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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13a-16 OR 15d-16 UNDER THE
SECURITIES EXCHANGE ACT OF 1934
For the month of November 10, 2004.
Commission File Number ___________
WESTERN FOREST PRODUCTS INC.
- --------------------------------------------------------------------------------
(Translation of registrant's name into English)
3rd Floor, 435 Trunk Road, Duncan, British Columbia Canada V9L 2P9
- --------------------------------------------------------------------------------
(Address of principal executive office)
Indicate by check mark whether the registrant files or will file annual reports
under cover of Form 20-F or Form 40-F. Form 20-F [X] Form 40-F [ ]
Indicate by check mark if the registrant is submitting the Form 6-K in paper as
permitted by Regulation S-T Rule 101(b)(1): _____
NOTE: Regulation S-T Rule 101(b)(1) only permits the submission in paper of a
Form 6-K if submitted solely to provide an attached annual report to security
holders.
Indicate by check mark if the registrant is submitting the Form 6-K in paper as
permitted by Regulation S-T Rule 101(b)(7): ______
NOTE: Regulation S-T Rule 101(b)(7) only permits the submission in paper of a
Form 6-K if submitted to furnish a report or other document that the registrant
foreign private issuer must furnish and make public under the laws of the
jurisdiction in which the registrant is incorporated, domiciled or legally
organized (the registrant's "home country"), or under the rules of the home
country exchange on which the registrant's securities are traded, as long as the
report or other document is not a press release, is not required to be and has
not been distributed to the registrant's security holders, and, if discussing a
material event, has already been the subject of a Form 6-K submission or other
Commission filing on EDGAR.
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes [ ] No [X]
If "Yes" is marked, indicate below the file number assigned to the registrant in
connection with Rule 12g3-2(b): 82- ___________________.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
WESTERN FOREST PRODUCTS INC.
--------------------------------
(Registrant)
Date November 10, 2004 By /s/ P.G. Hosier
--------------------------------
(Signature)*
Philip G. Hosier
Corporate Secretary
- ---------
* Print the name and title under the signature of the signing officer.
PERSONS WHO ARE TO RESPOND TO THE COLLECTION OF INFORMATION
SEC 1815 (11-02) CONTAINED IN THIS FORM ARE NOT REQUIRED TO RESPOND UNLESS THE
FORM DISPLAYS A CURRENTLY VALID OMB CONTROL NUMBER.
(WFP LOGO) WESTERN FOREST PRODUCTS INC.
435 Trunk Road
Duncan, British Columbia
Canada V9L 2P9
Telephone: (250) 748-3711
Facsimile: (250) 748-6045
NEWS RELEASE
WESTERN FOREST PRODUCTS INC.
FOR IMMEDIATE RELEASE
WESTERN FOREST PRODUCTS REPORTS EARNINGS OF $14.1 MILLION DURING THIRD QUARTER
November 10, 2004 - Duncan, British Columbia. Western Forest Products Inc. (the
"Company") announced today the Company's results for the stub period July 28 to
September 30, 2004.
Western Forest Products Inc. acquired the solid wood and NBSK pulp assets of
Doman Industries Limited (the "Predecessor") when the latter company emerged
from protection under the Companies' Creditors Arrangement Act (Canada) on July
27, 2004. The Company's common shares began trading on the Toronto Stock
Exchange on August 3, 2004 under the symbol "WEF".
This News Release and accompanying consolidated financial statements, including
footnotes, and Management Discussion and Analysis covers the period July 28,
2004 to September 30, 2004, but also includes comparisons to the Predecessor,
intended to help shareholders and others understand the Company's business and
the key factors underlying its financial results.
- --------------------------------------------------------------------------------
HIGHLIGHTS
o NET EARNINGS OF $14.1 MILLION OR $0.55 PER COMMON SHARE REFLECTING STRONG
MARKETS FOR LUMBER DURING THE EARLY PART OF THE STUB PERIOD AND A
FAVOURABLE NON-CASH FOREIGN EXCHANGE TRANSLATION GAIN ON OUR US DOLLAR
DENOMINATED DEBT.
o LUMBER PRODUCTION AT OUR SIX SAWMILLS OF 131,000 MFBM AND LOGGING
PRODUCTION OF 681,000 M3. PULP PRODUCTION AT THE SQUAMISH PULP MILL
TOTALLED 46,450 ADMT, SLIGHTLY LOWER THAN EXPECTED DUE TO AN UNPLANNED
SHUTDOWN OF 6 DAYS.
o REALIZED PRICES FOR LUMBER DURING THE PERIOD WERE CDN $634 PER MFBM
COMPARED TO CDN $562 IN THE THIRD QUARTER OF 2003. PULP PRICES WERE ALSO
HIGHER THAN THE COMPARABLE PERIOD IN 2003 WITH LIST PRICES FOR NBSK TO
EUROPE DURING THE PERIOD OF US $620 PER ADMT COMPARED TO US $520 PER ADMT
IN THE THIRD QUARTER OF 2003.
- --------------------------------------------------------------------------------
- 2 -
EARNINGS
Net earnings for the period July 28 to September 30, 2004 were $14.1 million or
$0.55 per share.
Operating earnings for the period totalled $12.3 million reflecting strong
markets for lumber and favourable markets for pulp at the beginning of the
period before weakening in September. Offsetting the favourable product pricing
was a strengthening Canadian dollar, which averaged US $0.7413 in the second
quarter of 2004 and climbed to an average of US $0.7560 for August and
September, reducing operating earnings in this period by approximately $2
million dollars. Softwood lumber duties expensed in the approximate two month
period to September 30, 2004 totalled $11.9 million (This brings the total
duties paid by the Company and its Predecessor, for which the Company is
eligible for any refund, to $94.2 million or US $65.8 million).
SOLID WOOD SEGMENT
Sales in the solid wood segment totalled $122.4 million in the period to
September 30, 2004 generating EBITDA of $19.7 million. Sales comprised lumber
$85.5 million - 135 mmfbm; logs $31.8 million -292 km(3); by-products - $5.1
million. Production from our six sawmills totalled 131 mmfbm and log production
totalled 681 km(3).
PULP SEGMENT
Pulp sales totalled $35.8 million in the period to September 30, 2004 generating
EBITDA of $0.5 million. Our Squamish pulpmill operated for 59 days and produced
46,450 admt of pulp. Results were negatively impacted by a weakening pulp market
and a stronger Canadian dollar during the period. In addition, the mill was shut
down for 6 days as a result of unplanned repairs required in the bleach plant.
CASH FLOWS, FINANCIAL POSITION AND LIQUIDITY
Cash flow in the period July 28 to September 30, 2004, before changes in
non-cash working capital, was $9.0 million. Working capital increased by $11.3
million (as a result of higher receivables and a seasonal increase in log
inventories prior to winter) so that funds used by operations totalled $2.3
million.
Additions to property, plant and equipment in the period were $7.2 million of
which $3.3 million was for road construction in the logging sector. The
remaining additions of $3.9 million included $0.3 million for maintenance
capital and $3.6 million for high return discretionary projects and logging
equipment.
Bank indebtedness increased by $4.2 million in the period, in part to finance
the increase in working capital.
Interest expense for the period on the Company's US $ denominated long term debt
and working capital facility totalled $8.6 million. Interest on the term debt is
payable semi-annually on December 31 and June 30 of each year.
As a result of the Canadian dollar strengthening from US $0.7505 at July 27,
2004 to US $0.7926 at September 30, 2004 there was a non-cash translation gain
of $14.8 million for the period on the translation of the US $ denominated
long-term debt.
The Company's cash balance at September 30, 2004 was $11.4 million. In addition,
$43.0 million was available under its revolving credit facility.
- 3 -
MARKETS & OUTLOOK
Lumber markets were strong going into the third quarter of 2004, but have
weakened significantly since the beginning of September. Prices in the US as
measured by SPF 2x4 peaked at US $470 per mfbm in August and averaged US $432
per mfbm in the third quarter of 2004, which was 37% higher than the same period
of 2003, but had declined to US$373 per mfbm at the end of September. While U.S.
housing start figures for September of 1,898,000 were slightly below the August
figure of 2,020,000, the number of single family permits, considered to be a
leading indicator, were higher in the month at a seasonally adjusted annual rate
of 2,005,000. While demand for lumber therefore remains strong, higher
production levels in the North American market has increased supply to the U.S.
market resulting in a softening in prices.
NBSK pulp markets weakened in the third quarter with prices to Europe dropping
from US $620 per admt in August to US $600 per admt in September. The market in
both Europe and Asia has improved recently as a result of strong paper demand,
the weaker US dollar and order backlogs with some price increases announced in
early November.
CONCLUDING REMARKS
Reynold Hert, the Company's new President & CEO appointed September 24, 2004
commented: "While the results for this period are comparable with our industry
competitors and reflect buoyant market conditions for lumber over the past few
months, I see opportunities to extract more value by optimizing our timber
through our operations and further cost reductions. Our immediate focus will be
on improving safety, optimizing operations from the forest to the customer and
maximizing cash flow to pay down our debt."
Note:
Cash flow is defined as cash flow from operations before changes in non-cash
working capital as disclosed in the consolidated statements of cash flows.
EBITDA represents operating earnings (loss) before amortisation, asset
write-downs and other income (expenses) as disclosed in the consolidated
statement of operations. The Company discloses EBITDA, as it is a measure used
by analysts to evaluate the Company's performance. As EBITDA is a non-GAAP
measure, it may not be comparable to EBITDA calculated by others. In addition,
as EBITDA is not a substitute for net earnings (loss), readers should consider
net earnings in evaluating the Company's performance.
This press release contains statements that are forward-looking in nature. Such
statements involve known and unknown risks and uncertainties that may cause the
actual results of the Company to be materially different from those expressed or
implied by those forward-looking statements. Such risks and uncertainties
include, among others: general economic and business conditions, product selling
prices, raw material and operating costs, changes in foreign-currency exchange
rates and other factors referenced herein including Management's Discussion and
Analysis for the period ending September 30, 2004.
FOR FURTHER INFORMATION CONTACT: REYNOLD HERT (250) 748-3711 OR PHILIP HOSIER
(604) 665-6231
Consolidated Financial Statements of
WESTERN FOREST PRODUCTS INC.
For the period from July 28, 2004 to September 30, 2004
WESTERN FOREST PRODUCTS INC.
Consolidated Balance Sheets
(Unaudited)
(Expressed in thousands of dollars)
==============================================================================================================
September 30, July 28,
2004 2004
- --------------------------------------------------------------------------------------------------------------
(note 1)
Assets
Current assets:
Cash $ 11,416 $ 16,640
Accounts receivable 93,813 78,325
Inventory (note 3) 189,532 188,065
Prepaid expenses 7,518 7,776
- --------------------------------------------------------------------------------------------------------------
302,279 290,806
Investments 6,615 6,665
Property, plant and equipment (note 4) 421,075 419,395
Other assets 1,452 1,171
- --------------------------------------------------------------------------------------------------------------
$ 731,421 $ 718,037
==============================================================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Bank indebtedness (note 5) $ 53,939 $ 49,738
Accounts payable and accrued liabilities 96,835 91,384
- --------------------------------------------------------------------------------------------------------------
150,774 141,122
Long-term debt (note 6) 265,399 279,825
Future income taxes (note 7) 18,429 14,546
Other liabilities 27,594 27,369
- --------------------------------------------------------------------------------------------------------------
462,196 462,862
Shareholders' equity:
Share capital (note 8):
Common shares 255,175 255,175
Retained earnings 14,050 -
- --------------------------------------------------------------------------------------------------------------
269,225 255,175
- --------------------------------------------------------------------------------------------------------------
$ 731,421 $ 718,037
==============================================================================================================
Basis of presentation and reorganization proceedings (note 1)
Commitment and contingencies (note 9)
See accompanying notes to consolidated financial statements.
Approved on behalf of the Board:
"REYNOLD HERT" Director
- ------------------------------------
"JOHN MACINTYRE" Director
- ------------------------------------
1
WESTERN FOREST PRODUCTS INC.
