EXHIBIT 2
NORSKE XXXX CANADA LIMITED
-------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED
FINANCIAL HIGHLIGHTS MARCH 31
---------------------------
UNAUDITED (IN MILLIONS OF DOLLARS, EXCEPT WHERE OTHERWISE STATED) 2003 2002
-------------------------------------------------------------------------------------------------------------------
SALES AND EARNINGS
Net sales $ 385.8 $ 324.3
Operating earnings (loss) (35.5) (44.6)
Net loss (24.8) (41.5)
EBITDA 1 11.8 (2.1)
EBITDA margin (%) 2 3.1 (0.6)
OTHER FINANCIAL INFORMATION
Working capital 3 $ 268.0 $ 228.0
Capital expenditures 13.8 9.4
Total assets 2,837.5 3,070.1
Total debt 4 868.5 1,170.0
Shareholders' equity 1,099.9 995.0
Current assets to current liabilities 3 2.08:1 1.82:1
Total debt to total capitalization 4, 5 0.44:1 0.54:1
Common shares outstanding at end of period (in millions) 205.9 174.8
Weighted average common shares outstanding (in millions) 205.9 174.8
PER COMMON SHARE PERFORMANCE (IN DOLLARS)
Basic and diluted loss $ (0.12) $ (0.24)
EBITDA 0.06 (0.01)
Book value 6 5.34 5.69
Operating cash flow 7 (0.16) (0.04)
Price - High 6.05 7.60
- Low 3.95 6.76
FOREIGN EXCHANGE RATES
Effective period foreign exchange rate - C$/US$ 8 1.507 1.553
Average period spot foreign exchange rate - C$/US$ 9 1.510 1.595
Period end spot foreign exchange rate - C$/US$ 1.469 1.594
SALES (IN THOUSANDS OF TONNES)
Specialties 261.7 206.6
Newsprint 195.6 150.6
Pulp 103.9 85.8
AVERAGE SALES REVENUE PER TONNE (IN DOLLARS)
Specialties $ 815 $ 912
Newsprint 586 604
Pulp 557 523
AVERAGE COST OF SALES PER TONNE (IN DOLLARS) 10
Specialties $ 732 $ 748
Newsprint 576 653
Pulp 539 674
1 EBITDA is defined as earnings before interest, taxes, depreciation and
amortization, and before other non-operating income and expenses. As there
is no generally accepted method of calculating EBITDA, the measures as
calculated by the Company may 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. The Company interprets EBITDA
trends as an indicator of relative operating performance. EBITDA should not
be considered by an investor as an alternative to net income, as an
indicator of Norske Xxxx Canada Limited's financial performance or as an
alternative to cash flows as a measure of liquidity.
Throughout this report EBITDA is calculated in the following manner:
Operating loss $ (35.5) $ (44.6)
Add: Depreciation and amortization 47.3 42.5
----------- ------------
EBITDA $ 11.8 $ (2.1)
=========== ============
2 EBITDA margin (%) is defined as EBITDA as a percentage of sales.
3 Working capital and current assets to current liabilities, for these
purposes, exclude current portion of long-term debt.
4 Total debt is comprised of long-term debt, including current portion.
5 Total capitalization is comprised of total debt and shareholders' equity.
6 Book value is calculated based on common shares outstanding at the end of
the period.
7 Operating cash flow is stated after changes in non-cash working capital.
8 Effective period foreign exchange rate represents a blended rate which
takes account of the applicable spot rates and the Company's revenue
hedging program in the period.
9 Average period spot foreign exchange rate is the average Bank of Canada
noon spot rate over the reporting period.
10 Average cost of sales per tonne, for these purposes, excludes selling,
general and administrative costs and depreciation and amortization.
