000 $6.08
========= ===== ========= ===== ========= =====
Norske Skog Canada Limited [79]
Notes to Consolidated Financial Statements
| Amounts expressed in millions of Canadian dollars,
except where otherwise stated |
The following table summarizes information about stock options outstanding
and exercisable at December 31, 2004:
Options Outstanding Options Exercisable
------------------------------------------------- ------------------------------
Weighted
Average Weighted Weighted
Remaining Average Average Accelerated
Exercise Number of Option Life Exercise Price Number of Exercise Price Price
Prices Options (years) (in dollars) Options (in dollars) (in dollars)
- -------- --------- ----------- -------------- --------- -------------- ------------
$6.60 1,221,500 1.7 $6.60 1,221,500 $6.60 $ 9.47
7.13 1,021,000 2.1 7.13 680,666 7.13 10.00
5.25 2,008,000 2.8 5.25 1,338,666 5.25 7.54
5.81 63,333 3.1 5.81 23,333 5.81 8.35
4.39 1,637,500 4.1 4.39 - 4.39 6.30
- ----- --------- --- ----- --------- ----- ------
5,951,333 2.8 $5.62 3,264,165 $6.15 $ 8.03
========= === ===== ========= ===== ======
(b) Deferred share unit plan
The Company has established a deferred share unit ("DSU") plan for its
directors. Under the terms of this plan, directors may elect to receive
their annual remuneration in DSUs, cash or a combination thereof. Each DSU
has a value equivalent to the Company's weighted average share price on the
TSX, during the ten consecutive trading days prior to the issuance date of
the DSU. A director's DSU account is credited with dividend equivalents in
the form of additional DSUs when dividends are paid on common shares. A
director may elect the date of redemption by filing an irrevocable written
election with the Company no later than November 15 of the calendar year
commencing immediately after the director's termination date. The value
shall be paid by the Company as a lump sum in cash, equal to the fair value
at that date, after deduction of applicable taxes and other source
deductions required to be withheld. During the year ended December 31,
2004, the Company recognized $0.5 in expense (2003-$0.2 million). As at
December 31, 2004, 225,336 DSUs are outstanding under this plan
(2003-121,295 DSUs) and there is approximately $0.8 million payable.
18. Employee Future Benefits
Description of benefit plans
The Company maintains pension benefit plans, which include defined benefit and
defined contribution segments that are available to all salaried employees and
to hourly employees not covered by union pension plans. Employees hired
subsequent to January 1, 1994, enroll in the defined contribution segment.
The defined benefit segment provides a pension based on years of service
and earnings. For the defined contribution segment, the Company's contributions
are based on a percentage of an employee's earnings with the Company's funding
obligations being satisfied upon crediting contributions to an employee's
account.
The Company provides other benefit plans consisting of provincial medical
plan premiums, extended health care and dental benefits to eligible retired
employees and their dependents. Assumed health care trend rates have a
significant effect on the amounts reported for the post-retirement medical
plans.
Norske Skog Canada Limited [80]
Notes to Consolidated Financial Statements
| Amounts expressed in millions of Canadian dollars,
except where otherwise stated |
Total cash payments
Total cash payments for employee future benefits for the year ending December
31, 2004, consisting of cash contributed by the Company to its funded pension
plans, cash payments directly to beneficiaries for its unfunded other benefit
plans and cash contributed to its defined contribution plans, was $29.4 million
(2003 - $15.4 million).
Defined benefit plan
The Company measures the fair value of plan assets and the accrued benefit
obligations for accounting purposes as at November 30 of each year. The most
recent actuarial valuation of the majority of pension plans for funding purposes
was as of December 31, 2003, and the next required valuation will be as of
December 31, 2006.
Defined benefit plan obligation
The following table represents the change in the accrued benefit obligation as
determined by independent actuaries:
Pension Benefit Plans Other Benefit Plans
--------------------- -------------------
2004 2003 2004 2003
------ ------ ------ ------
Accrued benefit obligations
Balance at beginning of year $327.2 $320.4 $183.6 $160.1
Service cost of defined benefit segment 4.5 4.3 4.3 4.2
Interest cost on accrued benefit obligation 19.8 20.1 11.1 11.0
Employee contributions 0.5 0.5 - -
Benefit payments (26.0) (25.1) (5.3) (4.6)
Actuarial loss (gain) and other adjustments 9.4 7.0 (15.5) 12.9
------ ------ ----- ------
Balance at end of year $335.4 $327.2 $178.2 $183.6
====== ====== ====== ======
Defined benefit plan assets
The following table represents the change in the fair value of assets of defined
benefit plans:
Pension Benefit Plans Other Benefit Plans
--------------------- -------------------
2004 2003 2004 2003
------ ------ ------ ------
Plan assets
Balance at beginning of year $214.7 $224.0 $ - $ -
Actual return on plan assets 24.0 11.1 - -
Service cost of defined contribution segment - (4.5) - -
Employee contributions 0.5 0.5 - -
Company contributions 19.1 8.4 5.5 4.9
Other 1.0 0.3 - -
Benefit payments (26.0) (25.1) (5.5) (4.9)
------ ------ ---- -----
Balance at end of year $233.3 $214.7 $ - $ -
====== ====== ==== =====
Norske Skog Canada Limited [81]
Notes to Consolidated Financial Statements
| Amounts expressed in millions of Canadian dollars,
except where otherwise stated |
The asset allocation for the Company's defined benefit pension plans, by
asset category, were as follows:
Plan assets at December 31, 2004 2003
- --------------------------- ------ ------
Equity securities 57.4% 61.0%
Fixed income securities 42.6% 39.0%
------ ------
Total 100.0% 100.0%
====== ======
Reconciliation of the funded status of the benefit plans to the amounts in the
consolidated balance sheets
The following table presents the difference between the fair value of the
defined benefit pension assets and the actuarially determined accrued benefit
obligations as at December 31, 2004 and 2003. This difference is also referred
to as either the deficit or surplus, as the case may be, or the funded status of
the plans.
The table also reconciles the amount of the surplus or deficit (funded
status) to the accrued benefit in the consolidated balance sheets. This
difference between the funded status and the obligation recognized in the
consolidated balance sheets, in accordance with Canadian GAAP, represents the
portion of the surplus or deficit not yet recognized for accounting purposes.
Deferred recognition is a key element of the Canadian GAAP pension accounting.
