<Page>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 14, 2004
Registration No. 333-114538
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
------------------------
AMENDMENT NO. 1 TO
FORM F-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
NORSKE SKOG CANADA LIMITED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------------
See Table of Additional Registrants
------------------------
<Table>
CANADA 2621 98-013-8030
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</Table>
250 HOWE STREET, 16TH FLOOR, VANCOUVER, BRITISH COLUMBIA, CANADA V6C 3R8,
(604) 654-4000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
CT CORPORATION SYSTEM, 111 EIGHTH AVENUE, 13TH FLOOR, NEW YORK, NY 10011,
(800) 786-3069
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE IN THE UNITED STATES)
Copies to:
<Table>
BRUCE CZACHOR, ESQ. VALERIE SEAGER GORDON CHAMBERS, ESQ.
SHEARMAN & STERLING LLP NORSKE SKOG CANADA LIMITED LAWSON LUNDELL
1080 Marsh Road 250 Howe Street 1600 Cathedral Place
Menlo Park, California 16th Floor 925 West Georgia Street
94025-1022 Vancouver, British Columbia Vancouver, British Columbia,
(650) 838-3600 Canada V6C 3R8 Canada V6C 3L2
(604) 654-4000 (604) 685-3456
</Table>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
------------------------
CALCULATION OF REGISTRATION FEE
<Table>
<Caption>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED PER SHARE OFFERING PRICE(1) REGISTRATION FEE(3)
7 3/8% Senior Notes due 2014....... US$250,000,000 100% US$250,000,000 US$31,675
Guarantees......................... US$250,000,000 -- -- (2)
</Table>
(1) Estimated pursuant to Rule 457 solely for the purpose of determining the
registration fee.
(2) Pursuant to Rule 457(n), no registration fee is required for the Guarantees.
(3) Previously paid.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<Page>
TABLE OF ADDITIONAL REGISTRANTS
<Table>
<Caption>
EXACT NAME OF REGISTRANT STATE OR OTHER JURISDICTION OF
AS SPECIFIED IN ITS CHARTER INCORPORATION OR ORGANIZATION PRINCIPAL EXECUTIVE OFFICE
- --------------------------- ------------------------------ -----------------------------------
Elk Falls Pulp and Paper Limited........ British Columbia 16th Floor, 250 Howe Street,
Vancouver, British Columbia, Canada
Norske Skog Canada Finance Limited...... British Columbia 16th Floor, 250 Howe Street,
Vancouver, British Columbia, Canada
Norske Skog Canada (Japan) Ltd.......... Japan 10-31, Takanawa 3-Chome,
Tokyo, Japan
Norske Skog Canada Pulp Operations British Columbia 16th Floor, 250 Howe Street,
Limited............................... Vancouver, British Columbia, Canada
Norske Skog Canada Pulp Sales Inc....... British Columbia 16th Floor, 250 Howe Street,
Vancouver, British Columbia, Canada
Norske Skog Canada Sales Inc............ British Columbia 16th Floor, 250 Howe Street,
Vancouver, British Columbia, Canada
Norske Skog Canada Services (Hungary) Hungary Hermina UT 17, South Tower, 4 EM,
Limited Liability Company............. Budapest, Hungary
Norske Skog Canada (USA) Inc............ California 1011 Western Avenue, Suite 700,
Seattle, Washington
NSCL Holdings Inc....................... Delaware 1011 Western Avenue, Suite 700,
Seattle, Washington
NorskeCanada*........................... British Columbia 16th Floor, 250 Howe Street,
Vancouver, British Columbia, Canada
Pacifica Papers Sales Ltd............... British Columbia 16th Floor, 250 Howe Street,
Vancouver, British Columbia, Canada
Pacifica Papers Sales Inc............... Delaware 1011 Western Avenue, Suite 700,
Seattle, Washington
Pacifica Poplars Ltd.................... British Columbia 16th Floor, 250 Howe Street,
Vancouver, British Columbia, Canada
Pacifica Poplars Inc.................... Delaware 1011 Western Avenue, Suite 700,
Seattle, Washington
Pacifica Papers US Inc.................. Delaware 1011 Western Avenue, Suite 700,
Seattle, Washington
</Table>
* NorskeCanada is a general partnership, the partners of which are Norske Skog
Canada Limited and Norske Skog Canada Pulp Operations Limited.
<Page>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<Page>
<Table>
PROSPECTUS Subject to Completion
- ------------------------------- Dated May 14, 2004
</Table>
NORSKE SKOG CANADA LIMITED
OFFER TO EXCHANGE ANY AND ALL OUTSTANDING
7 3/8% SENIOR NOTES DUE 2014
(U.S.$250,000,000 AGGREGATE PRINCIPAL AMOUNT OUTSTANDING)
FOR
7 3/8% SENIOR NOTES DUE 2014
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933
---------------------
THE EXCHANGE OFFER
- Expires 5:00 p.m., New York City time, , 2004, unless
extended.
- Not conditional upon any minimum principal amount of outstanding 7 3/8%
Senior Notes Due 2014 being tendered for exchange.
- All outstanding notes that are validly tendered and not validly withdrawn
will be exchanged.
- Tenders of outstanding notes may be withdrawn any time prior to
5:00 p.m., New York City time on the date of the expiration of the
exchange offer.
- The exchange of notes will generally not be a taxable exchange for
U.S. federal income tax purposes.
- We will not receive any proceeds from the exchange offer.
THE EXCHANGE NOTES
- The terms of the exchange notes to be issued in the exchange offer are
substantially identical to the notes, except for transfer restrictions and
registration rights relating to the outstanding notes. The exchange notes
will also be fully and unconditionally guaranteed by all of our material
wholly owned subsidiaries.
RESALE OF EXCHANGE NOTES
- There is currently no public market for the exchange notes and we do not
intend to apply for listing or quotation of the exchange notes on any
securities exchange or stock market.
------------------------
Our common shares are quoted on The Toronto Stock Exchange under the symbol
"NS."
INVESTING IN THE EXCHANGE NOTES INVOLVES RISKS THAT ARE DESCRIBED IN THE
"RISK FACTORS" SECTION BEGINNING ON PAGE 7 OF THIS PROSPECTUS.
---------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
---------------------
The date of this prospectus is , 2004
<Page>
TABLE OF CONTENTS
<Table>
<Caption>
PAGE
--------
NOTICE TO NEW HAMPSHIRE RESIDENTS........................... ii
EXCHANGE RATE DATA.......................................... iii
PRESENTATION OF OUR FINANCIAL AND OTHER INFORMATION......... iii
ENFORCEABILITY OF CIVIL LIABILITIES......................... iii
FORWARD-LOOKING STATEMENTS.................................. iv
INTELLECTUAL PROPERTY....................................... iv
SUMMARY..................................................... 1
RISK FACTORS................................................ 7
USE OF PROCEEDS............................................. 19
THE EXCHANGE OFFER.......................................... 19
CAPITALIZATION.............................................. 26
SELECTED CONSOLIDATED HISTORICAL FINANCIAL INFORMATION...... 27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 30
BUSINESS.................................................... 54
MANAGEMENT.................................................. 68
MAJOR SHAREHOLDERS.......................................... 77
CERTAIN AGREEMENTS AND RELATED TRANSACTIONS................. 78
DESCRIPTION OF SHARE CAPITAL................................ 79
DESCRIPTION OF ARTICLES OF AMALGAMATION AND BY-LAWS......... 79
DESCRIPTION OF OTHER INDEBTEDNESS........................... 81
DESCRIPTION OF THE EXCHANGE NOTES........................... 83
FORM DENOMINATION, BOOK-ENTRY PROCEDURES AND TRANSFER....... 124
EXCHANGE OFFER AND REGISTRATION RIGHTS...................... 127
INCOME TAX CONSIDERATIONS................................... 129
PLAN OF DISTRIBUTION........................................ 131
LEGAL MATTERS............................................... 132
EXPERTS..................................................... 132
WHERE YOU CAN FIND MORE INFORMATION ABOUT US................ 132
INDEX TO FINANCIAL STATEMENTS............................... F-1
</Table>
------------------
THIS PROSPECTUS INCORPORATES IMPORTANT BUSINESS AND FINANCIAL INFORMATION
ABOUT US THAT IS NOT INCLUDED IN OR DELIVERED WITH THE DOCUMENT. THIS
INFORMATION IS AVAILABLE WITHOUT CHARGE UPON WRITTEN OR ORAL REQUEST TO US AT
CORPORATE SECRETARY, 16TH FLOOR, 250 HOWE STREET, VANCOUVER, BRITISH COLUMBIA,
CANADA, V6C 3R8, (604) 654-4000. IN ORDER TO OBTAIN TIMELY DELIVERY OF THIS
INFORMATION YOU MUST REQUEST IT NO LATER THAN FIVE BUSINESS DAYS BEFORE THE
EXPIRATION DATE OF THE EXCHANGE OFFER.
The exchange offer is not being made to, nor will we accept surrenders for
exchanges from, holders of outstanding notes in any jurisdiction in which the
exchange offer would not be in compliance with the securities or blue sky laws
of such jurisdiction.
We have not authorized any dealer, salesperson or other individual to give
any information or make any representation not contained in this prospectus in
connection with the offering covered by this prospectus. If given or made, you
must not rely upon such information or representation as having been authorized
by us. This prospectus does not constitute an offer or a solicitation in any
jurisdiction where, or to any person to whom, it is unlawful to make such offer
or solicitation. Neither the delivery of this prospectus, nor any distribution
of securities made hereunder shall under any circumstances,
i
<Page>
create any implication that there has not been any change in the facts set forth
in this prospectus or in the affairs of Norske Skog Canada Limited since the
date hereof.
THE NOTES HAVE NOT BEEN AND WILL NOT BE QUALIFIED FOR PUBLIC DISTRIBUTION
UNDER THE SECURITIES LAWS OF ANY PROVINCE OR TERRITORY OF CANADA. THE NOTES ARE
NOT BEING OFFERED FOR SALE AND MAY NOT BE OFFERED OR SOLD, DIRECTLY OR
INDIRECTLY, IN CANADA OR TO ANY RESIDENT THEREOF EXCEPT IN ACCORDANCE WITH THE
SECURITIES LAWS OF THE PROVINCES AND TERRITORIES OF CANADA. THE NOTES HAVE BEEN
ISSUED PURSUANT TO AN EXEMPTION FROM THE PROSPECTUS REQUIREMENTS OF THE
APPLICABLE CANADIAN PROVINCIAL AND TERRITORIAL SECURITIES LAWS AND MAY BE SOLD
IN CANADA ONLY PURSUANT TO AN EXEMPTION THEREFROM.
------------------
NOTICE TO NEW HAMPSHIRE RESIDENTS
NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN APPLICATION FOR A
LICENSE HAS BEEN FILED UNDER CHAPTER 421-B OF THE NEW HAMPSHIRE REVISED STATUTES
ANNOTATED, 1955, AS AMENDED ("RSA") WITH THE STATE OF NEW HAMPSHIRE NOR THE FACT
THAT A SECURITY IS EFFECTIVELY REGISTERED OR A PERSON IS LICENSED IN THE STATE
OF NEW HAMPSHIRE CONSTITUTES A FINDING BY THE SECRETARY OF STATE THAT ANY
DOCUMENT FILED UNDER RSA 421-B IS TRUE, COMPLETE AND NOT MISLEADING. NEITHER ANY
SUCH FACT NOR THE FACT THAT AN EXEMPTION OR EXCEPTION IS AVAILABLE FOR A
SECURITY OR A TRANSACTION MEANS THAT THE SECRETARY OF STATE HAS PASSED IN ANY
WAY UPON THE MERITS OR QUALIFICATIONS OF, OR RECOMMENDED OR GIVEN APPROVAL TO,
ANY PERSON, SECURITY OR TRANSACTION. IT IS UNLAWFUL TO MAKE, OR CAUSE TO BE
MADE, TO ANY PROSPECTIVE PURCHASER, CUSTOMER OR CLIENT ANY REPRESENTATION
INCONSISTENT WITH THE PROVISIONS OF THIS PARAGRAPH.
ii
<Page>
EXCHANGE RATE DATA
The following table sets forth certain exchange rates based upon the noon
buying rate in New York City for cable transfers in foreign currencies for
customs purposes by the Federal Reserve Bank of New York. Such rates are set
forth as U.S. dollars per C$1.00 and are the inverse of the rate quoted by the
Federal Reserve Bank of New York for Canadian dollars per US$1.00. On May 14,
2004 the inverse of the noon buying rate was $1.00 per US$0.7180.
<Table>
<Caption>
YEAR ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
------------------- -----------------------------------------
1999 2000 2000 2001 2002 2003
-------- -------- -------- -------- -------- --------
Low....................................... 0.6341 0.6607 0.6410 0.6241 0.6200 0.6350
High...................................... 0.6891 0.6969 0.6969 0.6696 0.6619 0.7738
Period end................................ 0.6787 0.6758 0.6669 0.6267 0.6329 0.7738
Average rate.............................. 0.6615 0.6790 0.6725 0.6444 0.6368 0.7135
</Table>
<Table>
<Caption>
2003 2004
------------------- -----------------------------------------
NOVEMBER DECEMBER JANUARY FEBRUARY MARCH APRIL
-------- -------- -------- -------- -------- --------
Low..................................... 0.7486 0.7464 0.7497 0.7439 0.7418 0.7293
High.................................... 0.7708 0.7738 0.7879 0.7629 0.7645 0.7637
</Table>
The average rate is derived by taking the average of the noon buying rate on
the last day of each month during the relevant period.
PRESENTATION OF OUR FINANCIAL AND OTHER INFORMATION
Unless we indicate otherwise, financial information in this prospectus has
been prepared in accordance with Canadian generally accepted accounting
principles, or Canadian GAAP. Canadian GAAP differs in some respects from
United States generally accepted accounting principles, or U.S. GAAP, and thus
our financial statements may not be comparable to the financial statements of
U.S. companies. The principal differences as they apply to us are summarized in
note 22 to the audited consolidated financial statements of Norske Skog Canada
Limited included herein.
We present our financial information in Canadian dollars. In this
prospectus, except where we indicate, all dollar amounts are in Canadian
dollars. References to "$" or "C$" are to Canadian dollars and references to
"US$" are to U.S. dollars. This prospectus contains a translation of some
Canadian dollar amounts into U.S. dollars at specified exchange rates solely for
your convenience. See "Exchange Rate Data" above for information about the rates
of exchange between Canadian dollars and U.S. dollars for the past five fiscal
years and the six most recent months.
ENFORCEABILITY OF CIVIL LIABILITIES
We are a Canadian corporation. Some of our directors, all of our controlling
persons and officers and some of the experts named in this prospectus are not
residents of the United States, and a substantial portion of their assets and
substantially all of our assets are located outside the United States. As a
result, it may be difficult for you to effect service of process within the
United States upon us or our directors, controlling persons, officers and
experts who are not residents of the United States. Furthermore, it may not be
possible for you to enforce against them judgments of courts of the
United States based upon the civil liability under the federal securities laws
of the United States. We have been advised by Lawson Lundell, our Canadian
counsel, that there is doubt as to the enforceability in Canada against us or
against any of our directors, controlling persons, officers or experts, who are
not residents of the United States, in original actions or in actions for
enforcement of judgments of United States courts, of liabilities based solely
upon the federal securities laws of the United States.
iii
<Page>
FORWARD-LOOKING STATEMENTS
This prospectus includes "forward-looking statements." All statements, other
than statements of historical facts, included in this prospectus that address
activities, events or developments that we expect or anticipate will or may
occur in the future, including such things as future cost savings and
performance improvements, synergies or capital expenditures (including the
amount and nature thereof), product prices and strength of markets, business
strategy and measures to implement strategy, competitive strengths, goals,
expansion and growth of our company's businesses and operations, plans,
references to future success and other such matters are forward-looking
statements. When used in this prospectus, the words "estimate," "project,"
"anticipate," "expect," "intend," "believe", "will" and similar expressions are
intended to identify forward-looking statements.
These forward-looking statements are based on certain assumptions and
analyses made by us in light of our experience and our perception of historical
trends, current conditions and expected future developments as well as other
factors we believe are appropriate in the circumstances. These forward-looking
statements are not representations or guarantees as to future performance.
Whether actual future results and developments will conform with
expectations and predictions is subject to a number of risks and uncertainties,
including the considerations discussed in the "Risk Factors" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
sections of this prospectus.
Consequently, all of the forward-looking statements made in this prospectus
are qualified by these cautionary statements and we cannot assure you that the
actual results or developments anticipated by us will be realized. We undertake
no obligation to release publicly any revisions to any forward-looking
statements to reflect events or circumstances after the date of this prospectus
or to reflect the occurrence of unanticipated events.
INTELLECTUAL PROPERTY
We own or have rights to various trademarks, copyrights, service marks and
trade names used in our business, including the following: electrasoft-TM-,
electrabrite-TM-, electrastar-TM-, electracote-TM-, electracal-TM-,
:EXPRESS-TM-, Catalyst-TM-, Marathon-TM-, SilverLiner-TM- and Triax-TM-.
iv
<Page>
GLOSSARY
In this prospectus, the following terms have the following meanings ascribed to
them:
"AOX" means adsorbable organic halides, a measurement of total chlorinated
organic compounds.
"BASIS WEIGHT" means the weight of paper per specified area, such as gsm.
"CAPACITY" means the number of units which can be produced in a year based on
operating with the normal number of shifts and maintenance interruptions.
"COATED PAPER" means paper which is coated with clay and treated to impart a
smooth glossy surface.
"DIOXINS" means chlorinated chemical compounds, of which certain members have
been identified as carcinogens.
"DIRECTORY PAPER" means lightweight uncoated groundwood paper suitable for
printing bulky telephone books and other applications.
"EFFLUENT" means outflowing waste discharge from a pulp and paper mill.
"FIBER" means the primary raw material used to produce pulp. Fiber is classified
as either virgin fiber, which is derived from wood and wood chips that have not
previously been processed into paper, or recycled fiber, which is derived from
waste paper which may include office papers, magazines or newspapers.
"FURNISH" means a blend of different types of pulps and additives which are
provided to the paper machine for making paper.
"GROUNDWOOD PAPER" or "GROUNDWOOD SPECIALTY PAPER" means coated and uncoated
printing papers, with mechanical pulp as their major component, which differ
from newsprint in brightness, surface characteristics and end uses.
"GSM" means grams per square meter.
"HI-BRITE" means a group of uncoated groundwood papers with brightness levels
greater than standard newsprint.
"KRAFT PAPER" means any type of single and multi-ply liner used to make boxes
and other containers for shipping materials, and the type of paperboard used to
make them up.
"LIGHTWEIGHT COATED PAPER" or "LWC PAPER" means coated paper having a basis
weight generally below 72 gsm and used principally for magazine and mail order
catalogues, inserts, flyers, coupons and direct mail. The term is often used
interchangeably with coated groundwood paper.
"LINERBOARD" means a type of kraft paperboard, generally unbleached, used to
line or face corrugated core board (on both sides) to form shipping boxes and
various types of containers.
"NEWSPRINT" means a printing paper whose major use is in newspapers. It is made
largely from groundwood or mechanical pulp reinforced to varying degrees with
chemical pulp.
"PRINTABILITY" means the ease with which paper can be printed to high quality
standards with the least amount of spoilage.
"PRINTING PAPERS" is a general term used to describe those grades of paper used
by the printing trades, including job, book, magazine, and newspaper printers.
v
<Page>
"PULP" is the generic term describing the fibers derived from wood. Pulp can
result from a variety of pulping processes including cooking, refining, grinding
or the processing and cleaning of waste paper. Pulp can be either in a wet or
dry state. Types of pulp include:
- bleached pulp--pulp that has been purified or whitened by chemical
treatment to alter coloring matter and has taken on a higher brightness
characteristic.
- chemical pulp--obtained by cooking wood in solutions of various chemicals.
The principal chemical processes are sulphite and sulphate (kraft).
- deinked pulp--obtained by removing inks, clays and coatings, bindings and
other additives from waste papers (primarily old newspapers) so that it
can be reused as a source of papermaking furnish.
- kraft pulp--chemical pulp produced by an alkaline cooking process using
sodium sulphate.
- market pulp--pulp sold on the open market between companies.
- Northern bleached softwood kraft (NBSK) pulp--kraft pulp produced from
slow-growing coniferous trees indigenous to the forests of Canada, the
northern United States, and Scandinavian countries. NBSK pulp is noted for
its strength and length of fiber.
- refiner mechanical pulp--pulp made by processing untreated wood chips in
mechanical atmospheric refiners.
- thermomechanical pulp--pulp produced from wood chips using heated
mechanical processes to break the bonds between the wood fibers.
"SOFT CALENDER" means a machine which improves the smoothness and gloss of paper
by running it through a combination of steel rolls and proprietary synthetic
rolls during the on-machine papermaking process.
"TONNE" means a metric tonne, being 1,000 kilograms or 2,204 pounds.
"TWIN-WIRE" means a paper machine with forming wires on both sides of the paper
surface which provide a more uniform quality of sheet for both printing
surfaces. Older machines typically only have a forming wire on the lower
surface.
"UNCOATED SPECIALTY PAPER" means uncoated printing papers, with mechanical pulp
as their major component, which differ from newsprint in brightness, surface
characteristics and end uses.
"WOODFREE" means paper grades manufactured almost entirely with kraft pulp, and
containing less than 10 per cent groundwood or mechanical pulp.
vi
<Page>
SUMMARY
THIS SUMMARY HIGHLIGHTS INFORMATION ABOUT THE EXCHANGE OFFER THAT YOU WILL
FIND ELSEWHERE IN THIS PROSPECTUS. THIS SUMMARY DOES NOT CONTAIN ALL THE
INFORMATION YOU SHOULD CONSIDER BEFORE PARTICIPATING IN THIS EXCHANGE OFFER. YOU
SHOULD CAREFULLY READ THE ENTIRE PROSPECTUS AND THE RISK FACTORS BEGINNING ON
PAGE 7.
THE EXCHANGE OFFER
The exchange offer relates to the exchange of up to US$250,000,000 aggregate
principal amount of the outstanding 7 3/8% Senior Notes Due 2014, or notes, for
an equal aggregate principal amount of exchange notes. The exchange notes will
be our obligations and are entitled to the benefits of the indenture relating to
the notes. The form and terms of the exchange notes are identical in all
material respects to the form and terms of the notes, except that certain
transfer restrictions and registration rights relating to the notes do not apply
to the exchange notes.
<Table>
Registration Rights............... On March 23, 2004, we, the guarantors and the initial
purchasers agreed that the holders of the notes would be
entitled to exchange their outstanding notes for registered
exchange notes with substantially similar terms. This
exchange offer is intended to satisfy these rights. After
the exchange offer is complete, except in limited
circumstances, the holders of the outstanding notes will no
longer be entitled to any exchange or registration rights
with respect to their notes.
The Exchange Offer................ We are offering to exchange US$1,000 principal amount of
7 3/8% Senior Notes Due 2014 which have been registered
under the Securities Act for each US$1,000 principal amount
of our notes were issued on March 23, 2004 in a private
offering.
In order for an outstanding note to be exchanged, you must
properly tender, and we must accept, the outstanding note.
All outstanding notes that are validly tendered and not
validly withdrawn will be exchanged.
As of this date, there are US$250,000,000 in aggregate
principal amount of outstanding notes.
We will issue the exchange notes to you on or as soon as
practicable after the expiration of the exchange offer.
Expiration of Exchange
Offer........................... The exchange offer will expire at 5:00 p.m., New York City
time, on , 2004, unless we decide to extend the
expiration date.
Accrued Interest on the Exchange
Notes and the Outstanding
Notes........................... The exchange notes will bear interest from the later of
March 23, 2004 and the latest date on which interest has
been paid. Holders of outstanding notes whose notes are
accepted for exchange will be deemed to have waived the
right to receive any payment in respect of interest on such
outstanding notes accrued from the later of March 23, 2004
and the latest date on which interest has been paid to the
date of the issuance of the exchange notes.
Conditions of the Exchange
Offer........................... We may terminate the exchange offer if we determine that our
ability to proceed with the exchange offer could be
materially impaired due
</Table>
1
<Page>
<Table>
to any legal or governmental action, new law, statute, rule
or regulation or any interpretation of the staff of the
Securities and Exchange Commission of any existing law,
statute, rule or regulation. Holders of outstanding notes
will have certain rights against us under the registration
rights agreement executed as part of the offering of the
outstanding notes should we fail to consummate the exchange
offer.
Procedures for Tendering
Outstanding Notes............... If you are a holder of an outstanding note and you wish to
tender your note for exchange pursuant to the exchange
offer, you must transmit to Wells Fargo Bank, National
Association as exchange agent for the notes, on or prior to
the expiration date:
either
- a properly completed and duly executed letter of
transmittal, which accompanies this prospectus, or a
facsimile of the letter of transmittal, including all
other documents required by the letter of transmittal,
to the exchange agent at the address set forth on the
cover page of the letter of transmittal; or
- a computer-generated message transmitted by means of
the Depository Trust Company's Automated Tender Offer
Program system and received by the exchange agent and
forming a part of a confirmation of book-entry
transfer in which you acknowledge and agree to be
bound by the terms of the letter of transmittal;
and, either
- certificates for the outstanding notes being tendered;
or
- a timely confirmation of book-entry transfer of your
outstanding notes into the exchange agent's account at
The Depository Trust Company pursuant to the procedure
for book-entry transfers described in this prospectus
under the heading "The Exchange Offer--Procedures for
Tendering Outstanding Notes;" or
- the holder must comply with the guaranteed delivery
procedures described under the heading "The Exchange
Offer--Guaranteed Delivery Procedures."
By executing the letter of transmittal, or by agreeing to
the terms of the letter of transmittal, each holder
represents to us that, among other things, (1) the exchange
notes to be issued in the exchange offer are being obtained
in the ordinary course of business of the person receiving
such notes whether or not such person is the holder,
(2) neither the holder nor any such other person has an
arrangement or understanding with any person to participate
in the distribution of such exchange notes and (3) neither
the holder nor any such other person is an "affiliate" of
ours as "affiliate" is defined in Rule 405 under the
Securities Act.
</Table>
2
<Page>
<Table>
Special Procedures for Beneficial
Owners.......................... If you are a beneficial owner of outstanding notes that are
registered in the name of a broker, dealer, commercial bank,
trust company or other nominee and you wish to tender those
notes in the exchange offer, you should contact the person
in whose name your notes are registered promptly and
instruct that person to tender on your behalf. If you, as
the beneficial holder, wish to tender on your own behalf you
must, prior to completing and executing the letter of
transmittal and delivering your outstanding notes, make
appropriate arrangements to obtain a properly completed bond
power from the registered holder.
Guaranteed Delivery Procedures.... If you wish to tender your outstanding notes and time will
not permit your required documents to reach the exchange
agent by the expiration date, or the procedure for
book-entry transfer cannot be completed on time or
certificates for notes cannot be delivered on time, you may
tender your outstanding notes pursuant to the procedures
described in this prospectus under the heading "The Exchange
Offer--Guaranteed Delivery Procedures."
Withdrawal Rights................. You may withdraw the tender of your outstanding notes at any
time prior to 5:00 p.m., New York City time, on ,
2004, the business day prior to the expiration date.
Acceptance of Outstanding Notes
and Delivery of Notes........... Subject to the conditions summarized above in "Conditions of
the Exchange Offer" and described more fully under the "The
Exchange Offer--Certain Conditions to the Exchange Offer,"
we will accept for exchange any and all outstanding notes
which are properly tendered in the exchange offer prior to
5:00 p.m., New York City time on the expiration date. The
exchange notes issued pursuant to the exchange offer will be
delivered on or as soon as practicable after the expiration
date.
Federal Income Tax Consequences... The exchange of the outstanding notes for exchange notes
will generally not be a taxable exchange for United States
federal income tax purposes. See "Income Tax
Considerations."
Use of Proceeds................... We will not receive any proceeds from the issuance of
exchange notes pursuant to the exchange offer. We will pay
all expenses incident to the exchange offer.
Exchange Agent for Notes.......... Wells Fargo Bank, National Association is serving as
exchange agent in connection with the exchange offer. The
exchange agent is located at Corporate Trust Services, 213
Court Street, Suite 703, Middletown, CT 06457. For more
information with respect to the exchange of outstanding
notes, you may contact the exchange agent by telephone at
(860) 704-6216 or by facsimile at (860) 704-6219, both to
the attention of Corporate Trust Services.
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SUMMARY DESCRIPTION OF EXCHANGE NOTES
The following is a summary of material terms of the exchange notes. For a
more complete description of the terms of the exchange notes, see "Description
of the Exchange Notes" in this prospectus.
<Table>
Issuer............................ Norske Skog Canada Limited.
Notes Offered..................... US$250,000,000 aggregate principal amount of 7 3/8% Senior
Notes due 2014.
Maturity.......................... March 1, 2014.
Interest Payment Dates............ March 1 and September 1, beginning September 1, 2004.
Guarantees........................ All of our material wholly owned subsidiaries will fully and
unconditionally guarantee the exchange notes on a joint and
several basis. Future subsidiaries may also be required to
guarantee the exchange notes.
Ranking........................... The exchange notes and guarantees will be unsecured senior
obligations. The exchange notes will rank equally to all our
existing and future senior debt. Each subsidiary guarantee
will rank equally with all existing and future senior debt
of each guarantor. The exchange notes will effectively rank
junior to our nonguarantor subsidiaries' liabilities, and to
our secured debt and the secured debt of our guarantor
subsidiaries as to the assets securing such debt.
As of December 31, 2003, on a pro forma basis, after giving
effect to the exchange offer, on a consolidated basis, we
and the guarantors would have had outstanding approximately
$844.3 million of senior debt and would have been able to
incur up to $317.7 million of additional secured debt under
our credit facilities.
This excludes senior secured non-recourse debt owed by a
joint venture in which we have a 50.1% non-controlling
economic interest (of which our proportionate share is
$37.6 million).
Optional Redemption............... We may redeem some or all of the exchange notes, at any
time, on or after March 1, 2009 at our option, at the
redemption prices described on page 79 in this prospectus.
Public Equity Offering Optional
Redemption...................... Before March 1, 2007, we may redeem up to 35% of the
aggregate principal amount of the exchange notes with the
net proceeds of a public equity offering at 107.375% of the
principal amount of the exchange notes, plus accrued
interest, if at least 65% of the aggregate principal amount
of the exchange notes remain outstanding after such
redemption.
Change of Control................. Upon a change of control of our company, coupled with a
decrease in the rating of the exchange notes to below
investment grade by external rating agencies within
120 days after the announcement of the change of control, we
must offer to repurchase all of the exchange notes at a
purchase price equal to 101% of the principal amount of the
exchange notes, plus accrued and unpaid interest; provided
however, this obligation to make a change of control offer
</Table>
4
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<Table>
shall not apply after a Fall-away Event as described in
"Description of the Exchange Notes--Fall-away Event."
Covenants......................... The indenture governing the exchange notes will contain
covenants that, among other things, will limit our ability
and the ability of our subsidiaries to:
- incur additional indebtedness;
- pay dividends on, redeem or repurchase our capital
stock;
- make certain investments;
- issue or sell capital stock of restricted
subsidiaries;
- create certain liens;
- sell assets;
- in the case of our restricted subsidiaries, make
dividend or other payments to us;
- engage in transactions with affiliates;
- create unrestricted subsidiaries; and
- consolidate, merge or transfer all or substantially
all of our assets and the assets of our subsidiaries on
a consolidated basis.
These covenants are subject to important exceptions and
qualifications that are described under the heading
"Description of the Exchange Notes" in this prospectus,
including under "--Fall-away Event."
Fall-away Event................... If the exchange notes are rated investment grade and upon
the occurrence of certain other events described under
"Description of the Exchange Notes--Fall-away Event" in this
prospectus, we and our subsidiaries will cease to be subject
to many of the restrictive covenants in the indenture,
notwithstanding that the exchange notes may later cease to
be rated investment grade. See the section "Description of
the Exchange Notes--Fall-away Event" in this prospectus.
Exchange Offer;
Registration Rights............. Under a registration rights agreement executed as part of
the offering of the notes, we and the guarantors have agreed
to:
- file this registration statement within 120 days after
the issue date of the outstanding notes enabling holders
of outstanding notes to exchange the privately placed
outstanding notes for publicly registered exchange
notes with substantially similar terms;
- cause this registration statement to become effective
within 180 days after the issue date of the outstanding
notes;
- complete this exchange offer within 240 days after the
issue date of the outstanding notes; and
</Table>
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<Table>
- file a shelf registration statement for the resale of
the notes if we cannot effect this exchange offer within
the time periods listed above and in other
circumstances.
Terms of Indenture................ The indenture governing the exchange notes will have
substantially the same terms as the indentures governing our
notes.
Tax Redemption.................... If certain changes affecting Canadian withholding taxes
occur, we can redeem the exchange notes at their face
amount, plus accrued and unpaid interest. See "Description
of the Exchange Notes--Tax Redemptions."
Risk Factors...................... See "Risk Factors" and the other information in this
prospectus for a discussion of factors you should carefully
consider before deciding to accept the exchange offer.
</Table>
RECENT DEVELOPMENTS
Paper Recycling Acquisition. In December 2003, we established our Paper
Recycling Division through the acquisition of Western Canada's largest paper
recycling facility for a total purchase price of $61.1 million (which included a
$2.5 million working capital adjustment), comprised of $31.5 million of cash and
approximately 8.7 million of our common shares having a value of $29.0 million,
and $0.6 million in transaction costs. Our Paper Recycling Division has a
current production capacity of 145,000 air-dried equivalent tonnes of pulp per
year. See "Business--Lines of Business--Pulp--Paper Recycling Division"
First Quarter 2004 Upgrades and Maintenance. We completed the upgrade of a
recovery boiler at our Elk Falls mill in March, 2004. This upgrade will allow
the permanent shutdown of a smaller recovery boiler, a lime kiln and a bleach
plant. As a result, gross pulp production at Elk Falls will be reduced by
approximately 80,000 tonnes per year. This decrease in production is expected to
be offset by reduced internal consumption of kraft pulp. We expect the upgrade
will have a positive impact on our earnings over the balance of 2004. See
"Managements Discussion and Analysis of Financial Condition and Results of
Operations--Outlook".
First Quarter 2004 Results of Operations. We announced our first quarter
2004 results of operations on April 29, 2004. We had net sales, EBITDA and cash
flow provided by operations, after changes in non-cash working capital, of
$399.2 million, $7.4 million and $27.1 million, respectively. Our net loss for
this period was $46.3 million, or $0.22 per common share. EBITDA was in line
with our expectations, and our results reflect the previously announced annual
kraft mill maintenance shutdown at Crofton, and the extended Elk Falls kraft
mill shutdown to rebuild the No. 2 recovery boiler. For further information
concerning our first quarter 2004 results of operations, please see our
Form 6-K filed with the SEC on April 30, 2004 and incorporated by reference in
this prospectus.
CORPORATE INFORMATION
We are a corporation organized under the laws of Canada. Our principal
executive offices are located at Suite 1600, 250 Howe Street, Vancouver, British
Columbia, Canada, V6C 3R8 and our telephone number is 604.654.4000. Our website
is WWW.NORSKECANADA.COM. The information contained on or connected to our
website is not part of this prospectus and is not incorporated in this
prospectus by reference.
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RISK FACTORS
You should carefully consider the following factors and other information in
this prospectus before you decide to exchange your notes:
RISKS RELATED TO OUR BUSINESS
OUR BUSINESS IS OF A CYCLICAL NATURE AND OUR PRODUCT PRICES MAY FLUCTUATE
SIGNIFICANTLY
The pulp and paper industry is a commodity market in which producers compete
primarily on the basis of price. Prices for our products have fluctuated
significantly in the past and may fluctuate significantly in the future,
principally as a result of market conditions of supply and demand, as well as
changes in exchange rates. In addition, demand for our products is traditionally
weaker in the first half of the year. The markets for pulp and paper products,
including our products, are highly variable and are characterized by periods of
excess product supply due to many factors, including:
- additions to industry capacity;
- increased industry production;
- periods of insufficient demand due to weak general economic activity or
other causes; and
- reduced inventory levels held by customers.
Demand for forest products is generally correlated with global economic
conditions. In periods of economic weakness, reduced spending by consumers and
businesses results in decreased demand for forest products, resulting in lower
product prices and possible manufacturing downtime. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Outlook."
Our earnings are sensitive to price changes for our principal products, with
the effect of price changes on newsprint and groundwood specialty grades being
the greatest. The effect of changes in product prices on our net earnings is
shown under "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Product Price Sensitivity." Additionally, even though our
costs may increase, our customers may not accept price increases for our
products, or the prices for our products may decline. As our financial
performance is principally dependent on the prices we receive for our products,
prolonged periods of low prices, customer refusal to accept announced price
increases or significant cost increases could have a material adverse effect on
our business, financial condition, results of operations, cash flow and our
ability to satisfy our obligations under our debt, including the exchange notes.
WE FACE SIGNIFICANT GLOBAL COMPETITION WHICH MAY HARM OUR FINANCIAL CONDITION
The markets for our products are highly competitive on a global basis. The
pulp and paper industry is a commodity market in which producers compete
primarily on the basis of price. In addition, a majority of our production is
directed to export markets. For example, for the year ended December 31, 2003,
approximately 87% of our paper sales volume and 99% of our pulp sales volume
were directed to the export markets. We compete on a worldwide basis against
many producers of approximately the same or larger capacity.
In export markets, Canadian producers generally compete with American,
European and Asian producers. Many of our competitors have greater financial
resources than we do and some of the mills operated by our competitors are lower
cost producers than the mills we operate.
Variations in the exchange rate between the Canadian dollar and the currency
of the markets to which we export our products could adversely affect our
competitive position relative to those of our overseas competitors. In addition,
the following factors will also affect our ability to compete:
- the quality of our products and customer service;
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- our ability to maintain high plant efficiencies and operating rates and
thus lower manufacturing costs;
- the cost of energy; and
- the availability, quality and cost of fiber and labor.
Some of our competitors have lower energy, fiber and labor costs and fewer
environmental and governmental regulations to comply with than we do. Others are
larger in size, allowing them to achieve greater economies of scale on a global
basis. If we are unable to successfully compete on a global basis, our financial
condition could be harmed.
WE ARE SUBJECT TO THE RISKS OF EXCHANGE RATE FLUCTUATIONS
Nearly all of our sales are based upon prices that are set in U.S. dollars,
while most of our costs and expenses are incurred in Canadian dollars and our
results of operations and financial condition are reported in Canadian dollars.
An increase in the value of the Canadian dollar relative to the U.S. dollar
would reduce the amount of revenue in Canadian dollar terms realized by us from
sales made in U.S. dollars. This would reduce our operating margin and the cash
flow available to fund our operations and to service the portion of our debt
that is denominated in Canadian dollars.
Fluctuations in foreign currencies affect our competitive position in world
markets. Apart from the value of the Canadian dollar relative to the
U.S. dollar, our competitiveness in world markets is also affected by the
relative strength of the currencies of other producing countries.
In addition, we are exposed to currency exchange risk on debt denominated in
U.S. dollars, including our 8 5/8% notes and the exchange notes. Although we may
enter into transactions to hedge the currency exchange rate risk with respect to
our U.S. dollar denominated debt, we cannot assure you that we will engage in
such transactions or, if we decide to engage in any such transactions, that we
will be successful in eliminating currency exchange risks and that changes in
currency exchange rates will not have a material adverse effect on our ability
to make payments in respect of our indebtedness.
For the purposes of financial reporting, any change in the value of the
Canadian dollar against the U.S. dollar during a given financial reporting
period would result in a foreign currency loss or gain on the translation of any
U.S. cash and cash equivalents or U.S. dollar denominated debt into Canadian
currency. Consequently, our reported earnings could fluctuate materially as a
result of foreign exchange translation gains or losses. Foreign exchange gains
or losses on the translation of U.S. dollar denominated long-term debt are
reduced by resulting gains and losses on respective forward exchange contracts
and options.
OUR SUBSTANTIAL DEBT MAY IMPAIR OUR FINANCIAL AND OPERATING FLEXIBILITY
We have a substantial amount of debt. As of December 31, 2003 on a
consolidated basis, we and the guarantors had outstanding approximately
$808.2 million of senior debt, of which $12.5 million was secured debt. This
amount excludes senior secured non-recourse debt owed by a joint venture of
which our 50.1% non-controlling proportionate share is $37.6 million.
In addition, as of December 31, 2003 the borrowing base on the
$350.0 million revolving operating loan was $343.4 million. After drawings of
$12.5 million and outstanding letters of credit of $25.7 million,
$305.2 million was available to us.
Our debt agreements contain various restrictive and financial covenants, as
described in "Description of Other Indebtedness." All these restrictions,
together with our substantial debt, could:
- limit our ability to obtain additional financing to fund our growth
strategy, working capital, capital expenditures, debt service requirements
or other purposes;
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- limit our ability to use operating cash flow in other areas of our
business, because we must use a portion of these funds to make principal
and interest payments on our debt;
- increase our vulnerability to interest-rate fluctuations because the debt
under our secured credit facility is at variable interest rates;
- limit our ability to compete with competitors who have more flexibility as
to the use of their cash flow;
- limit our ability to make investments or take other actions; and
- limit our ability to react to changing market conditions, changes in our
industry and economic downturns.
Our ability to pay interest on the exchange notes and to satisfy our other
debt obligations will depend upon our future operating performance and our
ability to obtain additional debt or equity financing, when necessary.
Prevailing economic conditions and financial, business and other factors beyond
our control may affect our ability to make these payments. For example,
depressed market conditions had an adverse effect upon our financial condition
and results of operations. If in the future we cannot generate sufficient cash
from operations to make scheduled payments on the notes or meet our other
obligations, we will need to renegotiate our loan agreements, refinance all or
part of the exchange notes, obtain additional financing or sell assets. We
cannot assure you that our business will generate sufficient cash flow, or that
we will be able to obtain the funds necessary to satisfy these obligations.
Similarly, if we breach or are unable to meet the restrictions or financial
covenants in our secured credit facility, including a minimum consolidated
shareholders' equity threshold, maximum funded debt to capitalization, secured
debt to capitalization ratios and in some circumstances a minimum interest
coverage ratio, we would have to cure the default, obtain a waiver of the
default or enter into an appropriate amendment to the agreements governing our
secured credit facility. If we are not able to cure such default, obtain such
waiver or enter into such amendment, a significant portion of our debt,
including all of our secured debt, would become immediately due and payable.
As of December 31, 2003, we were in compliance with the covenants under both
the agreement governing our secured credit facility and the note indenture
governing our 8 5/8% notes. However, as at that date our consolidated fixed
charge ratio was below the 2.0:1 threshold in our existing note indentures. A
similar threshold is contained in the indenture governing the exchange notes.
While our consolidated fixed charge coverage ratio is below 2.0:1, we may not
pay dividends and we are limited as to the amount of additional debt we may
incur. We may not have, or be able to obtain, sufficient funds to make
accelerated debt payments, including any accelerated payments on the exchange
notes. We cannot assure you that we will be able to effectively cure a breach or
obtain debt or equity financing or sell assets as alternative means of
responding to a breach.
Our secured credit facility, described under "Description of Other
Indebtedness," provides us with financing at floating interest rates. The
interest rates charged from time to time on that debt depend, in part, upon our
credit rating. Accordingly, a credit rating upgrade could reduce our borrowing
costs and a downgrade in our credit rating could increase our borrowing costs.
An increase in our borrowing costs could have a material adverse effect on our
results of operations. In February 2004, Moody's lowered its existing ratings to
Ba3 on our senior unsecured debt and Ba2 on our secured credit facilities and
confirmed its outlook on our debt ratings as negative. This revision caused our
borrowing costs to increase by $1.3 million, assuming the facility is fully
drawn.
WE EXTEND TRADE CREDIT TO OUR CUSTOMERS AND THEY MAY NOT PAY US PROMPTLY OR IN
FULL
We extend trade credit to certain of our customers to facilitate the
purchase of our products. We rely on the creditworthiness of such customers. The
failure of such customers to pay us promptly or in
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full under the terms of the trade credit we extend to them could have a material
adverse effect on our financial condition.
INCREASES IN OUR CAPITAL EXPENDITURES OR MAINTENANCE COSTS COULD HAVE A MATERIAL
ADVERSE EFFECT ON OUR CASH FLOW AND OUR ABILITY TO SATISFY OUR DEBT OBLIGATIONS
Our business is capital intensive. Our annual capital expenditures may vary
due to fluctuations in requirements for maintenance, business capital, expansion
and as a result of changes to environmental regulations that require capital for
compliance. In addition, our senior management and board of directors may
approve projects in the future that will require significant capital
expenditures. Increased capital expenditures could have a material adverse
effect on our cash flow and our ability to satisfy our debt obligations.
Further, while we regularly perform maintenance on our manufacturing equipment,
key pieces of equipment in our various production processes may still need to be
repaired or replaced. The costs of repairing or replacing such equipment and the
associated down time could have a material adverse effect on our business,
financial condition, results of operations and cash flow.
WE FACE RISKS RELATED TO OUR INTERNATIONAL SALES
We have customers located outside Canada and the United States. For example,
99% of our pulp revenues for 2003 were generated in the Pacific Rim, Europe and
other offshore markets. As a result we face a number of risks and challenges,
including:
- the effective marketing of our products in these global regions;
- tariffs and other trade barriers;
- political and economic instability in foreign markets; and
- fluctuations in foreign currencies which may make our products less
competitive in countries in which currencies decline in value relative to
the dollar.
We have sales and marketing contracts with related parties, which provide
for sales agency and distribution arrangements in the United States and certain
international markets. Either party, upon six or, in some cases, three months
notice, may terminate each of these contracts. If any of these contracts are
terminated, we will be required to replace the sales agent or distributor within
the notice period in order to minimize disruption to our sales activities in the
relevant market. There is no assurance that we will be able to replace such
sales agents and distributors, or that we will be able to obtain comparable
terms and conditions in any replacement contract that we enter into.
WE ARE EXPOSED TO FLUCTUATIONS IN THE COST AND SUPPLY OF WOOD FIBER AND TO
POTENTIAL ABORIGINAL TITLE CLAIMS THAT MAY ALSO AFFECT THE SUPPLY OF WOOD FIBER
We have no timber holdings and consequently our operations are dependent on
the supply of wood fiber from third party suppliers. Any increase in the cost of
wood fiber will adversely affect our profit margins if we cannot pass along such
cost to our customers. We are subject to the following risks that are associated
with the fluctuations in the cost and supply of wood fiber.
We are dependent on a small number of suppliers to provide a significant
portion of our fiber needs. Currently, approximately 49% of our fiber needs are
provided by five suppliers, as described in more detail in "Business--Fiber
Supply." If we are unable to obtain wood fiber under our contracts with these
major suppliers, we may not be able to find alternative sources of fiber at
acceptable prices.
In December, 2002 one of our fiber suppliers commenced creditor protection
proceedings. Those proceedings have not yet been resolved and we are unable to
determine the impact of this development on our fiber supply.
The quantity of fiber that we receive from our suppliers could be reduced as
a result of events beyond our control, such as industrial disputes, material
curtailments or shutdown of operations by our
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suppliers or ourselves for market or other reasons, government orders and
legislation and natural disasters. If there is widespread curtailment in timber
harvesting operations in British Columbia, due to economic or other reasons, it
could have a significant negative impact upon us. The price of wood chips and
other fiber could increase materially and the volume of such fiber available
could decrease significantly. Export duties and tariffs on lumber may affect the
supply of wood fiber. The ongoing countervail and anti-dumping duties applied on
softwood lumber exports from Canada to the United States may affect the supply
of wood fiber to our manufacturing facilities. Countervail duties are duties or
taxes imposed by the United States government to counter the effect of alleged
subsidies provided by foreign governments. If any of our major suppliers of
fiber were to reduce its levels of producing softwood lumber, shut down for an
extended period of time or cease operations, this may decrease the quantity of
fiber available to us and may result in higher prices for the fiber that is
available. In such a situation our cost of fiber may increase and we may have to
reduce our production levels, perhaps substantially.
Government regulations and aboriginal issues may also lower the supply of
wood fiber. Most of our suppliers consume logs originating in British Columbia.
The Province of British Columbia owns approximately 95% of all timberlands in
British Columbia. Therefore, it could reduce the supply of wood fiber by
enacting legislation which could, among other things, reduce harvest levels
within forest tenures or increase the charges that it levies on the harvest of
Crown timber. In addition, under the terms of an understanding reached on
April 4, 2001 among industry and environmental participants, community and
aboriginal groups and the provincial government with respect to forestry
activities in British Columbia's central coast region (from which we obtain
approximately 12% of our fiber supply), we expect there will be a reduction of
the annual allowable cut in the central coast-region of British Columbia.
Furthermore, the Supreme Court of Canada affirmed in 1997 that aboriginal groups
may continue to have aboriginal title and rights in areas of British Columbia
that are not covered by treaties. Aboriginal groups have claimed aboriginal
title and rights over substantial portions of British Columbia, including areas
where the forest tenures held by our suppliers are situated, creating
uncertainty as to the status of competing property rights. In 1992, the
governments of Canada and British Columbia established a formal process to
negotiate settlements with aboriginal groups throughout British Columbia in
order to resolve these land claims. Some of these groups have withdrawn from
negotiations since the Supreme Court of Canada decision and commenced litigation
to pursue their claims. Although the renewal of forest tenures held by our
suppliers will likely be adversely affected by claims of aboriginal title by
aboriginal groups, the specific impact cannot be estimated at this time.
In 2003 the Province of British Columbia enacted fundamental changes to the
regulation of British Columbia's forest industry. The new legislation provides
for, among other things, the taking back by the Province of British Columbia of
approximately 20% of the harvesting rights under existing timber licenses and
existing replaceable tree farm licenses, forest licenses and timber sale
licenses.
The new legislation will also:
- increase the volume of timber to be sold by public auction;
- establish a more market-based system of charging tenure holders for
harvesting standing timber; and
- change or eliminate many of the requirements associated with holding long
term tenures such as minimum cut requirements and requirements that timber
be processed through certain facilities.
The new legislation provides that the 20% of existing harvesting rights to
be taken back can be attributed in "equal or unequal portions" to the tenures
listed in the schedule to the legislation. The schedule includes tenures held by
our five major suppliers. Accordingly, the tenures from which our fiber supply
is derived may be impacted by an amount up to 20%. The changes will not be
implemented until enabling regulations are put into place by the British
Columbia government.
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Accordingly, we cannot yet determine the extent to which these changes will
affect the supply of fiber to our mills, our relationship with our fiber
suppliers or the price and availability of fiber.
Also, the majority of our fiber suppliers have employees who are represented
by the Industrial Wood and Allied Workers' Union, or IWA. The IWA's collective
agreements expired in June, 2003. A four-week coast-region strike was ended by a
back to work order and the appointment of a commissioner to work with the
parties to conclude a new collective agreement. Negotiations for new collective
agreements with some British Columbia interior-region lumber producers are still
taking place and their outcome and the impact, if any, on our operations is not
currently determinable.
LABOR DISRUPTIONS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS
Our operations and maintenance staff are unionized. All of our approximately
2,900 hourly employees at our pulp and paper mills are members of either the
Communications, Energy & Paperworkers Union of Canada, or CEP, or the Pulp,
Paper and Woodworkers of Canada, or PPWC. Collective agreements with these
unions will expire in April 2008. Twenty-three employees at the Port Alberni
location are members of the Office and Professional Employees International
Union. The collective agreement with this union will expire in April 2006. We
may not be able to negotiate an acceptable contract with any of our unions upon
expiration of the existing contracts. This could result in a strike or work
stoppage by the affected workers. Renewal of contracts could result in higher
wages or benefits paid to union members. Therefore, we could experience a
significant disruption of our operations or higher ongoing labor costs, which
could have a material adverse effect on our business, financial condition,
results of operations and cash flow. We may also be negatively affected by
labour disruptions involving our suppliers and service providers.
OUR ABILITY TO OPERATE OUR MANUFACTURING FACILITIES WILL ALSO CONTINUE TO BE
AFFECTED BY ABORIGINAL GROUPS' CLAIMS OF ABORIGINAL TITLE AND RIGHTS.
To date, we have not been adversely affected by the issues raised by
aboriginal groups involving our manufacturing facilities. Such issues have been
successfully dealt with through consultation and mitigation measures on a case
by case basis. In the case of our mill at Powell River, British Columbia, the
site has been included in areas to which an aboriginal group has asserted
aboriginal title both through treaty negotiations with the governments of Canada
and British Columbia and by filing a claim in the Supreme Court of British
Columbia. It is the policy of the governments that ownership of lands held in
fee simple by third parties such as us will not be affected by treaty
negotiations. This was confirmed in relation to our Powell River mill in an
Agreement-in-Principle among the aboriginal group and the two governments that
was approved in October 2003 by a vote of the members of the aboriginal group
and that contemplates the settlement of the group's aboriginal claims on terms
of a final agreement to be negotiated. While we and other industrial companies
have been named as parties in the court proceeding along with the governments of
Canada and British Columbia, no other steps have yet been taken against us in
the proceeding. Based on the history of similar proceedings, we expect that it
would take many years before a final court decision could be rendered if the
court proceeding were pursued against us.
Recent court decisions have confirmed that the governments of Canada and
British Columbia are obligated to consult with aboriginal groups, and to
accommodate their concerns, whenever there is a reasonable prospect that a
governmental decision--such as a decision to grant a regulatory permit--may
infringe asserted aboriginal rights and title, even if those claims have not yet
been proven. This duty of consultation may affect our ability to obtain or amend
necessary regulatory permits on a timely basis. As well, if the respective
government does not consult as required in the granting of a regulatory permit,
the permit may be legally flawed, giving rise to remedies against
the permitholder.
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WE ARE DEPENDENT ON THE SUPPLY OF CERTAIN RAW MATERIALS
In addition to the supply of wood fiber, we are dependent on the supply of
certain chemicals and other inputs used in our production facilities. Any
disruption in the supply of these chemicals or other inputs could affect our
ability to meet customer demand in a timely manner and would harm our
reputation. Any material increase in the cost of these chemicals or other inputs
could have a material adverse effect on our financial condition.
WE ARE SUBJECT TO SIGNIFICANT ENVIRONMENTAL REGULATION
We are subject to extensive environmental laws and regulations. We describe
in more detail in "Business--Environment" the environmental laws and regulations
governing our operations and our compliance efforts in this regard. These
environmental laws and regulations impose stringent standards on us regarding,
among other things:
- air emissions;
- water discharges;
- use and handling of hazardous materials;
- use, handling and disposal of waste; and
- remediation of environmental contamination.
We have incurred and will continue to incur substantial costs to comply with
environmental laws. In 2003, capital expenditures relating to environmental
projects were $3 million. We estimate that our capital expenditures relating to
known environmental projects will total approximately $7 million in 2004 and
approximately $2 million in 2005. However, we cannot assure you that actual
expenditures will not exceed the estimated amounts. In addition, future events
such as any changes in environmental or other laws and regulations, including
any new legislation that might arise as a result of the Government of Canada's
ratification of the Kyoto Protocol or any change in interpretation or
enforcement of existing laws or regulations may give rise to additional
expenditures or liabilities. Enforcement of existing environmental laws and
regulations has become increasingly strict. We may discover currently unknown
environmental problems or conditions in relation to our past or present
operations, or we may be faced with unforeseen environmental liability in the
future. These may require site or other remediation costs to maintain compliance
or correct violations of environmental laws and regulations or result in
governmental or private claims for damage to person, property or the
environment, which could have a material adverse effect on our financial
condition and results of operations.
CONSUMER BOYCOTTS OR INCREASES IN COSTS DUE TO CHAIN-OF-CUSTODY PROGRAMS COULD
HAVE A MATERIAL ADVERSE EFFECT ON OUR EARNINGS
Some customers have become sensitive to issues related to harvesting of old
growth forests and require that we supply products that are not produced from
old growth forests. A growing number of customers want to purchase products that
originate from sustainably managed forests, as validated by certification
schemes. In order to meet our customers' demands we may be required to establish
chain-of-custody certification programs. This may increase our costs. If we
cannot successfully establish such programs, demand for our products may be
adversely affected. Also, we may be the subject of organized boycotts or similar
actions by environmental or other groups, which may adversely affect demand for
our products.
TEMPORARY PLANT SHUTDOWNS COULD AFFECT OUR ABILITY TO MEET CUSTOMER DEMAND
From time to time we temporarily suspend operations at one or more of our
manufacturing facilities as a result of environmental, workplace safety, or
other operational issues, including power
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failures. These temporary suspensions of operations could affect our ability to
meet customer demand in a timely manner. Any such failure to meet customer
demand would harm our reputation and could have a material adverse effect on our
financial condition.
ANY INCREASE IN ENERGY COSTS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR
EARNINGS
We are a significant electrical power and fossil fuel consumer. Our
electricity supply contracts are regulated by the Government of British Columbia
and there have been no recent fluctuations in the price or terms of such
contracts. Recent changes to the prices and terms of our other energy supply
contracts have not had a material effect on our financial condition. However, in
the future, changes in the prices and terms of our energy supply contracts could
have a significant effect on our earnings. In late 2003, the British Columbia
Utilities Commission, or BCUC, received an application from our electricity
supplier for approval to increase electricity prices by 7% from April 2004, and
a further 2% from April 2005. In March 2004, the electricity supplier filed a
revision to its application requesting a rate increase of 8.9% in 2004 and no
increase in 2005. The BCUC has determined that an interim rate increase of 7.3%,
approved by the BCUC, will take effect on April 1, 2004 pending the completion
of a full public hearing beginning May 17, 2004. If the full 8.9% rate increase
is awarded, the additional 1.6% would be effective 30 days after the BCUC
decision and would not be retroactive to April 1. Further, interruptions in the
supply of electricity to Vancouver Island, where three of our four mills are
located, if sustained, may have a material adverse effect on us.
WE HAVE RECORDED LOSSES FOR EACH OF THE LAST TEN QUARTERS
We have incurred a net loss in each of the ten quarters since the end of
September 2001, and operating losses have been recorded for the last eight
quarters. These losses have arisen primarily as a result of adverse market
conditions, as discussed in this "Risk Factors" section and in "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
Should these conditions continue, we may over time have to rely to a greater
extent on our revolving operating loan and if necessary, additional sources of
funding.
OUR INSURANCE IS LIMITED AND SUBJECT TO EXCLUSIONS
We have obtained insurance coverage that we believe would ordinarily be
maintained by an operator of facilities similar to our facilities. The insurance
policies are subject to limits and exclusions. Damage or destruction to our
facilities could result in claims that are excluded by our insurance policies or
exceed the limits of our policies.
THE PACIFICA PAPERS ACQUISITION WAS SUBJECT TO REGULATORY APPROVALS THAT MAY BE
CHALLENGED UP TO THREE YEARS AFTER THE ACQUISITION
The completion of the acquisition of Pacifica Papers Inc., or Pacifica
Papers, on August 27, 2001 was conditioned upon the expiration or earlier
termination of the applicable statutory waiting periods, which began upon notice
of the transaction to the Commissioner of Competition in Canada. We received
notification from the Commissioner of Competition on August 14, 2001 that the
acquisition of Pacifica Papers would not be opposed by the Commissioner.
However, an application to the Competition Tribunal alleging that the
transaction will, or is likely to, lessen competition substantially, may be
brought by the Commissioner of Competition at any time within three years after
completion of the transaction. Although we do not believe that grounds exist for
any such proceeding, we cannot assure you that a challenge to the Pacifica
Papers acquisition on competition grounds will not be made or that, if such a
challenge is made, it would not be successful.
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TERRORIST ATTACKS AND OTHER ACTS OF VIOLENCE OR WAR MAY AFFECT THE MARKETS IN
WHICH THE NOTES TRADE, THE MARKETS IN WHICH WE OPERATE AND OUR PROFITABILITY AND
CASH FLOW
Terrorist attacks or other acts of violence or war may negatively affect our
operations and your investment. These attacks may directly impact our suppliers'
or customers' physical facilities. Furthermore, these attacks may make travel
and the transportation of our supplies and products more difficult and more
expensive and ultimately affect our operating results. The United States has
entered into, and may enter into additional, armed conflicts which could have a
further impact on our sales and our ability to deliver product to our customers
in the United States and elsewhere. Political and economic instability in some
regions of the world may also result and could negatively impact our business.
The consequences of any of these armed conflicts are unpredictable, and we may
not be able to foresee events that could have an adverse effect on our business
or your investment. More generally, any of these events could cause consumer
confidence and spending to decrease or result in increased volatility in the
United States and worldwide financial markets and economy. They could also
result in economic recession in the United States or abroad. Any of these
occurrences could have a significant impact on our operating results, revenues,
costs and cash flow and may result in volatility of the market price of our
securities.
RISKS RELATED TO OUR COMPANY
YOU MAY HAVE DIFFICULTY ENFORCING U.S. BANKRUPTCY LAWS AND OTHER LAWS IN CANADA
Under bankruptcy laws in the United States, courts have jurisdiction over a
debtor's property wherever it is located, including property situated in other
countries. However, courts outside of the United States may not recognize the
U.S. bankruptcy court's jurisdiction. Accordingly, you may have difficulty
administering a U.S. bankruptcy case involving us, because we have property
located outside of the United States. Any orders or judgments of a bankruptcy
court in the United States may not be enforceable against us with respect to our
property located outside the United States.
Under the indenture governing the exchange notes, the rights of the trustee
to enforce remedies may be significantly impaired if we seek the benefit of the
restructuring provisions of applicable Canadian federal bankruptcy, insolvency
and other restructuring legislation. For example, both the BANKRUPTCY AND
INSOLVENCY ACT (Canada) and the COMPANIES' CREDITORS ARRANGEMENT ACT (Canada)
contain provisions enabling an "insolvent person" to obtain a stay of
proceedings against its creditors and others and to prepare and file a proposal
or plan of compromise or arrangement for consideration by all or some of its
creditors to be voted on by the various classes of its creditors. The
restructuring plan or proposal, if accepted by the requisite majorities of
creditors and if approved by the court, may be binding on persons who may not
otherwise accept it. Moreover, this "proposal legislation" may permit the
insolvent debtor to retain possession and administration of its property, even
though it may be in default under the applicable debt instrument.
The powers of the courts under the BANKRUPTCY AND INSOLVENCY ACT (Canada)
and particularly under the COMPANIES' CREDITORS ARRANGEMENT ACT (Canada) have
been exercised broadly to protect a restructuring entity from actions taken by
creditors and other parties. Accordingly, we cannot predict if payments under
the notes would be made following commencement of or during such a proceeding,
whether or when the trustee could exercise its rights under the indenture
governing the exchange notes, whether your claims could be compromised or
extinguished under such a proceeding or whether and to what extent holders of
the notes would be compensated for delays in payments, if any, of principal and
interest.
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YOU MAY NOT BE ABLE TO ENFORCE CIVIL LIABILITIES UNDER U.S. LAW
You may not be able to enforce civil liabilities under applicable
U.S. federal and state securities laws because:
- we are organized under the laws of Canada;
- all of our officers and all but one of our directors are not residents of
the United States;
- some or all of the experts named in this prospectus are not residents of
the United States; and
- all or substantially all of our assets, the assets of our officers and all
but one of our directors, and the experts named in this prospectus are
located outside the United States.
It may be difficult or impossible for you to effect service of process upon
us or our officers, directors or experts within the United States. It may also
be difficult for you to enforce judgments of U.S. courts for civil liabilities
under applicable U.S. federal and state securities laws against us, our
officers, directors or experts. Courts in Canada may not enforce:
- judgments of U.S. courts obtained in actions against us or our officers,
directors or experts predicated upon the civil liability provisions of
applicable U.S. federal and state securities laws; and
- liabilities against us or our officers, directors or experts predicated
upon U.S. federal and state securities laws in original actions brought in
Canada.
OUR MILLS ARE LOCATED IN SEISMICALLY ACTIVE AREAS
Since Vancouver and the south coast of British Columbia are located in a
seismically active area, we are particularly susceptible to the risk of damage
to, or total destruction of, our mills and the surrounding transportation
infrastructure caused by earthquakes. Further, our mills are located directly
adjacent to the ocean, and the south coast of British Columbia is an area that
is susceptible to similar damage caused by tsunamis. We cannot assure you that
we are adequately insured to cover the total amount of any losses caused by an
earthquake or tsunami. In addition, we are not insured against any losses due to
interruptions in our operations due to damage to, or destruction of, our mills
caused by earthquakes or tsunamis or to major transportation infrastructure
disruptions or other natural events that do not occur on our premises.
RISKS RELATED TO THE EXCHANGE NOTES
WE MAY NOT BE ABLE TO PURCHASE THE NOTES UPON A CHANGE OF CONTROL
The indentures governing the exchange notes and the existing 8 5/8% notes
provide that if we experience a change of control accompanied by a decline in
the rating of the applicable notes to below investment grade, we must make an
offer to purchase all of the exchange notes and the 8 5/8% notes at a purchase
price equal to 101% of the principal amount, plus accrued and unpaid interest to
the date of purchase. The source of funds for that purchase would be our
available cash or cash generated from other sources. However, we may not be able
to access sufficient funds, internally or otherwise, to purchase any notes
tendered. A change of control could also result in acceleration of our other
debt, including outstanding borrowings under revolving credit facilities. We may
not have sufficient funds at the time of a change of control to repay our other
senior debt and repurchase the notes. Our failure to meet any of these
obligations could cause an event of cross-default under our secured credit
facilities and other debt agreements, causing substantially all of our debt to
become immediately due and payable.
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YOUR CLAIMS ARE EFFECTIVELY SUBORDINATED TO OUR SECURED DEBT
As of December 31, 2003, on a consolidated basis, we had outstanding
$808.2 million of senior debt, of which $12.5 million was secured debt. In
addition, we had an additional $305.2 million of debt available under the
revolving portion of our secured credit facility. This excludes senior secured
non-recourse debt owed by a joint venture in which we have a 50.1%
non-controlling economic interest, of which our proportionate share is
$37.6 million.