NORSKE XXXX CANADA LIMITED
-------------------------------------------------------------------------------------------------------------------------------
QUARTERLY SEGMENTED INFORMATION
UNAUDITED (IN MILLIONS OF DOLLARS, EXCEPT WHERE OTHERWISE STATED)
-------------------------------------------------------------------------------------------------------------------------------
2003,
2001, 2002, THREE
Year 2002, Three months ended Year MONTHS
ended ------------------------------------------- ended ENDED
Dec 31 Mar 31 Jun 30 Sep 30 Dec 31 Dec 31 MAR 31
-------- -------- -------- -------- -------- -------- ---------
SPECIALTIES
Net sales $ 563.9 $ 188.4 $ 192.1 $ 217.3 $ 237.2 $ 835.0 $ 213.3
EBITDA 108.3 25.6 15.4 30.3 18.6 89.9 14.4
EBITDA margin (%) 19.2 13.6 8.0 14.0 7.8 10.8 6.8
Sales (in thousands of tonnes) 572.6 206.6 225.9 252.0 275.3 959.8 261.7
Production (in thousands of tonnes 572.5 215.3 224.8 271.6 267.6 979.3 260.9
Average sales revenue per tonne (in
dollars) $ 985 $ 912 $ 850 $ 862 $ 862 $ 870 $ 815
Average cost of sales per tonne (in
dollars) 1 757 748 746 710 759 741 732
NEWSPRINT
Net sales $ 489.2 $ 91.0 $ 112.0 $ 117.1 $ 120.5 $ 440.6 $ 114.6
EBITDA 85.7 (12.3) (8.2) 0.9 (3.0) (22.6) (2.7)
EBITDA margin (%) 17.5 (13.5) (7.3) 0.8 (2.5) (5.1) (2.4)
Sales (in thousands of tonnes) 603.9 150.6 198.5 201.6 198.8 749.5 195.6
Production (in thousands of tonnes) 592.6 150.0 197.3 201.8 198.1 747.2 199.6
Average sales revenue per tonne (in
dollars) $ 810 $ 604 $ 564 $ 581 $ 606 $ 588 $ 586
Average cost of sales per tonne (in
dollars) 1 624 653 581 551 591 590 576
BENCHMARK PRICE (US$ PER TONNE) 2
Newsprint 48.8 xxx, Xxxx Xxxxx Delivery $ 578 $ 462 $ 440 $ 452 $ 472 $ 456 $ 470
PULP
Sales $ 459.7 $ 89.6 $ 99.8 $ 111.5 $ 100.4 401.3 $ 104.6
Less: Inter-segment sales (124.1) (44.7) (44.1) (53.3) (52.5) (194.6) (46.7)
--------- -------- -------- -------- -------- -------- --------
Net sales 335.6 44.9 55.7 58.2 47.9 206.7 57.9
--------- -------- -------- -------- -------- -------- --------
EBITDA 16.9 (15.4) (1.2) 11.2 (5.3) (10.7) 0.1
EBITDA margin (%) 5.0 (34.3) (2.1) 19.2 (11.1) (5.2) 0.2
Sales (in thousands of tonnes)
Pulp 568.3 85.8 107.6 97.7 90.1 381.2 103.9
Production (in thousands of tonnes)
Pulp 538.8 80.4 101.8 98.3 93.8 374.3 99.0
Average sales revenue per tonne (in
dollars) $ 591 $ 523 $ 518 $ 596 $ 532 $ 542 $ 557
Average cost of sales per tonne (in
dollars) 1 535 674 506 456 560 544 539
BENCHMARK PRICE (US$ PER TONNE) 2
NBSK pulp, Average Northern Europe
Delivery $ 531 $ 443 $ 457 $ 485 $ 447 $ 458 $ 480
1 Average cost of sales per tonne for these purposes excludes selling,
general and administrative costs and depreciation and amortization.