Consolidated Statements of Operations
(Unaudited)
(Expressed in thousands of dollars, except for share and per share amounts)
==============================================================================================================
July 28, to July 1 to July 1 to January 1 to January 1 to
September 30, July 27, September 30, July 27, September 30,
2004 2004 2003 2004 2003
- --------------------------------------------------------------------------------------------------------------
(predecessor) (predecessor) (predecessor) (predecessor)
Sales (note 2(f)) $ 158,261 $ 44,307 $ 159,945 $ 433,704 $ 464,317
Costs and expenses:
Cost of goods sold 112,840 35,496 136,558 303,021 392,844
Anti-dumping and countervailing
duties 11,886 1,856 10,398 23,991 26,753
Freight expenses 11,835 2,344 12,991 28,294 37,491
Selling and administration 3,889 1,558 4,254 12,473 12,935
Amortization of property,
plant and equipment 5,544 4,389 9,516 33,036 33,769
Write-down of property, plant and
equipment and operating
restructuring costs - - 4,907 - 6,907
- --------------------------------------------------------------------------------------------------------------
145,994 45,643 178,624 400,815 510,699
- --------------------------------------------------------------------------------------------------------------
Operating earnings (loss) 12,267 (1,336) (18,679) 32,889 (46,382)
Interest expense:
Cash interest paid or payable (8,567) (8,670) (27,050) (69,083) (74,233)
Foreign exchange gains
(losses) on translation of
long-term debt and
amortization of deferred
finance costs 14,779 634 (2,037) (26,494) 150,598
- --------------------------------------------------------------------------------------------------------------
6,212 (8,036) (29,087) (95,577) 76,365
Other income (expense) (123) (4,563) 374 (4,900) 1,493
Financial restructuring costs - (3,084) (1,721) (11,391) (5,302)
- --------------------------------------------------------------------------------------------------------------
Earnings (loss) before income
taxes 18,356 (17,019) (49,113) (78,979) 26,174
Income taxes (note 7) (4,306) (121) (358) (869) (566)
- --------------------------------------------------------------------------------------------------------------
Net earnings (loss) from
continuing operations 14,050 (17,140) (49,471) (79,848) 25,608
Net earnings (loss) from
discontinued operations - (1,649) (5,699) (12,426) (14,895)
- --------------------------------------------------------------------------------------------------------------
Net earnings (loss) 14,050 (18,789) (55,170) (92,274) 10,713
Provision for dividends on
preferred shares - (350) (1,211) (2,753) (3,562)
- --------------------------------------------------------------------------------------------------------------
Net earnings (loss)
attributable to common and
non-voting shares $ 14,050 $ (19,139) $ (56,381) $ (95,027) $ 7,151
==============================================================================================================
Earnings (loss) per share:
Basic $ 0.55 $ (0.45) $ (1.33) $ (2.24) $ 0.17
Diluted 0.55 (0.45) (1.33) (2.24) 0.17
Weighted average number of
common and non-voting shares
outstanding (thousands of
shares) 25,636 42,481 42,481 42,481 42,481
==============================================================================================================
See accompanying notes to consolidated financial statements.
2
WESTERN FOREST PRODUCTS INC.
Consolidated Statements of Retained Earnings (Deficit)
(Unaudited)
(Expressed in thousands of dollars)
==============================================================================================================
July 28, to July 1 to July 1 to January 1 to January 1 to
September 30, July 27, September 30, July 27, September 30,
2004 2004 2003 2004 2003
- --------------------------------------------------------------------------------------------------------------
(predecessor) (predecessor) (predecessor) (predecessor)
Retained earnings (deficit),
beginning of period $ - $ (797,628) $ (656,656) $ (724,143) $ (722,539)
Net earnings (loss) 14,050 (18,789) (55,170) (92,274) 10,713
- --------------------------------------------------------------------------------------------------------------
Retained earnings (deficit),
end of period $ 14,050 $ (816,417) $ (711,826) $ (816,417) $ (711,826)
==============================================================================================================
See accompanying notes to consolidated financial statements.
3
WESTERN FOREST PRODUCTS INC.
Consolidated Statements of Cash Flows
(Unaudited)
(Expressed in thousands of dollars)
==========================================================================================================
July 28, to July 1 to July 1 to January 1 to January 1 to
September 30, July 27, September 30, July 27, September 30,
2004 2004 2003 2004 2003
- ----------------------------------------------------------------------------------------------------------
(predecessor) (predecessor) (predecessor) (predecessor)
Cash provided by (used in):
Operations:
Net earnings (loss) from
continuing operations $ 14,050 $ (17,140) $ (49,471) $ (79,848) $ 25,608
Items not involving cash:
Amortization of property,
plant and equipment 5,544 4,389 9,516 33,036 33,769
Future income taxes 3,883 - - - -
Amortization and
write-down of deferred
charges 120 241 1,095 2,266 3,317
Foreign currency
translation gain (14,898) (875) 942 24,228 (153,915)
Loss on property, plant
and equipment disposals - 877 4,554 450 3,432
Other 284 124 772 (3,462) 3,045
- --------------------------------------------------------------------------------------------------------
8,983 (12,384) (32,592) (23,330) (84,744)
Net change in non-cash
working capital items (11,250) 11,148 49,867 23,747 88,463
- --------------------------------------------------------------------------------------------------------
Continuing operations (2,267) (1,236) 17,275 417 3,719
Discontinued operations - 1,400 898 (2,307) 5,500
- --------------------------------------------------------------------------------------------------------
(2,267) 164 18,173 (1,890) 9,219
Investments:
Additions to property,
plant and equipment (3,930) (1,415) (375) (3,506) (2,665)
Additions to capitalized
roads (3,292) (4,429) (4,143) (21,122) (20,882)
Disposals of property,
plant and equipment - 7 2,561 1,062 4,229
Other 50 (930) (21) 1,224 437
- --------------------------------------------------------------------------------------------------------
(7,172) (6,767) (1,978) (22,342) (18,881)
Financing:
Bank indebtedness 4,201 5,350 (13,177) 19,311 6,895
Long-term debt 472 - - - -
Finance costs (458) - - - -
- --------------------------------------------------------------------------------------------------------
4,215 5,350 (13,177) 19,311 6,895
- --------------------------------------------------------------------------------------------------------
Increase (decrease) in cash (5,224) (1,253) 3,018 (4,921) (2,767)
Cash, beginning of period 16,640 17,893 16,814 21,561 22,599
- --------------------------------------------------------------------------------------------------------
Cash, end of period $ 11,416 $ 16,640 $ 19,832 $ 16,640 $ 19,832
========================================================================================================
See accompanying notes to consolidated financial statements.
4
WESTERN FOREST PRODUCTS INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts expressed in thousands of dollars, except per share amounts)
For the period from July 28, 2004 to September 30, 2004
================================================================================
1. BASIS OF PRESENTATION AND REORGANIZATION PROCEEDINGS:
Western Forest Products Inc.'s ("Western" and together with its
subsidiaries the "Company") business is the harvesting of timber and the
manufacturing and sale of lumber and pulp for worldwide markets.
On November 7, 2002, Doman Industries Limited ("Doman") and certain of its
subsidiaries (collectively with Doman, the "Predecessor"), voluntarily
filed for protection under the Companies' Creditors Arrangement Act
(Canada) ("CCAA") with the British Columbia Supreme Court (the "Court").
On July 27, 2004, the Predecessor implemented a Plan of Arrangement and
Reorganization (the "Plan") and emerged from protection under CCAA. Western
was incorporated under the Canada Business Corporations Act (the "CBCA ")
on April 27, 2004 under the name "4204247 Canada Inc." for the purpose of
implementing the Plan. The Company changed its name to "Western Forest
Products Inc." on June 21, 2004. On July 27, 2004, Western acquired the
solid wood and pulp assets from the Predecessor. Until the Plan was
implemented, Western did not carry on any business and had no material
assets or liabilities. Western commenced active business on July 28, 2004.
The purpose of the Plan was to (1) compromise the claims of the
Predecessor's affected creditors so as to enable its solid wood and pulp
businesses to be carried on under a new corporate structure, with relief
from its debt servicing and repayment obligations; and (2) facilitate the
repayment of Doman's secured senior notes through the distribution of
certain warrants (exercisable for Western's secured bonds and Common
shares) and the sale of certain private placement units consisting of
Western's secured bonds and Common shares.
The significant steps in the implementation of the Plan included:
(a) the incorporation of two new corporations, Western and Western Pulp
Limited ("WPL");
(b) the segregation of the principal operating assets of the Predecessor
into two separate operating groups: the solid wood assets, which were
transferred to Western, and the pulp assets, which were transferred to
WPL; WPL became a wholly-owned subsidiary of Western;
(c) the unsecured indebtedness of the Predecessor were compromised and
converted to approximately 75% of the Common shares of Western, subject
to certain cash elections; in addition, the Predecessor's unsecured
creditors were entitled to certain warrants (exercisable for the
Company's secured bonds and Common shares);
5
WESTERN FOREST PRODUCTS INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts expressed in thousands of dollars, except per share amounts)
For the period from July 28, 2004 to September 30, 2004
================================================================================
1. BASIS OF PRESENTATION AND REORGANIZATION PROCEEDINGS (CONTINUED):
(d) the indebtedness held by Doman's senior secured noteholders was
refinanced in full through a combination of a distribution of Class A
and B warrants to the Predecessor's unsecured creditors and a private
placement to certain standby purchasers (the "Standby Purchasers"); for
U.S.$210 million, the Company issued secured bonds with an aggregate
principal face value of U.S.$221 million and approximately 25% of
Western's Common shares to the Standby Purchasers and those unsecured
creditors of the Predecessor who exercised the warrants; the proceeds
of U.S.$210 million were used primarily to repay Doman's senior secured
noteholders and to cover the Predecessors' CCAA exit cost, with the
remaining amount released to the Company for working capital purposes.
(e) Western entered into a working capital facility providing for revolving
advances up to $100 million and reorganized certain intercorporate
debt; and
(f) Western issued three tranches of non-transferable Class C warrants to
purchase up to 10% of the Common shares of Western on the terms set out
in the Plan to existing shareholders of Doman; no other distributions
were made or other compensation paid to Doman shareholders under the
Plan.
The Company's balance sheet as at July 28, 2004 has been prepared under the
provisions of The Canadian Institute of Chartered Accountants ("CICA")
Handbook Section ("HB") 1625, "Comprehensive Revaluation of Assets and
Liabilities" ("fresh start accounting"). Under fresh start accounting, the
Company was required to determine its enterprise value. The enterprise
value of $535 million was determined by the Company's management based on
various third party reports and offers received in conjunction with the
Predecessor's reorganization proceedings.
The Predecessor's financial information has been presented to provide
additional information for the reader. In reviewing the Predecessor's
financial information, readers are reminded that they do not reflect the
effects of the financial reorganization or the application of its
accounting described below. Certain amounts presented in the Predecessor's
financial information have been reclassified to conform with the
presentation adopted by the Company.
6
WESTERN FOREST PRODUCTS INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts expressed in thousands of dollars, except per share amounts)
For the period from July 28, 2004 to September 30, 2004
================================================================================
1. BASIS OF PRESENTATION AND REORGANIZATION PROCEEDINGS (CONTINUED):
The following table summarizes the impact of adjustments required to
implement the Plan and to reflect the adoption of fresh start accounting:
=========================================================================================================
Adjustments
-------------------------------
July 27, 2004 July 28, 2004
Balance prior to Fresh Start Balance after
Plan Implementation The Plan Accounting Plan
---------------------------------------------------------------------------------------------------------
(unaudited) (note 1(a)) (note 1(b)) (unaudited)
Assets
Current assets:
Cash $ 16,640 $ 279,750 (iii) $ - $ 16,640
(279,750) (ii)
Accounts receivable 78,325 - - 78,325
Inventory 198,159 - (10,094) 188,065
Prepaid expenses 7,776 - - 7,776
---------------------------------------------------------------------------------------------------------
300,900 - (10,094) 290,806
Investments 9,838 (3,173) (ii) - 6,665
Property, plant and equipment 452,402 - (33,007) 419,395
Other assets 17,266 75 (iii) (16,170) 1,171
---------------------------------------------------------------------------------------------------------
$ 780,406 $ (3,098) $ (59,271) $ 718,037
=========================================================================================================
Liabilities and Shareholders' Equity (Deficiency)
Current liabilities:
Bank indebtedness $ 49,738 $ - $ - $ 49,738
Accounts payable and accrued
liabilities 97,196 (5,812) (v) - 91,384
Accounts payable subject to compromise 21,694 (21,694) (i) - -
Secured interest payable 62,841 (62,841) (iv) - -
Unsecured interest subject to
compromise 140,080 (140,080) (i) - -
Current portion of long-term debt
subject to compromise 683,573 (683,573) (i) - -
Current portion of long-term debt 213,200 (213,200) (iv) - -
---------------------------------------------------------------------------------------------------------
1,268,322 (1,127,200) - 141,122
Long-term debt - 279,825 (iii) - 279,825
Other liabilities 21,483 - 5,886 27,369
Future income taxes - - 14,546 14,546
Shareholders' equity (deficiency):
Old preferred shares 64,076 (64,076) (iv) - -
Old common and non-voting shares 242,942 (242,942) (iv) - -
New common shares - 255,175 (ii) - 255,175
Deficit (816,417) 896,120 (iii) (79,703) -
---------------------------------------------------------------------------------------------------------
(509,399) 844,277 (79,703) 255,175
---------------------------------------------------------------------------------------------------------
$ 780,406 $ (3,098) $ (59,271) $ 718,037
=========================================================================================================
7
WESTERN FOREST PRODUCTS INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts expressed in thousands of dollars, except per share amounts)
For the period from July 28, 2004 to September 30, 2004
================================================================================
1. BASIS OF PRESENTATION AND REORGANIZATION PROCEEDINGS (CONTINUED):
(a) Plan of Arrangement Adjustments:
In exchange for Doman's U.S. $513 million of unsecured senior notes in
default (the "Unsecured Notes") and the claims of other affected
creditors, the beneficial holders of two series of Doman Unsecured
Notes (the "Noteholders") and other creditors with affected claims (the
"Affected Claims") (collectively with the Noteholders, the "Affected
Creditors") received, on a pro rata basis, approximately 75% of the
equity of the Company, consisting of newly issued common shares.