This approach allows for a gradual recognition of changes in accrued benefit
obligations and fund performance over the expected average remaining service
life of the employee group covered by the plans.
As at December 31, 2004, there was a total funding deficit of $102.1
million (2003 - $112.5 million) in the Company's various pension plans. Of this
amount $60.4 million (2003 - $70.7 million) related to funded defined benefit
pension plans and $41.7 million (2003 - $41.8 million) to "pay-as-you-go"
unfunded defined benefit pension plans. In addition, the Company have other
"pay-as-you-go" post-retirement benefit plans, consisting of group health care
and life insurance, which had a deficit of $178.2 million at December 31, 2004
(2003 - $183.6 million).
Pension Benefit Plans Other Benefit Plans
--------------------- -------------------
2004 2003 2004 2003
------- ------- ------- -------
Accrued benefit obligation at end of year $ 335.4 $ 327.2 $ 178.2 $ 183.6
Fair value of plan assets at end of year 233.3 214.7 - -
------ ------ ------- -------
Funded status deficit (102.1) (112.5) (178.2) (183.6)
Transitional balance - (0.3) - -
Unrecognized past service costs 0.3 0.5 (2.3) (2.5)
Unrecognized actuarial losses 50.7 54.5 42.8 60.4
------- ------- ------- -------
Accrued benefit obligation recognized
in the consolidated balance sheets $ (51.1) $ (57.8) $(137.7) $(125.7)
======= ======= ======= =======
Norske Skog Canada Limited [82]
Notes to Consolidated Financial Statements
| Amounts expressed in millions of Canadian dollars,
except where otherwise stated |
Classification of accrued obligations:
The accrued benefit obligation is included in the Company's balance sheet as
follows:
- -------------------------------------------------------------------------------------------
Pension Benefit Plans Other Benefit Plans
--------------------- ---------------------
2004 2003 2004 2003
------- ------- ------- -------
Other assets $ 0.2 $ 0.2 $ - $ -
Accounts payable and accrued liabilities (18.1) (17.8) (5.6) (5.3)
Other long-term obligations (33.2) (40.2) (132.1) (120.4)
- -------------------------------------------------------------------------------------------
$ (51.1) $ (57.8) $(137.7) $(125.7)
===========================================================================================
Components of costs recognized in the year:
- ---------------------------------------------------------------------------------------------
Pension Plans 2004 2003 2002
------ ------ ------
Defined benefit costs:
Current service cost $ 4.5 $ 4.0 $ 4.1
Interest cost 19.8 20.4 20.6
Actual return on assets (23.9) 11.7 9.5
Actuarial (gain)/loss 9.0 7.5 (0.7)
Prior service costs - - 6.5
Difference between actual and expected return 7.8 (28.3) (29.6)
Difference between actual and recognized actuarial gain/(loss) (5.7) (4.9) 1.2
Difference between actual and recognized prior service costs 0.2 0.3 (6.0)
Amortization of transitional balance (0.3) (0.7) (0.7)
- ---------------------------------------------------------------------------------------------
11.4 10.0 4.9
- ---------------------------------------------------------------------------------------------
Defined contribution costs:
Current service cost 5.2 4.7 4.5
- ---------------------------------------------------------------------------------------------
$ 16.6 $ 14.7 $ 9.4
=============================================================================================
Norske Skog Canada Limited [83]
Notes to Consolidated Financial Statements
| Amounts expressed in millions of Canadian dollars,
except where otherwise stated |
- ---------------------------------------------------------------------------------------------
Other Benefit Plans 2004 2003 2002
------ ------ ------
Defined benefit costs:
Current service cost $ 4.3 $ 4.3 $ 3.4
Interest cost 11.2 11.2 9.3
Actuarial (gain)/loss (15.2) 13.0 -
Prior service costs - - 36.2
Difference between actual and recognized actuarial gain/(loss) 17.8 (10.1) 1.9
Difference between actual and recognized prior service costs (0.2) (0.2) (36.4)
- ---------------------------------------------------------------------------------------------
$ 17.9 $ 18.2 $ 14.4
=============================================================================================
Unionized employees of the Company are members of industry-wide benefit plans to
which the Company contributes a predetermined amount per hour worked by an
employee. The pension expense for these plans is equal to the Company's
contribution of $18.4 million for the year end December 31, 2004 (2003 - $18.4
million; 2002 - $16.2 million).
Significant assumptions
Actuarial assumptions used in accounting for the Company-maintained benefit
plans were:
- ------------------------------------------------------------------------------------
2004 2003
-------------- ------
Benefit obligations at December 31,
Discount rate 6.00% 6.25%
Rate of compensation increase 3.00% 3.00%
Net expense for year ended December 31,
Discount rate 6.25% 6.50%
Rate of compensation increase 3.00% 3.00%
Expected rate of return on plan assets 7.50% 7.50%
Assumed health care cost trend rate at December 31,
Extended health benefits
Initial health care cost trend rate 11.00% 14.00%
Annual rate of decline in trend rate 1.00% 1.00%
Ultimate health care cost trend rate 5.00% 5.00%
Dental benefits
Dental care cost trend rate 5.00% 5.00%
Medical services plan benefits
Premium trend rate 5% until
June 30, 2004,
2% thereafter 5.00%
- ------------------------------------------------------------------------------------
Norske Skog Canada Limited [84]
Notes to Consolidated Financial Statements
| Amounts expressed in millions of Canadian dollars,
except where otherwise stated |
Sensitivity analysis
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plans. A 1% change in assumed health care cost
rates would have the following effects for 2004.
- --------------------------------------------------------------------------------
Other Benefit Plans
---------------------
Increase Decrease
-------- --------
Total of service and interest cost $ 3.2 $ (2.5)
Accrued benefit obligation $31.8 $(25.2)
- --------------------------------------------------------------------------------
19. Financial Instruments
Derivative financial instruments
The Company uses derivative financial instruments to reduce its exposure to
foreign currency and price risk associated with its revenues, energy costs and
long-term debt. The Company also uses interest rate swaps to reduce its exposure
to long-term fixed interest rates associated with its senior notes.