Our secured credit facility is collateralized by substantially all of our
assets including the assets of our subsidiary guarantors. We may incur
additional secured debt in the future. Secured debt effectively ranks senior to
the exchange notes to the extent of the value of the collateral. If we default
on the exchange notes, become bankrupt, liquidate, restructure or reorganize, it
would result in a default under our secured credit facility and our secured
creditors could use the collateral to satisfy the secured debt before you will
receive any payment on the exchange notes. If the value of the collateral is
insufficient to pay all of the secured debt, our secured creditors would share
equally in the value of our other assets, if any, with you and any other
creditors (including the holders of the existing 8 5/8% notes, whose claims
against us rank equally with the exchange notes).
NO PUBLIC TRADING MARKET FOR THE EXCHANGE NOTES MAY DEVELOP
No active trading market currently exists for the exchange notes, and none
may develop following this offering. Although the initial purchasers have
informed us that they intend to make a market in the exchange notes, they are
not obligated to do so and may discontinue any market-making activities at any
time without notice.
The liquidity of any market for the exchange notes will depend on the number
of holders of the notes, the interest of securities dealers in making a market
in the exchange notes and other factors. Accordingly, we cannot assure you that
a market will develop or that any market for the exchange notes that develops
will be liquid. If an active trading market for the exchange notes does not
develop, the market price and liquidity of the exchange notes may be adversely
affected. If any of the exchange notes are traded, they may trade at a discount
from their initial offering price. The trading price may depend upon:
- prevailing interest rates;
- the market for similar securities;
- general economic conditions; and
- our financial condition, performance and prospects.
THERE ARE RESTRICTIONS ON YOUR ABILITY TO TRANSFER THE NOTES
The exchange notes will be distributed pursuant to exemptions from the
registration and prospectus requirements of applicable Canadian securities
legislation and may be resold in Canada only pursuant to an exemption from
applicable registration and prospectus requirements.
COURTS COULD SUBORDINATE OR VOID THE GUARANTEES UNDER FRAUDULENT CONVEYANCE
STATUTES
Fraudulent conveyance laws in the United States and in the Canadian
provinces have been enacted for the protection of creditors. Under these
fraudulent conveyance laws, a U.S. or Canadian court could further subordinate
the guarantees granted under the indenture governing the exchange notes to the
guarantors' present and future indebtedness and a U.S. or Canadian court could
take other detrimental actions, including voiding the guarantees and payments
made under the guarantees. The U.S. or Canadian court could take that action if
it found that at the time the guarantee was incurred, the guarantor intended to
hinder, delay or defraud any present or future creditor or the guarantor:
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- received less than reasonably equivalent value or fair consideration for
the incurrence of such indebtedness; and:
- was insolvent or rendered insolvent by reason of such incurrence;
- was engaged in a business or transaction for which such guarantor's
remaining assets constituted unreasonably small capital; or
- intended to incur, or believed that it would incur, debts beyond its
ability to pay such debts as they mature.
The measures of insolvency for purposes of these fraudulent transfer laws
vary depending on the law applied in any proceeding to determine whether a
fraudulent transfer has occurred. Generally, however, a party would be
considered insolvent if:
- the sum of its debts, including contingent liabilities, were greater than
the fair saleable or disposable value of all of its assets;
- the present fair saleable or disposable value of its assets was less than
the amount that would be required to pay its probable liability on its
existing debts, including contingent liabilities, as they become absolute
and mature; or
- it could not pay its debts as they become due.
Among other things, a legal challenge of a guarantee of the notes on
fraudulent conveyance grounds may focus on the benefits, if any, realized by
that subsidiary as a result of the issuance of the notes.
On the basis of historical financial information, recent operating history
and other factors, we believe that, after giving effect to the offering, we and
the guarantors will not be insolvent, will have sufficient capital to meet our
obligations as they mature and to operate our business effectively, and will not
have incurred debts beyond our ability to pay as they mature. We cannot assure
you, however, that a court would apply the same or similar standards in making a
determination or that a court would agree with our conclusions in this regard.
If a court voided a guarantee because it was a fraudulent conveyance, or
held it unenforceable for any other reason, holders of notes would cease to have
a claim against the guarantor. Consequently, the holders of exchange notes would
be creditors of us and any guarantor whose guarantee was not voided and not
creditors of those guarantors whose guarantee was voided.
THE HOLDERS OF A MAJORITY OF THE EXCHANGE NOTES MAY WAIVE DEFAULTS UNDER OR
MODIFY THE INDENTURE IN A MANNER ADVERSE TO NOTEHOLDERS WHO DO NOT APPROVE OF
SUCH ACTIONS
Subject to limitations specified in the indenture, the holders of a majority
in principal amount of the exchange notes then outstanding will have the right
to:
- waive existing defaults or events of default;
- waive compliance with provisions of the indenture or the exchange notes;
- modify or supplement the indenture; and
- direct the time, method and place of conducting any proceeding for any
remedy available to the trustee under the indenture.
These provisions of the indenture could allow actions affecting the exchange
notes to be taken without the approval of all of the holders of the exchange
notes and thus may have an adverse effect on the holders of exchange notes who
do not approve of such actions. See "Description of the Exchange Notes--Events
of Default" and "--Modification of Indenture."
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USE OF PROCEEDS
We will not receive any proceeds from the issuance of the exchange notes. In
consideration for issuing the exchange notes in this exchange offer, we will
receive outstanding notes of an equal principal amount. The outstanding notes
surrendered in exchange for the exchange notes will be retired and cancelled and
cannot be reissued. Accordingly, issuance of the exchange notes will not result
in any change in our indebtedness.
THE EXCHANGE OFFER
GENERAL
In connection with our private offering of the outstanding notes in
March 2004, we and the guarantors entered into a registration rights agreement
with Merrill Lynch, Pierce, Fenner & Smith Incorporated, Banc of America
Securities LLC, CIBC World Markets Corp., Scotia Capital (USA) Inc., RBC Capital
Markets Corporation, TD Securities (USA) Inc., Harris Nesbitt Corp., HSBC
Securities (USA) Inc. and NBF Securities (USA) Corp. who were the initial
purchasers of the outstanding notes. Under this registration rights agreement we
agreed to use our best efforts to file within 120 days after the issuance of the
outstanding notes a registration statement with the SEC with respect to a
registered offer to exchange the outstanding notes for exchange notes with terms
substantially similar to the outstanding notes, except that the exchange notes
will not contain terms with respect to transfer restrictions and registration
rights.
We are offering to exchange our exchange notes for up to 100% of our notes
on the terms set forth in this prospectus and in the accompanying letter of
transmittal. For each note surrendered to us pursuant to the exchange offer, the
holder of such note will receive an exchange note having a principal amount at
maturity equal to that of the surrendered note.
Based on interpretations by the staff of the SEC, as set forth in no-action
letters issued to third parties, we believe that the exchange notes issued
pursuant to the exchange offer in exchange for outstanding notes may be offered
for resale, resold or otherwise transferred by a holder under U.S. federal
securities laws without compliance with the registration and prospectus delivery
requirements of the Securities Act, provided that:
- the holder is acquiring the exchange notes in the ordinary course of
business;
- the holder is not participating, does not intend to participate and has no
arrangement or understanding with any person to participate in the
distribution of such exchange notes;
- the holder is not a broker-dealer who purchased the outstanding notes
directly from us for resale pursuant to Rule 144A or any other available
exemption under the Securities Act; and
- the holder is not an "affiliate" of ours within the meaning of Rule 405
under the Securities Act.
If you wish to participate in this exchange offer, you must represent to us
in the letter of transmittal or through the Depository Trust Company's Automated
Tender Offer Program (ATOP) that the conditions above have been met. However, we
do not intend to request the SEC to consider, and the SEC has not considered,
this exchange offer in the context of a no-action letter and therefore we cannot
assure you that the staff of the SEC would make a similar determination with
respect to this exchange offer. Therefore, if you transfer any exchange note
delivered to you in the exchange offer without delivering a prospectus meeting
the requirements of the Securities Act or without an exemption from registration
of your exchange notes from such requirements, you may incur liability under the
Securities Act. We do not assume such liability or indemnify you against such
liability, but we do not believe such liability should exist if the above
conditions are met.
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If any holder is an affiliate of ours, or is engaged in or intends to engage
in or has any arrangement or understanding with respect to the distribution of
the exchange notes to be acquired pursuant to the exchange offer, such holder:
- may not rely on the applicable interpretations of the staff of the SEC;
and
- must comply with the registration and prospectus delivery requirements of
the Securities Act in connection with any resale transaction.
Each broker-dealer that receives exchange notes for its own account in
exchange for outstanding notes, where such outstanding notes were acquired by
such broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such exchange notes.
In addition, in order to comply with state securities laws in the
United States, the exchange notes may not be offered or sold in any state unless
they have been registered or qualified for sale in such state or an exemption
from registration or qualification is available and is complied with. The
exchange notes also have not been and will not be qualified for public
distribution under the securities laws of any province or territory of Canada.
The exchange notes are not being offered for sale and may not be offered or
sold, directly or indirectly, in Canada, or to any resident of Canada, except in
accordance with the securities laws of the provinces and territories of Canada.
TERMS OF THE EXCHANGE OFFER
Subject to the terms and conditions set forth in this prospectus and in the
accompanying letter of transmittal, we will accept for exchange outstanding
notes that are properly tendered and not withdrawn on or prior to the Expiration
Date. The term "Expiration Date" means 5:00 p.m., New York City time, on ,
2004. If we, in our sole discretion, extend the period of time for which the
exchange offer is open, the term "Expiration Date" means the latest time and
date to which the exchange offer is extended.
As of the date of this prospectus, US$250,000,000 aggregate principal amount
notes are outstanding. Outstanding notes tendered in the exchange offer must be
in denominations of principal amount of US$1,000 and any integral multiple
thereof. This prospectus, together with the letter of transmittal, is first
being sent on or about , 2004, to all holders of outstanding notes known
to us. Our obligation to accept outstanding notes for exchange pursuant to the
exchange offer is subject to conditions as set forth below under "--Certain
Conditions to the Exchange Offer."
We expressly reserve the right to extend the period of time during which the
exchange offer is open and delay the acceptance of any outstanding notes for
exchange. We will give oral or written notice of such extension to the holders
of outstanding notes as described below. During any extension, all outstanding
notes previously tendered will remain subject to the exchange offer and may be
accepted for exchange by us. Any outstanding notes that we do not accept for
exchange for any reason will be returned without expense to the tendering holder
as soon as practicable after the expiration or termination of the exchange
offer.
We expressly reserve the right to amend or terminate the exchange offer, and
to reject any outstanding notes tendered upon the occurrence of any of the
events specified below under "--Certain Conditions to the Exchange Offer." We
will give oral or written notice of any extension, amendment, rejection or
termination to the holders of the outstanding notes as soon as practicable after
such event. In the case of any extension, we will give notice by issuing a press
release or other public announcement no later than 9:00 a.m., New York City
time, on the next business day after the previously scheduled Expiration Date.
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PROCEDURES FOR TENDERING OUTSTANDING NOTES
The tender of outstanding notes by a holder as set forth below and our
acceptance of such notes will constitute a binding agreement between the
tendering holder and us upon the terms and conditions set forth in this
prospectus and in the accompanying letter of transmittal. Except as set forth
below, a holder who wishes to tender outstanding notes for exchange pursuant to
the exchange offer must transmit a properly completed and duly executed letter
of transmittal, including all other documents required by such letter of
transmittal, to Wells Fargo Bank, National Association, as exchange agent at the
address set forth below under "--Exchange Agent" on or prior to the Expiration
Date. In addition, either:
(1) certificates for the outstanding notes must be received by the exchange
agent along with the letter of transmittal, or
(2) a timely confirmation of a book-entry transfer of the outstanding notes
into the exchange agent's account at The Depository Trust Company, or
DTC, pursuant to the procedure for book-entry transfer described below,
must be received by the exchange agent prior to the Expiration Date, or
(3) the holder must comply with the guaranteed delivery procedures described
below.
THE METHOD OF DELIVERY OF OUTSTANDING NOTES, LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDERS. IF SUCH
DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL, PROPERLY INSURED,
WITH RETURN RECEIPT REQUESTED BE USED. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ASSURE TIMELY DELIVERY. NO LETTER OF TRANSMITTAL OR OUTSTANDING NOTES
SHOULD BE SENT TO US; THEY SHOULD BE SENT TO THE EXCHANGE AGENT.
If the letter of transmittal is signed by a person or persons other than the
registered holder or holders of outstanding notes, those outstanding notes must
be endorsed or accompanied by appropriate powers of attorney, in either case
signed exactly as the name or names of the registered holder or holders that
appear on the outstanding notes. If the letter of transmittal or any outstanding
notes or powers of attorney are signed by trustees, executors, administrators,
guardians, attorneys-in-fact, officers of corporations or others acting in a
fiduciary or representative capacity, such persons should so indicate when
signing, and, must submit to us, proper evidence satisfactory to us of their
authority to so act.
Signatures on a letter of transmittal or a notice of withdrawal must be
guaranteed unless the outstanding notes surrendered for exchange are tendered:
- by a registered holder of the outstanding notes who has not completed the
box entitled "Special Issuance Instructions" or "Special Delivery
Instructions" on the letter of transmittal; or
- for the account of an Eligible Institution (as defined below).
In the event that signatures are required to be guaranteed, such guarantees
may be by a firm that is a member of a registered national securities exchange
or a member of the National Association of Securities Dealers, Inc. or by a
commercial bank or trust company having an office or correspondent in the
United States (collectively, "Eligible Institutions"). If outstanding notes are
registered in the name of a person other than the person who signs a letter of
transmittal, the outstanding notes surrendered for exchange must be endorsed by,
or be accompanied by a written instrument or instruments of transfer or
exchange, in a form satisfactory to us and the exchange agent, duly executed by,
the registered holder with the signature thereon guaranteed by an Eligible
Institution.
We will determine all questions as to the validity, form, eligibility
(including time of receipt) and acceptance of outstanding notes tendered for
exchange in our sole discretion, and our determination shall be final and
binding. We reserve the right to reject any tender of outstanding notes that are
not
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properly tendered or to reject any outstanding notes where acceptance might, in
our judgment or our counsel's judgment, be unlawful. We also reserve the right
to waive any defects or irregularities or conditions of the exchange offer as to
any particular outstanding notes either before or after the Expiration Date. Our
interpretation of the terms and conditions of the exchange offer as to any
particular outstanding notes either before or after the Expiration Date
(including the terms and conditions set forth in the letter of transmittal)
shall be final and binding on all parties. Unless waived, any defects or
irregularities in connection with tenders of outstanding notes for exchange must
be cured within a reasonable period of time, as we shall determine. We and the
exchange agent shall not be under any duty to give notification of any defect or
irregularity with respect to any tender of outstanding notes for exchange, and
we shall not incur any liability for failure to give such notification.
ACCEPTANCE OF OUTSTANDING NOTES FOR EXCHANGE
Upon satisfaction or waiver of all of the conditions to the exchange offer,
we will accept, promptly after the Expiration Date, all outstanding notes
properly tendered and not withdrawn. We will issue the exchange notes as soon as
practicable after the Expiration Date.
For purposes of the exchange offer, we shall be deemed to have accepted
properly tendered outstanding notes for exchange when we have given oral or
written notice of such acceptance to the exchange agent, with written
confirmation of any oral notice to be given promptly thereafter.
For each outstanding note accepted for exchange, the holder of such
outstanding note will receive an exchange note having a stated amount at
maturity equal to that of the surrendered outstanding note. Interest on the
exchange notes will accrue from the last interest payment date on which interest
was paid on the outstanding notes surrendered in exchange therefor or, if no
interest has been paid on the outstanding notes, from the date of original issue
of the outstanding notes. Holders of outstanding notes whose outstanding notes
are accepted for exchange will not receive any payment in respect of accrued
interest on such outstanding notes otherwise payable on any interest payment
date the record date for which occurs on or after consummation of the exchange
offer.
In all cases, issuance of notes for outstanding notes that are accepted for
exchange pursuant to the exchange offer, will be made only after timely receipt
by the exchange agent of certificates for such outstanding notes or a timely
confirmation of a book-entry transfer of such outstanding notes into the
exchange agent's account at DTC, a properly completed and duly executed letter
of transmittal and all other required documents. If any tendered outstanding
notes are not accepted for any reason set forth in the terms and conditions of
the exchange offer or if outstanding notes are submitted for a greater principal
amount than the holder desired to exchange, the outstanding notes not exchanged
will be returned without expense to the tendering holder (or, in the case of
outstanding notes tendered by book-entry transfer into the exchange agent's
account at DTC pursuant to book-entry procedures, such non-exchanged outstanding
notes will be credited to an account maintained with DTC for such outstanding
notes) as soon as practicable after the expiration or termination of the
exchange offer.
BOOK-ENTRY TRANSFER
The exchange agent will establish an account with respect to the outstanding
notes at DTC for purposes of the exchange offer within two business days after
the date of this prospectus, and any financial institution that is a participant
in the DTC's systems may make delivery of outstanding notes by causing DTC to
transfer such outstanding notes into the exchange agent's account at DTC in
accordance with DTC's procedures for transfer. Therefore, a holder of
outstanding notes may deliver the outstanding notes through book-entry transfer
at DTC and acknowledge and agree to the terms of the letter of transmittal by
transmitting a computer-generated message to the exchange agent through DTC's
ATOP.
22
<Page>
GUARANTEED DELIVERY PROCEDURES
If a registered holder of outstanding notes desires to tender such
outstanding notes and the outstanding notes are not immediately available, or
time will not permit such holder's outstanding notes or other required documents
to reach the exchange agent before the Expiration Date, or the procedure for
book-entry transfer cannot be completed on a timely basis, a tender may be
effected if the tender is made through an Eligible Institution; and prior to the
Expiration Date, the exchange agent received from the Eligible Institution a
properly completed and duly executed letter of transmittal and notice of
guaranteed delivery, substantially in the form provided by us, setting forth the
name and address of the holder of outstanding notes and the amount of
outstanding notes tendered, stating that the tender is being made thereby and
guaranteeing that within five business days after the date of execution of the
Notice of Guaranteed Delivery, the certificates for all physically tendered
outstanding notes, in proper form for transfer, or a book-entry confirmation, as
the case may be, and any other documents required by the letter of transmittal
will be deposited by the Eligible Institution with the exchange agent; and the
certificates for all physically tendered outstanding notes, in proper form for
transfer, or a book-entry confirmation, as the case may be, and all other
documents required by the letter of transmittal, are received by the exchange
agent within five business days after the date of execution of the Notice of
Guaranteed Delivery.
WITHDRAWAL RIGHTS
Tenders of outstanding notes may be withdrawn at any time prior to the
Expiration Date. For a withdrawal to be effective, a written notice of
withdrawal must be received by the exchange agent at the address set forth below
under "--Exchange Agent." Any such notice of withdrawal must:
- specify the name of the persons having tendered the outstanding notes to
be withdrawn; and
- identify the outstanding notes to be withdrawn (including the principal
amount of such outstanding notes, and, in the case where certificates for
outstanding notes have been transmitted, specify the name in which such
outstanding notes are registered if different from that of the withdrawing
holder).
If certificates for outstanding notes have been delivered or otherwise
identified to the exchange agent, then, prior to the release of such
certificates the withdrawing holder must also submit the serial numbers of the
particular certificates to be withdrawn and a signed notice of withdrawal with
signatures guaranteed by an Eligible Institution, unless such holder is an
Eligible Institution. If outstanding notes have been tendered pursuant to the
procedure for book-entry transfer described above, any notice of withdrawal must
specify the name and number of the account at the DTC to be credited with the
withdrawn outstanding notes and otherwise comply with the procedures of such
facility.
We will determine all questions as to the validity, form and eligibility,
including time of receipt, of such notices of withdrawal, which shall be final
and binding on all parties. Any outstanding notes so withdrawn will not be
deemed to have been validly tendered for exchange. Any outstanding notes which
have been tendered for exchange but which are not exchanged for any reason will
be returned to the holder thereof without cost to such holder (or, in the case
of outstanding notes tendered by book-entry transfer into the exchange agent's
account at the DTC pursuant to the book-entry transfer procedures described
above, such outstanding notes will be credited to an account maintained with DTC
for the outstanding notes) as soon as practicable after withdrawal, rejection of
tender or termination of the exchange offer. Properly withdrawn outstanding
notes may be retendered by following one of the procedures described under
"--Procedures for Tendering Outstanding Notes" above at any time on or prior to
the Expiration Date.
23
<Page>
CERTAIN CONDITIONS TO THE EXCHANGE OFFER
The exchange offer shall be subject to the following conditions:
(1) neither the exchange offer, nor the making of any exchange by a holder,
violates applicable law or any applicable interpretation of the staff of
the SEC;
(2) the due tendering of the outstanding notes in accordance with the
exchange offer;
(3) no action or proceeding shall have been instituted or threatened in any
court or by or before any governmental agency with respect to the
exchange offer which, in our judgment, would reasonably be expected to
impair our ability to proceed with the exchange offer;
(4) there shall not have been adopted or enacted any law, statute, rule or
regulation which, in our judgment, would reasonably be expected to impair
our ability to proceed with the exchange offer;
(5) there shall not have been declared by U.S. federal, New York State or
Canadian federal authorities a banking moratorium which, in our judgment,
would reasonably be expected to impair our ability to proceed with the
exchange offer;
(6) trading generally in the United States or Canadian over-the-counter
market shall have been suspended by order of the SEC, any securities
commission or securities regulatory authority in Canada or any other
governmental authority, which, in our judgment, would reasonably be
expected to impair our ability to proceed with the exchange offer; and
(7) each holder of outstanding notes (other than participating
broker-dealers) who wishes to exchange outstanding notes for exchange
notes shall have made such representations as may be reasonably necessary
under applicable SEC rules, regulations or interpretations to render the
use of Form F-4 or another appropriate form under the Securities Act
available.
The foregoing conditions are for our sole benefit and may be asserted by us
regardless of the circumstances giving rise to any such condition or may be
waived by us in whole or in part at any time and from time to time. Our failure
at any time to exercise any of the these rights shall not be deemed a waiver of
any such rights and each right shall be deemed an ongoing right which may be
asserted at any time and from time to time. None of the foregoing conditions
shall relieve us of our obligations under the registration rights agreement or
affect any increase in the interest rate borne by the outstanding notes pursuant
to the registration rights agreement.
EXCHANGE AGENT
Wells Fargo Bank, National Association has been appointed as the exchange
agent for the exchange offer. All executed letters of transmittal should be
directed to the exchange agent at the address set forth in the letter of
transmittal. Questions and requests for assistance, requests for additional
copies of this prospectus or the letter of transmittal and requests for notices
of guaranteed delivery should be directed to the exchange agent addressed as
follows:
By Mail, Hand or Overnight Delivery:
Wells Fargo Bank, National Association
213 Court Street
Suite 703
Middleton, CT 06457
Attention: Corporate Trust Services
Facsimile: (860) 704-6219
Confirm by Telephone: (860) 704-6216
24
<Page>
DELIVERY OF THE OUTSTANDING NOTES TO AN ADDRESS OTHER THAN THE EXCHANGE
AGENT'S ADDRESS (IN THE CASE OF CERTIFICATED NOTES) OR THROUGH DTC'S ATOP (IN
THE CASE OF A BOOK-ENTRY TRANSFER) OR AS SET FORTH IN THE LETTER OF TRANSMITTAL
OR TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH ABOVE DOES
NOT CONSTITUTE A VALID DELIVERY.
FEES AND EXPENSES
We will not make any payment to brokers, dealers, or others soliciting
acceptances of the exchange offer. We will pay the cash expenses incurred by us
in connection with the exchange offer, including the fees and expenses of the
exchange agent, accounting and certain legal fees.
TRANSFER TAXES
Holders who tender their outstanding notes for exchange will not be obliged
to pay any transfer taxes in connection with such exchange, except that holders
who instruct us to register exchange notes in the name of, or request that
outstanding notes not tendered or not accepted in the exchange offer be returned
to, a person other than the registered tendering holder will be responsible for
the payment of any applicable transfer tax.
CONSEQUENCES OF NOT EXCHANGING OUTSTANDING NOTES
Holders of outstanding notes who do not exchange their outstanding notes for
exchange notes pursuant to the exchange offer will continue to be subject to the
transfer restrictions under U.S. federal and state securities laws as set forth
in the legend on such notes and the indenture governing the notes regarding
transfer and exchange of the outstanding notes. In general, the outstanding
notes may not be offered or sold, unless registered under the Securities Act,
except pursuant to an exemption from, or in a transaction not subject to, the
Securities Act and applicable state securities laws. We do not currently
anticipate that we will register the outstanding notes under the Securities Act.
25
<Page>
CAPITALIZATION
The following table sets forth our cash and short-term investments and total
capitalization as of December 31, 2003; (i) on a pro forma basis, giving effect
to the issuance of the notes on March 23, 2004 and the use of proceeds
therefrom, as if each had occurred on December 31, 2003, and (ii) on a
pro forma as adjusted basis, to give effect to the exchange of all of the
outstanding notes for exchange notes pursuant to the exchange offer, as if each
had occurred on December 31, 2003. Because the outstanding notes surrendered in
exchange for the exchange notes will be retired and cancelled and cannot be
reissued, whether none, some, or all of the exchange notes are issued will not
change the outstanding long-term debt of NorskeCanada. The information in this
table should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the consolidated financial
statements and related notes, all of which are included elsewhere in this
prospectus.
<Table>
<Caption>
AS AT DECEMBER 31, 2003
------------------------
PRO FORMA
PRO FORMA AS ADJUSTED
---------- -----------
(IN MILLIONS OF DOLLARS)
Cash and short-term investments............................. $ 31.3 $ 31.3
======== ========
Secured credit facility(1).................................. $ -- $ --
Long term debt, including current maturities
US$250 million 7 3/8% senior notes due 2014(2)............ 323.1 --
US$400 million 8 5/8% senior notes due 2011............... 521.2 521.2
US$200 million 10% senior notes due 2009.................. -- --
Exchange Notes............................................ -- 323.1
Non-recourse joint venture debt(3)........................ 37.6 37.6
-------- --------
Total long term debt........................................ 881.9 881.9
Shareholders' equity
Share capital............................................. 913.6 913.6
Retained earnings(4)...................................... 152.8 152.8
-------- --------
Total shareholders' equity.................................. 1,066.4 1,066.4
-------- --------
Total capitalization........................................ $1,948.3 $1,948.3
======== ========
</Table>
- ------------------------
(1) We have a secured credit facility which consists of a revolving operating
loan which expires in July 2006. See "Description of Other Indebtedness--The
Secured Credit Facility".
(2) Based on the exchange rate of US$0.7738 per $1.00 on December 31, 2003.
(3) We have a 50.1% non-controlling economic interest in Powell River
Energy Inc., a joint venture that owns two hydroelectric dams that supply
electricity to the Powell River mill. Powell River Energy Inc. has issued
$75 million First Mortgage Bonds due July 2009, which are secured by first-
ranking mortgages over all of the assets of Powell River Energy Inc.
(4) After giving effect to the offering of the outstanding notes and use of
proceeds therefrom, as if each had occurred on December 31, 2003, retained
earnings would decrease by $2.8 million as a result of the redemption of our
US$200 million aggregate principal amount of 10% notes.
26
<Page>
SELECTED CONSOLIDATED HISTORICAL FINANCIAL INFORMATION
The following selected consolidated historical financial information is
derived from our audited consolidated financial statements as at and for each of
the years in the three year period ended December 31, 2003, as at and for the
six months ended December 31, 2000 and as at and for each of the years in the
two-year period ended June 30, 2000. In addition, certain information is
presented in order to show the differences that would result from the
application of U.S. GAAP, rather than Canadian GAAP.
The following selected consolidated financial information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements included
elsewhere in this prospectus.
<Table>
<Caption>
SIX MONTHS
YEARS ENDED JUNE 30, ENDED YEARS ENDED DECEMBER 31,
--------------------- DECEMBER 31, -------------------------------
1999 2000(1) 2000 2001(2) 2002 2003
--------- --------- ------------- --------- -------- --------
(IN MILLIONS OF DOLLARS EXCEPT PER SHARE AMOUNTS AND RATIOS)
AMOUNTS UNDER CANADIAN GAAP:
STATEMENT OF EARNINGS DATA:
Net sales............................... $1,036.5 $1,253.3 $ 729.0 $ 1,388.7 $1,482.3 $1,591.2
Operating expenses:
Cost of sales......................... 906.7 974.2 526.7 1,114.2 1,360.4 1,458.2
Selling, general and administrative... 59.5 60.9 34.5 63.6 65.3 54.7
Depreciation and amortization......... 111.4 114.3 59.8 131.2 178.5 189.9
-------- -------- -------- --------- -------- --------
1,077.6 1,149.4 621.0 1,309.0 1,604.2 1,702.8
-------- -------- -------- --------- -------- --------
Operating earnings (loss)............... (41.1) 103.9 108.0 79.7 (121.9) (111.6)
Foreign exchange gain (loss) on
translation of long-term debt......... -- -- -- (17.1) 12.3 58.2
Write-down of fixed assets.............. -- -- -- -- -- (14.2)
Other income (expense), net............. 33.1 (7.1) (2.1) (40.2) (13.3) (3.9)
Interest expense........................ -- -- -- (34.1) (77.9) (75.5)
Interest income......................... 36.7 38.2 26.4 35.0 1.7 0.5
-------- -------- -------- --------- -------- --------
Earnings (loss) from continuing
operations before income taxes........ 28.7 135.0 132.3 23.3 (199.1) (146.5)
Income tax expense (recovery)........... 2.3 35.6 49.8 (21.2) (75.8) (62.0)
-------- -------- -------- --------- -------- --------
Earnings (loss) from continuing
operations............................ 26.4 99.4 82.5 44.5 (123.3) (84.5)
Earnings from discontinued operations,
net of income taxes................... 9.1 -- -- -- -- --
-------- -------- -------- --------- -------- --------
Net earnings (loss)..................... $ 35.5 $ 99.4 $ 82.5 $ 44.5 $ (123.3) $ (84.5)
======== ======== ======== ========= ======== ========
Basic and diluted earnings (loss) per
share from continuing operations (in
dollars).............................. $ 0.21 $ 0.80 $ 0.66 $ 0.32 $ (0.64) $ (0.41)
======== ======== ======== ========= ======== ========
BALANCE SHEET DATA:
Working capital......................... $ 965.7 $1,093.7 $1,213.5 $ 380.6 $ 240.4 $ 251.8
Fixed assets............................ 1,360.4 1,300.9 1,298.5 2,416.4 2,326.6 2,290.2
Total assets............................ 2,551.1 2,599.3 2,720.6 3,149.8 2,893.5 2,816.2
Long-term debt(3)....................... -- -- -- 1,174.6 886.2 845.8
Shareholders' equity.................... 2,095.1 2,120.0 2,165.2 1,036.5 1,124.7 1,069.2
</Table>
27
<Page>
<Table>
<Caption>
SIX MONTHS
YEARS ENDED JUNE 30, ENDED YEARS ENDED DECEMBER 31,
--------------------- DECEMBER 31, -------------------------------
1999 2000(1) 2000 2001(2) 2002 2003
--------- --------- ------------- --------- -------- --------
(IN MILLIONS OF DOLLARS EXCEPT PER SHARE AMOUNTS AND RATIOS)
OTHER DATA:
Cash flow provided by
operating activities.................. 106.3 195.7 171.9 269.8 5.2 22.5
Cash flow used in
investing activities.................. (85.8) (50.9) (58.2) (60.7) (42.5) (96.1)
Cash flow provided by (used in)
financing activities.................. (75.6) (79.1) (38.9) (1,034.0) (67.5) 73.6
EBITDA(4)............................... 70.3 218.2 167.8 210.9 56.6 78.3
Dividends declared per share(5)......... 0.60 0.60 0.30 0.30 -- --
Capital expenditures.................... 90.8 57.2 58.4 92.7 82.2 81.4
Ratio of earnings to fixed charges(6)... 17.9x -- -- 1.7x -- --
AMOUNTS UNDER U.S. GAAP:
Net sales............................... $1,201.6 $1,426.0 $ 807.7 $ 1,561.3 $1,704.0 $1,820.5
Net earnings (loss)..................... 46.9 94.0 76.9 15.6 (84.7) (43.5)
Basic and diluted earnings (loss) per
share from continuing operations...... $ 0.30 $ 0.76 $ 0.62 $ 0.11 $ (0.44) $ (0.21)
Total assets............................ 2,569.9 2,609.2 2,721.4 3,142.4 2,917.4 2,879.0
Long-term debt(3)....................... -- -- -- 1,174.6 886.2 845.8
Shareholders' equity.................... 2,102.8 2,122.9 2,162.4 1,005.4 1,113.7 1,096.1
OTHER DATA:
Capital expenditures.................... 90.8 57.2 58.4 92.7 82.2 81.4
Ratio of earnings to fixed charges(6)... 28.9x -- -- -- -- --
</Table>
- --------------------------
(1) Effective July 1, 2000 we changed our financial year end from June 30 to
December 31.
(2) Effective June 15, 2001 our results exclude the Mackenzie pulp operations
which we disposed of and effective August 31, 2001 our results reflect the
acquisition of Pacifica Papers.
(3) Long-term debt includes current portion.
(4) EBITDA represents earnings (loss) from continuing operations before interest
expense, interest income, income taxes and depreciation and amortization and
before other non-operating income and expenses. Although EBITDA, as a
non-GAAP measure, should not be considered in isolation or as a substitute
for operating cash flows or other cash flow statement data or net earnings,
management understands that it is commonly used to evaluate a company's
liquidity. We consider EBITDA to be a useful measure of our ability to
service our debt and our ability to generate cash for other purposes. We
believe that our investors consider EBITDA useful for these purposes as
well. EBITDA, as presented, may not be comparable to similarly titled
measures of other companies.
We have provided below a reconciliation of EBITDA to cash flow provided by
(used in) operating activities, which we believe is the most directly
comparable GAAP measure.
<Table>
<Caption>
YEARS ENDED SIX MONTHS
JUNE 30, ENDED YEARS ENDED DECEMBER 31,
------------------- DECEMBER 31, ------------------------------
1999 2000 2000 2001(2) 2002 2003
-------- -------- ------------- -------- -------- --------
(IN MILLIONS OF DOLLARS UNLESS OTHERWISE SPECIFIED)
Cash flow provided by operating activities..... $106.3 $195.7 $171.9 $269.8 $ 5.2 $ 22.5
Cash interest (income) expense, net............ (28.1) (37.2) (30.0) (9.9) 78.3 80.2
Cash income taxes paid......................... 2.0 3.2 2.7 5.0 12.8 7.1
Increase in other long-term obligations........ (9.4) (8.8) (4.5) (8.5) (19.8) (17.5)
Other.......................................... (43.7) 3.0 3.5 (8.2) 1.6 (8.7)
Change in non-cash working capital............. 43.2 62.3 24.2 (37.3) (21.5) (5.3)
------ ------ ------ ------ ------ ------
EBITDA......................................... 70.3 218.2 167.8 210.9 56.6 78.3
====== ====== ====== ====== ====== ======
</Table>
28
<Page>
(5) Excludes a special cash distribution we paid on August 27, 2001 of $12.00
per common share, which consisted of a return of capital of $7.60 per common
share and a special dividend of $4.40 per common share.
(6) The ratio of earnings to fixed charges represents, on a pre-tax basis, the
number of times earnings cover fixed charges. Earnings are defined as
earnings (loss) from continuing operations before income taxes plus fixed
charges reduced by capitalized interest. Fixed charges consist of interest
on indebtedness, including capitalized interest, and amortization of
deferred financing costs. No ratio was calculated for the year ended
June 30, 2000 and for the six months ended December 31, 2000 as we did not
have indebtedness during this period. Under Canadian GAAP, earnings (as
defined) were insufficient to cover fixed charges for the years ended
December 31, 2003 and 2002 by $147.4 million and $199.1 million,
respectively. Under U.S. GAAP, earnings (as defined) were insufficient to
cover fixed charges for the years ended December 31, 2003, 2002 and 2001 by
$83.6 million, $140.9 million, and $21.5 million, respectively.
29
<Page>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
This section should be read in conjunction with the consolidated financial
statements for the years ended December 31, 2003, 2002 and 2001 and the notes
thereto included elsewhere in this prospectus.
On January 1, 2003, we segregated our kraft paper (containerboard)
activities from our pulp and containerboard business segment and included it in
our specialties business segment. Segmented information for the preceding year
has been restated to reflect this change.
Throughout the discussion, reference is made to EBITDA, which represents
earnings (loss) from continuing operations before interest expense, interest
income, income taxes and depreciation and amortization, and before other
non-operating income and expenses. As there is no generally accepted method of
calculating EBITDA, the measure as calculated by the Company might not be
comparable to similarly titled measures reported by other companies. EBITDA is
presented because we believe it is a useful indicator of a company's ability to
meet debt service and capital expenditure requirements. We interpret EBITDA
trends as an indicator of our relative operating performance. EBITDA should not
be considered by an investor as an alternative to net income, an indicator of
our financial performance, or an alternative to cash flows as a measure
of liquidity. See "Results of Operations -- Year ended December 31, 2003
compared to year ended December 31, 2002 -- Reconciliation of EBITDA to Cash
Flow".
Except for the historical information contained herein, the matters set
forth in this section are forward-looking. These include, for example,
statements with respect to general economic conditions in the United States and
Canada, assessment of market conditions, the outlook for inventories, production
and pricing, and performance improvements and cost savings, including those
related to the acquisition of, and expected synergies from, our paper recycling
division. These statements are subject to risks and uncertainties that may cause
actual results to differ materially from those contained in the statements. Such
statements reflect our views and are based on certain assumptions. They are, by
necessity, only estimates of future developments and actual developments may
differ materially from these statements due to a number of factors. Investors
are cautioned not to place undue reliance on these forward-looking statements.
No forward-looking statement is a guarantee of future results. See "Forward-
Looking Statements".
OUTLOOK
A robust U.S. economic recovery now appears to be well underway. There is
growing optimism amongst commentators that pulp and paper demand in 2004 will
begin to reflect the improved economic climate, allowing producers to record
healthy price increases across most product lines.
Coated groundwood paper producers are well positioned to reap the benefits
of a sustained economic recovery. Magazine advertising is projected to grow at
healthy levels in 2004, with little new capacity forecast.
Similarly, super-calendered and hi-brite paper producers are expected to
benefit from rising business and consumer confidence in 2004, through a growth
of printing of inserts, magazines, and catalogues. This positive development may
be tempered by the possible return to production of capacity that was
temporarily idled in 2003, which may limit the price gains expected to be
realized in 2004.
The directory market is currently beset by excess supply. In 2004, the
expected improved demand for directory publications and an anticipated shift of
capacity to newsprint as the year progresses, should help to rebalance supply
and demand by year end. Prices are expected to remain stable in 2004,
30
<Page>
but tighter markets expected at the end of 2004 should help producers implement
price increases for 2005.
To date, newsprint demand has been unaffected by the growth of the
U.S. economy, but the impact of lackluster demand has been largely offset by
significant capacity reductions, helping to balance production with orders. As a
result, producers are well positioned to benefit from an expected growth in
newspaper advertising lineage, which should pave the way for healthy price
increases during the year. A US$50 per tonne price increase for North American
markets was announced on February 1, 2004.
For pulp products, the performance of the Chinese economy and global paper
demand are likely to be the key drivers of demand growth in 2004. While softwood
pulp prices may once again fluctuate, average year-over-year pricing is expected
to reflect improving demand for paper products. A US$30 per tonne price increase
for European NBSK pulp was announced by major producers, for February 1, 2004.
For hardwood pulp, however, new capacity will likely affect the demand to supply
balance, increasing the discount between both pulp grades.
Despite the encouraging rate of economic growth in North America, the
strength of the Canadian dollar remains a major concern as it negatively impacts
the competitive position of Canadian exporters. Economic commentators are
divided over the future direction of the Canadian dollar relative to the
U.S. dollar.
To complete the upgrade of No. 2 recovery boiler at our Elk Falls mill, we
will be shutting down the boiler for approximately 55 days in the first quarter
of 2004. Although the upgrade will have a positive impact on our earnings over
the balance of the year we estimate operating earnings will be reduced by $15 to
$20 million in the first quarter of 2004. In addition, we will be taking the
annual shutdown of our pulp digesters at Crofton in the first quarter of 2004.
These two factors, combined with the potential impact of a continuing strong
Canadian dollar, will have a negative impact on our earnings for the first
quarter of 2004.
In 2004, we intend to build on the momentum created by our performance
improvement initiative. Our objectives this year include optimizing our mix of
higher-value specialty papers, extracting the maximum value from our recently
acquired recycled paper operation, completing our pulp production
rationalization at Elk Falls, as well as continuing to aggressively manage costs
in all business areas.
We continue to preserve cash flow and intend to restrict capital spending to
maintenance-of-business and carefully selected high-return capital projects
until there is clear evidence of a sustained improvement in market conditions.
As cash flows permit, we will invest in several already identified high-return
capital projects.
YEAR IN REVIEW
CONTINUED CHALLENGES FROM DIFFICULT MARKET CONDITIONS, EXACERBATED BY RAPIDLY
STRENGTHENING CANADIAN DOLLAR
The Canadian pulp and paper industry experienced another difficult year in
2003, as producers faced a number of major challenges, from various sources.
The most significant of these was the rapid, and largely unexpected,
appreciation of the Canadian dollar, relative to the U.S. dollar. By
December 31, 2003, the Canadian dollar had increased by 22% to US$0.77, from
US$0.63 at the end of 2002. The vast majority of the paper and pulp business is
conducted in U.S. dollars, and therefore, the strengthening Canadian dollar has
severely eroded Canadian producers' operating earnings.
In response to this and other factors, principally escalating energy costs,
groundwood paper producers announced several price increases during the year.
These price increases settled at moderate
31
<Page>
levels, however, due primarily to the failure of paper demand to rebound from
the depressed levels of 2002, despite the emergence of a U.S. economic recovery
in the second half of the year.
North American newsprint prices increased by US$50 per tonne, or 11%, in
2003. Despite further capacity reductions, producers were handicapped by
continued lackluster demand, which changed little from the prior year.
Markets for specialty papers fared somewhat better. Super-calendered and
lightweight coated paper markets recorded encouraging increases in demand during
2003. For lightweight coated paper, the positive impact of improved demand was
tempered somewhat by the introduction of new capacity to the North American
market during the year. In contrast, super-calendered markets benefited from the
idling of a significant amount of capacity in 2003. These factors contributed to
an average increase in benchmark lightweight coated and super-calendared papers
prices of US$28 per tonne (or 4%) and US$44 per tonne (or 6%), respectively. For
directory grades, excess supply resulted in lower 2003 contract pricing
(contracts make up the majority of directory business).
Pulp markets were volatile in 2003, reflecting the increasing influence
exercised by Chinese buyers in global markets. A steadily appreciating Euro,
sluggish paper demand, as well as weather-related fibre shortages and the
outbreak of SARS in the first half of 2003, also contributed to a significant
fluctuation in prices. Overall, improved global demand supported an increase in
average European NBSK prices of US$120 per tonne (or 28%) in 2003.
EXCELLENT PROGRESS ON STRATEGIC INITIATIVES
In spite of the external challenges, we continued to focus on our key
strategic objectives, and recorded a number of notable achievements during the
year. A discussion of this year's principal achievements follows.
Continued Performance Improvements
In January 2003, we launched our third performance improvement initiative in
three years, aimed at generating annualized run-rate improvements of
$100 million by the end of 2003, as compared to 2002 results. Potential
improvements were identified across all business areas from optimizing our mix
of higher-value sales and distribution channels, to enhancing manufacturing
processes, reducing furnish and conversion input costs, and lowering
company-wide overhead costs. By December 31, 2003 we had captured annualized
run-rate improvements of $104 million ($83 million embedded in the current
year's earnings), compared to 2002.
Acquisition of Recycling Paper Facility
Sourcing recycled paper at an affordable price has been high on our list of
priorities for some time. On December 1, 2003, we acquired western Canada's
largest paper recycling facility. The purchase price of $61.1 million, which
included a $2.5 million working capital adjustment and transaction costs of
$0.6 million, was financed almost equally by equity and cash, thereby preserving
our existing debt to capitalization ratio.
The division has a current production capacity of 145,000 air-dried metric
tonnes, and has the capability to produce another 35,000 air-dried metric
tonnes, with minimal capital cost. A well-managed and cost-efficient modern
operation, the division has excellent truck, rail and water access.
The addition of this paper recycling operation brings many benefits to us,
including:
- Expected positive impact on earnings:
- Improving EBITDA by an estimated $15 to $16 million per year before
synergies.
32
<Page>
- Synergies expected to improve annual EBITDA by $2 to $3 million.
- Accretion to annual earnings per share by an estimated $0.03 to $0.04
per share.
- Improved interest ratio coverage.
- A secure, stable raw material supply, with over 80% under contract from
suppliers in western North America.
- The ability to avoid the effect of waste paper price increases by
optimizing production scheduling and volumes.
- The ability to avoid capital expenditure requirements to address
thermomechanical pulping constraints arising from reduced kraft
consumption in newsprint production.
Rationalization of Elk Falls Pulp Operation
Our major capital project in 2003 was the upgrade of our No. 2 recovery
boiler at Elk Falls. As a result of this upgrade, we made the decision to reduce
pulp capacity by 80,000 tonnes. This reduction will be achieved primarily
through the permanent closure of our No. 1 recovery boiler, when our No. 2
recovery boiler upgrade is completed in April 2004.
As a result of this initiative, we expect to realize annual savings in
EBITDA of $9 million, primarily from an improved sales mix, lower maintenance
costs, and higher productivity, which will maintain our market sales capacity.
One-time costs associated with the rationalization comprise a $14 million
write-down of fixed assets, and other costs, including severance and retraining,
of $6 million ($2 million pertaining to severance costs was recognized at
December 31, 2003 in our financial statements).
To complete the upgrade, we will be shutting down our No. 2 recovery boiler
for approximately 55 days in the first quarter of 2004. As a result, we estimate
our operating earnings will be lower in the first quarter of 2004 by
approximately $15 to $20 million.
Enhanced Liquidity
On May 15, 2003, we issued an additional US$150 million 8 5/8% notes. The
notes were sold at a price of 102.953% of par to yield 8%. We used $134 million
of the proceeds to repay the outstanding balance at that time on the revolving
operating loan. We have also negotiated certain amendments to our $350 million
revolving operating loan, including an agreement to extend the maturity for
$350 million of the loan by one year, to July 2006, and an option to increase
the borrowing base to increase the availability of the facility.
33
<Page>
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002
Comparison of Earnings
<Table>
<Caption>
- --------------------------------------------------------------------------------------------
SUMMARY OF FINANCIAL RESULTS (IN MILLIONS OF CANADIAN DOLLARS, EXCEPT WHERE OTHERWISE STATED)
- --------------------------------------------------------------------------------------------
2002 2003
---------------------------------------------------- --------
Q1 Q2 Q3 Q4 YTD Q1
- --------------------------------------------------------------------------------------------
Net sales $ 324.3 $ 359.8 $ 392.6 $ 405.6 $1,482.3 $ 385.8
Operating earnings
(loss) (44.6) (37.1) (3.9) (36.3) (121.9) (35.5)
EBITDA(1) (2.1) 6.0 42.4 10.3 56.6 11.8
EBITDA margin(2) (0.6)% 1.7% 10.8% 2.5% 3.8% 3.1%
Cash flow from
operating
activities (5.7) (4.2) (44.8) 59.9 5.2 (29.0)
Cash flow from
operating
activities
margin(3) (1.8)% (1.2)% (11.4)% 14.8% 0.4% (7.5)%
Net earnings (loss) (41.5) (24.4) (20.1) (37.3) (123.3) (24.8)
Loss per share--
basic and diluted $ (0.24) $ (0.13) $ (0.10) $ (0.18) $ (0.64) $ (0.12)
- --------------------------------------------------------------------------------------------
Sales (000 MT)
Specialties 206.6 225.9 252.0 275.3 959.8 261.7
Newsprint 150.6 198.5 201.6 198.8 749.5 195.6
-------- -------- -------- -------- -------- --------
Total paper 357.2 424.4 453.6 474.1 1,709.3 457.3
Pulp 85.8 107.6 97.7 90.1 381.2 103.9
-------- -------- -------- -------- -------- --------
Total sales 443.0 532.0 551.3 564.2 2,090.5 561.2
Production (000 MT)
Specialties 215.3 224.8 271.6 267.6 979.3 260.9
Newsprint 150.0 197.3 201.8 198.1 747.2 199.6
-------- -------- -------- -------- -------- --------
Total paper 365.3 422.1 473.4 465.7 1,726.5 460.5
Pulp 80.4 101.8 98.3 93.8 374.3 99.0
-------- -------- -------- -------- -------- --------
Total production 445.7 523.9 571.7 559.5 2,100.8 559.5
- --------------------------------------------------------------------------------------------
Average spot foreign
exchange rate
C$/US$(4) 1.594 1.555 1.563 1.570 1.570 1.510
Period-end spot
foreign exchange
rate C$/US$(5) 1.594 1.519 1.586 1.580 1.580 1.469
- --------------------------------------------------------------------------------------------
Common shares
(millions):
At period end 174.8 205.9 205.9 205.9 205.9 205.9
Weighted average 174.8 186.4 205.9 205.9 193.4 205.9
- --------------------------------------------------------------------------------------------
<Caption>
- --------------------- ---------------------------------------------------
SUMMARY OF FINANCIAL SUMMARY OF FINANCIAL RESULTS (IN MILLIONS OF CANADIAN DOLLARS, EXCEPT WHERE OTHERWISE STATED)
- --------------------- ---------------------------------------------------
2003
---------------------------------------------------
Q2 Q3 Q4 YTD
- ---------------------
Net sales $ 383.7 $ 415.8 $ 405.9 $1,591.2
Operating earnings
(loss) (38.4) (21.3) (16.4) (111.6)
EBITDA(1) 9.6 26.1 30.8 78.3
EBITDA margin(2) 2.5% 6.3% 7.6% 4.9%
Cash flow from
operating
activities 16.8 11.4 23.3 22.5
Cash flow from
operating
activities
margin(3) 4.4% 2.7% 5.7% 1.4%
Net earnings (loss) (18.3) (28.1) (13.3) (84.5)
Loss per share--
basic and diluted $ (0.09) $ (0.14) $ (0.06) $ (0.41)
- ---------------------
Sales (000 MT)
Specialties 266.8 282.9 273.3 1,084.7
Newsprint 195.4 188.1 189.6 768.7
-------- -------- -------- --------
Total paper 462.2 471.0 462.9 1,853.4
Pulp 89.9 120.2 107.3 421.3
-------- -------- -------- --------
Total sales 552.1 591.2 570.2 2,274.7
Production (000 MT)
Specialties 277.1 273.5 263.8 1,075.3
Newsprint 186.2 188.2 200.8 774.8
-------- -------- -------- --------
Total paper 463.3 461.7 464.6 1,850.1
Pulp 93.7 114.8 111.3 418.8
-------- -------- -------- --------
Total production 557.0 576.5 575.9 2,268.9
- ---------------------
Average spot foreign
exchange rate
C$/US$(4) 1.398 1.380 1.316 1.402
Period-end spot
foreign exchange
rate C$/US$(5) 1.355 1.350 1.292 1.292
- ---------------------
Common shares
(millions):
At period end 205.9 205.9 214.6 214.6
Weighted average 205.9 205.9 208.8 206.6
- ---------------------
</Table>
(1) EBITDA represents earnings (loss) from continuing operations before interest
expense, interest income, income taxes and depreciation and amortization and
before other non-operating income and expenses. For the reasons why we
believe EBITDA provides useful information to investors, see footnote 3 to
"Summary Historical Consolidated Financial Information".
(2) EBITDA margin is defined as EBITDA as a percentage of sales.
(3) Cash flow from operating activities margin is defined as cash flow from
operating activities as a percentage of sales.
(4) Average spot foreign exchange rate is the average Bank of Canada noon spot
rate over the reporting period.
(5) Period-end spot foreign exchange rate is the Bank of Canada noon spot rate.
34
<Page>
Reconciliation of EBITDA to Cash Flow
The following table reconciles our EBITDA to cash flow provided by (used in)
operating activities:
<Table>
<Caption>
- -------------------------------------------------------------------------------------------------------
EBITDA RECONCILIATION TO CASH FLOW (IN MILLIONS OF CANADIAN DOLLARS, EXCEPT WHERE OTHERWISE STATED)
- -------------------------------------------------------------------------------------------------------
2002 2003
---------------------------------------------------- -------------------
Q1 Q2 Q3 Q4 YTD Q1 Q2
- -------------------------------------------------------------------------------------------------------
Cash flow provided by
(used in)
operating
activities $ (5.7) $ (4.2) $ (44.8) $ 59.9 $ 5.2 $ (29.0) $ 16.8
Cash interest
expense, net 20.5 19.9 18.8 19.1 78.3 18.3 19.1
Cash income taxes
paid 5.0 3.5 2.4 1.9 12.8 3.5 1.7
Increase in other
long-term
obligations (3.6) (2.7) (5.3) (8.2) (19.8) (4.5) (3.3)
Other 2.2 4.4 (3.8) (1.2) 1.6 (4.1) (2.4)
Change in non-cash
working capital (20.5) (14.9) 75.1 (61.2) (21.5) 27.6 (22.3)
--------------------------------------------------------------------------------
EBITDA $ (2.1) $ 6.0 $ 42.4 $ 10.3 $ 56.6 $ 11.8 $ 9.6
- -------------------------------------------------------------------------------------------------------
<Caption>
- --------------------- ----------------------------------------
EBITDA RECONCILIATI EBITDA RECONCILIATION TO CASH FLOW (IN MILLIONS OF CANADIAN DOLLARS, EXCEPT WHERE OTHERWISE STATED)
- --------------------- ----------------------------------------
2003
----------------------------------------
Q3 Q4 YTD
- ---------------------
Cash flow provided by
(used in)
operating
activities $ 11.4 $ 23.3 $ 22.5
Cash interest
expense, net 21.3 21.5 80.2
Cash income taxes
paid 1.4 0.5 7.1
Increase in other
long-term
obligations (8.8) (0.9) (17.5)
Other 0.7 (2.9) (8.7)
Change in non-cash
working capital 0.1 (10.7) (5.3)
----------------------------------------
EBITDA $ 26.1 $ 30.8 $ 78.3
- ---------------------
</Table>
CONSOLIDATED
Our net loss for the year ended December 31, 2003 was $84.5 million ($0.41
per common share) on net sales of $1,591.2 million compared to a net loss of
$123.3 million ($0.64 per common share) on net sales of $1,482.3 million for the
year ended December 31, 2002. EBITDA for the year ended December 31, 2003 was
$78.3 million, compared to $56.6 million for the comparative 2002 year. Our net
loss and EBITDA improved by $38.8 million, and $21.7 million, respectively. Our
net loss for the current year included an after-tax gain on translation of
United States-dollar denominated debt of $47.9 million ($0.23 per common share)
and an after-tax write-down of fixed assets, related to the Elk Falls pulp
production facility rationalization, of $9.2 million ($0.04 per common share).
Our net loss for the previous year included an after-tax write-off of deferred
financing costs of $10.3 million ($0.05 per common share), an after-tax gain on
translation of US$ debt of $10.1 million ($0.05 per common share), and the
release of future income taxes of $9.7 million ($0.05 per common share).
The improvement in EBITDA was largely due to our successful performance
improvement initiative, higher average transaction prices for pulp and
newsprint, and, to a lesser extent, lightweight coated and most uncoated
specialty grades, as well as the positive impact of reduced market-related
downtime in the current year. These gains were partially offset by the adverse
impact of the significantly stronger Canadian dollar, which was mitigated by our
hedging program, weaker contract directory pricing, and increased costs,
particularly higher fossil fuel prices.
35
<Page>
SPECIALTIES
<Table>
<Caption>
- --------------------------------------------------------------------------------------------
SUMMARY OF FINANCIAL RESULTS (IN MILLIONS OF CANADIAN DOLLARS, EXCEPT WHERE OTHERWISE STATED)
- --------------------------------------------------------------------------------------------
2002 2003
---------------------------------------------------- --------
Q1 Q2 Q3 Q4 YTD Q1
- --------------------------------------------------------------------------------------------
Net Sales $ 188.4 $ 192.1 $ 217.3 $ 237.2 $ 835.0 $ 213.3
Operating earnings
(loss) 4.9 (5.7) 5.9 (6.4) (1.3) (10.0)
Depreciation and
amortization 20.7 21.1 24.4 25.0 91.2 24.4
Sales (000 MT) 206.6 225.9 252.0 275.3 959.8 261.7
Production (000 MT) 215.3 224.8 271.6 267.6 979.3 260.9
Average net sales
revenue per tonne $ 912 $ 850 $ 862 $ 862 $ 870 $ 815
Average cash costs
per tonne(1) 788 782 742 794 776 760
- --------------------------------------------------------------------------------------------
<Caption>
- --------------------- ---------------------------------------------------
SUMMARY OF FINANCIAL SUMMARY OF FINANCIAL RESULTS (IN MILLIONS OF CANADIAN DOLLARS, EXCEPT WHERE OTHERWISE STATED)
- --------------------- ---------------------------------------------------
2003
---------------------------------------------------
Q2 Q3 Q4 YTD
- ---------------------
Net Sales $ 214.9 $ 228.7 $ 223.2 $ 880.1
Operating earnings
(loss) (9.8) (6.7) (6.0) (32.5)
Depreciation and
amortization 25.5 24.4 24.2 98.5
Sales (000 MT) 266.8 282.9 273.3 1,084.7
Production (000 MT) 277.1 273.5 263.8 1,075.3
Average net sales
revenue per tonne $ 805 $ 808 $ 817 $ 811
Average cash costs
per tonne(1) 747 746 750 751
- ---------------------
</Table>
(1) Average cash costs per tonne for these purposes consist of cost of sales and
SG&A costs.
Demand for printing and writing papers improved modestly in 2003 from the
depressed levels of 2002. Demand for both coated and uncoated groundwood papers
was stronger than for the overall printing and writing paper market, and the
sector continued to outperform newsprint.
Modest price increases were secured for most grades in 2003. These gains,
however, were more than offset by the impact of the strengthening Canadian
dollar. The directory market was affected by oversupply for most of the year.
European imports to the North American market largely negated reduced supply
from capacity closures in the first half of the year, stalling any recovery in
prices in 2003.
Our operating loss for the year ended December 31, 2003 was $32.5 million on
net sales of $880.1 million, compared to an operating loss of $1.3 million on
net sales of $835.0 million for the previous year.
Sales volumes increased 124,900 tonnes, or 13.0%, compared to the 2002
fiscal year, primarily reflecting improved demand in the current year and, to a
lesser extent, our continued shift of production from newsprint to higher-value
specialty papers.
Our average net sales revenue for the year ended December 31, 2003 was $811
per tonne compared to $870 per tonne in 2002. The decline primarily reflected
the impact of a significantly stronger Canadian dollar, lower pricing for
directory grades, and a lower-value sales mix of other uncoated groundwood
papers. The modest improvement in average transaction prices for other specialty
grades partially offset these declines.
Average cash costs for the year ended December 31, 2003 improved by $25 per
tonne, or 3.2%, from 2002. This improvement resulted primarily from
accomplishing various cost reductions related to our performance improvement
initiative, and higher operating rates. These improvements more than offset the
impact of increased fossil fuel costs, higher costs related to increased
post-retirement commitments, and costs arising from several isolated events in
2003, including the termination of a higher-cost fiber contract, a four-week
coast region Industrial Wood and Allied Workers' Union (IWA) strike in late
2003, and a storm-related company-wide power outage in March.
36
<Page>
NEWSPRINT
<Table>
<Caption>
- --------------------------------------------------------------------------------------------
SUMMARY OF FINANCIAL RESULTS (IN MILLIONS OF CANADIAN DOLLARS, EXCEPT WHERE OTHERWISE STATED)
- --------------------------------------------------------------------------------------------
2002 2003
---------------------------------------------------- --------
Q1 Q2 Q3 Q4 YTD Q1
- --------------------------------------------------------------------------------------------
Net Sales $ 91.0 $ 112.0 $ 117.1 $ 120.5 $ 440.6 $ 114.6
Operating earnings
(loss) (27.8) (23.7) (15.2) (19.3) (86.0) (18.5)
Depreciation and
amortization 15.5 15.5 16.1 16.3 63.4 15.8
Sales (000 MT) 150.6 198.5 201.6 198.8 749.5 195.6
Production (000 MT) 150.0 197.3 201.8 198.1 747.2 199.6
Average net sales
revenue per tonne $ 604 $ 564 $ 581 $ 606 $ 588 $ 586
Average cash costs
per tonne(1) 686 606 577 621 618 600
Newsprint 48.8 gsm,
West Coast Delivery
(US$ per tonne)(2) 462 440 452 472 456 470
- --------------------------------------------------------------------------------------------
<Caption>
- --------------------- ---------------------------------------------------
SUMMARY OF FINANCIAL SUMMARY OF FINANCIAL RESULTS (IN MILLIONS OF CANADIAN DOLLARS, EXCEPT WHERE OTHERWISE STATED)
- --------------------- ---------------------------------------------------
2003
---------------------------------------------------
Q2 Q3 Q4 YTD
- ---------------------
Net Sales $ 113.3 $ 117.5 $ 117.6 $ 463.0
Operating earnings
(loss) (16.7) (11.6) (9.8) (56.6)
Depreciation and
amortization 15.3 15.1 15.5 61.7
Sales (000 MT) 195.4 188.1 189.6 768.7
Production (000 MT) 186.2 188.2 200.8 774.8
Average net sales
revenue per tonne $ 580 $ 625 $ 620 $ 602
Average cash costs
per tonne(1) 587 606 590 596
Newsprint 48.8 gsm,
West Coast Delivery
(US$ per tonne)(2) 495 495 512 493
- ---------------------
</Table>
(1) Average cash costs per tonne for these purposes consist of cost of sales and
SG&A costs.
(2) Benchmark prices are sourced from Resource Information Systems, Inc.
The overall newsprint market continued to be soft in 2003, with
U.S. newsprint consumption down 0.6% year-over-year, to November 2003.
Inventories were maintained at moderate levels, and prices slowly increased
during the year. Despite the continued weakness in demand and the resulting low
North American operating rates, producers managed to secure price increases
totaling US$50 per tonne during the year. The depreciation of the U.S. dollar,
however, more than cancelled out these price increases for Canadian producers.
Our 2003 operating loss improved by $29.4 million, or 34.2% during 2003 from
a loss of $86.0 million on net sales of $440.6 million in 2002 to a loss of
$56.6 million on net sales of $463.0 million in 2003.
Sales volumes were 768,700 tonnes for 2003, an increase of 19,200 tonnes, or
2.6%, compared to 2002. The higher sales volumes primarily reflected lower
market-related downtime in the current year.
Average net sales revenue for the current year increased by $14 per tonne,
or 2.4%. Improved average transaction prices resulting from the modest price
increases during the year were partially offset by the impact of the stronger
Canadian dollar.
Average cash costs were $596 per tonne, an improvement of $22 per tonne, or
3.6%, from the previous year. The most significant factor of this improvement
was our successful performance improvement initiative. This, together with
improved unit costs resulting from higher operating rates, outweighed higher
energy costs, higher post-retirement commitment costs, as well as costs
associated with the previously-highlighted isolated events in 2003.
37
<Page>
PULP
<Table>
<Caption>
- --------------------------------------------------------------------------------------------
SUMMARY OF FINANCIAL RESULTS (IN MILLIONS OF CANADIAN DOLLARS, EXCEPT WHERE OTHERWISE STATED)
- --------------------------------------------------------------------------------------------
2002 2003
---------------------------------------------------- --------
Q1 Q2 Q3 Q4 YTD Q1
- --------------------------------------------------------------------------------------------
Net Sales $ 44.9 $ 55.7 $ 58.2 $ 47.9 $ 206.7 $ 57.9
Operating earnings
(loss) (21.7) (7.7) 5.4 (10.6) (34.6) (7.0)
Depreciation and
amortization 6.3 6.5 5.8 5.3 23.9 7.1
Sales (000 MT) 85.8 107.6 97.7 90.1 381.2 103.9
Production (000 MT) 80.4 101.8 98.3 93.8 374.3 99.0
Average net sales
revenue per tonne $ 523 $ 518 $ 596 $ 532 $ 542 $ 557
Average cash costs
per tonne(1) 703 529 481 591 570 556
NBSK pulp, Northern
Europe Delivery
(US$ per tonne)(2) 443 457 485 447 458 480
- --------------------------------------------------------------------------------------------
<Caption>
- --------------------- ---------------------------------------------------
SUMMARY OF FINANCIAL SUMMARY OF FINANCIAL RESULTS (IN MILLIONS OF CANADIAN DOLLARS, EXCEPT WHERE OTHERWISE STATED)
- --------------------- ---------------------------------------------------
2003
---------------------------------------------------
Q2 Q3 Q4 YTD
- ---------------------
Net Sales $ 55.5 $ 69.6 $ 65.1 $ 248.1
Operating earnings
(loss) (11.9) (3.0) (0.6) (22.5)
Depreciation and
amortization 7.2 7.9 7.5 29.7
Sales (000 MT) 89.9 120.2 107.3 421.3
Production (000 MT) 93.7 114.8 111.3 418.8
Average net sales
revenue per tonne $ 617 $ 580 $ 607 $ 589
Average cash costs
per tonne(1) 670 538 542 572
NBSK pulp, Northern
Europe Delivery
(US$ per tonne)(2) 550 518 552 525
- ---------------------
</Table>
(1) Average cash costs per tonne for these purposes consist of cost of sales and
SG&A costs.
(2) Benchmark prices are sourced from Resource Information Systems, Inc.
The year started promisingly for pulp markets with producers implementing
three consecutive price increases in the first and second quarters, driven in
part by weather-related fiber shortages in the U.S. south-east. Later in the
second quarter, however, market conditions and prices deteriorated mostly due to
the impact of the outbreak of SARS and a drawdown of inventory by Chinese
buyers. A subsequent resumption of Chinese buying in the third quarter helped
arrest this decline, and paved the way for prices to regain their upward
momentum by the end of the year. NBSK pulp benchmark prices closed the year at
US$560 per tonne, up from US$440 at the end of 2002.
