MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
The accompanying consolidated financial statements of IPSCO Inc., and all
information in this report, were prepared by management, which is responsible
for its integrity and objectivity.
The financial statements have been prepared in accordance with Canadian
generally accepted accounting principles and necessarily include some estimates
based upon management's judgments. The significant accounting policies, which
management believes appropriate for the Company, are described in Note 2 to the
financial statements. Financial and operating data presented elsewhere in the
annual report are consistent with the information contained in the financial
statements.
The integrity and reliability of IPSCO's reporting systems are achieved through
the use of formal policies and procedures, the careful selection and development
of employees and an appropriate division of responsibilities. Internal
accounting controls are continually monitored by an internal audit staff through
ongoing reviews and comprehensive audit programs. IPSCO regularly communicates
throughout the organization the requirement for employees to maintain high
ethical standards in their conduct of the Company's affairs.
The Board of Directors is responsible for ensuring that management fulfills its
responsibilities for financial reporting and internal control and exercises this
responsibility principally through the Audit Committee of the Board. The Board
of Directors annually appoints this Audit Committee which is comprised of
directors who are neither employees of IPSCO nor of companies affiliated with
the Company. This committee meets regularly with management, the head of the
internal audit department, and the shareholders' auditors to review significant
accounting, reporting and internal control matters. Both the internal and
shareholders' auditors have unrestricted access to the Audit Committee.
Following its review of the financial statements and annual report and
discussions with the shareholders' auditors, the Audit Committee reports to the
Board of Directors prior to the Board's approval of the financial statements and
annual report. The Audit Committee recommends the appointment of the Company's
external auditors, who are appointed by the Company's shareholders at its annual
meeting.
Ernst & Young LLP, the shareholders' auditors, have performed an independent
audit in accordance with Canadian generally accepted auditing standards and have
attested to the fairness, in all material respects, of the presentation of the
financial statements. Their report follows.
/s/ David Sutherland /s/ Robert Ratliff
David Sutherland Robert Ratliff
Vice President and Chief Financial President and Chief Executive Officer
Officer
January 28, 2003
1
AUDITORS' REPORT
To the Shareholders of IPSCO Inc.
We have audited the consolidated statements of financial position of IPSCO Inc.
as at December 31, 2002 and 2001 and the consolidated statements of income and
retained earnings, and cash flows for each of the years in the three year period
ended December 31, 2002. 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, 2002
and 2001 and the results of its operations and its cash flows for each of the
years in the three year period ended December 31, 2002 in accordance with
Canadian generally accepted accounting principles.
/s/ Ernst & Young LLP
Chicago, Illinois
January 28, 2003
2
- --------------------------------------------------------------------------------
IPSCO INC. CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
- --------------------------------------------------------------------------------
As at December 31 (thousands of United States dollars)
NOTES 2002 2001
CURRENT ASSETS
Cash and cash equivalents $ 22,859 $ 37,492
Accounts receivable
Trade, less allowances 135,421 106,770
Other, including current portion 18,331 9,938
of mortgage receivable 255,410 239,394
Inventories 3 2,847 2,031
Prepaid expenses 41,402 44,490
---------------------------
Future income taxes 4 476,270 440,115
---------------------------
NON-CURRENT ASSETS
Capital assets 5 1,134,357 1,155,901
Mortgage receivable 6 5,403 --
Deferred charges, less amortization 2,785 2,026
Deferred pension asset 7 3,911 --
Future income taxes 4 121,586 126,123
---------------------------
1,268,042 1,284,050
---------------------------
TOTAL ASSETS $ 1,744,312 $ 1,724,165
===========================
CURRENT LIABILITIES
Bank indebtedness 8 $ -- $ 35,000
Accounts payable and accrued charges 9 106,155 121,464
Accrued payroll and related liabilities 13,775 15,315
Income and other taxes payable -- 2,111
Current portion of long-term debt 8 35,386 21,100
Other current liabilities 16,142 13,926
---------------------------
171,458 208,916
---------------------------
LONG-TERM LIABILITIES
Long-term debt 8 342,202 386,809
Deferred pension liability 7 -- 234
Future income taxes 4 143,229 142,668
---------------------------
485,431 529,711
---------------------------
SHAREHOLDERS' EQUITY
Preferred shares 10 98,553 98,545
Common shares 11 351,311 256,163
Subordinated notes 12 104,250 104,250
Retained earnings 13 494,599 491,777
Cumulative translation adjustment 38,710 34,803
---------------------------
1,087,423 985,538
---------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,744,312 $ 1,724,165
===========================
Commitments and contingencies 19 & 22
The accompanying notes are an integral part of the consolidated financial
statements.
Approved by the Board
/s/ Burton Joyce /s/ David Sutherland
Burton Joyce, Director David Sutherland, Director
3
- --------------------------------------------------------------------------------
IPSCO INC. CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
- --------------------------------------------------------------------------------
Years Ended December 31 (thousands of United States dollars except per share
data)
NOTES 2002 2001 2000
Sales $ 1,081,709 $ 903,743 $ 949.263
------------------------------------------
Cost of sales
Manufacturing and raw material 925,343 770,788 764,633
Amortization of capital assets 51,049 37,107 35,257
------------------------------------------
976,392 807,895 799,890
------------------------------------------
Gross income 105,317 95,848 149,373
Selling, research and administration 55,155 57,527 62,076
------------------------------------------
Operating income 50,162 38,321 87,297
Other expenses (income)
Interest on long-term debt 8 23,821 6,634 6,934
Other interest expense (income), net 174 (928) (800)
Foreign exchange loss 938 882 365
Gain on sale of assets held for sale 6 (6,464) -- --
Litigation settlement 22 -- (39,000) --
Provision for loss on assets held for sale 5 -- 10,000 --
------------------------------------------
Income before income taxes 31,693 60,733 80,798
Income taxes 4 11,414 21,865 23,125
------------------------------------------
NET INCOME 20,279 38,868 57,673
Dividends on preferred shares,
including part VI.I tax 10 5,608 5,692 5,935
Interest on subordinated notes,
net of income tax 12 5,771 5,771 4,890
------------------------------------------
NET INCOME AVAILABLE TO
COMMON SHAREHOLDERS $ 8,900 $ 27,405 $ 46,848
==========================================
EARNINGS PER COMMON SHARE
BASIC 14 $ 0.19 $ 0.67 $ 1.15
==========================================
DILUTED 14 $ 0.19 $ 0.66 $ 0.19
==========================================
RETAINED EARNINGS AT BEGINNING OF YEAR $ 491,777 $ 475,551 $ 442,571
NET INCOME 20,279 38,868 57,673
------------------------------------------
512,056 514,419 500,244
Dividends on preferred shares,
including part VI.I tax 10 5,608 5,692 5,935
Interest on subordinated notes,
net of income tax 12 5,771 5,771 4,890
Dividends on common shares 13 6,078 11,179 13,748
Issue costs, net of income tax 12 -- -- --
------------------------------------------
RETAINED EARNINGS AT END OF YEAR $ 494,599 $ 491,777 $ 475,551
==========================================
The accompanying notes are an integral part of the consolidated financial
statements.