(a) Revenue risk management instruments
Foreign currency options and forward contracts outstanding to sell U.S.
dollars were as follows:
- --------------------------------------------------------------------------------------------
Options
- ---------------------------------------------------------------------
Purchased Options Sold Options Forward Contracts
- --------------------------------------------------------------------- --------------------
Average Rate Average Rate Average Rate
-------------------- -------------------- --------------------
Term US$Millions C$/US$ US$Millions C$/US$ US$Millions C$/US$
- ----------------------- ----------- ------ ----------- ------ ----------- ------
As at December 31, 2004
0 to 12 months $ 422 1.2902 $ 362 1.3588 $ 49 1.2798
13 to 24 months 56 1.2882 56 1.3693 - -
- --------------------------------------------------------------------- --------------------
$ 478 1.2900 $ 418 1.3602 $ 49 1.2798
- --------------------------------------------------------------------- --------------------
As at December 31, 2003
0 to 12 months $ 324 1.4477 $ 142 1.5756 $ 56 1.5764
13 to 24 months 105 1.3647 54 1.4539 9 1.5269
- --------------------------------------------------------------------- --------------------
$ 429 1.4273 $ 196 1.5421 $ 65 1.5695
- --------------------------------------------------------------------- --------------------
Foreign exchange translation gains and losses on the above instruments
designated as hedges are recognized concurrently with the hedged revenue in
"Sales". At December 31, 2004, all of the above contracts are designated as
hedging instruments, except for U.S. $138 million where the associated revenue
has been recognized. At period-end exchange rates, the net amount the Company
would receive to settle the above contracts and options is $50.2 million, of
which $14.2 million has been recognized and is included in "Sales" and "Prepaids
and other".
At December 31, 2004, no price hedging instruments were outstanding in
respect of pulp and paper products sold.
Norske Skog Canada Limited [85]
Notes to Consolidated Financial Statements
| Amounts expressed in millions of Canadian dollars,
except where otherwise stated |
(b) Cost risk management instruments
Oil and gas contracts outstanding were as follows:
- ------------------------------------------------- ---------------------
Oil Contracts Gas Contracts
- ------------------------------------------------- ---------------------
Barrels Average Gigajoules Average
("bbl") Rate ("Gj") Rate
Term ("000's") US$/bbl (millions) US$/Gj
- ----------------------- --------- ------- ---------- -------
As at December 31, 2004
0 to 12 months 125 $ 20.85 0.6 $ 5.58
13 to 36 months 80 32.34 - -
- ------------------------------------------------- ---------------------
205 $ 25.33 0.6 $ 5.58
- ------------------------------------------------- ---------------------
As at December 31, 2003
0 to 12 months 317 $ 23.24 1.6 $ 3.89
13 to 36 months 60 24.07 - -
- ------------------------------------------------- ---------------------
377 $ 23.37 1.6 $ 3.89
- ------------------------------------------------- ---------------------
The above instruments are not designated as hedging instruments for
accounting purposes and are reported under "Prepaids and other" on the
balance sheet at their fair value. Settlements and changes in fair value
are recognized in "Cost of sales". At period-end swap rates, the net amount
the Company would receive to settle these swaps is $3.8 million, of which
$3.5 million has been recognized and is included in "Cost of sales" and
"Prepaids and other".
(c) Long-term debt risk management instruments
The Company has forward foreign exchange contracts to acquire U.S. dollars
totalling US$115.5 million over a three-year period at rates averaging
C$1.5753/US$. These instruments are not designated as hedging instruments
for accounting purposes, and are included in "Other long-term obligations"
on the balance sheet at their fair value. Settlements and changes in fair
value are recognized in "Foreign exchange gain on translation of long-term
debt". At period-end exchange rates, the net amount the Company would pay
to settle these contracts is $41.7 million.
(d) Interest rate swaps
The Company has entered into fixed-to-floating interest rate swaps on US$30
million, under which it will receive a fixed rate receipt of 7.375%, and
pay a floating rate averaging U.S. six month LIBOR plus an average of
1.97%. The swaps mature March 1, 2014, and are cancellable at the
counterparties' option between March 1, 2009 and March 1, 2014 for premiums
which mirror the call premiums on the 7.375% senior notes. These
instruments are designated as fair value hedging instruments, with
settlement amounts recognized in interest expense offsetting the interest
expense otherwise incurred. At period-end rates, the net amount the Company
would receive to settle these contracts is $1.4 million.
(e) Credit risk
The Company is exposed to credit risk on accounts receivable from its
customers who are mainly in the newspaper publishing, commercial printing
and paper manufacturing businesses. The Company manages its credit risk,
principally through credit policies, which include the analysis of the
financial position of its customers and the regular
Norske Skog Canada Limited [86]
Notes to Consolidated Financial Statements
| Amounts expressed in millions of Canadian dollars,
except where otherwise stated |
review of their credit limits. The Company also subscribes to credit
insurance for a majority of its receivables, and bank letters of credit, as
required.
The Company is exposed to credit risk with counterparties to the Company's
derivative financial instruments. The credit risk arises from the potential
for a counterparty to default on its contractual obligations, and is
limited to those contracts where the Company would incur a loss in
replacing the defaulted transaction. The Company manages this risk by
diversifying through counterparties that are of strong credit quality.
(f) Fair value
Estimated fair-values of financial instruments, which differ from carrying
values at December 31, were as follows:
- --------------------------------------------------------------------------------------------
2004 2003
----------------- ----------------
Carrying Fair Carrying Fair
Value Value Value Value
-------- ----- -------- -----
Forward contracts and options hedging future
U.S. dollar receipts $ 14.2 $ 50.2 $ 15.3 $ 74.1
Commodity swaps hedging future oil and gas purchases 3.5 3.8 - 3.6
Instruments related to long-term debt risk management
Forward contracts to buy U.S. dollars (44.1) (41.7) (55.4) (50.0)
Fixed to floating interest swaps - 1.4 - -
- --------------------------------------------------------------------------------------------
The fair value of options and forward foreign currency contracts is based
on mid-market rates from financial institutions.