Our operating loss from our pulp segment improved $12.1 million, or 35.0%
from an operating loss of $34.6 million on net sales of $206.7 million for the
2002 fiscal year to an operating loss of $22.5 million on net sales of
$248.1 million for the year ended December 31, 2003.
Pulp sales volumes for the year ended December 31, 2003 increased by
40,100 tonnes or 10.5%, largely reflecting reduced requirements from our paper
production facilities and, to a lesser extent, lower planned maintenance
downtime in the current year.
Average net sales revenue for the year ended December 31, 2003 increased $47
per tonne, or 8.7%, from $542 per tonne in 2002, to $589 per tonne in 2003,
mostly as a result of higher average transaction prices. A significant increase
in the value of the Canadian dollar partly offset these gains.
Average cash costs were largely unchanged from the previous year. Various
cost savings, including improved energy consumption at our Crofton recovery
boiler, lower SG&A and reduced fiber costs, were offset by increased energy and
certain overhead costs, including increased post-retirement commitments and
costs related to the Elk Falls rationalization.
FOREIGN EXCHANGE GAIN (LOSS) ON TRANSLATION OF LONG-TERM DEBT
For the year ended December 31, 2003, we recorded a gain of $58.2 million on
the translation of U.S. dollar denominated debt, net of related foreign currency
contracts, compared to a gain of $12.3 million for the previous year. The
significant increase substantially related to the appreciation of the Canadian
dollar versus the U.S. dollar in the current year.
38
<Page>
WRITE-DOWN OF FIXED ASSETS
As previously highlighted, we plan to remove 80,000 tonnes of pulp
production capacity at our Elk Falls mill. This reduction will be achieved
through the permanent closure of our No. 1 recovery boiler and certain other
fixed assets, when our No. 2 recovery boiler upgrade is completed in
April 2004. In connection with this rationalization, a write-down of fixed
assets of $14.2 million was recorded for the year ended December 31, 2003.
OTHER EXPENSE, NET
Other expense, net for the year ended December 31, 2003 was $3.9 million
compared to $13.3 million for the year ended December 31, 2002. The current
year's balance is comprised of several smaller miscellaneous cost items. The net
expense for 2002 was primarily comprised of a $15.8 million write-off of
deferred financing costs related to repaid term and operating credit facilities,
and a gain of $4.8 million arising from the disposition of our shares of Pope
and Talbot Inc. (part of the consideration we received for the sale of our
former Mackenzie pulp operation in June 2001) in March 2002.
INTEREST EXPENSE, NET
Interest expense, net for the year ended December 31, 2003 was
$75.0 million, in line with the previous year, when we recorded a net interest
expense of $76.2 million.
INCOME TAX RECOVERY
Net income tax recovery for the 2003 fiscal year was $62.0 million compared
to $75.8 million for the previous year. The variance primarily reflected the
improved financial performance in 2003. Income tax recovery for the year ended
December 31, 2002 included a non-cash recovery of $9.7 million relating to a
change in the estimate of our income tax liability for prior years.
NET EARNINGS (LOSS)
Our net loss for the year ended December 31, 2003 was $84.5 million ($0.41
per common share), compared to a net loss of $123.3 million ($0.64 per common
share) for the preceding year.
39
<Page>
Liquidity and Capital Resources
<Table>
<Caption>
- --------------------------------------------------------------------------------------------
SUMMARY OF FINANCIAL RESULTS (IN MILLIONS OF CANADIAN DOLLARS, EXCEPT WHERE OTHERWISE STATED)
- --------------------------------------------------------------------------------------------
2002 2003
---------------------------------------------------- --------
Q1 Q2 Q3 Q4 YTD Q1
- --------------------------------------------------------------------------------------------
Cash provided (used)
by operations
(before changes in
non-cash working
capital) $ (26.2) $ (19.1) $ 30.3 $ (1.3) $ (16.3) $ (1.4)
Movement in non-cash
working capital 20.5 14.9 (75.1) 61.2 21.5 (27.6)
Capital spending 9.4 17.5 13.6 41.7 82.2 13.8
Capital spending as %
of depreciation and
amortization 22% 41% 29% 89% 46% 30%
Total debt to total
capitalization
(1)(2) 54% 41% 44% 44% 44% 44%
Net debt to net
capitalization
(3)(4) 51% 41% 44% 44% 44% 44%
- --------------------------------------------------------------------------------------------
Other Financial/
Statistical
Information
Total assets $2,893.5
Total debt(1) 886.2
Shareholders'
equity 1,124.7
No. of employees at
period end 3,800
- --------------------------------------------------------------------------------------------
<Caption>
- --------------------- ---------------------------------------------------
SUMMARY OF FINANCIAL SUMMARY OF FINANCIAL RESULTS (IN MILLIONS OF CANADIAN DOLLARS, EXCEPT WHERE OTHERWISE STATED)
- --------------------- ---------------------------------------------------
2003
---------------------------------------------------
Q2 Q3 Q4 YTD
- ---------------------
Cash provided (used)
by operations
(before changes in
non-cash working
capital) $ (5.5) $ 11.5 $ 12.6 $ 17.2
Movement in non-cash
working capital 22.3 (0.1) 10.7 5.3
Capital spending 27.6 26.0 14.0 81.4
Capital spending as %
of depreciation and
amortization 58% 55% 30% 43%
Total debt to total
capitalization
(1)(2) 45% 45% 44% 44%
Net debt to net
capitalization
(3)(4) 44% 45% 44% 44%
- ---------------------
Other Financial/
Statistical
Information
Total assets $2,816.2
Total debt(1) 845.8
Shareholders'
equity 1,069.2
No. of employees at
period end 4,000
- ---------------------
</Table>
(1) Total debt is comprised of long-term debt, including current portion.
(2) Total capitalization is comprised of total debt and shareholders' equity.
(3) Net debt is comprised of total debt, less cash on hand.
(4) Net capitalization is comprised of net debt and shareholders' equity.
CHANGES IN FINANCIAL POSITION
Cash flows provided (used) by operating activities, after changes in
non-cash working capital, for the year ended December 31, 2003 totaled
$22.5 million, compared to $5.2 million for the previous year. The improvement
was principally due to our stronger financial performance in the current year.
<Table>
<Caption>
CAPITAL SPENDING
FOR THE YEAR ENDED
DECEMBER 31,
----------------------
2002 2003
-------- --------
($ MILLIONS)
Capital expenditures....................................... 82.2 81.4
Depreciation and amortization.............................. 178.5 189.9
Capital spending as a percentage of depreciation and
amortization............................................. 46.1% 42.9%
</Table>
Given the difficult business climate, we continued to prudently manage our
capital expenditures during 2003. Spending for the current year was
$81.4 million, similar to $82.2 million for the previous
40
<Page>
year. Capital spending as a percentage of depreciation and amortization in 2003
was 42.9% compared to 46.1% in 2002.
The focus in 2003 remained on maintenance-of-business and carefully selected
high-return capital projects. The most significant project was the continuation
of the $45 million upgrade of our Elk Falls kraft pulp mill recovery boiler,
which is scheduled for completion in April, 2004.
Current year spending also included work performed on several smaller
high-return projects, including upgrades to our thermomechanical, or TMP, pulp
facility at our Crofton mill, as well as kraft reduction upgrades to our No. 5
paper machine and TMP screen line improvements at our Elk Falls operation.
The $61.1 million acquisition (including transaction costs of $0.6 million
and a working capital adjustment of $2.5 million) of our recycled paper
operation in December 2003, was financed using cash of $32.1 million and equity
of $29.0 million.
In 2004, we intend to maintain our disciplined approach to capital spending
and currently anticipate that our annual capital expenditures for the 2004
fiscal year will be in the region of $70 million. This includes spending to
complete the Elk Falls recovery boiler upgrade.
LIQUIDITY
During 2003, we completed an offering of US$150 million 8.625% senior notes,
repayable in June 2011, and extended the maturity for our $350 million revolving
operating loan by one year, to July 2006.
In February 2003, Standard & Poor's, or S&P, lowered its credit rating of
our long-term corporate and senior unsecured debt by one level, from BB+ to BB,
and affirmed its credit rating on our senior secured debt of BB+. S&P also
indicated that the outlook for our business, at that time, was stable. In
October 2003, Moody's revised its outlook on our debt ratings to negative from
stable and confirmed its existing ratings of Ba2 on our senior unsecured debt
and Ba1 on our bank credit facilities. S&P also revised its outlook in October
from stable to negative, affirmed its existing ratings of BB on our long-term
corporate debt and BB+ on our senior unsecured debt.
The following table highlights our credit rating and outlook with Moody's
and S&P, as of December 31, 2003 and 2002:
<Table>
<Caption>
DECEMBER 31,
--------------------
2002 2003(1)
--------- --------
MOODY'S
Outlook................................................ Stable Negative
Issuer rating.......................................... Ba2 Ba2
Senior unsecured debt.................................. Ba2 Ba2
Bank loan debt......................................... Ba1 Ba1
Senior implied issuer.................................. Ba2 Ba2
S&P
Outlook................................................ Negative Negative
Corporate credit rating................................ BB+ BB
Senior unsecured debt.................................. BB+ BB
Senior secured debt.................................... BB+ BB+
</Table>
- ------------------------
(1) In February 2004, Moody's lowered its existing ratings to Ba3 on our senior
unsecured debt and Ba2 on our secured credit facilities, and confirmed its
outlook on our debt ratings as negative.
41
<Page>
As of December 31, 2003, the borrowing base on our $350.0 million revolving
operating loan was $343.4 million. After drawings of $12.5 million and
outstanding letters of credit of $25.7 million, $305.2 million was available to
us at year-end. Our net debt to net capitalization as of December 31, 2003 was
44%.
At year-end, we remained in compliance with the covenants under both our
credit facilities and bond indentures. However, our consolidated fixed charge
ratio of the bond debentures was below the 2.0:1 threshold, which, while not
constituting a default, does prohibit the payment of dividends and limits the
amount of additional debt that can be incurred outside of the existing credit
facilities.
We use financial instruments to reduce our exposure to foreign currency and
price risks associated with our revenues. At December 31, 2003, no commodity
price hedging instruments were outstanding in respect of products sold. The
following table highlights our foreign currency options and forward contracts
outstanding to sell U.S. dollars at December 31, 2003:
<Table>
<Caption>
OPTIONS FORWARD CONTRACTS
----------------------------------------------------------- ----------------------------
FLOOR CEILING
---------------------------- ----------------------------
AVERAGE RATE AVERAGE RATE AVERAGE RATE
TERM US$ MILLIONS CDN$/US$ US$ MILLIONS CDN$/US$ US$ MILLIONS CDN$/US$
- ---- ------------- ------------ ------------- ------------ ------------- ------------
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
AS AT DECEMBER 31,
2002
0 to 12 months........ $297 1.5595 $285 1.6095 $118 1.5330
13 to 24 months....... $133 1.5695 $127 1.6263 $ 38 1.6123
</Table>
At period-end exchange rates, the amount that we would receive to settle the
above contracts and options is $74.1 million, of which $15.3 million has been
included in accounts receivable and accounts payable.
At December 31, 2003, our long-term debt related forward foreign exchange
contracts to acquire U.S. dollars totaled US$264.1 million over a four-year
period at rates averaging 1.5153. At period end exchange rates, the net amount
we would pay to settle these contracts is $50.0 million.
We also use financial instruments to reduce our exposure to energy costs. At
December 31, 2003, we had oil swaps to purchase 377,000 barrels at an average
contract rate of US$23.37 per barrel, settling between January 2004 and
March 2005 and natural gas swaps to purchase 1.6 million gigajoules at an
average contract rate of US$3.89 per gigajoule settling between January 2004 and
October 2004. At year-end rates, the net amount we would receive to settle these
contracts is $3.6 million.
From time to time, we enter into interest rate swaps to manage our exposure
to changes in long-term fixed interest rates associated with our senior notes.
During the year, we terminated US$105.0 million of fixed-to-floating interest
swaps for proceeds of $15.9 million. These funds were applied against our
revolving operating loan. No interest swaps were outstanding at December 31,
2003.
Post-retirement benefits and pension contributions paid in 2003 amounted to
$15.4 million (2002: $7.8 million). As outlined in note 15 to the 2003
consolidated financial statements, there was a total funding deficit of
$112.5 million in our various pension plans as of December 31, 2003. Of this
amount, $70.7 million related to funded defined benefit pension plans and
$41.8 million to "pay-as-you-go" unfunded defined benefit pension plans. In
addition, we have other "pay-as-you-go" post-retirement benefit plans,
consisting of group health care and life insurance, which had a deficit of
$183.6 million at December 31, 2003. We anticipate the annual funding
contributions to our defined benefit pension plans will increase to
approximately $20 million from their current level of approximately
$10 million.
42
<Page>
Related Party Transactions
Our related parties include Norske Skogindustrier ASA, or Norske Skog, a
significant shareholder, together with its subsidiaries and affiliates, and
Norske Skog North America LLC, a joint venture between Norske Skog and
NorskeCanada.
In prior years, we acquired companies with non-capital and capital loss
carryovers from Fletcher Challenge Limited, acquired by Norske Skog in 2000. The
purchase price for these companies is subject to adjustment under certain
conditions. In 2003, a downward adjustment of $17.8 million (net of taxes of
$1.5 million on the interest component) in the purchase price was recorded. The
adjustment was recorded as an increase to deferred credits. No such price
adjustments were recorded in the 2002 fiscal year.
We have sales and marketing contracts with affiliates of Norske Skog, which
provides for sales agency and distribution arrangements in the U.S. and certain
international markets.
Our product sales to related parties are at arm's length and in accordance
with normal trade practices.
Contractual Obligations
The following table presents the aggregate amount of future cash outflows of
our contractual obligations as of December 31, 2003, excluding amounts due for
interest on outstanding indebtedness:
<Table>
<Caption>
PAYMENTS DUE BY PERIOD
---------------------------------------------
LESS THAN MORE THAN
1 YEAR 1-3 YEARS 3-5 YEARS 5 YEARS
--------- --------- --------- ---------
(IN MILLIONS OF CANADIAN DOLLARS)
Long-term debt......................... $ -- $12.5 $ -- $833.3
Capital lease obligations.............. 0.7 1.5 1.5 5.1
Operating leases....................... 9.6 18.2 14.9 58.7
----- ----- ----- ------
Total.................................. $10.3 $32.2 $16.4 $897.1
===== ===== ===== ======
</Table>
Critical Accounting Policies and Judgmental Matters
The preparation of financial statements in conformity with generally
accepted accounting principles in Canada requires companies to establish
accounting policies and to make estimates that affect both the amount and timing
of the recording of assets, liabilities, revenues and expenses. Some of these
estimates require judgments about matters that are inherently uncertain.
Note 1 to the 2003 consolidated financial statements includes a summary of
the significant accounting policies used in the preparation of those
consolidated financial statements. While all of the significant accounting
policies are important to our consolidated financial statements, some of these
policies may be viewed as being critical. Such policies are those that are both
most important to the portrayal of our financial condition and require our most
difficult, subjective or complex estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of our consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. While the
judgments and estimates we make are based on historical experience and other
assumptions that management considers appropriate and reasonable under current
circumstances, the actual resolution and results may differ from the recorded
estimated amounts, resulting in charges or credits that could materially affect
our results or financial condition for a given reporting period.
43
<Page>
The following areas represent critical accounting policies where estimates
and judgments can have a significant effect on reported results of our
operations and financial position:
CONTINGENT LIABILITIES
Contingent liabilities, primarily pertaining to environmental and legal
matters, are recorded on an undiscounted basis when it is considered probable
that a liability has been incurred and the amount of the loss can be reasonably
estimated. Liabilities for environmental matters require evaluations of
applicable environmental regulations and estimates of remediation alternatives
and the costs thereof. Provisions for liabilities relating to legal actions and
claims require judgments regarding projected outcomes and the range of loss,
based on such factors as historical experience and recommendations of legal
counsel.
IMPAIRMENT OF LONG-LIVED ASSETS
We review long-lived assets, primarily plant and equipment, for impairment
when events or changes in circumstances indicate that the carrying value of
assets may not be recoverable. Canadian GAAP requires us to make certain
judgments, assumptions and estimates in identifying such events and changes in
circumstances, and in assessing their impact on the valuations and economic
lives of the affected assets. Impairments are recognized when the book values
exceed management's estimate of the undiscounted future cash flows, or net
recoverable amounts, associated with the affected assets. Key assumptions in
estimating these cash flows include future production volumes and average
product pricing over the commodity cycle, and future estimates of expenses to be
incurred.
Due to the numerous variables associated with our judgments and assumptions
relating to the valuation of assets in such situations, the precision and
accuracy of estimates of related impairment charges are subject to significant
uncertainties, and may change significantly as additional information becomes
known.
PENSION AND POST-RETIREMENT BENEFITS
We maintain various employee future benefit plans, which include defined
benefit pension and post-retirement benefit plans. We retain independent
actuarial firms to perform actuarial valuations of the fair values of our
defined benefit pension and post-retirement benefit plan assets and benefit
obligations, and advise on the amounts to be recorded in our financial
statements. This information is determined using certain assumptions, based on
historical and market data, that directly impact the fair value of the assets
and obligations and charges disclosed in our financial statements. These
assumptions include:
- The discount rate used to arrive at the net present value of the various
plan obligations;
- The long-term return on assets used to estimate the growth in the value of
invested assets available to satisfy certain obligations;
- Salary increases used to calculate the impact that future compensation
increases will have on pension and other post-retirement obligations; and
- Health care trend rates used to calculate the impact that future health
care costs will have on post-retirement obligations.
Actual experience can vary significantly from estimates, and could
materially impact the estimated cost of our employee benefit plans and future
cash requirements.
44
<Page>
PROVISION FOR BAD/DOUBTFUL ACCOUNTS AND SLOW-MOVING AND OBSOLETE INVENTORY ITEMS
We use generally accepted practices in estimating required provisions for
doubtful accounts and bad debt losses arising on trade and other receivable
balances and provisions for slow moving and obsolete inventory items. These
allowances are reviewed and updated from time to time to ensure that they take
into consideration all circumstances known to management. Our estimate of the
required allowance is ultimately a matter of opinion and the actual loss
eventually sustained may be more or less than that estimated.
INCOME TAXES
The amounts we record for future income assets and liabilities are based on
various judgments, assumptions and estimates. These include the tax rates and
laws that will apply when the temporary differences reverse, and the likelihood
that we will generate sufficient taxable income to utilize non-capital loss
carry-forwards prior to their expiration.
Due to the numerous variables associated with such judgments, assumptions
and estimates, and the effects of changes in circumstances on these valuations,
the precision and reliability of the resulting estimates are subject to
substantial uncertainties and may change significantly as additional information
becomes known.
In addition, we record provisions for federal, provincial and foreign taxes
based on the respective tax rules and regulations of the jurisdictions in which
we operate and our judgment as to the allocation of income and the amount of
deductions relating to those jurisdictions. From time to time, domestic and
foreign tax authorities challenge the timing and amounts of such income
allocations and deductions. In such circumstances, the final resolution of these
challenges can result in final settlements that differ from our estimated
amounts.
RECENT PRONOUNCEMENTS
Effective January 1, 2004, we will adopt the following new pronouncements by
the Canadian Institute of Chartered Accountants:
Accounting Guideline 13, HEDGING RELATIONSHIPS, and the Emerging Issues
Committee's Consensus EIC-128, ACCOUNTING FOR TRADING, SPECULATIVE, OR
NON-HEDGING DERIVATIVE FINANCIAL INSTRUMENTS. The new standards implement
requirements related to the identification, designation, documentation and
effectiveness of hedging relationships. The new standards are applied on a
prospective basis to all instruments existing on, or entered into after,
January 1, 2004. Under the new standards, hedge accounting is optional for
derivative transactions that are effective in offsetting financial statement
risks. Derivative financial instruments that are not subject to hedge accounting
are recorded on the balance sheet, with unrealized changes in fair value
recorded to the statement of earnings on each balance sheet date.
Section 3110, ASSET RETIREMENT OBLIGATIONS. The new standard requires
entities to record 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. In subsequent periods,
the liability is adjusted for the accretion of discount and any changes in the
amount or timing of the underlying future cash flows.
Section 3063, IMPAIRMENT OF LONG-LIVED ASSETS. The new standard requires
entities to recognize an impairment loss when the carrying amount of a
long-lived asset exceeds 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 asset's carrying amount exceeds its fair
value.
45
<Page>
Section 3870, STOCK-BASED COMPENSATION AND OTHER STOCK-BASED PAYMENTS. The
new standard requires entities to expense all stock-based compensation and
payments at grant date.
Uncertainties
We produce and market products that are sold globally. We seek to
differentiate our product lines from those of other producers by supplying
specialty products that add value for customers. However, our operating
environment is subject to uncertainties, many of which are common to virtually
all companies in the forest products industry in North America and also some
that are more specifically applicable to our operations based in British
Columbia.
See "Risk Factors" for a discussion of the principal uncertainties to which
we are subject.
Earnings Sensitivities
As previously mentioned, our earnings are sensitive to fluctuations in
prices for our products, energy costs and foreign exchange rates.
PRODUCT PRICE SENSITIVITY
Based on market production capacities and exchange rates as at December 31,
2003, a US$10 per tonne change in the net sales price of our principal products
would affect our annualized operating earnings and net earnings approximately as
follows:
<Table>
<Caption>
OPERATING EARNINGS NET EARNINGS
------------------ ------------
($ MILLIONS)
Specialties..................................... $15 $10
Newsprint....................................... 11 7
Pulp............................................ 4 3
</Table>
CURRENCY SENSITIVITY
Our operations are located in British Columbia, Canada and most of our costs
and expenses are denominated in Canadian dollars. We primarily sell our products
in Canada, the United States, Asia and Australasia, Latin America, and Europe. A
majority of our sales are denominated in foreign currencies, principally the
U.S. dollar and the Japanese yen. As a result, we are exposed to foreign
currency market risk on accounts receivable and future sales. We estimate that
in the absence of our risk management program, a $0.01 change in the
U.S. dollar relative to the value of the Canadian dollar would have affected our
operating earnings for 2003 by approximately $15 million, based on 2003 sales
and a movement from US$0.77 to US$0.78.
ENERGY COST SENSITIVITY
As mentioned, we are a significant consumer of electrical power and fossil
fuels. Changes in the prices and terms of our energy supply contracts could have
a significant effect on our earnings. The table below highlights the annualized
impact of a 5% change in natural gas and oil, and electricity prices on our
operating earnings and net earnings, in the absence of our risk management
program:
<Table>
<Caption>
OPERATING EARNINGS NET EARNINGS
------------------ ------------
(IN $ MILLIONS)
Impact of 5% change in price of:
Natural gas and oil........................... $ 3 $ 2
Electricity................................... 8 5
</Table>
46
<Page>
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
Comparison of Earnings
CONSOLIDATED
Our operating earnings (loss) for the year ended December 31, 2002 was
$(121.9) million on total sales of $1,482.3 million compared to operating
earnings of $79.7 million on net sales of $1,388.7 million for the year ended
December 31, 2001. Depreciation and amortization was $178.5 million for the year
ended December 31, 2002 and $131.2 million for the year ended December 31, 2001.
The increase in net sales resulted directly from the net sales, especially
in our specialty papers business, in 2002 of Pacifica Papers, which more than
offset decreases in net sales in our newsprint and pulp segments.
The sharp decline in operating earnings resulted primarily from depressed
market conditions, which more than offset the positive impact of our increased
specialty papers business as a result of the Pacifica Papers acquisition, and
reduced exposure to market pulp as a result of the Mackenzie sale in 2001, and
the synergies we realized from the Pacifica Papers acquisition.
Consolidated selling, general and administrative, or SG&A, costs for the
year ended December 31, 2002 were $65.3 million, a marginal increase of
$1.7 million, or 2.7%, from the previous year. Despite the significant increase
in sales volumes arising from the Pacifica Papers acquisition, we maintained our
SG&A costs at similar levels to 2001, primarily as a result of cost-saving
synergies realized during 2002.
<Table>
<Caption>
NET SALES YEAR ENDED
DECEMBER 31, INCREASE (DECREASE) FROM 2001
--------------------- ---------------------------------------
2001 2002 TOTAL CHANGE VOLUME MIX SALES VALUE
--------- --------- ------------ ---------- -----------
(IN MILLIONS OF DOLLARS)
Specialties............. $ 563.6 $ 835.0 $ 271.4 $ 403.0 $(131.6)
Newsprint............... 489.2 440.6 (48.6) 117.9 (166.5)
-------- -------- ------- ------- -------
$1,052.8 $1,275.6 $ 222.8 $ 520.9 $(298.1)
Pulp(1)................. 335.9 206.7 (129.2) (110.9) (18.3)
-------- -------- ------- ------- -------
$1,388.7 $1,482.3 $ 93.6 $ 410.0 $(316.4)
======== ======== ======= ======= =======
</Table>
- ------------------------
(1) Net sales of pulp is reported net of intercompany transfers.
SPECIALTIES
Continued weak industry fundamentals resulted in compressed margins for
specialty paper producers in 2002. Overall demand improved only marginally from
the depressed levels of 2001. A notable exception was uncoated super-calendered
papers where more robust demand arose primarily from customers replacing coated
papers with less expensive uncoated papers in many catalogues and magazine
inserts.
The introduction of new super calender and coated paper capacity through
2001 and 2002 into weak domestic markets inevitably led to significant price
discounting of higher-end specialty papers, particularly through the first half
of 2002. As a result, average transaction prices for coated papers and most
uncoated specialty paper grades declined steeply in 2002 compared to 2001.
Prices of coated paper fell to historically low levels in the third quarter of
2002. Certain lightweight uncoated groundwood grades, primarily directory,
escaped the price erosion, largely due to the significant volume of annual
contract business in those sectors.
47
<Page>
The kraft paper market remained relatively stable during the year. Price
volatility was sharply reduced in 2002 as producers responded effectively to
soft demand by lowering operating rates. As a result, prices remained fairly
steady throughout 2002, after the sharp decline in the second half of 2001.
For the 2002 fiscal year, our sales volumes were 959,800 tonnes, up
387,200 tonnes, or 67.6%, from the same period last year, primarily reflecting
increased sales following the Pacifica Papers acquisition.
Our average sales revenue for the year ended December 31, 2002 decreased
from $985 per tonne in 2001 to $870 per tonne in 2002, a decrease of $115 per
tonne, or 11.7%. A sharp deterioration in pricing was partly offset by the
positive impact of realized sales and distribution synergies, and a higher-value
sales mix.
The average cost of sales for the year ended December 31, 2002 was $741 per
tonne, an improvement of $16 per tonne, or 2.1%, from the same period in 2001.
Various synergy-driven furnish, conversion, and overhead cost improvements
realized during 2002, together with lower wood fiber costs, were largely offset
by higher planned maintenance costs, higher costs associated with our positive
sales mix and increased de-inked pulp costs.
SG&A costs for the 2002 fiscal year were $34.3 million, an increase of
$11.9 million, or 53.1% compared to the previous year. The higher SG&A level
primarily reflects the greater proportion of specialties in our total sales
volumes as a result of the Pacifica Papers acquisition.
Depreciation and amortization increased from $36.1 million in 2001 to
$91.2 million in 2002, primarily reflecting the additional expense arising from
the Pacifica Papers acquisition and, to a lesser extent, higher allocation of
depreciation arising from an increased use of internal pulp in 2002 following
the closure of the Powell River kraft pulp mill in late 2001.
Based on these factors, operating earnings (loss) from our specialties
business decreased $73.5 million to $(1.3) million on sales of $835.0 million
for the 2002 fiscal year, from $72.2 million on sales of $563.9 million for the
previous year.
NEWSPRINT
A continued slump in consumer demand, combined with continued global
overcapacity, presented newsprint producers in 2002 with one of the most
challenging years in recent history. Consumption, measured primarily in the form
of advertising lineage, was down by approximately 3% and 14%, respectively,
compared to the levels of 2001 and 2000, leading to an erosion of prices to
eight-year lows.
In response to the depressed market conditions, the major North American
newsprint producers took significant levels of market downtime throughout the
year, including the closure or conversion of several higher-cost paper machines,
in an attempt to balance supply and demand. Prices bottomed out in the third
quarter of 2002, and a US$35 per tonne price increase in North American markets
was successfully implemented in late October.
Our sales volumes in the year ended December 31, 2002 were 749,500 tonnes,
an increase of 145,600 tonnes, or 24.1%, compared to 2001. Increased sales
volumes following the Pacifica Papers acquisition were mostly offset by higher
downtime, particularly in the first half of 2002, to balance supply with weaker
demand.
Our average sales revenue for the year ended December 31, 2002 was $588 per
tonne, a decrease of $222 per tonne, or 27.4%, from previous year, reflecting
the depressed market conditions. A steep decline in prices and, to a lesser
extent, higher freight costs related to the weak markets, were partly offset by
synergies from the Pacifica Papers acquisition.
48
<Page>
The average cost of sales for the year ended December 31, 2002 was $590 per
tonne, an improvement of $34 per tonne, or 5.4%, from the corresponding period
in 2001. Cost savings arising from realized synergies, together with other cost
reductions, including lower kraft consumption and wood fiber costs in 2002, more
than offset the impact of additional market--related downtime taken during the
current year.
SG&A expenses for the year ended December 31, 2002 were $21.0 million,
$5.4 million, or 20.5%, less than for the 2001 fiscal year. The reduced amount
largely reflects newsprint's lower proportion of total sales volumes in the
current year compared to 2001, following the Pacifica Papers acquisition.
Our depreciation and amortization increased to $63.4 million in 2002 from
$48.4 million in 2001, primarily reflecting the additional expense arising from
the Pacifica Papers acquisition partially offset by the impact of the additional
downtime taken in 2002.
Accordingly, our operating earnings (loss) from our newsprint business
decreased $123.3 million to $(86.0) million on sales of $440.6 million for the
year ended December 31, 2002, from $37.3 million on sales of $489.2 million for
the 2001 fiscal year.
PULP
The weak global economic environment also adversely affected pulp producers.
Prices hit an eight-year low in April 2002 as pulp producers maintained high
operating rates throughout the 2001/2002 winter season, which resulted in
escalating inventory levels. After bottoming out in April 2002, prices improved
gradually during the spring/summer period, pushing prices close to US$500 per
tonne, prompted in part by some opportunistic purchasing by consumers. However,
this upturn was short-lived and as the year drew to a close, prices again came
under downward pressure.
Our pulp sales volumes for the year ended December 31, 2002 were
381,200 tonnes, a decrease of 187,100 tonnes, or 32.9%, compared to 2001. This
was substantially due to the reduction in available capacity following the
June 2001 sale of Mackenzie and the November 2001 closure of the Powell River
pulp mill. This decline was partly offset by market--related downtime taken in
2001.
Our average pulp sales revenue for the year ended December 31, 2002 was $542
per tonne, a decrease of $49 per tonne, or 8.3%, from the same period last year,
due primarily to lower prices for long-fiber pulp products in 2002.
The average cost of sales for pulp for the year ended December 31, 2002 was
$544 per tonne, an increase of $9 per tonne, or 1.6%, compared to 2001. Lower
fiber costs and improved unit fixed costs from higher operating rates were
offset by higher maintenance costs.
SG&A expenses were $10.0 million for the year ended December 31, 2002, a
decrease of $4.8 million from 2001, or 32.4% from 2001. The lower SG&A costs
reflect the segment's reduced proportion of total sales volumes as a result of
the Pacifica Papers acquisition and the sale of Mackenzie.
Depreciation and amortization expense decreased from $46.7 million in 2001
to $23.9 million in 2002 as a result of the increased internal use of pulp for
paper production and the sale of Mackenzie.
As a result of these factors, operating earnings (loss) from our pulp
business decreased $4.8 million, from $(29.8) million on sales of
$335.9 million for the 2001 fiscal year, to $(34.6) million on sales of
$206.7 million for the year ended December 31, 2002.
FOREIGN EXCHANGE GAIN (LOSS) ON TRANSLATION OF FOREIGN DENOMINATED DEBT
Effective January 1, 2002, we adopted the new CICA accounting standard for
foreign currency translation that retroactively eliminated the deferral and
amortization of unrealized foreign exchange
49
<Page>
gains and losses on long-term monetary items. Prior period financial statements
have been restated to reflect this new accounting policy. For the year ended
December 31, 2002, we recorded a gain of $12.3 million on the translation of
U.S. dollar denominated debt (2001 restated: $(17.1) million).
OTHER EXPENSE, NET
Other expense, net for the year ended December 31, 2002 was $13.3 million
compared to $40.2 million for the year ended December, 2001. Other expense, net
for the 2002 fiscal year was comprised primarily of a $15.8 million write-off of
deferred financing costs associated with term and operating credit facilities
that were repaid in May 2002 and July 2002, respectively. Partly offsetting this
was a gain of $4.8 million arising from the sale of Pope & Talbot shares in
March 2002.
INTEREST INCOME (EXPENSE)
Interest expense for the year ended December 31, 2002 increased
$43.8 million from $34.1 million in 2001 to $77.9 million in 2002. Interest
income decreased by $33.3 million from $35.0 million to $1.7 million, over the
same period. The movements primarily reflected the change in capital structure
arising from the Pacifica Papers acquisition and special distribution in 2001,
the equity offering in May 2002, and to a lesser extent, lower interest rates.
INCOME TAX RECOVERY
Income tax recovery for the 2002 fiscal year was $75.8 million compared to
$21.2 million for the previous year. The variance, for the most part, reflected
the significant decline in earnings in 2002. The income tax recovery for the
year ended December 31, 2002 included a non-cash recovery of $9.7 million
relating to a change in the estimate of the income tax liability for prior
years. Income tax recovery for the year ended December 31, 2001 included an
income tax recovery of $22.8 million related to a reduction in provincial income
tax rates in addition to a recovery of $16.1 million from the amortization of
deferred credits arising on the utilization of acquired tax losses.
NET EARNINGS/LOSS
As a result of the factors noted above, our net loss for the year ended
December 31, 2002 was $123.3 million, or $(0.64) per share, compared to net
earnings (restated for net impact of the new CICA accounting standard for
foreign currency translation) of $44.5 million, or $0.32 per share, for the
preceding year.
Liquidity and Capital Resources
CASH FLOWS PROVIDED BY OPERATIONS
Cash flows provided by operating activities, after changes in non-cash
working capital, for the year ended December 31, 2002 totaled $5.2 million,
compared to $269.8 million for the previous year, primarily as a result of the
significant decline in earnings and a change in capital structure in late
August 2001, following the special distribution and the Pacifica Papers
acquisition.
Over the longer term, we expect to fund our future operations and growth
through cash flows from operations and, if necessary, borrowings under our
secured credit facility, which is available for operating purposes. As
previously noted, operating earnings and cash flows decreased during the year as
a result of the economic downturn. If this trend were to continue, we would,
over time, rely to a greater extent on our available cash and our secured credit
facility.
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INVESTING AND FINANCING ACTIVITIES
In May 2002, we issued 31.1 million common shares for net proceeds of
$208.1 million, which, together with cash on hand and drawings on our secured
credit facility, were used to repay all of our secured term debt. Prior to the
repayment of our term debt, we had repaid debt of $2.6 million in 2002.
In July 2002, we replaced our existing $250.0 million secured credit
facility with a new $350.0 million secured credit facility. In the same month,
Powell River Energy Inc., or PREI, refinanced its debt by issuing $75.0 million
of First Mortgage Bonds due July 2009, of which our proportionate (non-recourse)
share is $37.6 million. As part of the refinancing, we and the other shareholder
of PREI each advanced $7.5 million to PREI.
As of December 31, 2002, we could have borrowed a further $183.1 million
under our secured credit facility. At year-end, we remained in compliance with
the covenants under both our secured credit facility and our existing note
indentures. However, our consolidated fixed charge coverage ratio was below the
2.0:1 threshold of the two note indentures governing our 10% notes and 8 5/8%
notes, which, while not constituting a default, does prohibit the payment of
dividends and limit the amount of additional debt that can be incurred.
In the foreseeable future, we expect to fund our operations through cash
flows from operations and, if necessary, borrowings under our secured credit
facility. As previously highlighted, operating earnings and cash flows decreased
during the year as a result of the economic downturn. If this trend were to
continue, we would, over time, rely to a greater extent on our secured credit
facility and, if necessary, additional sources of financing.
The following table highlights our credit rating and outlook with Moody's
and Standard and Poor's, as of December 31, 2002 and 2001:
<Table>
<Caption>
DECEMBER 31,
---------------------
2001 2002
--------- ---------
MOODY'S
Outlook............................................... Stable Stable
Issuer rating......................................... Ba2 Ba2
Senior unsecured debt................................. Ba2 Ba2
Bank loan debt........................................ Baa3 Ba1
Senior implied issuer................................. Ba1 Ba2
S&P
Outlook............................................... Stable Neg
Corporate credit rating............................... BB+ BB+
Senior unsecured debt................................. BB BB+
Senior secured debt................................... Not rated BB+
</Table>
There was a total funding deficit of $96.4 million in our various pension
plans as of December 31, 2002 (see note 15 of the consolidated financial
statements included elsewhere in this prospectus.) Of this amount,
$56.0 million related to the unfunded amount of defined benefit pension plans
for which funding occurs and $40.4 million related to unfunded "pay-as-you-go"
plans. With respect to the funded defined benefit plans, the next actuarial
valuations are scheduled for January 1, 2004. If stock markets remain at
depressed levels, we anticipate our annual funding contributions to these plans
will increase to approximately $19 million from their current level of
approximately $7 million.
In prior years, we acquired companies with non-capital and capital losses
carried forward from Fletcher Challenge Limited. The purchase price is subject
to adjustment under certain conditions. No
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price adjustments were recorded in 2002. In 2001, a negative purchase price
adjustment of $1.8 million was recorded. The difference between the future tax
benefit of these losses and the acquisition cost of the companies was recorded
as a deferred credit. The deferred credit is amortized to income tax expense as
the tax losses are utilized. No amortization was recorded in fiscal 2002; in
fiscal 2001, the amortization reduced income tax expense by $16.1 million.
Capital spending for the year ended December 31, 2002 was $82.2 million
compared to $92.7 million for the previous year. The focus in 2002 was primarily
on maintenance-of-business and carefully selected high-return capital
expenditures. The more significant projects in 2002 included the successful
integration of legacy NorskeCanada and Pacifica Papers order fulfillment systems
and the installation of an enhanced water pipeline at Port Alberni. In the last
quarter of 2002, we also commenced a rebuild of our Elk Falls kraft pulp mill
recovery boiler, which is expected to cost approximately $45 million. We believe
this project, which is scheduled for completion by April 2004, will lead to an
improvement in operational performance and reduction in maintenance costs.
Capital spending as a percentage of depreciation and amortization in 2002
was 46.1% as compared to 70.7% in 2001. We anticipate that our annual capital
expenditures in 2003 will be approximately $90 million, which includes further
spending on the recovery boiler rebuild at Elk Falls.
<Table>
<Caption>
CAPITAL SPENDING
FOR THE YEAR ENDED
DECEMBER 31,
----------------------
2001 2002
-------- --------
($ MILLIONS)
Capital expenditures....................................... 92.7 82.2
Depreciation and amortization.............................. 131.2 178.5
Capital spending as a percentage of depreciation and
amortization............................................. 70.7% 46.1%
</Table>
RESTRUCTURING OF POWELL RIVER AND PORT ALBERNI OPERATIONS
As part of our restructuring activities following the Pacifica Papers
acquisition in 2001, we permanently closed our kraft pulp mill operation at
Powell River and eliminated various positions at Port Alberni and our corporate
and sales offices. Total restructuring costs associated with these activities
amounted to $67.0 million, of which $30.7 million was paid during 2002 and
$7.1 million during 2001. We expect the remaining accrual for the majority of
these restructuring costs to be substantially drawn down over the next three
years. Further details are contained in note 3 to the consolidated financial
statements included elsewhere in this prospectus.
Earnings Sensitivities
Our earnings are sensitive to fluctuations in prices for our products and in
currency exchange rates.
PRODUCT PRICE SENSITIVITY
Based on market production capacities and exchange rates as at December 31,
2002, a US$10 per tonne change in the net sales price of our principal products
would have affected our operating earnings and net earnings approximately as
follows:
<Table>
<Caption>
OPERATING EARNINGS NET EARNINGS
------------------ -------------
($ MILLIONS) ($ MILLIONS)
Specialties..................................... 16 11
Newsprint....................................... 13 8
Pulp............................................ 3 2
</Table>
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CURRENCY SENSITIVITY
Our operations are located in British Columbia, Canada and most of our costs
and expenses are denominated in Canadian dollars. We primarily sell our products
in Canada, the United States, the Pacific Rim and Europe. A majority of our
sales are denominated in foreign currencies, primarily the U.S. dollar and the
Japanese yen. As a result, we are exposed to foreign currency market risk,
primarily on accounts receivable and future sales. We estimate that in the
absence of our market risk management program, a $0.01 change in the
U.S. dollar relative to the value of the Canadian dollar would affect our
operating earnings by approximately $18.8 million based on 2002 sales.
In order to mitigate the effects of the related foreign currency fluctuation
risk, we manage a portion of our foreign exchange exposure through a foreign
exchange risk management program that uses currency options and forward
contracts to hedge anticipated future cash flows denominated in foreign
currencies. Details of our forward foreign currency contracts and options
hedging future revenues as of December 31, 2002 are set out in note 16 to the
consolidated financial statements included elsewhere in this prospectus.
INTEREST RATE SENSITIVITY
Our borrowings are comprised primarily of senior notes and secured term and
revolving credit facilities. The interest rates on our senior notes are fixed;
however, from time to time, we enter into interest rate swaps and options to
convert certain amounts of fixed-rate debt to floating rates. Interest rates on
funds borrowed under our credit facilities vary with market interest rates and
our credit rating as assessed from time to time by external credit rating
agencies. Based on the outstanding balances under our secured credit facility at
December 31, 2002, and in the absence of our interest rate hedging program, a
change of 1% in interest rates under our credit facilities would affect our
annualized net earnings by approximately $0.8 million.
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BUSINESS
We are the third largest newsprint and uncoated groundwood specialty paper
manufacturer based in North America measured by production capacity. We are also
the largest producer of coated and uncoated specialty papers and newsprint, and
the only producer of lightweight coated papers, on the west coast of North
America. We are also the largest producer of lightweight, uncoated groundwood
(directory) paper in the world. We also produce market pulp and kraft paper and
we own the largest paper recycling operation in Western Canada.
Our four integrated pulp and paper operations are located in British
Columbia, at Crofton and Elk Falls on the east coast of Vancouver Island, Port
Alberni on the west coast of Vancouver Island, and Powell River on the west
coast of the British Columbia mainland. Our paper recycling operation is located
in Coquitlam, British Columbia.
The capacities by product, in thousands of tonnes, of our pulp and paper
facilities as at December 31, 2003 are:
<Table>
<Caption>
OTHER
UNCOATED
DIRECTORY GROUNDWOOD LWC KRAFT MARKET
MILL NEWSPRINT PAPER SPECIALTIES PAPER PAPER SUB-TOTAL PULP(1) TOTAL
- ---- --------- --------- ----------- -------- -------- --------- -------- --------
Crofton.................. 280 150 -- -- -- 430 295 725
Elk Falls................ 355 -- 155 -- 131 641 160 801
Port Alberni............. -- 223 -- 209 -- 432 -- 432
Powell River............. 182 -- 277 -- -- 459 -- 459
--- --- --- --- --- ----- --- -----
Total.................... 817 373 432 209 131 1,962 455 2,417
=== === === === === ===== === =====
</Table>
- ------------------------
(1) Total pulp capacity of 662,000 tonnes is reduced by 207,000 tonnes in order
to reflect the pulp that is provided to our paper and kraft paper
operations. Rationalization of Elk Falls' pulp facility commenced in 2003.
These figures represent a decline in capacity of approximately
80,000 tonnes which is expected to result from the rationalization.
In addition, our paper recycling operation has a production capacity of
145,000 air-dried equivalent tonnes of pulp per year, the vast majority of which
is consumed internally.
Our principal business is printing papers, consisting of groundwood coated,
uncoated papers and specialty papers, kraft paper and newsprint. For the year
ended December 31, 2003, groundwood and printing papers comprised approximately
81% of our total manufacturing capacity and contributed approximately 84% of our
total net sales revenues.
The principal markets for our products are located in North America and the
North Pacific Rim. The major markets for our market pulp are Western Europe and
Asia.
COMPETITIVE STRENGTHS
We believe that we have the following competitive strengths:
- STRONG MARKET POSITION. We are the third largest producer of newsprint and
uncoated groundwood specialty papers based in North America measured by
production capacity. We are also the largest producer of coated and
uncoated specialty papers and newsprint, and the only producer of
lightweight coated paper, on the west coast of North America. We are the
largest producer of directory paper in the world. We have annual
production capacity of approximately
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2.4 million tonnes of specialty paper, newsprint and market pulp. In
addition, we own the largest paper recycling operation in Western Canada.
- DIVERSIFIED PRODUCT MIX. Since 1993, we have introduced or expanded a
number of specialty and differentiated product lines, including
lightweight newsprint grades, coated papers, lightweight uncoated
specialty papers (primarily directory), sawdust-based pulp and whitetop
linerboard. These products are of superior quality and offer enhanced
margins over standard commodity grades. Additionally, market pulp accounts
for only 19% of our manufacturing capacity, significantly limiting our
exposure to volatile pulp markets.
- UPGRADED, COST-COMPETITIVE MANUFACTURING FACILITIES. Over the last five
years, we have invested approximately $573 million in our manufacturing
facilities to shift production towards higher margin papers, reduce unit
production costs, increase operating efficiency, improve product quality,
increase capacity and meet environmental regulations.
- STRONG SUPPLY CHAIN MANAGEMENT PRACTICES. We introduced new supply chain
systems in 2000 to improve our supply chain and order fulfillment
processes. These processes range from the purchase of raw materials to the
delivery of finished paper products to our customers. These new systems
have allowed us to reduce inventory levels, increase inventory turnover
and provide faster delivery to customers. We are also able to make better
use of the barges, rail cars, trucks and containers that we use to ship
our products. With better planning and scheduling, we are now able to ship
our products to customers using the most cost-efficient mode of
transportation on virtually every shipment. Following the acquisition of
Pacifica Papers Inc. in 2001, we harmonized our order fulfillment systems
to better service our customers' requirements. We have applied our order
fulfillment, distribution and procurement expertise to further lower the
supply chain costs at our Powell River and Port Alberni facilities.
- LIGHTWEIGHT ALKALINE PAPERMAKING TECHNOLOGY. Over the last few years, we
switched our paper mills to alkaline papermaking, which uses lower-cost
precipitated calcium carbonate, or PCC, fillers in the production process.
In addition to being a lower-cost input, the PCC filler leads to improved
brightness and opacity. Both our high performance Marathon newsprint and
Catalyst directory papers are created utilizing alkaline papermaking
processes, and we believe these products are well recognized by our
customers for their quality and performance. In addition, the use of PCC
fillers enhances sheet quality to facilitate the production of papers with
a lower basis weight. A lower basis weight gives us an important
competitive advantage because a higher volume of lower basis weight paper
can be stored on each paper roll, thereby reducing shipping, storage and
handling costs and warehouse space required for inventories. The use of
lower basis weight paper by our customers also reduces their postage
costs. PCC also enables us to produce high quality, higher brightness
uncoated groundwood grades. We have implemented the alkaline paper making
process at all of our facilities.
- SAWDUST PULP EXPERTISE. We are one of the few manufacturers of
sawdust-based pulp in the world. This product is valued by producers of
tissue and wood-free printing papers as a substitute for more costly NBSK
pulp. High initial tensile strength and ease of refining are other
attributes of this type of pulp. In addition, we realize higher margins
for sawdust pulps as a result of low-cost sawdust inputs, a by-product of
the sawmilling process. These higher margins allow us to offset earnings
volatility during periods of low pulp prices.
- PROVEN AND EXPERIENCED MANAGEMENT TEAM. Our management team is comprised
of seasoned industry professionals with experience operating through
multiple business cycles in the paper and forest products industry. Our
senior executives have an average of over 20 years of industry experience
and 15 years with NorskeCanada.
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BUSINESS STRATEGY
We intend to achieve greater earnings stability and maximize cash flow by
strengthening our position as a leading producer of value-added paper and
related forest products within Western North America. Key principles of our
strategy include:
- BECOME THE PREFERRED SUPPLIER FOR OUR CUSTOMERS. We are implementing
initiatives to improve service levels, distribution and customer
relationships. We will seek to differentiate ourselves from our
competitors by becoming a trusted source of supply that consistently
produces reliable products. Market and product development activities will
be focused on customer needs, as will enhancements to service levels for
technical support and supply chain management.
- REDUCING OPERATING COSTS AND IMPROVING EFFICIENCY. We are committed to
continuing to reduce operating costs and improve efficiency. In 2003, we
exceeded our target of $100 million in cost savings by achieving
$104 million on a run rate basis (which assumes operating at full
capacity). In 2004, we intend to continue to reduce costs and improve
efficiencies, and have identified approximately $90 million in potential
savings. Areas of potential savings include further reduction of energy
use and paper waste and synergies arising from our new Paper
Recycling Division.
- OPTIMIZING FIBER MIX TO REDUCE COSTS. We have reduced the weight per
square meter of paper produced, which results in lower fiber costs and
lower distribution costs for our products. We intend to maximize our
supply and use of the lowest cost chip supply available to us through
inventory and wood species management. We intend to continue to use low
cost PCC filler and to reduce kraft input without reducing the quality of
our products, while improving printability and decreasing high-cost fiber
inputs by improving our mechanical pulp quality and through paper machine
improvements. Within our pulp operations, we plan to maximize usage of
low-cost fiber and local residual wood chips, which results in lower
transportation costs for our inputs.
- CONTINUING TO FOCUS ON MARKET/PRODUCT MIX FOR MAXIMUM PROFITABILITY. In
addition to improving profitability by reducing basis weights, we also
plan to increase profitability within our paper operations by
(i) increasing uncoated groundwood specialty paper volumes in place of
standard newsprint and (ii) reducing the number of different paper grades
we manufacture to improve productivity and decrease downtime in our
production facilities, minimize storage and handling costs, trim losses
and the amount of relatively expensive kraft pulp that is used to
manufacture paper. Within our pulp operations, we plan to continue our
focus on higher value market segments by targeting our sawdust-based pulp
to higher value added end uses, including tissue, specialty printing and
writing, and bleached linerboard.
- EXERCISING DISCIPLINE IN CAPITAL SPENDING. We will continue to maintain a
value-based discipline for reinvesting in our business, focusing on modest
capital, high payback projects that enhance our product line, improve
productivity, reduce energy consumption, maximize the efficient use of
fiber supply and reduce costs.
- SECURING RAW MATERIAL SUPPLY. On December 1, 2003 we acquired Western
Canada's largest paper recycling operation. This acquisition provides us
with a secure supply of de-inked pulp, at a lower overall cost than
outsourcing. It also gives us better control over production scheduling
and volume and provides savings in transportation and material procurement
costs.
LINES OF BUSINESS
We have three business segments: specialty paper (which includes kraft
paper), newsprint and pulp. Our groundwood specialty papers and newsprint are
manufactured on 12 paper machines at four mill
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locations. Our specialty kraft papers are manufactured on a separate kraft paper
machine at our Elk Falls mill. Our market pulp is manufactured on three kraft
pulp lines at our Crofton and Elk Falls mills.
PAPER
Paper Operations
We manufacture our groundwood specialty papers, kraft paper and newsprint on
13 paper production lines at our four mill locations at Crofton, Elk Falls, Port
Alberni and Powell River, British Columbia. Our Elk Falls mill also manufactures
kraft paper products.
Our capacity to produce specialty papers and newsprint, in thousands of
tonnes, as compared to our production for each of the last two years is as
follows:
<Table>
<Caption>
ANNUAL CAPACITY YEAR ENDED DECEMBER 31,
------------------- -----------------------------------
MILL DECEMBER 31, 2003 2003 PRODUCTION 2002 PRODUCTION
- ---- ------------------- ---------------- ----------------
Crofton......................................... 430 390 410
Elk Falls....................................... 641 618 551
Port Alberni.................................... 432 411 352
Powell River.................................... 459 431 413
----- ----- -----
1,962 1,850 1,726
===== ===== =====
</Table>
CROFTON
Crofton's capacity for the year ending December 31, 2003 was 430,000 tonnes
of newsprint and directory paper. On a 48.8 gsm equivalent basis the annual
capacity of the Crofton paper operations is approximately 525,000 tonnes.
The Crofton paper mill, which produces newsprint and lightweight directory
paper, has three paper machines put in operation in 1964, 1968 and 1982. All
machines were installed with, or have been converted to, twin-wire sheet
formation, which provides a more uniform quality of sheet for both printing
surfaces. Pulp furnish for the paper mill comes from a three-line
thermomechanical pulp mill, from Crofton's kraft pulp mill and from our paper
recycling operation. Reduced fiber requirements, made possible by the move to
lighter weight paper production at the mill, allowed the closure of a groundwood
pulp mill in September 1999. In 2002, the refiner mechanical pulp mill was also
closed.
Crofton's No. 1 paper machine produces up to 118,000 tonnes of newsprint and
directory paper. The No. 2 paper machine produces up to 100,000 tonnes annually
of lightweight directory paper grades used in telephone and other directories,
as well as other lightweight printing papers. The No. 2 paper machine remains
capable of producing newsprint grades as market conditions warrant. To further
our objective to produce highly runnable directory paper, we completed
$16 million in modifications to the No. 2 paper machine in May 1999. These
modifications enable the Crofton mill to produce an innovative directory paper
at the lowest industry basis weight. This directory paper has improved
consistency, runnability and printability. Crofton's directory paper production
can be supplemented by excess production capacity available on the No. 1 paper
machine.
A $27 million upgrade of Crofton's No. 3 paper machine, completed in January
1997, increased annual production capacity by approximately 23,000 tonnes, on a
45 gsm equivalent basis, to 212,000 tonnes of newsprint, and has resulted in
significant improvements in machine trim, sheet profiles and roll quality.
Further improvements totaling $14 million to Crofton's thermomechanical pulp
refining and screening systems and to the No. 3 paper machine were completed in
August 1999. In
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August 2003 we completed an $11 million upgrade to increase the capacity of the
thermomechanical pulp facility and improve the quality of the pulp. All of these
improvements have resulted in improved consistency in quality and lower
production costs for light basis weight paper manufactured at the Crofton mill.
In 2001, the Crofton mill invested $13 million on bark presses to increase hog
burning capability and improve air quality.
ELK FALLS
Elk Falls' capacity for the year ending December 31, 2003 was
510,000 tonnes of newsprint and high brightness uncoated specialty grades of
paper. On a 48.8 gsm equivalent basis, the annual capacity of the Elk Falls
paper operations is approximately 530,000 tonnes. In addition, the Elk Falls
mill has a specialty kraft paper machine that was originally installed in 1966.
The machine primarily produces specialty whitetop linerboard grades for sale to
the packaging industry in western North America. Annual production capacity of
kraft paper is approximately 131,000 tonnes.
Three paper machines, which were put in operation in 1952, 1957 and 1982,
produce newsprint and soft calendered high brightness specialty papers. All
machines were installed with, or converted to, twin-wire sheet formation. Pulp
furnish for the newsprint mill is supplied primarily from the mill's seven-line
thermomechanical pulp mill and its semi-bleached kraft pulping facilities.
Paper machine No. 1 has a capacity to produce approximately 136,000 tonnes
of newsprint. Paper machine No. 2 has the capacity to produce approximately
145,000 tonnes of uncoated groundwood specialty grades. Paper machine No. 5 has
the capacity to produce approximately 219,000 tonnes of newsprint. Kraft paper
machine No. 4 has the capacity to produce approximately 131,000 tonnes of kraft
paper.
Elk Falls has continually broadened its range of uncoated groundwood
specialty papers to meet the needs of commercial printers. We have met the
demand for better quality through equipment upgrades to produce a cleaner, more
refined pulp furnish. We have improved smoothness and printability to meet the
exacting standards of large commercial printers, and we have developed high
brightness offset papers in a variety of basis weights. The No. 2 paper machine
has a soft roll calendering system designed to produce up to 145,000 tonnes
annually of uncoated groundwood specialty papers. Soft calendered specialty
grades, marketed under the ELECTRACAL and ELECTRASOFT labels, are used mainly by
the growing commercial print market for advertising flyers and newspaper
supplements. We are the largest supplier of soft calendered papers on the west
coast of North America.
Elk Falls increased the capacity of its thermomechanical pulp peroxide
bleach plant and improved filler systems in fiscal 1996, enabling increased
production of higher brightness specialty papers.
To further our runnability strategy for newsprint, $30 million in capital
expenditures were completed at Elk Falls in January 1999. We replaced the
headbox on the No. 5 paper machine and improved the thermomechanical pulp
process to enable the production of lighter weight newsprint with enhanced
runnability. Costs and efficiency are also improved as a result of the upgrade,
with an increase in capacity of approximately 9,000 tonnes, on a 45 gsm
equivalent basis. In 2001, a new $15 million precipitator was installed to
improve air quality. In August 2003 we completed a $4 million upgrade to our
No. 5 paper machine, which has resulted in reduced consumption of kraft in our
paper furnish.
Whitetop linerboard, which is produced by the kraft paper specialties
machine, is a premium product that combines a layer of unbleached kraft pulp
with a layer of bleached kraft pulp. The two layers are not glued together but
are formed on the paper machine by uniting the bleached and unbleached stock
into what is known as a duplex stock. This specialty product is white on the top
and brown on the reverse side and is used in packaging where bright, high
quality graphics are important. Elk Falls' competitive advantage in producing
this product stems from its ability to produce a
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<Page>
lightweight, high-performance sheet. The inclusion of sawdust-based pulp in the
furnish also results in a smoother, more consistent surface which performs
better in customers' conversion facilities.
Production of whitetop linerboard grades totaled approximately
116,600 tonnes, or 97%, of production from the Elk Falls kraft paper machine for
the year ended December 31, 2003. The majority of this product is marked under
the brand name "SilverLiner." In 2003 we completed a $3 million upgrade to the
stock preparation equipment supporting the No. 4 paper machine, enabling us to
replace a portion of sawdust-based pulp with externally purchased hardwood pulp.
The upgrade has improved the quality and production of our Silverliner product
and allows us to sell a higher volume of sawdust-based pulp externally.
The furnish for the kraft paper specialties produced at Elk Falls is
comprised of long-fiber pulp and alternative fiber sources such as sawdust-based
pulp and rejects from the Elk Falls kraft pulp mill as well as clippings
received from converting plants and post-consumer waste. Elk Falls also
purchases a limited quantity of high quality hardwood kraft pulp in order to
enhance the top sheet quality of our kraft paper product line.
PORT ALBERNI
Port Alberni's capacity for the year ending December 31, 2003 was
432,000 tonnes of directory paper and lightweight coated paper. Port Alberni's
annual directory paper capacity on a 48.8 gsm equivalent basis is approximately
303,000 tonnes.
The Port Alberni paper mill has three paper machines. Two of the paper
machines were put in operation in 1957, with the third paper machine put in
operation in 1968.
Paper machine No. 3 has the capacity to produce approximately
116,000 tonnes of directory paper, paper machine No. 4 has the capacity to
produce approximately 107,000 tonnes of directory paper and paper machine No. 5
has the capacity to produce approximately 209,000 tonnes of lightweight coated
paper.
Paper machine No. 5 is the only lightweight coated paper machine in western
North America. Its technology allows for the coating of paper on both sides
simultaneously, reduces the amount of kraft pulp required to produce
conventional lightweight coated paper and produces the desired product quality
in terms of runnability, printability and bulk.
Pulp furnish for the paper mill is supplied primarily from the mill's
thermomechanical pulp plant and groundwood mill, from our paper recycling
operation and, at present, from kraft pulp supplied from the Crofton mill. We
have installed equipment at the Port Alberni mill to allow the use of recycled
fiber in telephone directory paper.
POWELL RIVER
Powell River's capacity for the year ending December 31, 2003 was
459,000 tonnes of newsprint and uncoated groundwood specialty paper. Powell
River's annual capacity on a 48.8 gsm equivalent basis is approximately
473,000 tonnes.
The Powell River paper mill has three paper machines. The paper machines
were put in operation in 1957, 1967 and 1981.
No. 9 paper machine has the capacity to produce 119,000 tonnes of hi-brite,
uncoated groundwood specialty papers or newsprint. At the end of 2003, this
machine was fully dedicated to the production of specialty paper grades. No. 10
paper machine has a capacity of 158,000 tonnes and produces only high quality,
soft calendered, specialty papers, and No. 11 paper machine is Powell River's
largest machine with a capacity to produce 182,000 tonnes of newsprint. We
expect to incur capital expenditures in 2004
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of $7.5 million for a paper machine upgrade to support the production of higher
value groundwood specialty papers.
Pulp furnish for the paper mill comes primarily from a thermomechanical pulp
plant. In November 2001 we permanently closed the kraft pulp mill, which
consumed a high-cost fiber diet which resulted in higher unit costs than our
other two pulp mills at Elk Falls and Crofton, both of which have roughly twice
the capacity of the Powell River pulp mill. We now supply the pulp requirements
of the paper machines at Powell River from our Elk Falls and Crofton facilities.
The Powell River mill has the capability to use recycled deinked pulp on a
limited scale. Recycled deinked pulp is supplied from our paper recycling
operation.
We hold a 50.1% economic interest in Powell River Energy Inc., or Powell
River Energy, which owns two hydroelectric dams near the Powell River mill with
a combined generating capacity of 82 megawatts. Pursuant to a power purchase
agreement between us and Powell River Energy, Powell River Energy will provide
the power generated by its facilities to us at a fixed rate approximating
current British Columbia Hydro and Power Authority rates for a period of
10 years. Powell River Energy's hydroelectric facilities will continue to supply
approximately 40% to 45% of the annual power needs of the Powell River mill.
Paper Marketing
The principal customers for our specialty papers and newsprint are
commercial printers, telephone directory publishers, corrugated box
manufacturers and newspaper publishers, located primarily in western and central
North America and the Pacific Rim. Specialty and newsprint customers are served
primarily by our sales and marketing personnel in North America and Japan and
distributors and agents in other geographic markets. In recent years our
marketing strategy for kraft paper has been to shift the sales mix to 100%
white-top production and eliminate lower value unbleached grades. The second
part of this strategy has been to improve surface properties in order to expand
freight logical North American sales with high graphic accounts that prefer our
lightweight grades.
The following table sets out our paper sales revenue by country or
geographic region:
<Table>
<Caption>
ASIA AND OTHER TOTAL
CANADA UNITED STATES AUSTRALASIA OFFSHORE ($ MILLIONS)
-------- -------------- ----------- -------- -------------
Year ended December 31, 2001...... 16% 59% 12% 13% 1,053
Year ended December 31, 2002...... 14% 67% 11% 8% 1,276
Year ended December 31, 2003...... 13% 67% 13% 7% 1,343
</Table>
Historically, approximately two-thirds of our paper sales revenue has been
derived from the United States. The United States is the world's largest
consumer of newsprint, with consumption of approximately 10 million tonnes in
2003, representing about 28% of total world consumption.
For the years ended December 31, 2003 and 2002, specialty paper and
newsprint accounted for 84% and 86%, respectively, of our consolidated net sales
revenue. No single customer accounts for more than 10% of our specialty
consolidated net sales revenue nor is a material part of our business dependent
on a small group of customers. Specialty paper and newsprint markets are not
subject to significant seasonal fluctuations.
The Crofton, Elk Falls and Powell River mills are located on tidewater and
have deep-sea vessel loading facilities. Specialty paper and newsprint is
shipped primarily by deep-sea vessel, and for inland destinations by combination
of ship, barge, rail and truck. We use the services of independent warehouses in
western North America and Europe for distribution to our customers.
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We have built effective long-term relationships with our customers for our
specialty papers and newsprint, based on a partnership approach to produce the
best product for their particular needs. As a result, we expect to remain a
preferred supplier to many of those customers.
PULP
Pulp Operations
We manufacture market pulp on three kraft pulp lines at our Crofton and Elk
Falls pulp and paper mills, located in British Columbia on the east coast of
Vancouver Island.
Our capacity, in thousands of tonnes, as compared to our production for each
of the last two years, is as follows:
<Table>
<Caption>
ANNUAL
CAPACITY YEAR ENDED DECEMBER 31,
------------- -------------------------
DECEMBER 31, 2003 2002
MILL 2003(1) PRODUCTION PRODUCTION
--------- ------------- ----------- -----------
Market pulp....................... Crofton 295 253 212
Elk Falls 160 166 162
--- --- ---
Total............................. 455 419 374
=== === ===
</Table>
- ------------------------
(1) Total pulp capacity of 662,000 tonnes is reduced by 207,000 tonnes in order
to reflect the pulp that is provided to our paper and kraft paper
operations. Rationalization of Elk Falls' pulp facility commenced in 2003.
These figures represent a decline in capacity of approximately
80,000 tonnes which is expected to result from the rationalization.
The Crofton kraft pulp mill is a two-line mill, with the first line starting
up in 1957 and the second in 1965, with a total annual market pulp capacity of
295,000 tonnes. It is equipped with two continuous digesters and eight batch
digesters, which provide the flexibility to cook different species of chips
independently. Crofton's batch digesters utilize a rapid displacement heating,
or RDH, cooking system. The RDH system allows for rapid turnaround in the batch
cooking process, as the cooking liquor is rapidly extracted and replaced in the
cooking vessel for each batch without a significant loss in temperature. This
technology improves the overall quality of Crofton pulps and provides a stronger
and more uniform pulp than conventional cooking.
The Crofton kraft pulp mill produces a limited number of high quality
Northern bleached softwood kraft, or NBSK pulp grades. One grade is a low
coarseness fine fiber pulp of which the majority is consumed internally at
Crofton and at our Port Alberni and Powell River operations. This pulp is a high
tensile grade which is ideally suited for the manufacture of lightweight papers.