2 Benchmark prices are sourced from Resource Information Systems, Inc.
NORSKE XXXX CANADA LIMITED
------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED
CONSOLIDATED STATEMENTS OF EARNINGS AND RETAINED EARNINGS MARCH 31
--------------------------------
UNAUDITED (IN MILLIONS OF DOLLARS, EXCEPT WHERE OTHERWISE STATED) 2003 2002
------------------------------------------------------------------------------------------------------- ---------------
NET SALES $ 385.8 $ 324.3
--------------- ---------------
OPERATING EXPENSES
Cost of sales 360.4 310.6
Selling, general and administrative 13.6 15.8
Depreciation and amortization 47.3 42.5
--------------- ---------------
421.3 368.9
--------------- ---------------
OPERATING EARNINGS (LOSS) (35.5) (44.6)
GAIN ON SALE OF MARKETABLE SECURITIES (NOTE 3) - 4.8
FOREIGN EXCHANGE GAIN ON TRANSLATION OF LONG-TERM DEBT 15.5 0.2
OTHER INCOME (EXPENSE), NET 0.3 (2.9)
INTEREST EXPENSE (17.3) (22.4)
INTEREST INCOME - 1.2
--------------- ---------------
EARNINGS (LOSS) BEFORE INCOME TAXES (37.0) (63.7)
--------------- ---------------
INCOME TAX EXPENSE (RECOVERY)
Current 1.6 5.9
Future (13.8) (28.1)
--------------- ---------------
(12.2) (22.2)
--------------- ---------------
NET EARNINGS (LOSS) (24.8) (41.5)
RETAINED EARNINGS, BEGINNING OF PERIOD 240.1 363.4
--------------- ---------------
RETAINED EARNINGS, END OF PERIOD $ 215.3 $ 321.9
=============== ===============
BASIC AND DILUTED LOSS PER SHARE (IN DOLLARS) $ (0.12) $ (0.24)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING (IN MILLIONS) 205.9 174.8
NORSKE XXXX CANADA LIMITED
--------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS AS AT
---------------------------------
UNAUDITED (IN MILLIONS OF DOLLARS) MARCH 31 DECEMBER 31
2003 2002
-------------------------------------------------------------------------------------------------------- ---------------
ASSETS
Current assets
Accounts receivable $ 277.1 $ 277.3
Inventories 234.1 242.7
Prepaid expenses 4.4 9.2
--------------- ---------------
515.6 529.2
Fixed assets 2,293.0 2,326.6
Other assets 28.9 37.7
=============== ===============
$ 2,837.5 $ 2,893.5
=============== ===============
LIABILITIES
Current liabilities
Accounts payable and accrued liabilities $ 247.6 $ 288.8
Long-term debt (note 4) 868.5 886.2
Other long-term obligations 229.8 188.3
Future income taxes 383.2 397.0
Deferred credits 8.5 8.5
--------------- ---------------
1,737.6 1,768.8
--------------- ---------------
SHAREHOLDERS' EQUITY
Share capital (note 5) 884.6 884.6
Retained earnings 215.3 240.1
--------------- ---------------
1,099.9 1,124.7
=============== ===============
$ 2,837.5 $ 2,893.5
=============== ===============
ON BEHALF OF THE BOARD
(SIGNED) "XXXXXXX X. XXXXXX" (SIGNED) "XXXXXXX X. XXXXXXXXX"
DIRECTOR DIRECTOR
NORSKE XXXX CANADA LIMITED
--------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED
CONSOLIDATED STATEMENTS OF CASH FLOWS MARCH 31
--------------------------------
UNAUDITED (IN MILLIONS OF DOLLARS) 2003 2002
--------------------------------------------------------------------------------------------------------- --------------
CASH PROVIDED (USED) BY
OPERATIONS
Net earnings (loss) $ (24.8) $ (41.5)
Items not requiring (providing) cash
Depreciation and amortization 47.3 42.5
Future income taxes (13.8) (28.1)
Increase in other long-term obligations 1.2 2.8
Gain on sale of marketable securities (note 3) - (4.8)
Foreign exchange gain on translation of long-term debt (15.5) (0.2)
Other 0.9 2.3
--------------- --------------
(4.7) (27.0)
--------------- --------------
Change in non-cash working capital
Accounts receivable 0.2 30.7
Inventories 8.6 3.8
Prepaid expenses 4.8 1.1
Accounts payable and accrued liabilities (41.2) (15.1)
--------------- --------------
(27.6) 20.5
--------------- --------------
Cash used by operations (32.3) (6.5)
--------------- --------------
INVESTING
Additions to fixed assets (13.8) (9.4)
Proceeds from sale of marketable securities (note 3) - 39.2
Proceeds from sale of fixed assets 0.2 1.0
Proceeds from termination of interest rate swaps (note 6) 15.9 -
Decrease in other long-term obligations (4.7) -
Decrease (increase) in other assets 0.9 (0.2)
--------------- --------------
(1.5) 30.6
--------------- --------------
FINANCING
Increase in revolving loan (note 4) 33.8 -
Repayment of long-term debt (note 4) - (4.3)
--------------- --------------
33.8 (4.3)
--------------- --------------
CASH, INCREASE DURING PERIOD 1 - 19.8
CASH, BEGINNING OF PERIOD 1 - 104.8
=============== ==============
CASH, END OF PERIOD 1 $ - $ 124.6
=============== ==============
SUPPLEMENTAL INFORMATION
Income taxes paid $ 3.5 $ 5.0
Net interest paid 16.8 20.6
1 Cash includes cash and short-term investments.
NORSKE XXXX CANADA LIMITED
--------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED (IN MILLIONS OF DOLLARS, EXCEPT WHERE OTHERWISE STATED)
--------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Norske Xxxx
Canada Limited ("the Company" or "NorskeCanada") 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 Xxxxxx River
Energy Inc. ("PREI"), a joint venture between Great Lakes Power Inc.