20. Interest in Joint Venture
PREI commenced operations in February 2001 and consists of an integrated
hydroelectric power generating, transmission and distribution system which
includes two hydroelectric generating stations. PREI is a joint venture which
provides power to the Company. The following amounts represent the Company's
50.0% interest in PREI which is proportionately consolidated:
- -----------------------------------------------------------------------
As at December 31,
--------------------
2004 2003
------ ------
Balance sheet
Current assets $ 2.4 $ 0.9
Fixed assets 57.1 57.2
Other assets 1.3 1.3
- -----------------------------------------------------------------------
$ 60.8 $ 59.4
=======================================================================
Current liabilities $ 1.5 $ 1.4
Long-term liabilities 75.8 74.4
Deficit (16.5) (16.4)
- -----------------------------------------------------------------------
$ 60.8 $ 59.4
=======================================================================
Norske Skog Canada Limited [87]
Notes to Consolidated Financial Statements
| Amounts expressed in millions of Canadian dollars,
except where otherwise stated |
- --------------------------------------------------------------------------------
Year ended December 31,
----------------------------------
2004 2003 2002
------ ------ ------
Statement of operations
Sales $ 10.1 $ 9.5 $ 9.5
Cost of sales 2.1 2.2 2.7
Amortization 1.3 1.6 0.7
- --------------------------------------------------------------------------------
Operating earnings 6.7 5.7 6.1
Other expense, net 0.7 0.6 -
Interest expense, net 6.0 5.6 4.6
Income tax expense (recovery) 0.1 (0.1) 1.5
- --------------------------------------------------------------------------------
Net earnings (loss) $ (0.1) $ (0.4) $ -
================================================================================
- --------------------------------------------------------------------------------
2004 2003 2002
------ ------ ------
Statement of cash flows
Cash provided (used) by:
Operations $ 1.1 $ 1.1 $ 1.5
Investing (1.2) (1.7) (0.1)
Financing 1.6 - (1.0)
- --------------------------------------------------------------------------------
21. Related Party Transactions
Related parties include Norske Skogindustrier ASA ("Norske Skog"), together with
its subsidiaries and affiliates and Norske Skog North America LLC, a joint
venture between Norske Skog and the Company. Transactions or balances with these
related parties, not otherwise disclosed in these financial statements, were as
follows:
- --------------------------------------------------------------------------------
2004 2003 2002
------ ------ ------
Norske Skog
Selling, general and administrative $ 0.1 $ 0.1 $ 0.2
Accounts receivable - 19.3 -
Norske Skog North America LLC
Commission expenses 4.8 4.2 3.8
Net loss 0.1 0.1 0.1
Investment (US$0.5 million) 0.8 0.8 0.8
Accounts payable 0.4 0.2 0.3
- --------------------------------------------------------------------------------
Norske Skog Canada Limited [88]
Notes to Consolidated Financial Statements
| Amounts expressed in millions of Canadian dollars,
except where otherwise stated |
The Company has sales arrangements with affiliates of Norske Skog, and has
entered into agency and distribution agreements whereby all sales of the
Company's newsprint and specialty papers in certain international markets are
effected through affiliates of Norske Skog. During the year, product sales to
these affiliates were $121.7 million (2003 - $115.0 million). These transactions
are in accordance with normal third party trade practices.
In prior years, the Company acquired, from wholly-owned subsidiaries of FCL
(now subsidiaries of Norske Skog), companies with tax losses. The purchase price
of these companies is subject to adjustment under certain conditions. In
addition to the $19.3 million included in accounts receivable as at December 31,
2003, the Company recorded a further adjustment of $7.1 million in the second
quarter of 2004, reflecting a reduction to the purchase price. The Company
collected the receivable of $26.6 million (including an interest adjustment of
$0.2 million) in the third quarter of 2004.
The Company undertakes certain transactions with companies affiliated with
a director of the Company. These transactions are in the normal course of
business and are on the same terms as those accorded to non-related parties.
During 2004, the Company paid aggregate fees of $0.4 million (2003 - $0.1
million; 2002 - $0.1 million) primarily for legal services to companies
affiliated with directors of the Company. The Company has charged the costs to
"selling, general and administrative expenses".
The Company has advanced interest-free loans to three officers of the
Company. As at December 31, 2004, the balance outstanding was $0.5 million
(December 31, 2003 - $0.6 million). These loans were issued prior to the
enactment of the United States Sarbanes-Oxley Act of 2002, which prohibits
such loans effective July 30, 2002. The Company has made no loans to any of its
directors or officers since that date.
22. Segmented Information
The Company operates in three business segments:
Specialties - Manufacture and sale of groundwood specialty printing paper
and kraft paper.
Newsprint - Manufacture and sale of newsprint.
Pulp - Manufacture and sale of softwood pulps
Effective January 1, 2003, the Company segregated its kraft paper activities
(previously referred to as containerboard) from its pulp business segment and
included it in its specialties business segment. Segment information for prior
periods has been restated to reflect these changes.
The accounting policies of the segments are the same as described in the
Summary of Significant Accounting Policies in note 2. Segment performance is
evaluated based on operating earnings (loss). Inter-segment sales consist of
pulp transfers at cost.
Norske Skog Canada Limited [89]
Notes to Consolidated Financial Statements
| Amounts expressed in millions of Canadian dollars,
except where otherwise stated |
- -----------------------------------------------------------------------------------
2004
--------------------------------------------------
Sales by Shipment Destination Specialties Newsprint Pulp Total
- ----------------------------- ----------- --------- --------- ---------
Canada $ 114.0 $ 80.7 $ 3.2 $ 197.9
United States 750.6 283.0 - 1,033.6
Asia and Australasia 66.3 115.4 160.1 341.8
Latin America 91.5 74.0 1.3 166.8
Europe and Other 14.8 - 123.3 138.1
- -----------------------------------------------------------------------------------
$ 1,037.2 $ 553.1 $ 287.9 $ 1,878.2
===================================================================================
- -----------------------------------------------------------------------------------
2003
--------------------------------------------------
Sales by Shipment Destination Specialties Newsprint Pulp Total
- ----------------------------- ----------- --------- --------- ---------
Canada $ 101.1 $ 77.7 $ 2.1 $ 180.9
United States 729.8 311.9 - 1,041.7
Asia and Australasia 95.0 102.7 155.6 353.3
Latin America 71.0 46.9 1.0 118.9
Europe and other 5.8 - 119.9 125.7
- -----------------------------------------------------------------------------------
$ 1,002.7 $ 539.2 $ 278.6 $ 1,820.5
===================================================================================
- -----------------------------------------------------------------------------------
2002
--------------------------------------------------
Sales by Shipment Destination Specialties Newsprint Pulp Total
- ----------------------------- ----------- --------- --------- ---------
Canada $ 102.3 $ 84.9 $ 1.5 $ 188.7
United States 706.9 278.7 1.2 986.8
Asia and Australasia 74.2 94.0 109.7 277.9
Latin America 63.5 60.6 5.8 129.9
Europe and Other 1.0 - 119.7 120.7
- -----------------------------------------------------------------------------------
$ 947.9 $ 518.2 $ 237.9 $ 1,704.0
===================================================================================
23. Commitments
The Company has entered into operating leases for property, plant and equipment.