The other pulp grade produced is made from Coastal Hemlock and Douglas Fir fiber
species. This pulp has high intrinsic strength and bulk, and is used in a
variety of printing and writing papers.
In late 2002, we commenced the initial work on an estimated $45 million
upgrade of the Elk Falls No. 2 recovery boiler to increase capacity and maintain
reliability. Work on this upgrade continued in 2003. This upgrade will allow the
permanent shut down of the smaller recovery boiler, a lime kiln and a bleach
plant. As a result, gross pulp production at Elk Falls will be reduced by
approximately 80,000 tonnes per year. This decrease in production is expected to
be offset by reduced internal consumption of kraft pulp.
The Elk Falls kraft pulp mill is equipped with five batch digesters and
three continuous digesters with a total annual market pulp capacity of
160,000 tonnes. The mill manufactures a sawdust-based
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pulp branded "Elk Prime", with a capacity of 160,000 tonnes per year.
Substantially all of the mill's long fiber pulp capacity is used internally.
Elk Prime is a fully bleached sawdust-based pulp that is manufactured from a
combination of low-cost sawdust, wood shavings and chip screenings. Blending of
these residuals produces a pulp with an average fiber length between that of
conventional softwood and hardwood pulps. Elk Prime is easy to refine, delivers
high initial tensile strength and when added to a paper makers furnish enhances
dimensional stability. Manufacturers of products such as specialty papers,
tissue, paper toweling, printing and writing and other paper products can
substitute Elk Prime for portions of their conventional NBSK pulp feedstock,
realizing cost savings and, in many cases, improved quality. Sawdust-based pulps
have an added environmental advantage in that they are made from fiber that
would otherwise have been a waste product. Elk Falls uses some sawdust-based
pulp in producing its specialty brands of high quality white-top linerboard,
sold to customers who manufacture corrugated containers that require high
quality graphics.
The Elk Falls kraft pulp mill was initially commissioned in 1956, with its
sawdust-based pulp production beginning in 1964. The mill has been extensively
modernized over recent years to meet or exceed current environmental standards
and to improve operating efficiency and costs.
All of the kraft pulp operations are equipped with chlorine dioxide
bleaching systems and secondary effluent treatment facilities and are presently
operating in substantial compliance with applicable environmental laws and
regulations.
Pulp Marketing
Our two pulp mills are well situated for export shipments to Asia and
Western Europe, the largest pulp consuming market.
Our strategy is to maintain a diversified range of freight-logical
customers, including producers of tissue, magazine papers, woodfree printing and
writing papers and certain specialty paper products. Our sawdust-based pulp
produced at Elk Falls is particularly versatile and is used as a lower cost
substitute for more expensive NBSK and eucalyptus fiber-based hardwood pulp.
The combination of a simple pulp product line and a diversified range of
customers enables the full utilization of our pulp production facilities
throughout market cycles.
The following table sets out our market pulp sales revenue by country or
geographic region:
<Table>
<Caption>
ASIA & LATIN EUROPE & TOTAL
CANADA UNITED STATES AUSTRALASIA AMERICA OTHER ($ MILLIONS)
-------- -------------- ----------- -------- --------- -------------
MARKET PULP
Year ended December 31, 2001...... 9% 8% 38% 1% 44% 336
Year ended December 31, 2002...... 1% 1% 47% 2% 49% 207
Year ended December 31, 2003...... 1% 0% 57% 0% 42% 248
</Table>
Pulp customers are served by sales and marketing staff in Canada and Japan
and a network of agents in locations throughout the world.
The Crofton and Elk Falls pulp mills are located on tidewater and have
deep-sea vessel loading facilities. Pulp is shipped to offshore locations by
both break bulk on deep-sea vessels and container shipment.
For the year ended December 31, 2003, pulp accounted for 16% of our
consolidated net sales revenue. This compares with 14% for the year ended
December 31, 2002. There is no single customer
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which accounts for more than 10% of our consolidated net sales revenue, nor is a
material part of our business dependent upon a small group of customers.
Paper Recycling Division
On December 1, 2003 we acquired Western Canada's largest paper recycling
operation, located in Coquitlam, B.C. The purchase price was $61.1 million
(which included a $2.5 million working capital adjustment) comprised of
$31.5 million of cash, approximately 8.7 million of our common shares having a
value of $29 million, and $0.6 million of transaction costs. As part of the
acquisition, we entered into a lease of the land and buildings on which the
paper recycling plant operates for an initial term of 20 years, with one
10 year renewal option. The annual rent under the lease is $2.0 million, subject
to adjustment for changes in the Canadian Consumer Price Index. The lease
includes options to purchase the land and buildings and a right of first offer
in the event the landlord wishes to sell the land to a third party.
Our paper recycling operation recycles old newspapers, magazines and other
waste paper into pulp suitable for the manufacture of newsprint, telephone
directory paper, and similar grades of paper. The plant was constructed in 1990.
Its current production capacity is 145,000 air-dried metric tonnes of pulp per
year. Average annual production in the last three fiscal years was approximately
130,000 air-dried metric tonnes per year. We were the principal customer of the
paper recycling operation and prior to our acquisition we purchased
approximately 95% of the de-inked pulp it produced. The operation supplies 100%
of our de-inked pulp requirements.
The paper recycling operation utilizes flotation, cleaning and screening
technologies to remove ink and impurities from the waste paper input in order to
produce high-quality pulp that can be blended with traditional virgin-fiber pulp
to produce paper in accordance with customers' specifications. The pulp is
mechanically dried to a consistency of about 50% moisture content for shipment
to its customers.
The waste paper furnish for our paper recycling operation is purchased in
Western Canada and the Western United States. In the most recent fiscal year,
approximately 44% of the furnish was sourced in British Columbia, 22% in the
balance of Western Canada and 34% in the United States.
The plant receives waste paper primarily by rail and truck into warehouse
facilities located adjacent to the production facility. An independent
contractor is responsible for operations in the raw materials warehouse. Batches
of waste paper are loaded onto a conveyor for transport into the production
facility.
Within the production facility the waste paper is initially mixed with water
and de-inking and bleaching chemicals in a batch pulper. The paper slurry
produced by the pulper is then processed by a succession of cleaners and screens
to remove contaminants. It then passes through a flotation unit, where tiny air
bubbles float ink particles out of the slurry. The slurry is then further
processed through additional cleaners and a final flotation process before being
formed into mechanically-dried sheets which are baled for shipment. The recycled
pulp is shipped to our other operations by truck, rail and barge.
FIBER SUPPLY
Our pulp and paper operations consume wood fiber which is purchased from
more than 50 independent mills. Our fiber supply comes primarily from residual
wood chips and sawdust from lumber operations located on the coast or in the
southern Interior of British Columbia and secondarily from the chipping of pulp
logs originating from locations throughout the region.
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Sawmill wood chips presently comprise 56% of the fiber supply for our pulp
and paper operations. The remainder is comprised of pulp logs (25%), sawdust
(15%) and recycled deinked pulp (4%). Currently, five wood chip, log and sawdust
suppliers provide 49% of our fiber supply. The supply contracts with these
companies were negotiated for indefinite ("evergreen") terms, or when certain of
our timber and processing assets were sold.
In addition, through an evergreen contract with a coastal log producer,
additional wood chips can be obtained from regional sawmills. This supplier
provides an additional 11% of our fiber supply.
Together, all of these long-term, secure supply agreements provide
approximately 60% of the fiber supply for our pulp and paper operations.
In December, 2002 one of our fiber suppliers commenced creditor protection
proceedings. These proceedings have not yet been resolved and we are unable to
determine the impact of this development on our fiber supply.
The remainder of the fiber requirements for the four pulp and paper
operations is sourced from independent suppliers, many under long-term
contracts. Fiber is purchased from these suppliers at market prices or at prices
determined under market-based formulas.
To enhance our fiber security, we maintain a surplus fiber position. As a
result of our fiber position, we make annual sales of approximately 460,000
cubic meters of surplus fiber to regional customers. In addition, we engage in
fiber trading activities to ensure optimum allocation of different fiber grades
to the appropriate product.
COMPETITION
The markets for our products are highly competitive on a global basis. The
pulp and paper industry is essentially a commodity market in which producers
compete primarily on the basis of price. In addition, since a majority of our
production is directed to export markets, we compete on a worldwide basis
against many producers of approximately the same or larger capacity. In export
markets, Canadian producers generally compete with American, European and Asian
producers.
PROPERTIES
Our head office is located in leased premises in Vancouver, British
Columbia. The lease covers an aggregate of 40,842 square feet and expires
February 15, 2016.
We lease the land and buildings where our paper recycling operation is
located. The lease expires November 30, 2023, subject to one 10 year renewal
option.
Each of our Crofton, Elk Falls, Powell River and Port Alberni pulp and paper
manufacturing facilities are situated on land we own. The Crofton mill is
located on a 107 hectare site, the Elk Falls mill is located near the town of
Campbell River, British Columbia on a 78 hectare site, the Powell River mill is
located on a 94 hectare site and the Port Alberni mill is located on a 44
hectare site. Each of our properties is the subject of a mortgage in favor of
our lenders to secure our credit facilities.
HUMAN RESOURCES
We have approximately 4,000 employees.
All of the approximately 2,900 hourly employees at our pulp and paper mills
are members of either the Communications, Energy & Paperworkers Union of Canada,
or CEP, or the Pulp, Paper and Woodworkers of Canada, or PPWC. Twenty-three
employees in the Port Alberni Mill are represented by the Office and
Professional Employees International Union, or OPEIU.
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The current collective agreements with each of CEP and PPWC expire on
April 30, 2008. The collective agreement with the OPEIU expires on
April 30, 2006.
ENVIRONMENT
Our operations are subject to a wide range of general and industry-specific
environmental laws and regulations including those related to waste management,
air emissions, water discharges and remediation of environmental contamination.
There has been significant upgrading of our facilities during the last few years
to comply with solid and special waste, effluent and air regulations.
Environmental performance is monitored regularly by us. We believe that our
facilities are operating in substantial compliance with applicable environmental
laws and regulations.
In addition to regular monitoring of emission points and reporting to
regulatory authorities, we manage our environmental performance through an
environmental management system. This system is registered to the ISO 14001
standard at four of our five facilities. The environmental management system
utilizes annual internal surveillance audits and bi-annual external compliance
audits of our manufacturing facilities. The audit findings are communicated to
management and a committee of the board of directors, so that appropriate action
plans can be developed to address any deficiencies. Audits were completed during
late 2002 and 2003 and no material problems were uncovered during those reviews.
RECYCLED CONTENT IN GROUNDWOOD PAPER
We are a major supplier of newsprint, directory and other groundwood
printing papers to western North America. The most significant of these markets
is the western United States, where in three states--California, Arizona and
Oregon--newspaper publishers and commercial printers are required by law to use
a certain proportion of recycled containing paper. While the other western
U.S. states and Canada do not have legislated requirements for recycled
containing paper, many printers and publishers are demanding some recycled
containing paper as part of their supply mix.
We meet this market demand through the use of de-inked pulp from our paper
recycling operation located in Coquitlam, British Columbia. This deinked
post-consumer recycled pulp is mixed with virgin pulp furnish to produce
newsprint and directory paper that meets the legislated requirement.
The recycling plant was designed to minimize deleterious impacts on the
environment. Water is obtained from the municipal water supply and is recycled
and reused in the operation to minimize water intake. Process effluent is
processed in on-site primary, secondary and tertiary treatment facilities before
being discharged into the municipal sewer system. The majority of the solid
waste produced by plant operations is used in agricultural and thermal
applications, with only a small portion of the waste stream (consisting
primarily of metal, glass and plastic contaminants received with the waste
paper) going to landfill. No chlorine-based bleaching chemicals are used in the
process.
SOLID WASTE
One of the most significant environmental issues faced by our operations is
the disposal of solid waste. Most non-recyclable waste is disposed of at on-site
landfills and based on current practice we have at least four year's capacity in
the landfills at each of our facilities. We will continue to work to reduce
volumes sent to landfill by increasing recycling efforts and investigating
alternative uses for boiler ash and recaust waste.
EFFLUENT
In the early 1990s, the British Columbia provincial government mandated the
elimination of adsorbable organic halides, or AOX, in mill effluent by
December 31, 2002. In July 2002, this
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regulation was amended to 0.6 kilograms per tonne of pulp produced effective
December 31, 2002. All of our facilities are operating below this new limit
which is similar to legislation recently enacted in the United States.
The Port Alberni and Powell River mills do not produce kraft pulp or use a
brightening process involving chlorine or chlorine derivatives, so they do not
produce any appreciable AOX or dioxins in their effluent.
AIR EMISSIONS
Over the past five years, substantial environmental capital has been spent
at all facilities upgrading air emissions controls and infrastructure. This
includes an odour collection and treatment system at Crofton, a new wet
precipitator for the Elk Falls power boiler, a fluidized bed boiler conversion
at Port Alberni, and a new fluidized bed boiler at Powell River. Our facilities
are well positioned to be compliant with future air emissions standards.
In 2003, we spent approximately $3 million on environmental capital
projects. We estimate that capital expenditures relating to known environmental
matters, including compliance issues and the assessment and remediation of the
environmental condition of our properties will total approximately $7 million in
2004. While we believe that our estimate for environmental projects for the
remainder of 2004 is reasonable, there can be no assurance that actual
expenditures will not exceed the estimated amounts.
CONTAMINATED SITES
We are not aware of any sites or land parcels which are considered
contaminated under the province's contaminated sites legislation.
Provincial legislation governing contaminated sites came into effect in
British Columbia on April 1, 1997. If a particular site exceeds prescribed
levels of certain classes of substances, the site is determined to be a
"contaminated site" under the legislation. The legislation specifies the
circumstances in which a "site profile" must be prepared in respect of any
property that has been used for certain industrial or commercial purposes. If a
site is determined to be contaminated, remediation will normally be required
under government supervision. As current and past owners of mill sites, all
forest products companies in British Columbia may face remediation costs
particularly as a result of historical operations and disposal practices.
Compliance with this legislation has not resulted in any material cost to us but
there can be no guarantee that such costs will not be incurred in the future as
a consequence, for example, of discovery of unknown conditions, or changes in
enforcement policies.
RESEARCH AND DEVELOPMENT
We will continue to contribute to industry supported research organizations
such as the Pulp and Paper Research Institute of Canada. In addition, research
required to meet our specific needs is conducted at private laboratories under
the direction of our technical experts and at the mill laboratories.
Business unit technical staff provide scientific and technological expertise
in support of operations and product development efforts.
Our research and development expenditures totaled approximately $2 million
for the year ended December 31, 2003 and $3 million for the year ended
December 31, 2002.
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CORPORATE ORGANIZATION
We have the following significant subsidiaries, all of which are wholly
owned:
<Table>
<Caption>
COMPANY JURISDICTION OF INCORPORATION
- ------- -----------------------------
Elk Falls Pulp and Paper Limited............................ British Columbia
Norske Skog Canada Finance Limited.......................... British Columbia
Norske Skog Canada (Japan) Ltd.............................. Japan
Norske Skog Canada Pulp Operations Limited.................. British Columbia
Norske Skog Canada Pulp Sales Inc........................... British Columbia
Norske Skog Canada Sales Inc................................ British Columbia
Norske Skog Canada Services (Hungary) Limited Liability
Company................................................... Hungary
Norske Skog Canada (USA) Inc................................ California
NSC Holdings (Barbados) Limited............................. Barbados
NSCL Holdings Inc........................................... Delaware
NorskeCanada (partnership).................................. British Columbia
Pacifica Paper Sales Ltd.................................... British Columbia
Pacifica Papers Sales Inc................................... Delaware
Pacifica Poplars Ltd........................................ British Columbia
Pacifica Poplars Inc........................................ Delaware
Pacifica Papers US Inc...................................... Delaware
</Table>
Each of these subsidiaries, other than NSC Holdings (Barbados) Limited, are
guarantors of the notes. NorskeCanada is a general partnership, the partners of
which are Norske Skog Canada Limited and Norske Skog Canada Pulp Operations
Limited.
LEGAL PROCEEDINGS
We are involved from time to time in routine legal matters and other claims
incidental to our business. When it appears probable in management's judgment
that we will be required to pay monetary damages or incur other costs in
connection with such claims and proceedings, and such costs can be reasonably
estimated, liabilities are recorded in the consolidated financial statements and
charges are recorded against earnings. We believe that the resolution of such
routine matters and other incidental claims will not have a material adverse
impact on our consolidated financial position or results of operations.
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MANAGEMENT
DIRECTORS AND SENIOR MANAGERS
The following table sets forth certain information regarding each of the
directors and senior managers of NorskeCanada:
<Table>
<Caption>
NAME AGE POSITION
- ---- -------- ------------------------------------------------------------
Jan A. Oksum........... 54 Director and Chairman
W. Thomas Stephens..... 61 Director and Deputy Chairman
Russell J. Horner...... 54 Director, President and Chief Executive Officer
Thomas S. Chambers..... 59 Director
J. Trevor Johnstone.... 50 Director
Jan Kildal............. 53 Director
Harold N. Kvisle....... 51 Director
Vidar Lerstad.......... 59 Director
R. Keith Purchase...... 60 Director
William P. Rosenfeld... 67 Director
James E. Armitage...... 55 Senior Vice-President, Sales and Marketing
Jesse M. Beaman........ 55 Senior Vice-President, Operations
W.R. (Ron) Buchhorn.... 57 Vice-President, Corporate Services
Stuart H. Clugston..... 59 Vice-President, Corporate Affairs and Social Responsibility
Ralph Leverton......... 56 Vice-President, Finance and Chief Financial Officer
Robert H. Lindstrom.... 50 Vice-President, Strategy
</Table>
The following information sets forth the office or executive position held
by each of our directors and officers, their principal occupation for the past
five years, and the names of any public companies of which they are a director.
JAN A. OKSUM has served as a director since October 2001 and was appointed
Chairman in May 2002. From July 2000 to August 2001 Mr. Oksum was an alternate
director for Jan Reinas, the former Chairman. Since January 2004 Mr. Oksum has
been President and Chief Executive Officer of Norske Skogindustrier ASA. From
August 2000 to December 2003, Mr. Oksum was Deputy CEO and Senior Vice
President, Strategy of Norske Skogindustrier ASA. From September 1999 to
August 2000, Mr. Oksum was Executive Vice President, Business Development of
Norske Skogindustrier ASA. From October 1997 to September 1999, he was Senior
Vice President, Fiber/Magazine Paper of Norske Skogindustrier ASA. From
April 1997 to October 1997, he was Vice President, Research & Development of
Norske Skogindustrier ASA. From January 1994 to April 1997, Mr. Oksum was
General Manager of Norske Skog Golbey.
W. THOMAS STEPHENS has served as a director since November 1999.
Mr. Stephens was President and Chief Executive Officer of MacMillan Bloedel
Limited from September 1997 until November 1999, and prior thereto was President
of Manville Corporation. Mr. Stephens is a director of the following public
companies: Excel Energy Inc., TransCanada PipeLines Limited and Qwest
Communications International, Inc., and is a Trustee of Putnam Mutual Trust.
RUSSELL J. HORNER has served as a director since November 1999 and has been
our President and Chief Executive Officer since September 2000. From
November 1999 to September 2000, Mr. Horner
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was our Chief Operating Officer and President. From March 1998 to
November 1999, Mr. Horner was the Chief Operating Officer, Australasia, of the
Fletcher Challenge Paper Division of Fletcher Challenge Limited.
THOMAS S. CHAMBERS has served as a director since October 2003.
Mr. Chambers is a Fellow of the Institute of Chartered Accountants of British
Columbia and is a corporate director. Prior to July 2002, Mr. Chambers was a
partner of PricewaterhouseCoopers LLP and its predecessor firm. Mr. Chambers is
a director of the following public companies: Terasen Inc. and Elephant and
Castle Group, Inc.
J. TREVOR JOHNSTONE was appointed a director immediately prior to completion
of the acquisition of Pacifica Papers and was formerly the Chairman and a
director of Pacifica Papers, having served as a director of Pacifica Papers
since March 1999. Mr. Johnstone is a Managing Director of Tricor Pacific
Capital, Inc. Mr. Johnstone is a director of the following public companies:
Tree Island Wire Income Fund, Carmanah Technologies Inc. and Pacific Northern
Gas Ltd.
JAN L. KILDAL has served as a director from May 2002 to the present and
previously, from July 2000 to October 2001. Mr. Kildal has been the Executive
Vice-President and Chief Financial Officer of Norske Skogindustrier ASA since
1995. Mr. Kildal is a director of the following public companies: Storebrand
Livsforsikring AS.
HAROLD N. KVISLE has served as a director since November 1997. Since
May 2001, Mr. Kvisle has been President and CEO of TransCanada Corporation. From
June 2000 to April 2001, Mr. Kvisle was Executive Vice-President, Trading and
Business Development, TransCanada PipeLines Limited; from April 2000 to
June 2000, Senior Vice-President, Trading and Business Development; from
September 1999 to April 2000, Senior Vice-President, Energy Operations,
TransCanada PipeLines. Prior to September 1999, Mr. Kvisle was the President of
Fletcher Challenge Energy Canada Limited. Mr. Kvisle is a director of the
following public companies: PrimeWest Energy Trust, TransCanada Corporation and
TransCanada Power L.P.
VIDAR LERSTAD has served as a director since April 2004. Since
February 2004 Mr. Lerstad has been Senior Vice-President, Corporate Strategy of
Norske Skogindustrier ASA. From January 2002 to February 2004 Mr. Lerstad was
Executive Vice-President South America, from August 2000 to January 2002, Senior
Vice-President, Asian Activities, and from October 1999 to August 2000, Senior
Vice-President, International, of Norske Skogindustrier ASA. Prior to
October 1999 Mr. Lerstad held various sales and marketing positions with Norske
Skogindustrier ASA.
R. KEITH PURCHASE was appointed a director immediately prior to completion
of the acquisition of Pacifica Papers and was formerly a director of Pacifica
Papers, having served as a director of Pacifica Papers since May 2000.
Mr. Purchase is a corporate director and advisor. Mr. Purchase was the Executive
Vice-President and Chief Operating Officer of MacMillan Bloedel Limited from
November 1998 to November 1999. Prior to November 1998 he was the President and
Chief Executive Officer of TimberWest Timber Trust. Mr. Purchase is a director
of the following public company: Tree Island Wire Income Fund.
WILLIAM P. ROSENFELD has served as a director since October 1993 and has
been a partner of Goodmans LLP, Barristers and Solicitors, since 1982.
JAMES E. ARMITAGE has been Senior Vice-President, Sales and Marketing since
August 2000. From August 1998 to July 2000, Mr. Armitage was Senior
Vice-President, Newsprint, and from November 1997 to July 1998 was
Vice-President, Worldwide Newsprint Sales. Prior to November 1997, Mr. Armitage
was a self-employed consultant.
JESSE M. BEAMAN has been Senior Vice-President, Operations since
April 2001. From December 2000 to March 2001, Mr. Beaman was Vice-President,
Crofton Pulp and Paper, and from March 2000 to November 2000 was Manager,
Crofton Paper. From July 1998 to January 2000,
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Mr. Beaman was Vice-President, Eastern Operations, Building Materials, of
MacMillan Bloedel Limited; from May, 1998 to June 1998, Vice-President, Business
Transformation, Printing Papers, of MacMillan Bloedel Limited, and prior to
May 1998 was General Manager, Alberni Specialties, of MacMillan Bloedel Limited.
W.R. (RON) BUCHHORN has been Vice-President, Corporate Services since
January 2004. From June 2000 to January 2004 he was Vice President, Human
Resources. From April 1999 to June 2000 Mr. Buchhorn was a self-employed
consultant and prior to April 1999, Mr. Buchhorn was Vice-President,
Compensation and Rehabilitation Services of the Workers' Compensation Board of
British Columbia.
STUART H. CLUGSTON has been Vice-President, Corporate Affairs and Social
Responsibility since April 2003 and from August 2000 to April 2003 he was
Vice-President, Corporate Affairs. Prior to August 2000, he was Director,
Communication Management.
RALPH LEVERTON has been Vice-President, Finance, Chief Financial Officer
since May 2002 and from August 2000 to May 2002 was Vice-President, Finance,
Chief Financial Officer and Secretary. In the month of July 2000, Mr. Leverton
was Chief Financial Officer, Secretary and Treasurer. From September 1999 to
June 2000, Mr. Leverton was a self-employed consultant, and from September 1998
to August 1999 was President and Chief Operating Officer of Harmac Pacific Inc.
Prior to August 1998, Mr. Leverton was Vice-President, Finance, Chief Financial
Officer and Secretary of Harmac Pacific Inc.
ROBERT H. LINDSTROM has been Vice-President, Strategy since February 2001.
From May 1999 to January 2001, Mr. Lindstrom was Vice-President, Supply and
Utilities, Pulp Operations and from October 1996 to April 1999 was Director,
Strategic Planning, Pulp Operations. Prior to October 1996, Mr. Lindstrom was
Director, Business Development.
None of the persons named above have any family relationship with any other
person named above. There are no arrangements or understandings with major
shareholders, customers or suppliers or others, pursuant to which any person
referred to above was selected as a director or member of senior management.
In accordance with our by-laws and the resolutions of our directors, our
current board of directors consists of ten directors. Each director is to serve
until the next annual meeting of shareholders, or until a successor is duly
elected or appointed.
Our board of directors has an Audit Committee, a Governance and Human
Resources Committee and an Environmental, Health and Safety Committee.
The members of the Audit Committee are Messrs. Chambers (who serves as Chair
of the Audit Committee), Johnstone, Kildal, Kvisle, Lerstad, Purchase and
Stephens. The principal functions of the Audit Committee are to review all
financial information and statutory disclosure documents prior to their approval
by the board of directors and their distribution to shareholders and other
interested persons; to review our systems of internal control; to monitor the
performance of our external and internal auditors; and to recommend to the board
of directors the appointment of investment managers for our salaried pension
plans and to monitor the performance of these managers.
The members of the Governance and Human Resources Committee are
Messrs. Chambers, Johnstone, Lerstad, Oksum, Rosenfeld and Stephens (who serves
as Chair of the Governance and Human Resources Committee). The principal
functions of the Governance and Human Resources Committee are to develop and
monitor our overall approach to corporate governance issues; to recommend to the
board of directors nominees for election and re-election as directors; to review
the performance of the board of directors as a whole and of its committees; and
to oversee organizational structure, executive appointment and succession,
executive compensation, performance review of the Chief Executive Officer and
approval of changes to benefit provisions in our salaried pension plans.
The members of the Environmental, Health and Safety Committee are
Messrs. Horner, Oksum, Purchase (who serves as Chair of the Environmental,
Health and Safety Committee) and Rosenfeld. The principal functions of the
Environmental, Health and Safety Committee are to establish principles of
environmental, health and safety standards and to monitor compliance with these
principles.
70
<Page>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table reflects compensation paid during each of the years
ended December 31, 2003, 2002 and 2001 (except that bonus amounts are in respect
of each year) to our President and Chief Executive Officer and our four other
most highly-compensated executive officers who were serving as executive
officers at December 31, 2003, and to R. S. McLean, who would have been one of
our four most highly-compensated executive officers but for the fact he was not
serving as an executive officer at December 31, 2003. In this section "Executive
Compensation", we refer to these individuals as the Named Executive Officers.
<Table>
<Caption>
- ------------------------------------------------------------------------------------------------------------------------
ANNUAL COMPENSATION LONG-TERM COMPENSATION
---------------------------------------- -------------------------------------------
AWARDS PAYOUTS
----------------- -----------------------
SECURITIES RESTRICTED
OTHER UNDER SHARES OR
ANNUAL OPTIONS/ RESTRICTED LTIP
NAME AND SALARY BONUS COMPENSATION(1) SARS GRANTED(2) SHARE UNITS PAYOUTS
PRINCIPAL POSITION YEAR ($) ($) ($) (#) ($) ($)
(A) (B) (C) (D) (E) (F) (G) (H)
- ------------------------------------------------------------------------------------------------------------------------
R.J. Horner 2003 600,000 400,000 -- 531,250 -- --
President and Chief 2002 600,000 900,000 -- 500,000 -- --
Executive Officer 2001 516,666 1,500,000 -- 601,500 -- --
- ------------------------------------------------------------------------------------------------------------------------
J.M. Beaman 2003 322,917 196,630 -- 150,000 -- --
Senior Vice 2002 300,000 517,000 -- 226,500 -- --
President, Operations 2001 249,332 197,000 -- 140,000 -- --
- ------------------------------------------------------------------------------------------------------------------------
J.E. Armitage 2003 250,000 151,250 -- 112,500 -- --
Senior Vice 2002 250,000 400,000 -- 189,000 -- --
President, Sales and 2001 243,333 144,000 -- 140,500 -- --
Marketing
- ------------------------------------------------------------------------------------------------------------------------
R. Leverton 2003 280,000 147,000 -- 125,000 -- --
Vice President, 2002 280,000 473,000 -- 210,500 -- --
Finance and Chief 2001 233,333 262,000 -- 152,500 -- --
Financial Officer
- ------------------------------------------------------------------------------------------------------------------------
R.S. McLean(5) 2003 165,000 -- -- -- -- --
Senior Vice 2002 220,000 337,150 -- 166,000 -- --
President, Supply 2001 206,666 111,000 -- 108,500 -- --
Chain and Information
Technology
- ------------------------------------------------------------------------------------------------------------------------
W.R. Buchhorn 2003 200,000 81,750 -- 93,750 -- --
Vice President, Human 2002 200,000 91,000 -- 124,500 -- --
Resources 2001 193,333 231,000 -- 74,000 -- --
- ------------------------------------------------------------------------------------------------------------------------
<Caption>
- --------------------- -------------------
ALL OTHER
NAME AND COMPENSATION(3)(4)
PRINCIPAL POSITION ($)
(A) (J)
- ---------------------
R.J. Horner 166,749
President and Chief 103,294
Executive Officer 67,101
- ---------------------
J.M. Beaman 66,203
Senior Vice 61,878
President, Operations 38,022
- ---------------------
J.E. Armitage 52,318
Senior Vice 55,685
President, Sales and 35,497
Marketing
- ---------------------
R. Leverton 54,458
Vice President, 60,520
Finance and Chief 31,633
Financial Officer
- ---------------------
R.S. McLean(5) 315,443
Senior Vice 45,774
President, Supply 31,346
Chain and Information
Technology
- ---------------------
W.R. Buchhorn 36,772
Vice President, Human 41,582
Resources 28,714
- ---------------------
</Table>
Notes:
(1) Perquisites and other personal benefits do not exceed the lesser of $50,000
and 10 per cent of the total of the annual salary and bonus for any of the
Named Executive Officers.
(2) Options for 2003 in this column were granted in January, 2004. The grant and
exercise of these options is conditional upon obtaining shareholder approval
to a proposed amendment to our stock option plan.
(3) Amounts in this column include our contribution to an employee share
purchase plan which was available to all our employees up to December 31,
2003.
(4) Amounts in this column include annual contributions and allocations
(including investment returns on notional account balances) to our defined
contribution pension plan for the year ended December 31, 2003: R.J. Horner
$139,749; J.M Beaman $57,564; J.E. Armitage $46,018; R. Leverton $46,952,
R.S. McLean $27,039, and W.R. Buchhorn $31,534.
(5) R.S. McLean ceased to be an employee in September, 2003. Amounts under "All
other Compensation" for the year ended December 31, 2003 include severance
entitlements of $284,117, a portion of which have not yet been paid.
STOCK OPTIONS
No stock options were granted to the Named Executive Officers during the
year ended December 31, 2003.
71
<Page>
The following table summarizes for each of the Named Executive Officers the
number of Options/ Share Appreciation Rights, or SARs if any, exercised during
the year ended December 31, 2003, the aggregate value realized upon exercise,
the total number of unexercised Options/SARs, if any, held at December 31, 2003,
and the value of such unexercised Options/SARs at the same date. Options/SARs
can be exercised to acquire, or utilized to purchase, as applicable, our common
shares. For further details regarding our Stock Option Plan, see "INCENTIVE AND
STOCK PURCHASE PLANS -- Long Term Incentives Plan -- Stock Option Plan" below.
AGGREGATED OPTION/SAR EXERCISES DURING THE MOST RECENTLY COMPLETED
FINANCIAL YEAR AND FINANCIAL YEAR-END OPTION VALUES
<Table>
<Caption>
VALUE OF UNEXERCISED
UNEXERCISED OPTIONS/SARS IN-THE-MONEY OPTIONS/SARS
AGGREGATE AT DECEMBER 31, 2003(1)(3) (#) AT DECEMBER 31, 2003(2) ($)
SECURITIES VALUE --------------------------------- ------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
NAME EXERCISED (#) REALIZED(1) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -----------------------------------------------------------------------------------------------------------------------------
R.J. Horner -- -- 401,000 700,500 -- --
- -----------------------------------------------------------------------------------------------------------------------------
J.M. Beaman -- -- 93,333 273,167 -- --
- -----------------------------------------------------------------------------------------------------------------------------
J.E. Armitage -- -- 93,667 235,833 -- --
- -----------------------------------------------------------------------------------------------------------------------------
R. Leverton -- -- 101,667 261,333 -- --
- -----------------------------------------------------------------------------------------------------------------------------
R.S. McLean -- -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
W.R. Buchhorn -- -- 49,333 149,167 -- --
- -----------------------------------------------------------------------------------------------------------------------------
</Table>
Notes:
(1) The value realized on the exercise of an Option or SAR is equal to the
difference between the market value of the relevant underlying security at
the time of exercise and the exercise or base price of the Option or SAR.
(2) The value of the unexercised in-the-money Options/SARs at the year end is
the excess, if any, of the market value of the relevant underlying security
as at December 31, 2003 (being $4.17 in respect of the Common Shares) over
the exercise or base price of the relevant Options or SARs.
(3) Underlying securities are our Common Shares.
RETIREMENT PLANS
Each of the Named Executive Officers are members of the defined contribution
segment of our Supplemental Retirement Plan for Senior Executives. Under the
defined contribution segment, we allocate an aggregate of 12 per cent of the
executive officer's monthly salary and bonus to individual retirement accounts.
Of this total, seven per cent of the monthly salary and bonus (to a maximum of
$12,500) is contributed to the member's account in the defined contribution
segment of the salaried retirement plan available to all of our Canadian
employees and the remainder is allocated to a notional account maintained for
the member under the Supplemental Retirement Plan. No benefit is payable under
the Supplemental Retirement Plan if the member ceases to be employed by us prior
to attaining five years as an executive officer.
Under the defined contribution segment of our Limited Supplemental
Retirement Plan for Senior Executives, the amount of bonus recognized in
pensionable earnings is limited to 50 per cent of the bonus payment for the year
subject to a further limit of 50 per cent of the executive's target bonus. The
portion of the bonus that is not recognized due to this latter limit may be
carried forward to the immediately following calendar years and applied in years
in which the target bonus limit is not reached.
The retirement benefits that become payable under the Limited Supplemental
Retirement Plan for Senior Executives are offset by the retirement benefits
payable under any other of our pension plans.
72
<Page>
The total amounts set aside or accrued by us and our subsidiaries to provide
pension, retirement or similar benefits to our Named Executive Officers is as
follows:
<Table>
<Caption>
AMOUNT SET ASIDE OR ACCRUED
NAME AS OF DECEMBER 31, 2003
- ---- ---------------------------
Russell J. Horner........................... $1,083,783
J.M. Beaman................................. 142,258
J.E. Armitage............................... 213,163
R. Leverton................................. 142,675
R.S. McLean................................. 61,601
W.R. Buchhorn............................... 103,685
</Table>
TERMINATION OF EMPLOYMENT, CHANGE IN RESPONSIBILITIES AND EMPLOYMENT CONTRACTS
The Board of Directors has determined it is in our best interests to
encourage the continuity of senior management under certain circumstances.
We entered into severance agreements with certain of the Named Executive
Officers, which replace previous agreements that expired in July, 2002. The
agreements provide that the Named Executive Officer whose employment is
terminated by us without cause within the period of two years after the date of
completion of a "Proposed Transaction" will be entitled to a two-year
termination leave. During this termination leave, he will receive annual salary,
bonus under our Short Term Incentive Plan and certain of the benefits previously
received. A "Proposed Transaction" means (i) the acquisition by Norske
SkogIndustrier ASA of more than 50% of our outstanding voting shares or the
acquisition by an entity other than Norske SkogIndustrier ASA of more than 35%
of our outstanding voting shares; (ii) the acquisition of all or substantially
all of our assets; (iii) a merger with one or more other entities that results
in a change in the majority of the Board of Directors or securities holders of
the parties to the merger other than us holding more than 35% of the outstanding
voting shares of the surviving corporation; or (iv) a merger that has been
designated by the directors as a Proposed Transaction.
If the Named Executive Officer secures comparable alternative employment
during the termination leave, the Named Executive Officer will receive a lump
sum payment equal to one-half of the salary which would otherwise be received
during the balance of the termination leave. In lieu of taking termination
leave, the Named Executive Officer may elect to receive a lump sum settlement
equal to 80 per cent of the salary which would otherwise be received during the
termination leave plus 75 per cent of the Named Executive Officer's target bonus
under the Short Term Incentive Plan for the current year. These severance
agreements expire, if a Proposed Transaction has not been completed, on
September 30, 2004.
In 2001 we entered into an agreement with each of Mr. Horner and
Mr. Leverton that provides for benefits to be paid to such individual in the
event his employment terminates following a "Control Change", which has the same
meaning as a Proposed Transaction described above. The benefits include payment
of three times the individual's annual remuneration, being his base salary plus
an amount equal to his target bonus for the year, the acceleration of all
outstanding stock options, the acceleration of retirement benefits equal to five
years' service, and job relocation counselling fees. These benefits are payable
if the individual resigns, in the case of Mr. Horner within one year, and in the
case of Mr. Leverton with 90 days, after a Control Change or if, within two
years after such Control Change, his employment is terminated without just cause
or he terminates his employment for good reason. Each of these agreements
becomes operative if a Control Change occurs prior to October 1, 2004 or such
later date as we may from time to time specify.
73
<Page>
INCENTIVE AND STOCK PURCHASE PLANS
Short Term Incentive Plan
We have a short term incentive plan under which executive officers may be
paid an annual bonus based upon the achievement of objectively measured
corporate objectives and subjectively measured personal objectives.
Membership in the plan is limited to designated individuals and includes the
Named Executive Officers.
Annual bonuses that may be awarded under the short term incentive plan can
vary from zero to 60% to 80% of base salary for participants in the plan, other
than the Chief Executive Officer, and zero to 124% of base salary in the case of
the Chief Executive Officer.
The Governance and Human Resources Committee determines the amounts of the
annual bonuses made under the plan. For participants in the plan, other than the
Chief Executive Officer, one half of the bonus is based upon the achievement of
objectively measured corporate objectives and one half of the bonus is based
upon the achievement of personal objectives that are agreed to individually by
each participant. In 2003 the corporate objectives included the attainment of a
measured improvement in employee safety (20%) and the attainment of a target
amount of EBITDA (30%). In 2003, bonuses were paid to the participants based
upon the attainment of a target amount of EBITDA but no bonus was paid in
respect of improvements in employee safety. The Governance and Human Resources
Committee determines the bonuses for the attainment of personal objectives on
the recommendation of the Chief Executive Officer. The bonuses awarded for 2003
to the participants in the plan for the attainment of personal objectives range
from 70% to 90% of the maximum bonus available for this criterion.
In addition to the bonuses awarded under the short-term incentive plan, the
Governance and Human Resources Committee may also award one time special bonuses
to the Named Executive Officers in recognition of the achievement of special
results in a fiscal year. No special bonuses were awarded to the Named Executive
Officers in 2003.
The compensation of the Chief Executive Officer is based upon a combination
of base salary, a short term incentive plan under which a cash bonus may be
awarded and the grant of stock options under our stock option plan. The base
salary of the Chief Executive Officer is targeted at the median of the salaries
paid to chief executive officers of companies engaged in the forest products
industry in Canada. The ranges of these salaries are determined from a report of
an independent compensation consultant engaged by the Corporation.
The short-term incentive plan is based upon the attainment of objectively
measured corporate objectives and the achievement of personal objectives. These
objectives are each determined by the Governance and Human Resources Committee,
in consultation with the Chief Executive Officer, before the commencement of
each fiscal years. In 2003, the relative weighting of the objectives for the
Chief Executive Officer in that fiscal year were: improvement in the health and
safety performance of our employees -- 20%; attainment of a target amount of
EBITDA -- 50%; and attainment of personal objectives -- 30%. The personal
objectives emphasized leadership and initiative in matters agreed to between the
Governance and Human Resources Committee and the Chief Executive Officer. The
bonus awarded to the Chief Executive Officer for 2003 recognized the
achievements in respect of our EBITDA objectives and the attainment of the
agreed upon personal objectives, but no bonus was awarded in respect of our
health and safety performance.
Long Term Incentives Plan_--_Stock Option Plan
To provide a longer term incentive to executives, we have a Stock Option
Plan. This Plan provides for grants of options to acquire our common shares to
our employees and employees of our
74
<Page>
subsidiaries in such numbers as the Governance and Human Resources Committee
determines from time to time. At our 2004 Annual Meeting held April 29, 2004,
our shareholders approved the granting of options for up to 10,000,000 common
shares. As of April 1, 2004, options to purchase a total of 6,058,000 common
shares were outstanding under the Plan.
The stock options are performance-based options with a maximum term of
10 years. The exercise price of the options is based on the 10-day average
trading value of the common shares on the Toronto Stock Exchange immediately
preceding the date of grant. The vesting of the options is determined by the
Committee at the time of the grant; however most options become exercisable as
to one-third on or after the first, second and third anniversary of the date of
grant, and become immediately exercisable if a predetermined share price hurdle
is exceeded. The share price hurdle is based on a benchmark compound annual
growth rate calculated over the life of the options, as established by the
Committee at the time of grant.
Individual executives are eligible for option grants annually, with a
notional value that corresponds to a target percentage of the executive's
salary. The target percentage of salary is determined annually by the Governance
and Human Resources Committee to maintain market median total compensation
levels for executives. The notional value of the options granted is
150 per cent of annual salary for the Chief Executive Officer and 50 per cent to
75 per cent for other executives. The notional value of the options is
established by an external, independent specialist using a modified form of the
"Black -- Scholes" option valuation methodology.
The following table sets out the date of grant, exercise price, hurdle price
and number of common shares issuable upon exercise of options granted to each
Named Executive Officer and director:
<Table>
<Caption>
NAME DATE OF GRANT(1) TOTAL
- ---- ------------------------------------------------------------------------- ---------
SEPT. 12 01 JAN. 31 02 OCT. 31 02 JAN. 29 03 JAN. 29 04
------------- ------------ ------------ ------------ ------------
EXERCISE PRICE............... $ 6.60 $ 7.13 $ 5.25 $ 5.81 $ 4.39
HURDLE PRICE(2).............. 9.47 10.00 7.54 8.35 6.30
Jan A. Oksum................. -- 10,000 -- 20,000 -- 30,000
W. Thomas Stephens........... -- 20,000 -- 20,000 -- 40,000
Russell J. Horner............ 601,500 500,000 -- -- 531,250 1,632,750
Mitchell H. Gropper, QC(3)... -- 10,000 -- 10,000 -- 20,000
J. Trevor Johnstone.......... -- 10,000 -- 10,000 -- 20,000
Jan Kildal................... -- -- -- 10,000 -- 10,000
Harold N. Kvisle............. -- 10,0000 -- 10,000 -- 20,000
R. Keith Purchase............ -- 10,000 -- 10,000 -- 20,000
William P. Rosenfeld......... -- 10,000 -- 10,000 -- 20,000
Jesse M. Beaman.............. 140,000 118,500 108,000 -- 150,000 516,500
James E. Armitage............ 140,500 99,000 90,000 -- 112,500 442,000
Ralph Leverton............... 152,500 110,500 100,000 -- 125,000 488,000
R. Scott MacLean............. 108,500 87,000 79,000 -- -- 274,500
W.R. Buchhorn................ 74,000 52,500 72,000 -- 93,750 292,250
</Table>
- ------------------------
(1) The term of each of the option series is ten years and each series of
options expire on the tenth anniversary of its respective date of grant.
(2) Options become exercisable as to one-third on the first, second and third
anniversary of the date of grant, and become immediately execisable if our
common shares trade at the hurdle price.
(3) Mr. Gropper ceased to be a director following our 2004 Annual Meeting on
April 29, 2004.
75
<Page>
DIRECTOR COMPENSATION
The Chairman of the Board receives an annual retainer of $110,000 and the
Deputy Chair receives an annual retainer of $55,000. All of the other directors
receive an annual retainer of $25,000 except that no director who is an
executive officer of the Corporation receives any additional compensation for
his activities as a director.
In addition to the annual retainer, each director is paid $1,500 for each
Board meeting attended. (The fee for Board meetings held by telephone is $750.)
Directors acting on committees of the Board receive an additional annual
retainer of $3,000. Chairs of the Governance and Human Resources and the
Environmental, Health and Safety Committees receive an additional annual
retainer of $5,000 and the Chair of the Audit Committee receives an additional
annual retainer of $10,000. In addition, directors are paid $1,200 for each
committee meeting they attend. Directors are also reimbursed for their
reasonable expenses in connection with such meetings.
Directors may choose to convert all or part of their compensation into
deferred stock units ("DSUs"). The number of DSUs granted to a director is equal
to the elected amount of the compensation divided by the weighted average price
of our common shares on the Toronto Stock Exchange over the ten days prior to
the calculation date. The value of the DSUs is payable by us to a director upon
the director's departure from the Board and is equal to the number of DSUs held
by the director multiplied by the weighted average price of our common shares on
the Toronto Stock Exchange over the ten days prior to the relevant calculation
date. All amounts are paid in cash, subject to statutory withholdings. A
director may change his or her DSU election prior to the commencement of each
calendar year.
The following directors have elected to receive all or a portion of their
compensation in DSU's:
<Table>
<Caption>
NUMBER OF DSU'S HELD PERCENTAGE OF
DIRECTOR AS AT DECEMBER 31, 2003 COMPENSATION AS DSU'S
- -------- ------------------------ ---------------------
T.S. Chambers....................................... 3,025 100%
M.H. Gropper, QC(1)................................. 10,954 50%
J.T. Johnstone...................................... 23,631 100%
H.N. Kvisle......................................... 18,137 100%
R.K. Purchase....................................... 10,405 50%
W.P. Rosenfeld...................................... 19,960 75%
W.T. Stephens....................................... 35,183 100%
</Table>
- ------------------------
(1) Mr. Gropper ceased to be a director following our 2004 Annual Meeting on
April 29, 2004.
Although directors were previously eligible for a stock option grant, we
have discontinued this practice. Beginning in 2004, directors are eligible for
an annual grant of Deferred Share Units having a value at the time of the grant
of $12,600.
76
<Page>
MAJOR SHAREHOLDERS
The following table sets forth certain information as of March 31, 2004
concerning the beneficial ownership of our common shares, or shares, by each
director and senior manager and each person known to us to own more than 5% of
our shares.
<Table>
<Caption>
% OF ISSUED AND
NAME SHARES OUTSTANDING SHARES
- ---- ---------- ------------------
Norske Skogindustrier ASA(1)................................ 63,035,942 29.4
Jan A. Oksum................................................ nil *
Russell J. Horner........................................... 58,913 *
Thomas S. Chambers.......................................... 10,000 *
Mitchell H. Gropper(2)...................................... 3,400 *
J. Trevor Johnstone......................................... nil *
Jan Kildal.................................................. nil *
Harold N. Kvisle............................................ 10,000 *
Vidar Lerstad(3)............................................ nil *
William P. Rosenfeld........................................ 13,430 *
R. Keith Purchase........................................... 9,487 *
W. Thomas Stephens.......................................... 5,000 *
James E. Armitage........................................... 14,547 *
Jesse M. Beaman............................................. 29,787 *
W.R. (Ron) Buchhorn......................................... 9,899 *
Stuart H. Clugston.......................................... 8,165 *
Ralph Leverton.............................................. 17,284 *
Robert H. Lindstrom......................................... 13,564 *
Directors and senior managers as a group (17 people)........ 203,476 *
</Table>
- ------------------------
(*) less than 1%.
(1) Norske Skogindustrier ASA acquired its shares from Fletcher Challenge
Limited of New Zealand in July 2000. Norske Skogindustrier ASA does not have
any different voting rights with respect to these shares.
(2) Mr. Gropper ceased to be a director following our 2004 Annual Meeting on
April 29, 2004.
(3) Mr. Lerstad was appointed a director at our 2004 Annual Meeting on
April 29, 2004.
Our directors and senior managers as a group beneficially own, directly or
indirectly, or exercise control or direction over, less than 1% of our issued
and outstanding shares.
As at March 31, 2004 we had 185 registered shareholders with addresses in
the United States, who held, in total, 11,168,990 shares, being 5.2% of our
issued and outstanding common shares.
77
<Page>
CERTAIN AGREEMENTS AND RELATED TRANSACTIONS
Three employees of our largest shareholder, Norske Skogindustrier ASA, were
seconded to our operations in 2001. We reimbursed Norske Skogindustrier ASA for
the cost of these employees' salaries and other employment benefits. During the
year ended December 31, 2001, the total amount we paid Norske
Skogindustrier ASA in respect of the employees' services was $343,600.
William P. Rosenfeld, one of our directors, is a senior partner of the law
firm Goodmans LLP. Goodmans LLP provides us with legal services from time to
time, at usual and customary rates.
We formerly had a program whereby housing assistance loans were made
available to certain current and former directors and officers. As of
December 31, 2003, the following loans were outstanding to the following
persons:
<Table>
<Caption>
LARGEST AMOUNT
OUTSTANDING SINCE AMOUNT OUTSTANDING
POSITION WITH DECEMBER 31, AS AT
NAME NORSKE SKOG CANADA 2001 DECEMBER 31, 2003
- ---- ------------------------------------- ----------------- ------------------
Russell J. Horner....... President and Chief Executive Officer $441,667 $351,097
and a director
Ralph Leverton.......... Vice-President, Finance and Chief $227,500 $183,290
Financial Officer
James E. Armitage....... Senior Vice-President, Sales and $129,999 $ 97,668
Marketing
</Table>
Each of the loans was made for the purpose of allowing the recipient to
purchase a residence and is secured by a mortgage over the residence. As at
December 31, 2003 the loans are interest-free. The loans are due and payable
upon the termination of the employment of the recipient.
We have entered into a strategic alliance with Norske Skogindustrier ASA,
our largest shareholder, for the purposes of sharing of expertise, best
practices and the utilization of combined resources in manufacturing,
procurement, employment matters, including employee health and safety issues,
environmental, information technology and similar matters for the benefit of
both parties.
We have entered into a joint venture for the sale of specialty papers in the
United States by way of the incorporation, with Norske Skogindustrier ASA, of a
Delaware limited liability company. This joint venture company acts as sales
agent for sales in the United States of specialty papers manufactured by each of
NorskeCanada and Norske Skogindustrier ASA.
We have a sales arrangement with Pan Asia Paper Co. Pte. Ltd., a company 50%
owned by Norske Skogindustrier ASA in Asia and have entered into a distribution
agreement with that company whereby all sales of our newsprint and specialty
papers to customers in Asia (other than Japan) are effected through that
company. That company takes title to our products and sells them to its
customers. The price payable to us is equal to the price that company negotiates
with its customers, less a commission fee at customary market rates.
We have a sales agency agreement with a wholly-owned Brazilian based
subsidiary of Norske Skogindustrier ASA for the sale of our products in South
America. Under this sales agency agreement, all sales to customers in South
America (other than Venezuela, where we have an existing sales agency
relationship) are effected by Norske Skogindustrier ASA's Brazilian subsidiary,
which is paid a commission at usual and customary rates as compensation for its
services.
78
<Page>
DESCRIPTION OF SHARE CAPITAL
We are authorized to issue an unlimited number of common shares and
100,000,000 preferred shares. As of March 31, 2004 there are 214,604,120 common
shares issued and outstanding and no preferred shares issued and outstanding.
All of the issued and outstanding common shares are fully paid. Applicable
corporate law prohibits the issue of shares with par value.
As of January 1, 2003, there were 205,910,132 common shares issued and
outstanding. Pursuant to a business acquisition in December 2003, 8,693,988
common shares were issued at a price equal to the volume weighted average
closing price of our common shares during the twenty trading days ending on the
last trading day immediately prior to the closing date. There were no other
issuances of our Common Shares during the period from January 1, 2003 to
December 31, 2003.
Neither NorskeCanada nor any of its subsidiaries hold any common shares.
Pursuant to the terms of our 1995 Stock Option Plan, as of March 31, 2004 we
have issued to certain members of our senior management group options to acquire
an aggregate of 4,451,500 common shares. (See "Management--Executive
Compensation"). None of these options have been exercised.
In addition to the distribution of common shares pursuant to the acquisition
referred to above, during the previous three years, the following other events
have occurred which have changed the amount of issued capital and/or the number
in classes of shares comprising our issued capital:
(a) Pursuant to the terms of a plan of arrangement with our shareholders in
2001 our authorized capital was increased from 250,000,000 shares without
par value (divided into 100,000,000 Class B Preferred Shares and
150,000,000 Class A Common Shares) to 1,100,000,000 shares without par
value divided into 1,000,000,000 Common Shares and 100,000,000 Class B
Preferred Shares. This change increased the number of authorized common
shares and changed the designation of our Class A Common Shares to common
shares. There was no change in the voting rights attached to the common
shares or Class B Preferred Shares.
(b) Prior to our acquisition of Pacifica Papers Inc., or Pacifica Papers, in
2001, we transferred our jurisdiction of incorporation from British
Columbia to the federal Canada Business Corporations Act and in
connection with this transfer we changed our authorized share capital to
an unlimited number of common shares and 100,000,000 preferred shares.
(c) Pursuant to the terms of our acquisition of Pacifica Papers in 2001, an
aggregate of 50,620,880 common shares were issued to the former holders
of common shares of Pacifica Papers in exchange for the shares of
Pacifica Papers held by such persons. The consideration received by us
for the issuance of these common shares were the common shares of
Pacifica Papers exchanged by the holders thereof. The Pacifica Papers
acquisition was approved by Pacifica Papers' securityholders on July 11,
2001 and by the Supreme Court of British Columbia on July 20, 2001.
DESCRIPTION OF ARTICLES OF AMALGAMATION AND BY-LAWS
Our articles of amalgamation issued pursuant to the CANADA BUSINESS
CORPORATIONS ACT contain no restrictions on the business we may carry on.
Our articles of amalgamation and by-laws contain no restrictions on the
power of directors:
1. to vote on a proposal arrangement or contract in which the director is
materially interested;
2. in the absence of an independent quorum, to vote compensation to
themselves or any member of their body; or
3. with respect to borrowing powers exercisable by the directors or how
such borrowing powers may be varied.
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The restrictions on the ability of a director to vote and the requirement to
disclose his or her interest are governed by applicable corporate legislation.
There are no restrictions or provisions in our articles of amalgamation or
by-laws regarding the retirement or non-retirement of directors under an age
limit, although the board of directors' Administrative Guidelines provide that a
director must retire at the age of 70, unless otherwise approved by the board of
directors. There are no restrictions or provisions in our articles of
amalgamation or by-laws pertaining to the number of shares required for director
qualification.
RIGHTS, PREFERENCES AND RESTRICTIONS OF SHARES
Holders of common shares have a right to receive dividends if, as and when
declared by the directors. There is no time limit after which dividend
entitlement lapses. Each common share entitles the holder to one vote on a poll
in respect of the election of directors and any other matter properly coming
before a meeting of such holders.
Our directors do not stand for re-election at staggered intervals and
cumulative voting for the election of our directors is not permitted. Neither
the common shares nor the preferred shares have any right to share in our
profits, other than in respect of dividends.
The holders of common shares, subject to the rights of any issued and
outstanding preferred shares, have the right to share pro rata in any surplus in
the event of our liquidation.
There are no redemption or sinking fund provisions or liability to further
capital calls on holders of common shares. Special rights and restrictions that
may be attached to any series of preferred shares issued in the future may
include redemption or sinking fund provisions.
The rights, preferences and restrictions applicable to preferred shares will
be determined by the Board of Directors at the time such Preferred Shares are
created and issued.
MEETINGS
Meetings of shareholders may be called by our directors and may be
requisitioned by the holders of not less than five percent of our issued share
capital carrying the right to vote at a meeting. The court may also call a
meeting of shareholders upon application by any director or shareholder. For the
purposes of determining shareholders entitled to receive notice of a meeting,
the directors may fix an advance date as the record date for such determination.
Any record date shall not precede by more than 50 days or by less than 21 days
the date on which the meeting is to be held. Each registered shareholder and our
auditor is entitled to attend at meetings of shareholders.
There are no limitations on the right to own our securities, including the
right of non-resident or foreign shareholders to hold or exercise voting rights
on our securities, imposed by the laws of Canada or by our articles of
amalgamation or by-laws. There are no provisions in our articles of amalgamation
or by-laws that would have the effect of delaying, deferring or preventing a
change of control of us and that would only operate with respect to a merger,
acquisition or corporate restructuring involving us or any of our subsidiaries.
There are no provisions in our articles of amalgamation or by-laws governing
the ownership threshold above which shareholder ownership must be disclosed.
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DESCRIPTION OF OTHER INDEBTEDNESS
This section contains a summary of the material provisions of our secured
credit facility, our 8 5/8% notes, and senior secured non-recourse debt owed by
a joint venture in which we have a non-controlling 50.1% interest. The borrower
under the secured credit facility is one of our wholly owned subsidiaries.
THE SECURED CREDIT FACILITY
We entered into a secured credit facility on July 19, 2002, which was
amended effective May 8, 2003. The secured credit facility consists of a
revolving operating loan with a three year term in the amount of $350 million.
We have the option, annually, of requesting one year extensions to the final
maturity date, subject to the approval of each extension by lenders representing
66 2/3% of the amount of the operating loan.
The amendments to our secured credit facility included, among other things,
the following changes:
- The maturity date was extended for one year from July 19, 2005 to
July 19, 2006.
- Technical amendments were made to the secured credit facility to permit us
to enter into secured commodity swaps and fixed to floating swaps with our
lenders. Our net marked-to-market obligations to our lenders under all
such swaps would be contractually limited to certain threshold amounts
(which may not exceed $150 million or such lesser amount as we may elect).
- Technical amendments were made to the secured credit facility to permit us
to offer the 8 5/8% notes, and to make future offerings of similar
securities, on terms and conditions contained in the credit agreement.
- The sale of accounts receivable was excluded from the cumulative
limitation on sale of assets. This will permit us to reduce our borrowing
costs by monetizing certain of our accounts receivable, should we choose
to do so in the future.
- We have been given a one-time option to amend our "borrowing base", which
may provide us with greater availability of funds under the credit
agreement.
- The range of currencies that may be the subject of derivative contracts
was broadened.
Availability of drawdowns of the revolving operating loan is subject to a
maximum borrowing base under the operating loan equal to a percentage of
accounts receivable and inventories. As at December 31, 2003, the borrowing base
formula limited drawdowns of the operating loan to a maximum of $343.4 million.
The secured credit facility also requires us to limit our funded debt to
capitalization ratio to 60% at all times.
SECURITY
The secured credit facility is secured by:
- a first priority security interest, subject to specified permitted liens,
over all our assets and revenues, together with a pledge in relation to
all shares of our material wholly owned subsidiaries; and
- a guarantee by us and all of our material wholly owned subsidiaries.
COVENANTS
The secured credit facility contains customary covenants including, but not
limited to, restrictions on the following: indebtedness; liens; guaranty
obligations; changes in business; mergers; sales and purchases of assets; loans
and investments; transactions with affiliates; sale and lease back transactions;
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restricted payments, including restrictions on stock repurchases; optional
pre-payments of indebtedness other than the secured credit facility and material
amendments to indebtedness; and restrictive agreements and changes in fiscal
year or accounting methods.
The secured credit facility also requires us to comply with certain
financial tests and maintain various financial ratios. These financial tests and
ratios include a minimum consolidated shareholders' equity threshold, maximum
funded debt to capitalization and senior secured debt to capitalization ratios
and, in some circumstances, a minimum interest coverage ratio.
The secured credit facility also contains customary events of default. An
event of default under the secured credit facility will allow the lenders to
accelerate, or in some cases, will automatically cause the acceleration of the
maturity of the debt under the secured credit facility.
8 5/8% NOTES
On August 14, 2001 and May 15, 2003, we issued an aggregate of
US$400 million of 8 5/8% notes. The 8 5/8% notes rank equally with the notes and
are senior in right of payment to all of our existing and future subordinated
debt.
We may redeem some or all of the 8 5/8% notes beginning June 15, 2006. The
initial redemption price is 104.313% of the principal amount, plus accrued
interest. The redemption price will decline ratably each year after 2006 and
will be 100% of the principal amount, plus accrued interest, beginning on
June 15, 2009.
COVENANTS
The indenture governing the 8 5/8% notes contains covenants that, among
other things, will limit our ability and the ability of our subsidiaries to:
- incur additional indebtedness;
- pay dividends on, redeem or repurchase our capital stock;
- make certain investments;
- issue or sell capital stock of restricted subsidiaries;
- create certain liens;
- sell assets;
- in the case of our restricted subsidiaries, make dividend or other
payments to us;
- engage in transactions with affiliates;
- create unrestricted subsidiaries; and
- consolidate, merge or transfer all or substantially all of our assets and
the assets of our subsidiaries on a consolidated basis.
These covenants are subject to important exceptions and qualifications that
are described more fully in the indenture governing the 8 5/8% notes.
POWELL RIVER ENERGY DEBT
The hydroelectric facilities which supply power to the Powell River mill are
held by Powell River Energy Inc., or Powell River Energy, of which we have a
50.1% non-controlling interest. We have the right to appoint two of the four
directors of Powell River Energy and our joint venture partner has the right to
appoint the other two directors. On July 24, 2002, Powell River Energy
refinanced its debt by issuing $75.0 million of First Mortgage Bonds due
July 2009. The First Mortgage Bonds are secured by a pledge of substantially all
the assets of Powell River Energy. As part of the refinancing, we and our joint
venture partner each advanced $7.5 million to Powell River Energy. We drew
$7.5 million from our revolving operating loan to finance our advance.
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DESCRIPTION OF THE EXCHANGE NOTES
The outstanding notes and the exchange notes are referred collectively
herein as the notes. The notes will be issued by NorskeCanada pursuant to an
indenture to be dated as of March 23, 2004, among NorskeCanada, the Guarantors
and Wells Fargo Bank, National Association, as trustee. You may obtain a copy of
the indenture from NorskeCanada upon request.
The indenture is subject to and governed by the Trust Indenture Act of 1939.
The statements under this section are summaries of the material terms and
provisions of the indenture and the notes. They do not purport to be complete
and are qualified in their entirety by reference to all the provisions in the
indenture. Therefore, we urge you to read the indenture because it, and not this
description, defines your rights as holders of the notes. Definitions relating
to certain capitalized terms are set forth under "--Certain Definitions" and
throughout this description. Capitalized terms that are used but not otherwise
defined in this description have the meanings ascribed to them in the indenture.
References herein to "$" or "dollars" are to Canadian dollars and references to
"US$" or "U.S. dollars" are to United States dollars.
GENERAL
The outstanding notes were limited in aggregate principal amount to
US$250,000,000. The exchange notes will be limited in aggregate principal amount
to US$250,000,000. Subject to compliance with the covenant entitled "Limitation
on Additional Debt," after the Issue Date NorskeCanada may at any time and from
time to time issue additional notes having identical terms (except as to issue
price) in unlimited amounts. The notes offered hereby and any additional notes
subsequently issued would be treated as a single series for all purposes under
the indenture. The notes will be unsecured obligations of NorskeCanada, ranking
equally and ratably in right of payment with all existing and future
unsubordinated obligations of NorskeCanada and senior in right of payment to all
existing and future subordinated obligations of NorskeCanada. The notes will be
effectively subordinated to all secured obligations of NorskeCanada to the
extent of the collateral securing such obligations. As of December 31, 2003, on
a pro forma basis after giving effect to the offering of the notes and the
application of the proceeds as described in "Use of Proceeds", and excluding
senior secured non-recourse debt owed by a joint venture in which we have a
50.1% non-controlling economic interest of which our proportionate share is
$37.6 million, on a consolidated basis, NorskeCanada would have had
approximately $844.3 million of senior debt and would have had the ability to
incur up to $317.7 million of additional secured debt under its Credit
Facilities. NorskeCanada will also have the ability to incur Permitted Liens
with respect to certain indebtedness. See "--Covenants--LIMITATION ON LIENS."
The notes will be fully and unconditionally guaranteed, on a senior
unsecured basis, as to the payment of principal, premium, if any, and interest,
jointly and severally, by each of NorskeCanada's material Subsidiaries and by
each future Restricted Subsidiary of NorskeCanada that guarantees payment of the
notes in accordance with the covenant described under "--Covenants--LIMITATION
ON SUBSIDIARIES."
MATURITY, INTEREST AND PRINCIPAL
The notes will mature on March 1, 2014. The notes will bear interest at a
rate of 7 3/8% per annum from March 23, 2004 until maturity. Interest on the
notes is payable semiannually in arrears on each March 1 and September 1, to
holders of record of the notes at the close of business on the immediately
preceding February 15 and August 15, respectively. Interest on the notes will
accrue from the later of March 23, 2004 and the most recent date to which
interest has been paid. The interest rate on the notes is subject to increase,
and such Additional Interest (as defined under "Exchange Offer and Registration
Rights" below) will be payable on the payment dates set forth above, in certain
circumstances, if NorskeCanada fails to comply with its obligations to file
registration statements with
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respect to the notes or if the notes are not registered with the SEC within the
prescribed time periods. See "Exchange Offer and Registration Rights."