4
- --------------------------------------------------------------------------------
IPSCO INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
Years Ended December 31 (thousands of United States dollars)
NOTES 2002 2001 2000
CASH DERIVED FROM (APPLIED TO)
Operating activities
Working capital provided by operations 15 $ 72,397 $ 57,766 $ 92,166
Change in non-cash operating working capital 15 (59,795) 50,557 (69,412)
------------------------------------------
12,602 108,323 22,754
------------------------------------------
Financing activities
Proceeds from issuance of common shares 11 90,670 -- --
Proceeds from issuance of common shares
pursuant to share option plan 11 2,953 391 115
Common share dividends (6,078) (11,179) (13,748)
Preferred share dividends (5,254) (5,337) (5,540)
Issue of subordinated notes, net of issue costs 12 -- -- 89,824
Subordinated notes interest (8,500) (8,500) (3,161)
Proceeds from sale-leaseback of capital assets 19 -- 15,000 158,001
Issue of long-term debt 8 83,300 120,000 70,000
Repayment of long-term debt 8 (114,400) (73,100) (21,200)
------------------------------------------
42,691 37,275 274,391
------------------------------------------
Investing activities
Expenditures for capital assets 16 (34,211) (155,775) (368,190)
Proceeds from sale of assets held for sale 6 1,466 -- --
Investment in partnership 17 (1,706) (1,993) (2,075)
------------------------------------------
(34,451) (157,768) (370,265)
------------------------------------------
Effect of exchange rate changes on cash
and cash equivalents (475) (3,489) (3,560)
------------------------------------------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS LESS BANK INDEBTEDNESS 20,367 (15,659) (76,680)
CASH AND CASH EQUIVALENTS LESS BANK
INDEBTEDNESS AT BEGINNING OF YEAR 2,492 18,151 94,831
------------------------------------------
CASH AND CASH EQUIVALENTS LESS BANK
INDEBTEDNESS AT END OF YEAR $ 22,859 $ 2,492 $ 18,151
==========================================
The accompanying notes are an integral part of the consolidated financial
statements.
5
- --------------------------------------------------------------------------------
IPSCO INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Years Ended December 31 (thousands of United States dollars except per share
data)
1. NATURE OF OPERATIONS
IPSCO Inc. is a producer of steel products. The Company's products are sold
primarily in Canada and the United States.
The Company currently employs approximately 2,300 people, of whom approximately
56% are non-unionized personnel and approximately 44% are represented by trade
unions. The Company is a party to separate collective bargaining agreements with
a term to July 31, 2006 with locals of the United Steelworkers of America (USWA)
which represent unionized employees in Regina and Calgary. These employees
account for approximately 89% of the Company's unionized employees.
In 2002, 2001 and 2000, no individual customer accounted for 10% of sales. At
December 31, 2002 and 2001, no customer represented 10% of the accounts
receivable balance.
2. SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared in accordance with
Canadian generally accepted accounting principles, and include certain estimates
based on management's judgments. These estimates affect the reported amounts of
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the year.Actual results may differ from
those estimates. The accounting policies followed by the Company also conform in
all material respects with accounting principles generally accepted in the
United States, except as described in Note 21.
REPORTING CURRENCY
Assets and liabilities of the Company's operations having a functional currency
other than the U.S. dollar are translated into U.S. dollars using the exchange
rate in effect at the year-end and revenues and expenses are translated at the
average rate during the year. Exchange gains or losses on translation of the
Company's net equity investment in these operations are deferred as a separate
component of shareholders' equity.
The change in the cumulative translation adjustment results primarily from
fluctuations of the Canadian dollar against the U.S. dollar.
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its subsidiaries. Significant inter-company transactions are eliminated on
consolidation.
CASH EQUIVALENTS
Cash equivalents are securities of the government of Canada and its provinces,
the government of the United States, banks, and other corporations, with a
maturity of less than three months when purchased. These highly liquid
securities are short-term and have fixed interest rates.
INVENTORIES
Inventories are valued at the lowest of average cost, replacement cost and net
realizable value.
INCOME TAXES
The Company follows the liability method of tax allocation in accounting for
income taxes. Under this method, future tax assets and liabilities are
determined based on differences between the financial reporting and tax bases of
assets and liabilities, and measured using the substantially enacted tax rates
and laws that will be in effect when the differences are expected to reverse.
6
------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
CAPITAL ASSETS
Capital assets are stated at cost. For major projects under construction, the
Company capitalizes interest based on expenditures incurred to a maximum of
interest costs on debt.
Amortization is provided on the straight-line basis at the following annual
rates:
Buildings 4%
Machinery and Equipment 4% to 33%
Amortization is provided on all assets acquired as they come into production.
For certain major projects, the units-of-production method is used until a
substantial level of production is reasonably sustained.
REPAIR AND MAINTENANCE COSTS
Repair and maintenance costs are expensed as incurred except for the estimated
cost of major overhauls and repairs which are accrued over the period between
the major overhauls and repairs.
DEFERRED CHARGES
Financing costs relating to long-term debt are deferred and amortized over the
term of the related debt and included in interest expense for the year.
GOODWILL AND OTHER INTANGIBLE ASSETS
Effective January 1, 2002, the Company adopted the recommendations of The
Canadian Institute of Chartered Accountants Handbook Section 3062, Goodwill and
Other Intangible Assets. This standard requires that goodwill and intangible
assets with indefinite lives are no longer amortized; rather, their carrying
value is reviewed annually for impairment. The adoption of this standard did not
materially affect the Company.
PENSION EXPENSE AND DEFERRED PENSION BALANCE
The cost of pension benefits earned by the employees covered by defined benefit
plans is actuarially determined using the projected benefit method prorated on
service and management's best estimate of expected plan investment performance,
salary escalation, terminations, and retirement ages of plan members.
Adjustments for plan amendments, changes in assumptions and actuarial gains and
losses are charged to operations over the expected average remaining service
life of the employee group which is approximately 12 years. The costs of pension
benefits for defined contribution plans are charged to operations as
contributions are earned.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument:
CASH AND CASH EQUIVALENTS
The carrying value of cash and cash equivalents approximates its fair
value.
MORTGAGE RECEIVABLE
The fair value of the mortgage receivable has been estimated based on
current rates for similar instruments with similar maturities.At
December 31, 2002, the estimated fair value of the mortgage receivable
was $6,332.
LONG-TERM DEBT
The fair value of the Company's long-term debt has been estimated based
on current market prices.Where no market price is available, an
estimate based on current rates for similar instruments with similar
maturities has been used to approximate fair value.
NATURAL GAS SWAP
The Company has entered into a swap agreement to hedge the cost of
purchasing natural gas. The agreement fixes the price the Company must
pay for 1,500 gigajoules per day from November 1, 2001 through October
31, 2004. As at December 31, 2002 the unrealized loss under the swap
agreement was $78 (2001 - $1,892).
7
- ------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
STOCK BASED COMPENSATION
The Company has a share option plan as described in Note 11 (c). No
compensation expense is recognized when the share options are issued to
employees since the options are issued at market value on the date of
the grant. Any consideration paid by employees on exercise of share
options is credited to share capital.
The Company has a deferred share unit plan as described in Note 11 (d).
Compensation expense equal to the amount deferred is recorded. The
liability relating to the deferred share units is revalued quarterly
based on the market value of the Company's common shares and the
resulting adjustment recorded in income.