(i) The following recorded liabilities of Doman, as at July 27, 2004,
were liabilities subject to compromise.
================================================================================================
Accrued interest payable on Unsecured Notes $ 140,080
Long-term debt subject to compromise consisting of the Unsecured Notes 683,573
------------------------------------------------------------------------------------------------
Noteholders' liabilities subject to compromise 823,653
------------------------------------------------------------------------------------------------
Accounts payable and accrued liabilities subject to compromise 21,694
Other long-term liabilities -
------------------------------------------------------------------------------------------------
Other affected creditors' liabilities subject to compromise 21,694
------------------------------------------------------------------------------------------------
Total $ 845,347
================================================================================================
(ii) Under the Plan, the Company acquired all the assets and
liabilities of Doman not subject to compromise, but excluding the
Port Alice pulp mill assets, in exchange for 75% of the issued
common shares of the Company and certain warrants of the Company.
The remaining 25% of the issued common shares of the Company were
issued to the new Senior Secured Bondholders as described below.
The common share value of $255.2 million has been determined as
the enterprise value of the Company using a going concern
valuation approach, of $535 million less the $279.8 million value
of the new Senior Secured Bonds ("Secured Bonds") issued to retire
Doman's Senior Secured Notes ("Old Secured Notes"). The enterprise
value has been determined by the Company's management based on
various third party reports and offers received in conjunction
with the reorganization proceedings.
(iii)The Company issued Secured Bonds in the amount of US$221 million
and 25% of the equity of the Company in exchange for cash of
US$210 million. The Secured Bonds are recorded at the cash amount
received of $279.8 million based on an exchange rate of 1.3325 at
July 27, 2004. The difference between the cash paid and stated
amount of the Secured Bonds represents a discount that will be
accreted over the five year term of the Secured Bonds.
(iv) The holders of the Old Secured Notes of Doman received a
distribution of cash for 100% of their outstanding principle of
US$160 million ($213.2 million) and unpaid interest of $62.8
million.
8
WESTERN FOREST PRODUCTS INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts expressed in thousands of dollars, except per share amounts)
For the period from July 28, 2004 to September 30, 2004
================================================================================
1. BASIS OF PRESENTATION AND REORGANIZATION PROCEEDINGS (CONTINUED):
(a) Plan of Arrangement Adjustments (continued):
(v) The Predecessor paid outstanding advisory fees of $5.8 million
including legal, accounting and investment fees from cash on hand
immediately before the transfer of assets to the Company.
(vi) The existing shareholders of Doman received three tranches of
non-transferable class C warrants (note 8(c)) to acquire up to 10%
of the shares of the Company. The warrants will expire if on or
after July 27, 2005, the Company amalgamates or completes a
similar business combination that results in the shareholders of
the Company owning less than 80% of the issued and outstanding
equity shares of the continuing entity. In preparing the opening
balance sheet, no value has been allocated to these warrants due
to their contingent nature.
(b) Fresh start accounting adjustments:
The Company has performed a comprehensive revaluation of its balance
sheet under the provisions of the Canadian Institute of Chartered
Accountants ("CICA") Handbook Section ("HB") 1625, "Comprehensive
Revaluation of Assets and Liabilities" ("Fresh Start Accounting").
Under Fresh Start Accounting, the Company is required to assess the
fair value of its recorded and unrecorded assets and liabilities and
prepare a "fresh start accounting" balance sheet upon emergence from
the Plan.
As required by CICA HB 1625, the enterprise value of $535 million has
been allocated upon Fresh Start Accounting to the assets and
liabilities of the Company in accordance with the guidance in CICA HB
1581 "Business Combinations":
=====================================================================================================
Current assets $ 290,806
Investments 6,665
Property, plant and equipment 419,395
Other assets 1,171
-----------------------------------------------------------------------------------------------------
718,037
Current liabilities 141,122
Secured Bonds 279,825
Other long-term liabilities 27,369
Future income taxes 14,546
-----------------------------------------------------------------------------------------------------
462,862
-----------------------------------------------------------------------------------------------------
Equity value $ 255,175
=====================================================================================================
For purposes of this unaudited interim consolidated balance sheet, the
fair values ascribed to the assets and liabilities were based on
estimates of amounts and are subject to change to the extent of further
valuation reports and analysis.
9
WESTERN FOREST PRODUCTS INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts expressed in thousands of dollars, except per share amounts)
For the period from July 28, 2004 to September 30, 2004
================================================================================
1. BASIS OF PRESENTATION AND REORGANIZATION PROCEEDINGS (CONTINUED):
(b) Fresh start accounting adjustments (continued):
The adjustments required to arrive at the values above are as follows:
=====================================================================================================
Inventory valuation $ (10,094)
Property, plant and equipment write-down (33,007)
Deferred pension asset and other assets eliminated (16,170)
-----------------------------------------------------------------------------------------------------
(59,271)
Other long-term liabilities fair value adjustment (5,886)
Future income taxes (14,546)
-----------------------------------------------------------------------------------------------------
Elimination of remaining deficit $ (79,703)
=====================================================================================================
2. SIGNIFICANT ACCOUNTING POLICIES:
These consolidated financial statements are prepared in accordance with
Canadian generally accepted accounting principles ("Canadian GAAP"), which
require management to make assumptions and estimates that affect the
reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates.
The significant policies are summarized below.
(a) Basis of consolidation:
These consolidated financial statements include the accounts of Western
Forest Products Inc. and all of its subsidiaries. All intercompany
balances and transactions have been eliminated on consolidation.
(b) Inventory:
Inventory, other than supplies which are valued at cost, are valued at
the lower of average cost and net realizable value.
(c) Property, plant and equipment:
Property, plant and equipment are initially recorded at cost, including
capitalized interest and start-up costs incurred for major projects
during the period of construction. Amortization periods range from 5 to
20 years, except:
(i) Logging roads: spur roads are expensed and all other roads are
capitalized and amortized on a production basis over the
estimated volume of timber;
(ii) Timberlands: are capitalized and amortized over 40 years; and
(iii) Squamish Pulp Mill: amortization is on a unit of production basis
over 25 years.
The Company conducts reviews for the impairment of property, plant and
equipment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. An impairment loss
would be recognized when estimates of future cash flows expected to
result from the use of an asset and its eventual disposition are less
than its carrying amount.
10
WESTERN FOREST PRODUCTS INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts expressed in thousands of dollars, except per share amounts)
For the period from July 28, 2004 to September 30, 2004
================================================================================
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(d) Foreign currency translation:
Transactions denominated in US dollars have been translated into
Canadian dollars at the approximate rate of exchange prevailing at the
time of the transaction. Monetary assets and liabilities have been
translated into Canadian dollars at the period-end exchange rates. All
exchange gains and losses are included directly in earnings. Exchange
gains and losses included in earnings that relate to long-term debt are
considered to be an integral part of financing costs and, accordingly,
are included in interest expense.
(e) Reforestation obligation:
Timber is harvested under various licences issued by the Province of
British Columbia. The future estimated reforestation obligation is
accrued on the basis of the volume of timber cut. The obligation is
recognized at the fair value in the period in which the legal
obligation was incurred, with the fair value of a liability determined
with reference to the present value of estimated future cash flows.
In periods subsequent to the initial measurement, changes in the
liability resulting from the passage of time and revisions to fair
value calculations are recognized in the statement of operations as
they occur. The non-current and current portion of this obligation are
included in other liabilities and accounts payable and accrued
liabilities, respectively.
(f) Revenue recognition:
Sales are recognized at the time products are shipped to external
customers. The CICA introduced a new recommendation for the application
of GAAP, which provides guidance on alternate sources to consult with
when an issue is not specifically addressed by Canadian GAAP. Prior to
January 1, 2004, the Predecessor, along with other companies in the
forest industry, presented sales net of countervailing and anti-dumping
duties and freight costs. In accordance with the new GAAP standard,
countervailing and anti-dumping duties and freight costs have been
reclassified to costs and expenses. Prior period amounts for the
Predecessor have been restated to reflect these reclassifications.
(g) Income taxes:
The Company uses the liability method of accounting for future income
taxes. Under the liability method, future income tax assets and
liabilities are determined based on temporary differences (differences
between the accounting bases and the tax bases of existing assets and
liabilities), and are measured using the currently enacted, or
substantively enacted, tax rates and laws expected to apply when these
differences reverse. A valuation allowance is recorded against any
future income tax asset if it is more likely than not that the asset
will not be realized.
(h) Employee future benefits:
The Company recognizes the cost of retirement benefits and certain
other post-employment benefits over the periods in which the employees
render services to the entity in return for the benefits and with
respect to pensions, requires the use of a discount rate, that is set
with reference to market interest rates on high-quality debt
instruments, to measure the accrued pension benefit obligation.
11
WESTERN FOREST PRODUCTS INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts expressed in thousands of dollars, except per share amounts)
For the period from July 28, 2004 to September 30, 2004
================================================================================
3. INVENTORY:
=========================================================================================================
September 30, July 28,
2004 2004
---------------------------------------------------------------------------------------------------------
Raw materials $ 5,368 $ 4,515
Logs 76,841 75,017
Finished pulp 8,014 12,151
Lumber 76,722 74,526
Supplies and other 22,587 21,856
---------------------------------------------------------------------------------------------------------
$ 189,532 $ 188,065
=========================================================================================================
4. PROPERTY, PLANT AND EQUIPMENT:
=========================================================================================================
Accumulated
amortization Net book
September 30, 2004 Cost and write-downs value
---------------------------------------------------------------------------------------------------------
Land, buildings and equipment $ 218,194 $ 2,189 $ 216,005
Timberlands and logging roads 208,425 3,355 205,070
---------------------------------------------------------------------------------------------------------
$ 426,619 $ 5,544 $ 421,075
=========================================================================================================
The allocation of the asset values is preliminary. A detailed review is
underway, and the allocation is subject to change.
The final allocation will be completed by December 31, 2004. The annual
financial statements will provide more detail of specific asset values,
based on the final results of the review.
5. BANK CREDIT FACILITY:
On July 27, 2004, the Company established a three-year revolving credit
facility, secured by receivables and inventory, which bears an interest
rate of prime plus 0.75%. The size of this asset-backed facility is
determined by the level of outstanding receivables and inventory, but
cannot exceed $100,000,000.
At September 30, 2004, of the $100,000,000 of the facility that was
available to the Company, $53,939,000 had been drawn down and $3,080,000
was used to support standby letters of credit.
6. LONG-TERM DEBT:
=========================================================================================================
September 30, July 28,
2004 2004
---------------------------------------------------------------------------------------------------------
Secured Bonds (US $221,000,000), 15% due in 2009 $ 265,399 $ 279,825
=========================================================================================================
12
WESTERN FOREST PRODUCTS INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts expressed in thousands of dollars, except per share amounts)
For the period from July 28, 2004 to September 30, 2004
================================================================================
6. LONG-TERM DEBT (CONTINUED):
On July 27, 2004, the Company issued US$221,000,000 of 15% Secured Bonds
due 2009 for proceeds of US$210,000,000. Interest is payable semi-annually
in arrears on December 31 and June 30 of each year commencing December 31,
2004. The Company has the right to defer payment of up to one-half of the
interest payable on any interest payable date for up to five years but not
beyond the maturity date of the Secured Bonds. The Secured Bonds are
secured by a first priority charge over all of the fixed assets of the
Company including timber tenures, sawmills and the value-added lumber
remanufacturing plant. The security ranks subordinate to the security
provided under the working capital facility (see note 5). The Secured Bonds
are redeemable at the option of the Company at any time after July 27, 2005
at their principal amount plus (i) a premium (which decreases annually to
their 2009 maturity date resulting in a redemption price of: 2005 -
107.50%; 2006 - 105.50%; 2007 - 103.50%; 2008 - 101.50%) and (ii) any
accrued and unpaid interest. Subject to ensuring adequate liquidity,
proceeds from asset sales, a softwood lumber duty settlement and capital
market transactions are generally to be used to redeem Secured Bonds. The
indenture governing the Secured Bonds contains certain restrictions
regarding, among other things, the ability of the Company to incur
additional indebtedness (with certain exceptions) and limitations on the
payment of dividends and other restricted payments.