OPTIONAL REDEMPTION
NorskeCanada may redeem the notes, at its option, in whole at any time or in
part from time to time, on or after March 1, 2009 at the following redemption
prices, expressed as percentages of the principal amount, together, in each
case, with accrued and unpaid interest to the redemption date, if redeemed
during the 12 month period beginning on March 1 of each year listed below:
<Table>
<Caption>
YEAR PERCENTAGE
- ---- ----------
2009........................................................ 103.688%
2010........................................................ 102.458%
2011........................................................ 101.229%
2012 and thereafter......................................... 100.000%
</Table>
Notwithstanding the foregoing, NorskeCanada may, at its option, redeem in
the aggregate up to 35% of the principal amount of notes issued under the
indenture at any time and from time to time prior to March 1, 2007 at a
redemption price equal to 107.375% of the aggregate principal amount so
redeemed, plus accrued and unpaid interest to the redemption date, out of the
net cash proceeds of one or more Public Equity Offerings; PROVIDED that at least
65% of the aggregate principal amount of the notes issued under the indenture
remains outstanding immediately after the occurrence of any such redemption and
that any such redemption occurs within 90 days following the closing of any such
Public Equity Offering.
In the event of a redemption of fewer than all of the notes, the trustee
will select the notes to be redeemed in compliance with the requirements of the
principal national securities exchange, if any, on which the notes are listed,
or if the notes are not then listed on a national securities exchange, on a
proportional basis, by lot or in such other manner as the trustee deems fair and
equitable; PROVIDED, HOWEVER, that if a partial redemption is made with the
proceeds of a Public Equity Offering, selection of the notes or portions of
notes for redemption will be made by the trustee only on a proportional basis or
on as nearly a proportional basis as is practicable, subject to DTC procedures,
unless such method is otherwise prohibited. The notes will be redeemable as
described above in whole or in part upon not less than 30 nor more than 60 days
prior written notice, mailed by first class mail to a holder's last address as
it appears on the register maintained by the registrar of the notes. On and
after any redemption date, interest will cease to accrue on the notes or
portions of notes called for redemption unless NorskeCanada fails to redeem any
such note.
ADDITIONAL AMOUNTS
All amounts paid or credited by NorskeCanada under or with respect to the
notes or by any Guarantor under or in respect of its guarantee will be made free
and clear of and without withholding or deduction for or on account of any
present or future tax, duty, levy, impost, assessment or other government charge
(including penalties, interest and any other liabilities related thereto)
imposed or levied by or on behalf of the federal government of Canada or any
government of any political subdivision, province or territory of Canada or any
authority or agency therein or thereof having power to tax (hereinafter,
"Taxes"), unless NorskeCanada or such Guarantor is required to withhold or
deduct any amount for or on account of Taxes by law or by interpretation or
administration of law. If NorskeCanada or any Guarantor is required to withhold
or deduct any amount for or on account of Taxes from any amount paid or credited
under or with respect to the notes or the guarantees, NorskeCanada or such
Guarantor will pay such additional amounts ("Additional Amounts") as may be
necessary so that the net amount received by each holder of notes, including
Additional Amounts, after such withholding or deduction (including any
withholding or deduction in respect of Additional
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Amounts) will not be less than the amount the holder would have received if such
Taxes had not been withheld or deducted; PROVIDED that no Additional Amounts
will be payable with respect to a payment made to a holder of notes (an
"Excluded Holder"):
(1) with whom NorskeCanada or such Guarantor does not deal at arm's length,
within the meaning of the INCOME TAX ACT (Canada), at the time of making
such payment;
(2) who is subject to the Taxes in question by reason of its being connected
with the jurisdiction imposing such Taxes otherwise than by the mere
acquisition or holding of the notes or the receipt of payments thereunder
or the enforcement of its rights thereunder; or
(3) who is subject to such Taxes because the holder is or is deemed to be
resident in Canada or uses or holds or is deemed or considered to use or
hold the notes in carrying on business in Canada for the purposes of the
INCOME TAX ACT (Canada).
NorskeCanada and any Guarantors will also:
(1) make such withholding or deduction; and
(2) remit the full amount deducted or withheld to the relevant authority;
in accordance with and in the time required under applicable law.
NorskeCanada and any Guarantors will furnish to the holders of the notes
that are outstanding on the date of the withholding or deduction, within
30 days after the date of the payment of any Taxes due under applicable law,
certified copies of tax receipts evidencing such payment by NorskeCanada or such
Guarantor.
NorskeCanada and any Guarantors will, upon written request of any holder of
notes other than an Excluded Holder, reimburse each such holder, for the amount
of:
(1) any such Taxes so required to be withheld or deducted which are levied
or imposed on and paid by such holder or the beneficial owner of the
notes (the "owner") as a result of payments made under or with respect to
the notes or the guarantees and reasonable expenses related thereto; and
(2) any such Taxes so levied or imposed with respect to any reimbursement
under the foregoing clause (1)
so that the net amount received by such holder or owner after such reimbursement
will not be less than the net amount the holder or owner would have received if
the Taxes described in (1) and (2) had not been imposed, but excluding any such
Taxes on such holder's or owner's net income generally.
At least 30 days prior to each date on which any payment under or with
respect to the notes is due and payable, if NorskeCanada or any Guarantor will
be obligated to pay Additional Amounts with respect to such payment,
NorskeCanada or such Guarantor will deliver to the trustee an Officers'
Certificate stating the fact that such Additional Amounts will be payable and
specifying the amounts so payable and will set forth such other information
necessary to enable the trustee to pay such Additional Amounts to holders of
notes on the payment date. Whenever in the indenture or in this "Description of
the Notes" there is mentioned, in any context, principal, premium, if any,
interest or any other amount payable under or with respect to any note, such
mention will be considered to include the payment of Additional Amounts to the
extent that, in such context, Additional Amounts are, were or would be payable
in respect thereof.
NorskeCanada or a Guarantor will pay any present or future stamp, court,
documentary or other similar taxes, charges or levies that arise in Canada (or
any political subdivision, province or territory therein) from the execution,
delivery or registration of, or enforcement of rights under, the notes, the
indenture governing the notes or any related document ("Documentary Taxes").
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The obligation to pay Additional Amounts (and any reimbursement) and
Documentary Taxes under the terms and conditions described above will survive
any termination, defeasance or discharge of the indenture governing the notes.
For a discussion of the exemption from Canadian withholding taxes applicable
to payments under or with respect to the notes, see "Income Tax
Considerations--Canadian Federal Income Tax Considerations."
TAX REDEMPTION
NorskeCanada may, at its option, redeem the notes, in whole but not in part
at any time, upon not less than 30 nor more than 60 calendar days prior written
notice, mailed by first class mail to each holder of notes at its last address
appearing in the register maintained by the registrar of the notes, at 100% of
the principal amount, plus accrued and unpaid interest to the redemption date,
if NorskeCanada or any Guarantor is or would become obligated to pay, on the
next date on which any amount would be payable with respect to the notes or the
guarantees, any Additional Amounts in accordance with the provisions set forth
above in "--Additional Amounts" as a result of a change in, or amendment to, the
laws or regulations of Canada (or any political subdivision, province, territory
or taxing authority therein or thereof), or any changes in, or amendment to, any
official position of any governmental authority, taxing authority or regulatory
authority regarding the application or interpretation of such laws or
regulations, which change or amendment is announced on or after the Issue Date;
PROVIDED that NorskeCanada or such Guarantor determines, in its business
judgment, that the obligation to pay such Additional Amounts cannot be avoided
by the use of reasonable measures available to NorskeCanada or such Guarantor,
not including substitution of the obligor under the notes; AND FURTHER PROVIDED
that (i) no such notice of redemption may be given earlier than 90 days prior to
the earliest date on which NorskeCanada or such Guarantor would but for such
redemption be obligated to pay such Additional Amounts or later than 270 days
after NorskeCanada or such Guarantor first becomes liable to pay any Additional
Amounts as a result of any changes in or amendments to laws, regulations or
official positions described above and (ii) at the time such notice is given,
NorskeCanada's or such Guarantor's obligation to pay such Additional Amounts
remains in effect.
Prior to the publication of any notice of redemption pursuant to this
provision, NorskeCanada will deliver to the trustee (a) an Officers' Certificate
stating that NorskeCanada is entitled to effect such redemption and setting
forth a statement of facts showing that the conditions precedent to the right of
NorskeCanada so to redeem have occurred and (b) an opinion of legal counsel
qualified under the laws of the relevant jurisdiction to the effect that
NorskeCanada or such Guarantor has or will become obligated to pay such
Additional Amounts as a result of such amendment or change as described above.
MANDATORY REDEMPTION
NorskeCanada is not required to make sinking fund payments or mandatory
redemption payments prior to maturity with respect to the notes.
COVENANTS
The indenture contains, among others, the following covenants:
LIMITATION ON ADDITIONAL DEBT
NorskeCanada will not, and will not cause or permit any of its Restricted
Subsidiaries to, directly or indirectly, incur any Debt, including, without
limitation, any Acquired Debt, except Permitted Debt and except that, if no
Default or Event of Default will have occurred and be continuing at the time or
as a consequence of the incurrence of such Debt, NorskeCanada or any Restricted
Subsidiary may
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incur Debt, including any Acquired Debt, if NorskeCanada's Consolidated Fixed
Charge Coverage Ratio is at least 2.0 to 1.
Even if NorskeCanada's Consolidated Fixed Charge Coverage Ratio is less than
2.0 to 1, NorskeCanada and its Restricted Subsidiaries may incur Permitted Debt.
For purposes of determining compliance with this covenant, if an item of
Debt meets the criteria of more than one of the categories of Permitted Debt
described in clauses (1) through (14) of the definition of Permitted Debt or is
entitled to be incurred in accordance with the first paragraph of this covenant
(other than Debt outstanding under the Credit Facilities on the date on which
the notes are first issued under the indenture, which shall be treated as
incurred pursuant to clause (1) of the definition of Permitted Debt),
NorskeCanada shall classify (and subsequently may reclassify one or more times)
such Debt in its sole discretion, and such item of Debt will, upon such
classification or reclassification, as the case may be, be treated as having
been incurred in accordance with only one of such clauses or in accordance with
the first paragraph of this covenant. Accrual of interest, the accretion of
accreted value and the payment of interest in the form of additional Debt, in
each case in accordance with the terms of the underlying Debt at its time of
incurrence by NorskeCanada or a Restricted Subsidiary, as the case may be, will
not be considered to be an incurrence of Debt for purposes of this covenant;
PROVIDED that the underlying Debt is incurred in accordance with the terms of
the indenture. Any increase in the Canadian dollar equivalent of outstanding
Debt of NorskeCanada or any of its Restricted Subsidiaries denominated in a
currency other than Canadian dollars resulting from fluctuations in the exchange
values of currencies will not be considered to be an incurrence of Debt for
purposes of this covenant; PROVIDED that the amount of Debt of NorskeCanada
outstanding at any time will be the Canadian dollar equivalent of all such Debt
of NorskeCanada outstanding at such time.
LIMITATION ON RESTRICTED PAYMENTS
NorskeCanada will not make, and will not cause or permit any of its
Restricted Subsidiaries to, directly or indirectly, make any Restricted Payment,
unless:
(1) no Default or Event of Default will have occurred and be continuing at
the time of or immediately after giving effect to such Restricted
Payment;
(2) immediately after giving pro forma effect to such Restricted Payment,
NorskeCanada could incur US$1.00 of additional Debt, other than Permitted
Debt, under the "--LIMITATION ON ADDITIONAL DEBT" covenant above; and
(3) immediately after giving effect to such Restricted Payment, the
aggregate amount of all Restricted Payments declared or made after
August 14, 2001 does not exceed the sum, without duplication, of:
(A) the sum of: (i) 50% of NorskeCanada's cumulative Consolidated Net
Income, or, if cumulative Consolidated Net Income is a loss, minus
100% of such loss, for the period beginning on July 1, 2001 and
ending on the last day of the fiscal quarter immediately preceding
the date of such proposed Restricted Payment, treating such period as
a single accounting period, and (ii) the Pacifica Income Adjustment
Amount; plus
(B) 100% of the aggregate net cash proceeds received by NorskeCanada from
Capital Contributions or from the issuance or sale after August 14,
2001, other than to a Restricted Subsidiary, of:
(i) Capital Stock, other than Disqualified Capital Stock, of
NorskeCanada, or
(ii) any Debt or other securities of NorskeCanada that are
convertible into or exercisable or exchangeable for Capital
Stock, other than Disqualified Capital Stock, of
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NorskeCanada which have been so converted, exercised or
exchanged, as the case may be; plus
(C) without duplication of any amounts included in subclause (A) of this
clause (3), so long as the Designation thereof was treated as a
Restricted Payment made after August 14, 2001, with respect to any
Unrestricted Subsidiary that has been redesignated as a Restricted
Subsidiary after August 14, 2001 in accordance with the definition of
"Restricted Subsidiary," NorskeCanada's proportionate interest in an
amount equal to the Fair Market Value of NorskeCanada's interest in
such Subsidiary; PROVIDED that such amount will not in any case
exceed the Designation Amount (as defined in the definition of
Restricted Payments) with respect to such Restricted Subsidiary at
the time of its Designation; plus
(D) in the case of the disposition or repayment of any Investment
constituting a Restricted Payment made after August 14, 2001, to the
extent not otherwise included in NorskeCanada's Consolidated Net
Income, the amount of cash proceeds or Cash Equivalents received by
NorskeCanada or any Restricted Subsidiary with respect to such
Investment, net of any costs of disposition and taxes paid or payable
in connection with such disposition or repayment; plus
(E) to the extent not otherwise included in NorskeCanada's Consolidated
Net Income, the amount of the cash proceeds or Cash Equivalents
received by NorskeCanada or any Restricted Subsidiary upon the sale
of any Unrestricted Subsidiary after August 14, 2001, net of any
costs of disposition and taxes paid or payable in connection with
such sale; plus
(F) $40,000,000.
For purposes of determining the amount expended for Restricted Payments under
this clause (3), property other than cash will be valued at its Fair Market
Value.
The provisions of this covenant will not prevent:
(1) the payment of any dividend or distribution within 60 days after the
date of declaration, if at such date of declaration such payment would
comply with the provisions of the indenture;
(2) the repurchase, redemption or other acquisition or retirement of any
shares of Capital Stock of NorskeCanada or Debt of NorskeCanada or any
Guarantor subordinated to the notes or such Guarantor's guarantee, as the
case may be, by conversion into, or by or in exchange for, shares of
Capital Stock of NorskeCanada, other than Disqualified Capital Stock, or
out of the net cash proceeds of the substantially concurrent sale, other
than to a Restricted Subsidiary of NorskeCanada, of other shares of
Capital Stock of NorskeCanada other than Disqualified Capital Stock;
PROVIDED that any such net cash proceeds are excluded from clause (3)(B)
of the immediately preceding paragraph for the purposes of this
calculation and were not included in such clause (3)(B) at any time;
(3) the redemption, repayment or retirement of Debt of NorskeCanada or any
Guarantor subordinated to the notes or such Guarantor's guarantee, as the
case may be, in exchange for, by conversion into, or out of the net cash
proceeds of:
(A) a substantially concurrent sale or incurrence of Debt of NorskeCanada
or such Guarantor, as the case may be, other than any Debt owed to a
Restricted Subsidiary, that is contractually subordinated in right of
payment to the notes or such Guarantor's guarantee, as the case may
be, to at least the same extent as the Debt being redeemed, repaid or
retired, or
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(B) a substantially concurrent sale other than to a Restricted Subsidiary
of NorskeCanada of shares of Capital Stock of NorskeCanada,
PROVIDED that any such net cash proceeds are excluded from clause (3)(B)
of the immediately preceding paragraph and were not included in such
clause (3)(B) at any time;
(4) the retirement of any shares of Disqualified Capital Stock of
NorskeCanada by conversion into, or by exchange for, other shares of
Disqualified Capital Stock of NorskeCanada, or out of the net cash
proceeds of the substantially concurrent sale, other than to a Restricted
Subsidiary of NorskeCanada, of other shares of Disqualified Capital Stock
of NorskeCanada; PROVIDED that any such net cash proceeds are excluded
from clause 3(B) of the immediately preceding paragraph and were not
included in such clause 3(B) at any time;
(5) the purchase, redemption or other acquisition for value of shares of
Capital Stock of NorskeCanada, other than Disqualified Capital Stock,
held by employees or directors of NorskeCanada or their estates or
beneficiaries under their estates, upon the death, retirement or
termination of employment or directorship of such employees or directors
or in accordance with the terms of an employee benefit plan or other
agreement approved by the board of directors of NorskeCanada; PROVIDED
that the aggregate cash consideration paid, or distributions made, under
this clause (5) do not exceed $5,000,000 in the aggregate after
August 14, 2001;
(6) the payment of any dividend in respect of shares of NorskeCanada's
Capital Stock, PROVIDED that (A) the aggregate amount of all such
dividends paid pursuant to this clause (6) in any twelve month period
shall not exceed $25 million and (B) immediately after giving pro forma
effect to such payment, NorskeCanada could incur US$1.00 of additional
Debt, other than Permitted Debt, under the "--LIMITATION ON ADDITIONAL
DEBT" covenant above; and
(7) the repurchase of shares of NorskeCanada's Capital Stock deemed to occur
upon the exercise of stock options if such shares of Capital Stock
represent a portion of the exercise price of such stock options.
In calculating the aggregate amount of Restricted Payments made after
August 14, 2001 for purposes of clause (3) of the first paragraph of this
covenant, amounts expended under subclauses (1) and (5) of this paragraph will
be included in such calculation and subclauses (2), (3), (4), (6) and (7) of
this paragraph will not be included in such calculation; PROVIDED that amounts
under subclause (1) of this paragraph will only be included if the declaration
thereof had not been counted in a prior period.
LIMITATION ON LIENS
NorskeCanada will not, and will not cause or permit any of its Restricted
Subsidiaries, directly or indirectly, to, create, incur or otherwise cause or
suffer to exist or become effective any Liens, other than Permitted Liens, upon
or with respect to any property or assets of NorskeCanada or any of its
Restricted Subsidiaries, unless:
(1) if such Lien secures Debt that is ranked equally and ratably with the
notes or any guarantee, then the notes or such guarantee, as the case may
be, are secured on an equal and ratable basis with the obligations so
secured until such time as such obligations are no longer secured by such
Lien or the Lien is a Permitted Lien; or
(2) if such Lien secures Debt that is subordinated to the notes or any
guarantee, then the notes or such guarantee, as the case may be, are
secured and the Lien securing such other Debt will be subordinated to the
Lien granted to the holders of the notes or such guarantee, as the case
may be, at least to the same extent as such Debt is subordinated to the
notes or such guarantee, as the case may be, until such time as such
obligations are no longer secured by a Lien.
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NorskeCanada and Restricted Subsidiaries may create, incur or cause or
permit to exist Permitted Liens as described in the definition of "PERMITTED
LIENS" under "--Certain Definitions".
LIMITATION ON TRANSACTIONS WITH AFFILIATES
NorskeCanada will not, and will not cause or permit any of its Restricted
Subsidiaries to, directly or indirectly, enter into or suffer to exist any
transaction or series of related transactions, including, without limitation,
the sale, purchase, exchange or lease of assets, property or services with any
Affiliate (each an "Affiliate Transaction") or extend, renew, waive or otherwise
modify the terms of any Affiliate Transaction entered into prior to the Issue
Date unless:
(1) such Affiliate Transaction is between or among NorskeCanada and its
Restricted Subsidiaries or between or among Restricted Subsidiaries; or
(2) the terms of such Affiliate Transaction are no less favorable to
NorskeCanada or such Restricted Subsidiary, as the case may be, than the
terms which could reasonably be obtained by NorskeCanada or such
Restricted Subsidiary, as the case may be, at such time in a comparable
transaction made on an arm's-length basis between unaffiliated parties.
In any Affiliate Transaction or any series of related Affiliate Transactions
involving an amount or having a Fair Market Value in excess of $10,000,000 which
is not permitted under clause (1) of the first paragraph of this covenant,
NorskeCanada must obtain a resolution of the disinterested members of the board
of directors of NorskeCanada certifying that they have approved such Affiliate
Transaction and determined that such Affiliate Transaction complies with
clause (2) of the first paragraph of this covenant. In addition, in any
Affiliate Transaction or any series of related Affiliate Transactions involving
an amount or having a Fair Market Value in excess of $75,000,000 which is not
permitted under clause (1) of the first paragraph of this covenant, NorskeCanada
must obtain a written opinion from an Independent Financial Advisor that such
transaction or transactions are fair to NorskeCanada or such Restricted
Subsidiary, as the case may be, from a financial point of view.
The provisions in the first paragraph of this covenant will not apply to:
(1) any Restricted Payment made in compliance with the provisions described
under the "LIMITATION ON RESTRICTED PAYMENTS" covenant above;
(2) any payment of customary and reasonable fees to directors of
NorskeCanada;
(3) any employment agreement or compensation arrangement in effect on the
Issue Date, or entered into thereafter by NorskeCanada or any of its
Restricted Subsidiaries in the ordinary course of business and consistent
with the past practice of NorskeCanada and its Restricted Subsidiaries;
(4) transactions in the ordinary course of business under any pension, share
or partnership unit option, profit sharing, partnership unit or share
appreciation rights or other employee benefit plan or agreement,
including insurance, indemnification and reimbursement plans and
arrangements for directors, officers and employees;
(5) loans to employees not to exceed $10,000,000 in aggregate amount at any
one time outstanding; or
(6) issuances of Capital Stock, other than Disqualified Capital Stock, of
NorskeCanada.
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LIMITATION ON ASSET SALES
NorskeCanada will not, and will not cause or permit any of its Restricted
Subsidiaries to, complete an Asset Sale unless:
(1) NorskeCanada or such applicable Restricted Subsidiary, as the case may
be, receives consideration at the time of such sale or other disposition
at least equal to the Fair Market Value of the assets sold or otherwise
disposed of;
(2) not less than 75% of the consideration received by NorskeCanada or such
applicable Restricted Subsidiary, as the case may be, is in the form of:
(A) cash or Cash Equivalents, or
(B) Replacement Assets,
and in each case set forth in subclauses (A) and (B) of this clause (2),
is received at the time of such sale or other disposition, PROVIDED that
the amount of
(i) any Debt other than subordinated Debt of NorskeCanada or any
such applicable Restricted Subsidiary that is actually assumed
by the transferee in such Asset Sale and from which NorskeCanada
and its Restricted Subsidiaries are fully and unconditionally
released, and
(ii) any securities received by NorskeCanada or any such applicable
Restricted Subsidiary which are converted into cash or Cash
Equivalents within 10 business days of such Asset Sale, to the
extent of the cash or Cash Equivalents received,
will be considered to be cash for purposes of this clause (2) and to have
been received at the time of such sale, and
(3) the Asset Sale Proceeds received by NorskeCanada or such Restricted
Subsidiary, as the case may be, are applied, at the option of
NorskeCanada or such Restricted Subsidiary:
(A) to prepay, repay or purchase indebtedness under any Credit Facilities
or any other secured Debt of NorskeCanada or such Restricted
Subsidiary or the Other Senior Notes; or
(B) to an investment in properties and assets that are used or useful in
the business of NorskeCanada or its Restricted Subsidiaries or in
businesses reasonably similar to or ancillary to the business of
NorskeCanada or its Restricted Subsidiaries as conducted at the time
of such Asset Sale; PROVIDED that:
(i) such investment occurs, or
(ii) NorskeCanada or any such Restricted Subsidiary enters into
contractual commitments to so apply such Asset Sale Proceeds,
subject only to customary conditions other than the obtaining
of financing,
in each case, within 365 days following the receipt of such Asset Sale
Proceeds. If on such 365th day, the Available Asset Sale Proceeds exceed
$15,000,000, NorskeCanada will apply an amount equal to the Available
Asset Sale Proceeds to an offer to repurchase the notes and, at its
option, to an offer to repurchase other equal and ratable Debt at a
purchase price in cash equal to 100% of the principal amount of the notes
plus accrued and unpaid interest, if any, to the purchase date (an
"Excess Proceeds Offer").
If an Excess Proceeds Offer is not fully subscribed, NorskeCanada may
retain and use for general corporate purposes the portion (any such
portion, a "Deficiency") of the Available Asset Sale Proceeds not
required to repurchase notes. Upon completion of any Excess Proceeds
Offer, the amount of Available Asset Sale Proceeds will be reset to zero.
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If NorskeCanada is required to make an Excess Proceeds Offer, NorskeCanada
will mail, within 30 days of the 365th day following the receipt of the
Available Asset Sale Proceeds exceeding $15,000,000, a notice to the holders
stating, among other things:
(1) that NorskeCanada is offering to apply the Available Asset Sale Proceeds
to repurchase such notes at a purchase price in cash equal to 100% of the
principal amount of the notes, plus accrued and unpaid interest, if any,
to the purchase date;
(2) the purchase date, which will be no earlier than 30 days and not later
than 60 days from the date such notice is mailed;
(3) the instructions that each holder must follow in order to have such
notes purchased; and
(4) the calculations used in determining the amount of Available Asset Sale
Proceeds to be applied to the purchase of such notes.
NorskeCanada will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations to the extent such
laws and regulations are applicable in connection with the repurchase of notes
in connection with an Excess Proceeds Offer. To the extent that the provisions
of any securities laws or regulations conflict with the "Asset Sale" provisions
of the indenture, NorskeCanada will comply with the applicable securities laws
and regulations and will not be deemed to have breached its obligations under
the "Asset Sale" covenant of the indenture by virtue of such compliance.
LIMITATION ON CAPITAL STOCK OF RESTRICTED SUBSIDIARIES
NorskeCanada will not
(1) sell, pledge, hypothecate, other than by Permitted Liens, or otherwise
convey or dispose of any Capital Stock of a Restricted Subsidiary, or
(2) permit any of its Restricted Subsidiaries to issue any Capital Stock,
other than to NorskeCanada or a Wholly Owned Restricted Subsidiary,
if, as a result of such transaction, such Restricted Subsidiary would
cease to be a Restricted Subsidiary.
The restrictions described in the first paragraph of this covenant will not
apply to an Asset Sale consisting of all of the Capital Stock of a Restricted
Subsidiary owned by NorskeCanada and its Restricted Subsidiaries made in
compliance with the provisions described under the "LIMITATION ON ASSET SALES"
covenant above.
LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED
SUBSIDIARIES
NorskeCanada will not, and will not cause or permit any of its Restricted
Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to
exist or become effective any encumbrance or restriction on the ability of any
Restricted Subsidiary to:
(1) (A) pay dividends or make any other distributions to NorskeCanada or any
Restricted Subsidiary of NorskeCanada:
(i) on its Capital Stock, or
(ii) with respect to any other interest or participation in, or
measured by, its profits, or
(B) repay any Debt or any other obligation owed to NorskeCanada or any
Restricted Subsidiary,
(2) make loans or advances or Capital Contributions to NorskeCanada or any
Restricted Subsidiary; or
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(3) transfer any of its properties or assets to NorskeCanada or any
Restricted Subsidiary, except for such encumbrances or restrictions
existing under or by reason of:
(A) encumbrances or restrictions existing on the Issue Date to the extent
and in the manner such encumbrances and restrictions are in effect on
the Issue Date;
(B) encumbrances or restrictions in any Credit Facilities;
(C) the indenture, the notes and any guarantees;
(D) applicable law;
(E) any instrument governing Acquired Debt as in effect at the time of
such acquisition, which encumbrance or restriction is not applicable
to any Person, or the properties or assets of any Person, other than
the Person or the property or assets of the Person, including any
Subsidiary of the Person, so acquired;
(F) customary non-assignment provisions in leases or other agreements
entered in the ordinary course of business and consistent with past
practices;
(G) Refinancing Debt; PROVIDED that such restrictions are not on the
whole materially more restrictive than those contained in the
agreements governing the Debt being extended, refinanced, renewed,
replaced, defeased or refunded;
(H) restrictions in security agreements or mortgages securing Debt of
NorskeCanada or a Restricted Subsidiary only to the extent such
restrictions restrict the transfer of the property subject to such
security agreements and mortgages;
(I) restrictions with respect to a Restricted Subsidiary under an
agreement that has been entered into for the sale or disposition of
all or substantially all of the Capital Stock or assets of such
Restricted Subsidiary to be completed in accordance with the terms of
the indenture solely in respect of the Capital Stock or assets to be
sold or disposed of;
(J) purchase money obligations for property acquired in the ordinary
course of business that impose restrictions of the nature described
in subclause (H) of this clause (3) on the property so acquired;
(K) any agreement for the sale of assets, including any Asset Sale, that
restricts transfers of such assets pending their sale;
(L) secured Debt otherwise permitted to be incurred in accordance with
the provisions of the covenant described above under the "LIMITATION
ON LIENS" covenant that limits the right of the debtor to dispose of
the assets securing such Debt;
(M) any encumbrance or restriction contained in Purchase Money Debt to
the extent that such encumbrance or restriction (i) only restricts
the transfer of the Property financed with such Purchase Money Debt
and (ii) solely relates to the Property financed with such Purchase
Money Debt; or
(N) restrictions on cash or other deposits imposed by customers under
contracts entered into in the ordinary course of business.
LIMITATION ON SUBSIDIARIES
If (a) any Subsidiary guarantees the Other Senior Notes or (b) NorskeCanada
or any Restricted Subsidiary transfers or causes to be transferred any Property
to, or organizes, acquires, invests in or otherwise holds an Investment in, any
Restricted Subsidiary that is not a Guarantor having total
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consolidated assets with a book value in excess of $500,000, then such
subsidiary, transferee or acquired or other Restricted Subsidiary will:
(1) execute and deliver to the trustee a supplemental indenture in form
reasonably satisfactory to the trustee under which such Restricted
Subsidiary will unconditionally guarantee all of NorskeCanada's
obligations under the notes and the indenture on the terms set forth in
the indenture; and
(2) deliver to the trustee an opinion of counsel that such supplemental
indenture has been duly authorized, executed and delivered by such
Restricted Subsidiary and constitutes a legal, valid, binding and
enforceable obligation of such Restricted Subsidiary. Thereafter, such
Restricted Subsidiary will be a Guarantor for all purposes of the
indenture.
CHANGE OF CONTROL OFFER
Upon the occurrence of a Change of Control Triggering Event, NorskeCanada
will be obligated to make an offer to purchase (the "Change of Control Offer")
all outstanding notes at a purchase price (the "Change of Control Purchase
Price") equal to 101% of the principal amount, plus accrued and unpaid interest
to the Change of Control Payment Date, in accordance with the procedures set
forth in this covenant.
Within 30 days of the occurrence of a Change of Control Triggering Event,
NorskeCanada will:
(1) cause a notice of the Change of Control Offer to be sent at least once
to the Dow Jones News Service or similar business news service in the
United States; and
(2) send by first-class mail, postage prepaid, to the trustee and to each
holder of the notes, at the address appearing in the register maintained
by the registrar of the notes, a notice stating:
(A) that the Change of Control Offer is being made in accordance with
this covenant and that all notes tendered will be accepted for
payment;
(B) the Change of Control Purchase Price and the purchase date, which
will be a Business Day no earlier than 30 days nor later than
60 days from the date such notice is mailed (the "Change of Control
Payment Date");
(C) that any note not tendered will continue to accrue interest;
(D) that, unless NorskeCanada defaults in the payment of the Change of
Control Purchase Price, any notes accepted for payment in accordance
with the Change of Control Offer will cease to accrue interest after
the Change of Control Payment Date;
(E) that holders accepting the offer to have their notes purchased in
accordance with a Change of Control Offer will be required to
surrender the notes to the Paying Agent at the address specified in
the notice prior to the close of business on the Business Day
preceding the Change of Control Payment Date;
(F) that holders will be entitled to withdraw their acceptance if the
Paying Agent receives, not later than the close of business on the
third Business Day preceding the Change of Control Payment Date, a
telegram, telex, facsimile transmission or letter setting forth the
name of the holder, the principal amount of the notes delivered for
purchase, and a statement that such holder is withdrawing his
election to have such notes purchased;
(G) that holders whose notes are being purchased only in part will be
issued new notes, representing the same indebtedness to the extent
not repurchased, equal in principal amount to the unpurchased portion
of the notes surrendered; PROVIDED that each note purchased and each
such new note issued will be in an original principal amount in
denominations of US$1,000 and integral multiples of US$1,000;
(H) any other procedures that a holder must follow to accept a Change of
Control Offer or effect withdrawal of such acceptance; and
(I) the name and address of the Paying Agent.
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On the Change of Control Payment Date, NorskeCanada will, to the extent
lawful:
(1) accept for payment notes or portions of notes properly tendered under
the Change of Control Offer;
(2) deposit with the Paying Agent money sufficient to pay the Change of
Control Purchase Price of all notes or portions of notes properly
tendered; and
(3) deliver or cause to be delivered to the trustee notes so accepted
together with an Officers' Certificate stating the notes or portions of
notes tendered to NorskeCanada.
The Paying Agent will promptly mail to each holder of notes so accepted
payment in an amount equal to the Change of Control Purchase Price for such
notes, and NorskeCanada will execute and issue, and the trustee will promptly
authenticate and mail to such holder, a new note equal in principal amount to
any unpurchased portion of the notes surrendered; PROVIDED that each such new
note will be issued in an original principal amount in denominations of US$1,000
and integral multiples of US$1,000.
The indenture further provides that:
(1) if NorskeCanada or any Restricted Subsidiary has issued any outstanding:
(A) Debt that is subordinated in right of payment to the notes; or
(B) Preferred Stock,
and NorskeCanada or such Restricted Subsidiary is required to make a
Change of Control Offer or to make a distribution with respect to such
subordinated Debt or Preferred Stock in the event of a Change of Control,
NorskeCanada will not complete any such offer or distribution with
respect to such subordinated Debt or Preferred Stock until such time as
NorskeCanada will have paid the Change of Control Purchase Price in full
to the holders of notes that have accepted NorskeCanada's Change of
Control Offer and will otherwise have completed the Change of Control
Offer made to holders of the notes; and
(2) NorskeCanada will not issue Debt that is subordinated in right of
payment to the notes or Preferred Stock with Change of Control provisions
requiring the payment of such Debt or Preferred Stock prior to the
payment of the notes in the event of a Change of Control Triggering Event
under the indenture.
If a Change of Control Offer is made, there can be no assurance that
NorskeCanada will have available funds sufficient to pay the Change of Control
Purchase Price for all the notes that might be delivered by holders seeking to
accept the Change of Control Offer. If NorskeCanada is required to purchase
outstanding notes under a Change of Control Offer, NorskeCanada expects that it
would seek third party financing to the extent it does not have available funds
to meet its purchase obligations. However, there can be no assurance that
NorskeCanada would be able to obtain such financing.
Restrictions in the indenture on the ability of NorskeCanada and its
Restricted Subsidiaries to incur additional Debt, to grant liens on its
property, to make Restricted Payments and to make Asset Sales may also make more
difficult or discourage an acquisition of NorskeCanada, whether favored or
opposed by the management of NorskeCanada. Completion of any such transaction
may require redemption or repurchase of the notes, and there can be no assurance
that NorskeCanada or the acquiring party will have sufficient financial
resources to effect such redemption or repurchase. Such restrictions and the
restrictions on transactions with Affiliates may make more difficult or
discourage any leveraged buyout of NorskeCanada or any of its Subsidiaries by
the management of NorskeCanada. While such restrictions cover a wide variety of
arrangements which have traditionally been used to effect highly leveraged
transactions, the indenture may not afford the holders of notes protection in
all
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circumstances from the adverse aspects of a highly leveraged transaction,
reorganization, restructuring, merger or similar transaction.
NorskeCanada will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations to the extent such
laws and regulations are applicable in connection with the repurchase of notes
under a Change of Control Offer. To the extent that the provisions of any
securities laws or regulations conflict with the "Change of Control" provisions
of the indenture, NorskeCanada will comply with the applicable securities laws
and regulations and will not be deemed to have breached its obligations under
the "Change of Control" provisions of the indenture by virtue of such
compliance.
MERGER, CONSOLIDATION OR SALE OF ASSETS
NorskeCanada will not and will not cause or permit any of its Restricted
Subsidiaries to consolidate with, amalgamate with, merge with or into, or sell,
assign, transfer, lease, convey or otherwise dispose of all or substantially all
of the assets of NorskeCanada, determined on a consolidated basis for
NorskeCanada and its Restricted Subsidiaries, in one transaction or a series of
related transactions, to any Person unless:
(1) (x) NorskeCanada or such Restricted Subsidiary, as the case may be, will
be the continuing Person, (y) in the case of a Restricted Subsidiary, the
Person is also a Restricted Subsidiary, and one of the Restricted
Subsidiaries is the continuing Person, or (z) the Person formed by such
consolidation or amalgamation, if other than NorskeCanada or such
Restricted Subsidiary, or into which NorskeCanada or such Restricted
Subsidiary, as the case may be, is merged or assigned, transferred,
leased, conveyed or otherwise disposed of will be organized and existing
under the laws of the United States or any State of the United States or
the District of Columbia or the laws of Canada or any province or
territory of Canada and will expressly assume, by a supplemental
indenture, executed and delivered to the trustee, in form satisfactory to
the trustee, all of the obligations of NorskeCanada or such Restricted
Subsidiary, as the case may be, under the indenture, the notes and any
guarantee, as the case may be, and the obligations thereunder will remain
in full force and effect;
(2) immediately before and immediately after giving effect to such
transaction, including, without limitation, giving effect to any Debt and
Acquired Debt incurred or anticipated to be incurred and any Lien granted
in connection with or in respect of the transaction, no Default or Event
of Default will have occurred and be continuing; and
(3) immediately after giving effect to such transaction on a PRO FORMA basis
NorskeCanada or such Person:
(A) could incur at least US$1.00 of additional Debt, other than Permitted
Debt, under the "--LIMITATION ON ADDITIONAL DEBT" provision or
(B) shall have a Consolidated Fixed Charge Coverage Ratio that is greater
than the Consolidated Fixed Charge Coverage Ratio of NorskeCanada
immediately prior to such transaction;
PROVIDED that NorskeCanada or a Guarantor may merge into or amalgamate
with or sell all or substantially all of its assets to NorskeCanada or
another Guarantor, as the case may be, without complying with this
clause (3).
In connection with any consolidation, merger, amalgamation or transfer of
assets contemplated by this provision, NorskeCanada will deliver, or cause to be
delivered, to the trustee, in form and substance reasonably satisfactory to the
trustee, an Officers' Certificate and an opinion of counsel, each stating that
such consolidation, merger, amalgamation or transfer and the supplemental
indenture in
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respect thereto comply with the "Merger, Consolidation or Sale of Assets"
provisions and that all conditions precedent relating to such transaction or
transactions have been complied with.
For purposes of the foregoing, the transfer by lease, assignment, sale or
otherwise, in a single transaction or series of transactions of all or
substantially all of the properties or assets of one or more Restricted
Subsidiaries of NorskeCanada, the Capital Stock of which constitutes all or
substantially all of the properties and assets of NorskeCanada, will be
considered to be the transfer of all or substantially all of the properties and
assets of NorskeCanada.
Upon any consolidation, amalgamation or merger, or any transfer of all or
substantially all of the assets of NorskeCanada or any Restricted Subsidiary in
accordance with the foregoing, the successor person formed by such consolidation
or amalgamation or into which NorskeCanada or a Restricted Subsidiary is merged
or to which such transfer is made will succeed to, and be substituted for, and
may exercise every right and power of, NorskeCanada or such Restricted
Subsidiary under the indenture and the notes with the same effect as if such
successor person had been named as NorskeCanada or such Restricted Subsidiary in
the indenture and the notes, and thereafter the predecessor person will be
relieved of all obligations and covenants under the indenture and the notes.
The foregoing restrictions shall not apply to any transaction involving a
merger of NorskeCanada with an Affiliate solely for the purpose of
reincorporating NorskeCanada in another jurisdiction.
FALL-AWAY EVENT
In the event that (1) the notes are rated Investment Grade and (2) no Event
of Default or Default shall have occurred and be continuing (the occurrence of
the foregoing events, being collectively referred to as the "Fall-away Event"),
certain of the covenants described under "--Covenants" will no longer be
applicable to NorskeCanada and its Restricted Subsidiaries even if the notes
later cease to be rated Investment Grade. The covenants that will be released
upon the Fall-away Event are "--LIMITATION ON ADDITIONAL DEBT," "--LIMITATION ON
RESTRICTED PAYMENTS," "--LIMITATION ON TRANSACTIONS WITH AFFILIATES,"
"--LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED
SUBSIDIARIES," "--LIMITATION ON ASSET SALES," "--Change of Control Offer" and
clause (3) of the first paragraph of the "--Merger, Consolidation or Sale of
Assets" covenant.
After the Fall-away Event, NorskeCanada and its Restricted Subsidiaries will
be subject to the following covenants: "--LIMITATION ON LIENS," "--LIMITATION ON
CAPITAL STOCK OF RESTRICTED SUBSIDIARIES" and "--LIMITATION ON SUBSIDIARIES." As
a result upon the occurrence of the Fall-away Event, the notes will be entitled
to substantially less covenant protection.
GUARANTEES
The Guarantors will fully and unconditionally guarantee all of the
obligations of NorskeCanada under the indenture, on a joint and several basis,
including NorskeCanada's obligation to pay principal, premium, if any, and
interest with respect to the notes. The obligations of each Guarantor will be
subject to all other contingent and fixed liabilities of such Guarantor. Each
Guarantor that makes a payment or distribution under a guarantee will be
entitled to a contribution from each other Guarantor in a proportional amount
based on the net assets of each Guarantor, determined in accordance with GAAP.
As described in "Risk Factors--Risk Relating to the Notes--COURTS COULD
SUBORDINATE OR VOID THE GUARANTEES UNDER FRAUDULENT CONVEYANCE STATUTES," courts
could subordinate or void the guarantees under fraudulent conveyance statutes.
A Guarantor will be released from all of its obligations under its guarantee
if all of its assets or Capital Stock is sold, in each case in a transaction in
compliance with the provisions described under "--Covenants--LIMITATION ON ASSET
SALES" above, or the Guarantor merges or amalgamates with or into or
consolidates with, or transfers all or substantially all of its assets in
compliance with the provisions
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described under "--Merger, Consolidation or Sale of Assets" above, or the
Guarantor is designated an Unrestricted Subsidiary in compliance with the other
terms of the indenture, and such Guarantor has delivered to the trustee an
Officers' Certificate and an opinion of counsel, each stating that all
conditions precedent herein provided for relating to such transaction have been
complied with.
EVENTS OF DEFAULT
The following events are defined in the indenture as "Events of Default":
(1) default in payment of any principal of, or premium, if any, on the notes
when due, whether at maturity, upon redemption or otherwise;
(2) default in the payment of any interest on any note when due, which
default continues for 30 days or more;
(3) default by NorskeCanada or any Restricted Subsidiary in the observance
or performance of any other covenant in the notes or the indenture for
60 days after written notice from the trustee or the holders of not less
than 25% in aggregate principal amount of the notes then outstanding,
except in the case of a default with respect to the
"--Covenants--LIMITATION ON ASSET SALES," "--Change of Control Offer" or
"--Merger, Consolidation or Sale of Assets" covenants, which will
constitute an Event of Default with such notice requirement but without
such passage of time requirement;
(4) failure to pay at final maturity, giving effect to any applicable grace
periods and any extensions thereof, the principal amount of any Debt of
NorskeCanada or any Restricted Subsidiary of NorskeCanada, or the
acceleration of the final stated maturity of such Debt, if, in either
case, the aggregate principal amount of such Debt, together with the
principal amount of any other Debt not paid at final maturity or which
has been accelerated, aggregates $25 million or more at any time and such
Debt has not been discharged in full or such acceleration has not been
rescinded or annulled within 30 days of such final maturity or
acceleration;
(5) any final judgment or judgments which can no longer be appealed for the
payment of money in excess of $25 million, in excess of amounts covered
by insurance and as to which the insurer has acknowledged coverage, is
rendered against NorskeCanada or any Restricted Subsidiary, and is not
discharged for any period of 60 consecutive days during which a stay of
enforcement is not in effect;
(6) certain events involving bankruptcy, insolvency or reorganization of
NorskeCanada or any Restricted Subsidiary that would be considered a
"significant subsidiary" of NorskeCanada pursuant to Rule 1.02(w) of
Regulation S-X under the Securities Act of 1933, as amended; and
(7) any of the guarantees of a Material Subsidiary ceases to be in full
force and effect or any of the Guarantees of a Material Subsidiary is
declared to be null and void and unenforceable or any of the guarantees
of a Material Subsidiary is found to be invalid or any of the Guarantors
denies its liability under its guarantee, other than by reason of release
of a Guarantor in accordance with the terms of the indenture.
The indenture provides that the trustee may withhold notice to the holders
of the notes of any default if the trustee considers it to be in the best
interest of the holders of the notes to do so, PROVIDED that the trustee may not
withhold notice of a default in payment of principal or premium, if any, or
interest on the notes or a default in the observance or performance of the
"--Merger, Consolidation or Sale of Assets" covenant.
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The indenture provides that if an Event of Default, other than an Event of
Default described in clause (6) of the first paragraph of this section, will
have occurred and be continuing, and if the trustee or the holders of not less
than 25% in aggregate principal amount of the notes then outstanding by written
notice to NorskeCanada and the trustee so declares, the entire principal amount
of all the notes then outstanding plus accrued interest to the date of
acceleration will become immediately due and payable. If an Event of Default as
described in clause (6) of the first paragraph of this section occurs, the
principal, premium and interest amount with respect to all of the notes will be
due and payable immediately without any declaration or other act on the part of
the trustee or the holders of the notes. After any such acceleration but before
a judgment or decree based on acceleration is obtained by the trustee, the
holders of a majority in aggregate principal amount of outstanding notes may,
under certain circumstances, rescind and annul such acceleration if:
(1) all Events of Default, other than nonpayment of principal, premium, if
any, or interest that has become due solely because of the acceleration,
have been cured or waived as provided in the indenture;
(2) to the extent the payment of such interest is lawful, interest on
overdue installments of interest and overdue principal, which has become
due otherwise than by such declaration of acceleration, has been paid;
(3) NorskeCanada has paid the trustee its reasonable compensation and
reimbursed the trustee for its expenses, disbursements and advances; and
(4) in the event of the cure or waiver of an Event of Default of the type
described in clause (6) of the first paragraph of this section, the
trustee will have received an Officers' Certificate and an opinion of
counsel that such Event of Default has been cured or waived.
No such rescission will affect any subsequent Default or impair any right
consequent thereto.
The holders of a majority in principal amount of the notes then outstanding
will have the right to waive any existing default or compliance with any
provision of the indenture or the notes and to direct the time, method and place
of conducting any proceeding for any remedy available to the trustee, subject to
limitations provided for in the indenture and under the Trust Indenture Act of
1939, or TIA.
No holder of any note will have any right to institute any proceeding with
respect to the indenture or for any remedy thereunder, unless such holder will
have previously given to the trustee written notice of a continuing Event of
Default and unless the holders of at least 25% in aggregate principal amount of
the outstanding notes will have made written request and offered reasonable
indemnity to the trustee to institute such proceeding as trustee, and unless the
trustee will not have received from the holders of a majority in aggregate
principal amount of the outstanding notes a direction inconsistent with such
request and will have failed to institute such proceeding within 60 days.
Notwithstanding the foregoing, such limitations do not apply to a suit
instituted on such note on or after the respective due dates expressed in such
note.
DEFEASANCE AND COVENANT DEFEASANCE
The indenture provides that NorskeCanada may elect either
(1) to defease and be discharged from any and all of its and any Guarantor's
obligations with respect to the notes, except for the obligations to
register the transfer or exchange of such notes, to replace temporary or
mutilated, destroyed, lost or stolen notes, to maintain an office or
agency in respect of the notes and to hold monies for payment in trust
("defeasance"), or
(2) to be released from its obligations with respect to the notes under
certain covenants contained in the indenture ("covenant defeasance"),
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upon the deposit with the trustee or other qualifying trustee, in trust for such
purpose, of money in U.S. dollars, U.S. Government Securities, or a combination
thereof, in such amounts as will be sufficient, in the opinion of a nationally
recognized firm of independent public accountants, to pay the principal of,
premium, if any, and interest on the notes, on the scheduled due dates or on a
selected date of redemption in accordance with the terms of the indenture.
Such a trust may only be established if, among other things:
(1) in the case of defeasance, NorskeCanada will have delivered to the
trustee an opinion of counsel stating that:
(A) NorskeCanada has received from, or there has been published by, the
Internal Revenue Service or Canada Customs and Revenue Agency, a
ruling, or
(B) the applicable U.S. Federal or Canadian income tax law provides or
since March 23, 2004 there has been a change in any applicable
U.S. Federal or Canadian income tax law,
in either case to the effect that, and such opinion of counsel will
confirm that, holders of the notes or Persons in their positions will not
recognize income, gain or loss for purposes of both U.S. Federal and
Canadian income tax purposes as a result of such defeasance and will be
subject to U.S. Federal and Canadian income tax on the same amounts and
in the same manner and at the same times, as would have been the case if
defeasance had not occurred;
(2) in the case of covenant defeasance, NorskeCanada will have delivered to
the trustee an opinion of counsel reasonably acceptable to the trustee to
the effect that the holders of the notes will not recognize income, gain
or loss for U.S. Federal and Canadian income tax purposes as a result of
such covenant defeasance and will be subject to U.S. Federal and Canadian
income tax on the same amounts, and in the same manner and at the same
times, as would have been the case if covenant defeasance had not
occurred;
(3) no Default or Event of Default will have occurred and be continuing on
the date of such deposit or insofar as Events of Default from bankruptcy,
insolvency or reorganization events are concerned, at any time in the
period ending on the 91st day after the date of deposit;
(4) such defeasance or covenant defeasance will not result in a breach or
violation of, or constitute a default under the indenture or any other
material agreement or instrument to which NorskeCanada or any of its
Subsidiaries is a party or by which NorskeCanada or any or its
Subsidiaries is bound;
(5) NorskeCanada will have delivered to the trustee an Officers' Certificate
stating that the deposit was not made by NorskeCanada with the intent of
preferring the holders of the notes over any other creditors of
NorskeCanada or with the intent of defeating, hindering, delaying or
defrauding any other creditors of NorskeCanada or others;
(6) NorskeCanada will have delivered to the trustee an Officers' Certificate
and an opinion of counsel, each stating that all conditions precedent
provided for or relating to the defeasance or the covenant defeasance
have been complied with;
(7) NorskeCanada will have delivered to the trustee an opinion of counsel
substantially to the effect that after the passage of 123 days following
the deposit (except, with respect to any trust funds for the account of
any holder who may be deemed to be an "insider" for purposes of the
United States Bankruptcy Code, after one year following the deposit), the
trust funds will not be subject to the effect of Section 547 of the
United States Bankruptcy Code or Section 15 of the New York Debtor and
Creditor Law in a case commenced by or against NorskeCanada under such
statute; and
(8) other customary conditions precedent are satisfied.
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SATISFACTION AND DISCHARGE
The indenture will be discharged and will cease to be of further effect,
except for the obligations to register the transfer or exchange of such notes
and to pay Additional Amounts, if any, as to all outstanding notes when:
(1) either
(A) all the notes previously authenticated and delivered, except lost,
stolen or destroyed notes which have been replaced or paid and notes
for whose payment money had theretofore been deposited in trust or
segregated and held in trust by NorskeCanada and thereafter repaid to
NorskeCanada or discharged from such trust, have been delivered to
the trustee for cancellation, or
(B) all notes not theretofore delivered to the trustee for cancellation
have become due and payable or are to be called for redemption within
one year and NorskeCanada has deposited or caused to be deposited
with the trustee funds in an amount sufficient to pay and discharge
the entire Debt on the notes not theretofore delivered to the trustee
for cancellation, for principal of, premium, if any, and interest on
the notes to the date of maturity or redemption together with
irrevocable instructions from NorskeCanada directing the trustee to
apply such funds to the payment thereof at maturity or redemption, as
the case may be;
(2) NorskeCanada has paid all other sums payable under the indenture by
NorskeCanada; and
(3) NorskeCanada has delivered to the trustee an Officers' Certificate and
an opinion of counsel stating that all conditions precedent under the
indenture relating to the satisfaction and discharge of the indenture
have been complied with.
MODIFICATION OF INDENTURE
From time to time, NorskeCanada, any Guarantors and the trustee may, without
the consent of holders of the notes, amend, waive or supplement the indenture
for specified purposes, including:
(1) providing for uncertificated notes in addition to or in place of
certificated notes;
(2) curing any ambiguity, defect or inconsistency;
(3) to provide for the assumption of NorskeCanada's obligations to holders
in the event of a merger, amalgamation or consolidation in accordance
with the terms of the indenture;
(4) making any other change that does not, in reliance on an opinion of
counsel, adversely affect the rights of any holder in any material
respect;
(5) to add a guarantor;
(6) to provide for the issuance of exchange notes in a manner that does not
adversely affect the rights of any holder;
(7) to comply with the requirements of the SEC to effect or maintain the
qualification of the indenture under the TIA; or
(8) to appoint a successor trustee in the event that the trustee is
disqualified from acting or ineligible to act as such because of a
conflict of interest; PROVIDED THAT the successor trustee is otherwise
qualified and eligible to act as such under the indenture.
The indenture contains provisions permitting NorskeCanada, any Guarantors
and the trustee, with the consent of holders of at least a majority in principal
amount of the outstanding notes, to modify,
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waive or supplement the indenture, except that no such modification will,
without the consent of each holder affected thereby:
(1) reduce the amount of notes whose holders must consent to an amendment,
supplement, or waiver to the indenture;
(2) reduce the rate of, change the method of calculation of or change the
time for payment of interest, including defaulted interest, on any note;
(3) reduce the principal of or premium on or change the stated maturity of
any note or change the date on which any notes may be subject to
redemption or repurchase or reduce the redemption or repurchase price for
any notes;
(4) make any note payable in money other than that stated in the note or
change the place of payment from New York, New York;
(5) waive a default on the payment of the principal of, interest on, or
redemption payment with respect to any note, except a rescission of
acceleration of the notes in accordance with the terms of the indenture
or a waiver of the payment default that resulted from such acceleration
in accordance with the terms of the indenture;
(6) make any change in provisions of the indenture protecting the right of
each holder of notes to receive payment of principal of and interest on
such note on or after the due date thereof or to bring suit to enforce
such payment, or permitting holders of a majority in principal amount of
notes to waive Defaults or Events of Default;
(7) amend, change or modify in any material respect the obligation of
NorskeCanada to make and complete a Change of Control Offer in the event
of a Change of Control Triggering Event or make and complete an Excess
Proceeds Offer with respect to any Asset Sale that has been completed or
modify any of the provisions or definitions with respect thereto;
(8) modify or change any provision of the indenture or the related
definitions affecting the ranking of the notes or any guarantee in a
manner which adversely affects the holders of notes; or
(9) release any Guarantor from any of its obligations under its guarantee or
the indenture otherwise than in accordance with the terms of the
indenture.
REPORTS TO HOLDERS
The indenture provides that whether or not required by the rules and
regulations of the SEC, so long as the notes are outstanding, NorskeCanada will
furnish to the trustee and, upon request, to the holders of the notes all annual
and quarterly financial information that would be required to be contained in a
filing with the SEC on Forms 20-F, 40-F or 6-K, as applicable, if NorskeCanada
were required to file such Forms, including a "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and, with respect to
the annual financial information, a report on the audit of the financial
statements by NorskeCanada's independent accountants; PROVIDED that:
(1) such quarterly financial information will be furnished within 60 days
following the end of each quarter of NorskeCanada; and
(2) such annual financial information will be furnished within 180 days
following the end of the fiscal year of NorskeCanada.
In addition, whether or not required by the rules and regulations of the SEC,
NorskeCanada will file with or furnish to the SEC a copy of all such information
and reports for public availability, unless the SEC will not accept such filing
or furnishing. In addition, NorskeCanada will furnish to the holders of
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the notes and to prospective investors, upon request, any information required
to be delivered under Rule 144A(d)(4) under the Securities Act so long as the
notes are not freely transferable under the Securities Act. NorskeCanada will
also comply with the other provisions of TIA Section314(a).
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND SHAREHOLDERS
No past, present or future director, officer, employee, partner,
incorporator or shareholder of NorskeCanada or any corporate successor thereto,
as such, will have any liability for any obligations of NorskeCanada under the
notes, the guarantees of any Guarantor or the indenture or for any claim based
on, in respect of, or by reason of, such obligations or their creation. Each
holder of notes by accepting a note waives and releases all such liability. The
waiver and release are part of the consideration for issuance of the notes. Such
waiver may not be effective to waive liabilities under the federal securities
laws, and it is the view of the SEC that such a waiver is against public policy.
COMPLIANCE CERTIFICATE
NorskeCanada will deliver to the trustee on or before 120 days after the end
of NorskeCanada's fiscal year and on or before 60 days after the end of each the
first, second and third fiscal quarters in each year an Officers' Certificate
stating whether or not such officers know of any Default or Event of Default
that has occurred. If they do, the certificate will describe the Default or
Event of Default, its status and the intended method of cure, if any.
THE TRUSTEE
The trustee under the indenture will be the registrar and paying agent with
regard to the notes. The indenture provides that, except during the continuance
of an Event of Default, the trustee will perform only such duties as are
specifically set forth in the indenture. During the existence of an Event of
Default, the trustee will exercise such rights and powers vested in it under the
indenture and use the same degree of care and skill in its exercise as a prudent
person would exercise under the circumstances in the conduct of such person's
own affairs.
The address and telephone number of the trustee is Wells Fargo Bank,
National Association, 213 Court Street, Suite 703, Middletown, CT 06457,
(860) 704-6200.
TRANSFER AND EXCHANGE
Holders of the notes may transfer or exchange notes in accordance with the
indenture. The registrar under the indenture may require a holder, among other
things, to furnish appropriate endorsements and transfer documents, and to pay
any taxes and fees required by law or permitted by the indenture. The registrar
is not required to transfer or exchange any note selected for redemption and,
further, is not required to transfer or exchange any note for a period of
15 days before selection of the notes to be redeemed.
The notes will be issued in a transaction exempt from registration under the
Securities Act and will be subject to the restrictions on transfer described in
the indenture.
The registered holder of a note may be treated as the owner of it for all
purposes.
GOVERNING LAW
The indenture provides that the indenture and the notes will be governed by
and construed in accordance with the laws of the State of New York.
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ENFORCEABILITY OF JUDGMENTS
Since substantially all of the assets of NorskeCanada are outside the
United States, any judgment obtained in the United States against NorskeCanada
or the Guarantors, including judgments with respect to the payment of principal,
premium, if any, and interest or other amounts payable on the notes, may not be
collectible within the United States.
NorskeCanada has been informed by its Canadian counsel, Lawson Lundell, that
the laws of the Province of British Columbia and the federal laws of Canada
applicable in such Province, permit an action to be brought in a court of
competent jurisdiction in the Province of British Columbia on any final and
conclusive civil judgment IN PERSONAM for a sum certain of a court of the State
of New York or a federal court sitting in the State of New York ("New York
Courts") that is not impeachable or void or voidable under the internal laws of
the State of New York. Subject to the following constraints, a British Columbia
court may enforce such judgment:
(1) The British Columbia courts may enforce such a judgment only if the
foreign court had jurisdiction over the claim against the judgment
debtor, as determined by the private international law of British
Columbia.
(2) The British Columbia courts may enforce such a judgment if it was not
obtained in breach of the principles of natural justice or results in a
substantial injustice such that a court in British Columbia would
consider its enforcement unfair.
(3) The British Columbia courts may not enforce a judgment with a manifest
error on its face.
(4) In most circumstances, the British Columbia courts may not enforce,
directly or indirectly, a foreign revenue or tax law, a foreign law
effecting expropriation or confiscation, or a foreign penal law (civil or
criminal).
(5) The British Columbia courts may not enforce a judgment obtained by
fraud.
(6) The British Columbia courts may refuse to enforce a foreign judgment on
the grounds that its enforcement in British Columbia would be offensive
to the public policy of British Columbia or Canada.
(7) Enforcement of a foreign judgment in British Columbia may be prohibited
by an order of the Attorney-General of Canada under the FOREIGN
EXTRATERRITORIAL MEASURES ACT or an order of the Competition Tribunal
under the COMPETITION ACT.
(8) An action to enforce a foreign judgment must be brought within the time
limited by the Limitations Act (British Columbia) (presently six years,
but subject to amendment by the Legislature at any time).
NorskeCanada has been advised by counsel that they do not know of any
reasons under the present laws of the Province of British Columbia and the
federal laws of Canada applicable in such Province for avoiding recognition of
said judgments of New York Courts with respect to the indenture or the notes
based upon public policy.
CONSENT TO JURISDICTION AND SERVICE
The indenture provides that NorskeCanada and any Guarantors will appoint CT
Corporation System as their respective agent for service of process in any suit,
action or proceeding with respect to the indenture or the notes and for actions
brought under U.S. federal or state securities laws brought in any U.S. federal
or state court located in The City of New York and will submit to the
jurisdiction of such courts.
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CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
indenture. Reference is made to the indenture for the full definition of all
such terms as well as any other capitalized terms used herein for which no
definition is provided.
"ACCOUNTS RECEIVABLE" of a Person means all of the accounts receivable of
such Person, whether now existing or existing in the future.
"ACQUIRED DEBT" means Debt of a Person or any of its Subsidiaries existing
at the time such Person becomes a Restricted Subsidiary or is merged or
amalgamated with or into or consolidated with NorskeCanada or a Restricted
Subsidiary or which is assumed in connection with the acquisition of assets from
such Person and, in each case, not incurred by such Person in connection with,
or in anticipation or contemplation of, such Person becoming a Restricted
Subsidiary or such merger, amalgamation, consolidation or acquisition.
"AFFILIATE" means, with respect to any specific Person, any other Person,
including, without limitation, such Person's issue, siblings and spouse, that
directly or indirectly through one or more intermediaries controls, or is
controlled by, or is under common control with, such specified Person; PROVIDED
that for purposes of the indenture, the term "Affiliate" will not include Norske
Skogindustrier ASA or its Affiliates. For the purposes of this definition,
"control," including, with correlative meanings, the terms "controlling,"
"controlled by," and "under common control with," as used with respect to any
Person, means the possession, directly or indirectly, of the power to direct or
cause the direction of the management or policies of such Person, whether
through the ownership of voting securities, by agreement or otherwise; PROVIDED
that, for purposes of the covenant described under "Covenants--LIMITATION ON
TRANSACTIONS WITH AFFILIATES," beneficial ownership of at least 10% of the
voting securities of a Person, either directly or indirectly, will be deemed to
be control.
"ASSET ACQUISITION" means:
(1) an Investment by NorskeCanada or any Restricted Subsidiary in any other
Person pursuant to which such Person becomes a Restricted Subsidiary, or
will be merged or amalgamated with or into NorskeCanada or any Restricted
Subsidiary; or
(2) the acquisition by NorskeCanada or any Restricted Subsidiary of the
assets of any Person, other than a Restricted Subsidiary, which
constitute all or substantially all of the assets of such Person or
comprise any division or line of business of such Person or any other
properties or assets of such Person other than in the ordinary course of
business.
"ASSET SALE" means any direct or indirect sale, issuance, conveyance,
assignment, transfer, lease, other than operating leases entered into in the
ordinary course of business, or other disposition, including pursuant to any
Sale and Lease-Back Transaction, other than to NorskeCanada or any of its
Restricted Subsidiaries, in any single transaction or series of related
transactions of:
(1) any Capital Stock of any Restricted Subsidiary; or
(2) any other property or assets, including any interest therein, of
NorskeCanada or of any Restricted Subsidiary outside of the ordinary
course of business;
PROVIDED that Asset Sales will not include:
(A) a transaction or series of related transactions for which NorskeCanada or
its Restricted Subsidiaries receive aggregate consideration of less than
$5,000,000, PROVIDED that NorskeCanada or such Restricted Subsidiary
received consideration equal to the Fair Market Value of any such property
or assets so sold, conveyed, assigned, transferred, leased or otherwise
disposed of;
(B) the sale, lease, conveyance, disposition or other transfer of all or
substantially all of the assets of NorskeCanada as permitted under
"--Merger, Consolidation or Sale of Assets";
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(C) sales, transfers or other dispositions of property or equipment that has
become worn out, obsolete or damaged or otherwise unsuitable for use in
connection with the business of NorskeCanada or any Restricted Subsidiary,
as the case may be;
(D) the sale of inventory in the ordinary course of business;
(E) sales, transfers or other dispositions of assets of NorskeCanada or its
Restricted Subsidiaries, provided that the aggregate Fair Market Value of
all such assets shall not exceed $5 million;
(F) the sale of accounts receivable without recourse to NorskeCanada or any
Restricted Subsidiary at no more than customary discounts in the market for
such sales of receivables of similar quality;
(G) any Restricted Payment made in compliance with the "LIMITATION ON RESTRICTED
PAYMENTS" covenant;
(H) the surrender or waiver of contract rights or the settlement, release or
surrender of contract, tort or other claims of any kind;
(I) the granting of Liens not prohibited by the indenture; and
(J) the liquidation of Cash Equivalents in the ordinary course of business.
"ASSET SALE PROCEEDS" means, with respect to any Asset Sale:
(1) cash or Cash Equivalents received by NorskeCanada or any Restricted
Subsidiary from such Asset Sale, after:
(A) provision for all income or other taxes measured by or resulting from
such Asset Sale;
(B) payment of all brokerage commissions, underwriting and other fees and
expenses, including, without limitation, legal, accounting and
appraisal fees, related to such Asset Sale;
(C) provision for minority interest holders in any Restricted Subsidiary
as a result of such Asset Sale; and
(D) deduction of appropriate amounts to be provided by NorskeCanada or a
Restricted Subsidiary as a reserve, in accordance with GAAP, against
any liabilities associated with the assets sold or disposed of in
such Asset Sale and retained by Norske Skog Canada or a Restricted
Subsidiary after such Asset Sale, including, without limitation,
pension and other post-employment benefit liabilities and liabilities
related to environmental matters or against any indemnification
obligations associated with the assets sold or disposed of in such
Asset Sale; and
(2) promissory notes and other non-cash consideration received by
NorskeCanada or any Restricted Subsidiary from such Asset Sale or other
disposition upon the liquidation or conversion of such notes or non-cash
consideration into cash.