("Great Lakes") and the Company, is accounted for using the proportionate
consolidation method. All inter-company transactions and amounts have been
eliminated on consolidation. The accompanying unaudited consolidated
financial statements of the Company have been prepared in accordance with
Canadian generally accepted accounting principles on a basis consistent
with those followed in the most recent audited annual consolidated
financial statements. These unaudited interim consolidated financial
statements do not include all information and note disclosures required by
Canadian generally accepted accounting principles for annual financial
statements, and therefore should be read in conjunction with the December
31, 2002 audited consolidated financial statements and the notes below.
2. 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 has 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.
SPECIALTIES NEWSPRINT PULP TOTAL
--------------------------------------- --------
THREE MONTHS ENDED MARCH 31, 2003
Net sales 1 $ 213.3 $ 114.6 $ 57.9 $ 385.8
Depreciation and amortization 24.4 15.8 7.1 47.3
Operating earnings (loss) (10.0) (18.5) (7.0) (35.5)
Capital expenditures 5.3 5.4 3.1 13.8
THREE MONTHS ENDED MARCH 31, 2002
Net sales 1 $ 188.4 $ 91.0 $ 44.9 $ 324.3
Depreciation and amortization 20.7 15.5 6.3 42.5
Operating earnings (loss) 4.9 (27.8) (21.7) (44.6)
Capital expenditures 4.6 1.6 3.2 9.4
1 Pulp net sales are stated net of inter-segment pulp sales of $46.7
million for the three months ended March 31, 2003 ($44.7 - three
months ended March 31, 2002).
3. MARKETABLE SECURITIES
In March 2002, the Company sold its 1,750,000 shares of Xxxx & Xxxxxx Inc.
for net proceeds of $39.2 million and a gain of $4.8 million. The shares
were part of the net proceeds on the sale of the Company's Mackenzie
operations on June 15, 2001.
NORSKE XXXX CANADA LIMITED
--------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED (IN MILLIONS OF DOLLARS, EXCEPT WHERE OTHERWISE STATED)
--------------------------------------------------------------------------------
4. LONG-TERM DEBT
The Company's long-term debt, all of which mature after one year, is as
follows:
AS AT
---------------------------------------
MARCH 31, 2003 DECEMBER 31, 2002
------------------- ------------------
RECOURSE
Senior notes, 8.625% due June 2011 (US$250.0 million) $ 367.3 $ 394.9
Senior notes, 10% due March 2009 (US$200.0 million) 312.2 335.0
------------------- ------------------
679.5 729.9
Revolving operating loan of up to $350.0 million, due July 2005, with
interest at CDN prime rate/US base rate plus 1.25%, or LIBOR/BA rate
plus 2.25% at the Company's option 151.4 118.7
------------------- ------------------
830.9 848.6
------------------- ------------------
NON-RECOURSE (PREI)
First Mortgage Bonds, 6.387% due July 2009 37.6 37.6
------------------- ------------------
37.6 37.6
------------------- ------------------
Total long-term debt $ 868.5 $ 886.2
=================== ==================
Substantially all of the assets of the Company are pledged as security
under the revolving operating loan and its availability is determined by a
borrowing base, calculated on accounts receivable and inventory balances,
and includes a covenant to maintain the debt/capitalization ratio below
60%. 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. At March 31, 2003 the
unused portion of the revolving operating loan available to the Company,
after giving effect to outstanding letters of credit, was $146.1 million.
Subsequent to March 31, 2003, the Company negotiated certain amendments to
this loan facility including flexibility to increase the borrowing base,
and agreement by a substantial majority of lenders to extend the maturity
of the facility by one year, to July 2006.
As at March 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 was below the 2.0:1 threshold of
the bond indentures, 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.