7. INCOME TAXES:
Income tax expense for the period from July 28, 2004 to September 30, 2004
differs from the amount that would be computed by applying the Company's
combined Federal and Provincial statutory rate as follows:
======================================================================================================
2003
------------------------------------------------------------------------------------------------------
Net income before taxes $ 18,356
=======================================================================================================
Expected income tax expense $ 6,538 35.62%
Tax effect of:
Capital gains tax rate on unrealized foreign exchange gain (2,655) (14.46%)
Large corporations tax 423 2.30%
-------------------------------------------------------------------------------------------------------
Income tax expense (recovery) per financial statements $ 4,306 23.46%
=======================================================================================================
Income tax expense (recovery) comprised of:
Current income tax expense $ 423
Future income tax expense 3,883
=======================================================================================================
A subsidiary company has tax loss carry forwards of approximately
$500,000,000 which are available to reduce taxable income in the future. A
full valuation allowance has been provided.
13
WESTERN FOREST PRODUCTS INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts expressed in thousands of dollars, except per share amounts)
For the period from July 28, 2004 to September 30, 2004
================================================================================
8. SHARE CAPITAL:
(a) Authorized and issued share capital:
Western's authorized capital consists of an unlimited number of Common
shares (the "Common Shares") and an unlimited number of preferred
shares issuable in series, of which, as of September 30, 2004,
25,635,931 Common Shares are issued and outstanding, and no preferred
shares are issued and outstanding.
All Common Shares rank equally as to voting rights, participation in a
distribution of the assets of Western on a liquidation, dissolution or
winding-up of Western and the entitlement to dividends.
(b) Stock-based compensation plan:
Western has an incentive stock option plan (the "Option Plan"), which
permits the granting of options ("Options") to eligible participants to
purchase up to a maximum of 2,500,000 Common Shares, which have been
reserved for issuance under the Plan. The Option Plan provides that
Western's Board of Directors may from time to time grant Options to
acquire Common Shares to any participant who is an employee, officer or
director of Western or its affiliates or a consultant to Western or its
affiliates.
The total number of Common Shares that may be reserved for issuance to
any one participant pursuant to Options granted under the Option Plan
may not exceed 5% of the issued and outstanding Common Shares of the
Company outstanding (on a non-diluted basis) on the grant date of the
Options. The maximum number of Common Shares that may be reserved for
issuance under Options granted to insiders and their associates under
the Option Plan may not exceed 10% of the issued and outstanding Common
Shares on a non-diluted basis at the grant date of the Options. The
maximum number of Common Shares that may be issued to the Company's
insiders and their associates pursuant to Options granted under the
Option Plan within any one-year period may not exceed 10% of the
Company's issued and outstanding Common Shares on a non-diluted basis
at the end of such period and, in the case of any one insider and his
associates, may not exceed 5% of the issued and outstanding Common
Shares.
Each Option is exercisable, subject to vesting terms as may be
determined by the Board, into one Common Share, subject to adjustments,
at a price of not less than the closing price of the Common Shares on
the TSX on the day immediately preceding the grant date. Options
granted under the Option Plan expire, generally, a maximum of ten years
from the date of the grant.
The following table summarizes the Options outstanding at September 30,
2004:
==========================================================================================================
Number of Exercise price per Weighted average
Common Shares Common Share exercise price
----------------------------------------------------------------------------------------------------------
Outstanding, July 28, 2004 - - -
Granted 49,590 $ 12.10 (1) $ 12.10
Cancelled - - -
Exercised - - -
----------------------------------------------------------------------------------------------------------
Outstanding, September 30, 2004 49,590 $ 12.10 $ 12.10
==========================================================================================================
(1) Granted at a 10% premium above trading price of the shares at grant
date.
14
WESTERN FOREST PRODUCTS INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts expressed in thousands of dollars, except per share amounts)
For the period from July 28, 2004 to September 30, 2004
================================================================================
8. SHARE CAPITAL (CONTINUED):
(b) Stock-based compensation plan (continued):
During the period ended September 30, 2004, 49,590 Options with a
weighted average fair value of $3.12 per Common Share were granted and
valued using the Black-Scholes option pricing model with the following
weighted average assumptions:
==========================================================================================================
Period ended
June 30, 2004
----------------------------------------------------------------------------------------------------------
Risk-free interest rate (%) 4%
Expected volatility (%) 28%
Expected life (in years) 5
Expected dividends 0%
==========================================================================================================
The Black-Scholes option pricing model was developed for use in
estimating the fair value of traded options that have no vesting
restrictions and are fully transferable. Option pricing models also
require estimates, which are highly subjective, including expected
volatility of the underlying stock. The Company bases estimates of
volatility on historical stock prices. Changes in assumptions can
materially affect estimates of fair values.
The Company recorded compensation expense of $5,420 during the quarter
based on the fair value of the options of $154,559 as determined under
Black-Scholes using the above assumptions, and prorated for the vesting
period of 20% per year over five years and the number of days in the
reporting period.
(c) Class C Warrants:
The Company issued 569,373 Tranche 1 Class C Warrants, 854,146 Tranche
2 Class C Warrants and 1,423,743 Tranche 3 Class C Warrants
(collectively, the "Class C Warrants") as of July 27, 2004. Each Class
C Warrant entitles the holder to purchase one Common Share (subject to
certain adjustments) at the following exercise price: $16.28 for
Tranche 1 Class C Warrants, $26.03 for Tranche 2 Class C Warrants, and
$33.83 for the Tranche 3 Class C Warrants.
The Class C Warrants are non-transferable and have a five-year term,
subject to early termination provisions. Western is entitled to give a
30-day notice of termination with respect to any tranche of Class C
Warrants if, during a 20-day trading period ending prior to the fifth
business day prior to the date of such notice, the Company's Common
shares trade at weighted average price per share that is more than 125%
of the exercise price of such tranche. In addition, the warrants will
expire if, on or after July 27, 2005, the Company amalgamates or
completes a similar business combination that results in the
shareholders of the Company owning less than 80% of the issued and
outstanding equity shares of the continuing entity. For accounting
purposes, no value has been allocated to these warrants due to their
contingent nature.
15
WESTERN FOREST PRODUCTS INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts expressed in thousands of dollars, except per share amounts)
For the period from July 28, 2004 to September 30, 2004
================================================================================
9. COMMITMENT AND CONTINGENCIES:
(a) Operating leases:
Future minimum lease payments at September 30, 2004 under operating
leases were as follows:
==========================================================================================================
2004 $ 1,083
2005 3,171
2006 2,388
2007 1,475
2008 849
Thereafter 260
----------------------------------------------------------------------------------------------------------
$ 9,226
==========================================================================================================
(b) Contingencies:
(i) Softwood lumber duties:
On March 21, 2002 and further adjusted on April 25, 2002, the U.S.
Department of Commerce ("USDOC") issued its final determination in
the countervailing and antidumping investigations. The USDOC's
final determination in the countervailing investigation resulted
in a duty rate of 18.79% to be posted by cash deposits from the
effective date of the Final Order (May 22, 2002 as discussed
below). The USDOC's final determination in the antidumping
investigation resulted in company specific duty rates ranging from
2.18% to 12.44% on the six companies investigated and an all other
rate of 8.43% for all other companies including this Company and
its Predecessor.
On May 16, 2002, the U.S. International Trade Commission ("USITC")
published its final written determination on injury and stated
that Canadian softwood lumber threatens material injury to the
U.S. industry. As a result, effective from the Final Order date of
May 22, 2002, cash deposits are required for shipments at the
rates determined by the USDOC. All prior bonds or cash deposits
posted prior to May 22, 2002 were refunded.
The Company has recorded countervailing and antidumping duties at
27.22% totalling $11,886,000 for the period from July 28, 2004 to
September 30, 2004. Cumulative duties from May 22, 2002, when cash
deposits were made necessary for shipments of Canadian lumber into
the U.S., until September 30, 2004 total $94,236,000. Any further
adjustments resulting from a change in the countervailing and
antidumping duty rates will be made prospectively.
16
WESTERN FOREST PRODUCTS INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts expressed in thousands of dollars, except per share amounts)
For the period from July 28, 2004 to September 30, 2004
================================================================================
9. COMMITMENT AND CONTINGENCIES (CONTINUED):
(b) Contingencies (continued):
(i) Softwood lumber duties (continued):
The Company and other Canadian forest product companies, the
Federal government and Canadian Provincial governments ("Canadian
Interests") categorically deny the U.S. allegations and strongly
disagree with the final countervailing and antidumping
determinations made by the USITC and USDOC. Canadian Interests
continue to aggressively defend the Canadian industry in this U.S.
trade dispute. Canadian Interests have appealed these decisions to
NAFTA panels and the WTO. The final amount of countervailing and
antidumping duties that may be assessed on Canadian softwood
lumber exports to the U.S. cannot be determined at this time and
will depend on appeals of the final determinations to any
reviewing courts, NAFTA or WTO panels. Notwithstanding the final
rates established in the investigations, the final liability for
the assessment of countervailing and antidumping duties will not
be determined until each annual administrative review process is
complete.
(ii) Litigation and claims:
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.
(iii) The Forest Revitalization Plan:
In March 2003, the Government of B.C. ("Crown") as part of the
Forestry Revitalization Plan ("FR Plan"), took back 20% of public
land harvesting rights from all tenure holders who had combined
holdings of more than 200,000 m(3). The FR Plan states that
approximately half of this volume will be distributed to open
opportunities for woodlots, community forests and First Nations
and the other half will be available for public auction made
available through B.C. Timber Sales. The take-back volume totalled
685,216 m(3) from tenures managed by the Company.
Although the legal take-back occurred at the end of March 2003,
the volume was loaned back to licence holders to allow
negotiations as to which replaceable tenures the volume would come
from. The first phase of negotiation, which began in November,
2003 has recently concluded and an agreement has been reached
between the Company and the Crown. This agreement will form the
basis for Ministerial Orders that the Company expects to receive
at the end of the year that will formally take the volume from
specific tenures and reduce our annual allowable cuts. These
Orders may include a schedule that delays the take-back for some
portions of the First Nations, woodlots and community forests
volume but will specify all the volume allocated for public
auction to be taken January 1, 2005. The Company put considerable
effort into directing as much of the take-back volume to tenures
not associated with forestry dependent communities.
17
WESTERN FOREST PRODUCTS INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts expressed in thousands of dollars, except per share amounts)
For the period from July 28, 2004 to September 30, 2004
================================================================================
9. COMMITMENT AND CONTINGENCIES (CONTINUED):
(b) Contingencies (continued):
(iii) The Forest Revitalization Plan (continued):
The next series of the negotiations are on-going and will
finalize the areas within certain tenures that will be used to
provide the take-back volume, the compensation payable to the
Company for the return of the take-back volume, and related
costs associated with improvement, infrastructure and planning
associated with the take-back areas. Two funds for the entire
industry totalling $275 million have been budgeted by the Crown
- $200 million to compensate forest companies for harvesting
rights and $75 million to mitigate impacts on their displaced
contractors as well as company and contractor employees.
The effect of the FR Plan on the Company's financial position
and results of operations cannot be determined at this time.
The Company will record the effects of the FR Plan at the time
the amounts to be recorded are estimable.
10. SEGMENTED INFORMATION:
(a) Industry segments:
The Company is an integrated Canadian forest products company operating
in two industry segments. The Solid Wood Segment comprises the
Company's timber harvesting, reforestation, sawmilling, value-added
lumber remanufacturing and lumber marketing operations. The Pulp
Segment comprises the Company's NBSK pulp manufacturing and sales
operations.
==========================================================================================================
July 28 to September 30, 2004
---------------------------------------------------------
Solid wood Pulp Total
----------------------------------------------------------------------------------------------------------
Sales:
To external customers $ 122,467 $ 35,794 $ 158,261
To other segment (1) 6,997 - 6,997
----------------------------------------------------------------------------------------------------------
$ 129,464 $ 35,794 $ 165,258
==========================================================================================================
==========================================================================================================
July 28 to September 30, 2004
---------------------------------------------------------
Solid wood Pulp Total
----------------------------------------------------------------------------------------------------------
Segmented operating earnings (loss) $ 14,874 $ (219) $ 14,655
General corporate expenses (2,388)
Cash interest (8,567)
Foreign exchange gain/amortization of
finance costs 14,779
Other income (expense) (123)
Income tax expense (4,306)
----------------------------------------------------------------------------------------------------------
Net earnings $ 14,050
==========================================================================================================
18
WESTERN FOREST PRODUCTS INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts expressed in thousands of dollars, except per share amounts)
For the period from July 28, 2004 to September 30, 2004
================================================================================
10. SEGMENTED INFORMATION (CONTINUED):
(a) Industry segments (continued):
==========================================================================================================
July 28 to September 30, 2004
----------------------------------------------------------
Solid wood Pulp Total
----------------------------------------------------------------------------------------------------------
Identifiable assets $ 581,899 $ 141,897 $ 723,796
Corporate assets, including investments 7,608 17 7,625
----------------------------------------------------------------------------------------------------------
$ 589,507 $ 141,914 $ 731,421
==========================================================================================================
Amortization of property, plant and equipment $ 4,845 $ 699 $ 5,544
==========================================================================================================
Capital expenditures $ 6,902 $ 320 $ 7,222
==========================================================================================================
(1) Inter-segment sales are accounted for at prevailing market prices.