REVENUE RECOGNITION
Sales and related costs are recognized upon transfer of ownership which
coincides with acceptance of and shipment of products to customers.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company enters into hedging transactions, from time to time, in
order to manage its exposure to changes in energy commodity prices.
Gains or losses relating to derivative instruments are deferred and
recognized in the same period and in the same financial statement
category as the gains or losses on the corresponding hedged
transactions. Premiums paid with respect to derivatives are deferred
and amortized to income over the term of the hedge.
RECLASSIFICATION
Certain of the prior year's figures have been reclassified to conform
with the presentation adopted for the current year.
3. INVENTORIES
2002 2001
Finished goods $ 99,489 $105,105
Work-in-process 70,492 62,029
Raw materials 31,831 18,755
Supplies 53,598 53,505
------------------------
$255,410 $239,394
========================
4. INCOME TAXES
a) The components of income (loss) before income taxes are
summarized below:
2002 2001 2000
Canada $48,452 $61,033 $77,785
United States (16,759) (300) 3,013
------------------------------
$31,693 $60,733 $80,798
==============================
b) The provision for income taxes is summarized as follows:
2002 2001 2000
Current
Canada $ 3,695 $ 30,501 $23,003
United States (3,169) 5,020 (4,819)
------------------------------
526 35,521 18,184
------------------------------
Future
Canada 14,642 (5,995) 6,649
United States (3,754) (7,661) (1,708)
------------------------------
10,888 (13,656) 4,941
------------------------------
$11,414 $ 21,865 $23,125
==============================
8
------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
c) Income tax expense differs from the amount computed by
applying the corporate income tax rates (Canadian Federal and
Provincial) to income before income taxes. The reasons for
this difference are as follows:
2002 2001 2000
Corporate income tax rate 41.1% 45.9% 46.1%
----------------------------------------
Provision for income taxes
based on corporate income
tax rate $ 13,026 $ 27,870 $ 37,240
Increase (decrease) in taxes
resulting from
Manufacturing and processing
profit (6,604) (6,748) (9,672)
Large corporation tax 895 880 857
Income taxed at different
rates in the United States 3,000 10,800 8,000
Valuation allowance 3,474 1,015 206
----------------------------------------
Other $ 11,414 $ 21,865 $ 23,125
========================================
d) Future income taxes are comprised of the following:
2002 2001
Future tax assets
Accounting provisions not
currently deductible for
tax purposes $ 37,100 $ 34,669
Capitalized general and
administration 4,296 9,821
Net operating loss carry-forwards 141,852 141,942
Pension expense in excess of
contributions -- 517
Other 1,540 2,464
-------------------------
Total future tax assets 184,788 189,413
-------------------------
Future tax liabilities
Tax depreciation in excess of
accounting amortization 133,671 129,958
Pension contributions in excess
of expense 1,420 --
Foreign exchange gain on debt 3,414 9,128
Other 4,724 3,582
-------------------------
Total future tax liabilities 143,229 142,668
-------------------------
Valuation allowance 21,800 18,800
-------------------------
Net future income tax asset $ 19,759 $ 27,945
=========================
e) At December 31, 2002, United States subsidiaries of the
Company had accumulated net operating losses carried forward
of $355,179 for which the future tax benefits have been
recorded. The related tax benefits can be carried forward and,
subject to certain limitations, offset against income tax
expense arising in future periods up to the year 2021. In
determining the valuation allowance for net future income
taxes at December 31, 2002, the Company has considered certain
tax planning strategies that it believes to be prudent and
feasible.
9
- ------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
5. CAPITAL ASSETS
2002 2001
ACCUMULATED ACCUMULATED
COST AMORTIZATION NET COST AMORTIZATION NET
-------------------------------------- --------------------------------------
Land and land
improvements $ 55,789 $ -- $ 55,789 $ 55,741 $ -- $ 55,741
Buildings 312,724 38,775 93,949 130,165 33,956 96,209
Machinery and
equipment 1,213,168 257,450 955,718 1,166,975 212,889 954,086
Construction
in progress 14,085 -- 14,085 35,184 -- 35,184
-------------------------------------- --------------------------------------
1,415,766 296,225 1,119,541 1,388,065 246,845 1,141,220
Assets held for sale 24,931 10,115 14,816 26,441 11,760 14,681
-------------------------------------- --------------------------------------
$1,440,697 $ 306,340 $1,134,357 $1,414,506 $ 258,605 $1,155,901
====================================== ======================================
During the year, $nil (2001 - $20,523, 2000 - $17,055) of interest
costs were capitalized in connection with major capital asset projects.
Certain capital assets, which are not employed in production, have been
segregated pending their ultimate disposition and are carried at an
amount not exceeding management's best estimate of net realizable
value. During 2001, the Company wrote down the carrying value of these
assets by $10,000 to reflect the Company's valuation. The Company's
valuation includes significant estimates concerning the cost to
complete environmental remediation activities, as well as in estimating
the ultimate net recovery value of the property. The estimated
environmental costs could change depending on the remediation method
used. The Company's estimates of net sales value could be impacted by
the prevailing economic conditions and the Company's ability to obtain
necessary zoning and other approvals. See Note 6 for discussion of
asset sales.
6. MORTGAGE RECEIVABLE AND SALE OF ASSETS HELD FOR SALE
During 2002, the Company sold certain of its assets held for sale for
cash of $1,466 and a mortgage of $6,338. The transaction resulted in
gain of $6,464. The mortgage bears interest at 5% for the first two
years, and at bank prime plus 1/2% for the remaining term. Minimum
principal payments due in each of the next five years are as follows:
2003 $ 954
2004 954
2005 954
2006 954
2007 2,541
------
6,357
Current portion, included in
other accounts receivable 954
------
$5,403
======
7. PENSION PLANS
The Company provides retirement benefits for substantially all of its
employees under several defined benefit and defined contribution plans.
The defined benefit plans provide benefits that are based on a
combination of years of service and an amount that is either fixed or
based on final earnings. The defined contribution plans restrict the
Company's matching contributions to 5% of each participating employee's
annual earnings.
10
------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
The Company's policy with regard to the defined benefit plans is to
fund the amount that is required by governing legislation. Pension plan
assets are invested in Canadian and U.S. equities and Canadian fixed
income instruments with no investment in securities of the Company.
During 2002, amendments were made to increase benefits payable under
plans for the Company's Canadian unionized employees.