"ATTRIBUTABLE DEBT" in respect of a Sale and Lease-Back Transaction means,
as at the time of determination, the present value, discounted according to GAAP
at the cost of indebtedness implied in the Sale and Lease-Back Transaction, of
the total obligations of the lessee for minimum rental payments during the
remaining term of the lease included in such Sale and Lease-Back Transaction,
including any period for which such lease has been extended.
"AVAILABLE ASSET SALE PROCEEDS" means, with respect to any Asset Sale, the
aggregate Asset Sale Proceeds from such Asset Sale that have not been applied in
accordance with clauses (3)(A) or (3)(B), and which have not yet been the basis
for an Excess Proceeds Offer in accordance with clause (3), in each case, of the
first paragraph of "--Covenants--LIMITATION ON ASSET SALES."
"CAPITAL CONTRIBUTION" means any cash contribution to the equity of
NorskeCanada from a direct or indirect parent of NorskeCanada or from another
shareholder for which no consideration other than the issuance of Capital Stock,
other than Disqualified Capital Stock, is given.
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"CAPITAL STOCK" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated and whether
or not voting) of corporate stock, shares, partnership interests or any other
participation, right or other interest in the nature of an equity interest in
such Person including, without limitation, Common Stock and Preferred Stock of
such Person, or any option, warrant or other security convertible into any of
the foregoing.
"CAPITALIZED LEASE OBLIGATIONS" means, with respect to any Person, Debt
represented by obligations under a lease that is required to be capitalized for
financial reporting purposes in accordance with GAAP, and the amount of such
Debt will be the capitalized amount of such obligations determined in accordance
with GAAP.
"CASH EQUIVALENTS" means:
(1) Canadian or U.S. dollars;
(2) marketable direct obligations issued by, or unconditionally guaranteed
by, the federal government of the United States of America or Canada,
respectively, or issued by any agency thereof and backed by the full
faith and credit of the federal government of the United States of
America or Canada, respectively, in each case maturing within one year
from the date of acquisition thereof;
(3) marketable direct obligations issued by any state of the United States
of America or any province of Canada or any political subdivision of any
such state or province, as the case may be, or any public instrumentality
thereof maturing within one year from the date of acquisition thereof
and, at the time of acquisition, having one of the two highest ratings
obtainable from either Standard & Poor's Ratings Group ("S&P") or Moody's
Investors Service, Inc. ("Moody's"); PROVIDED that, in the event that any
such obligation is not rated by S&P or Moody's, such obligation will have
the highest rating from Dominion Bond Rating Service Limited ("DBRS");
(4) commercial paper maturing no more than one year from the date of
creation thereof and, at the time of acquisition, having a rating of at
least R-1 (low) from DBRS or A-2 from S&P or P-2 from Moody's;
(5) overnight deposits, certificates of deposit or bankers' acceptances
maturing within one year from the date of acquisition thereof issued by
any bank organized under the laws of the United States of America or
Canada or any state or province, as the case may be, thereof or the
District of Columbia or any U.S. or Canadian branch of a foreign bank
having at the date of acquisition thereof combined capital and surplus of
not less than US$250,000,000;
(6) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clause (2) of this
definition entered into with any bank meeting the qualifications
specified in clause (5) of this definition; and
(7) investments in money market funds which invest substantially all their
assets in securities of the types described in clauses (1) through (6) of
this definition.
A "CHANGE OF CONTROL" of NorskeCanada will be deemed to have occurred at
such time as:
(1) any Person or group of related Persons for purposes of Section 13(d) of
the Exchange Act ("Group"), becomes the beneficial owner, as defined
under Rule 13d-3 or any successor rule or regulation promulgated under
the Exchange Act, directly or indirectly, of 50% or more of the total
voting power of the Common Stock of NorskeCanada;
(2) there will be consummated any consolidation or merger or amalgamation of
NorskeCanada in which NorskeCanada is not the continuing or surviving
corporation or pursuant to which the Common Stock of NorskeCanada would
be converted into cash, securities or other property, other than a merger
or consolidation or amalgamation of NorskeCanada in which the holders
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of the Common Stock of NorskeCanada outstanding immediately prior to the
consolidation or merger or amalgamation hold, directly or indirectly, at
least a majority of the Common Stock of the surviving corporation
immediately after such consolidation or merger or amalgamation; or
(3) the first day on which a majority of the members of the Board of
Directors of NorskeCanada are not Continuing Directors.
"CHANGE OF CONTROL TRIGGERING EVENT" means the occurrence of both a Change
of Control and a Rating Decline.
"COMMODITY AGREEMENT" means any commodity forward contract, commodity
futures contract, commodity swap, commodity option or other similar agreement or
arrangement entered into by NorskeCanada or any Restricted Subsidiary.
"COMMON STOCK" of any Person means all Capital Stock of that Person that is
generally entitled to:
(1) vote in the election of directors of that Person; or
(2) if that Person is not a corporation, vote or otherwise participate in
the selection of the governing body, partners, managers or others that
will control the management and policies of that Person.
"CONSOLIDATED FIXED CHARGE COVERAGE RATIO" means, at any date of
determination, with respect to any Person, the ratio of EBITDA of such Person to
Consolidated Fixed Charges of such Person for the Four-Quarter Period.
In addition to and without limitation of the foregoing, for purposes of this
definition, "EBITDA" and "Consolidated Fixed Charges" will be calculated after
giving effect on a pro forma basis to:
(1) the incurrence or repayment of any Debt of such Person or any of its
Restricted Subsidiaries (and the application of the proceeds thereof)
giving rise to the need to make such calculation;
(2) any incurrence or repayment of other Debt (and the application of the
proceeds thereof), occurring on or after the first day of the
Four-Quarter Period and on or prior to the date of determination, as if
such incurrence or repayment, as the case may be (and the application of
the proceeds thereof), occurred on the first day of such Four-Quarter
Period; and
(3) any Asset Sales or Asset Acquisitions (including, without limitation,
any Asset Acquisition giving rise to the need to make such calculation as
a result of NorskeCanada or a Restricted Subsidiary (including any Person
who becomes a Restricted Subsidiary as a result of the Asset Acquisition)
incurring, assuming or otherwise being liable for Acquired Debt and also
including any increase or decrease, as the case may be, in EBITDA
(including any pro forma cost reductions calculated on a basis consistent
with Regulation S-X under the Securities Act of 1933, as amended)
directly attributable to the assets which are the subject of the Asset
Sale or Asset Acquisition during the Four-Quarter Period) occurring on or
after the first day of the Four-Quarter Period and on or prior to the
date of determination, as if such Asset Sale or Asset Acquisition
(including the incurrence, assumption or liability for any such Acquired
Debt) occurred on the first day of such Four-Quarter Period.
"CONSOLIDATED FIXED CHARGES" means, with respect to any Person, for any
period, the sum, without duplication, of:
(1) Consolidated Interest Expense, plus
(2) the amount of all dividend payments (to any Person other than
NorskeCanada or a Restricted Subsidiary) on any series of Disqualified
Capital Stock of that Person (other than dividends paid in Capital Stock
(other than Disqualified Capital Stock)) paid, accrued or scheduled to be
paid or accrued during such period, plus
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(3) the amount of all cash dividend payments (to any Person other than
NorskeCanada or a Restricted Subsidiary) on any series of Preferred Stock
(other than Disqualified Capital Stock) of that Person paid during that
period, in each case, on a consolidated basis in accordance with GAAP.
"CONSOLIDATED INTEREST EXPENSE" means, with respect to any Person, for any
period, the sum, without duplication, of:
(1) the aggregate amount of interest charges (excluding (a) fees and
expenses incurred in connection with any Debt incurred pursuant to the
"Limitation on Additional Debt" covenant, including, but not limited to,
any Permitted Debt, any Debt outstanding on the Issue Date and the notes;
(b) the amortization of any deferred gains or losses in respect of Debt
denominated in foreign currency as a result of fluctuations in exchange
rates and (c) any premium paid or fees and expenses incurred, in
connection with the redemption, repurchase or retirement of any Debt of
that Person or its Restricted Subsidiaries prior to the stated maturity
thereof), whether expensed or capitalized, incurred or accrued by that
Person and its Restricted Subsidiaries, determined on a consolidated
basis in accordance with GAAP for such period (including non-cash
interest payments); plus
(2) to the extent not included in clause (1) of this definition, an amount
equal to the sum of:
(A) imputed interest included in Capitalized Lease Obligations;
(B) the net costs associated with Interest Rate Agreements, Currency
Agreements and other hedging obligations;
(C) the interest portion of any deferred payment obligations;
(D) amortization of discount or premium on Debt, if any;
(E) all capitalized interest and all accrued interest;
(F) all other non-cash interest expense;
(G) all interest incurred or paid under any guarantee of Debt (including
a guarantee of principal, interest or any combination thereof) of any
Person; and
(H) the amount of all payments charged to shareholders equity on any
"compound financial instrument" (as described under GAAP) paid,
accrued or scheduled to be paid or accrued during such period.
For purposes of calculating Consolidated Interest Expense on a pro forma basis:
(1) interest on Debt bearing a floating rate of interest will be calculated
using the interest rate in effect at the time of determination, taking
into account on a pro forma basis any Interest Rate Agreement applicable
to such Debt if such Interest Rate Agreement has a remaining term at the
date of determination of at least 12 months; and
(2) if Debt was incurred under a revolving credit facility, the interest
expense on such Debt will be calculated based upon the average daily
balance of such Debt during the applicable period.
"CONSOLIDATED LEVERAGE RATIO" means, at any date of determination, with
respect to any Person, the ratio of the total Debt of such Person at such date
of determination to the EBITDA of such Person for the Four-Quarter Period.
In addition to and without limitation of the foregoing, for purposes of this
definition, "EBITDA" and "total Debt" will be calculated after giving effect on
a pro forma basis to:
(1) the incurrence or repayment of any Debt of such Person or any of its
Restricted Subsidiaries (and the application of the proceeds thereof)
giving rise to the need to make such calculation;
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(2) any incurrence or repayment of other Debt (and the application of the
proceeds thereof), occurring on or after the first day of the
Four-Quarter Period and on or prior to the date of determination, as if
such incurrence or repayment, as the case may be (and the application of
the proceeds thereof), occurred on the first day of such Four-Quarter
Period; and
(3) any Asset Sales or Asset Acquisitions (including, without limitation,
any Asset Acquisition giving rise to the need to make such calculation as
a result of NorskeCanada or a Restricted Subsidiary (including any Person
who becomes a Restricted Subsidiary as a result of the Asset Acquisition)
incurring, assuming or otherwise being liable for Acquired Debt and also
including any increase or decrease, as the case may be, in EBITDA
(including any pro forma cost reductions calculated on a basis consistent
with Regulation S-X under the Securities Act of 1933, as amended)
directly attributable to the assets which are the subject of the Asset
Sale or Asset Acquisition during the Four-Quarter Period) occurring on or
after the first day of the Four-Quarter Period and on or prior to the
date of determination, as if such Asset Sale or Asset Acquisition
(including the incurrence, assumption or liability for any such Acquired
Debt) occurred on the first day of such Four-Quarter Period.
"CONSOLIDATED NET INCOME" means, with respect to any Person, for any period,
the aggregate of the Net Income of such Person and its Restricted Subsidiaries
for that period, on a consolidated basis, determined in accordance with GAAP;
PROVIDED that, to the extent included in calculating Net Income of such Person:
(1) the Net Income of any other Person that is not a Restricted Subsidiary
of the Person in question will be excluded, except to the extent of the
amount of cash dividends or distributions actually received by such
Person or a Restricted Subsidiary of such Person;
(2) the Net Income (but not loss) of any Restricted Subsidiary of the Person
in question that is subject to any restriction or limitation on the
payment of dividends or the making of other distributions (other than
pursuant to the notes or the indenture or pursuant to a restriction or
limitation of the type described in clause (3)(B) of the "--LIMITATION ON
DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED
SUBSIDIARIES" covenant) will be excluded to the extent of such
restriction or limitation;
(3) (a) the Net Income of any Person acquired in a "pooling of interests"
transaction for any period prior to the date of such acquisition will be
excluded and (b) any net after-tax gain (but not loss) resulting from an
Asset Sale by the Person in question or any of its Restricted
Subsidiaries other than in the ordinary course of business will be
excluded;
(4) after-tax items classified as extraordinary or unusual gains or losses
and any foreign exchange gains and losses will be excluded;
(5) any restoration to income or any contingency reserve of an
extraordinary, non-recurring or unusual nature will be excluded; and
(6) in the case of a successor to such Person by consolidation or merger or
amalgamation or as a transferee of such Person's assets, any earnings of
the successor corporation prior to that consolidation, merger or
amalgamation or transfer of assets will be excluded if and to the extent
such corporation was not subject to the indenture governing the notes
offered hereby.
"CONTINUING DIRECTOR" means with respect to NorskeCanada, as of any date of
determination, any member of the board of directors of NorskeCanada:
(A) who was a member of the board of directors of NorskeCanada on the
Issue Date; or
(B) whose appointment or election was approved by the affirmative vote of
a majority of the Continuing Directors who were members of the board
of directors of NorskeCanada at the time of that director's
nomination or election.
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"CREDIT FACILITIES" means, collectively, any credit facilities, letter of
credit or other borrowing or lending arrangements of NorskeCanada and/or the
Guarantors together with the related documents thereto (including, without
limitation, any loan agreements, note purchase agreements, indentures, notes,
guarantee agreements, collateral documents, mortgages, instruments and security
documents executed in connection therewith), in each case as any such agreements
or arrangements may be amended (including any amendment and restatement
thereof), supplemented or otherwise modified from time to time, in each case,
including, without limitation, any credit facility, letter of credit, agreement,
indenture, notes, other documents or instruments or other arrangement extending
the maturity of, refinancing, replacing or otherwise restructuring (including
adding Subsidiaries of NorskeCanada as additional borrowers or guarantors
thereunder) all or any portion of the Debt under such agreements or
arrangements, together with any successor or replacement agreements or other
arrangements, and whether by or with the same or any other agent, lender or
group of lenders or other institutions providing credit.
"CURRENCY AGREEMENT" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement designed to protect
NorskeCanada or any Restricted Subsidiary of NorskeCanada against fluctuations
in currency values.
"DEBT" means (without duplication, including, without limitation,
duplication arising or existing because a Person and one or more of its
subsidiaries are or will become either directly or indirectly liable for the
same Debt whether by virtue of guarantees, or joint, or joint and several
liability in respect of such Debt or otherwise), with respect to any Person, any
indebtedness at any time outstanding, secured or unsecured, contingent or
otherwise, which is for borrowed money (whether or not the recourse of the
lender is to the whole of the assets of that Person or only to a portion of the
assets of that Person), or evidenced by bonds, notes, debentures or similar
instruments or representing the balance deferred and unpaid of the purchase
price of any property (excluding, without limitation, any balances that
constitute accounts payable or trade payables, and other accrued liabilities
arising in the ordinary course of business) if and to the extent any of the
foregoing indebtedness would appear as a liability upon a balance sheet of that
Person prepared in accordance with GAAP, and will also include, to the extent
not otherwise included:
(1) Capitalized Lease Obligations of that Person;
(2) obligations secured by a Lien (other than obligations under Interest
Rate Agreements, Currency Agreements or Commodity Agreements) to which
any property or assets owned or held by that Person are subject, whether
or not the obligation or obligations secured thereby will have been
assumed by a third party, PROVIDED that, for the purposes of determining
the amount of Debt described in this clause, if recourse with respect to
that Debt is limited to such property or assets, the amount of that Debt
will be deemed to be the Fair Market Value of such property or assets;
(3) guarantees of items of other Persons which would be included within this
definition for that other Person (whether or not such items would appear
upon the balance sheet of the guarantor);
(4) obligations of that Person for the reimbursement of any obligor on any
letter of credit, banker's acceptance or similar credit transaction;
(5) all Disqualified Capital Stock issued by that Person with the amount of
Debt represented by that Disqualified Capital Stock being equal to the
greater of its voluntary or involuntary liquidation preference and its
maximum fixed repurchase price (for the purposes hereof, "maximum fixed
repurchase price" of any Disqualified Capital Stock which does not have a
fixed repurchase price will be calculated in accordance with the terms of
that Disqualified Capital Stock as if that Disqualified Capital Stock
were repurchased on any date on which Debt will be required to be
determined pursuant to the indenture and if that price is based
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upon, or measured by, the fair market value of that Disqualified Capital
Stock, that price will be the Fair Market Value of that Disqualified
Capital Stock);
(6) obligations of that Person under any Currency Agreement or any Interest
Rate Agreement applicable to any of the foregoing (if and to the extent
such Currency Agreement or Interest Rate Agreement obligations would
appear as a liability upon a balance sheet of that Person prepared in
accordance with GAAP);
(7) obligations of that Person under any Commodity Agreement (if and to the
extent such Commodity Agreement obligations would appear as a liability
upon a balance sheet of that Person prepared in accordance with GAAP);
and
(8) Attributable Debt.
The amount of Debt of any Person at any date will be the outstanding balance
at such date of all unconditional obligations as described above and, with
respect to contingent obligations (other than contingent obligations under
Interest Rate Agreements, Currency Agreements and Commodity Agreements, which
shall be valued as set forth above), the maximum liability upon the occurrence
of the contingency giving rise to the obligation; PROVIDED that:
(1) the amount outstanding at any time of any Debt issued with original
issue discount is the accreted value of that Debt at that time as
determined in conformity with GAAP; and
(2) Debt will not include any liability for federal, provincial, state,
local or other taxes.
Notwithstanding any other provision of the foregoing definition, any trade
payable, deferred credit or accrued liability arising from the purchase of goods
or materials or for services obtained in the ordinary course of business will
not be deemed to be Debt of NorskeCanada or any of its Restricted Subsidiaries
for purposes of this definition. Furthermore, guarantees of (or obligations with
respect to letters of credit supporting) Debt otherwise included in the
determination of that amount will also not be included.
"DESIGNATION" means the designation of any Subsidiary of NorskeCanada as an
Unrestricted Subsidiary.
"DESIGNATION AMOUNT" will have the meaning set forth in the definition of
"Restricted Payment."
"DISQUALIFIED CAPITAL STOCK" means any Capital Stock of a Person or a
Restricted Subsidiary thereof which, by its terms (or by the terms of any
security into which it is convertible or for which it is exchangeable at the
option of the holder), or upon the happening of any event, matures or is
mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or
is redeemable at the option of the holder thereof (except, in each case, in
accordance with a change of control provision, which provision has substantially
the same effect as the provisions of the indenture described under "--Change of
Control Offer"), in whole or in part, or is exchangeable into Debt on or prior
to the final maturity date of the notes.
"EBITDA" means, with respect to any Person and its Restricted Subsidiaries,
for any period, an amount equal to:
(1) the sum, without duplication, of:
(A) Consolidated Net Income for that period MINUS any net income (or PLUS
any net loss) attributable to discontinued operations (including,
without limitation, operations disposed of during that period whether
or not such operations were classified as discontinued); PLUS
(B) the provision for taxes for that period based on income or profits to
the extent that income or profits were included in computing
Consolidated Net Income (MINUS any provision for taxes utilized in
computing net loss under clause (1) of this definition to the extent
that provision reduced net loss); PLUS
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(C) Consolidated Interest Expense for such period; PLUS
(D) depreciation for that period on a consolidated basis, to the extent
reducing Consolidated Net Income; PLUS
(E) amortization of goodwill, deferred charges and other intangibles for
that period on a consolidated basis, to the extent reducing
Consolidated Net Income; PLUS
(F) any other non-cash items reducing Consolidated Net Income for that
period; MINUS
(2) all non-cash items increasing Consolidated Net Income for that period,
determined on a consolidated basis in accordance with GAAP.
"FAIR MARKET VALUE" means, with respect to any asset or property, the price
which could be negotiated in an arm's-length, free market transaction, for cash,
between a willing seller and a willing and able buyer, neither of whom is under
undue pressure or compulsion to complete the transaction. Fair Market Value will
be determined by the board of directors of NorskeCanada acting reasonably and in
good faith and, in the case of determination involving assets or property in
excess of $5,000,000, will be evidenced by a resolution of the board of
directors of NorskeCanada delivered to the trustee.
"FOUR-QUARTER PERIOD" means at any date of determination the four most
recent consecutive fiscal quarters for which consolidated financial statements
are available ending on or prior to the date of such determination.
"GAAP" means generally accepted accounting principles in Canada.
"GUARANTORS" means all of the Restricted Subsidiaries of NorskeCanada that
hereafter become Guarantors pursuant to the indenture.
"INCUR" means, with respect to any Debt or other obligation of any Person,
to create, issue, incur (by conversion, exchange or otherwise), assume,
guarantee or otherwise become liable in respect of such Debt or other obligation
or the recording, as required pursuant to GAAP or otherwise, of any such Debt or
other obligation on the balance sheet of that Person (and "incurrence,"
"incurred," "incurrable," and "incurring" will have meanings correlative to the
foregoing); PROVIDED that a change in GAAP that results in an obligation of that
Person that exists at such time becoming Debt will not be deemed an incurrence
of such Debt.
"INDEPENDENT FINANCIAL ADVISOR" means an investment banking firm or
accounting firm of national reputation in the United States of America or
Canada:
(1) which does not, and whose directors, officers, employees and Affiliates
do not, have a direct or indirect financial interest in NorskeCanada or
any of its Affiliates; and
(2) which, in the judgment of the board of directors of NorskeCanada, is
otherwise independent and qualified to perform the task for which it is
to be engaged.
"INTEREST RATE AGREEMENT" means, with respect to any Person, any interest
rate protection agreement, interest rate futures agreement, interest rate swap
agreement, interest rate cap agreement, interest rate collar agreement, interest
rate forward agreement or other similar agreement or arrangement.
"INVENTORY" of a Person means all inventory of such Person, including
(1) all raw materials, work in process, parts, components, assemblies, supplies
and materials used or consumed by such Person's business, (2) all goods, wares
and merchandise, finished or unfinished, held for sale or lease and (3) all
goods returned or repossessed by such Person.
"INVESTMENT GRADE" means (1) BBB- or above, in the case of S&P (or its
equivalent under any successor Rating Categories of S&P) or Baa3 or above, in
the case of Moody's (or its equivalent under any successor Rating Categories of
Moody's), or (2) the equivalent in respect of the Rating Categories of any
Rating Agencies substituted for S&P or Moody's.
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"INVESTMENTS" means (without duplication), with respect to any Person,
directly or indirectly, any advance (or other extension of credit), account
receivable (other than an account receivable arising in the ordinary course of
business of such Person), loan or capital contribution to (by means of transfers
of cash or other Property to others, payments for Property or services for the
account or use of others or otherwise), any guarantee of any obligations or Debt
of any other Person, the purchase of any Capital Stock, bonds, notes,
debentures, partnership or joint venture interests or other securities of, the
acquisition, by purchase or otherwise, of all or substantially all of the
business or assets or stock or other evidence of beneficial ownership of, or
interest in any Person or the making of any investment in any Person.
Investments will exclude:
(1) extensions of trade credit to customers and advances in respect of
commissions and travel and similar expenses to officers and employees, in
each case made in the ordinary course of business; and
(2) the repurchase of securities of any Person by that Person.
For the purposes of the "Limitation on Restricted Payments" covenant, the
amount of any Investment will be the original cost of such Investment plus the
cost of all additional Investments by NorskeCanada or any of its Restricted
Subsidiaries, without any adjustments for increases or decreases in value, or
write-ups, write-downs or write-offs with respect to such Investment, reduced by
the payment of dividends or distributions in connection with such Investment or
any other amounts received in respect of such Investment; PROVIDED that no such
payment of dividends or distributions or receipt of any such other amounts will
reduce the amount of any Investment if that payment of dividends or
distributions or receipt of any such amounts would be included in Consolidated
Net Income. In determining the amount of any Investment involving the transfer
of any property or assets other than cash, such property or assets will be
valued at its or their Fair Market Value at the time of the transfer, as
determined in good faith by the board of directors of the Person making that
transfer.
"ISSUE DATE" means the date the notes are first issued by NorskeCanada and
authenticated by the trustee under the indenture.
"LIEN" means, with respect to any property or assets of any Person, any
mortgage or deed of trust, pledge, hypothecation, assignment, deposit
arrangement, security interest, lien, charge, easement, encumbrance, priority,
or other security agreement of any kind or nature whatsoever on or with respect
to that property or assets (including without limitation, any Capitalized Lease
Obligation, conditional sales, or other title retention agreement having
substantially the same economic effect as any of the foregoing).
"MATERIAL SUBSIDIARY" means, at any date of determination:
(1) any Restricted Subsidiary that, together with its Subsidiaries that
constitute Restricted Subsidiaries:
(A) for the most recent fiscal year of NorskeCanada accounted for more
than 5.0% of the consolidated revenues of NorskeCanada and the
Restricted Subsidiaries; or
(B) as of the end of such fiscal year, owned more than 5.0% of the
consolidated assets of NorskeCanada and the Restricted Subsidiaries,
all as set forth on the consolidated financial statements of NorskeCanada
and the Restricted Subsidiaries for such year prepared in conformity with
GAAP; and
(2) any Restricted Subsidiary which, when aggregated with all other
Restricted Subsidiaries that are not otherwise Material Subsidiaries and
as to which any event described in clause (7) of the first paragraph
under "Events of Default" above has occurred, would constitute a Material
Subsidiary under clause (1) of this definition.
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"NET INCOME" means, with respect to any Person, for any period, the net
income (loss) of that Person determined in accordance with GAAP and in
accordance with clause (7) of the definition of Consolidated Net Income.
"OFFICERS' CERTIFICATE" means, with respect to any Person, a certificate
signed by the Chief Executive Officer, the President or any Vice President and
the Chief Financial Officer, the Treasurer or the Corporate Secretary of such
Person that will comply with applicable provisions of the indenture.
"OTHER SENIOR NOTES" means the 8 5/8% Senior Notes due 2011.
"PACIFICA" means Pacifica Papers Inc., a Canadian company that amalgamated
with Norske Skog Canada Limited to form NorskeCanada on September 1, 2001.
"PACIFICA INCOME ADJUSTMENT AMOUNT" means the amount equal to 50% of the
cumulative Consolidated Net Income of Pacifica for the period from January 1,
1999 to September 1, 2001 (but not including any amount which is included in
determining Consolidated Net Income of NorskeCanada and its successors) less the
aggregate amount of any "Restricted Payments" (as such term is defined in the
indenture governing the Pacifica Notes, as such indenture was in effect on the
date the Pacifica Notes were originally issued, whether or not any of such
Pacifica Notes remain outstanding) made by Pacifica in that period that would be
required to be deducted in calculating the limitation on "Restricted Payments"
thereunder.
"PACIFICA NOTES" means the 10% Senior Notes due 2009 of Pacifica, and
assumed by NorskeCanada.
"PERMITTED DEBT" means:
(1) Debt of NorskeCanada or a Guarantor arising under or in connection with
any Credit Facilities in an aggregate principal amount at any time
outstanding not to exceed the greater of:
(A) $725,000,000; and
(B) the sum of:
(i) 85.0% of the book value of Accounts Receivable net of any
allowance for doubtful accounts of NorskeCanada and its
Restricted Subsidiaries as of the last fiscal quarter for which
financial statements are prepared, plus
(ii) 60.0% of the book value of Inventory at the lower of cost or
net realizable value net of any allowance for obsolescence of
NorskeCanada and its Restricted Subsidiaries as of the last
fiscal quarter for which financial statements are prepared,
plus
(iii) $375,000,000;
(2) Debt under the notes and any guarantees;
(3) Debt of NorskeCanada owed to and held by any Guarantor which is
unsecured and subordinated in right of payment to the payment and
performance of NorskeCanada's obligations under the indenture and the
notes and Debt of any Restricted Subsidiary owed to and held by
NorskeCanada or another Guarantor; PROVIDED that:
(A) any sale or other disposition of any Debt of NorskeCanada or any
Restricted Subsidiary referred to in this clause (3) to a Person
other than NorskeCanada or a Guarantor,
(B) any sale or other disposition of Capital Stock of any Guarantor which
holds Debt of NorskeCanada or another Restricted Subsidiary such that
such Guarantor ceases to be a Guarantor of NorskeCanada, and
(C) the Designation of a Guarantor that holds Debt of NorskeCanada or any
other Restricted Subsidiary as an Unrestricted Subsidiary,
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will be deemed to be an incurrence of Debt not constituting Permitted
Debt by the issuer of that Debt;
(4) Purchase Money Debt and Capitalized Lease Obligations incurred to
acquire property in the ordinary course of business in an aggregate
principal amount outstanding not to exceed, together with all other Debt
outstanding under this clause (4), at the time of any such incurrence and
after giving PRO FORMA effect thereto, 7.5% of the consolidated tangible
assets of NorskeCanada and its Restricted Subsidiaries as of the end of
the most recent fiscal quarter for which consolidated financial
statements are available ending on or prior to the date of determination;
(5) Debt under Interest Rate Agreements entered into in the ordinary course
of business of NorskeCanada or any Restricted Subsidiary and not for
speculative purposes; PROVIDED that the notional principal amount of such
Interest Rate Agreements, at the time of the incurrence thereof, does not
exceed the principal amount of the Debt to which such Interest Rate
Agreements relate;
(6) Debt under Currency Agreements entered into in the ordinary course of
business of NorskeCanada or any Restricted Subsidiaries and not for
speculative purposes; PROVIDED that in the case of Currency Agreements
which relate to Debt, such Currency Agreements do not increase the
principal amount of Debt of NorskeCanada and its Restricted Subsidiaries
outstanding other than as a result of fluctuations in foreign currency
exchange rates or by reason of fees, indemnities or compensation payable
thereunder;
(7) Debt of NorskeCanada or any Restricted Subsidiary in respect of
reimbursement obligations relating to undrawn standby letters of credit
issued for the account of NorskeCanada or such Restricted Subsidiary, as
the case may be, in connection with workers' compensation claims, self
insurance or other similar reimbursement type obligations;
(8) Debt of NorskeCanada or any Restricted Subsidiary in respect of bid,
performance, surety and appeal bonds provided in the ordinary course of
business;
(9) additional Debt of NorskeCanada or the Guarantors not to exceed
$100,000,000 in aggregate principal amount at any one time outstanding
which may, but need not be, incurred under the Credit Facilities;
(10) Refinancing Debt;
(11) Debt of NorskeCanada or any of its Restricted Subsidiaries in respect
of accommodation guarantees for the benefit of trade creditors of any
such person, trade letters of credit, standby letters of credit,
performance bonds, bankers' acceptances and surety bonds, in each case,
incurred in the ordinary course of business in an aggregate principal
amount not in excess of $5,000,000 at any one time outstanding;
(12) Debt outstanding on the Issue Date except for indebtedness incurred
pursuant to clause (1) or (2) of this definition;
(13) Debt under Commodity Agreements entered into in the ordinary course of
business and not for speculative purposes; and
(14) any Debt incurred by NorskeCanada or any Restricted Subsidiary to the
extent (i) (A) all of the net proceeds of such Debt are used to fully or
partially pay the consideration for any Asset Acquisition or (B) such
Debt constitutes Acquired Debt and (ii) after giving pro forma effect to
such incurrence and the related Asset Acquisition, (1) no Default or
Event of Default will have occurred and be continuing or result therefrom
and (2) NorskeCanada's Consolidated Leverage Ratio is equal to or lower
than NorskeCanada's Consolidated
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Leverage Ratio immediately prior to giving effect to such incurrence and
related Asset Acquisition.
"PERMITTED INVESTMENTS" means Investments made on or after the Issue Date
consisting of:
(1) Investments by NorskeCanada, or by a Restricted Subsidiary thereof, in
NorskeCanada or a Restricted Subsidiary;
(2) Investments by NorskeCanada, or by a Restricted Subsidiary thereof, in a
Person, if as a result of that Investment:
(A) that Person becomes a Restricted Subsidiary of NorskeCanada, or
(B) that Person is merged, consolidated or amalgamated with or into, or
transfers or conveys substantially all of its assets to, or is
liquidated into, NorskeCanada or a Restricted Subsidiary thereof;
(3) Investments in Cash Equivalents;
(4) reasonable and customary loans and advances made to employees not to
exceed $10,000,000 in the aggregate at any one time outstanding;
(5) an Investment that is made by NorskeCanada or a Restricted Subsidiary
thereof in the form of any Capital Stock, bonds, notes, debentures or
other securities that are issued by a third party to NorskeCanada or
Restricted Subsidiary solely as partial consideration for the
consummation of an Asset Sale that is permitted under the covenant
"LIMITATION ON ASSET SALES";
(6) Investments (including, but not limited to, Investments in co-generation
facilities) in Unrestricted Subsidiaries or in any corporation,
partnership, joint venture or other entity (including, but not limited
to, any entity engaged in the business of constructing and/or operating
co-generation or similar facilities) in an amount not to exceed, together
with the amount of all other Investments outstanding under this
clause (6), at the time of such Investment and after giving PRO FORMA
effect thereto, 7.5% of the consolidated tangible assets of NorskeCanada
and its Restricted Subsidiaries as of the end of the most recent fiscal
quarter for which consolidated financial statements are available ending
on or prior to the date of determination (with the amount of each
Investment being measured at the time made and without giving effect to
subsequent changes in value);
(7) any acquisition of assets in exchange for the Capital Stock (other than
Disqualified Capital Stock) of NorskeCanada;
(8) Investments in securities of trade creditors or customers received in
settlement of obligations that arose in the ordinary course of business
pursuant to any plan of reorganization or similar arrangement upon the
bankruptcy or insolvency of such trade creditors or customers;
(9) Investments in Commodity Agreements, Interest Rate Agreements and
Currency Agreements entered into in the ordinary course of business and
not for speculative purposes; and
(10) other Investments in any Person in any amount, together with the amount
of all other Investments outstanding under this clause (10) not to exceed
at the time of such Investment, the greater of (A) $25.0 million and
(B) 2.0% of the consolidated tangible assets of NorskeCanada and its
Restricted Subsidiaries as of the end of the most recent fiscal quarter
for which consolidated financial statements are available ending on or
prior to the date of determination (with the amount of each Investment
being measured at the time made and without giving effect to subsequent
changes in value).
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"PERMITTED LIENS" means:
(1) Liens on Property or assets of, or any Capital Stock of, any corporation
existing at the time such assets are acquired by NorskeCanada or any of
its Restricted Subsidiaries, whether by merger, amalgamation,
consolidation, purchase of assets or otherwise; PROVIDED:
(A) that such Liens are not created, incurred or assumed in connection
with, or in contemplation of, such assets being acquired by
NorskeCanada or its Restricted Subsidiaries; and
(B) that any such Lien does not extend to or cover any Property, Capital
Stock or Debt other than the Property, Capital Stock or Debt being
acquired;
(2) Liens securing Refinancing Debt; PROVIDED that any such Lien does not
extend to or cover any Property, Capital Stock or Debt other than the
Property, Capital Stock or Debt securing the Debt so refunded, refinanced
or extended;
(3) Liens in favor of NorskeCanada or any Guarantor;
(4) Liens to secure Purchase Money Debt that is otherwise permitted to be
incurred under the indenture; PROVIDED that:
(A) any such Lien is created solely for the purpose of securing Debt
representing, or incurred to finance, refinance or refund, the cost
(including sales and excise taxes, installation and delivery charges
and other direct costs of, and other direct expenses paid or charged
in connection with, such purchase or construction) of the Property so
acquired;
(B) the principal amount of the Debt secured by such Lien does not exceed
100% of such costs and expenses; and
(C) such Lien does not extend to or cover any Property other than such
item of Property and any improvements on such item;
(5) statutory liens or landlords', carriers', warehousemen's, unemployment
insurance, surety or appeal bonds, mechanics', suppliers', materialmen's,
repairmen's or other like Liens imposed by law arising in the ordinary
course of business and with respect to amounts not yet delinquent or
being contested in good faith by appropriate proceedings;
(6) Liens existing on the Issue Date;
(7) Liens securing only the notes or the Guarantees;
(8) Liens for taxes, assessments or governmental charges not yet due or that
are being contested in good faith by appropriate proceedings; PROVIDED
that any reserve or other appropriate provision as will be required in
conformity with GAAP will have been made therefor;
(9) Liens securing Capitalized Lease Obligations permitted to be incurred
under clause (4) of the definition of "Permitted Debt"; PROVIDED that
such Lien does not extend to any Property other than that subject to the
underlying lease;
(10) Liens securing Debt permitted to be incurred under clause (1) of the
definition of "Permitted Debt";
(11) Liens securing obligations under Interest Rate Agreements, Currency
Agreements and Commodity Agreements in each case permitted to be incurred
under the indenture;
(12) Liens created or deposits made to secure the performance of tenders,
bids, leases, statutory obligations, government contracts, performance
bonds and other obligations of a like nature incurred in the ordinary
course of business;
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(13) Liens in favor of customs and revenue authorities arising as a matter
of law to secure payment of customs duties in connection with the
importation of goods;
(14) other Liens securing obligations incurred in the ordinary course of
business, which obligations do not exceed $3 million in the aggregate at
any one time outstanding;
(15) Liens arising pursuant to Sale and Lease-Back transactions entered into
in compliance with the indenture;
(16) Liens securing Debt permitted to be incurred under clause (9) or (11)
of the definition of "Permitted Debt";
(17) Liens incurred in the ordinary course of business of NorskeCanada or
any Restricted Subsidiary of NorskeCanada with respect to obligations
that do not exceed $7,500,000 at any one time outstanding and that:
(A) are not incurred in connection with the borrowing of money or the
obtaining of advances or credit (other than trade credit in the
ordinary course of business), and
(B) do not in the aggregate materially detract from the value of the
property or materially impair the use thereof in the operation of
business by NorskeCanada or such Restricted Subsidiary;
(18) the Lien of any judgment rendered which is being contested diligently
and in good faith by appropriate proceedings by NorskeCanada or any of
its Restricted Subsidiaries and which does not have a material adverse
effect on the ability of NorskeCanada and its Restricted Subsidiaries to
operate the business or operations of NorskeCanada;
(19) reservations, limitations, provisos and conditions expressed in any
original grants from a government (including any agency or political
subdivision thereof) which do not materially adversely impair the use of
the subject property by NorskeCanada or a Restricted Subsidiary;
(20) servitudes, licenses, easements, rights-of-way and rights in the nature
of easements (including, without in any way limiting the generality of
the foregoing, servitudes, licenses, easements, rights-of-way and rights
in the nature of easements for sidewalks, public ways, sewers, drains,
gas, steam and water mains or electric light and power, or telephone and
telegraph conduits, poles, wires and cable) which do not in the aggregate
materially adversely impair the use of the subject property by
NorskeCanada or a Restricted Subsidiary or in respect to which
NorskeCanada or any of its Restricted Subsidiaries has made satisfactory
arrangement for relocation so that such use will not in the aggregate be
materially and adversely impaired;
(21) zoning and building by-laws and ordinances, municipal by-laws and
regulations, and restrictive covenants, which do not materially adversely
interfere with the use of the subject property by NorskeCanada or a
Restricted Subsidiary;
(22) with respect to personal property only, Liens arising pursuant to
registration under the PERSONAL PROPERTY ACT (British Columbia) and
similar legislation in other provinces or jurisdictions exclusively
relating to property and assets subject to equipment leases which are not
Capitalized Lease Obligations;
(23) Liens with respect to any property of (i) any Unrestricted
Subsidiaries, corporations, partnerships, joint ventures or other
entities specified in clause (6) of the "Permitted Investments"
definition or (ii) any other Unrestricted Subsidiaries, if pursuant to
any laws or regulations such property would be deemed to be that of
NorskeCanada or any of its Restricted Subsidiaries; and
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(24) any extension, renewal or replacement, in whole or in part, of any Lien
described in clauses (1), (2), (4), (6), or (9) of this definition;
PROVIDED that the principal amount secured by any such extension, renewal
or replacement will not be increased and such lien will not extend to any
other Property of NorskeCanada or its Subsidiaries other than such item
of Property originally covered by such Lien or by improvement thereon or
additions or accessions thereto.
"PERSON" means any individual, corporation, partnership, limited liability
company, joint venture, association, joint-stock company, trust, unincorporated
organization or government (including any agency or political subdivision
thereof).
"PREFERRED STOCK" means any Capital Stock of a Person, however designated,
which entitles the holder thereof to a preference with respect to dividends,
distributions or liquidation proceeds of such Person over the holders of other
Capital Stock issued by such Person.
"PROPERTY" of any Person means all types of real, personal, tangible,
intangible or mixed property owned by such Person whether or not included in the
most recent consolidated balance sheet of such Person and its Subsidiaries under
GAAP.
"PUBLIC EQUITY OFFERING" means a public offering of shares of Common Stock
(however designated and whether voting or non-voting) and any and all rights,
warrants, receipts or options to acquire such Common Stock of NorskeCanada
pursuant to a registration statement filed with the SEC in accordance with the
Securities Act or pursuant to a prospectus filed with the appropriate securities
regulatory authorities in any province of Canada. For the purposes of this
definition of "Public Equity Offering," any offering of securities specified in
this definition that:
(1) does not satisfy the criteria required for a Public Equity Offering
because such securities are not sold pursuant to a registration statement
filed with the SEC in accordance with the Securities Act or pursuant to a
prospectus filed with the appropriate securities regulatory authorities
in a province of Canada; and
(2) becomes eligible for resale to the general public in any province or
territory of Canada or the United States of America within 90 days of the
date on which such securities were initially sold,
will be deemed to be a Public Equity Offering on and as of the date upon which
such securities first become eligible for such resale.
"PURCHASE MONEY DEBT" means any Debt incurred by a Person to finance the
cost (including the cost of acquisition, construction, lease, installation or
improvement) of an item of Property, the principal amount of which Debt does not
exceed the sum of:
(1) the lesser of (a) the Fair Market Value of such property and (b) 100% of
such cost; and
(2) reasonable fees and expenses of such Person incurred in connection
therewith.
"RATING AGENCIES" means:
(1) S&P; and
(2) Moody's; and
(3) if S&P or Moody's or both will not make a rating of the notes publicly
available, a nationally recognized United States securities rating agency
or agencies, as the case may be, selected by NorskeCanada, which will be
substituted for S&P or Moody's or both, as the case may be.
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"RATING CATEGORY" means:
(1) with respect to S&P, any of the following categories: BB, B, CCC, CC, C
and D (or equivalent successor categories);
(2) with respect to Moody's, any of the following categories: Ba, B, Caa,
Ca, C and D (or equivalent successor categories); and
(3) the equivalent of any such category of S&P or Moody's used by another
Rating Agency.
In determining whether the rating of the notes has decreased by one or more
gradations, gradations within Rating Categories (+ and - for S&P; 1, 2 and 3 for
Moody's; or the equivalent gradations for another Rating Agency) will be taken
into account (e.g., with respect to S&P a decline in rating from BB+ to BB, as
well as from BB- to B+, will constitute a decrease of one gradation).
"RATING DATE" means the date which is 90 days prior to the earlier of (1) a
Change of Control and (2) public notice of the occurrence of a Change of Control
or of the intention by NorskeCanada to effect a Change of Control.
"RATING DECLINE" means the decrease (as compared with the Rating Date) by
one or more gradations within Rating Categories as well as between Rating
Categories of the rating of the notes by a Rating Agency on, or within 120 days
after, the earlier of the date of public notice of the occurrence of a Change of
Control or of the intention by NorskeCanada to effect a Change of Control (which
period will be extended for so long as the rating of the notes is under publicly
announced consideration for possible downgrade by any of the Rating Agencies).
"REFINANCING DEBT" means Debt that replaces, refunds, renews, refinances or
extends any Debt of NorskeCanada or a Restricted Subsidiary permitted to be
incurred by NorskeCanada or its Restricted Subsidiaries pursuant to the
"--LIMITATION ON ADDITIONAL DEBT" provision (other than pursuant to
clauses (1), (4), (5), (6), (7), (8), (9) and (13) of the definition of
Permitted Debt), but only to the extent that:
(1) the Refinancing Debt is subordinated to the notes to at least the same
extent as the Debt being replaced, refunded, renewed, refinanced or
extended, if at all;
(2) the Refinancing Debt is scheduled to mature either:
(A) no earlier than the Debt being replaced, refunded, renewed,
refinanced or extended; or
(B) after the maturity date of the notes;
(3) the portion, if any, of the Refinancing Debt that is scheduled to mature
on or prior to the maturity date of the notes has a weighted average life
to maturity at the time such Refinancing Debt is incurred that is equal
to or greater than the weighted average life to maturity of the portion
of the Debt being replaced, refunded, renewed, refinanced or extended
that is scheduled to mature on or prior to the maturity date of the
notes; and
(4) such Refinancing Debt is in an aggregate principal amount that is equal
to or less than the sum of:
(A) the aggregate principal amount then outstanding under the Debt being
replaced, refunded, renewed, refinanced or extended;
(B) the amount of accrued and unpaid interest, if any, and premiums owed,
if any, not in excess of preexisting prepayment provisions on such
Debt being replaced, refunded, renewed, refinanced or extended; and
(C) the amount of customary fees, expenses and costs related to the
incurrence of such Refinancing Debt.
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"REPLACEMENT ASSETS" means:
(1) properties or assets (other than cash or Cash Equivalents or any Capital
Stock or other security) that will be used or useful in the business of
NorskeCanada or its Restricted Subsidiaries, or in businesses reasonably
similar to or ancillary to the business of NorskeCanada or its Restricted
Subsidiaries; or
(2) Capital Stock of any Person that will become on the date of acquisition
thereof a Guarantor as a result of such acquisition.
"RESTRICTED PAYMENT" means any of the following:
(1) the declaration or payment of any dividend or any other distribution or
payment on Capital Stock of NorskeCanada or any Restricted Subsidiary or
any payment made to the direct or indirect holders (in their capacities
as such) of Capital Stock of NorskeCanada or any Restricted Subsidiary
(other than (x) the amount of any such dividends or distributions payable
solely in Capital Stock (other than Disqualified Capital Stock) of
NorskeCanada, and (y) in the case of Restricted Subsidiaries, dividends
or distributions payable to NorskeCanada or to a Restricted Subsidiary);
(2) the purchase, redemption or other acquisition or retirement for value of
any Capital Stock of NorskeCanada or of any Restricted Subsidiaries
(other than Capital Stock owned by NorskeCanada or a Restricted
Subsidiary);
(3) the making of any principal payment on, or the purchase, defeasance,
repurchase, redemption or other acquisition or retirement for value,
prior to any scheduled maturity, scheduled repayment or scheduled sinking
fund payment, of any Debt of NorskeCanada or any Guarantor which is
subordinated in right of payment to the Notes or such Guarantor's
guarantee, as the case may be (other than any such Debt acquired in
anticipation of satisfying a scheduled sinking fund obligation, principal
installment or final maturity in each case due within one year of the
date of acquisition);
(4) the making of any Investment other than a Permitted Investment;
(5) any Designation; PROVIDED that the Designation of a Subsidiary of
NorskeCanada as an Unrestricted Subsidiary will be deemed to include the
Designation of all of the Subsidiaries of such Subsidiary; and
(6) the forgiveness of any Debt of an Affiliate of NorskeCanada owed to
NorskeCanada or a Restricted Subsidiary.
In determining the amount of any Restricted Payment, cash distributed or
invested will be valued at the face amount thereof and Property other than cash
will be valued at its Fair Market Value, except that, in determining the amount
of any Restricted Payment made under clause (5) of this definition, the amount
of such Restricted Payment (the "Designation Amount") will be equal to the
greater of:
(1) the book value; or
(2) the Fair Market Value;
of NorskeCanada's proportionate direct or indirect interest in such Subsidiary
on such date.
"RESTRICTED SUBSIDIARY" means a Subsidiary of NorskeCanada other than an
Unrestricted Subsidiary.
"SALE AND LEASE-BACK TRANSACTION" means any arrangement with any Person
providing for the leasing by NorskeCanada or any Restricted Subsidiary of any
real or tangible personal property, which property has been or is to be sold or
transferred by NorskeCanada or such Restricted Subsidiary to such Person in
contemplation of such leasing.
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"SUBSIDIARY" of any specified Person means any corporation, partnership,
joint venture, limited liability company, association or other business entity,
whether now existing or hereafter organized or acquired:
(1) in the case of a corporation, of which more than 50% of the total voting
power of the Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, officers or
trustees thereof is held by that first-named Person or any of its
Subsidiaries; or
(2) in the case of a partnership, joint venture, limited liability company,
association or other business entity, with respect to which that
first-named Person or any of its Subsidiaries has the power to direct or
cause the direction of the management and policies of that entity by
contract or otherwise or if in accordance with GAAP such entity is
consolidated with the first-named Person for financial statement
purposes;
PROVIDED that, for greater certainty, the term "Subsidiary" when used in
relation to Norske Canada or any of its Subsidiaries shall not include Powell
River Energy Inc. or Powell River Energy Limited Partnership.
"UNRESTRICTED SUBSIDIARY" means:
(1) any Subsidiary of an Unrestricted Subsidiary; and
(2) any Subsidiary of NorskeCanada which is classified on or after the Issue
Date as an Unrestricted Subsidiary by a resolution adopted by the board
of directors of NorskeCanada;
PROVIDED that a Subsidiary may be so classified as an Unrestricted Subsidiary
only if such classification is in compliance with the "LIMITATION ON RESTRICTED
PAYMENTS" covenant above; PROVIDED FURTHER that the board of directors of
NorskeCanada may not designate any Subsidiary of NorskeCanada to be an
Unrestricted Subsidiary if, after such designation, such Subsidiary owns any
Capital Stock of, or owns or holds any Lien on any property of, any Restricted
Subsidiary which is not a Subsidiary of the Subsidiary to be so designated. The
trustee will be given prompt notice by NorskeCanada of each resolution adopted
by the board of directors of NorskeCanada under this provision, together with a
copy of each such resolution adopted.
"U.S. GOVERNMENT SECURITIES" means securities that are direct obligations of
the United States of America, direct obligations of the Federal Home Loan
Mortgage Corporation, direct obligations of the Federal National Mortgage
Association, securities which the timely payment of whose principal and interest
is unconditionally guaranteed by the full faith and credit of the United States
of America, trust receipts or other evidence of indebtedness of a direct claim
upon the instrument described above and money market mutual funds that invest
solely in such securities.
"WHOLLY OWNED RESTRICTED SUBSIDIARY" means any Restricted Subsidiary, all of
the outstanding voting securities (other than directors' qualifying shares or
similar requirements of law) of which are owned, directly or indirectly, by
NorskeCanada or another Wholly Owned Restricted Subsidiary.
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FORM DENOMINATION, BOOK-ENTRY PROCEDURES AND TRANSFER
The notes will be issued in the form of one or more global securities
(collectively, the "Global Notes"). The Global Notes will be deposited with, or
on behalf of, DTC and registered in the name of DTC or its nominee or will
remain in the custody of the trustee pursuant to the FAST Balance Certificate
Agreement between DTC and the trustee. Except as set forth below, the Global
Notes may be transferred, in whole but not in part, only to DTC or another
nominee of DTC. The information in this section concerning DTC and its
book-entry systems has been obtained from sources we believe to be reliable, but
NorskeCanada takes no responsibility for the accuracy thereof.
DEPOSITARY PROCEDURES
DTC has advised NorskeCanada that DTC is a limited-purpose trust company
created to hold securities for its participating organizations (collectively,
the "Participants") and to facilitate the clearance and settlement of
transactions in those securities between Participants through electronic
book-entry changes in accounts of its Participants. The Participants include
securities brokers and dealers, banks, trust companies, clearing corporations
and certain other organizations. Access to DTC's system is also available to
other entities such as banks, brokers, dealers and trust companies that clear
through or maintain a custodian relationship with a Participant, either directly
or indirectly (collectively, the "Indirect Participants"). Persons who are not
Participants may beneficially own securities held by or on behalf of DTC only
through the Participants or the Indirect Participants. The ownership interest
and transfer of ownership interest of each actual purchaser of each security
held by or on behalf of DTC are recorded on the records of the Participants and
Indirect Participants.
DTC has also advised NorskeCanada that, pursuant to procedures established
by it, (1) upon deposit of the Global Notes, DTC will credit the accounts of
Participants designated by the initial purchasers with respective principal
amount of the individual beneficial interests represented by such Global Notes
and (2) ownership of such interests in the Global Notes will be shown on, and
the transfer of ownership thereof will be effected only through, records
maintained by DTC (with respect to the Participants) or records maintained by
the Participants and the Indirect Participants (with respect to other owners of
beneficial interests in the Global Notes).
Investors in the Global Notes may hold their interests therein directly
through DTC if they are Participants in such system, or indirectly through
organizations (including Euroclear and Clearstream) which are Participants in
such system.
The laws of some jurisdictions require that certain persons take physical
delivery in certificated form of securities that they own. Consequently, the
ability to transfer beneficial interests in a Global Note to such persons will
be limited to that extent. Because DTC can act only on behalf of Participants,
which in turn act on behalf of Indirect Participants and certain banks, the
ability of a person having beneficial interests in a Global Note to pledge such
interests to persons or entities that do not participate in the DTC system, or
otherwise take actions in respect of such interests, may be affected by the lack
of a physical certificate evidencing such interests. For certain other
restrictions on the transferability of the notes, see "Exchange of Book-Entry
Notes for Certificated Notes".
Except as described below, owners of interests in the Global Notes will not
have notes registered in their names, will not receive physical delivery of
notes in certificated form and will not be considered the registered owners or
holders thereof under the indenture for any purpose.
Payments in respect of the Global Note registered in the name of DTC or its
nominee will be payable to DTC in its capacity as the registered holder under
the indenture. Under the terms of the indenture, the trustee will treat the
persons in whose names the notes, including the Global Notes, are registered as
the owners thereof for the purpose of receiving such payments and for any and
all other
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purposes whatsoever. Consequently, neither the trustee nor any agent thereof has
or will have any responsibility or liability for:
(1) any aspect of DTC's records or any Participant's or Indirect
Participant's records relating to or payments made on account of
beneficial ownership interests in the Global Notes, or
(2) maintaining, supervising or reviewing any of DTC's records or any
Participant's or Indirect Participant's records relating to the
beneficial ownership interests in the Global Notes, or
(3) any other matter relating to the actions and practices of DTC or any of
its Participants or Indirect Participants.
DTC has advised NorskeCanada that its current practice, upon receipt of any
payment in respect of securities such as the notes, is to credit the accounts of
the relevant Participants with the payment on the payment date, in amounts
proportionate to their respective holdings in principal amount of beneficial
interests in the relevant security as shown on the records of DTC. Payments by
the Participants and the Indirect Participants to the beneficial owners of the
notes will be governed by standing instructions and customary practices and will
be the responsibility of the Participants or the Indirect Participants and will
not be the responsibility of DTC, the trustee or NorskeCanada. Neither
NorskeCanada nor the trustee will be liable for any delay by DTC or any of its
Participants identifying the beneficial owners of the notes, and NorskeCanada
and the trustee may conclusively rely on, and will be protected in relying on,
instructions from DTC or its nominee for all purposes.
Interests in the Global Notes will trade in DTC's Same-Day Funds Settlement
System and secondary market trading activity in such interests will therefore
settle in immediately available funds, subject in all cases to the rules and
procedures of DTC and its Participants. Transfers between Participants in DTC
will be effected in accordance with DTC's procedures, and will be settled in
same-day funds.
DTC has advised NorskeCanada that it will take any action permitted to be
taken by a holder of notes only at the direction of one or more Participants to
whose account with DTC interests in the Global Notes are credited and only in
respect to such portion of the principal amount of the notes as to which such
Participant or Participants has or have given such direction. However, if there
is an Event of Default under the indenture, DTC reserves the right to exchange
the Global Notes for legended notes in certificated form and to distribute such
notes to its Participants.
The information in this section concerning DTC, Euroclear and Clearstream
and their book-entry systems has been obtained from sources that NorskeCanada
believes to be reliable, but NorskeCanada takes no responsibility for the
accuracy thereof.
Although DTC, has agreed to the foregoing procedures to facilitate transfers
of interest in the Global Notes among Participants in DTC, it is under no
obligation to perform or to continue to perform such procedures, and such
procedures may be discontinued at any time. Neither NorskeCanada nor the trustee
will have any responsibility for the performance by DTC or its Participants or
Indirect Participants of their respective obligations under the rules and
procedures governing their operations.
EXCHANGE OF BOOK-ENTRY NOTES FOR CERTIFICATED NOTES
A beneficial interest in a Global Note may not be exchanged for a security
in certificated form unless:
(1) DTC notifies NorskeCanada that it is unwilling or unable to continue as
Depositary for such Global Notes and NorskeCanada thereupon fails to
appoint a successor Depositary,
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<Page>
(2) NorskeCanada, at its option, notifies the trustee in writing that it
elects to cause the issuance of the notes in certificated form, or
(3) there shall have occurred and be continuing an Event of Default with
respect to the notes.
In all cases, certificated notes delivered in exchange for any Global Note
or beneficial interests therein will be registered in the names, and issued in
any approved denominations, requested by or on behalf of the Depositary (in
accordance with its customary procedures). Any certificated notes issued in
exchange for an interest in a Global Note will bear the legend restricting
transfers that is borne by such Global Note. Any such exchange will be effected
through the DWAC system and an appropriate adjustment will be made in the
records of the applicable security registrar to reflect a decrease in the
principal amount of the relevant Global Note.
126
<Page>
EXCHANGE OFFER AND REGISTRATION RIGHTS
The summary set forth below of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified in
its entirety by reference to, all the provisions of the Registration Rights
Agreement, a copy of which will be made available to prospective purchasers of
the notes upon request to us.
We entered into the Registration Rights Agreement with the Initial
Purchasers, pursuant to which we agreed to file with the SEC, within 120 days, a
registration statement on an appropriate form under the Securities Act (the
"Exchange Offer Registration Statement") with respect to an offer to exchange
each of the notes for senior debt securities with terms substantially identical
to the notes and representing the same indebtedness as the notes (the "Exchange
Notes") (except that the Exchange Notes will not contain transfer restrictions)
and to offer to the holders of notes who are able to make certain
representations the opportunity to exchange their notes for Exchange Notes. If:
- filing the Exchange Offer Registration Statement would not be permitted by
applicable law or SEC policy;
- the Exchange Offer (as defined in the Registration Rights Agreement) is
not for any other reason consummated within 240 days after the Issue Date;
- any holder of notes notifies us within a specified time period that
(a) due to a change in law or policy it is not entitled to participate in
the Exchange Offer, (b) due to a change in law or policy it may not resell
the Exchange Notes acquired by it in the Exchange Offer to the public
without delivering a prospectus and the prospectus contained in the
Exchange Offer Registration statement is not appropriate or available for
such resales by such holder or (c) it is a broker-dealer and owns notes
acquired directly from us or an affiliate of ours; or
- the holders of a majority of the notes may not resell the Exchange Notes
acquired by them in the Exchange Offer to the public without restriction
under the Securities Act and without restriction under applicable blue sky
or state securities laws;
we agreed to use our best efforts to file with the SEC a shelf registration
statement (the "Shelf Registration Statement") to cover resales of the Transfer
Restricted Notes (as defined in the Registration Rights Agreement) by the
holders thereof.
We agreed to pay all expenses incident to the Exchange Offer and will
indemnify the Initial Purchasers against certain liabilities, including
liabilities under the Securities Act.
The Registration Rights Agreement provides that:
- unless the Exchange Offer would not be permitted by applicable law or SEC
policy, we will use our best efforts to file the Exchange Offer
Registration Statement with the SEC on or prior to 120 days after the
Issue Date;
- unless the Exchange Offer would not be permitted by applicable law or SEC
policy, we will use our best efforts to have the Exchange Offer
Registration Statement declared effective by the SEC on or prior to
180 days after the Issue Date;
- unless the Exchange Offer would not be permitted by applicable law or SEC
policy, we will commence the Exchange Offer and use our best efforts to
issue, on or prior to 240 days after the Issue Date, Exchange Notes in
exchange for all notes tendered prior thereto in the Exchange Offer; and
- if obligated to file the Shelf Registration Statement, we will use our
best efforts to file prior to the later of (a) 240 days after the Issue
Date and (b) 30 days after such filing obligation arises
127
<Page>
and use our best efforts to cause the Shelf Registration Statement to be
declared effective by the SEC on or prior to 60 days after the Shelf
Registration Statement was first filed with the SEC.
We shall use our best efforts to keep such Shelf Registration Statement
continuously effective, until the second anniversary of the effective date of
the Shelf Registration Statement or such shorter period that will terminate when
all the Transfer Restricted Notes covered by the Shelf Registration Statement
have been sold pursuant thereto.
If (i) we fail to file any of the registration statements required by the
Registration Rights Agreement on or before the date specified for such filing,
(ii) any of such registration statements are not declared effective by the SEC
on or prior to the date specified for such effectiveness (the "Effectiveness
Target Date"), (iii) we fail to consummate the Exchange Offer within 60 days of
the Effectiveness Target Date or (iv) the Shelf Registration Statement or the
Exchange Offer Registration Statement is declared effective prior to the
Effectiveness Target Date but thereafter ceases to be effective or usable in
connection with the Exchange Offer or resales of Transfer Restricted Notes,
except under certain circumstances specified in the Registration Rights
Agreement (each such event referred to in clauses (i) through (iv) above, a
"Registration Default"), then we will pay additional interest ("Additional
Interest") to each holder of Transfer Restricted Notes (as defined in the
Registration Rights Agreement), with respect to the first 90-day period (or
portion thereof) while a Registration Default is continuing immediately
following the occurrence of such Registration Default in an amount equal to
0.25% per annum of the principal amount of the notes. The amount of Additional
Interest will increase by an additional 0.25% per annum of the principal amount
of the notes for each subsequent 90-day period (or portion thereof) while a
Registration Default is continuing until all Registration Defaults have been
cured, up to a maximum amount of 1.00% per annum of the principal amount of the
notes. Following the cure of a particular Registration Default, the accrual of
Additional Interest with respect to such Registration Default will cease.
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<Page>
INCOME TAX CONSIDERATIONS
U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following summary describes material U.S. federal income tax
consequences of the ownership of exchange notes to a U.S. Holder (as defined
below) and the issuance of the exchange notes in exchange for the outstanding
notes. It deals only with exchange notes held as capital assets by investors who
purchased the outstanding notes as part of their original issuance and for their
original offering price, and not with special classes of holders, such as
dealers in securities or currencies, traders in securities that elect mark to
market, banks, tax-exempt organizations, partnerships or other pass-through
entities, life insurance companies, certain expatriates, persons that hold the
exchange notes as a hedge, or as part of a straddle or conversion transaction,
taxpayers subject to the alternative minimum tax or whose functional currency is
not the U.S. dollar. In addition, this summary does not describe any U.S.
federal estate and gift, foreign, state or local tax consequences. This summary
is based on the Internal Revenue Code of 1986, as amended (the "Code"), its
legislative history, existing and proposed Treasury regulations thereunder,
published rulings and court decisions, all as currently in effect and all
subject to change at any time, perhaps with retroactive effect.
WE RECOMMEND THAT HOLDERS OF THE EXCHANGE NOTES CONSULT THEIR OWN TAX
ADVISORS CONCERNING THE CONSEQUENCES, IN THEIR PARTICULAR CIRCUMSTANCES, UNDER
THE CODE AND THE LAWS OF ANY OTHER TAXING JURISDICTION, OF THE OWNERSHIP OF THE
EXCHANGE NOTES.
For the purposes of this summary, a U.S. Holder is a beneficial owner of
exchange notes that is (i) an individual citizen or resident of the
United States for U.S. federal income tax purposes, (ii) a corporation created
or organized in or under the laws of the United States or of any political
subdivision thereof, (iii) an estate that is subject to U.S. federal income tax
without regard to the source of its income or (iv) a trust if (a) a
United States court is able to exercise primary supervision over administration
of the trust and one or more United States persons have authority to control all
substantial decisions of the trust, or (b) the trust has elected to be treated
as a United States person under applicable Treasury regulations.
The exchange of the outstanding notes for exchange notes will not constitute
a taxable exchange. As a result, (i) a U.S. Holder will not recognize any gain
or loss as a result of exchanging such holder's outstanding notes; (ii) the
holding period of the exchange notes received will include the holding period of
the outstanding notes exchanged therefor; and (iii) the adjusted tax basis of
the exchange notes received will be the same as the adjusted tax basis of the
outstanding notes exchanged therefor immediately before such exchange.
A U.S. Holder of the exchange notes will be required to report as ordinary
interest income for U.S. federal income tax purposes interest paid or accrued on
the exchange notes (including Additional Amounts, if any, and any income tax
withheld) in accordance with the U.S. Holder's method of accounting for U.S.
federal income tax purposes. Such income will generally be treated as foreign
source passive income (or, in the case of certain U.S. Holders, foreign source
financial services income) for foreign tax credit purposes.
If any Canadian taxes with respect to payments to a U.S. Holder of interest
on the exchange notes are withheld, such withholding taxes generally will be
treated as foreign income taxes eligible for credit against the U.S. Holder's
U.S. federal income tax liability, subject to generally applicable limitations
and conditions, or, at the election of such U.S. Holder, for deduction in
computing such U.S. Holder's taxable income. The rules relating to foreign tax
credits and the timing thereof are extremely complex. We recommend that
U.S. Holders consult their own tax advisors concerning the implications of these
rules in light of their particular circumstances.
129
<Page>
A U.S. Holder's adjusted tax basis for the exchange notes will be the same
as the adjusted tax basis of the outstanding notes exchanged therefor, which
generally will be the U.S. Holder's purchase price for the outstanding notes.
Upon the sale, exchange or other taxable disposition of the exchange notes, a
U.S. Holder generally will recognize gain or loss equal to the difference (if
any) between the amount realized (except to the extent attributable to accrued
but unpaid interest, which will be taxable as described above) and the
U.S. Holder's tax basis in the exchange notes. In general, such gain or loss
will be U.S. source capital gain or loss. Such gain or loss will be long-term
capital gain or loss if the notes have been held for more than one year. The
deductibility of capital losses is subject to limitations.