(b) Geographic information:
(i) Sales:
The Company's sales, based on the known origin of the customer,
from July 28 to September 30, 2004 were as follows:
=====================================================================================================
Canada $ 45,280
United States 56,221
Asia 44,527
Europe 11,320
Other 913
-----------------------------------------------------------------------------------------------------
$ 158,261
=====================================================================================================
(ii) Property, plant and equipment:
All of the Company's property, plant and equipment are located in
British Columbia, Canada.
11. PENSION PLANS:
The Company's hourly paid employees are members of union pension plans
established pursuant to collective bargaining agreements. The aggregate
contributions made by the Company and charged to earnings amounted to
$1,484,000 for the period from July 28, 2004 to September 30, 2004.
The Company has defined benefit pension plans which cover substantially all
salaried employees. The plans provide pensions based on length of service
and final average annual earnings. The company also has health care plans
covering certain hourly and retired salaried employees.
On July 28, 2004, the Company implemented fresh start accounting and
recorded on its books a liability of $17,978,000 representing the excess of
actuarial liabilities over the market value of assets as calculated by the
company's actuary. Included in this amount are the liabilities for the
Supplementary pension plan ($6,681,000) and the hourly bridging and hourly
non-pension post retirement plans ($10,097,000) which are unfunded
arrangements.
19
WESTERN FOREST PRODUCTS INC.
Notes to Consolidated Financial Statements
(Unaudited)
(Tabular amounts expressed in thousands of dollars, except per share amounts)
For the period from July 28, 2004 to September 30, 2004
================================================================================
11. PENSION PLANS (CONTINUED):
The Company's salaried pension and non-pension benefits expense was
$749,000 for the period from July 28, 2004 to September 30, 2004.
The significant actuarial assumptions adopted in measuring the Company's
accrued benefit obligations are as follows:
==========================================================================================================
Discount rate at July 27, 2004:
Pension plans 6.50%
Non-pension plans 6.50%
Expected return on plan assets 7.50%
Rate of compensation increases 3.50%
Health care cost trend rate 6.5% for 2004 grading to 4.2% in 2010
==========================================================================================================
12. FINANCIAL INSTRUMENTS AND RELATED DISCLOSURES:
(a) Fair value of financial instruments:
The estimated fair values of the Company's financial instruments as at
September 30, 2004 are as follows:
=======================================================================================================
Carrying Fair
amount value
-------------------------------------------------------------------------------------------------------
Accounts receivable $ 93,813 $ 93,813
Other investments 6,615 6,615
Bank indebtedness 53,939 53,939
Accounts payable and accrued liabilities 96,835 96,835
Secured Bonds (note 6) 265,399 299,901
=======================================================================================================
The fair value of the Company's accounts receivable, bank indebtedness,
and accounts payable and accrued liabilities was estimated to
approximate their carrying values due to the immediate or short-term
maturity of these financial instruments. The fair value of the
Company's other investments, as a result of their nature, was also
estimated to approximate their carrying values. The fair value of the
Company's Secured Bonds was estimated based on market prices.
(b) Concentration of credit risk:
The Company has significant exposures to individual customers. However,
all of the Company's sales are either made on a cash basis, without
credit terms, or are insured with the Export Development Corporation.
20
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion and analysis reports on and explains the financial
condition and results of operations of Western Forest Products Inc. (the
"Company", "us", "we", or "our") for the period commencing July 28, 2004 and
ending September 30, 2004 to help security holders and other readers understand
our Company and the key factors underlying our financial results. You should
read this discussion and analysis in conjunction with our consolidated interim
financial statements and related notes thereto, for the period commencing July
28, 2004 and ending September 30, 2004, which are filed on SEDAR at
<www.sedar.com> under our Company's name.
BACKGROUND
On July 27, 2004, Doman Industries Limited ("Doman") and certain of its
subsidiaries (collectively with Doman, the "Predecessor") implemented a Plan of
Arrangement and Reorganization (the "Plan") and emerged from protection under
the Companies' Creditors Arrangement Act (Canada). We were incorporated under
the Canada Business Corporations Act on April 27, 2004 under the name "4204247
Canada Inc." for the purposes of implementing the Plan. On June 21, 2004, we
changed our name to "Western Forest Products Inc." On July 27, 2004, the Plan
implementation date, we acquired the solid wood and pulp assets of the
Predecessor. Until the Plan was implemented, we did not carry on business and
had no material assets or liabilities. We commenced business after the
implementation of the Plan on July 27, 2004.
The purpose of the Plan was to (1) compromise the claims of our Predecessor's
affected creditors so as to enable the Predecessor's solid wood and pulp
businesses to be carried on under a new corporate structure, with relief from
the debt servicing and repayment obligations that it was subject to at that
time; and (2) facilitate the refinancing of Doman's senior secured notes through
the distribution of certain warrants (exercisable for the Company's secured
bonds and Common shares) and the sale of certain private placement units
consisting of the Company's secured bonds and Common shares.
The significant steps in the implementation of the Plan included:
(a) the incorporation of two new corporations, the Company and
Western Pulp Limited ("WPL");
(b) the segregation of the principal operating assets of our
Predecessor into two separate operating groups: the solid wood
assets, which were transferred to the Company, and the pulp
assets, which were transferred to WPL; WPL became a wholly
owned subsidiary of the Company;
(c) the unsecured indebtedness of our Predecessor was compromised
and converted to approximately 75% of the Common shares of the
Company, subject to certain cash elections; in addition, the
Predecessor's unsecured creditors were entitled to certain
warrants (exercisable for our secured bonds and Common
shares);
(d) the indebtedness held by Doman's senior secured noteholders
was refinanced in full through a combination of a distribution
of Class A and B warrants to the Predecessor's unsecured
creditors and a private placement to certain standby
purchasers (the "Standby Purchasers"); for proceeds of US$210
million, the Company issued secured bonds with an aggregate
principal face value of US$221 million and approximately 25%
of the Company's Common shares to the Standby Purchasers and
those unsecured creditors of our Predecessor who exercised the
Class A and B warrants; the proceeds of U.S.$210 million were
used primarily to repay Doman's senior secured noteholders and
to cover our Predecessor's CCAA exit cost, with the remaining
amount released to us for working capital purposes;
(e) the Company entered into a working capital facility providing
for revolving advances up to $100 million and reorganized
certain intercorporate debt; and
(f) the Company issued three tranches of non-transferable Class C
warrants to purchase up to 10% of the Common shares of the
Company on the terms set out in the Plan to existing
shareholders of Doman; no other distributions were made, or
other compensation paid, to Doman shareholders under the Plan.
On August 3, 2004, our Common shares began trading on the Toronto Stock Exchange
under the symbol "WEF".
1
For further information about the Plan, please see the information circular and
proxy statement pertaining to the Plan dated May 7, 2004 and related documents
of our Predecessor, which documents are available at <www.sedar.com> under our
Company's name.
GENERAL
In addition to discussing and analyzing the financial condition and results of
operations, this discussion and analysis compares our results for the period
from July 28, 2004 to September 30, 2004 combined with our Predecessor's results
from June 30, 2004 to July 27, 2004 (pro forma third quarter) with the three
month period ended September 30, 2003 of our Predecessor and our results for the
period from July 28, 2004 to September 30, 2004, combined with our Predecessor's
results from January 1, 2004 to July 27, 2004 (pro forma nine months). The
consolidated interim financial and other information of the Company issued
subsequent to the Plan implementation may not be comparable with the
consolidated interim financial information and other information issued by the
Predecessor prior to the Plan implementation. Accordingly, the discussion and
analysis of our financial condition and result of operations compared to our
Predecessor should be reviewed with caution.
We have prepared the financial information contained in this discussion and
analysis in accordance with Canadian generally accepted accounting principles
("GAAP"). Reference is also made to "EBITDA". "EBITDA" refers to operating
earnings (losses) before interest, taxes, amortization and other non-operating
income and expenses and in the case of our Predecessor, also before
restructuring costs and asset write-downs. We have included information
concerning EBITDA because the Company understands that it is used by certain
investors as a measure of the Company's performance. EBITDA does not represent
cash generated from operations as defined by Canadian GAAP and it is not
necessarily indicative of cash available to fund cash needs. "EBIT" refers to
operating earnings (losses) before interest, income and capital taxes and other
non-operating income and expenses.
CERTAIN STATEMENTS IN THIS DISCUSSION AND ANALYSIS AND OUR CONSOLIDATED INTERIM
FINANCIAL STATEMENTS CONSTITUTE FORWARD-LOOKING STATEMENTS. SUCH FORWARD-LOOKING
STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS,
INCLUDING THOSE DESCRIBED UNDER THE "RISKS AND UNCERTAINTIES" SECTION, WHICH MAY
CAUSE OUR ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS, TO BE MATERIALLY
DIFFERENT FROM FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED
BY SUCH FORWARD-LOOKING STATEMENTS.
Unless otherwise noted, the information in this discussion and analysis is as at
November 10, 2004. All financial references are in Canadian dollars unless
otherwise noted.
OVERVIEW
The Company's business is the harvesting of timber and the manufacturing and
sale of lumber and pulp for worldwide markets. Factors that have affected and
will continue to affect operating results include the economic health of the US,
Japan and Canada, which are the leading markets for the Company's lumber
products, and of Asia and Europe, which are the leading markets for the
Company's pulp products.
Demand for the Company's lumber products is significantly driven by the level of
US housing starts, and indirectly is a function of the health of the US economy
and mortgage borrowing rates. The supply of lumber to the US is tied to the
levels of lumber industry production, the ability or inability of certain
producers to shift production between different lumber markets and, since May
2002, the countervailing and anti-dumping duties imposed by the US upon Canadian
producers of softwood lumber exports to the US. The Company, as a result, is
unable to maintain significant lumber shipments to the US without incurring
significant costs. We also market our lumber products to the Japanese market. As
a result, the condition of the Japanese economy has significant impact on the
demand for our lumber products.
The pulp industry is highly competitive on a global basis and producers compete
primarily on price. Over the long-term, demand for Northern Bleached Softwood
Kraft ("NBSK") pulp is a function of economic growth generally, and paper and
paperboard demand specifically. The supply of market pulp is a function of both
industry production and the level of inventories that exist, and, over short
periods of time, NBSK prices are subject to wide fluctuations depending on the
balance between demand and supply.
2
SELECTED FINANCIAL INFORMATION
PERIOD COMMENCING
JULY 28, 2004
AND ENDING
(millions of Canadian dollars) SEPTEMBER 30, 2004
----------------------
----------------------
Sales volumes
Lumber - millions of board feet 135
Logs - thousands of cubic metres 292
Wood chips - thousands of units 65
Pulp - thousands of ADMT 52
Net sales
- Lumber $ 85.5
- Logs 31.8
- By-products 5.1
----------------------
Solid wood segment $122.4
Pulp segment 35.8
----------------------
Consolidated $158.2
Costs and Expenses 140.4
----------------------
Operating earnings (loss) before amortization,
restructuring costs, asset write-downs (EBITDA) 17.8
Amortization of property, plant and equipment 5.5
Operating earnings (loss) (EBIT) 12.3
Other income and expense
Interest 8.6
Exchange gains and (losses) on long-term debt and
amortization of debt issue costs 14.8
Other income (expense) (0.1)
----------------------
Earnings (loss) before income taxes $18.4
Income tax (expense) recovery (4.3)
----------------------
Net income (loss) $14.1
======================
Basic earnings (loss) per share $0.55
Diluted earnings (loss) per share $0.55
----------------------
Total assets $731.4
Total long-term debt $265.4
Notes:
1. The financial information presented has been prepared in accordance with
Canadian GAAP, with the exception of references to EBITDA, as discussed
under "General" above.
2. Secured debt of US$210.4 million represents the US$210 million proceeds
(from the issuance of Secured Bonds with an aggregate principal value of
US$221 million) plus accretion of the discount, translated at an exchange
rate of 1.2616 at September 30, 2004.
3
OVERVIEW OF THE PERIOD FROM JULY 28, 2004 TO SEPTEMBER 30, 2004
Sales for the period July 28, 2004 to September 30, 2004 totalled $158.2
million, comprising $122.4 million for the solid wood segment (77.0% of the
total) and $35.8 million for the pulp segment (23% of the total). Sales included
the four day period at the end of July 2004. Since a significant portion of our
lumber and pulp sales occur near the end of a month due to the timing of the
shipping of our lumber and pulp overseas by ocean vessels, the sales for the
period benefited from this inclusion.
Operations were impacted significantly in the period by the softwood lumber
duties, declining pulp and lumber prices and the strengthening of the Canadian
dollar versus the US dollar. The Canadian dollar strengthened from US $0.7505 on
July 27, 2004 to US $0.7926 at September 30, 2004. The strengthening Canadian
dollar impacts us in two ways. Firstly, since most of our products are priced in
US dollars, this trend adversely affects the sales and net income for the
period. Secondly, however, since our debt is denominated in US dollars, the
strengthening Canadian dollar resulted in a non-cash translation gain on the
debt of $14.9 million.