Net pension expense attributable to the Company's pension plans for
2002, 2001, and 2000 included the following components:
2002 2001 2000
Defined benefit plans
Service cost for benefits earned $ 3,288 $ 2,966 $ 2,899
Interest cost on benefit obligations 7,029 6,389 6,522
Expected return on plan assets (6,993) (7,303) (6,965)
Net amortization 443 -- --
---------------------------
3,767 2,052 2,456
Defined contribution plans 3,050 2,743 1,917
---------------------------
Net pension expense $ 6,817 $ 4,795 $ 4.373
===========================
The following table sets forth the defined benefit plans' funded status
and amount included in the deferred pension balance in the Company's
statement of financial position at December 31, 2002 and 2001:
2002 2001
Benefit obligation at beginning of year $ 97,449 $101,256
Service cost for benefits earned 3,440 3,088
Interest cost on benefit obligation 7,029 6,389
Plan amendments 8,344 --
Actuarial losses (gains) 11,076 (701)
Benefit payments (6,603) (6,587)
Currency translation 1,162 (5,996)
-------------------
Benefit obligation at end of year 121,897 97,449
-------------------
Market value of plan assets at beginning
of year 87,554 94,101
Actual return on plan assets (5,328) (484)
Employer contributions 7,809 5,855
Plan participants contributions 253 158
Benefit payments (6,603) (6,587)
Currency translation 1,092 (5,489)
-------------------
Market value of plan assets
at end of year 84,777 87,554
-------------------
Funded status at end of year (37,120) (9,895)
Item not recognized in earnings
Unamortized actuarial losses and
plan amendments 41,031 9,661
-------------------
Deferred pension asset (liability) $ 3,911 $ (234)
===================
Amounts applicable to the Company's pension plans with an accumulated
benefit obligation in excess of plan assets are:
2002 2001
Projected benefit obligation $116,272 $ 67,721
===================
Accumulated benefit obligation $111,783 $ 65,961
===================
Market value of plan assets $ 79,702 $ 59,012
===================
11
- ------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
The significant actuarial assumptions adopted in measuring the
Company's accrued benefit obligations as at December 31, 2002 and 2001
follow. Variances between such estimates and actual experience, which
may be material, are amortized over the employees' average remaining
service life.
2002 2001
Weighted average discount rate 6.6% 6.6%
Expected long-term rate of return on plan assets 7.0% 8.0%
Weighted average rate of compensation increase 3.8% 3.7%
8. DEBT
(a) Long-term debt
CARRYING VALUE FAIR VALUE
2002 2001 2002 2001
------------------- -------------------
10.58% Unsecured note, payable in three
remaining equal annual installments
with the next payment due
September 1, 2003 $ 3,300 $ 4,400 $ 3,576 $ 4,774
6.94% Unsecured notes, payable in two
remaining equal annual installments
with the next payment due
April 1, 2003 40,000 60,000 40,541 61,061
7.32% Unsecured notes, payable in seven
equal annual installments
commencing April 1, 2003 100,000 100,000 104,230 99,500
7.80% Unsecured debentures, (CDN $100,000)
maturing and payable
December 1, 2006 63,573 62,794 63,605 65,639
6.00% Unsecured loan, maturing and payable
June 1, 2007. The Company has the option
at maturity to extend the term of the
loan to no later than June 1, 2027 at
an interest rate to be negotiated 14,715 14,715 14,566 13,584
8.11% Unsecured financing, maturing and payable
November 1, 2009. The Company has the
option at maturity to extend the term of
the loan to no later than November 1,
2029 at an interest rate to be negotiated 28,000 28,000 29,459 27,890
6.875% Unsecured financing, maturing and payable
May 1, 2010. The Company has the option
at maturity to extend the term of the
loan to no later than May 1, 2030 at an
interest rate to be negotiated 10,000 10,000 9,797 9,181
Various Bank lines of credit (b) 118,000 128,000 118,000 128,000
------------------- -------------------
377,588 407,909 383,774 409,629
Less current portion of long-term debt (35,386) (21,100) (41,330) (23,529)
------------------- -------------------
$342,202 $386,809 $342,444 $386,100
=================== ===================
Fair value of debt has been estimated on the basis described in Note 2.
12
------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
b) Bank lines of credit
At December 31, 2002, the Company had bank lines of credit aggregating
U.S. $250,000 (2001 - U.S. $250,000), which can be drawn in Canadian or
U.S. currency, of which U.S. $118,000 (2001 - U.S. $163,000) had been
drawn down other than letters of credit of CDN $13,049, U.S. $3,775
(2001 - CDN $13,413, U.S. $3,775). Bank lines of credit are comprised
of a U.S. $200,000 (2001 - U.S. $200,000) revolving term facility that
expires March 4, 2005 and a U.S. $50,000 (2001 - U.S. $50,000) 364-day
facility that expires February 18, 2003. Both facilities bear interest
at spreads over the Canadian prime rate, the U.S. base rate, Canadian
Bankers' Acceptances Reference Discount Rate or U.S. dollar LIBOR and
are not secured by specific assets of the Company.
At December 31, 2002, a partnership in which the Company has a 100%
(2001 - 91%) residual interest had short-term bank lines of credit
aggregating CDN $16,652 (2001 - CDN $16,652) of which CDN $Nil (2001 -
CDN $Nil) had been drawn down. These bank lines of credit are reviewed
at least annually and are revolving operating and term facilities that
bear interest at either the Canadian prime rate or the U.S. base rate
and are secured by certain assets of the partnership.
Minimum payment requirements on long-term debt arrangements, without
exercising the options to extend the terms outstanding, are as follows:
2003 $ 35,386
2004 35,386
2005 133,386
2006 77,859
2007 29,001
--------
311,018
2008 - 2010 66,570
--------
$377,588
========
9. ACCOUNTS PAYABLE AND ACCRUED CHARGES
Included in accounts payable and accrued charges is an accrual to cover
the costs of major overhauls and repairs. Timing of these expenditures
is dictated by future events and market conditions. At December 31,
2002 and 2001, the amounts accrued are $16,115 and $13,578
respectively.
10. PREFERRED SHARES
a) Authorized
The Company is authorized to issue unlimited first and second preferred
shares. The first preferred shares rank in priority to the second
preferred shares and the common shares as to payment of dividends and
the distribution of assets. The first and second preferred shares may
be issued in series and the directors of the Company may fix, before
issuance, the further rights, privileges, restrictions and conditions
attached thereto.
The Company has issued first preferred shares, Series 1 (the Series 1
Preferred Shares) at a price of CDN $25.00 per Series 1 Preferred Share
with a fixed cumulative preferential dividend as and when declared by
the directors equal to 5.50% per annum payable quarterly on the 15th of
February, May, August and November of each year.
The Series 1 Preferred Shares are non-voting. However, if the Company
fails to declare and pay eight quarterly dividends, consecutive or
otherwise, and so long as any of those dividends are in arrears, the
Series 1 Preferred Shares become voting. The Series 1 Preferred Shares
may be redeemed in whole or in part by the Company at any time on or
after May 15, 2004 for CDN $25.00 per share plus accrued and unpaid
dividends. On or after May 15, 2004, the Company may elect to convert
each Series 1 Preferred Share into that number of common shares
determined 54 Notes to Consolidated Financial Statements by dividing
CDN $25.00 plus accrued and unpaid dividends by the greater of CDN
$3.00 and 95% of the market price of the common shares. In addition, on
or after August 15, 2004, the holders have the option to convert each
Series 1 Preferred Share into that number of common shares determined
13
- ------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
by dividing CDN $25.00 plus accrued and unpaid dividends by the greater
of CDN $3.00 and 95% of the market price of the common shares subject
to the Company's right to redeem the Series 1 Preferred Shares, arrange
sales to substitute purchasers or a combination thereof.
Unless all dividends are paid to the most recent dividend date, the
Company may not: 1) pay cash dividends on shares ranking junior to the
Series 1 Preferred Shares; 2) redeem, purchase or otherwise retire
shares ranking on parity with or junior to the Series 1 Preferred
Shares; or 3) redeem, purchase or otherwise retire less than all of the
Series 1 Preferred Shares.