The minimum future payments under various operating leases in each of the years
ended December 31 are as follows:
2005 $ 13.3
2006 12.5
2007 10.0
2008 9.3
2009 7.7
Subsequent years 52.8
- --------------------------------------------------------------------------------
$ 105.6
- --------------------------------------------------------------------------------
The total lease expense amounted to $14.5 million for the year ended December
31, 2004 (2003 - $8.5 million; 2002 - $7.1 million).
Norske Skog Canada Limited [90]
Notes to Consolidated Financial Statements
| Amounts expressed in millions of Canadian dollars,
except where otherwise stated |
24. Guarantees and Indemnities
The Company has, over time, provided various indemnities with respect to tax,
environment, and general representations and warranties on sales of portions of
its business, acquisitions, and commodity contracts. Significant existing
indemnities are as follows:
(a) The Company sold a portion of its operations in June 2001. In this
regard, the Company provided a 10-year environmental indemnity with a
maximum liability to the Company of $12.5 million. This liability has
subsequently been reduced by expenditures related to certain
decommissioning projects. The Company also provided a tax indemnity,
which continues while the relevant tax years of the indemnified
parties remain open to audit and a general indemnity, capped at $5
million, which expired in 2004. The Company is unable to estimate any
potential liability under these indemnities as the amounts are
dependent upon the outcome of future contingent events, the nature and
likelihood of which cannot be determined at this time. As such, no
liability has been recorded for these potential obligations.
(b) In connection with the acquisition of the paper recycling business in
December 2003, the Company has provided indemnities with respect to
representations and warranties related to general corporate matters
and to the shares that have been issued to the vendors. Liability
under these indemnities expires in November 2008, except that the
indemnity related to title to the shares does not expire. The Company
does not expect any Significant claims with respect to these
indemnities. The Company has also provided indemnities with respect to
general environmental matters under its lease of the land and
buildings. The Company has agreed to indemnify the landlord for all
costs, claims and damages related to any release by the Company of any
hazardous substances on the property or the breach by the Company of
its environmental covenants under the lease or any environmental laws.
This indemnity is indefinite and survives after the lease is
terminated. The Company is not liable for pre-existing environmental
conditions.
(c) The Company has entered a building lease agreement whereby it has
agreed to continue making the prescribed lease payments directly to
the financial institution holding the mortgage on the building in the
event the lessor is no longer able to meet its contractual
obligations. As at December 31, 2004, the value of the mortgage was
approximately $14 million. This agreement does not increase the
Company's liability beyond the obligation under the building lease.
25. Contingent Liabilities
In the normal course of its business activities, the Company is subject to a
number of claims and legal actions that may be made by customers, suppliers and
others. While the final outcome with respect to actions outstanding or pending
as at December 31, 2004, cannot be predicted with certainty, the Company
believes either an adequate provision has been made or the resolution will not
have a material effect on the Company's financial position, earnings or cash
flows.
Class Action Lawsuits
In early 2004, the European Commission began an investigation into possible
anti-competitive practices by certain European paper producers. Shortly after
the investigation was announced, the Company and certain of its affiliates were
named, together with a number of other paper producers, in several United States
class action lawsuits alleging an ongoing conspiracy to fix prices of magazine
and other publication papers. The Company believes there is no merit to the
lawsuits, but will nevertheless incur related costs to defend itself.
Norske Skog Canada Limited [91]
Notes to Consolidated Financial Statements
| Amounts expressed in millions of Canadian dollars,
except where otherwise stated |
26. Differences Between United States And Canadian Generally Accepted
Accounting Principles
The Company's consolidated financial statements have been prepared in accordance
with Canadian GAAP. Significant differences to accounting principles generally
accepted in the United States are set forth below:
Earnings adjustments
The following table provides a reconciliation of the net earnings (loss) for the
years ended December 31 under Canadian GAAP to U.S. GAAP:
- ----------------------------------------------------------------------------------------
2004 2003 2002
------- ------- -------
Net earnings (loss) in accordance with Canadian GAAP $ (28.6) $ (84.5) $(123.3)
U.S. dollar revenue hedges (a) (22.8) 67.5 24.6
U.S. dollar long-term debt hedges (b) (3.0) (0.6) 15.6
Fixed to floating interest swaps (c) (5.4) (6.7) 18.0
Commodity swaps (d) (3.3) 3.6 -
Stock based compensation expense (e) (0.6) - -
Income tax impact of above items 11.7 (22.8) (19.6)
- ----------------------------------------------------------------------------------------
Net earnings (loss) in accordance with U.S. GAAP (52.0) (43.5) (84.7)
Unrealized gain on securities held as available-for-sale,
net of deferred income taxes for 2002 of $0.9 million (f) - - (4.4)
Minimum pension liability adjustment, net of deferred
income taxes of $1.5 million (2003 - $1.7 million;
2002 - $7.9 million) (g) (2.9) (3.1) (14.1)
- ----------------------------------------------------------------------------------------
Comprehensive income (loss) in accordance with U.S. GAAP $ (54.9) $ (46.6) $(103.2)
========================================================================================
Basic and diluted net earnings (loss) per share in
accordance with U.S. GAAP (in dollars) $ (0.24) $ (0.21) $ (0.44)
Basic and diluted weighted average number of shares in
accordance with U.S. GAAP (in millions) 214.6 206.6 193.4
- ----------------------------------------------------------------------------------------
Norske Skog Canada Limited [92]
Notes to Consolidated Financial Statements
| Amounts expressed in millions of Canadian dollars,
except where otherwise stated |
Balance Sheet Adjustments
The following table provides a reconciliation of the consolidated balance sheet
components at December 31 from Canadian GAAP to U.S. GAAP.