Log sales for the period included 116 km(3) of pulp logs sold to Port Alice
Specialty Cellulose Inc. ("PASCI") for consumption in the Port Alice pulp mill.
This pulp mill was sold by our Predecessor to PASCI on May 11, 2004. Sales of
pulp logs to PASCI subsequent to May 11, 2004, all made on a cash-basis by our
Predecessor and ourselves, have been recorded as external sales made to a third
party. Prior to the pulp mill sale, our Predecessor recorded the log flow as an
internal transfer.
Costs and expenses for the period were $140.4 million or 88.7% of sales. The
Squamish pulp mill had a 6 day shutdown in the period as a result of an
unplanned outage in the bleach plant. The shutdown expense associated with this
was approximately $0.8 million representing fixed overhead costs and repair
parts.
Over the period, operations generated EBITDA of $17.8 million (11.3% of sales)
primarily as a result of the solid wood results as discussed above.
Amortization of property plant and equipment for the period was $5.5 million
compared to capital expenditures of $7.2 million. Logging was responsible for
$5.4 million of the capital expenditures which were predominately for building
logging roads. EBIT for the period was $12.3 million or 7.8% of sales.
Other income and expenses are made up from $8.6 million in interest expense,
$14.8 million gain on the translation of the US $ denominated long term debt and
other expenses of $0.1 million. The $14.8 million gain on the debt translation
is a non-cash gain that affects earnings as the debt is marked to the current
exchange rate. The interest expense of $8.6 million was comprised of:
o $7.6 million in interest on the long term debt. The debt is denominated
in US dollars at 15% interest rate. The amount of interest each period
will fluctuate with changes in the exchange rate;
o $0.5 million in long term debt fees amortization; and
o $0.5 million in interest on the line of credit.
Income taxes have been provided for at the estimated tax rate of 35.62%. The
foreign currency translation gain on US$ denominated long-term debt has been
given capital gains treatment. We have not recognized any benefits from the tax
loss carryforwards of a subsidiary at this time. Such potential benefits may be
recognized in the future.
As a result of the above factors, net income was $14.1 million and earnings per
share was $0.55.
4
RESULTS OF OPERATIONS - COMPARISONS WITH PRIOR PERIODS
To assist shareholders and other readers understand the Company's business, the
following table compares the pro forma results of operations of the Company and
its Predecessor for the three and nine month periods ended September 30, 2004
with the results of the Predecessor for the three and nine month periods ended
September 30, 2003.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
-----------------------------------------------------------------------
(millions of Canadian dollars) 2004 2003 2004 2003
=======================================================================
PRO FORMA PREDECESSOR PRO FORMA PREDECESSOR
---------------- ------------------ ---------------- ------------------
SALES ($ MILLIONS)
Lumber $ 106.9 $ 92.2 $ 322.1 $ 247.4
Logs 45.3 22.1 112.8 80.5
By-products 8.0 5.5 19.9 15.9
Other 0.1 - 0.1 -
-----------------------------------------------------------------------
Solid Wood 160.3 119.8 454.9 343.8
Pulp 42.2 40.1 137.0 120.5
-----------------------------------------------------------------------
TOTAL SALES TO EXTERNAL
CUSTOMERS $ 202.5 $ 159.9 $ 591.9 $ 464.3
SALES VOLUMES
Lumber (mmfbm) 165 164 511 440
Logs (km(3)) 411 172 960 545
Pulp - NBSK (ADMT) 60,343 64,380 186,093 192,365
PRODUCTION VOLUMES
Lumber (mmfbm) 191 143 521 450
Logs (km(3)) 1,103 472 3,029 1,907
Pulp - NBSK (ADMT) 57,344 59,462 193,108 190,513
AVERAGE PRICES
Lumber (mfbm) 648 562 630 562
Logs (m(3)) 110 129 118 148
Pulp - NBSK (ADMT) 699 623 736 626
EBITDA
Solid Wood $ 34.2 $ (1.8) $ 88.8 $ 13.8
Pulp (10.3) (1.0) 2.0 (15.4)
General Corporate (3.0) (1.5) (7.1) (4.1)
-----------------------------------------------------------------------
TOTAL EBITDA $ 20.9 $ (4.3) $ 83.7 $ (5.7)
AMORTIZATION
Solid Wood $ 8.8 $ 7.2 $ 32.6 $ 26.5
Pulp 1.1 2.3 6.0 7.3
-----------------------------------------------------------------------
TOTAL AMORTIZATION $ 9.9 $ 9.5 $ 38.6 $ 33.8
-----------------------------------------------------------------------
WRITE DOWN OF ASSETS AND OPERATING RESTRUCTURING
COSTS - (4.9) - (6.9)
-----------------------------------------------------------------------
SEGMENTED OPERATING EARNINGS (LOSS) ($ MILLIONS)
Solid Wood $ 25.4 $ (13.9) $ 56.2 $ (19.6)
Pulp (11.4) (3.3) (4.0) (22.7)
-----------------------------------------------------------------------
TOTAL $ 14.0 $ (17.2) $ 52.2 $ (42.3)
As described above, our interim results of operations are not necessarily
indicative of the results that may be expected for the full fiscal period or for
any other interim period and any comparisons of financial performance with our
Predecessor should be reviewed with caution.
For the third quarter of 2004, our sales increased by 27% to $202.5 million from
$159.9 million in the third quarter of 2003. Increases were achieved across all
active segments.
5
Sales for solid wood increased 34% to $160.3 million in the third quarter of
2004 from $119.8 million in the same period of 2003. This increase reflects:
o an upturn in lumber market prices from an average price per mfbm of
$562 Cdn in the third quarter of 2003 to $648 Cdn for the same period
in 2004. As most of our lumber sales are quoted in US dollars, the
Canadian lumber prices were adversely affected by the foreign exchange
rate which went from 1.3489 at September 30, 2003 to 1.2616 at
September 30, 2004. Lumber sales volumes were relatively stable at 165
million FBM compared to 164 million FBM for the third quarter 2003.
o Log sales for the third quarter of 2004 of $45 million were more than
double than for the same period of 2003. Although average log prices
decreased by $19 per cubic meter from the third quarter of 2003, sales
volume increased by 240%. The lower price is due to the increase in
sales of pulp logs to PASCI in the period.
o Log Sales to PASCI occurred from May 18, 2004 through September 30,
2004. From May 18 to September 30, we and our Predecessor sold
299 km(3) of logs at an average price of $54 per m(3). For the third
quarter 2004, we and our Predecessor sold 164 km(3) of logs at $54
per m(3). In prior years, our Predecessor would have transferred these
pulp logs internally and would not have recorded them as an external
sale.
These factors caused solid wood operating earnings to increase by $39.3 million
from the third quarter of 2003 to the third quarter of 2004. The increase in
sales due to PASCI are unlikely to continue as PASCI has, on or about October
22, 2004, shut down the pulp mill and laid off its workers. It subsequently
filed a Notice of Intention to file a proposal under the Bankruptcy and
Insolvency Act (Canada).
Overall sales for the pulp segment increased to $42.2 million in the third
quarter of 2004 from $40.1 million in the same period of 2003. Sales for kraft
pulp increased as a result of $77 Cdn increase in kraft prices which offset a
lower volume. Pulp operating loss was $11.4 million for the third quarter of
2004 compared to a loss of $3.3 million in the third quarter for 2003. The loss
increased because the pulp mill took a maintenance shutdown in the third quarter
in 2004 whereas in 2003, the maintenance shutdown occurred in the second
quarter. The maintenance shutdown cost $10.2 million. This is in addition to the
$0.8 million in unscheduled shutdown costs which was incurred in September.
The increase in our sales of 27% was met with an increase in cost of goods sold
of nearly 11%, from $164.2 million in the third quarter of 2003 to $181.6
million in the third quarter of 2004. Overall EBITDA increased by $24.1 million
from ($4.3) million in the third quarter of 2003 to $20.9 million in the same
period of 2004. The primary factor for this increase was a $36 million increase
in EBITDA for the solid wood segment, due to increased lumber prices and
increased log sale volumes.
US SOFTWOOD LUMBER DUTIES
On March 22, 2002 and further adjusted on April 25, 2002, the US Department of
Commerce ("USDOC") issued its final determination in the countervailing and
antidumping investigations. The USDOC's final determination in the
countervailing investigation resulted in a duty rate of 18.79% to be posted by
cash deposits from the effective date of the Final Order (May 22, 2002 as
discussed below). The USDOC's final determination in the antidumping
investigation resulted in company specific duty rates ranging from 2.18% to
12.44% on the six companies investigated and an "all other rate" of 8.43% for
all other companies, including the Company. On May 16, 2002, the US
International Trade Commission ("USITC") published its final written
determination on injury and stated that Canadian softwood lumber threatens
material injury to the US industry. As a result, effective from the Final Order
date of May 22, 2002, cash deposits are required for shipments at the rates
determined by the USDOC. All prior bonds or cash deposits posted prior to May
22, 2002 were refunded. The final amount of countervailing and antidumping
duties that may be assessed on Canadian softwood lumber exports to the US cannot
be determined at this time and will depend on the outcome of the various
challenges and appeals of the final determinations to any reviewing courts,
North American Free Trade Agreement ("NAFTA") or World Trade Organization
("WTO") panels or on a negotiated settlement. Furthermore, notwithstanding the
final rates established in the investigations, the final liability for the
assessment of countervailing and antidumping duties will not be determined until
each annual administrative review process is complete. NAFTA has ruled that the
United States has not proven that Canadian lumber shipments threaten material
injury and therefore the United States should remove the duties. The United
States indicated its intention to launch an extraordinary appeal of the NAFTA
ruling.
6
B.C. FOREST REVITALIZATION PLAN
In March 2003, the Government of B.C. ("Crown") as part of the Forestry
Revitalization Plan ("FR Plan"), took back 20% of public land harvesting rights
from all tenure holders who had combined holdings of more than 200,000 m(3). The
FR Plan states that approximately half of this volume will be distributed to
open opportunities for woodlots, community forests and First Nations and the
other half will be available for public auction made available through B.C.
Timber Sales. The take-back volume totalled 685,216 m(3) from tenures managed by
us.
Although the legal take-back occurred at the end of March 2003, the volume was
loaned back to licence holders to allow negotiations as to which replaceable
tenures the volume would come from. The first phase of negotiation, which began
in November, 2003 has recently concluded and an agreement has been reached
between us and the Crown. This agreement will form the basis for Ministerial
Orders that we expect to receive at the end of the year that will formally take
the volume from specific tenures and reduce our annual allowable cuts. These
Orders may include a schedule that delays the take-back for some portions of the
First Nations, woodlots and community forests volume but will specify all the
volume allocated for public auction to be taken January 1, 2005. We put
considerable effort into directing as much of the take-back volume to tenures
not associated with forestry dependent communities.
The next series of the negotiations are on-going and will finalize the areas
within certain tenures that will be used to provide the take-back volume, the
compensation payable to us for the return of the take-back volume, and related
costs associated with improvement, infrastructure and planning associated with
the take-back areas. Two funds totalling $275 million have been budgeted by the
Crown - $200 million to compensate British Columbia forest companies for
harvesting rights and $75 million to mitigate impacts on their displaced
contractors as well as company and contractor employees.
The effect of the FR Plan on our financial position and results of operations
cannot be determined at this time. We will record the effects of the FR Plan at
the time the amounts to be recorded are estimable.
SUMMARY OF FINANCIAL POSITION
(millions of dollars) AS AT
---------------------------
September July 28,
30, 2004 2004
--------- --------
Cash $ 11.4 $ 16.6
Accounts receivable 93.8 78.3
Inventories 189.5 188.1
Prepaid expenses 7.5 7.8
------- --------
Current Assets 302.2 290.8
Investments 6.6 6.6
Property, plant and equipment 421.1 419.4
Other assets 1.5 1.2
------- --------
Total Assets $ 731.4 $ 718.0
======= ========
Bank indebtedness $ 53.9 $ 49.7
Accounts payable and accrued liabilities 96.9 91.4
------- --------
Current Liabilities 150.8 141.1
Long-term debt 265.4 279.8
Other liabilities 46.0 41.9
Shareholders' Equity 269.2 255.2
------- --------
Total Liabilities and Shareholders' Equity $ 731.4 $ 718.0
======= ========
Cash generated from (used in):
Working capital generated from operations $ 9.0
Increase in non-cash working capital (11.3)
-------
Funds used in operating activities (2.3)
Financing activities(1) 4.2
Investing activities (7.2)
-------
Increase (decrease) in net cash(1) $ (5.2)
=======
7
Note:
1. Net cash represents cash less bank indebtedness. Bank indebtedness has been
reclassified from financing activities, as disclosed in the consolidated
financial statements, to net cash.