The Series 1 Preferred Shares, including accrued and unpaid cumulative
dividends, have been classified as equity since the Company has the
unrestricted ability to settle the Series 1 Preferred Shares and
related dividends by issuing its own common shares.
b) Issued
The Series 1 Preferred Shares amount at December 31 is comprised of:
2001 2002
NUMBER AMOUNT NUMBER AMOUNT
------------------- -------------------
Issued for cash 6,000,000 $097,829 6,000,000 $097,829
Accrued dividends -- 724 -- 716
------------------- -------------------
Balance at end of year 6,000,000 $098,553 6,000,000 $098,545
=================== ===================
11. COMMON SHARES
a) Authorized
The Company is authorized to issue unlimited common shares.
b) Issued
In February 2002, the Company issued, for cash, 6,500,000 common shares
at an issue price of CDN $23.25. Gross proceeds of U.S. $94,761 have
been reduced by the related share issue expenses of $4,073, net of
income taxes of $1,507.
In July 2002, the Company granted 4,400 restricted shares to an officer
of the Company whose salaried compensation was reduced by the fair
value of the shares at the date of the award. Compensation expense was
recorded in an amount equal to the fair market value of the shares as
at the date of the grant. The rights of the recipient to dispose of the
shares are restricted for three years from the date of the grant.
Following is the continuity of common shares outstanding:
2002 2001 2000
NUMBER AMOUNT NUMBER AMOUNT NUMBER AMOUNT
-------------------- -------------------- --------------------
Balance at
beginning of year 40,843,536 $256,163 40,812,936 $255,772 40,796,436 $255,657
Issued for cash 6,500,000 92,195 -- -- -- --
Issue of restricted shares 4,400 61 -- -- -- --
Exercise of share options 319,551 2,892 30,600 391 16,500 115
-------------------- -------------------- --------------------
Balance at end of year 47,667,487 $351,311 40,843,536 $256,163 40,812,936 $255,772
==================== ==================== ====================
14
------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
c) Share Option Plan
The Company has a share option plan under which common shares are
reserved for directors, officers and employees. These options, which
are exercisable within 10 years, are to be granted at a price
established by the Board of not less than the last Toronto Stock
Exchange board lot trading price on the day of the grant. The options
vest over one to three years. Outstanding options at December 31, 2002
expire between 2003 and 2012.
Following is the continuity of granted options outstanding in Canadian
dollars:
2002 2001 2000
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
NUMBER PRICE NUMBER PRICE NUMBER PRICE
-------------------- -------------------- --------------------
Balance at
beginning of year 3,311,955 $22.47 3,085,959 $22,70 2,471,325 $24.39
Options granted 439,500 22.22 284,885 20.00 654,760 16.13
--------- --------- ---------
3,751,455 22.44 3,370,844 22.48 3,126,085 22.66
Options exercised (319,551) 14.28 (30,600) 19.71 (16,500) 10.33
Options cancelled (10,500) 27.98 (28,289) 26.76 (23,626) 25.14
--------- --------- ---------
Balance at end of year 3,421,404 23.18 3,311,955 22.47 3,085,959 22.70
========= ========= =========
Following is the continuity of common shares reserved for future option
grants under the share option plan:
2002 2001 2000
Balance at beginning of year 696,558 203,154 834,288
Options approved -- 750,000 --
Options granted (439,500) (284,885) (654,760)
Restricted shares issued (4,400) -- --
Options cancelled 10,500 28,289 23,626
-------------------------------
Balance at end of year 263,158 696,558 203,154
==============================
Following is the range of exercise prices and contractual life of
outstanding options under the plan in Canadian dollars as at December
31, 2002:
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE CONTRACTUAL
NUMBER PRICE LIFE
---------------------------------
Balance of options outstanding
at year end within the
following ranges:
$10.00 to $19.99 1,389,079 $16.91 4.9
$20.00 to $29.99 1,181,200 21.74 5.3
$30.00 to $50.00 851,125 35.41 4.5
---------
3,421,404 23.18 4.9
=========
15
- ------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Following is the range of exercise prices of options currently
exercisable under the plan in Canadian dollars as at December 31, 2002:
WEIGHTED
AVERAGE
EXERCISE
NUMBER PRICE
--------------------
Balance of options exercisable at year end
within the following ranges:
$16.82 $10.00 to $19.99 1,329,578 $16.82
$20.00 to $29.99 731,700 21.46
$30.00 to $50.00 844,225 35.32
---------
2,905,503 23.36
=========
d) Deferred Share Unit Plan
The Company has a deferred share unit plan into which directors must
defer at least half of their annual retainer. Such deferrals are
converted to deferred share units, each of which has a value equal to
the value of one common share. On retirement from the Board, the
director may receive payment of their deferred share units in cash,
shares purchased on the open market or shares issued by the Company.
The liability for deferred share units is included in accrued payroll
and related liabilities.
e) Additional Disclosure
Section 3870 of the CICA Handbook requires the disclosure of pro forma
information regarding net income and earnings per share using option
valuation models that calculate the fair value of employee stock
options granted.
The fair value for the stock options was estimated at the date of grant
using a Black-Scholes option pricing model using the following
weighted-average assumptions for 2002, 2001 and 2000 respectively:
risk-free interest rates of 3.6%, 4.8% and 5.8%; dividend yields of
0.9%, 2.5% and 3.1%; volatility factors of the expected market price of
the Company's common stock of .44, .40 and .35; and a weighted-average
expected life of the options of 1.0 year. The weighted-average
grant-date fair value of the options granted during 2002 was $4.05
(2001 - $3.33, 2000 - $2.70).
The Black-Scholes option valuation model was developed for use in
estimating fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of
traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion,
the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized over the options vesting period. The Company's pro
forma information follows:
2002 2001 2000
Pro forma net income $19,304 $37,391 $55,720
=============================
Pro forma net income available to
common shareholders $ 7,925 $25,928 $44,895
=============================
Pro forma earnings per common share:
Basic $ 0.17 $ 0.64 $ 1.10
=============================
Diluted $ 0.17 $ 0.63 $ 0.88
=============================
16
------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
12. SUBORDINATED NOTES
During 2000 and 1999, respectively, the Company issued $90,000 and
$10,000 incremental rate junior subordinated notes maturing December
31, 2038. The incremental rate junior subordinated notes bear interest
in arrears payable semi-annually at 8.5% for the ten year period ending
December 10, 2008, 9.5% for the eleventh to fifteenth year and
increasing by an additional 2% every five years thereafter. The
incremental rate junior subordinated notes are redeemable, in whole or
in part, by the Company, at any time, at the principal amount plus
accrued and unpaid interest to the date of redemption (hereafter
referred to as the Redemption Amount) and at maturity at the principal
amount plus accrued and unpaid interest to the date of maturity
(hereafter referred to as the Maturity Amount).
The Company may, at its option, pay the Redemption Amount, Maturity
Amount or any interest payment in cash or by delivering common shares
to a trustee. The trustee would sell the Company's common shares and
remit the proceeds to the holders of the incremental rate junior
subordinated notes in payment of the Redemption Amount, the Maturity
Amount or the accrued interest.