2004 2003
---------- ----------
Prepaids and other - Canadian GAAP $ 24.6 $ 21.9
U.S. dollar revenue hedges 36.0 58.8
Fixed to floating interest swaps 1.4 --
Commodity swaps 0.3 3.6
---------- ----------
Prepaids and other - U.S. GAAP $ 62.3 $ 84.3
---------- ----------
Other assets - Canadian GAAP $ 27.5 $ 30.2
Intangible assets related to additional minimum pension liability 0.1 0.4
---------- ----------
Other assets - U.S. GAAP $ 27.6 $ 30.6
---------- ----------
Long-term debt - Canadian GAAP $ 823.6 $ 845.8
Adjustment related to fixed to floating interest swaps 0.8 --
---------- ----------
Long-term debt - U.S. GAAP $ 824.4 $ 845.8
---------- ----------
Other long-term obligations - Canadian GAAP $ 233.6 $ 249.8
Additional minimum pension liability 42.4 38.3
U.S. dollar long-term debt hedges (2.4) (5.4)
Cancelled interest rate swaps (4.2) (10.2)
---------- ----------
Other long-term obligations - U.S. GAAP $ 269.4 $ 272.5
---------- ----------
Future income taxes - Canadian GAAP $ 332.9 $ 363.3
Tax effect of pension adjustment (15.0) (13.6)
Tax effect of other adjustments 15.0 26.8
---------- ----------
Future income taxes - U.S. GAAP $ 332.9 $ 376.5
---------- ----------
Shareholders' equity - Canadian GAAP $ 1,042.8 $ 1,069.2
U.S. dollar revenue hedges 36.0 58.8
U.S. dollar long-term debt hedges 2.4 5.4
Fixed to floating interest swaps 4.8 10.2
Commodity swaps 0.3 3.6
Minimum pension liability adjustment (42.3) (37.9)
Tax effect of pension adjustment 15.0 13.6
Tax effect of other adjustments (15.0) (26.8)
---------- ----------
Shareholders' equity - U.S. GAAP $ 1,044.0 $ 1,096.1
---------- ----------
Norske Skog Canada Limited [93]
Notes to Consolidated Financial Statements
| Amounts expressed in millions of Canadian dollars,
except where otherwise stated |
(a) U.S. dollar revenue hedges
Under Canadian GAAP, translation gains and losses on the foreign currency
options and forward contracts to sell foreign currencies formally
designated as hedges are recognized concurrently with the hedged revenue in
Sales. Under U.S. GAAP, the Company does not account for such contracts as
hedges of revenues and, accordingly, recognizes the options and contracts
on a fair value basis at each reporting date, with changes in fair value in
the year included in net income (loss).
(b) U.S. dollar long-term debt hedges
Under Canadian GAAP, prior to January 1, 2004, the Company designated
foreign currency contracts related to its U.S. dollar debt as hedges. The
forward premium or discount on forward foreign currency contracts used to
hedge the U.S. dollar long-term debt was amortized to interest expense over
the term of the forward contract. Effective January 1, 2004, foreign
currency contracts related to US dollar debt are not designated as hedges.
Under U.S. GAAP, the Company does not account for such contracts as hedges
of long-term debt and recognizes the foreign currency contracts on a fair
value basis at each reporting date. Transitional differences arising prior
to January 1, 2004 remain a reconciling difference.
(c) Fixed to floating interest swaps
Under Canadian GAAP, unrealized gains and losses on interest rate swap
contracts designated as hedges are not recognized in the financial
statements. Under U.S. GAAP, the ineffectiveness of the hedge is quantified
and the changes in fair value are recorded in interest expense.
During 2003, the Company terminated prior to maturity, interest rate swap
contracts for cash proceeds of $15.9 million. Under Canadian GAAP, the net
gain is deferred and is being amortized as a reduction of interest expense
based on the U.S. swap curve at the time of termination. Under U.S. GAAP,
there is no deferred amount as the fluctuations in the fair value and
interest payments are recognized in earnings as they arise.
(d) Commodity swaps
Under Canadian GAAP, prior to January 1, 2004, the Company accounted for
commodity swaps as hedges. Effective January 1, 2004, commodity swaps are
not designated as hedges and are recognized at their fair value at each
reporting date, with changes in fair value in the year included in net
income (loss). Under U.S. GAAP, the Company does not designate commodity
swaps as hedges. Transitional differences arising prior to January 1, 2004,
remain a reconciling difference.
(e) Stock based compensation expense
Under Canadian GAAP, effective January 1, 2004, the Company retroactively
applied the fair-value method of accounting to all awards of employee stock
options granted on or after January 1, 2002, without restatement of prior
periods. Under U.S. GAAP, effective January 1, 2004, the Company adopted
the fair value recognition provisions of Statement of Financial Accounting
Standards ("SFS") No. 123, "Accounting for Stock-Based Compensation". Under
the modified prospective method of adoption selected by the Company under
the provisions of SFAS No. 148, "Accounting for Stock-Based Compensation
Transition and Disclosure", compensation cost recognized in 2004 is the
same as that which would have been recognized had the recognition
provisions of SFAS No. 123 been applied from its original effective date.
Results for prior periods have not been restated. Compensation cost
attributable to employee stock options granted prior to January 1, 2002, is
a reconciling difference.
Norske Skog Canada Limited [94]
Notes to Consolidated Financial Statements
| Amounts expressed in millions of Canadian dollars,
except where otherwise stated |
(f) Marketable securities
Under Canadian GAAP, marketable securities are valued at the lower of cost
and quoted market value. Under U.S. GAAP, these securities are classified
as available-for-sale and are carried at fair value. Unrealized gains and
losses, net of tax, are reported as comprehensive income (loss).
(g) Minimum pension liability
Under U.S. GAAP, if the accumulated benefit obligation exceeds the market
value of plan assets, a minimum pension liability for the excess is
recognized to the extent that the liability recorded in the balance sheet
is less than the minimum liability. Any portion of this additional
liability that relates to unrecognized prior service cost is recognized as
an intangible asset while the remainder is charged to comprehensive income
(loss). Canadian GAAP has no such requirement to record a minimum liability
and does not have the concept of comprehensive income.
(h) Comprehensive income
SFAS No. 130, "Reporting Comprehensive Income", requires that a company
classify items of other comprehensive income by their nature in a financial
statement and display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the
equity section of the balance sheet.
(i) Investment in Joint Venture
The investment in PREI, a joint venture, is accounted for under the
proportionate consolidation method for the purposes of Canadian GAAP. Under
U.S. GAAP, investments in joint ventures are accounted for under the equity
method. However, rules prescribed by the SEC permit the use of the
proportionate consolidation method in the reconciliation to U.S. GAAP
provided the joint venture is an operating entity and the significant
financial operating policies are, by contractual arrangement, jointly
controlled by all parties having an equity interest in the joint venture.