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of liquidity are cash on hand, the unused portion of our
credit facility, cash flow generated from operations and working capital.
Our cash balance at September 30, 2004 was $11.4 million. In addition, $43.0
million was available under our revolving credit facility.
We generated $9.0 million from operations for the two month period, before
changes in non-cash working capital. Non-cash working capital increased by $11.3
million over the period causing operations to use $2.3 million in cash for the
period.
The long term debt consists of secured debt denominated in US dollars. It
declined from $279.8 million at July 28, 2004 to $265.4 million at September 30,
2004 as a result of the strengthening Canadian dollar.
Investing activities for the quarter used $7.2 million compared to $2.0 million
in the third quarter 2003. The main use of cash was logging road construction of
$3.3 million. We currently plan a further $8.5 million in capital projects and
road construction for the fourth quarter. Overall, we do not expect significant
changes to the capital requirements of the business. The goal is to reduce the
long term debt, so any capital requirements will need to meet specified
financial targets and be funded by cash flow from operations.
SUMMARY OF CONTRACTUAL OBLIGATIONS
The following table summarizes our contractual obligations at September 30, 2004
and our payments due for each of the next five years commencing December 31,
2004 and thereafter:
4Q
Millions of Dollars Total 2004 2005 2006 2007 2008 2009 Thereafter
----- ---- ---- ---- ---- ---- ---- ----------
Long-term debt(1) $ 278.8 - - - - - $ 278.8 -
Operating leases 9.2 1.1 3.2 2.4 1.5 0.8 0.2 -
Reforestation liability 10.3 1.2 5.6 1.5 1.2 0.2 0.1 0.5
- -----------------------------------------------------------------------------------------------------------------------
Total contractual obligations $ 298.3 $ 2.3 $ 8.8 $ 3.9 $ 2.7 $ 1.0 $ 279.1 $0.5
=======================================================================================================================
Note:
1. The amount shown for long-term debt represents the US$221 million Secured
Bonds translated at the September 30, 2004 exchange rate of 1.2616. This
amount is different to the Balance Sheet figure of $265.4 million due to the
original issue discount of US$11 million which is being amortized over the 5
year term of the Secured Bonds.
FINANCIAL INSTRUMENTS, OFF-BALANCE SHEET ARRANGEMENTS AND RELATED PARTY
TRANSACTIONS
We do not have any financial instruments not recognized in the financial
statements. Recognized financial instruments, consisting primarily of debt
instruments, are discussed elsewhere in this discussion and analysis. We did not
use any derivative financial instruments.
We do not have any off-balance sheet arrangements or related party transactions.
CRITICAL ACCOUNTING ESTIMATES
RECOVERABILITY OF PROPERTY, PLANT AND EQUIPMENT AND OTHER LONG-TERM ASSETS
We assess the recoverability of our property, plant and equipment and other
long-term assets by projecting the future cash flows to be generated by our
manufacturing plants. These projections require estimates to be made regarding
future commodity prices, foreign currency exchange rates, sales volumes,
production volumes, operating costs and renewal of licenses and permits. There
is a high degree of uncertainty in estimating future cash flows, primarily as a
8
result of the uncertainty regarding future prices for commodities, foreign
exchange rates and operating costs. The application of different assumptions for
commodity prices, foreign exchange rates and operating costs could result in a
conclusion that we would not recover the carrying amount of our property, plant
and equipment and other long-lived assets, which could result in a material
charge to earnings.
REFORESTATION LIABILITIES
We accrue our reforestation liabilities based on estimates of future costs at
the time the timber is harvested. The estimate of future reforestation costs is
based on a detailed analysis for all areas that have been logged and includes
estimates for the extent of planting seedlings versus natural regeneration, the
cost of planting including the cost of seedlings, the extent and cost of site
preparation, brushing, weeding, thinning and replanting and the cost of
conducting surveys. Our registered professional foresters conduct the analysis
that is used to estimate these costs. However, these costs are difficult to
estimate and can be affected by weather patterns, forest fires and wildlife
issues that could impact the actual future costs incurred and result in material
adjustments.
VALUATION OF INVENTORY
We value our inventories at the lower of cost and net realizable value. We
estimate net realizable value by reviewing current market prices for the
specific inventory based on recent sales prices and current sales orders. If the
net realizable value is less than the cost amount, we will record a write-down.
The determination of net realizable value at a point in time is generally both
objective and verifiable. However, changes in commodity prices can occur
suddenly which could result in a material write-down in inventories in future
periods.
SOFTWOOD LUMBER DUTIES
Softwood lumber duties represent contingent liabilities that require a cash
deposit to be paid to US customs in order to ship softwood lumber products into
the US. We have expensed softwood lumber duties based on the deposit amounts
paid to US customs. The actual amount of the duties for softwood lumber products
shipped will depend on the outcome of various challenges and appeals made to
NAFTA panels, WTO panels and reviewing courts or on a negotiated settlement. In
addition, the actual duty amounts will likely be based on rates established by
an administrative review process completed by the USDOC. Any difference between
the deposit rate paid either by us or our Predecessor and the rate established
on administrative review will be refunded to or paid by us, plus interest. The
actual amount paid in the future for softwood lumber duties on shipments made in
current periods could be materially different than the amounts paid and
expensed.
VALUATION OF ACCOUNTS RECEIVABLE
We record an allowance for doubtful collection of accounts receivable based on
our best estimate of any potential uncollectable amounts. The best estimate
considers past experience with our customer base and review of current economic
conditions and specific customer issues. We have significant exposure to
individual customers. However, all of our sales are either made on a cash basis,
without credit terms, or are insured or backed by letters of credit with the
Export Development Corporation or a private United States credit insurance
company. Although we and our Predecessor have not had significant bad debt
expenses in prior periods, deteriorating economic conditions could result in
financial difficulties in our customer base that could lead to bad debts. In
addition, although our sales are not concentrated in any particular customer,
accounts receivable balances with particular customers can be material at any
given time.
PENSION AND OTHER POST RETIREMENT BENEFITS
We have defined benefit pension plans and post-retirement medical and health
benefit plans for our officers and employees. We retain independent actuarial
consultants to perform actuarial valuations of plan obligations and asset
values, and advise on the amounts to be recorded in the financial statements.
Actuarial valuations include certain assumptions that directly affect the fair
value of the assets and obligations and expenses recorded in the financial
statements. These assumptions include the discount rate used to determine the
net present value of obligations, the return on plan assets used to estimate the
increase in the plan assets available to fund obligations and the increase in
future compensation amounts and medical and health care costs used to estimate
obligations. Actual experience can vary materially from the estimates and impact
the cost of our pension and post retirement medical and health plans and future
cash flow requirements.
9
ENVIRONMENT
We disclose environmental obligations when known and accrue the cost associated
with the obligations when they are known and the costs can be reasonably
estimated. We own a number of manufacturing sites that have been in existence
for a significant period of time and as a result may have unknown environmental
obligations. However, until the sites are decommissioned and the property, plant
and equipment are removed a detailed environmental review can not be completed.
Until these reviews are done, a reasonable cost estimate of the obligations, if
any, cannot be completed.
CHANGES IN ACCOUNTING POLICIES
Our accounting policy for logging road capitalization expenses the cost of spur
roads in the period the expense is incurred. For intermediate and mainline
roads, our practice is to capitalize the road cost and amortize it over the
estimated timber volume that the road services. This policy reflects industry
practice and is effective from July 28, 2004. Our Predecessor's past practice
was to capitalize all roads and amortize them over the estimated timber volume.
The new policy will reduce the amount of road spending that is capitalized. The
overall impact on expenses should not be significant as it will transfer the
amortization expense to an operations expense.
As of July 28, 2004, our accounting policy is to value inventory at the lower of
cost and net realizable value as follows:
o for lumber, we compare the average cost of the inventory to the
estimated net realizable value for each species of lumber, hemlock, fir
and cedar, separately;
o for logs, we compare the average cost of the inventory to the estimated
net realizable value for saw logs and pulp logs, separately; and
o for NBSK pulp, we compare the average cost of the inventory to the
estimated net realizable value for total pulp inventory.
We believe that this policy results in a conservative valuation of inventory in
that unrealized losses on lower value lumber and pulp log inventory are
recognized immediately on production whereas the unrealized profits in higher
value lumber and log inventories are recognized when realized on sale.
The practice of our Predecessor was to compare the average cost of inventory to
the net realizable value for lumber, logs and NBSK pulp on a total basis for
each.
RISKS AND UNCERTAINTIES
The following risks and uncertainties may have a material adverse effect on our
operations.
FOREST RESOURCE RISK AND NATURAL CATASTROPHES
Our timber tenures are subject to the risks associated with standing forests, in
particular, forest fires. Procedures and controls are in place to manage such
risk through prevention and early detection. Most of the timber we harvest comes
from Crown tenures and insurance coverage is maintained only for loss of logs
due to fire and other occurrences following harvesting. Utilizing the services
of an insurance consultant, we believe we have adequate insurance coverage to
protect our assets from undue risk and that this coverage is in line with that
of other large forest product companies operating in British Columbia. However,
there is no assurance that this coverage would be adequate to provide protection
against all eventualities, including natural catastrophes.
SUBSTANTIAL LEVERAGE AND ABILITY TO SERVICE INDEBTEDNESS
The level of debt that we have and the limitations imposed on us by our secured
bond trust indenture, working capital facility and other debt agreements that we
have entered into may have important consequences for our business, including
the following:
o a significant portion of our cash flow from operations is used for
servicing debt, rather than operations;
o we may not be able to obtain additional debt or equity financing for
future working capital, capital expenditures or other corporate
purposes;
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o we may remain vulnerable to economic downturns and be less able to take
advantage of significant business opportunities and react to changes in
market or industry conditions; and
o our less leveraged competitors may have a competitive advantage.
Our ability to pay our debt obligations will depend on our future performance.
To a significant extent, our performance will be subject to general economic,
financial, competitive, legislative, regulatory and other factors, including
lumber and pulp prices, all of which are beyond our control. No assurance can be
given that our business will generate sufficient cash flow from operations to
pay our debt or fund our other liquidity needs. We cannot provide any assurance
that we can secure any further credit facilities or that the terms of any such
credit facilities will be favourable.
VARIABLE OPERATING RESULTS AND PRODUCT PRICING
Our financial performance is principally dependent on the prices we receive for
our products. Prices for our products are highly cyclical and have fluctuated
significantly in the past and may fluctuate significantly in the future. We
cannot provide any assurance as to the timing and extent of any price
improvements. On an annualized basis (i) a change of $50 per thousand board feet
of lumber would impact EBITDA, net earnings and per share earnings by
approximately $34 million, $12 million and $0.85 per share respectively, and
(ii) a change of $50 per ADMT of pulp would impact EBITDA, net earnings and per
share earnings by approximately $14 million, $9 million and $0.35 per share
respectively.
Our financial performance is also dependent on the rate at which we utilize our
production capacity. When capacity utilization is reduced in response to weak
demand for products, the cost per unit of production will increase, and
profitability decrease.
The markets for our products are highly cyclical and are characterized by
periods of excess product supply due to many factors, including:
o additions to industry capacity;
o increased industry production;
o periods of insufficient demand due to weak general economic activity or
other causes; and
o inventory destocking by customers.
Demand for our products is influenced to a significant degree by the global
level of economic activity. Additionally, even though costs may increase, our
customers may not accept price increases for the products. We are not able to
predict with certainty market conditions and prices for our products. Our future
financial condition and results of operations will depend primarily upon the
prices we receive for lumber and pulp, and a deterioration in prices of or
demand for our products could have a material adverse effect on our financial
condition, results of operations and ability to satisfy our debt obligations.
RISKS OF EXCHANGE RATE FLUCTUATIONS
Approximately 70% of our sales are made in US dollars, while most of our
operating costs and expenses are incurred in Canadian dollars. Our results of
operations are reported in Canadian dollars. Significant variations in relative
currency values, particularly a significant increase in the value of the
Canadian dollar relative to the US dollar, could have a material adverse effect
on our business, financial condition, results of operations and cash flows. On
an annualized basis, a change of 1% in the value of the Canadian dollar per
US$1.00 would impact EBITDA, net earnings and per share earnings by
approximately $4 million, $2.5 million and $0.10 per share respectively.
All of our long term debt of US$210.4 million at September 30, 2004, is
denominated in $US. The exchange rate at September 30, 2004, was 1.2616. A 1%
change in the US dollar has an effect of $2.7 million on our debt when
translated into Canadian dollars.
DEPENDENCY ON FIBRE OBTAINED FROM GOVERNMENT TIMBER TENURES
Over 90% of the timberlands in which we operate in British Columbia are owned by
the Province of British Columbia and administered by the Ministry of Forests.