The Company may, at its option, defer payment of interest on the
incremental rate junior subordinated notes by extending the interest
payment date for up to four consecutive semi-annual periods. Interest
continues to accrue during the extension periods, but does not
compound. An interest deferral can only commence if there have been no
dividends paid on common or preferred shares during the preceding six
months. Should the Company pay any dividends on common or preferred
shares during the interest deferral period, the deferral period ceases
and the payment of deferred interest is required.
The principal amount of the incremental rate junior subordinated notes
is classified as equity and accrued interest, on an after tax basis, is
classified as a charge to retained earnings since the Company has the
ability to settle the amounts by issuing its own common shares. In
2000, the related issue expenses of $176, $120 net of income taxes,
were charged to retained earnings.
13. DIVIDENDS
The most restrictive covenant pertaining to dividend payments in the
Company's financing agreements requires consolidated shareholders'
equity, excluding the balance of outstanding subordinated notes, to be
maintained at a minimum of $570,000 plus 50% of net income earned after
December 31, 1998. At December 31, 2002, the Company's shareholders'
equity exceeded this requirement by $316,787.
Dividends on common shares totalled CDN $0.20 per share in 2002
(2001-CDN $0.425 per share, 2000-CDN $0.50 per share).
14. EARNINGS PER COMMON SHARE
Basic earnings per common share is calculated by dividing net income
available to common shareholders by the weighted average number of
common shares outstanding. Diluted earnings per share is calculated by
dividing net income by the actual shares outstanding and share
equivalents that would arise from the exercise of share options and
deferred share units, and the conversion of preferred shares and
subordinated notes. Out-of-themoney share options, those with an
exercise price greater than market price, are excluded from the
calculation as they are anti-dilutive. Preferred shares and
subordinated notes have been excluded from the calculation in 2002 as
they are anti-dilutive.
17
- ------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
The per share amounts disclosed on the Consolidated Statements of
Income and Retained Earnings are based on the following:
2002 2001 2000
Numerator for basic earnings per share
Net income available to common shareholders $ 8,900 $ 27,405 $ 46,848
Dividends on preferred shares,
including part VI.I tax -- 5,692 5,935
Interest on subordinated notes, net of income tax -- 5,771 4,890
-----------------------------------------
Numerator for diluted earnings per share $ 8,900 $ 38,868 $ 57,673
=========================================
Common shares outstanding - January 1 40,843,536 40,812,936 40,796,436
Additional shares issued 5,638,318 19,282 9,183
-----------------------------------------
Denominator for basic earnings per share 46,481,854 40,832,218 40,805,619
Adjustment for share options 366,999 231,360 145,195
Adjustment for deferred share units 44,176 29,435 7,449
Adjustment for preferred shares -- 8,841,623 12,600,969
Adjustment for subordinated notes -- 8,971,601 9,796,926
-----------------------------------------
Denominator for diluted earnings per share 46,893,029 58,906,237 63,356,158
=========================================
15. CASH DERIVED FROM (APPLIED TO) OPERATING ACTIVITIES
2002 2001 2000
Working capital provided by operations
Net income $ 20,279 $ 38,868 $ 57,673
Gain on sale of assets held for sale (6,464) -- --
Non-cash portion of litigation settlement -- (11,000) --
Non-cash provision for loss on assets
held for sale -- 10,000 --
Amortization of capital assets 51,049 37,107 35,257
Amortization of deferred charges 813 549 544
Deferred pension expense (4,168) (3,958) (6,201)
Income taxes allocated to future years 10,888 (13,656) 4,941
Other -- (144) (48)
------------------------------------------
$ 72,397 $ 57,766 $ 92,166
==========================================
Change in non-cash operating working capital
Trade receivables $ (28,651) $ 28,642 $ (24,069)
Other receivables (7,439) 21,099 (22,034)
Inventories (16,016) (13,436) (13,576)
Prepaid expenses (816) 600 127
Accounts payable and accrued charges (8,168) 6,916 (5,795)
Accrued payroll and related liabilities (1,540) (1,523) (1,492)
Income and other taxes payable 619 4,841 (4,851)
Other current liabilities 2,216 3,418 2,278
------------------------------------------
$ (59,795) $ 50,557 $ (69,412)
==========================================
16. EXPENDITURES FOR CAPITAL ASSETS
2002 2001 2000
Additions to capital assets $ 28,265 $ 155,007 $ 374,473
Decrease (increase) in accounts payable
and accrued charges for capital expenditures 5,946 768 (6,283)
------------------------------------------
$ 34,211 $ 155,775 $ 368,190
==========================================
18
------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
17. INVESTMENT IN PARTNERSHIP
A partnership formed between the Company and Jamel Metals Ltd. (Jamel),
formerly General Scrap & Car Shredder Ltd. (General Scrap), purchased
the Canadian scrap metal operations of General Scrap and the shares of
Sametco Auto Inc., an automotive parts operation, effective April 1,
1997 for approximately $24,131, including the assumption of debt.
IPSCO's interest in the capital of the partnership is 100% at December
31, 2002 (2001 - 91%). In 2002, the Company contributed $1,706 in
exchange for the remaining 9% interest (2001 - $1,993 for an additional
10% interest). The partnership agreement requires annual payments of
$1.3 million to Jamel through 2007 for services and land use.
18. SEGMENTED INFORMATION
The Company is organized and managed as a single business segment,
being steel products, and the Company is viewed as a single operating
segment by the chief operating decision maker for the purposes of
resource allocation and assessing performance.
Financial information on the Company's geographic areas follows. Sales
are allocated to the country in which the third party customer receives
the product.
2002 2001 2000
Sales
Canada $ 365,854 $ 395,841 $ 463,860
United States 715,855 507,902 485,403
------------------------------------------
$ 1,081,709 $ 903,743 $ 949,263
==========================================
Capital Assets
Canada $ 186,377 $ 195,390
United States 947,980 960,511
--------------------------
$ 1,134,357 $ 1,155,901
==========================
Sales information by product group is as follows:
2002 2001 2000
Steel mill products $ 687,439 $ 458,625 $ 492,463
Tubular products 394,270 445,118 456,800
------------------------------------------
$ 1,081,709 $ 903,743 $ 949,263
==========================================
19. COMMITMENTS
a) The Company and its subsidiaries have lease commitments on
property for the period to 2015. The payments required by
these leases, including the sale-leaseback transactions
discussed below, are as follows:
2003 $ 30,075
2004 25,434
2005 18,236
2006 16,568
2007 18,010
--------
108,323
2008 - 2015 125,364
--------
$233,687
========
19
- ------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Rental expenses incurred under operating leases during 2002, 2001 and
2000 were $23,152, $26,858 and $10,839 respectively.
In 2001, the Company concluded a sale and leaseback of the temper mill
at its coil processing facility in Houston for cash proceeds of
$15,000. The sale resulted in no gain or loss. The Company has the
option, but not the obligation, to purchase the equipment for a
predetermined amount after seven years of the 7.5 year lease term.
In October 2000, the Company concluded the sale and leaseback of
certain of its Montpelier Steelworks production equipment for cash
proceeds of $150,000. The Company has options, but is not obligated, to
purchase the equipment after seven and ten years for predetermined
amounts and at the end of the lease term for the fair market value of
the equipment.