Certain financial information is presented in note 20, "Interest in Joint
Venture". Accordingly, for purposes of this U.S. GAAP reconciliation, the
Company has used the proportionate consolidation method and no GAAP
difference arises.
(j) Variable interest entities
Effective January 1, 2004, the Company adopted the Financial Accounting
Standards Board's ("FASB") Interpretation No. 46R, "Consolidation of
Variable Interest Entities" which requires that an enterprise holding other
than a voting interest in a variable interest entity ("VIE") could, subject
to certain conditions, be required to consolidate the VIE if it is
considered the primary beneficiary whereby it would absorb the majority of
the VIE's expected losses and/or receive the majority of its expected
residual returns, or both. The implementation of this requirement has had
no material impact on the U.S. GAAP reconciliation to the Company's
consolidated financial statements for the year ended December 31, 2004. The
Company will adopt substantially similar requirements in Canada in 2005,
and is currently assessing the disclosure and other implications under
Canadian GAAP.
(k) Accounting standard issued but not yet implemented
The FASB issued SFAS No. 151, "Inventory Costs", which provides guidance on
allocating certain costs to inventory. The new standard is effective for
inventory costs incurred during fiscal years beginning after June 15, 2005.
The Company will apply this new standard prospectively and does not expect
that its implementation will have a significant impact on its consolidated
financial position or results of operations.
Norske Skog Canada Limited [95]
2000-2004 COMPARATIVE REVIEW
CONSOLIDATED STATEMENTS OF EARNINGS
(In millions of Canadian dollars) Years ended December 31,
------------------------------------------------------------------
Audited
2004 2003 2002 2001(2) 2000(1)
---------- ---------- ---------- ---------- ----------
Sales(3) $ 1,878.2 $ 1,820.5 $ 1,704.0 $ 1,561.1 $ 1,571.6
Operating expenses
Cost of sales(3) 1,674.9 1,687.5 1,582.1 1,286.6 1,201.0
Selling, general and administrative 50.5 54.7 65.3 63.6 66.2
Amortization 184.1 189.9 178.5 131.2 117.3
---------- ---------- ---------- ---------- ----------
1,909.5 1,932.1 1,825.9 1,481.4 1,384.5
---------- ---------- ---------- ---------- ----------
Operating earnings (loss) (31.3) (111.6) (121.9) 79.7 187.1
Foreign exchange gain (loss) on translation of
long-term debt 53.5 58.2 12.3 (17.1) -
Write-down of property, plant and equipment - (14.2) - - -
Loss on repayment of long-term debt (5.2)
Other income (expense), net 1.2 (3.9) (13.3) (40.2) 0.3
Interest income (expense), net (74.9) (75.0) (76.2) 0.9 47.4
---------- ---------- ---------- ---------- ----------
Earnings (loss) before income taxes (56.7) (146.5) (199.1) 23.3 234.8
Income tax expense (recovery) (28.1) (62.0) (75.8) (21.2) 71.7
---------- ---------- ---------- ---------- ----------
Net earnings (loss) $ (28.6) $ (84.5) $ (123.3) $ 44.5 $ 163.1
========== ========== ========== ========== ==========
(1) Effective July 1, 2000, the Company changed its year-end from June 30 to
December 31. Accordingly, figures reported have been restated to be on a
December 31 year-end basis for this comparative review.
(2) Effective January 1, 2002, the Company adopted the Canadian Institute of
Chartered Accountants recommendations eliminating the deferral and
amortization of foreign currency translation gains and losses on long-lived
monetary items. Prior years have been restated to be on a consistent basis
as applicable.
(3) Effective January 1, 2004, the Company adopted the new Canadian Institute
of Chartered Accountants Section 1100 "Generally Accepted Accounting
Principles" ("GAAP") recommendations which defines use of alternate sources
of Canadian GAAP when a matter is not explicitly addressed by primary
sources of Canadian GAAP. Historically, the Company recorded distribution
costs as a deduction from sales. The Company now relies on the alternate
source of Canadian GAAP and records distribution costs as operating
expenses. As a result, distribution costs have been reclassified from
"Sales" to "Cost of sales".
(4) A special distribution of $12.00 per common share was paid to shareholders
on August 28, 2001.
Norske Skog Canada Limited [96]
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions of Canadian dollars) Years ended December 31,
----------------------------------------------------------
Audited
2004 2003 2002 2001(2) 2000(1)
-------- -------- -------- ---------- --------
Cash provided (used) by:
Operations
Net earnings (loss) $ (28.6) $ (84.5) $ (123.3) $ 44.5 $ 163.1
Items not requiring (providing) cash
Amortization 184.1 189.9 178.5 131.2 117.3
Future income taxes (31.3) (67.9) (91.5) (7.7) 69.9
Increase in long-term obligations 23.5 17.5 19.8 8.5 7.1
Foreign exchange loss (gain) on translation of
long-term debt (53.5) (58.2) (12.3) 17.1 -
Write-down of property, plant and equipment - 14.2 - - -
Loss on sale of Mackenzie pulp operations - - - 31.4 -
Write-off of deferred financing costs - - 15.8 - -
Loss on repayment of long-term debt 5.2 - - - -
Other (10.5) (10.9) (7.6) 13.6 1.6
-------- -------- -------- ---------- --------
88.9 0.1 (20.6) 238.6 359.0
Changes in non-cash working capital (24.4) 22.4 25.8 31.2 (7.8)
-------- -------- -------- ---------- --------
Cash flows provided by operations 64.5 22.5 5.2 269.8 351.2
-------- -------- -------- ---------- --------
Investing
Acquisition of paper recycling business - (32.1) - - -
Acquisition of Pacifica Papers Inc. - - - (74.1) -
Additions to property, plant and equipment (68.0) (81.4) (82.2) (92.7) (90.8)
Proceeds from sale of marketable securities - - 39.2 - -
Proceeds from sale of property, plant and equipment 0.5 0.4 1.5 0.7 0.3
Proceeds from sale of Mackenzie pulp operations - - - 103.8 -
Proceeds from termination of interest rate swaps - 15.9 3.4 - -
Purchase price adjustment 26.6 - - - -
Decrease (increase) in other assets (0.9) 1.1 (4.4) 1.6 4.5
-------- -------- -------- ---------- --------
Cash flows used by investing activities (41.8) (96.1) (42.5) (60.7) (86.0)
-------- -------- -------- ---------- --------
Financing
Special distribution(4) - - - (1,490.3) -
Issue of common shares, net of share issue costs - (0.1) 208.1 - -
Increase (decrease) in revolving loan (12.5) (105.7) 119.1 - -
Issue of long-term debt 333.1 212.7 - 768.7 -
Repayment of long-term debt (266.1) - (386.7) (240.9) -
Premium and expenses on repayment
of long-term debt (15.0) - - - -
Decrease in other long-term obligations (30.0) (27.7) (8.0) (3.6) (5.6)
Deferred financing costs (6.2) (5.6) - (30.7) -
Dividends paid - - - (37.2) (74.5)
-------- -------- -------- ---------- --------
Cash flows provided (used) by financing activities 3.3 73.6 (67.5) (1,034.0) (80.1)
-------- -------- -------- ---------- --------
Cash and cash equivalents, increase (decrease) during year 26.0 - (104.8) (824.9) 185.1
Cash and cash equivalents, beginning of year - - 104.8 929.7 744.6
-------- -------- -------- ---------- --------
Cash and cash equivalents, end of year $ 26.0 $ - $ - $ 104.8 $ 929.7
======== ======== ======== ========== ========
Notes 1-3 refer to page 96.