5. SHARE CAPITAL
AS AT
---------------------------------------------------
MARCH 31, 2003 DECEMBER 31, 2002
SHARES $ SHARES $
------------------------ ------------------------
Continuity of common shares:
Beginning of period 205,910,132 884.6 174,810,132 673.1
Common shares issued - - 31,100,000 217.7
Share issue costs (net of income tax recovery of $3.4 million) - - - (6.2)
------------------------ ------------------------
End of period 205,910,132 884.6 205,910,132 884.6
======================== ========================
NORSKE XXXX CANADA LIMITED
--------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED (IN MILLIONS OF DOLLARS, EXCEPT WHERE OTHERWISE STATED)
--------------------------------------------------------------------------------
6. FINANCIAL INSTRUMENTS
The Company uses financial instruments to reduce its exposure to foreign
currency and price risk associated with its revenues, energy costs and
long-term debt. The Company also uses interest rate swaps to reduce its
exposure to changes in long-term fixed interest rates associated with its
senior notes.
REVENUE AND COST HEDGING INSTRUMENTS
Foreign currency options and forward contracts outstanding to sell US
dollars were as follows:
AS AT MARCH 31, 2003
OPTIONS
--------------------------------------------------
FLOOR CEILING FORWARD CONTRACTS
-------------------------------------------------- -----------------------
AVERAGE AVERAGE AVERAGE
TERM US$MILLIONS RATE US$MILLIONS RATE US$MILLIONS RATE
----------------------------------------------------------------------------------------------------------------
0 TO 12 MONTHS $ 286 1.5530 $ 251 1.6129 $ 64 1.5571
13 TO 24 MONTHS $ 105 1.5472 $ 76 1.5980 $ 47 1.5785
AS AT DECEMBER 31, 2002
OPTIONS
--------------------------------------------------
FLOOR CEILING FORWARD CONTRACTS
-------------------------------------------------- -----------------------
AVERAGE AVERAGE AVERAGE
TERM US$MILLIONS RATE US$MILLIONS RATE US$MILLIONS RATE
----------------------------------------------------------------------------------------------------------------
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
At March 31, 2003, the Company has no commodity price hedging instruments
for product sales. The Company has oil swaps to purchase 290,000 bbls at
an average contract rate of US$23.80 per bbl, settling between November
2003 and March 2005.
LONG-TERM DEBT HEDGING INSTRUMENTS
The Company has forward foreign exchange contracts to acquire US dollars
totalling US$306.4 million over a 5-year period at rates averaging 1.5568.
Fixed to floating interest rate swaps on US$105.0 million were terminated
during the quarter for proceeds of $15.9 million. The proceeds are being
amortized as a reduction of interest expense based on the U.S. swap curve
at the time of the termination.
7. 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:
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 2003 MARCH 31, 2002
----------------------- ------------------------
Net loss:
As reported $ (24.8) $ (41.5)
Pro forma (25.3) (41.6)
Net loss per common share (in dollars):
As reported $ (0.12) $ (0.24)
Pro forma (0.12) (0.24)
NORSKE XXXX CANADA LIMITED
--------------------------------------------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED (IN MILLIONS OF DOLLARS, EXCEPT WHERE OTHERWISE STATED)
--------------------------------------------------------------------------------
The fair value of share options was estimated using the Black-Scholes
option-pricing model with the following assumptions:
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 2003 MARCH 31, 2002
----------------------- ------------------------
Risk-free interest rate (%) 4.9 5.2
Annual dividends per share NIL Nil
Expected stock price volatility (%) 27.3 26.0
Average fair value of options granted $ 1.74 $ 2.33
The average expected life of the options used in the option pricing model
was determined as four years.
8. 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. Significant existing indemnities are as follows:
The Company sold a portion of its operations in June 2001. In this regard,
the Company provided a 10-year environmental indemnity with a maximum
liability to the Company of $12.5 million. This liability has subsequently
been reduced by expenditures related to certain decommissioning projects.
The Company also provided a tax indemnity, which continues while the
relevant tax years of the indemnified parties remain open to audit and a
general indemnity, capped at $5 million, which expires in 2004. The
Company is unable to estimate its potential liability under these
indemnities as the amounts are dependent upon the outcome of future
contingent events, the nature and likelihood of which cannot be determined
at this time. As such, no liability has been recorded for these potential
obligations.
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.
9. COMPARATIVE FIGURES
Certain comparative figures have been reclassified to conform with the
presentation adopted for the current period.