In December 2000, the Company concluded a sale and leaseback of the
temper mill at its coil processing facility in St. Paul for cash
proceeds of $8,251. The Company has the option, but not the obligation,
to purchase the equipment for a predetermined amount after four years
of the five year lease term.
b) The Company and its subsidiaries have commitments under
service and supply contracts for the period to 2017.
Payments required under these contracts are as follows:
2003 $ 39,629
2004 37,952
2005 37,102
2006 32,328
2007 30,846
--------
177,857
2008 - 2017 109,930
--------
$287,787
========
c) At December 31, 2002, commitments to complete capital programs
in progress total $5,021.
20. SUPPLEMENTAL INFORMATION
2002 2001 2000
Allowance for doubtful accounts $ 9,170 $10,326 $ 6,122
=============================
Doubtful accounts charged to expense (706) 4,435 11
=============================
Interest income 819 1,561 4,866
=============================
Other interest expense 993 633 4,066
=============================
Miscellaneous income 1,391 1,477 2,022
=============================
Research and development expense 1,391 1,306 5,507
=============================
Interest paid 20,856 25,466 25,219
=============================
Income tax installments paid 12,289 26,304 60,402
=============================
20
------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
21. SIGNIFICANT DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES (GAAP)
a) Reconciliation of net income (loss) between accounting
principles generally accepted in Canada and the United States:
2002 2001 2000
Net income as reported under Canadian GAAP $ 20,279 $ 38,868 $ 57,673
Adjustments relating to the capitalization
of interest (i) -- (8,908) (758)
Adjustments relating to commissioning costs (ii) -- (22,776) (16,356)
Adjustments relating to amortization of
capital assets (iii) (1,839) (4,126) 998
Adjustments relating to subordinated notes (iv) (5,771) (5,771) (4,890)
Adjustments relating to sale-leaseback (v) (1,404) (1,014) (709)
Adjustments relating to change in
accounting principles (vi) -- -- (8,977)
Adjustments relating to natural gas hedge (vii) 736 (8) --
Adjustments relating to valuation allowance
on net future income tax asset (viii) 26,700 (37,200) --
------------------------------------------
Net income (loss) in accordance with U.S. GAAP 38,701 (40,935) 26,981
Dividends on preferred shares
including part VI.I tax (5,608) (5,692) (5,935)
------------------------------------------
Net income (loss) available to common
shareholders in accordance with U.S. GAAP $ 33,903 $ (46,627) $ 21,046
==========================================
Earnings (loss) per common share:
United States
Basic $ 0.71 $ (1.14) $ 0.52
==========================================
Diluted (ix) $ 0.66 $ (1.14) $ 0.50
==========================================
Common shares outstanding - January 1 40,843,536 40,812,936 40,796,436
Additional shares issued 5,638,318 19,282 9,183
------------------------------------------
Denominator for basic earnings per share 46,481,854 40,832,218 40,805,619
Adjustment for share options 366,999 -- 145,195
Adjustment for deferred share units 44,176 -- 7,449
Adjustment for preferred shares 10,328,336 -- 12,600,969
Adjustment for subordinated notes 10,373,134 -- 9,796,926
------------------------------------------
Denominator for diluted earnings per share 67,594,499 40,832,218 63,356,158
==========================================
i) United States GAAP requires interest to be capitalized on the
expenditures incurred for all major projects under
construction to a maximum of all interest costs during the
year or until the assets are placed into production.
Commissioning and start-up costs are not included in the
calculation of interest to be capitalized. For Canadian GAAP,
commissioning and start-up costs are included in the
calculation.
ii) United States GAAP requires commissioning or start-up costs to
be expensed as incurred. For Canadian GAAP, these costs are
capitalized.
21
- ------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
iii) United States GAAP requires amortization of capital assets to
commence when the capital assets are available for use. Under
Canadian GAAP, amortization commences when the assets are
placed into production which occurs at the end of the
commissioning or start-up period. Further, the amount
capitalized to capital assets under United States GAAP differs
from the amount capitalized under Canadian GAAP (see i and ii
above).
iv) United States GAAP requires that the subordinated notes be
classified as long-term debt, the related accrued interest to
be classified as a liability, the related issue costs to be
recorded as an asset which is amortized to interest expense
over the term of the debt, the related pre-tax interest to be
deducted in determining income and the related income tax
benefit to be recorded as part of income tax expense. Under
Canadian GAAP, as disclosed in Note 12, the Company has
classified the subordinated notes as part of shareholders'
equity and the interest, net of related tax effects, and the
issue costs have been classified as charges to retained
earnings.
v) United States GAAP requires the financing method of accounting
for the Montpelier Steelworks sale-leaseback transaction.
Under Canadian GAAP, the transaction has been afforded
operating lease treatment. U.S. GAAP gives rise to interest
expense on the obligation and amortization of the capital
asset. Under Canadian GAAP, a lease expense is incurred.
vi) United States GAAP requires the cumulative effect of adoption
of changes in accounting principles to be recorded, net of
income taxes, as a charge to income. For Canadian GAAP, the
cumulative effect is charged directly to retained earnings. In
2000, prior to the cumulative effect of the change in
accounting principle, basic earnings per share were $0.74 and
diluted earnings per share were $0.64.
vii) United States GAAP requires recording of the ineffective
portion of cash flow hedges in the income statement including
the mark-to-market adjustment of the natural gas contract and
the amortization of the effective portion (prior to the
counterparty bankruptcy) of the natural gas hedge over the
remaining life of the contract. Canadian GAAP allows for
probable hedged transactions to be accounted for off-balance
sheet.
viii) Represents the change in the valuation allowance provided on
the net tax asset allocated to future years for United States
GAAP as a result of differences in accounting practices
between United States and Canadian GAAP. See i), ii), and iii)
above for explanation of the principal differences.
ix) Due to the net loss in 2001, no adjustment was made for
potentially dilutive instruments as the impact was
anti-dilutive.