Norske Skog Canada Limited [97]
CONSOLIDATED BALANCE SHEETS
(In millions of Canadian dollars) As at December 31,
--------------------------------------------------------------
Audited
2004 2003 2002 2001(2,3) 2000(1)
---------- ---------- ---------- ---------- ----------
Assets
Current assets
Cash and cash equivalents $ 26.0 $ - $ - $ 104.8 $ 929.7
Marketable securities - - - 34.4 -
Accounts receivable 236.8 238.2 279.1 309.2 283.4
Inventories 258.1 235.9 242.7 230.5 191.7
Prepaids and other 24.6 21.9 9.2 4.1 5.0
---------- ---------- ---------- ---------- ----------
545.5 496.0 531.0 683.0 1,409.8
Property, plant and equipment 2,172.9 2,290.2 2,326.6 2,416.4 1,298.5
Other assets 27.5 30.2 39.5 60.4 17.0
---------- ---------- ---------- ---------- ----------
$ 2,745.9 $ 2,816.4 $ 2,897.1 $ 3,159.8 $ 2,725.3
========== ========== ========== ========== ==========
Liabilities
Current liabilities
Accounts payable and accrued liabilities $ 285.5 $ 267.3 $ 303.7 $ 303.5 $ 202.7
Current portion of long-term debt - - - 10.7 -
---------- ---------- ---------- ---------- ----------
285.5 267.3 303.7 314.2 202.7
---------- ---------- ---------- ---------- ----------
Long-term debt 823.6 845.8 886.2 1,163.9 -
Other long-term obligations 233.6 249.8 177.0 144.7 88.4
Future income taxes/deferred credits 360.4 384.3 405.5 500.5 269.0
---------- ---------- ---------- ---------- ----------
1,703.1 1,747.2 1,772.4 2,123.3 560.1
---------- ---------- ---------- ---------- ----------
Shareholders' Equity
Share capital 913.6 913.6 884.6 673.1 1,262.6
Contributed surplus 4.8 - - - -
Retained earnings 124.4 155.6 240.1 363.4 902.6
---------- ---------- ---------- ---------- ----------
1,042.8 1,069.2 1,124.7 1,036.5 2,165.2
---------- ---------- ---------- ---------- ----------
$ 2,745.9 $ 2,816.4 $ 2,897.1 $ 3,159.8 $ 2,725.3
========== ========== ========== ========== ==========
Notes 1-3 refer to page 96.
Norske Skog Canada Limited [98]
OTHER FINANCIAL AND OPERATIONAL INFORMATION
(In millions of Canadian dollars, except where otherwise stated)
Years ended December 31,
----------------------------------------------------------------
2004 2003 2002 2001(2) 2000(1,2)
------- ------- ------- ------- ---------
Selected Financial Information
EBITDA $ 152.8 $ 78.3 $ 56.6 $ 210.9 $ 304.4
EBITDA margin(5) 8.1% 4.3% 3.3% 13.5% 19.4%
Weighted average common shares outstanding
(in millions) 214.6 206.6 193.4 141.1 124.2
Basic and diluted earnings (loss) per share
(in dollars) $ (0.13) $ (0.41) $ (0.64) $ 0.32 $ 1.31
------- ------- ------- ------- -------
Working capital(6) $ 234.0 $ 228.7 $ 240.4 $ 252.1 $ 283.8
Current assets to current liabilities(6) 1.82 1.86 1.83 1.98 2.45
Total debt to total capitalization(7,8) 44% 44% 44% 53% 0%
Net debt to net capitalization(9,10) 43% 44% 44% 50% N/A
Common shares outstanding at end of year
(in millions) 214.6 214.6 205.9 174.8 124.2
Book value per share (in dollars) $ 4.86 $ 4.98 $ 5.46 $ 5.93 $ 17.43
------- ------- ------- ------- -------
Share prices
High $ 4.95 $ 6.06 $ 7.70 $ 19.99 $ 18.90
Low 3.30 2.93 4.65 5.30 14.35
Close 3.77 4.17 5.45 6.80 16.75
------- ------- ------- ------- -------
Benchmark prices
SC-A paper, 35 lb. (US$ per ton) $ 713 $ 675 $ 669 $ 807 $ 821
LWC paper, No. 5, 40 lb. (US$ per ton) 726 688 678 803 864
Telephone directory paper, 22.1 lb
(US$ per ton) 650 654 695 730 705
Newsprint 48.8 gsm, average West Coast
Delivery (US$ per tonne) 544 493 456 578 562
NBSK pulp, Northern Europe Delivery
(US$ per tonne) 618 525 458 531 681
------- ------- ------- ------- -------
Sales (000 tonnes)
Specialities 1,116 1,085 960 573 920
Newsprint 755 769 750 604 686
Pulp 406 421 381 568 107
------- ------- ------- ------- -------
Notes 1-4 refer to page 96.
5 EBTIDA margin is defined as EBITDA as a percentage of sales.
6 Working capital and current assets to current liabilities, for these
purposes, exclude current portion of long-term debt.
7 Total debt comprises long-term debt, including current portion.
8 Total capitalization comprises total debt and shareholders' equity.
9 Net debt comprises total debt less cash on hand.
10 Net capitalization comprises net debt and shareholders' equity.
Norske Skog Canada Limited [99]