A holder of an exchange note may be subject to backup withholding with
respect to interest and principal paid on the exchange notes and to proceeds
from the sale, exchange, redemption or retirement of the exchange notes, unless
such holder (a) is a corporation or comes within certain other exempt categories
and, when required, demonstrates that fact or (b) provides a correct taxpayer
identification number, certifies as to no loss of exemption from backup
withholding and otherwise complies with applicable requirements of the backup
withholding rules. A holder of an exchange note who does not provide
NorskeCanada with the holder's correct taxpayer identification number may be
subject to penalties imposed by the Internal Revenue Service.
Backup withholding is not an additional tax. Any amount paid as backup
withholding tax may be creditable against the holder's U.S. federal income tax
liability provided that the required information is furnished to the Internal
Revenue Service in a timely manner.
CANADIAN FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary, as of the date hereof, of the principal Canadian
federal income tax considerations generally applicable to a person (a
"Non-Resident holder") who is a holder of exchange notes and who, for the
purposes of the INCOME TAX ACT (Canada) (the "Canadian Tax Act") and at all
relevant times, is not and is not deemed to be resident in Canada, deals at
arm's length with NorskeCanada, and does not use or hold and is not deemed or
considered to use or hold the exchange notes in carrying on business in Canada.
Special rules which are not discussed in this summary may apply to a
Non-Resident holder that is an insurer that carries on an insurance business in
Canada and elsewhere.
This summary is based on the current provisions of the Canadian Tax Act and
the regulations thereunder (the "Regulations") in force on the date hereof, all
specific proposals to amend the Canadian Tax Act and the Regulations publicly
announced by or on behalf of the Minister of Finance (Canada) prior to the date
hereof and NorskeCanada's understanding of the published administrative
practices of the Canada Customs and Revenue Agency. This summary does not take
into account or anticipate any other changes in law or administrative practice,
whether legislative, government or judicial decision or action and does not take
into account provincial, territorial or foreign income tax legislation or
considerations.
THIS SUMMARY IS OF A GENERAL NATURE ONLY AND IS NOT INTENDED TO BE, NOR
SHOULD IT BE INTERPRETED AS, LEGAL OR TAX ADVICE TO ANY PARTICULAR NON-RESIDENT
HOLDER AND NO REPRESENTATION IS MADE WITH RESPECT TO THE CANADIAN INCOME TAX
CONSEQUENCES TO ANY PARTICULAR PERSON ACQUIRING EXCHANGE NOTES. NON-RESIDENT
HOLDERS SHOULD THEREFORE CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THEIR
PARTICULAR CIRCUMSTANCES.
Under the Canadian Tax Act, payments by NorskeCanada to a Non-Resident
holder of principal, interest and premium, if any, on the exchange notes will be
exempt from Canadian withholding tax.
No other taxes on income (including taxable capital gains) will be payable
by a Non-Resident holder under the Canadian Tax Act solely as a consequence of
the ownership, acquisition or disposition of exchange notes.
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<Page>
PLAN OF DISTRIBUTION
Based on positions taken by the staff of the SEC set forth in no-action
letters issued to third parties, we believe that the exchange notes issued in
exchange for outstanding notes pursuant to this exchange offer may be offered
for resale, resold or otherwise transferred by holders thereof, other than any
holder which is
- an "affiliate" of ours within the meaning of Rule 405 under the Securities
Act;
- a broker-dealer who acquired exchange notes directly from us; or
- a broker-dealer who acquired exchange notes as a result of market-making
or other trading activities.
without compliance with the registration and prospectus delivery provisions of
the Securities Act, provided that such exchange notes are acquired in the
ordinary course of such holders' business, and such holders and are engaged in,
and do not intend to engage in, and have no arrangement or understanding with
any person to participate in, a distribution of such exchange notes.
Each holder of outstanding notes who wishes to exchange its outstanding
notes for exchange notes in the exchange offer will be required to make
representations to us as set forth in "The Exchange Offer." Holders who tender
outstanding notes in the exchange offer with the intention of participating in a
distribution of the exchange notes may not rely upon no-action letters issued to
third parties, including "Exxon Capital Holdings Corporation" (available
May 13, 1988), "Morgan Stanley & Co. Incorporated" (available June 5, 1991),
"Mary Kay Cosmetics, Inc." (available June 5, 1991), "Warnaco, Inc." (available
October 11, 1991) and "Shearman & Sterling" (available July 2, 1993) or similar
no-action letters.
Each participating broker-dealer that receives exchange notes for its own
account pursuant to the exchange offer must acknowledge that it will deliver a
prospectus in connection with any resale of such exchange notes. This
prospectus, as it may be amended or supplemented from time to time, may be used
by a participating broker-dealer in connection with resales of exchange notes
received in exchange for outstanding notes where such outstanding notes were
acquired as a result of market-making activities or other trading activities. We
have agreed that for a period of 180 days after the consummation of the exchange
offer, we will make this prospectus, as amended or supplemented, available to
any participating broker-dealer for use in connection with any such resale.
We will not receive any proceeds from any sales of the exchange notes by
participating broker-dealers. Exchange notes received by participating
broker-dealers for their own account pursuant to the exchange offer may be sold
from time to time in one or more transactions in the over-the-counter market, in
negotiated transactions, through the writing of options on the exchange notes or
a combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such participating broker-dealer and/or the purchasers of
any such exchange notes. Any participating broker-dealer that resells the
exchange notes that were received by it for its own account pursuant to the
exchange offer and any broker or dealer that participates in a distribution of
such exchange notes may be deemed to be an "underwriter" within the meaning of
the Securities Act and any profit on any such resale of exchange notes and any
commission or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The letter of transmittal
states that, by acknowledging that it will deliver and by delivering a
prospectus, a participating broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act.
For a period of 180 days after the consummation of the exchange offer, we
will promptly send additional copies of this prospectus and any amendment or
supplement to this prospectus to any participating broker-dealer that requests
such documents in the letter of transmittal.
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LEGAL MATTERS
Certain legal matters in connection with the notes being offered will be
passed upon for NorskeCanada by Lawson Lundell, Vancouver, British Columbia with
respect to matters of Canadian law, and by Shearman & Sterling LLP, Menlo Park,
California with respect to matters of U.S. law.
EXPERTS
Norske Skog Canada Limited's consolidated balance sheets as at December 31,
2003 and 2002 and its consolidated statements of earnings, retained earnings and
cash flows for each of the years in the three-year period ended December 31,
2003, have been included in this prospectus in reliance upon the report of
KPMG LLP, Chartered Accountants, appearing elsewhere herein, and upon the
authority of such firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION ABOUT US
We have filed a registration statement on Form F-4 with the SEC with respect
to the exchange notes offered under this prospectus. This prospectus, which
constitutes a part of the registration statement, does not contain all of the
information in the registration statement or the exhibits and schedules that are
part of the registration statement. For further information on our company and
the exchange notes we are offering, you should review the registration statement
and the exhibits filed as a part of the registration statement. The registration
statement, including the exhibits, may be inspected without charge at the public
reference facilities maintained by the SEC in Room 1024, 450 Fifth Street, N.W.
Washington, D.C. 20549, and the SEC's regional offices located in New York,
New York and Chicago, Illinois. Copies of all or any part of the registration
statement may be obtained from these offices after payment of fees prescribed by
the SEC. Please call the SEC at 1-800-SEC-0330 for further information on the
public reference rooms. The SEC also maintains a Web site at http://www.sec.gov
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the SEC.
We file periodic reports and other information with the SEC. Our filings
with the SEC are available for inspection and copying at the SEC's public
reference room, at 450 Fifth Street NW, Washington, DC 20549 and the internet
website www.sec.gov. The public may obtain information on the operation of the
public reference room by calling the SEC at 1-800-SEC-0330. As a foreign private
issuer, we are exempt from the rule under the Exchange Act prescribing the
furnishing and content of proxy statements to shareholders. Because we are a
foreign private issuer, we, our directors and our officers are also exempt from
the short swing profit recovery disclosure regime of Section 16 of the Exchange
Act.
We hereby incorporate by refence into this prospectus our Form 6-K dated
April 30, 2004 and all documents that we file with the SEC under
Sections 13(a), 13(c) and 15(d) of the Exchange Act, as amended, and any
Form 6-Ks that provide for incorporation by reference into this prospectus and
that are submitted to the SEC, from the date of the initial filing of this
prospectus until the exchange offer is completed shall also be deemed to be
incorporated by reference into and will automatically update information in this
registration statement.
In addition, pursuant to the indenture for the notes, we have agreed, to the
extent permitted by the SEC, to furnish to the SEC and in all events to
distribute to the trustee for the notes and the holders of notes its annual
reports containing audited financial statements and unaudited financial
statements for each of the first three quarters of each fiscal year. We will do
this without regard to whether we are subject to the informational requirements
of the Exchange Act.
Further information regarding us may also be obtained from the internet
website www.sedar.com, maintained on behalf of the Canadian Securities
Administrators.
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INDEX TO FINANCIAL STATEMENTS
<Table>
<Caption>
PAGE
--------
Auditors' Report............................................ F-2
Audited consolidated balance sheets of Norske Skog Canada
Limited as at December 31, 2003 and 2002 and the
consolidated statements of earnings, retained earnings and
cash flows for each of the years in the three-year period
ended December 31, 2003, including the auditors' report
thereon..................................................... F-3
</Table>
F-1
<Page>
AUDITORS' REPORT
To the Directors of
NORSKE SKOG CANADA LIMITED
We have audited the consolidated balance sheets of Norske Skog Canada
Limited as at December 31, 2003 and 2002 and the consolidated statements of
earnings, retained earnings and cash flows for each of the years in the
three-year period ended December 31, 2003. 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 and United States
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,
2003 and 2002 and the results of its operations and its cash flows for each of
the years in the three-year period ended December 31, 2003 in accordance with
Canadian generally accepted accounting principles.
Vancouver, Canada (Signed) KPMG LLP
January 20, 2004, except as to notes 23 and 24 Chartered Accountants
which are as of March 23, 2004
F-2
<Page>
NORSKE SKOG CANADA LIMITED
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS OF CANADIAN DOLLARS)
<Table>
<Caption>
AS AT DECEMBER 31
-------------------
2002 2003
-------- --------
ASSETS
Current assets
Accounts receivable....................................... $ 277.3 $ 253.5
Inventories (note 4)...................................... 242.7 235.9
Prepaid expenses.......................................... 9.2 6.6
-------- --------
529.2 496.0
Fixed assets (note 5)....................................... 2,326.6 2,290.2
Other assets (note 6)....................................... 37.7 30.0
-------- --------
$2,893.5 $2,816.2
======== ========
LIABILITIES
Current liabilities
Accounts payable and accrued liabilities (note 7)......... $ 288.8 $ 244.2
Long-term debt (note 8)..................................... 886.2 845.8
Other long-term obligations (note 9)........................ 188.3 272.7
Future income taxes (note 10)............................... 397.0 363.3
Deferred credits (note 11).................................. 8.5 21.0
-------- --------
1,768.8 1,747.0
-------- --------
SHAREHOLDERS' EQUITY
Share capital (note 12)..................................... 884.6 913.6
Retained earnings........................................... 240.1 155.6
-------- --------
1,124.7 1,069.2
-------- --------
$2,893.5 $2,816.2
======== ========
</Table>
Commitments, Guarantees and Indemnities (notes 19 and 20)
Contingency (note 21)
APPROVED BY THE BOARD:
<Table>
(Signed) RUSSELL J. HORNER (Signed) WILLIAM P. ROSENFELD
Director Director
</Table>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-3
<Page>
NORSKE SKOG CANADA LIMITED
CONSOLIDATED STATEMENTS OF EARNINGS
(IN MILLIONS OF CANADIAN DOLLARS, EXCEPT WHERE OTHERWISE STATED)
<Table>
<Caption>
YEAR ENDED DECEMBER 31
------------------------------
2001 2002 2003
-------- -------- --------
Gross sales................................................. $1,561.3 $1,704.0 $1,820.5
Distribution costs.......................................... 172.6 221.7 229.3
-------- -------- --------
Net sales................................................... 1,388.7 1,482.3 1,591.2
-------- -------- --------
Operating expenses
Cost of sales............................................. 1,114.2 1,360.4 1,458.2
Selling, general and administrative....................... 63.6 65.3 54.7
Depreciation and amortization............................. 131.2 178.5 189.9
-------- -------- --------
1,309.0 1,604.2 1,702.8
-------- -------- --------
Operating earnings (loss)................................... 79.7 (121.9) (111.6)
Foreign exchange gain (loss) on translation of long-term
debt...................................................... (17.1) 12.3 58.2
Write-down of fixed assets (note 5)......................... -- -- (14.2)
Other expense, net (note 14)................................ (40.2) (13.3) (3.9)
Interest expense............................................ (34.1) (77.9) (75.5)
Interest income............................................. 35.0 1.7 0.5
-------- -------- --------
Earnings (loss) before income taxes......................... 23.3 (199.1) (146.5)
Income tax recovery (note 10)............................... (21.2) (75.8) (62.0)
-------- -------- --------
Net earnings (loss)......................................... $ 44.5 $ (123.3) $ (84.5)
-------- -------- --------
Basic and diluted earnings (loss) per share (note 13) (in
dollars).................................................. $ 0.32 $ (0.64) $ (0.41)
======== ======== ========
</Table>
NORSKE SKOG CANADA LIMITED
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(IN MILLIONS OF CANADIAN DOLLARS)
<Table>
<Caption>
YEAR ENDED DECEMBER 31
------------------------------
2001 2002 2003
-------- -------- --------
Balance, beginning of year.................................. $902.6 $363.4 $240.1
Net earnings (loss)......................................... 44.5 (123.3) (84.5)
Special distribution (note 2)............................... (546.5) -- --
Dividends................................................... (37.2) -- --
------ ------ ------
Balance, end of year........................................ $363.4 $240.1 $155.6
====== ====== ======
</Table>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
<Page>
NORSKE SKOG CANADA LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS OF CANADIAN DOLLARS)
<Table>
<Caption>
YEAR ENDED DECEMBER 31
-------------------------------
2001 2002 2003
--------- -------- --------
Cash provided by (used for):
Operations
Net earnings (loss)....................................... $ 44.5 $(123.3) $ (84.5)
Items not requiring (providing) cash
Depreciation and amortization........................... 131.2 178.5 189.9
Future income taxes..................................... (7.7) (91.5) (67.9)
Increase in other long-term obligations................. 8.5 19.8 17.5
Foreign exchange gain on translation of long-term
debt................................................... 17.1 (12.3) (58.2)
Loss on sale of Mackenzie Pulp Operations............... 31.4 -- --
Write-down of fixed assets (note 5)..................... -- -- 14.2
Write-off of deferred financing costs................... -- 15.8 --
Other................................................... 7.5 (3.3) 6.2
--------- ------- -------
232.5 (16.3) 17.2
--------- ------- -------
Changes in non-cash working capital
Accounts receivable..................................... 59.2 30.4 40.4
Inventories............................................. 52.3 (13.0) 10.2
Prepaid expenses........................................ 6.3 (4.9) 2.6
Accounts payable and accrued liabilities................ (80.5) 9.0 (47.9)
--------- ------- -------
37.3 21.5 5.3
--------- ------- -------
Cash provided by operations................................. 269.8 5.2 22.5
--------- ------- -------
Investing
Acquisition of paper recycling business (note 3(a))....... -- -- (32.1)
Acquisition of Pacifica Papers Inc. (note 3(b))........... (74.1) -- --
Additions to fixed assets................................. (92.7) (82.2) (81.4)
Proceeds from sale of marketable securities............... -- 39.2 --
Proceeds from sale of Mackenzie Pulp Operations
(note 3(c))............................................. 103.8 -- --
Proceeds from sale of fixed assets........................ 0.7 1.5 0.4
Proceeds from termination of interest rate swaps
(note 9)................................................ -- 3.4 15.9
Decrease (increase) in other assets....................... 1.6 (4.4) 1.1
--------- ------- -------
(60.7) (42.5) (96.1)
--------- ------- -------
Financing
Special distribution (note 2)............................. (1,490.3) -- --
Issue of common shares, net of share issue costs
(note 12)............................................... -- 208.1 (0.1)
Increase (decrease) in revolving loan (note 8)............ -- 119.1 (105.7)
Issue of long-term debt (note 8).......................... 768.7 -- 212.7
Repayment of long-term debt (note 8)...................... (240.9) (386.7) --
Deferred financing costs.................................. (30.7) -- (5.6)
Decrease in other long-term obligations................... (3.6) (8.0) (27.7)
Dividends paid............................................ (37.2) -- --
--------- ------- -------
(1,034.0) (67.5) 73.6
--------- ------- -------
Cash, decrease during year(1)............................... (824.9) (104.8) --
Cash, beginning of year(1).................................. 929.7 104.8 --
--------- ------- -------
Cash, end of year(1)........................................ $ 104.8 $ -- $ --
========= ======= =======
Supplemental information:
Income taxes paid......................................... $ 5.0 $ 12.8 $ 7.1
Net interest paid (received).............................. (9.9) 78.3 80.2
Common shares issued for acquisition of paper recycling
business (note 3(a)).................................... -- -- 29.1
Common shares issued for acquisition of Pacifica Papers
(note 3(b))............................................. 354.3 -- --
Non-cash proceeds from sale of Mackenzie Pulp Operations
(note 3(c))............................................. 34.6 -- --
</Table>
- ------------------------------
(1) Cash includes cash and short-term investments.
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-5
<Page>
NORSKE SKOG CANADA LIMITED
CONSOLIDATED BUSINESS SEGMENTS
(IN MILLIONS OF CANADIAN DOLLARS)
<Table>
<Caption>
YEAR ENDED DECEMBER 31, 2001
---------------------------------------------------------------
CORPORATE
SPECIALTIES NEWSPRINT PULP ADJUSTMENTS CONSOLIDATED
----------- --------- -------- ----------- ------------
Net sales to external customers........... $ 563.6 $489.2 $335.9 $ -- $1,388.7
Inter-segment sales....................... -- -- 124.1 (124.1) --
Operating earnings (loss)................. 72.2 37.3 (29.8) -- 79.7
Depreciation and amortization............. 36.1 48.4 46.7 -- 131.2
Total assets.............................. 1,359.7 914.1 669.3 206.7 3,149.8
Additions to fixed assets................. 29.0 31.3 32.4 -- 92.7
</Table>
<Table>
<Caption>
YEAR ENDED DECEMBER 31, 2002
---------------------------------------------------------------
CORPORATE
SPECIALTIES NEWSPRINT PULP ADJUSTMENTS CONSOLIDATED
----------- --------- -------- ----------- ------------
Net sales to external customers........... $ 835.0 $440.6 $206.7 $ -- $1,482.3
Inter-segment sales....................... -- -- 193.1 (193.1) --
Operating earnings (loss)................. (1.3) (86.0) (34.6) -- (121.9)
Depreciation and amortization............. 91.2 63.4 23.9 -- 178.5
Total assets.............................. 1,380.0 851.8 629.1 32.6 2,893.5
Additions to fixed assets................. 43.9 19.5 18.8 -- 82.2
</Table>
<Table>
<Caption>
YEAR ENDED DECEMBER 31, 2003
---------------------------------------------------------------
CORPORATE
SPECIALTIES NEWSPRINT PULP ADJUSTMENTS CONSOLIDATED
----------- --------- -------- ----------- ------------
Net sales to external customers........... $ 880.1 $463.0 $248.1 $ -- $1,591.2
Inter-segment sales....................... -- -- 171.5 (171.5) --
Operating earnings (loss)................. (32.5) (56.6) (22.5) -- (111.6)
Depreciation and amortization............. 98.5 61.7 29.7 -- 189.9
Total assets.............................. 1,424.4 775.0 591.6 25.2 2,816.2
Additions to fixed assets................. 28.1 25.6 27.7 -- 81.4
</Table>
SEE ACCOMPANYING NOTE 18 TO CONSOLIDATED FINANCIAL STATEMENTS.
F-6
<Page>
NORSKE SKOG CANADA LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003
(IN MILLIONS OF CANADIAN DOLLARS, EXCEPT PER SHARE AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These consolidated financial statements of Norske Skog Canada Limited ("the
Company" or "NorskeCanada") 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 differences are described in
note 22, "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 50.1%
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 preparation of financial statements in conformity with Canadian
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the period. Actual amounts could differ from those
estimates.
(c) INVENTORIES
Inventories, other than supplies which are valued at cost, are valued at
the lower of average cost and net realizable value.
(d) FIXED ASSETS
Fixed assets are recorded at cost.
Buildings, machinery and equipment are depreciated 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:
<Table>
Buildings............................................... 2.5 - 5.0%
Pulp and paper machinery and equipment.................. 5.0%
</Table>
During periods of major production interruption, an obsolescence amount
of 10% of normal depreciation is charged on manufacturing equipment.
No depreciation 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.
F-7
<Page>
NORSKE SKOG CANADA LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003
(IN MILLIONS OF CANADIAN DOLLARS, EXCEPT PER SHARE AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(e) DEFERRED FINANCING COSTS
Deferred financing costs included in other assets on the consolidated
balance sheet represent the costs of negotiating and securing the
Company's long-term debt. Related amortization is included in interest
expense on a straight-line basis over the term of the debt.
(f) 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.
(g) 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
on sales invoices. Customers have no contractual right of return, except
in the event of a quality issue. Distribution costs are classified as a
reduction to gross revenue in determining net sales.
(h) 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 the rates of exchange
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 rates of exchange in effect when the assets are acquired or
obligations incurred. Foreign exchange gains and losses are reflected in
net earnings for the period.
(i) DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses derivative financial instruments for hedging purposes 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. Risk management strategies and relationships are
assessed on a regular, on-going basis to ensure the derivatives are
achieving the intended hedging objectives.
Foreign exchange exposure to foreign currency receipts and related
receivables, primarily in U.S. currency, is managed through the use of
foreign exchange forward contracts and options. Resulting foreign
exchange translation gains and losses are recognized when realized on
maturity in "Net 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. Resulting realized gains and losses are
recognized when realized on maturity in "Net sales" or "Cost of sales".
F-8
<Page>
NORSKE SKOG CANADA LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003
(IN MILLIONS OF CANADIAN DOLLARS, EXCEPT PER SHARE AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Foreign currency exposure on long-term debt denominated in U.S. currency
is managed through the use of forward contracts and options. Resulting
gains and losses are accrued under other assets or liabilities on the
balance sheet and recognized in "Foreign exchange gain(loss) on
translation of long-term debt", offsetting the respective translation
gains and losses recognized on the underlying foreign currency long-term
debt. The forward premium or discount on forward foreign exchange
contracts used to hedge foreign currency long-term debt is initially
deferred and amortized prospectively as an adjustment to interest expense
over the term of the forward contract.
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
are recognized as adjustments to interest expense.
(j) 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 or
enactment occurs.
(k) 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 expense in proportion to the net reduction in the future
income tax asset that gave rise to the deferred credit.
(l) ENVIRONMENTAL COSTS
Environmental expenditures are expensed or capitalized depending upon
their future economic benefit. Expenditures that prevent future
environmental contamination are capitalized as fixed 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.
(m) EMPLOYEE FUTURE BENEFITS
The estimated cost for pensions and other post-retirement benefits
provided to employees by the Company is accrued using actuarial
techniques and assumptions during the employees' active years of service.
F-9
<Page>
NORSKE SKOG CANADA LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003
(IN MILLIONS OF CANADIAN DOLLARS, EXCEPT PER SHARE AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(n) EARNINGS PER SHARE
Basic earnings (loss) per share are computed by dividing net earnings
(loss) by the weighted average shares outstanding during the reporting
period. Diluted earnings (loss) per share are computed using the treasury
stock method.
(o) MARKETABLE SECURITIES
Marketable securities are valued at the lower of cost or quoted market
value.
(p) STOCK-BASED COMPENSATION PLANS
The Company accounts for stock-based payments to non-employees, and
employee awards that are direct awards of stock, call for settlement in
cash or other assets, or are stock appreciation rights that call for net
settlement by the issuance of equity instruments, granted on or after
January 1, 2002, using the fair-value method. No compensation cost is
recorded for all other stock-based employee compensation awards.
Consideration paid by employees on the exercise of stock options is
recorded as share capital and contributed surplus. The Company discloses
the pro forma effect of accounting for these awards under the fair value
method (see note 12(c)).
(q) COMPARATIVE FIGURES
Certain comparative figures have been reclassified to conform with the
presentation adopted for the current year.
2. SPECIAL DISTRIBUTION
On August 28, 2001, the Company paid a special distribution ("Special
Distribution") of $1,490.3 ($12.00 per common share), which consisted of a
return of capital of $943.8 ($7.60 per common share) and a special dividend of
$546.5 ($4.40 per common share).
3. ACQUISITIONS AND DISPOSAL
(a) ACQUISITION OF PAPER RECYCLING BUSINESS
On December 1, 2003, the Company completed the acquisition of a paper
recycling business from Newstech Recycling Partnership for a total
purchase price of $61.1, including a working capital adjustment payment
of $2.5 at closing.
The Company's consideration comprised of $31.5 in cash, $29.0 in equity
and $0.6 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.
F-10
<Page>
NORSKE SKOG CANADA LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003
(IN MILLIONS OF CANADIAN DOLLARS, EXCEPT PER SHARE AMOUNTS)
3. ACQUISITIONS AND DISPOSAL (CONTINUED)
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.
<Table>
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
=====
</Table>
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.
(b) ACQUISITION OF PACIFICA PAPERS INC.
On August 27, 2001, the Company completed the acquisition of Pacifica
Papers Inc. ("Pacifica"). Under the terms of an arrangement agreement
("Arrangement") between both companies, the Pacifica shareholders were
entitled, for each of their shares, to elect to receive either: (i) 2.1
NorskeCanada common shares ("Shares Option"), or (ii) 1.0 NorskeCanada
common share and $7.50 in cash ("Partial Cash Option").
The Company based its valuation on $7.00 per common share, which
represented the weighted average trading price of its common shares over
the twenty-day period prior to the signing and announcement of the
Arrangement on March 25, 2001, as adjusted for the Special Distribution.
Upon closing, shareholders owning 21,050,273 of Pacifica's shares elected
to receive the Shares Option and shareholders owning 6,415,307 of
Pacifica's shares elected to receive the Partial Cash Option.
F-11
<Page>
NORSKE SKOG CANADA LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003
(IN MILLIONS OF CANADIAN DOLLARS, EXCEPT PER SHARE AMOUNTS)
3. ACQUISITIONS AND DISPOSAL (CONTINUED)
The acquisition has been accounted for by using the purchase method of
accounting. The following amounts were assigned to the assets and
liabilities acquired, based on their fair value as at August 31, 2001
(the effective date of the acquisition for accounting purposes):
<Table>
ASSETS ACQUIRED:
Current assets.............................................. $ 237.9
Fixed assets................................................ 1,302.4
Other assets................................................ 9.3
--------
$1,549.6
--------
LIABILITIES ASSUMED:
Current liabilities......................................... $ 164.9
Operating loan.............................................. 23.3
Long-term debt.............................................. 591.5
Other long-term liabilities................................. 80.9
Future income taxes......................................... 260.6
--------
$1,121.2
--------
FAIR VALUE OF NET ASSETS ACQUIRED........................... $ 428.4
========
CONSIDERATION PAID:
Cash, including transaction costs........................... $ 74.1
Common shares............................................... 354.3
--------
$ 428.4
========
</Table>
Liabilities assumed on acquisition included severance and restructuring
costs of $67.0 related to the permanent closure of the Powell River kraft
pulp mill operations in November 2001 and elimination of 120 positions at
the Company's corporate and sales offices and its Port Alberni
operations. The closure of the Powell River kraft pulp mill operations,
which included the mill's groundwood and woodroom operations, resulted in
the elimination of 282 positions.
Liabilities assumed on acquisition also included an increase of $23.2
related to the fair value of Pacifica's US$200.0 senior notes (note 8).
(c) DISPOSAL OF MACKENZIE PULP OPERATIONS
On June 15, 2001, the Company sold its Mackenzie pulp operations for net
proceeds of $138.4, resulting in a loss of $19.0, net of an income tax
recovery of $12.4. The net proceeds of disposal ("Disposal") included
1,750,000 shares of Pope & Talbot Inc., which had a quoted market value
of $34.6 on the closing date. The assets and liabilities disposed of were
$185.9 and $28.5, respectively.
F-12
<Page>
NORSKE SKOG CANADA LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003
(IN MILLIONS OF CANADIAN DOLLARS, EXCEPT PER SHARE AMOUNTS)
4. INVENTORIES
<Table>
<Caption>
2002 2003
-------- --------
Specialties................................................. $ 56.7 $ 47.4
Newsprint................................................... 22.8 28.0
Pulp........................................................ 16.8 16.0
Wood chips, pulp logs and other raw materials............... 58.8 50.2
Operating and maintenance supplies.......................... 87.6 94.3
------ ------
$242.7 $235.9
====== ======
</Table>
5. FIXED ASSETS
<Table>
<Caption>
2002
----------------------------------
ACCUMULATED NET BOOK
COST DEPRECIATION VALUE
-------- ------------ --------
Property, plant and equipment
Specialties and newsprint........................... $2,659.9 $ 824.6 $1,835.3
Pulp................................................ 935.6 444.3 491.3
-------- -------- --------
$3,595.5 $1,268.9 $2,326.6
======== ======== ========
</Table>
<Table>
<Caption>
2003
----------------------------------
ACCUMULATED NET BOOK
COST DEPRECIATION VALUE
-------- ------------ --------
Property, plant and equipment
Specialties and newsprint........................... $2,804.1 $ 978.2 $1,825.9
Pulp................................................ 925.1 460.8 464.3
-------- -------- --------
$3,729.2 $1,439.0 $2,290.2
======== ======== ========
</Table>
In December 2003, the Company recorded a write-down of $14.2 relating to the
permanent closure of a portion of its pulp producing capacity at its Elk
Falls mill, in early 2004. Related severance costs of $1.9 have been
recorded in cost of sales.
6. OTHER ASSETS
<Table>
<Caption>
2002 2003
-------- --------
Deferred financing costs.................................... $25.8 $25.2
Forward foreign currency contracts hedging long-term debt... 6.7 --
Deferred charges and other.................................. 5.2 4.8
----- -----
$37.7 $30.0
===== =====
</Table>
F-13
<Page>
NORSKE SKOG CANADA LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003
(IN MILLIONS OF CANADIAN DOLLARS, EXCEPT PER SHARE AMOUNTS)
7. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
<Table>
<Caption>
2002 2003
-------- --------
Trade accounts payable...................................... $174.1 $127.7
Accrued payroll and related liabilities..................... 68.7 71.8
Other....................................................... 46.0 44.7
------ ------
$288.8 $244.2
====== ======
</Table>
8. LONG-TERM DEBT
The Company's long-term debt, all of which matures beyond one year, is as
follows:
<Table>
<Caption>
2002 2003
-------- --------
RECOURSE
Senior notes, 8.625% due June 2011 (US$400.0;
2002--US$250.0)........................................... $394.9 $521.2
Senior notes, 10% due March 2009 (US$200.0)................. 335.0 274.5
------ ------
729.9 795.7
Revolving operating loan of up to $350.0 due July 2006 with
interest based on CDN prime rates/U.S. base rates or
LIBOR/BA rates, at the Company's option................... 118.7 12.5
------ ------
848.6 808.2
------ ------
NON-RECOURSE (PREI)
First Mortgage Bonds, 6.387% due July 2009.................. 37.6 37.6
------ ------
$886.2 $845.8
====== ======
</Table>
On May 15, 2003, the Company issued an additional US$150.0 8.625% Senior
Notes ("Notes") due June 2011. The Notes were issued at a premium amount of
US$4.4 to yield 8%. Proceeds were used to repay the outstanding balance on the
revolving operating loan and for general corporate purposes.
Substantially all of the assets of the Company are pledged as security under
the revolving loan. During the year ended December 31, 2003, the Company
negotiated certain amendments to the revolving loan of $350.0, including an
option to increase the borrowing base, and an agreement to extend the maturity
for $335.0 of the loan by one year, to July 2006. The Company elected to change
the borrowing base formula, which resulted in an increased availability under
the revolving loan effective July 31, 2003. Subsequent to December 31, 2003, the
maturity for the remaining $15.0 was also extended by one year, to July 2006.
The revolving loan's availability is determined by a borrowing base,
calculated 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 shareholder's equity above $779.3 as at
December 31, 2003. At the end of the current year, the borrowing base on the
$350.0 revolving operating loan was $343.4. After drawings of $12.5 and
outstanding letters of credit of $25.7, $305.2
F-14
<Page>
NORSKE SKOG CANADA LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003
(IN MILLIONS OF CANADIAN DOLLARS, EXCEPT PER SHARE AMOUNTS)
8. LONG-TERM DEBT (CONTINUED)
was available to the Company. An interest coverage covenant is applicable in
certain circumstances if the Company incurs secured debt other than under its
revolving operating loan. No such debt has been incurred.
The indentures and agreements governing the Company's senior notes and
revolving operating loan 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, 2003, the Company remained in
compliance with the covenants under both its credit facilities and bond
indentures. However, the Company's Consolidated Fixed Charge Ratio of the bond
indentures was below the 2.0:1 threshold, which, while not constituting a
default, does prohibit the payment of dividends and limits the amount of
additional debt that can be incurred outside of the existing credit facilities.
SCHEDULED LONG-TERM DEBT REPAYMENTS
The Company's scheduled long-term debt repayments at December 31, 2003 are
as follows:
<Table>
<Caption>
RECOURSE NON-RECOURSE
DEBT DEBT
-------- ------------
2004........................................................ $ -- $ --
2005........................................................ -- --
2006........................................................ 12.5 --
2007........................................................ -- --
2008........................................................ -- --
Thereafter.................................................. 795.7 37.6
------ -----
$808.2 $37.6
====== =====
</Table>
FAIR-VALUE OF LONG-TERM DEBT
The following estimated fair-value of the long-term debt at December 31,
2003 and 2002 has been determined based on management's best estimate of the
fair-value to refinance debt with similar terms at the respective
year-end dates:
<Table>
<Caption>
2002 2003
-------- --------
Recourse.................................................... $875.4 $845.4
Non-recourse................................................ 38.7 39.2
------ ------
$914.1 $884.6
====== ======
</Table>
F-15
<Page>
NORSKE SKOG CANADA LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003
(IN MILLIONS OF CANADIAN DOLLARS, EXCEPT PER SHARE AMOUNTS)
9. OTHER LONG-TERM OBLIGATIONS
<Table>
<Caption>
2002 2003
-------- --------
Post-retirement benefits (note 15).......................... $112.7 $125.7
Pension plans (note 15)..................................... 51.1 57.8
Forward foreign currency contracts hedging long-term debt... -- 55.4
Deferred gain on termination of interest rate swaps......... -- 10.2
Environmental, remedial and other........................... 24.5 23.6
------ ------
$188.3 $272.7
====== ======
</Table>
Fixed-to-floating interest rate swaps on US$105.0 were terminated during the
current year for proceeds of $15.9. The proceeds are being amortized as a
reduction of interest expense based on the U.S. swap curve at the time
of termination.
10. INCOME TAXES
The tax effects of temporary differences that give rise to significant
future tax liabilities (assets) are as follows:
<Table>
<Caption>
2002 2003
-------- --------
Future tax liability
Fixed assets............................................ $ 512.0 $ 557.6
Other................................................... 39.4 49.0
------- -------
551.4 606.6
------- -------
Future tax assets
Non-capital loss carry-forwards......................... (56.9) (154.3)
Employee future benefits................................ (60.9) (65.5)
Other................................................... (47.7) (34.5)
------- -------
(165.5) (254.3)
Valuation allowance....................................... 11.1 11.0
------- -------
(154.4) (243.3)
------- -------
Net future income tax liability........................... $ 397.0 $ 363.3
======= =======
</Table>
F-16
<Page>
NORSKE SKOG CANADA LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003
(IN MILLIONS OF CANADIAN DOLLARS, EXCEPT PER SHARE AMOUNTS)
10. INCOME TAXES (CONTINUED)
The components of income tax recovery are as follows:
<Table>
<Caption>
2001 2002 2003
-------- -------- --------
Current.............................................. $ 5.6 $ 15.7 $ 5.9
Future............................................... 12.1 (91.5) (67.9)
Release of future taxes related to 3% reduction in
provincial corporate income tax rate............... (22.8) -- --
Amortization of deferred credits on utilization of
acquired tax losses................................ (16.1) -- --
------ ------ ------
$(21.2) $(75.8) $(62.0)
====== ====== ======
</Table>
The reconciliation of income taxes calculated at the statutory rate to the
actual income tax provision is as follows:
<Table>
<Caption>
2001 2002 2003
------------------- ------------------- -------------------
Income tax expense (recovery) at
Canadian statutory rates.................. $ 9.0 38.5% $(70.7) (35.5)% $(52.1) (35.5)%
Increase (decrease) in income taxes for:
Non-taxable income and expenses........... 4.2 18.0 (1.9) (1.0) (8.9) (6.1)
Release of future income taxes related to
3% reduction in provincial corporate
income tax rate......................... (22.8) (97.8) -- -- -- --
Amortization of deferred credits on
utilization of acquired tax losses...... (16.1) (69.0) -- -- -- --
Difference in foreign tax rate............ -- -- -- -- (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.................... 4.5 19.3 5.7 2.9 5.2 3.5
Other..................................... -- -- 0.8 0.4 1.5 1.0
------ ----- ------ ----- ------ -----
Income tax recovery......................... $(21.2) (91.0)% $(75.8) (38.1)% $(62.0) (42.3)%
====== ===== ====== ===== ====== =====
</Table>
11. DEFERRED CREDITS
<Table>
<Caption>
2002 2003
-------- --------
Beginning of year........................................... $8.5 $ 8.5
Net price adjustment related to acquired tax losses......... -- 17.8
Adjustment related to release of deferred credits........... -- (5.3)
---- -----
End of year................................................. $8.5 $21.0
==== =====
</Table>
In prior years, the Company acquired from wholly owned subsidiaries of
Fletcher Challenge Limited ("FCL"), the Company's majority shareholder up to
July 28, 2000, companies with tax losses
F-17
<Page>
NORSKE SKOG CANADA LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003
(IN MILLIONS OF CANADIAN DOLLARS, EXCEPT PER SHARE AMOUNTS)
11. DEFERRED CREDITS (CONTINUED)
carried forward. The purchase price of these companies is subject to adjustment
under certain conditions. In 2003, the Company recorded a downward adjustment of
$17.8 (net of taxes of $1.5 on the interest component) to the purchase price
(2002--nil). This adjustment has been recorded as an increase to deferred
credits.
12. SHARE CAPITAL
(a) AUTHORIZED, ISSUED AND OUTSTANDING
<Table>
<Caption>
2001 2002 2003
---------------------- ---------------------- ----------------------
SHARES $ SHARES $ SHARES $
----------- -------- ----------- -------- ----------- --------
Authorized:
Common shares.................. Unlimited Unlimited Unlimited
Preferred shares............... 100,000,000 100,000,000 100,000,000
=========== =========== ===========
Issued and outstanding:
Common shares.................. 174,810,132 673.1 205,910,132 884.6 214,604,120 913.6
=========== ======= =========== ===== =========== =====
Continuity of common shares:
Beginning of year.............. 124,189,252 1,262.6 174,810,132 673.1 205,910,132 884.6
Special Distribution
(note 2)..................... -- (943.8) -- -- -- --
Issued for business acquisition
(note 3)..................... 50,620,880 354.3 -- -- 8,693,988 29.1
Issued for cash................ -- -- 31,100,000 217.7 -- --
Share issue costs (net of
income tax recovery of:
2003--$0.1; 2002--$3.4;
2001--nil)................... -- -- -- (6.2) -- (0.1)
----------- ------- ----------- ----- ----------- -----
End of year.................... 174,810,132 673.1 205,910,132 884.6 214,604,120 913.6
=========== ======= =========== ===== =========== =====
</Table>
(b) STOCK OPTION PLANS
The Company has an employee share option plan for its key officers and
management. Granted options have a term of five years and 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, at which time all of the options are
exercisable. The stock option plan provides for the issuance of up to a
maximum of 5.0 million common shares. Details of the
F-18
<Page>
NORSKE SKOG CANADA LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003
(IN MILLIONS OF CANADIAN DOLLARS, EXCEPT PER SHARE AMOUNTS)
12. SHARE CAPITAL (CONTINUED)
Company's share option plan for the years ended December 31, 2001, 2002
and 2003 are as follows:
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------------
2001 2002 2003
--------------------------- --------------------------- ---------------------------
NUMBER OF WEIGHTED NUMBER OF WEIGHTED NUMBER OF WEIGHTED
COMMON AVERAGE COMMON AVERAGE COMMON AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
--------- --------------- --------- --------------- --------- ---------------
Beginning of year.... 800,845 $ 19.77 1,330,000 $6.60 4,722,000 $6.08
Granted.............. 1,330,000 6.60 3,412,000 5.89 100,000 5.81
Exercised............ -- -- -- -- -- --
Expired or
cancelled.......... (800,845) (19.77) (20,000) 7.13 (326,500) 6.20
--------- ------- --------- ----- --------- -----
End of year.......... 1,330,000 $ 6.60 4,722,000 $6.08 4,495,500 $6.07
========= ======= ========= ===== ========= =====
</Table>
The following table summarizes information about stock options
outstanding at December 31, 2003:
<Table>
<Caption>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------ --------------------------------
WEIGHTED
NUMBER AVERAGE NUMBER
OUTSTANDING AT REMAINING WEIGHTED EXERCISABLE AT WEIGHTED
EXERCISE DECEMBER 31, OPTION LIFE AVERAGE DECEMBER 31, AVERAGE ACCELERATED
PRICES 2003 (YRS) EXERCISE PRICE 2003 EXERCISE PRICE PRICE
-------- -------------- ------------ --------------- -------------- --------------- -----------
$6.60................ 1,221,500 2.7 $6.60 814,334 $6.60 $ 9.47
$7.13................ 1,051,000 3.1 7.13 350,333 7.13 10.00
$5.25................ 2,123,000 3.8 5.25 707,667 5.25 7.54
$5.81................ 100,000 4.1 5.81 -- -- 8.35
--------- --- ----- --------- ----- ------
4,495,500 3.4 $6.07 1,872,334 $6.19 $ 8.66
========= === ===== ========= ===== ======
</Table>
(c) STOCK-BASED COMPENSATION
The Company applies settlement accounting for recording share options
granted to directors, officers and employees. If the fair-value method
had been used to determine compensation cost for share options granted to
directors, officers and employees, the Company's net loss and loss per
share would have been as follows:
<Table>
<Caption>
2002 2003
-------- --------
Net earnings (loss):
As reported...................................... $(123.3) $(84.5)
Pro forma........................................ (123.9) (86.5)
Net earnings (loss) per common share:
As reported...................................... $ (0.64) $(0.41)
Pro forma........................................ (0.64) (0.42)
</Table>
F-19
<Page>
NORSKE SKOG CANADA LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003
(IN MILLIONS OF CANADIAN DOLLARS, EXCEPT PER SHARE AMOUNTS)
12. SHARE CAPITAL (CONTINUED)
The fair-value of share options was estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions:
<Table>
<Caption>
2002 2003
-------- --------
Risk-free interest rate............................. 5.0% 4.9%
Annual dividends per share.......................... Nil Nil
Expected stock price volatility..................... 27.3% 27.3%
Expected option life (in years)..................... 4.0 4.0
Average fair-value of options granted............... $1.75 $1.73
</Table>
13. EARNINGS PER SHARE
The following weighted average number of shares were used for computation of
earnings per share:
<Table>
<Caption>
2001 2002 2003
-------- -------- --------
Net earnings (loss) reported................................ $ 44.5 $(123.3) $(84.5)
Weighted average shares used in computation of
basic earnings per share (in millions).................... 141.1 193.4 206.6
Weighted average shares from assumed conversion of
dilutive options (in millions)............................ -- -- --
Weighted average shares used in computation of
diluted earnings per share (in millions).................. 141.1 193.4 206.6
Basic and diluted earnings (loss) per share (in dollars).... $ 0.32 $ (0.64) $(0.41)
</Table>
14. OTHER EXPENSE, NET
<Table>
<Caption>
2001 2002 2003
-------- -------- --------
Loss on sale of Mackenzie Pulp Operations (note 3(c))....... $ 31.4 $ -- $ --
Provision for credit risk on commodity swaps................ 6.5 -- --
Write-off of deferred financing costs....................... -- 15.8 --
Gain on sale of marketable securities....................... -- (4.8) --
Other....................................................... 2.3 2.3 3.9
------ ------- ------
$ 40.2 $ 13.3 $ 3.9
====== ======= ======
</Table>
15. EMPLOYEE FUTURE BENEFITS
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 are enrolled in the defined contribution segment.
F-20
<Page>
NORSKE SKOG CANADA LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003
(IN MILLIONS OF CANADIAN DOLLARS, EXCEPT PER SHARE AMOUNTS)
15. EMPLOYEE FUTURE BENEFITS (CONTINUED)
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 group health care and
life insurance 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.
Information concerning the Company's defined benefit plans, in aggregate, is
as follows:
<Table>
<Caption>
PENSION BENEFIT OTHER BENEFIT
PLANS PLANS
------------------- -------------------
2002 2003 2002 2003
-------- -------- -------- --------
PLAN ASSETS
Fair value at beginning of year....................... $253.8 $224.0 $ -- $ --
Actual return on plan assets.......................... (11.2) 11.1 -- --
Service cost of defined contribution segment.......... (4.2) (4.5) -- --
Employee contributions................................ 0.6 0.5 -- --
Company contributions................................. 9.9 9.7 3.5 4.9
Other................................................. 0.5 0.3 -- --
Benefit payments...................................... (25.4) (25.1) (3.5) (4.9)
------ ------ ------ ------
Fair value of plan assets at end of year.............. 224.0 216.0 -- --
------ ------ ------ ------
ACCRUED BENEFIT OBLIGATION
Beginning of year..................................... 300.2 320.4 115.3 160.1
Service cost of defined benefit segment............... 4.4 5.6 3.3 4.2
Interest cost on accrued benefit obligation........... 20.3 20.1 9.1 11.0
Employee contributions................................ 0.6 0.5 -- --
Benefit payments...................................... (25.4) (25.1) (3.5) (4.6)
Powell River and Alberni downsizing................... 19.4 -- -- --
Changes to the Provincial Medical Services Plan....... -- -- 36.2 --
Actuarial loss (gain) and other adjustments........... 0.9 7.0 (0.3) 12.9
------ ------ ------ ------
Accrued benefit obligation at end of year............. 320.4 328.5 160.1 183.6
------ ------ ------ ------
PLAN DEFICIT............................................ 96.4 112.5 160.1 183.6
UNRECOGNIZED AMOUNTS
Transitional balance.................................. 1.1 0.3 -- --
Past service costs.................................... (0.9) (0.5) 2.8 2.5
Actuarial gain (loss)................................. (45.5) (54.5) (50.2) (60.4)
------ ------ ------ ------
Employee future benefits liability...................... $ 51.1 $ 57.8 $112.7 $125.7
====== ====== ====== ======
</Table>
F-21
<Page>
NORSKE SKOG CANADA LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003
(IN MILLIONS OF CANADIAN DOLLARS, EXCEPT PER SHARE AMOUNTS)
15. EMPLOYEE FUTURE BENEFITS (CONTINUED)
The Company's net expense for Company-maintained benefit plans is:
<Table>
<Caption>
PENSION BENEFIT PLANS 2001 2002 2003
- --------------------- -------- -------- --------
Current service cost........................................ $ 5.4 $ 8.6 $ 8.7
Interest cost............................................... 16.7 20.6 20.4
Expected return on plan assets.............................. (17.6) (20.1) (16.5)
Amortization of unrecognized amounts........................ 0.7 0.3 2.1
------ ------ ------
$ 5.2 $ 9.4 $ 14.7
====== ====== ======
</Table>
<Table>
<Caption>
OTHER BENEFIT PLANS 2001 2002 2003
- ------------------- -------- -------- --------
Current service cost........................................ $ 1.9 $ 3.4 $ 4.3
Interest cost............................................... 6.2 9.3 11.2
Amortization of unrecognized amounts........................ 0.2 1.7 2.7
------ ------ ------
$ 8.3 $ 14.4 $ 18.2
====== ====== ======
</Table>
Actuarial assumptions used in accounting for the Company-maintained benefit
plans are:
<Table>
<Caption>
2001 2002 2003
-------- -------- --------
Discount rate............................................... 6.50% 6.50% 6.25%
Expected return on plan assets.............................. 8.00% 7.50% 7.50%
Compensation increases...................................... 3.50% 3.00% 3.00%
Health care trend rate--medical and dental.................. 5.00% 5.00% 5.00%
Health care trend rate--extended health (decrease in
1% increments until 2012 and thereafter to 5%; 2002 and
2001--decrease in 1% increments until 2006 and thereafter
to 5%).................................................... 10.00% 9.00% 14.00%
</Table>
Unionized employees of the Company and its subsidiaries 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 in the year (year ended
December 31, 2002--$16.2; year ended December 31, 2001--$11.2).
The asset allocation for the Company's defined benefit pension plans by
asset category were as follows:
<Table>
<Caption>
PLAN ASSETS AT
YEAR-END
-------------------
2002 2003
-------- --------
Equity securities......................................... 54.3% 61.0%
Fixed income securities................................... 45.7% 39.0%
------ ------
Total..................................................... 100.0% 100.0%
====== ======
</Table>
F-22
<Page>
NORSKE SKOG CANADA LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003
(IN MILLIONS OF CANADIAN DOLLARS, EXCEPT PER SHARE AMOUNTS)
16. FINANCIAL INSTRUMENTS
(a) DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses financial instruments to reduce its exposure to foreign
currency and price risk associated with its revenues, energy costs and
long-term debt. The Company also uses interest rate swaps to reduce its
exposure to long-term fixed interest rates associated with its senior
notes.
(b) REVENUE AND COST HEDGING INSTRUMENTS
Foreign currency options and forward contracts outstanding to sell
U.S. dollars were as follows:
<Table>
<Caption>
OPTIONS
-----------------------------------------------
FLOOR CEILING FORWARD CONTRACTS
---------------------- ---------------------- ----------------------
AVERAGE AVERAGE AVERAGE
TERM US$MILLIONS RATE US$MILLIONS RATE US$MILLIONS RATE
---- ----------- -------- ----------- -------- ----------- --------
As at December 31, 2002:
0 to 12 months................. $297 1.5595 $285 1.6095 $118 1.5330
13 to 24 months................ 133 1.5695 127 1.6263 38 1.6123
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
</Table>
At December 31, 2003, no commodity price hedging instruments were
outstanding in respect of products sold. The Company has oil swaps to
purchase 377,000 barrels ("bbls") at an average contract rate of US$23.37
per bbl, settling between January 2004 and March 2005 and natural gas
swaps to purchase 1.6 gigajoules ("Gj") at an average contract rate of
US$3.89 per Gj, settling between January 2004 and October 2004.
(c) LONG-TERM DEBT HEDGING INSTRUMENTS
The Company has forward foreign exchange contracts to acquire
U.S. dollars totalling US$264.1 over a four-year period at rates
averaging $1.5153/US$.
(d) CREDIT RISK
The Company is exposed to credit risk on accounts receivable from
customers. Its customers 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 review of their credit limits, 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 options and forward foreign currency contracts. The Company
limits the possibility of non-performance by dealing with major financial
institutions.
F-23
<Page>
NORSKE SKOG CANADA LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003
(IN MILLIONS OF CANADIAN DOLLARS, EXCEPT PER SHARE AMOUNTS)
16. FINANCIAL INSTRUMENTS (CONTINUED)
(e) FAIR VALUE
Estimated fair values of financial instruments, which differ from
carrying values, are as follows:
<Table>
<Caption>
DECEMBER 31, 2002 DECEMBER 31, 2003
------------------- -------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------- -------- -------- --------
Forward contracts and options hedging future
U.S. dollar receipts............................. $ -- $ (8.7) $ 15.3 $ 74.1
Commodity swaps hedging future oil and gas
purchases........................................ -- -- -- 3.6
Forward contracts hedging long-term debt
repayable in U.S. dollars........................ 6.7 12.7 (55.4) (50.0)
Fixed to floating interest rate swaps.............. -- 16.9 -- --
</Table>
The fair value of options and forward foreign currency contracts is based
on mid-market rates from financial institutions.
17. 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, are as
follows:
<Table>
<Caption>
2001 2002 2003
-------- -------- --------
Norske Skog
Selling, general and administrative....................... $ -- $0.2 $ 0.1
Accounts receivable....................................... 0.8 -- 19.3
Norske Skog North America LLC
Commission expenses....................................... -- 3.8 4.2
Net loss.................................................. -- 0.1 0.1
Investment (US$0.5)....................................... 0.8 0.8 0.8
Accounts payable.......................................... -- 0.3 0.2
</Table>
The Company participated in Norske Skog's global property and liability
insurance programs from January 1, 2001 to June 30, 2002.
Product sales to related parties are in accordance with normal trade
practices.
In prior years, the Company acquired, from wholly-owned subsidiaries of FCL
(now subsidiaries of Norske Skog), companies with tax losses carried forward.
The purchase price of these companies is subject to adjustment under certain
conditions and $19.3 was included in accounts receivable as at December 31, 2003
with respect to such adjustments.
F-24
<Page>
NORSKE SKOG CANADA LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003
(IN MILLIONS OF CANADIAN DOLLARS, EXCEPT PER SHARE AMOUNTS)
17. RELATED PARTY TRANSACTIONS (CONTINUED)
The Company undertakes certain transactions with companies affiliated with
directors 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 2003, the Company paid aggregate fees of $0.1 (2002--$0.1; 2001--$1.1)
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, 2003, the balance outstanding is $0.6 (2002--$0.7).
18. SEGMENTED INFORMATION
The Company operates in three business segments:
Specialties--Manufacture and sale of groundwood specialty printing papers
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 segments are managed separately and all manufacturing facilities are
located in Canada.
The accounting policies of the segments are the same as described in the
Summary of Significant Accounting Policies in note 1. Segment performance is
evaluated based on operating earnings (loss). Inter-segment sales consist of
slush pulp transfers at cost.
<Table>
<Caption>
2001
---------------------------------------------
NET SALES BY SHIPMENT DESTINATION SPECIALTIES NEWSPRINT PULP TOTAL
- --------------------------------- ----------- --------- -------- --------
Canada................................................. $ 71.6 $ 90.9 $ 29.2 $ 191.7
United States.......................................... 399.7 225.8 26.7 652.2
Asia and Australasia................................... 35.5 94.3 127.5 257.3
Latin America.......................................... 49.2 69.2 4.7 123.1
Europe and Other....................................... 7.6 9.0 147.8 164.4
------ ------ ------ --------
$563.6 $489.2 $335.9 $1,388.7
====== ====== ====== ========
</Table>
<Table>
<Caption>
2002
---------------------------------------------
NET SALES BY SHIPMENT DESTINATION SPECIALTIES NEWSPRINT PULP TOTAL
- --------------------------------- ----------- --------- -------- --------
Canada................................................. $ 96.5 $ 80.4 $ 1.4 $ 178.3
United States.......................................... 618.9 231.7 1.0 851.6
Asia and Australasia................................... 64.0 79.8 97.0 240.8
Latin America.......................................... 54.8 48.7 4.6 108.1
Europe and Other....................................... 0.8 -- 102.7 103.5
------ ------ ------ --------
$835.0 $440.6 $206.7 $1,482.3
====== ====== ====== ========
</Table>
F-25
<Page>
NORSKE SKOG CANADA LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003
(IN MILLIONS OF CANADIAN DOLLARS, EXCEPT PER SHARE AMOUNTS)
18. SEGMENTED INFORMATION (CONTINUED)
<Table>
<Caption>
2003
---------------------------------------------
NET SALES BY SHIPMENT DESTINATION SPECIALTIES NEWSPRINT PULP TOTAL
- --------------------------------- ----------- --------- -------- --------
Canada................................................. $ 94.6 $ 73.7 $ 2.0 $ 170.3
United States.......................................... 637.9 264.7 -- 902.6
Asia and Australasia................................... 82.2 87.2 140.1 309.5
Latin America.......................................... 60.7 37.4 1.0 99.1
Europe and other....................................... 4.7 -- 105.0 109.7
------ ------ ------ --------
$880.1 $463.0 $248.1 $1,591.2
====== ====== ====== ========
</Table>
19. COMMITMENTS
(a) CAPITAL COMMITMENTS
In late 2002, the Company commenced work on an upgrade to its recovery
boiler at its Elk Falls mill. The total cost of this project is estimated
at $45.1. As at December 31, 2003, the Company had incurred costs of
$23.2 and had firm commitments of $19.9 in connection with this project.
(b) OTHER
The Company is committed to make the following future minimum payments
under various operating leases in each of the years ended December 31:
<Table>
2004........................................................ $ 9.6
2005........................................................ 9.2
2006........................................................ 9.0
2007........................................................ 7.5
2008........................................................ 7.4
Subsequent years............................................ 58.7
------
$101.4
======
</Table>
20. 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. 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 $5.0, which
expires in 2004. The Company is unable to estimate its potential
liability under these indemnities as the amounts are dependent upon the
outcome of
F-26
<Page>
NORSKE SKOG CANADA LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003
(IN MILLIONS OF CANADIAN DOLLARS, EXCEPT PER SHARE AMOUNTS)
20. GUARANTEES AND INDEMNITIES (CONTINUED)
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 dispositions of certain businesses in 1997, the
Company provided tax indemnities, which survive while the relevant tax
years of the indemnified parties remain open to audit. The Company does
not expect any significant claims with respect to these liabilities and
has therefore not recorded any related liability.
(c) The Company has provided a guarantee capped at US$5.0 in connection with
the purchase and sale of natural gas for its manufacturing operations.
The guarantee is cancellable upon 20 business days notice.
(d) 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.
21. CONTINGENCY
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 in respect of which either an adequate provision has been made or for
which no material liability is expected.
F-27
<Page>
NORSKE SKOG CANADA LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003
(IN MILLIONS OF CANADIAN DOLLARS, EXCEPT PER SHARE AMOUNTS)
22. 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 U.S. GAAP are set
forth below:
<Table>
<Caption>
EARNINGS 2001 2002 2003
- -------- -------- -------- --------
Net earnings (loss) in accordance with Canadian GAAP........ $ 44.5 $(123.3) $ (84.5)
U.S. dollar revenue hedges (a).............................. (34.1) 24.6 67.5
U.S. dollar long-term debt hedges (a)....................... (9.6) 15.6 (0.6)
Fixed to floating interest swaps (a)........................ (1.1) 18.0 (6.7)
Commodity swaps (a)......................................... -- -- 3.6
Income tax impact of above items............................ 15.9 (19.6) (22.8)
------- ------- -------
Net earnings (loss) in accordance with U.S. GAAP............ 15.6 (84.7) (43.5)
Unrealized gain on securities held as available-for-sale,
net of deferred income taxes for 2002 of $0.9
(2001--$(0.9)) (b)........................................ 4.4 (4.4) --
Minimum pension liability adjustment, net of deferred income
taxes of $1.7 (2002--$7.9; 2001--$1.9) (c)................ (3.9) (14.1) (3.1)
------- ------- -------
Comprehensive income (loss) in accordance with U.S. GAAP.... $ 16.1 $(103.2) $ (46.6)
======= ======= =======
Basic and diluted net earnings (loss) per share in
accordance with U.S. GAAP (in dollars).................... $ 0.11 $ (0.44) $ (0.21)
Basic and diluted weighted average number of shares in
accordance with U.S. GAAP (in millions)................... 141.1 193.4 206.6
</Table>
<Table>
<Caption>
2002 2003
------------------- -------------------
CANADIAN U.S. CANADIAN U.S.
BALANCE SHEET COMPONENTS GAAP GAAP GAAP GAAP
- ------------------------ -------- -------- -------- --------
Other assets.......................................... $ 37.7 $ 61.6 $ 30.0 $ 92.8
Current liabilities................................... 288.8 297.5 244.2 244.2
Other long-term obligations........................... 188.3 222.3 272.7 295.4
Future income taxes................................... 397.0 389.2 363.3 376.5
Shareholders' equity.................................. 1,124.7 1,113.7 1,069.2 1,096.1
</Table>
(a) FINANCIAL INSTRUMENTS
Under Canadian GAAP, the Company follows hedge accounting for derivative
financial instruments, including foreign exchange forward contracts and
options, interest rate swaps, and commodity swaps. Under U.S. GAAP, the
Company does not apply hedge accounting and records all derivatives on a
"marked to market" basis at each reporting period.
(b) 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
F-28
<Page>
NORSKE SKOG CANADA LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003
(IN MILLIONS OF CANADIAN DOLLARS, EXCEPT PER SHARE AMOUNTS)
22. DIFFERENCES BETWEEN UNITED STATES AND CANADIAN GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (CONTINUED)
carried at fair-value. Unrealized gains and losses, net of tax, are
reported as comprehensive income.
(c) PENSIONS
Under U.S. GAAP, the Company recognizes a minimum pension liability
adjustment which represents the excess of the unfunded accumulated
pension benefit obligation over the fair value of the plan assets. There
is no such requirement under Canadian GAAP.
(d) DISTRIBUTION COSTS
Under Canadian GAAP, the Company includes distribution costs as a
deduction in determining net sales in the consolidated statement of
earnings. Under U.S. GAAP, distribution costs are included as operating
expenses. As a result, net sales, cost of sales and operating expenses
under U.S. GAAP would increase by $229.3 for the year ended December 31,
2003 (2002--$221.7; 2001--$172.6).
(e) GAINS (LOSSES) ON THE DISPOSAL OF FIXED ASSETS
Under Canadian GAAP, the Company includes gains (losses) on the disposal
of fixed assets in other income (expense) after operating earnings (loss)
in the consolidated statement of earnings. Under U.S. GAAP, gains
(losses) on the disposal of assets would be classified before operating
earnings (loss). As a result, operating earnings for the year ended
December 31, 2003 would increase (decrease) by $(0.7) (2002--$0.3;
2001--$(1.2)).
(f) WRITE-DOWN OF FIXED ASSETS
Under Canadian GAAP, the Company includes the write-down of fixed assets
after operating earnings (loss) in the consolidated statement of
earnings. Under U.S. GAAP, the write-down of fixed assets would be
classified before operating earnings (loss). As a result, operating
earnings (loss) would decrease by $14.2 (2002--nil; 2001--nil).
(g) ACCOUNTS RECEIVABLE
Accounts receivable are disclosed net of allowance for doubtful accounts
as follows:
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
----------------------------
2001 2002 2003
----- ---- -----
Allowance for doubtful accounts, beginning of year....... $ 2.2 $3.2 $ 9.3
Bad debt expense......................................... 1.4 6.1 0.2
Writeoffs................................................ (0.4) -- (3.2)
----- ---- -----
Allowance for doubtful accounts, end of year............. $ 3.2 $9.3 $ 6.3
===== ==== =====
</Table>
F-29
<Page>
NORSKE SKOG CANADA LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003
(IN MILLIONS OF CANADIAN DOLLARS, EXCEPT PER SHARE AMOUNTS)
22. DIFFERENCES BETWEEN UNITED STATES AND CANADIAN GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (CONTINUED)
(h) STOCK-BASED COMPENSATION
In accordance with Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation", the Company has opted to
continue to apply the intrinsic value method of valuing share options
granted to employees for U.S. GAAP purposes. If the fair value method had
been used to determine compensation cost for share options granted to
directors, officers and employees, the Company's net loss and loss per
share under U.S. GAAP would have been as follows:
<Table>
<Caption>
YEAR ENDED DECEMBER 31
------------------------------
2001 2002 2003
-------- -------- --------
Net earnings (loss) in accordance with U.S. GAAP:
As reported............................................... $15.6 $(84.7) $(43.5)
Pro forma................................................. 15.5 (85.3) (45.5)
Basic and diluted earnings (loss) per share in accordance
with U.S. GAAP (in dollars):
As reported............................................... $0.11 $(0.44) $(0.21)
Pro forma................................................. 0.11 (0.44) (0.22)
</Table>
(i) DIVIDENDS PER SHARE
Under U.S. GAAP, the Company is required to disclose dividends per share.
The Company paid no dividends for the year ended December 31, 2003
(2002--$nil per share; 2001--$0.30 per share).
(j) OPERATING LEASE RENTAL EXPENSE
Under U.S. GAAP, the Company is required to disclose operating lease
rental expense. For the year ended December 31, 2003 the Company recorded
$5.8 in operating lease rental expense (2002--$7.1; 2001--$4.6).
(k) POST-RETIREMENT DISCLOSURE
Under U.S. GAAP, the Company is required to disclose the effect of a 1%
change in health care trend rates on the post-retirement obligation.
Assumed health care trend rates have a significant effect on the amounts
reported for the post-retirement medical plans.
F-30
<Page>
NORSKE SKOG CANADA LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003
(IN MILLIONS OF CANADIAN DOLLARS, EXCEPT PER SHARE AMOUNTS)
22. DIFFERENCES BETWEEN UNITED STATES AND CANADIAN GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (CONTINUED)
A one-percentage point change in the assumed health care cost trend rates
would have the following effects:
<Table>
<Caption>
YEAR ENDED DECEMBER 31
---------------------------------------------------------------
2001 2002 2003
------------------- ------------------- -------------------
1% 1% 1% 1% 1% 1%
INCREASE DECREASE INCREASE DECREASE INCREASE DECREASE
-------- -------- -------- -------- -------- --------
Effect on service and interest
costs........................... $ 1.5 $ (1.3) $ 2.6 $ (2.1) $ 2.9 $ (2.4)
Effect on post-retirement benefit
obligation...................... 18.0 (15.5) 20.6 (17.5) 31.5 (26.5)
</Table>
(l) COMPREHENSIVE INCOME
Statement of Financial Accounting Standards 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.
(m) STATEMENT OF CASH FLOWS
Under U.S. GAAP, no subtotal would be provided in the operations section
of the consolidated statement of cash flows.
(n) 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. Accordingly, for purposes of this U.S. GAAP reconciliation, the
Company has used the proportionate consolidation method and no GAAP
difference arises.