b) Comprehensive income (loss):
2002 2001 2000
Net income (loss) in accordance with U.S. GAAP $38,701 $(40,935) $26,981
--------------------------------
Other comprehensive income
Foreign currency translation adjustments (198) (15,686) (13,668)
Adjustments relating to minimum pension
liability (25,366) (3,853) 3,427
Tax effect 9,436 1,433 (1,275)
Fair value adjustment for natural gas hedge -- (1,991) --
Tax effect -- 717 --
Amortization of natural gas hedge to income 664 111 --
Tax effect (239) (40) --
--------------------------------
(15,703) (19,309) (11,516)
--------------------------------
Comprehensive income (loss) in accordance
with U.S. GAAP $22,998 $(60,244) $15,465
================================
22
------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
c) Reconciliation of the statement of financial position between
accounting principles generally accepted in Canada and the
United States:
2002 2001
i) Capital assets
Balance under Canadian GAAP $1,134,357 $1,155,901
Adjustments relating to the capitalization of interest (13,902) (13,902)
Adjustments relating to commissioning costs (112,233) (112,233)
Adjustments relating to amortization of capital assets (8,619) (5,690)
Adjustments relating to sale-leaseback 136,432 142,269
---------- ----------
Balance under U.S. GAAP $1,136,035 $1,166,345
========== ==========
ii) Deferred pension liability
Balance under Canadian GAAP $ (3,911) $ 234
Adjustments relating to minimum pension liability 32,081 6,715
---------- ----------
Balance under U.S. GAAP $ 28,170 $ 6,949
========== ==========
iii) Future income taxes
Net future tax asset balance under Canadian GAAP $ (19,759) $ (27,945)
Adjustments relating to the capitalization of interest (5,172) (5,172)
Adjustments relating to commissioning costs (41,751) (41,751)
Adjustments relating to amortization of capital assets (3,206) (2,117)
Adjustments relating to minimum pension liability (11,934) (2,498)
Adjustments relating to sale-leaseback (1,853) (1,020)
Adjustments relating to natural gas contract (28) (681)
Adjustments relating to valuation allowance
on net future income tax asset 10,500 37,200
---------- ----------
Net future tax asset balance under U.S. GAAP $ (73,203) $ (43,984)
========== ==========
iv) Accounts payable and accrued charges
Balance under Canadian GAAP $ 106,155 $ 121,464
Adjustments relating to subordinated notes 4,250 4,250
Adjustments relating to sale-leaseback 51 1,417
Adjustments relating to natural gas contract 78 1,892
---------- ----------
Balance under U.S. GAAP $ 110,534 $ 129,023
========== ==========
v) Current portion of long-term debt
Balance under Canadian GAAP $ 35,386 $ 21,100
Adjustments relating to sale-leaseback 9,973 2,234
---------- ----------
Balance under U.S. GAAP $ 45,359 $ 23,334
========== ==========
vi) Long-term debt
Balance under Canadian GAAP $ 342,202 $ 386,809
Adjustments relating to subordinated notes 100,000 100,000
Adjustments relating to sale-leaseback 131,388 141,361
---------- ----------
Balance under U.S. GAAP $ 537,590 $ 628,170
========== ==========
23
- ------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
2002 2001
vii) Shareholders' equity
Balance under Canadian GAAP $1,087,423 $ 985,538
Adjustments relating to the capitalization of interest (8,730) (8,730)
Adjustments relating to commissioning costs (70,482) (70,482)
Adjustments relating to amortization of capital assets (5,413) (3,573)
Adjustments relating to minimum pension liability (20,147) (4,217)
Adjustments relating to subordinated notes (104,250) (104,250)
Adjustments relating to sale-leaseback (3,127) (1,723)
Adjustments relating to natural gas hedge (50) (1,211)
Adjustments relating to valuation allowance on
net future income tax asset (10,500) (37,200)
---------- ----------
Balance under U.S. GAAP $ 864,724 $ 754,152
========== ==========
In accordance with FASB Statement No. 87, the Company has
recorded an additional minimum pension liability for
underfunded plans representing the excess of unfunded
accumulated benefit obligations over previously recorded
pension cost liabilities. A corresponding amount is recognized
as a deferred charge except to the extent that these
additional liabilities exceed the related unrecognized prior
service cost and net transition obligation, in which case the
increase in liabilities is charged directly to shareholders'
equity, net of related deferred income taxes.
d) United States GAAP defines cash position to be cash and cash
equivalents. Under Canadian GAAP, cash position, in certain
circumstances, can be defined as cash and cash equivalents
less bank indebtedness. This difference and the above U.S.
GAAP adjustments result in the following statements of cash
flows for the Company:
2001 2000 2002
Cash derived from (applied to) operating activities $ 12,602 $ 58,260 $ (4,498)
=================================
Cash derived from financing activities $ 7,691 $ 72,275 $ 265,291
=================================
Cash applied to investing activities $(34,451) $(107,705) $(343,013)
=================================
Effect of exchange rate changes on cash
and cash equivalents $ (475) $ (3,489) $ (3,560)
=================================
Cash position at December 31 $ 22,859 $ 37,492 $ 18,151
=================================
e) Stock Based Compensation
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized over the options vesting period. Under FASB 123,
Accounting and Disclosure of Stock Based Compensation, the Company's
pro forma U.S. GAAP information follows:
2001 2000 2002
Pro forma net income (loss) $37,726 $(42,412) $25,028
==============================
Pro forma net income (loss) available
to common shareholders $32,118 $(48,104) $19,093
==============================
Pro forma earnings per common share:
Basic $ 0.69 $ (1.18) $ 0.47
==============================
Diluted $ 0.64 $ (1.18) $ 0.47
==============================
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------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
f) Additional disclosure required under U.S. GAAP:
i) The total interest paid, including interest on the
subordinated notes, was $39,707, $41,961 and $28,380
in 2002, 2001 and 2000 respectively.
The total fair market value of the Company's
long-term debt, including the subordinated notes, was
$658,156 (2001 - $652,610) and the current portion
was $48,003 (2001 - $22,119).
ii) The Company's natural gas swap contract was
designated as a hedge against volatility in the price
of natural gas purchased for consumption in the steel
production process. The bankruptcy of the
counterparty's parent company, as guarantor of the
contract, has caused the contract to be deemed
ineffective. As a result, the unrealized liability
recorded in other comprehensive income at the time of
the bankruptcy will be amortized to income over the
remaining life of the contract. The fair value of the
contract liability will be marked-to-market each
reporting period with the change being recorded to
income in the period.
iii) Under Staff Accounting Bulletin 74, the Company is
required to disclose certain information related to
new accounting standards which have not yet been
adopted due to delayed effective dates.
In June 2001, the FASB issued SFAS No. 143,
Accounting for Asset Retirement Obligations, which
addresses the accounting for tangible long-lived
asset retirements and their associated costs. SFAS
No. 143 is effective for 2003, and will require a
liability for the retirement of long-lived assets be
recorded when incurred and amortized over its
remaining life. The Company has not yet assessed the
impact of SFAS No. 143, but its adoption could have a
significant impact on the Company's financial
position.
22. CONTINGENCIES AND ENVIRONMENTAL EXPENDITURES
The major raw material used in the steelmaking process is reclaimed
iron and steel scrap. This recycling has made a significant
contribution to protecting the environment. As an ongoing commitment to
the environment, the Company continues to monitor emissions, perform
site clean-up, and invest in new equipment and processes. Nevertheless,
rapidly changing environmental legislation and regulatory practices are
likely to require future expenditures to modify operations, install
pollution control equipment, dispose of waste products, and perform
site clean-up and site management. The magnitude of future expenditures
cannot be determined at this time. However, management is of the
opinion that under existing legislation and regulatory practices,
expenditures required for environmental compliance will not have a
material adverse effect on the Company's financial position.
Environmental expenditures that relate to ongoing environmental and
reclamation programs are charged against earnings as incurred or
capitalized and amortized depending on the future economic benefits.
The Company settled the litigation with the turnkey contractors of the
Montpelier Steelworks on April 27, 2001 for cash of $28,000 and
retainage of construction holdbacks of $21,000. As a result of the
settlement, the Company recorded income of $39,000 representing claims
for lost business and reimbursement of legal costs and approximately
$10,000 was recorded to cover the necessary cost of capital asset
improvements to bring the Montpelier Steelworks to original contract
specifications.
The Company is involved in various other legal actions and claims,
including environmental matters, arising from the normal course of
business. It is the opinion of management that the ultimate resolution
of these matters will not have a material adverse effect on the results
of operations, financial position or net cash flows of the Company.
25