F-31
<Page>
NORSKE SKOG CANADA LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003
(IN MILLIONS OF CANADIAN DOLLARS, EXCEPT PER SHARE AMOUNTS)
22. DIFFERENCES BETWEEN UNITED STATES AND CANADIAN GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (CONTINUED)
Condensed joint venture financial information, with respect to the
Company's 50.1% interest in PREI which is proportionately consolidated is
as follows:
<Table>
<Caption>
DECEMBER 31, DECEMBER 31,
2002 2003
------------- -------------
BALANCE SHEETS
Current assets.................................... $ 1.4 $ 0.9
Fixed assets...................................... 57.1 57.2
Other assets...................................... 1.1 1.3
------ ------
$ 59.6 $ 59.4
====== ======
Current liabilities............................... $ 1.0 $ 1.4
Long-term liabilities............................. 74.6 74.4
Deficit........................................... (16.0) (16.4)
------ ------
$ 59.6 $ 59.4
====== ======
</Table>
<Table>
<Caption>
YEAR ENDED
4 MONTHS ENDED DECEMBER 31,
DECEMBER 31, -------------------
2001 2002 2003
--------------- -------- --------
STATEMENTS OF EARNINGS
Net sales...................................... $ 1.9 $ 9.5 $ 9.5
Cost of sales.................................. (0.4) 2.7 2.2
Depreciation and amortization.................. 0.6 0.7 1.6
----- ----- -----
Operating earnings (loss)...................... 1.7 6.1 5.7
Other expense, net............................. 1.5 -- 0.6
Interest expense............................... 0.1 4.6 5.6
Income tax expense (recovery).................. -- 1.5 (0.1)
----- ----- -----
Net earnings (loss)............................ $ 0.1 $ -- $(0.4)
===== ===== =====
STATEMENTS OF CASH FLOWS
Cash provided by (used for):
Operations..................................... $(0.9) $ 1.5 $ 1.1
Financing...................................... 0.8 (1.0) --
Investing...................................... (0.2) (0.1) (1.7)
</Table>
(o) RECENT PRONOUNCEMENTS
In August 2001 the Financial Accounting Standards Board (FASB) issued
Statement No. 143, "Accounting for Asset Retirement Obligations,"
('SFAS 143'), which requires entities to record 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
F-32
<Page>
NORSKE SKOG CANADA LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003
(IN MILLIONS OF CANADIAN DOLLARS, EXCEPT PER SHARE AMOUNTS)
22. DIFFERENCES BETWEEN UNITED STATES AND CANADIAN GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (CONTINUED)
and is effective for fiscal years beginning after June 15, 2002. The
Company adopted SFAS 143 effective January 1, 2003, which had no material
effect on the consolidated financial statements.
In July 2002 the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ('SFAS 146'). SFAS 146
applies to costs associated with an exit activity (including
restructuring) or with a disposal of long-lived assets. Under SFAS 146, a
company will record a liability for a cost associated with an exit or
disposal activity when that liability is incurred and can be measured at
fair value. SFAS 146 will require entities to disclose information about
its exit and disposal activities, the related costs, and changes in those
costs in the notes to the interim and annual financial statements that
include the period in which an exit activity is initiated and in any
subsequent period until the activity is completed. SFAS 146 is effective
for exit or disposal activities initiated after December 31, 2002, with
earlier adoption encouraged. The Company adopted SFAS 146 effective
January 1, 2003, which had no material effect on the consolidated
financial statements.
23. SUPPLEMENTAL GUARANTOR INFORMATION
On March 23, 2004 the Company completed a private placement of US$250.0
principal amount of senior unsecured notes due 2014 (see note 24). All of the
Company's material wholly owned subsidiaries fully and unconditionally
guaranteed the notes on a joint and several basis.
The Company has not presented separate financial statements and other
disclosures concerning the guarantor subsidiaries because management has
determined that such information will not be material to the holders of the
senior notes; however, the following consolidating financial information is
being provided for each of the years ended December 31, 2003, 2002 and 2001.
Investments in subsidiaries are accounted for on the equity basis. The principal
elimination entries eliminate investments in subsidiaries and intercompany
balances.
F-33
<Page>
NORSKE SKOG CANADA LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003
(IN MILLIONS OF CANADIAN DOLLARS, EXCEPT PER SHARE AMOUNTS)
23. SUPPLEMENTAL GUARANTOR INFORMATION (CONTINUED)
SUPPLEMENTAL CONSOLIDATED BALANCE SHEET
AS AT DECEMBER 31, 2001
<Table>
<Caption>
CONSOLIDATED
NORSKE SKOG SUBSIDIARY SUBSIDIARY ELIMINATING NORSKE SKOG
CANADA LIMITED GUARANTORS NON-GUARANTORS ENTRIES CANADA LIMITED
-------------- ---------- -------------- ----------- --------------
ASSETS
Current assets:
Cash and short-term
investments................. $ 92.4 $ 9.9 $ 2.5 $ -- $ 104.8
Marketable securities......... 34.4 -- -- -- 34.4
Accounts receivable........... 11.1 290.5 1.5 -- 303.1
Inventories................... -- 230.5 -- -- 230.5
Prepaid expenses.............. 0.2 3.7 0.2 -- 4.1
-------- -------- ------ --------- --------
138.1 534.6 4.2 -- 676.9
Fixed assets.................... 1,602.0 756.3 58.1 -- 2,416.4
Advances to related companies... 120.7 660.6 2.7 (784.0) --
Investments in related
companies..................... 845.5 1.0 -- (846.5) --
Other assets.................... 37.4 19.1 -- -- 56.5
-------- -------- ------ --------- --------
$2,743.7 $1,971.6 $ 65.0 $(1,630.5) $3,149.8
======== ======== ====== ========= ========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current liabilities:
Accounts payable and accrued
liabilities................. $ 51.8 $ 232.0 $ 1.8 $ -- $ 285.6
Current portion of long-term
debt.......................... -- 10.7 -- -- 10.7
-------- -------- ------ --------- --------
51.8 242.7 1.8 -- 296.3
Long-term debt.................. 738.9 378.4 46.6 -- 1,163.9
Advances from related
companies..................... 511.1 257.9 15.0 (784.0) --
Other long-term obligations..... 80.2 72.4 -- -- 152.6
Future income taxes............. 316.7 160.0 15.3 -- 492.0
Deferred credits................ 8.5 -- -- -- 8.5
-------- -------- ------ --------- --------
1,707.2 1,111.4 78.7 (784.0) 2,113.3
-------- -------- ------ --------- --------
Shareholders' equity:
Share capital................. 673.1 498.2 (16.1) (482.1) 673.1
Contributed surplus........... -- 148.7 9.1 (157.8) --
Retained earnings (deficit)... 363.4 213.3 (6.7) (206.6) 363.4
-------- -------- ------ --------- --------
1,036.5 860.2 (13.7) (846.5) 1,036.5
-------- -------- ------ --------- --------
$2,743.7 $1,971.6 $ 65.0 $(1,630.5) $3,149.8
======== ======== ====== ========= ========
</Table>
F-34
<Page>
NORSKE SKOG CANADA LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003
(IN MILLIONS OF CANADIAN DOLLARS, EXCEPT PER SHARE AMOUNTS)
23. SUPPLEMENTAL GUARANTOR INFORMATION (CONTINUED)
SUPPLEMENTAL CONSOLIDATED STATEMENT OF EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 2001
<Table>
<Caption>
CONSOLIDATED
NORSKE SKOG SUBSIDIARY SUBSIDIARY ELIMINATING NORSKE SKOG
CANADA LIMITED GUARANTORS NON-GUARANTORS ENTRIES CANADA LIMITED
-------------- ---------- -------------- ----------- --------------
Net sales....................... $554.5 $1,456.2 $ 1.6 $(623.6) $1,388.7
Operating expenses:
Cost of sales................. 428.3 1,309.9 (0.4) (623.6) 1,114.2
Selling and administrative.... 26.0 37.6 -- -- 63.6
Depreciation and
amortization................ 76.1 54.5 0.6 -- 131.2
------ -------- ----- ------- --------
530.4 1,402.0 0.2 (623.6) 1,309.0
------ -------- ----- ------- --------
Operating earnings.............. 24.1 54.2 1.4 -- 79.7
Foreign exchange loss on
translation of long-term
debt.......................... (16.6) (0.5) -- -- (17.1)
Equity in earnings of
partnership................... 98.5 -- -- (98.5) --
Other expense, net.............. (0.7) (36.2) (3.3) -- (40.2)
Interest expense................ (26.6) (10.2) (1.5) 4.2 (34.1)
Interest income................. 39.2 -- -- (4.2) 35.0
------ -------- ----- ------- --------
Earnings (loss) before income
taxes......................... 117.9 7.3 (3.4) (98.5) 23.3
Income tax expense (recovery)... 14.5 (35.8) 0.1 -- (21.2)
Equity in earnings (loss) of
subsidiaries.................. (58.9) -- -- 58.9 --
------ -------- ----- ------- --------
Net earnings (loss)............. $ 44.5 $ 43.1 $(3.5) $ (39.6) $ 44.5
====== ======== ===== ======= ========
Differences between
United States and Canadian
generally accepted accounting
principles:
Net earnings (loss) in
accordance with Canadian
GAAP.......................... $ 44.5 $ 43.1 $(3.5) $ (39.6) $ 44.5
Financial instruments........... (44.8) -- -- -- (44.8)
Income tax impact of above
item.......................... 15.9 -- -- -- 15.9
------ -------- ----- ------- --------
Net earnings (loss) in
accordance with U.S. GAAP..... $ 15.6 $ 43.1 $(3.5) $ (39.6) $ 15.6
====== ======== ===== ======= ========
</Table>
F-35
<Page>
NORSKE SKOG CANADA LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003
(IN MILLIONS OF CANADIAN DOLLARS, EXCEPT PER SHARE AMOUNTS)
23. SUPPLEMENTAL GUARANTOR INFORMATION (CONTINUED)
SUPPLEMENTAL CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2001
<Table>
<Caption>
CONSOLIDATED
NORSKE SKOG SUBSIDIARY SUBSIDIARY ELIMINATING NORSKE SKOG
CANADA LIMITED GUARANTORS NON-GUARANTORS ENTRIES CANADA LIMITED
-------------- ---------- -------------- ----------- --------------
Cash provided by (used for):
Operations:
Net earnings (loss)........... $ 44.5 $ 43.1 $(3.5) $(39.6) $ 44.5
Items not requiring cash:
Depreciation and
amortization.............. 76.1 54.5 0.6 -- 131.2
Future income taxes......... 11.7 (19.5) 0.1 -- (7.7)
Increase in other long-term
obligations............... 3.2 5.3 -- -- 8.5
Foreign exchange loss on
translation of long-term
debt...................... 16.6 0.5 -- -- 17.1
Loss on sale of Mackenzie
operation................. -- 31.4 -- -- 31.4
Other....................... 3.4 (0.8) 4.9 -- 7.5
--------- ------- ----- ------ ---------
155.5 114.5 2.1 (39.6) 232.5
Change in non-cash working
capital....................... 43.9 (5.4) (1.2) -- 37.3
--------- ------- ----- ------ ---------
Cash provided (used) by
operations.................... 199.4 109.1 0.9 (39.6) 269.8
--------- ------- ----- ------ ---------
Investment:
Acquisition of Pacifica
Papers Inc.................. (74.1) -- -- -- (74.1)
Proceeds from sale of
Mackenzie operation......... -- 103.8 -- -- 103.8
Additions to fixed assets..... (53.0) (39.0) (0.7) -- (92.7)
Proceeds from sale of fixed
assets...................... 0.3 0.4 -- -- 0.7
Decrease (increase) in other
assets...................... (1.6) 3.2 -- -- 1.6
--------- ------- ----- ------ ---------
(128.4) 68.4 (0.7) -- (60.7)
--------- ------- ----- ------ ---------
</Table>
F-36
<Page>
NORSKE SKOG CANADA LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003
(IN MILLIONS OF CANADIAN DOLLARS, EXCEPT PER SHARE AMOUNTS)
23. SUPPLEMENTAL GUARANTOR INFORMATION (CONTINUED)
<Table>
<Caption>
CONSOLIDATED
NORSKE SKOG SUBSIDIARY SUBSIDIARY ELIMINATING NORSKE SKOG
CANADA LIMITED GUARANTORS NON-GUARANTORS ENTRIES CANADA LIMITED
-------------- ---------- -------------- ----------- --------------
Financing:
Special distribution.......... (1,490.3) -- -- -- (1,490.3)
Issue of long-term debt....... 385.5 382.7 0.5 -- 768.7
Repayment of long-term debt... (214.1) (26.8) -- -- (240.9)
Deferred financing costs...... (20.2) (10.5) -- -- (30.7)
Decrease in other long-term
obligations................. (2.4) (1.2) -- -- (3.6)
Increase (decrease) in
advances to related
companies................... 466.8 (508.2) 1.8 39.6 --
Dividends paid................ (37.2) -- -- -- (37.2)
--------- ------- ----- ------ ---------
(911.9) (164.0) 2.3 39.6 (1,034.0)
--------- ------- ----- ------ ---------
Cash, increase (decrease) during
year.......................... (840.9) 13.5 2.5 -- (824.9)
Cash, beginning of year......... 933.3 (3.6) -- -- 929.7
--------- ------- ----- ------ ---------
Cash, end of year............... $ 92.4 $ 9.9 $ 2.5 $ -- $ 104.8
========= ======= ===== ====== =========
</Table>
F-37
<Page>
NORSKE SKOG CANADA LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003
(IN MILLIONS OF CANADIAN DOLLARS, EXCEPT PER SHARE AMOUNTS)
23. SUPPLEMENTAL GUARANTOR INFORMATION (CONTINUED)
SUPPLEMENTAL CONSOLIDATED BALANCE SHEET
AS AT DECEMBER 31, 2002
<Table>
<Caption>
CONSOLIDATED
NORSKE SKOG SUBSIDIARY SUBSIDIARY ELIMINATING NORSKE SKOG
CANADA LIMITED GUARANTORS NON-GUARANTORS ENTRIES CANADA LIMITED
-------------- ---------- -------------- ----------- --------------
ASSETS
Current assets:
Cash and short-term
investments................. $ -- $ 0.1 $ 2.7 $ (2.8) $ --
Accounts receivable........... 7.4 269.8 0.1 -- 277.3
Inventories................... -- 242.7 -- -- 242.7
Prepaid expenses.............. 5.8 3.3 0.1 -- 9.2
-------- -------- ------ --------- --------
13.2 515.9 2.9 (2.8) 529.2
Fixed assets.................... 1,560.5 709.0 57.1 -- 2,326.6
Advances to related companies... 264.5 455.9 1.4 (721.8) --
Investments in related
companies..................... 923.7 1.0 -- (924.7) --
Other assets.................... 35.2 1.8 0.7 -- 37.7
-------- -------- ------ --------- --------
$2,797.1 $1,683.6 $ 62.1 $(1,649.3) $2,893.5
======== ======== ====== ========= ========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current liabilities:
Accounts payable and accrued
liabilities................. $ 41.1 $ 246.6 $ 1.1 $ -- $ 288.8
Long-term debt.................. 745.1 106.3 37.6 (2.8) 886.2
Advances from related
companies..................... 456.0 244.5 21.3 (721.8) --
Other long-term obligations..... 137.0 51.3 -- -- 188.3
Future income taxes............. 284.7 96.7 15.6 -- 397.0
Deferred credits................ 8.5 -- -- -- 8.5
-------- -------- ------ --------- --------
1,672.4 745.4 75.6 (724.6) 1,768.8
======== ======== ====== ========= ========
Shareholders' equity:
Share capital................. 884.6 602.3 (16.1) (586.2) 884.6
Contributed surplus........... -- 148.7 9.1 (157.8) --
Retained earnings (deficit)... 240.1 187.2 (6.5) (180.7) 240.1
-------- -------- ------ --------- --------
1,124.7 938.2 (13.5) (924.7) 1,124.7
-------- -------- ------ --------- --------
$2,797.1 $1,683.6 $ 62.1 $(1,649.3) $2,893.5
======== ======== ====== ========= ========
</Table>
F-38
<Page>
NORSKE SKOG CANADA LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003
(IN MILLIONS OF CANADIAN DOLLARS, EXCEPT PER SHARE AMOUNTS)
23. SUPPLEMENTAL GUARANTOR INFORMATION (CONTINUED)
SUPPLEMENTAL CONSOLIDATED STATEMENT OF EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 2002
<Table>
<Caption>
CONSOLIDATED
NORSKE SKOG SUBSIDIARY SUBSIDIARY ELIMINATING NORSKE SKOG
CANADA LIMITED GUARANTORS NON-GUARANTORS ENTRIES CANADA LIMITED
-------------- ---------- -------------- ----------- --------------
Net sales....................... $ -- $1,481.9 $ 9.8 $ (9.4) $1,482.3
Operating expenses:
Cost of sales................. 33.1 1,334.7 2.7 (10.1) 1,360.4
Selling and administrative.... 31.5 33.8 -- -- 65.3
Depreciation and
amortization................ 119.6 58.2 0.7 -- 178.5
------- -------- ----- ------- --------
184.2 1,426.7 3.4 (10.1) 1,604.2
------- -------- ----- ------- --------
Operating earnings (loss)....... (184.2) 55.2 6.4 0.7 (121.9)
Foreign exchange gain on
translation of long-term
debt.......................... 11.1 1.2 -- -- 12.3
Equity in earnings of
partnership................... 93.6 -- -- (93.6) --
Other income (expense), net..... (1.3) (11.3) -- (0.7) (13.3)
Interest expense................ (60.0) (15.1) (6.5) 3.7 (77.9)
Interest income................. 10.5 (7.0) 1.9 (3.7) 1.7
------- -------- ----- ------- --------
Earnings (loss) before income
taxes......................... (130.3) 23.0 1.8 (93.6) (199.1)
Income tax expense (recovery)... (25.9) (51.5) 1.6 -- (75.8)
Equity in earnings (loss) of
subsidiaries.................. (18.9) -- -- 18.9 --
------- -------- ----- ------- --------
Net earnings (loss)............. $(123.3) $ 74.5 $ 0.2 $ (74.7) $ (123.3)
======= ======== ===== ======= ========
Differences between
United States and Canadian
generally accepted accounting
principles:
Net earnings (loss) in
accordance with Canadian
GAAP.......................... $(123.3) $ 74.5 $ 0.2 $ (74.7) $ (123.3)
Financial instruments........... 58.2 -- -- -- 58.2
Income tax impact of above
item.......................... (19.6) -- -- -- (19.6)
------- -------- ----- ------- --------
Net earnings (loss) in
accordance with U.S. GAAP..... $ (84.7) $ 74.5 $ 0.2 $ (74.7) $ (84.7)
======= ======== ===== ======= ========
</Table>
F-39
<Page>
NORSKE SKOG CANADA LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003
(IN MILLIONS OF CANADIAN DOLLARS, EXCEPT PER SHARE AMOUNTS)
23. SUPPLEMENTAL GUARANTOR INFORMATION (CONTINUED)
SUPPLEMENTAL CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2002
<Table>
<Caption>
CONSOLIDATED
NORSKE SKOG SUBSIDIARY SUBSIDIARY ELIMINATING NORSKE SKOG
CANADA LIMITED GUARANTORS NON-GUARANTORS ENTRIES CANADA LIMITED
-------------- ---------- -------------- ----------- --------------
Cash provided by (used for):
Operations:
Net earnings (loss)........... $(123.3) $ 74.5 $ 0.2 $ (74.7) $(123.3)
Items not requiring
(providing) cash:
Depreciation and
amortization.............. 119.6 58.2 0.7 -- 178.5
Future income taxes......... (30.4) (61.6) 0.5 -- (91.5)
Increase (decrease) in other
long-term obligations..... 39.7 (19.9) -- -- 19.8
Foreign exchange gain on
translation of long-term
debt...................... (11.1) (1.2) -- -- (12.3)
Write-off of deferred
financing costs........... 5.5 10.3 -- -- 15.8
Other....................... 1.6 (5.5) 0.6 -- (3.3)
------- -------- ----- ------- -------
1.6 54.8 2.0 (74.7) (16.3)
Change in non-cash working
capital....................... 1.6 19.1 0.8 -- 21.5
------- -------- ----- ------- -------
Cash provided (used) by
operations.................... 3.2 73.9 2.8 (74.7) 5.2
------- -------- ----- ------- -------
Investment:
Additions to fixed assets..... (57.6) (24.1) (0.5) -- (82.2)
Proceeds from sale of
marketable securities....... 39.2 -- -- -- 39.2
Proceeds from sale of fixed
assets...................... 0.1 1.4 -- -- 1.5
Proceeds from termination of
interest rate swaps......... 3.4 -- -- -- 3.4
Investment in related
companies................... (103.5) -- -- 103.5 --
Decrease (increase) in other
assets...................... (12.1) 8.4 (0.7) -- (4.4)
------- -------- ----- ------- -------
(130.5) (14.3) (1.2) 103.5 (42.5)
------- -------- ----- ------- -------
</Table>
F-40
<Page>
NORSKE SKOG CANADA LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003
(IN MILLIONS OF CANADIAN DOLLARS, EXCEPT PER SHARE AMOUNTS)
23. SUPPLEMENTAL GUARANTOR INFORMATION (CONTINUED)
<Table>
<Caption>
CONSOLIDATED
NORSKE SKOG SUBSIDIARY SUBSIDIARY ELIMINATING NORSKE SKOG
CANADA LIMITED GUARANTORS NON-GUARANTORS ENTRIES CANADA LIMITED
-------------- ---------- -------------- ----------- --------------
Financing:
Increase (decrease) in
advances to related
companies................... (181.6) 99.3 7.6 74.7 --
Decrease in other long-term
obligations................. (6.8) (1.2) -- -- (8.0)
Increase (decrease) in
revolving loan.............. 15.2 106.7 -- (2.8) 119.1
Repayment of long-term debt... -- (377.7) (9.0) -- (386.7)
Issue of common shares, net of
share interest issue
costs....................... 208.1 103.5 -- (103.5) 208.1
------- -------- ----- ------- -------
34.9 (69.4) (1.4) (31.6) (67.5)
------- -------- ----- ------- -------
Cash, increase (decrease) during
year.......................... (92.4) (9.8) 0.2 (2.8) (104.8)
Cash, beginning of year......... 92.4 9.9 2.5 -- 104.8
------- -------- ----- ------- -------
Cash, end of year............... $ -- $ 0.1 $ 2.7 $ (2.8) $ --
======= ======== ===== ======= =======
</Table>
F-41
<Page>
NORSKE SKOG CANADA LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003
(IN MILLIONS OF CANADIAN DOLLARS, EXCEPT PER SHARE AMOUNTS)
23. SUPPLEMENTAL GUARANTOR INFORMATION (CONTINUED)
SUPPLEMENTAL CONSOLIDATED BALANCE SHEET
AS AT DECEMBER 31, 2003
<Table>
<Caption>
CONSOLIDATED
NORSKE SKOG SUBSIDIARY SUBSIDIARY ELIMINATING NORSKE SKOG
CANADA LIMITED GUARANTORS NON-GUARANTORS ENTRIES CANADA LIMITED
-------------- ---------- -------------- ----------- --------------
ASSETS
Current assets:
Cash and short-term
investments................. $ 9.4 $ (9.1) $ 1.9 $ (2.2) $ --
Accounts receivable........... 25.3 228.1 0.1 -- 253.5
Inventories................... -- 235.9 -- -- 235.9
Prepaid expenses.............. 4.8 1.6 0.2 -- 6.6
-------- -------- ------ --------- --------
39.5 456.5 2.2 (2.2) 496.0
Fixed assets.................... 1,566.7 666.2 57.3 -- 2,290.2
Advances to related companies... 415.2 615.8 1.7 (1,032.7) --
Investments in related
companies..................... 969.1 1.0 -- (970.1) --
Other assets.................... 28.5 0.9 0.6 -- 30.0
-------- -------- ------ --------- --------
$3,019.0 $1,740.4 $ 61.8 $(2,005.0) $2,816.2
======== ======== ====== ========= ========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current liabilities:
Accounts payable and accrued
liabilities................. $ 36.9 $ 205.8 $ 1.5 $ -- $ 244.2
Long-term debt.................. 795.7 14.7 37.6 (2.2) 845.8
Advances from related
companies..................... 615.8 395.3 21.6 (1,032.7) --
Other long-term obligations..... 210.4 62.3 -- -- 272.7
Future income taxes............. 270.0 78.0 15.3 -- 363.3
Deferred credits................ 21.0 -- -- -- 21.0
-------- -------- ------ --------- --------
1,949.8 756.1 76.0 (1,034.9) 1,747.0
-------- -------- ------ --------- --------
Shareholders' equity:
Share capital................. 913.6 602.8 (16.1) (586.7) 913.6
Contributed surplus........... -- 148.7 9.1 (157.8) --
Retained earnings (deficit)... 155.6 232.8 (7.2) (225.6) 155.6
-------- -------- ------ --------- --------
1,069.2 984.3 (14.2) (970.1) 1,069.2
-------- -------- ------ --------- --------
$3,019.0 $1,740.4 $ 61.8 $(2,005.0) $2,816.2
======== ======== ====== ========= ========
</Table>
F-42
<Page>
NORSKE SKOG CANADA LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003
(IN MILLIONS OF CANADIAN DOLLARS, EXCEPT PER SHARE AMOUNTS)
23. SUPPLEMENTAL GUARANTOR INFORMATION (CONTINUED)
SUPPLEMENTAL CONSOLIDATED STATEMENT OF EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 2003
<Table>
<Caption>
CONSOLIDATED
NORSKE SKOG SUBSIDIARY SUBSIDIARY ELIMINATING NORSKE SKOG
CANADA LIMITED GUARANTORS NON-GUARANTORS ENTRIES CANADA LIMITED
-------------- ---------- -------------- ----------- --------------
Net sales....................... $ -- $1,591.2 $ 9.5 $ (9.5) $1,591.2
Operating expenses:
Cost of product sold.......... 34.1 1,431.3 2.3 (9.5) 1,458.2
Selling, general and
administrative.............. 25.8 28.9 -- -- 54.7
Depreciation and
amortization................ 125.5 62.9 1.5 -- 189.9
------- -------- ------ ------ --------
185.4 1,523.1 3.8 (9.5) 1,702.8
------- -------- ------ ------ --------
Operating earnings (loss)....... (185.4) 68.1 5.7 -- (111.6)
Foreign exchange gain on
translation of long-term
debt.......................... 57.9 0.3 -- -- 58.2
Write-down of fixed assets...... (0.3) (13.9) -- -- (14.2)
Equity earnings in
partnership................... 87.5 -- -- (87.5) --
Other expense, net.............. (1.9) (1.3) (0.7) -- (3.9)
Interest expense................ (66.1) (7.0) (12.7) 10.3 (75.5)
Interest income................. 19.9 (16.1) 7.0 (10.3) 0.5
------- -------- ------ ------ --------
Earnings (loss) before income
taxes......................... (88.4) 30.1 (0.7) (87.5) (146.5)
Income tax recovery............. (46.5) (15.5) -- -- (62.0)
Equity in earnings (loss) of
subsidiaries.................. (42.6) -- -- 42.6 --
------- -------- ------ ------ --------
Net earnings (loss)............. $ (84.5) $ 45.6 $ (0.7) $(44.9) $ (84.5)
======= ======== ====== ====== ========
Differences between
United States and Canadian
generally accepted accounting
principles:
Net earnings (loss) in
accordance with Canadian
GAAP.......................... $ (84.5) $ 45.6 $ (0.7) $(44.9) $ (84.5)
Financial instruments........... 63.8 -- -- -- 63.8
Income tax impact of above
item.......................... (22.8) -- -- -- (22.8)
------- -------- ------ ------ --------
Net earnings (loss) in
accordance with U.S. GAAP..... $ (43.5) $ 45.6 $ (0.7) $(44.9) $ (43.5)
======= ======== ====== ====== ========
</Table>
F-43
<Page>
NORSKE SKOG CANADA LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003
(IN MILLIONS OF CANADIAN DOLLARS, EXCEPT PER SHARE AMOUNTS)
23. SUPPLEMENTAL GUARANTOR INFORMATION (CONTINUED)
SUPPLEMENTAL CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2003
<Table>
<Caption>
CONSOLIDATED
NORSKE SKOG SUBSIDIARY SUBSIDIARY ELIMINATING NORSKE SKOG
CANADA LIMITED GUARANTORS NON-GUARANTORS ENTRIES CANADA LIMITED
-------------- ---------- -------------- ----------- --------------
Cash provided by (used for):
Operations:
Net earnings (loss)........... $(84.5) $ 45.6 $(0.7) $(44.9) $(84.5)
Items not requiring cash:
Depreciation and
amortization.............. 125.5 62.9 1.5 -- 189.9
Future income taxes......... (49.1) (18.5) (0.3) -- (67.9)
Increase in other long-term
obligations............... 7.6 9.9 -- -- 17.5
Write-down of fixed
assets.................... 0.3 13.9 -- -- 14.2
Foreign exchange gain on
translation of long-term
debt...................... (57.9) (0.3) -- -- (58.2)
Other....................... 5.6 0.6 -- -- 6.2
------ ------ ----- ------ ------
(52.5) 114.1 0.5 (44.9) 17.2
Change in non-cash working
capital....................... (9.0) 14.0 0.3 -- 5.3
------ ------ ----- ------ ------
Cash provided (used) by
operations.................... (61.5) 128.1 0.8 (44.9) 22.5
------ ------ ----- ------ ------
Investing:
Acquisition of paper recycling
business.................... (32.1) -- -- -- (32.1)
Additions to fixed assets..... (45.0) (34.7) (1.7) -- (81.4)
Proceeds from sale of fixed
assets...................... 0.2 0.2 -- -- 0.4
Investment in related
companies................... (0.5) -- -- 0.5 --
Proceeds from termination of
interest rate swaps......... 15.9 -- -- -- 15.9
Decrease in other assets...... 1.0 -- 0.1 -- 1.1
------ ------ ----- ------ ------
(60.5) (34.5) (1.6) 0.5 (96.1)
------ ------ ----- ------ ------
</Table>
F-44
<Page>
NORSKE SKOG CANADA LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003
(IN MILLIONS OF CANADIAN DOLLARS, EXCEPT PER SHARE AMOUNTS)
23. SUPPLEMENTAL GUARANTOR INFORMATION (CONTINUED)
<Table>
<Caption>
CONSOLIDATED
NORSKE SKOG SUBSIDIARY SUBSIDIARY ELIMINATING NORSKE SKOG
CANADA LIMITED GUARANTORS NON-GUARANTORS ENTRIES CANADA LIMITED
-------------- ---------- -------------- ----------- --------------
Financing:
Increase (decrease) in
advances to related
companies................... (31.5) (13.4) -- 44.9 --
Increase (decrease) in other
long-term obligations....... (28.9) 1.2 -- -- (27.7)
Issue of long-term debt....... 212.7 -- -- -- 212.7
Increase (decrease) in
revolving loan.............. (15.2) (91.1) -- 0.6 (105.7)
Deferred financing costs...... (5.6) -- -- -- (5.6)
Issue of common shares, net of
share issue costs........... (0.1) 0.5 -- (0.5) (0.1)
------ ------ ----- ------ ------
131.4 (102.8) -- 45.0 73.6
------ ------ ----- ------ ------
Cash, increase (decrease) during
year.......................... 9.4 (9.2) (0.8) 0.6 --
Cash, beginning of year......... -- 0.1 2.7 (2.8) --
------ ------ ----- ------ ------
Cash, end of year............... $ 9.4 $ (9.1) $ 1.9 $ (2.2) $ --
====== ====== ===== ====== ======
</Table>
24. SUBSEQUENT EVENTS
On March 23, 2004 the Company completed a private placement of US$250.0
principal amount of senior unsecured notes due 2014. The proceeds from the sale
of the notes were used to purchase or redeem all of the Company's US$200.0
aggregate principal amount of 10% senior notes due 2009, including related
premiums, fees and expenses and for general corporate purposes.
F-45
<Page>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Under the CANADA BUSINESS CORPORATIONS ACT (the "CBCA"), a corporation may
indemnify a present or former director or officer to such corporation or a
person who acts or acted as a director or officer of another corporation at the
corporation's request and where the corporation is or was a shareholder or
creditor, and his heirs and legal representatives, against all costs, charges
and expenses, including an amount paid to settle an action or satisfy a
judgment, reasonably incurred by him in respect of any civil, criminal or
administrative action or proceeding to which he is made a party by reason of his
being or having been a director or officer of such corporation, provided that
the director or officer acted honestly and in good faith with a view to the best
interests of the corporation, and, in the case of a criminal or administrative
action or proceeding that is enforced by a monetary penalty, had reasonable
grounds for believing that his conduct was lawful. Such indemnification may be
made in connection with a derivative action only with court approval. A director
or officer is entitled to indemnification from the corporation as a matter of
right in respect of all costs, charges and expenses reasonably incurred by him
in connection with the defense of a civil, criminal or administrative action or
proceeding to which he is made a party by reason of being or having been a
director or officer of the corporation if he was substantially successful on the
merits and fulfilled the conditions set forth above.
In accordance with the CBCA, Norske Skog Canada Limited ("NSCL") may
indemnify a director or officer of NSCL, a former director or officer of NSCL, a
former director or officer of a body corporate of which NSCL is or was a
shareholder or creditor and his heirs and legal representatives against all
costs, charges and expenses, including an amount paid to settle an action or
satisfy a judgment reasonably incurred by him in respect of any civil, criminal
or administrative action or proceeding to which he has been made a party by
reason of being or having been a director or officer of NSCL or such body
corporate if (1) he acted honestly and in good faith with a view to the best
interests of NSCL, and (2) in the case of a criminal or administrative action or
proceeding that is enforced by a monetary penalty, he had reasonable grounds for
believing that his conduct was lawful.
NSCL will also indemnify such directors or officers who have been
substantially successful in the defense of any civil, criminal or administrative
action or proceeding to which he is made a party by reason of being or having
been a director of NSCL or body corporate against all costs, charges and
expenses reasonably incurred by him in respect of such action or proceeding.
A policy of directors' and officers' liability insurance is maintained by
NSCL which insures directors and officers for losses as a result of claims based
upon the acts or omissions as directors and officers of the Registrant,
including liabilities arising under the Securities Act of 1933, as amended (the
"Securities Act"), and also reimburses NSCL for payments made pursuant to the
indemnity provisions under the Securities Act.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling NSCL pursuant to
the foregoing provisions, NSCL has been informed that, in the opinion of the
U.S. Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Securities Act and is therefore unenforceable.
ITEM 21. EXHIBITS
The exhibits to this registration statement are listed in the Exhibit Index
to this registration statement, which Exhibit Index is hereby incorporated by
reference.
II-1
<Page>
ITEM 22. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(a) that, insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that, in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
(b) (1) to respond to requests for information that is incorporated by
reference into the prospectus pursuant to Item 4, 10(b), 11 or 13 of Form F-4,
within one business day of receipt of such request, and to send the incorporated
documents by first class mail or other equally prompt means; and (2) to arrange
or provide for a facility in the U.S. for the purpose of responding to such
requests. The undertaking in subparagraph (1) above includes information
contained in documents filed subsequent to the effective date of the
registration statement through the date of responding to the request.
(c) to supply by means of a post-effective amendment all information
concerning a transaction and the company being acquired involved therein, that
was not the subject of and included in the registration statement when it became
effective.
(d) that, for purposes of determining any liability under the Securities
Act, each filing of the registrant's annual report pursuant to Section 13(a) or
Section 15(d) of the Securities Exchange Act of 1934 (and, where applicable,
each filing of an employee benefit plan's annual report pursuant to
Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by
reference in the registration statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof;
(e) to file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement: (i) to include any
prospectus required by section 10(a)(3) of the Securities Act, (ii) to reflect
in the prospectus any facts or events arising after the effective date of the
registration statement (or the most recent post-effective amendment thereof)
which, individually or in the aggregate, represent a fundamental change in the
information set forth in the registration statement, (iii) to include any
material information with respect to the plan of distribution not previously
disclosed in the registration statement or any material change to such
information in the registration statement;
(f) that, for the purpose of determining any liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof;
(g) to remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering; and
(h) to file a post-effective amendment to the registration statement to
include any financial statements required by Item 8.A of Form 20-F at the start
of any delayed offering or throughout a continuous offering. Financial
statements and information otherwise required by Section 10(a)(3) of the Act
need not be furnished, PROVIDED, that the registrant includes in the prospectus,
by means of a post-effective amendment, financial statements required pursuant
to this paragraph (h) and other information necessary to ensure that all other
information in the prospectus is at least as current as the date of those
financial statements.
II-2
<Page>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant issuer
has duly caused this amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of Vancouver,
Province of British Columbia, Country of Canada, on May 14, 2004.
<Table>
NORSKE SKOG CANADA LIMITED
By: /s/ RALPH LEVERTON
-----------------------------------------
Name: Ralph Leverton
Title: VICE-PRESIDENT, FINANCE AND CHIEF
FINANCIAL OFFICER
</Table>
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the Registration Statement has been signed by the following persons in the
capacities indicated on May 14, 2004.
<Table>
<Caption>
SIGNATURE TITLE
--------- -----
*
------------------------------------------- Director and Chairman
Jan A. Oksum
* Director, President and Chief Executive
------------------------------------------- Officer
Russell J. Horner (principal executive officer)
*
------------------------------------------- Director
Thomas S. Chambers
*
------------------------------------------- Director
J. Trevor Johnstone
*
------------------------------------------- Director
Harold N. Kvisle
*
------------------------------------------- Director
Jan Kildal
*
------------------------------------------- Director
R. Keith Purchase
</Table>
II-3
<Page>
<Table>
<Caption>
SIGNATURE TITLE
--------- -----
*
------------------------------------------- Director
William P. Rosenfeld
*
------------------------------------------- Director and Deputy Chairman
W. Thomas Stephens
/s/ RALPH LEVERTON
------------------------------------------- Vice-President, Finance and Chief Financial
Ralph Leverton Officer (principal financial officer)
*
------------------------------------------- Controller
David K. Ure (principal accounting officer)
</Table>
<Table>
NORSKE SKOG CANADA (USA) INC.
By: /s/ VALERIE SEAGER
-------------------------------------
Valerie B. Seager Authorized Representative in the United States
LEGAL COUNSEL AND
CORPORATE SECRETARY
</Table>
* Power of Attorney
<Table>
By: /s/ VALERIE SEAGER
--------------------------------------
Valerie Seager
ATTORNEY-IN-FACT
</Table>
II-4
<Page>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant guarantor
has duly caused this amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of Vancouver,
Province of British Columbia, Country of Canada, on May 14, 2004.
<Table>
ELK FALLS PULP AND PAPER LIMITED
By: /s/ PETER M. STAIGER
-----------------------------------------
Name: Peter M. Staiger
Title: PRESIDENT
</Table>
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the Registration Statement has been signed by the following persons in the
capacities indicated on May 14, 2004.
<Table>
<Caption>
SIGNATURE TITLE
--------- -----
/s/ PETER M. STAIGER
------------------------------------------- Director and President
Peter M. Staiger (principal executive officer)
* Controller
------------------------------------------- (principal financial officer and principal
David K. Ure accounting officer)
/s/ VALERIE B. SEAGER
------------------------------------------- Director and Corporate Secretary and
Valerie B. Seager Legal Counsel
</Table>
<Table>
NORSKE SKOG CANADA (USA) INC.
By: /s/ VALERIE B. SEAGER
-------------------------------------
Valerie B. Seager Authorized Representative in the United States
LEGAL COUNSEL AND
CORPORATE SECRETARY
</Table>
* Power of Attorney
<Table>
By: /s/ VALERIE SEAGER
--------------------------------------
Valerie Seager
ATTORNEY-IN-FACT
</Table>
II-5
<Page>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant guarantor
has duly caused this amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of Vancouver,
Province of British Columbia, Country of Canada, on May 14, 2004.
<Table>
NORSKE SKOG CANADA PULP OPERATIONS LIMITED
By: /s/ RALPH LEVERTON
-----------------------------------------
Name: Ralph Leverton
Title: VICE-PRESIDENT FINANCE AND CHIEF
FINANCIAL OFFICER
</Table>
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the Registration Statement has been signed by the following persons in the
capacities indicated on May 14, 2004.
<Table>
<Caption>
SIGNATURE TITLE
--------- -----
* Director, President and Chief Executive
------------------------------------------- Officer
Russell J. Horner (principal executive officer)
/s/ RALPH LEVERTON Director, Vice-President Finance and
------------------------------------------- Chief Financial Officer
Ralph Leverton (principal financial officer)
/s/ PETER M. STAIGER
------------------------------------------- Director and Treasurer
Peter M. Staiger
*
------------------------------------------- Controller
David K. Ure (principal accounting officer)
</Table>
<Table>
NORSKE SKOG CANADA (USA) INC.
By: /s/ VALERIE B. SEAGER
-------------------------------------
Valerie B. Seager Authorized Representative in the United States
LEGAL COUNSEL AND
CORPORATE SECRETARY
</Table>
* Power of Attorney
<Table>
By: /s/ VALERIE SEAGER
--------------------------------------
Valerie Seager
ATTORNEY-IN-FACT
</Table>
II-6
<Page>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant guarantor
has duly caused this amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of Vancouver,
Province of British Columbia, Country of Canada, on May 14, 2004.
<Table>
NORSKE SKOG CANADA FINANCE LIMITED
By: /s/ RALPH LEVERTON
-----------------------------------------
Name: Ralph Leverton
Title: PRESIDENT
</Table>
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the Registration Statement has been signed by the following persons in the
capacities indicated on May 14, 2004.
<Table>
<Caption>
SIGNATURE TITLE
--------- -----
/s/ RALPH LEVERTON
------------------------------------------- Director and President
Ralph Leverton (principal executive officer)
/s/ PETER M. STAIGER
------------------------------------------- Director and Treasurer
Peter M. Staiger (principal financial officer)
*
------------------------------------------- Controller
David K. Ure (principal accounting officer)
/s/ VALERIE B. SEAGER
------------------------------------------- Director and Corporate Secretary and
Valerie B. Seager Legal Counsel
</Table>
<Table>
NORSKE SKOG CANADA (USA) INC.
By: /s/ VALERIE B. SEAGER
-------------------------------------
Valerie B. Seager Authorized Representative in the United States
LEGAL COUNSEL AND CORPORATE SECRETARY
</Table>
* Power of Attorney
<Table>
By: /s/ VALERIE SEAGER
--------------------------------------
Valerie Seager
ATTORNEY-IN-FACT
</Table>
II-7
<Page>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant issuer
has duly caused this amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of Tokyo,
Country of Japan, on May 14, 2004.
<Table>
NORSKE SKOG CANADA (JAPAN) LTD.
By: /s/ RYOJI MIYAKITA
-----------------------------------------
Name: Ryoji Miyakita
Title: PRESIDENT
</Table>
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the Registration Statement has been signed by the following persons in the
capacities indicated on May 14, 2004.
<Table>
<Caption>
SIGNATURE TITLE
--------- -----
/s/ RYOJI MIYAKITA
------------------------------------------- Director and President
Ryoji Miyakita (principal executive officer)
*
------------------------------------------- Auditor (principal financial officer and
Mitsuru Ozaki principal accounting officer)
*
------------------------------------------- Director
James E. Armitage
*
------------------------------------------- Director
James M. Bayles
</Table>
<Table>
NORSKE SKOG CANADA (USA) INC.
By: /s/ VALERIE B. SEAGER
-------------------------------------
Valerie B. Seager Authorized Representative in the United States
LEGAL COUNSEL AND CORPORATE SECRETARY
</Table>
* Power of Attorney
<Table>
By: /s/ VALERIE SEAGER
--------------------------------------
Valerie Seager
ATTORNEY-IN-FACT
</Table>
II-8
<Page>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant guarantor
has duly caused this amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of Vancouver,
Province of British Columbia, Country of Canada, on May 14, 2004.
<Table>
NORSKE SKOG CANADA PULP SALES INC.
By: /s/ PETER M. STAIGER
-----------------------------------------
Name: Peter M. Staiger
Title: TREASURER
</Table>
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the Registration Statement has been signed by the following persons in the
capacities indicated on May 14, 2004.
<Table>
<Caption>
SIGNATURE TITLE
--------- -----
/s/ RALPH LEVERTON
------------------------------------------- Director and President
Ralph Leverton (principal executive officer)
/s/ PETER M. STAIGER
------------------------------------------- Director and Treasurer
Peter M. Staiger (principal financial officer)
*
------------------------------------------- Controller
David K. Ure (principal accounting officer)
/s/ VALERIE B. SEAGER
------------------------------------------- Director, Corporate Secretary and
Valerie B. Seager Legal Counsel
</Table>
<Table>
NORSKE SKOG CANADA (USA) INC.
By: /s/ VALERIE B. SEAGER
-------------------------------------
Valerie B. Seager Authorized Representative in the United States
LEGAL COUNSEL AND CORPORATE SECRETARY
</Table>
* Power of Attorney
<Table>
By: /s/ VALERIE SEAGER
--------------------------------------
Valerie Seager
ATTORNEY-IN-FACT
</Table>
II-10
<Page>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant guarantor
has duly caused this amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of Vancouver,
Province of British Columbia, Country of Canada, on May 14, 2004.
<Table>
NORSKE SKOG CANADA SALES INC.
By: /s/ PETER M. STAIGER
-----------------------------------------
Name: Peter M. Staiger
Title: TREASURER
</Table>
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the Registration Statement has been signed by the following persons in the
capacities indicated on May 14, 2004.
<Table>
<Caption>
SIGNATURE TITLE
--------- -----
/s/ RALPH LEVERTON
------------------------------------------- Director and President
Ralph Leverton (principal executive officer)
/s/ PETER M. STAIGER
------------------------------------------- Director and Treasurer
Peter M. Staiger (principal financial officer)
*
------------------------------------------- Controller
David K. Ure (principal accounting officer)
/s/ VALERIE B. SEAGER
------------------------------------------- Director, Corporate Secretary and
Valerie B. Seager Legal Counsel
</Table>
<Table>
NORSKE SKOG CANADA (USA) INC.
By: /s/ VALERIE B. SEAGER
-------------------------------------
Valerie B. Seager Authorized Representative in the United States
LEGAL COUNSEL AND CORPORATE SECRETARY
</Table>
* Power of Attorney
<Table>
By: /s/ VALERIE SEAGER
--------------------------------------
Valerie Seager
ATTORNEY-IN-FACT
</Table>
II-11
<Page>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant issuer
has duly caused this amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of Vancouver,
Province of British Columbia, Country of Canada, on May 14, 2004.
<Table>
NORSKE SKOG CANADA SERVICES (HUNGARY) LIMITED
LIABILITY COMPANY
By: /s/ ZOLTAN HERCZEG
-----------------------------------------
Name: Zoltan Herczeg
Title: MANAGING DIRECTOR
</Table>
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the Registration Statement has been signed by the following persons in the
capacities indicated on May 14, 2004.
<Table>
<Caption>
SIGNATURE TITLE
--------- -----
*
------------------------------------------- Managing Director
Patricia M. Sakai (principal executive officer)
/s/ ZOLTAN HERCZEG Managing Director
------------------------------------------- (principal financial officer and principal
Zoltan Herczeg accounting officer)
*
------------------------------------------- Managing Director
Attila Galambos
</Table>
<Table>
NORSKE SKOG CANADA (USA) INC.
By: /s/ VALERIE B. SEAGER
-------------------------------------
Valerie B. Seager Authorized Representative in the United States
LEGAL COUNSEL AND CORPORATE SECRETARY
</Table>
* Power of Attorney
<Table>
By: /s/ VALERIE SEAGER
--------------------------------------
Valerie Seager
ATTORNEY-IN-FACT
</Table>
II-12
<Page>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant guarantor
has duly caused this amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of Vancouver,
Province of British Columbia, Country of Canada, on May 14, 2004.
<Table>
NORSKE SKOG CANADA (USA) INC.
By: /s/ PETER M. STAIGER
-----------------------------------------
Name: Peter M. Staiger
Title: TREASURER
</Table>
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the Registration Statement has been signed by the following persons in the
capacities indicated on May 14, 2004.
<Table>
<Caption>
SIGNATURE TITLE
--------- -----
*
------------------------------------------- Director and President
L. Thomas Crowley (principal executive officer)
/s/ RALPH LEVERTON Director, Vice-President Finance and Chief
------------------------------------------- Financial Officer
Ralph Leverton (principal financial officer)
*
------------------------------------------- Director and Vice-President
Paul A. Gordon
*
------------------------------------------- Controller
David K. Ure (principal accounting officer)
</Table>
* Power of Attorney
<Table>
By: /s/ VALERIE SEAGER
--------------------------------------
Valerie Seager
ATTORNEY-IN-FACT
</Table>
II-13
<Page>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant guarantor
has duly caused this amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of Vancouver,
Province of British Columbia, Country of Canada, on May 14, 2004.
<Table>
NSCL HOLDINGS INC.
By: /s/ PETER M. STAIGER
-----------------------------------------
Name: Peter M. Staiger
Title: TREASURER
</Table>
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the Registration Statement has been signed by the following persons in the
capacities indicated on May 14, 2004.
<Table>
<Caption>
SIGNATURE TITLE
--------- -----
*
------------------------------------------- Director and President
L. Thomas Crowley (principal executive officer)
* Vice-President Finance and Chief Financial
------------------------------------------- Officer
Ralph Leverton (principal financial officer)
*
------------------------------------------- Director and Vice-President
Paul Gordon
/s/ PETER M. STAIGER
------------------------------------------- Director and Treasurer
Peter M. Staiger
*
------------------------------------------- Controller
David K. Ure (principal accounting officer)
</Table>
* Power of Attorney
<Table>
By: /s/ VALERIE SEAGER
--------------------------------------
Valerie Seager
ATTORNEY-IN-FACT
</Table>
II-14
<Page>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant guarantor
has duly caused this amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of Vancouver,
Province of British Columbia, Country of Canada, on May 14, 2004.
<Table>
NORSKECANADA
By: Norske Skog Canada Pulp Operations
Limited, as partner of NorskeCanada,
a partnership
-----------------------------------------
By: /s/ RALPH LEVERTON
-----------------------------------------
Name: Ralph Leverton
Title: VICE-PRESIDENT, FINANCE AND CHIEF
FINANCIAL OFFICER
</Table>
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the Registration Statement has been signed by the following persons in the
capacities indicated on May 14, 2004.
<Table>
<Caption>
SIGNATURE TITLE
--------- -----
* Director, President and Chief Executive
------------------------------------------- Officer
Russell J. Horner (principal executive officer)
/s/ RALPH LEVERTON Director, Vice-President, Finance, Chief
------------------------------------------- Financial Officer and Secretary (principal
Ralph Leverton financial officer)
/s/ PETER M. STAIGER
------------------------------------------- Director and Treasurer
Peter M. Staiger
*
------------------------------------------- Controller
David K. Ure (principal accounting officer)
</Table>
<Table>
NORSKE SKOG CANADA (USA) INC.
By: /s/ VALERIE B. SEAGER
-------------------------------------
Valerie B. Seager Authorized Representative in the United States
LEGAL COUNSEL AND CORPORATE SECRETARY
</Table>
* Power of Attorney
<Table>
By: /s/ VALERIE SEAGER
--------------------------------------
Valerie Seager
ATTORNEY-IN-FACT
</Table>
II-15
<Page>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant guarantor
has duly caused this amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of Vancouver,
Province of British Columbia, Canada, on May 14, 2004.
<Table>
PACIFICA PAPER SALES LTD.
By: /s/ PETER M. STAIGER
-----------------------------------------
Name: Peter M. Staiger
Title: PRESIDENT
</Table>
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the Registration Statement has been signed by the following persons in the
capacities indicated on May 14, 2004.
<Table>
<Caption>
SIGNATURE TITLE
--------- -----
/s/ PETER M. STAIGER
------------------------------------------- Director and President
Peter M. Staiger (principal executive officer)
* Controller
------------------------------------------- (principal financial officer and principal
David K. Ure accounting officer)
/s/ VALERIE B. SEAGER
------------------------------------------- Director, Corporate Secretary and Legal
Valerie B. Seager Counsel
</Table>
<Table>
NORSKE SKOG CANADA (USA) INC.
By: /s/ VALERIE B. SEAGER
-------------------------------------
Valerie B. Seager Authorized Representative in the United States
LEGAL COUNSEL AND CORPORATE SECRETARY
</Table>
* Power of Attorney
<Table>
By: /s/ VALERIE SEAGER
--------------------------------------
Valerie Seager
ATTORNEY-IN-FACT
</Table>
II-16
<Page>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant guarantor
has duly caused this amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of Vancouver,
Province of British Columbia, Country of Canada, on May 14, 2004.
<Table>
PACIFICA PAPERS SALES INC.
By: /s/ PETER M. STAIGER
-----------------------------------------
Name: Peter M. Staiger
Title: TREASURER
</Table>
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the Registration Statement has been signed by the following persons in the
capacities indicated on May 14, 2004.
<Table>
<Caption>
SIGNATURE TITLE
--------- -----
*
------------------------------------------- Director and President
L. Thomas Crowley (principal executive officer)
/s/ PETER M. STAIGER
------------------------------------------- Treasurer
Peter M. Staiger (principal financial officer)
*
------------------------------------------- Controller
David K. Ure (principal accounting officer)
*
------------------------------------------- Director and Vice-President
Paul A. Gordon
/s/ VALERIE B. SEAGER
------------------------------------------- Director, Corporate Secretary and Legal
Valerie B. Seager Counsel
</Table>
* Power of Attorney
<Table>
By: /s/ VALERIE SEAGER
--------------------------------------
Valerie Seager
ATTORNEY-IN-FACT
</Table>
II-17
<Page>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant guarantor
has duly caused this amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of Vancouver,
Province of British Columbia, Country of Canada, on May 14, 2004.
<Table>
PACIFICA POPLARS LTD.
By: /s/ PETER M. STAIGER
-----------------------------------------
Name: Peter M. Staiger
Title: PRESIDENT
</Table>
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the Registration Statement has been signed by the following persons in the
capacities indicated on May 14, 2004.
<Table>
<Caption>
SIGNATURE TITLE
--------- -----
/s/ PETER M. STAIGER
------------------------------------------- Director and President
Peter M. Staiger (principal executive officer)
* Controller
------------------------------------------- (principal financial officer and principal
David K. Ure accounting officer)
/s/ VALERIE B. SEAGER
------------------------------------------- Director, Corporate Secretary and Legal
Valerie B. Seager Counsel
</Table>
<Table>
NORSKE SKOG CANADA (USA) INC.
By: /s/ VALERIE B. SEAGER
-------------------------------------
Valerie B. Seager Authorized Representative in the United States
LEGAL COUNSEL AND CORPORATE SECRETARY
</Table>
* Power of Attorney
<Table>
By: /s/ VALERIE SEAGER
--------------------------------------
Valerie Seager
ATTORNEY-IN-FACT
</Table>
II-18
<Page>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant guarantor
has duly caused this amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of Vancouver,
Province of British Columbia, Country of Canada, on May 14, 2004.
<Table>
PACIFICA POPLARS INC.
By: /s/ PETER M. STAIGER
-----------------------------------------
Name: Peter M. Staiger
Title: TREASURER
</Table>
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the Registration Statement has been signed by the following persons in the
capacities indicated on May 14, 2004.
<Table>
<Caption>
SIGNATURE TITLE
--------- -----
*
------------------------------------------- Director, President and Chairman of the Board
L. Thomas Crowley (principal executive officer)
/s/ PETER M. STAIGER Treasurer
------------------------------------------- (principal financial officer and principal
Peter M. Staiger accounting officer)
*
------------------------------------------- Director and Vice-President
Paul A. Gordon
/s/ VALERIE B. SEAGER
------------------------------------------- Director, Corporate Secretary and Legal
Valerie B. Seager Counsel
</Table>
II-19
<Page>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant guarantor
has duly caused this amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of Vancouver,
Province of British Columbia, Country of Canada, on May 14, 2004.
<Table>
PACIFICA PAPERS US INC.
By: /s/ PETER M. STAIGER
-----------------------------------------
Name: Peter M. Staiger
Title: TREASURER
</Table>
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the Registration Statement has been signed by the following persons in the
capacities indicated on May 14, 2004.
<Table>
<Caption>
SIGNATURE TITLE
--------- -----
*
------------------------------------------- Director and President
L. Thomas Crowley (principal executive officer)
/s/ PETER M. STAIGER
------------------------------------------- Treasurer
Peter M. Staiger (principal financial officer)
*
------------------------------------------- Controller
David K. Ure (principal accounting officer)
*
------------------------------------------- Director and Vice-President
Paul A. Gordon
/s/ VALERIE B. SEAGER
------------------------------------------- Director, Corporate Secretary and Legal
Valerie B. Seager Counsel
</Table>
* Power of Attorney
<Table>
By: /s/ VALERIE SEAGER
--------------------------------------
Valerie Seager
ATTORNEY-IN-FACT
</Table>
II-20
<Page>
EXHIBIT INDEX
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- --------------------- ----------------------
3.1*** Articles of Amalgamation of Norske Skog Canada Limited
("NSCL").
3.2*** By-laws of NSCL.
4.1* Registration Rights Agreement dated as of March 23, 2004
among NSCL, the subsidiary guarantors and the initial
purchasers named therein.
4.2* Indenture dated as of March 23, 2004 governing NSCL's 7 3/8%
Senior Notes due 2014, among NSCL, the subsidiary guarantors
and Wells Fargo Bank, National Association, as trustee.
4.3** Credit Agreement dated as of 19 July 2002 among NSCL, the
subsidiary restricted parties named therein, TD Securities
and RBC Capital Markets as arrangers, The Toronto-Dominion
Bank, as administration agent, Royal Bank of Canada as
syndication agent, and the lender parties named therein (the
"Credit Agreement").
4.4** First Amending Agreement to Credit Agreement dated as of
8 May 2003 among NSCL, the subsidiary restricted parties
named therein, The Toronto-Dominion Bank, as administration
agent, and the lender parties named therein.
4.5* Second Amending Agreement to Credit Agreement dated
6 August 2003 among NSCL, its subsidiary restricted parties
named therein, the Toronto-Dominion Bank, as administration
agent, and the lender parties thereto.
4.6*** Trust Deed dated as of August 9, 2001 and Supplemental Trust
Deed dated as of September 1, 2001, both entered into by
certain wholly owned subsidiaries of NSCL and The Canada
Trust Company, governing security granted pursuant to the
Credit Agreement.
4.7** Omnibus Pledge Agreement dated as of 19 July 2002 entered
into by certain wholly owned subsidiaries of NSCL and The
Toronto-Dominion Bank pursuant to the Credit Agreement.
4.8*** Aggregate Repricing Agreement dated as of May 14, 2003 among
Norske Skog Canada Finance Limited, certain lenders or
affiliates of lenders named in the Credit Agreement and
Royal Bank of Canada as group valuation agent, with respect
to the repricing from time to time of certain secured
derivative contracts entered into by Norske Skog Canada
Finance Limited.
5.1 Opinion of Lawson Lundell, Canadian counsel to NSCL, as to
the legality of the securities being registered.
5.2 Opinion of Shearman & Sterling LLP, United States counsel to
NSCL, as to the legality of the securities being registered.
5.3 Opinion of Haruki, Sawai & Inoue, Japanese counsel to NSCL,
as to the legality of the securities being registered.
5.4 Opinion of Deri & Lovrecz, Hungarian counsel to NSCL, as to
the legality of the securities being registered.
10.1** Indenture dated as of May 15, 2003, governing NSCL's 8 5/8%
Senior Notes due 2011, among NSCL, the subsidiary guarantors
and Wells Fargo Bank Minnesota, National Association, as
trustee (the "2003 Notes Indenture").
</Table>
II-21
<Page>
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- --------------------- ----------------------
10.2* First Supplemental Indenture amending the 2003 Notes
Indenture, dated as of December 1, 2003, among NSCL, the
subsidiary guarantors named therein and Wells Fargo Bank
Minnesota, National Association, as trustee.
10.3* Release Agreement in respect of the 2003 Note Indenture
executed as of the 1st day of December, 2003 between Wells
Fargo Bank Minnesota, National Association and 6141005
Canada Inc.
10.4** Credit Agreement dated as of 19 July 2002 among NSCL, the
subsidiary restricted parties named therein, TD Securities,
and RBC Capital Markets as arrangers, The Toronto-Dominion
Bank, as administration agent and the lender parties named
therein. (See Exhibit 4.3).
10.5** First Amending Agreement to Credit Agreement dated as of
8 May 2003 among NSCL, the subsidiary restricted parties
named therein, The Toronto-Dominion Bank, as administration
agent, and the lender parties named therein. (See
Exhibit 4.4).
10.6* Second Amending Agreement to Credit Agreement dated
6 August 2003 among NSLC, its subsidiary restricted parties
named therein, the Toronto-Dominion Bank, as administration
agent, and the lender parties thereto (See Exhibit 4.5).
10.7*** Trust Deed dated as of August 14, 2001 and Supplemental
Trust Deed dated as of September 1, 2001, both entered into
among certain wholly owned subsidiaries of NSCL and The
Canada Trust Company, governing security granted pursuant to
the Credit Agreement. (See Exhibit 4.6).
10.8** Omnibus Pledge Agreement dated as of 19 July 2002 entered
into among certain wholly owned subsidiaries of NSCL and The
Toronto-Dominion Bank pursuant to the Credit Agreement. (See
Exhibit 4.7).
10.9** Aggregate Repricing Agreement dated as of May 14, 2003 among
Norske Skog Canada Finance Limited, certain lenders or
affiliates of lenders named in the Credit Agreement and
Royal Bank of Canada as group valuation agent, with respect
to the repricing from time to time of certain secured
derivative contracts entered into by Norske Skog Canada
Finance Limited. (See Exhibit 4.8).
10.10**** Chip Supply Agreement dated November 19, 1992 between Crown
Forest Industries Limited and Riverside Forest Products
Limited, as assigned July 6, 2000 and assigned January 1,
2001 (Current parties NCSL and Riverside Forest Products
Limited).
10.11**** Amended and Restated Chip and Pulplog Supply Agreement dated
as of June 23, 1997 between 3264891 Canada Limited, 3264912
Canada Limited and TimberWest Forest Limited, as amended
January 1, 1999 (Current parties Norske Skog Canada Pulp
Operations Limited and TFL Forest Ltd. and TimberWest Forest
Company Partnership).
10.12**** Amendment dated October 3, 2002 to the Amended and Restated
Chip and Pulplog Supply Agreement referred to in
Exhibit 10.10 above.
10.13**** Amended and Restated Timber Harvesting Management Agreement
dated as of January 1, 1999 between FCCL, TimberWest Forest
Corp. and TimberWest Forest Company (Current parties NSCL,
TimberWest Forest Corp. and TimberWest Forest Company
Partnership).
10.14*** Chip and Log Supply Agreement dated as of June 8, 1998
between MacMillan Bloedel Limited and MB Paper Limited
(Current Parties Weyerhaeuser Company Limited and NSCL).
</Table>
II-22
<Page>
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- --------------------- ----------------------
10.15*** Fletcher Challenge Canada Limited (now NSCL) 1995 Stock
Option Plan.
10.16*** Sample Stock Option Grant Agreement under 10.14 above.
10.17*** Fletcher Challenge Canada Limited (now NSCL) Supplemental
Retirement Plan for Senior Employees.
10.18*** Change of control contract between NSCL and Russell J.
Horner dated as of August 29, 2001.
10.19** Amendment dated September 30, 2002, to change of control
contract referred to in Exhibit 10.30 above.
10.20*** Change of control contract between NSCL and Ralph Leverton
dated as of August 29, 2001.
10.21** Amendment dated September 30, 2002, to change of control
contract referred to in Exhibit 10.32 above.
10.22** Executive severance agreement dated as of October 15, 2002,
between NSCL and Jesse M. Beaman.
10.23** Executive severance agreement dated as of October 15, 2002,
between NSCL and W. Ron Buchhorn.
10.24** Executive severance agreement dated as of October 15, 2002,
between NSCL and Stuart H. Clugston.
10.25** Executive severance agreement dated as of October 15, 2002,
between NSCL and James E. Armitage.
10.26** Executive severance agreement dated as of October 15, 2002,
between NSCL and Robert H. Lindstrom.
10.27*** Special Synergy Incentive Plan.
10.28*** Form of Special Synergy Incentive Plan participant's
memorandum.
10.29**** Distribution Agreement between Norske Skog Canada
Sales Inc. and Pan Asia Paper Co. Pte Ltd. dated
November 23, 2001.
10.30*** Strategic Alliance Agreement between Norske Skog Canada
Limited and Norske Skogindustrier ASA dated for reference
October 1, 2001.
12.1* Computation of Ratio of Earnings to Fixed Charges.
21.1* Subsidiaries of Norske Skog Canada Limited.
23.1 Consent of KPMG LLP.
23.2 Consent of Lawson Lundell (included in Exhibit 5.1).
23.3 Consent of Shearman & Sterling LLP (included in
Exhibit 5.2).
23.4 Consent of Haruki, Sawai & Inoue (included in Exhibit 5.3).
23.5 Consent of Deri & Lovrecz (included in Exhibit 5.4).
24.0* Powers of Attorney (included on signature pages of
Registration Statement).
25.1* Statement of Eligibility of trustee on Form T-1 relating to
the 7 3/8% Senior Notes due 2014.
</Table>
II-23
<Page>
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- --------------------- ----------------------
99.1* Form of Letter of Transmittal in respect of NSCL's 7 3/8%
Senior Notes due 2014.
99.2* Form of Notice of Guaranteed Delivery in respect of NSCL's
7 3/8% Senior Notes due 2014.
</Table>
* Previously filed with the registration statement (No. 333-114538) on
Form F-4 of Norske Skog Canada Limited on April 16, 2004.
** Previously filed with the registration statement (No. 333-105719) on
Form F-4 of Norske Skog Canada Limited on May 30, 2003.
*** Previously filed with the registration statement (No. 333-82406) on
Form F-4 of Norske Skog Canada Limited on March 1, 2002.
**** Previously filed with the registration statement (No. 333-82406) on
Form F-4 of Norske Skog Canada Limited on March 1, 2002. Confidential
information has been omitted and has been filed separately with the
Securities and Exchange Commission.
II-24