The Forest Act (British Columbia) empowers the Ministry of Forests to grant
timber tenures, including tree farm licenses ("TFLs"), forest licenses ("FLs")
and timber sales
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licences to producers. The provincial Chief Forester periodically conducts or
requires a licensee to conduct a timber supply analysis upon which various
licence AACs are based. Such assessments have in the past resulted and may in
the future result in reductions of the AACs attributable to licences held by
British Columbia forest companies, including the licences that we own. There can
be no assurance that the amounts of such future reductions, if any, will not be
material or the amounts of compensation, if any, for such reductions will be
fair and adequate.
FOREST POLICY CHANGES IN BRITISH COLUMBIA
In March 2003, the Provincial Government adopted legislation which implements
the most significant reforms in the Province's forest industry in over 40 years.
The reforms, which apply to forest companies that have operations in British
Columbia, address the following areas, among others (1) market pricing - for
stumpage purposes, (2) appurtenancy - the removal of the requirement to link
fibre supply under harvesting licenses to specified conversion facilities, (3)
cut control - introduction of new cut control provisions and elimination of
minimum harvesting requirements, (4) industry rationalization - through
transfers, mergers or division of forest tenures and changes of control of
licencees.
The most controversial aspect of the new legislation involves the Provincial
Government taking back 20% of the AAC contributed by public lands from all
licensees having Crown cutting rights in excess of 200,000 m(3) per year. The
Forestry Revitalization Act (British Columbia) requires that we surrender
685,216 m(3) of our AAC derived from our TFLs (including timber licenses
contained within TFLs) and FLs by March 31, 2006 as well as 20% of the
unreverted area of timber licenses outside of TFLs. We will be compensated for
the take back according to criteria to be prescribed by the Provincial
Government. Disputes regarding the amount of compensation will be resolved by
arbitration. The legislation provides for a period of up to three years for the
tenure reductions to be negotiated. As of the date hereof, harvesting in these
areas has continued as normal in most areas. The Provincial Government indicated
that continued rights to harvesting these areas until compensation has been
determined will be set out in a Ministerial Order which we expect to be issued
by December 31, 2004. Until then, there may be some disruption to our continued
harvesting of these areas. Considerable uncertainty and concern exists as to the
amount of compensation payable for the tenure take-back, the operational
logistics associated with it and the long-term impact on stumpage fees of the
new auction based stumpage system.
It is therefore not yet possible to gauge the overall impacts of the new
legislation on our operations as many have just been instituted.
STUMPAGE FEES
Stumpage is the fee that the Provincial Government charges forest companies to
harvest timber from Crown land in British Columbia. Prior to February 29, 2004,
the amount of stumpage paid for each cubic metre of wood harvested was based on
a target rate set by government. Stumpage payments for a harvesting area took
into consideration specific operating conditions, timber quality and
administrative procedures.
Amending the stumpage system is complex and is the subject of discussion
involving, among other things, lumber trade issues between Canada and the US.
The Provincial Government announced on January 16, 2004 the move to a more open
and competitive market pricing system for timber and logs for the coastal forest
sector. Periodic changes in the Provincial Government's administrative policy
can affect stumpage and the viability of individual logging operations. There
can be no assurance that current changes or future changes will not have a
material impact on stumpage fees.
SOFTWOOD LUMBER DISPUTE
The USITC determined that the softwood lumber industry in the United States was
threatened with material injury by reason of the imports of softwood lumber from
Canada. As a result of this determination, the USDOC issued countervailing and
anti-dumping orders, which took effect on May 22, 2002. These duties have had a
material adverse impact on operations of our Predecessor including reduced
profit margins. Cumulative duties, including those of our Predecessor, from May
22, 2002, when cash deposits were made necessary for shipments of Canadian
lumber into the US, until September 30, 2004, total approximately US$65.8
million. Pursuant to the Plan, we have the right to any refunds of duties, and
the obligation to pay further duties, of our Predecessor. Although the Canadian
government and Canadian lumber companies affected by such duties have initiated
challenges under NAFTA and before the WTO, it is not possible to predict the
ultimate results of such challenges. The final amount of countervailing and
antidumping duties that may be assessed on Canadian softwood lumber exports to
the US cannot be determined at this time and will depend on the outcome of the
challenges and appeals of the final determinations to any reviewing courts,
NAFTA or WTO panels or on a negotiated settlement. Unless the
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challenges are resolved in favour of Canadian lumber companies, the softwood
lumber dispute will continue to adversely impact on our future operations.
COMPETITION
The markets for our products are highly competitive on a domestic and
international level, with a large number of major companies competing in each
market. Many of our future competitors have substantially greater financial
resources and less debt than we do. Some of our competitors may have the
advantage of not being affected by fluctuations in the value of the Canadian
dollar. We also compete indirectly with firms that manufacture substitutes for
solid wood products, including non-wood and engineered wood products. While the
principal basis for competition is price, we also compete to a lesser extent on
the basis of quality and customer service. Changes in the level of competition,
industry capacity and the global economy will have a significant impact on our
selling prices and our overall profitability. Our competitive position will be
influenced by factors including the availability, quality and cost of fibre,
energy and labour, and plant efficiencies and productivity in relation to our
competitors.
INTERNATIONAL BUSINESS
In general, our sales will be subject to the risks of international business,
including:
o fluctuations in foreign currencies;
o changes in the economic strength of the countries in which we conduct
business;
o trade disputes;
o changes in regulatory requirements;
o tariffs and other barriers; and
o quotas, duties, taxes and other charges or restrictions upon
exportation.
Our principal products are sold in international markets. As a result, economic
conditions in the US, Japan and Europe, the strength of the housing markets in
the US and Japan, international sensitivity to interest rates, and the strength
of world markets for NBSK pulp can all have a significant effect on our
operations and results.
ENVIRONMENTAL REGULATION
We are subject to extensive environmental laws and regulations. These laws and
regulations impose stringent standards on our operations and impose liability to
remedy problems for which we are legally responsible regarding, among other
things:
o air emissions;
o water discharges;
o operations or activities affecting watercourses or the natural
environment;
o operations or activities affecting species at risk;
o use and handling of hazardous materials;
o use, handling and disposal of waste; and
o remediation of environmental contamination.
We may incur substantial costs to comply with current requirements, to respond
to orders or directions made, to remedy problems for which we are legally
responsible or to comply with new environmental laws that may be adopted from
time to time. In addition, we may discover currently unknown environmental
problems or conditions affecting our operations or activities or for which we
are otherwise legally responsible. Any such event could have a material adverse
effect on our business, financial condition, results of operations and cash
flows.
With respect to the pulp and paper industry, both the Federal Government and
Provincial Government generally agree that effluent discharge limits are
acceptable. However the governments are now focussing their attention on
13
air issues. For example, the Federal Government is identifying "criteria air
contaminants" for which new lower emission limits have been established.
Included in the criteria air contaminants are sulphur dioxide and particulate
matter. Implementation and enforcement of the standard by government agencies is
unclear at this time, therefore it is not known what the impact will be on our
operations. In addition, the Federal Government's primary initiative with
respect to air quality improvement is the reduction of greenhouse gas emissions
(mandated by the Kyoto Protocol). Negotiations are in progress to determine the
forest industry allocation with respect to greenhouse gas reduction
requirements. Once this has been determined, reduction requirements for
individual operations can be assessed. Therefore the costs of complying with
these new requirements cannot be assessed at this time.
FIRST NATIONS LAND CLAIMS
First Nations groups in British Columbia have made claims of ownership or
interests in substantial portions of land in the Province of British Columbia
including areas where our timber tenures and operations are situated, creating
uncertainty as to the status of competing property rights. The Supreme Court of
Canada has held that aboriginal groups may have a spectrum of aboriginal rights
in lands that have been traditionally used or occupied by their ancestors;
however, such rights or title are not absolute and may be infringed upon by
government in furtherance of a legislative objective, including forestry,
subject to meeting a justification test and being consistent with the honour of
the Crown. The effect on any particular lands will not be determinable until the
exact nature of historical use, occupancy and rights in any particular piece of
property have been clarified.
First Nations groups are seeking compensation from governments with respect to
these claims, and the effect of these claims on timber tenure rights, including
our timber tenures, cannot be estimated at this time. The Federal Government and
Provincial Government have been seeking to negotiate settlements with aboriginal
groups throughout British Columbia in order to resolve these claims. Any
settlements that may result from this treaty process may involve a combination
of cash, resources, grants of conditional rights to gather food on public lands,
and some rights of self-government. The effect of such a settlement on our
timber tenures or the amounts of compensation that we would receive for any
taking, if any, cannot be estimated at this time.
To resolve outstanding claims, the Federal Government and Provincial Government
in 1992 instituted a tripartite treaty negotiation process with the First
Nations Summit, representing the majority of the First Nations in British
Columbia. As at September 30, 2004, 55 British Columbia First Nations were
involved in the treaty process. Approximately 23 of the 36 First Nations with
traditional territories covering our timber tenures were engaged in this treaty
process.
Current Provincial Government policy requires that forest management and
operating plans take into account and not infringe upon aboriginal rights and
provide for consultation with First Nations groups. This policy is reflected in
the terms of our timber tenures, which provide that the Ministry of Forests may
refuse to issue cutting permits in respect of a timber tenure if it is
determined that the forestry operation would interfere with aboriginal rights.
First Nations have, at times, sought to restrict the Provincial Government from
granting or renewing forest tenures and other operating authorizations without
their consent if the tenures affect lands claimed by them. In 2003, the
Provincial Government updated its policy on aboriginal rights and title with
respect to consultation and accommodation responsibilities. We believe that the
fostering of mutually beneficial business relationships with First Nations will
facilitate these consultations and accommodation processes. Our Predecessor
developed and we continue to develop working relationships with many First
Nations. We have timber harvesting, silviculture, planning and other capacity
building arrangements with First Nation groups.
The issues surrounding aboriginal title and rights are not likely to be resolved
by the Federal Government or the Provincial Government in the near future.
REGULATORY RISKS
Forestry and pulp operations are subject to extensive federal, provincial,
state, municipal and other local laws and regulations, including those governing
forestry (see above), exports, taxes, labour standards, occupational health,
waste disposal, environmental protection and remediation (see above), protection
of endangered and protected species and land use and expropriation. Under
certain laws and regulations, we are also required to obtain permits, licenses
and other authorizations to conduct our operations, which permits, licenses and
authorizations may impose additional conditions that we must comply with.
Although we budget for expenditures to maintain compliance with such laws and
permits, there can be no assurance that these laws and regulations will not
change in the future in a manner that could have an adverse effect on our
financial condition, liquidity or results of operations or on the manner that we
conduct our operations.
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RELIANCE ON DIRECTORS, MANAGEMENT AND OTHER KEY PERSONNEL
We rely upon the experience and expertise of our personnel. The competition for
qualified personnel in the forest products industry is intense. No assurance can
be given that we will be able to retain our current personnel and attract
additional personnel as necessary for the development and operation of our
business. Loss of, or failure to attract and retain key personnel could have a
material adverse effect on us.
EMPLOYEES AND LABOUR RELATIONS
The majority of the hourly paid employees at our manufacturing facilities are
unionized. Our inability to negotiate an acceptable contract with any of the
unions could result in a strike or work stoppage by the affected workers and
increased operating costs as a result of higher wages or benefits paid to union
members. If the unionized workers engage in a strike or other work stoppage, we
could experience a significant disruption of our operations or higher ongoing
labour costs, which could have a material adverse effect on our business,
financial condition, results of operations and cash flows.
The majority of our hourly paid workers in the solid wood segment are
represented by the Industrial, Wood & Allied Workers of Canada (the "IWA"). We
are a member of Forest Industrial Relations Limited, which represents forestry
companies in the coastal region of the Province of British Columbia in their
negotiations with the IWA. In May, 2004 a new four year collective agreement was
implemented.
The majority of the our hourly workers in the pulp segment are represented by
the Pulp, Paper and Woodworkers Union of Canada ("PPWC"). In April, 2003 a five
year collective agreement with the PPWC was implemented.
In addition, we rely on certain third parties whose workforces are unionized to
provide us with services needed to operate our business. If their workers engage
in strike or other work stoppages, we could experience disruption of our
operations.
OUTSTANDING SHARE DATA
As of November 10, 2004, 25,635,424 of our Common Shares are issued and
outstanding. In addition, we have issued 569,373 Tranche 1 Class C Warrants,
854,146 Tranche 2 Class C Warrants, and 1,423,743 Tranche 3 Class C Warrants
(collectively, the "Class C Warrants"). We have reserved up to 2,847,262 Common
shares for issuance upon the exercise of the Class C Warrants. We have also
reserved 2,500,000 Common shares for issuance upon the exercise of options
granted under our incentive stock option plan. As of November 10, 2004 we have
granted 299,590 options under our incentive stock option plan.
To the knowledge of the directors and senior officers of the Company as of the
date hereof, the following parties beneficially own, directly or indirectly, or
exercise control or direction over, more than 10% of our issued and outstanding
Common Shares.
PERCENTAGE OF ISSUED
NAME AND MUNICIPALITY OF RESIDENCE OF SHAREHOLDER NO. OF COMMON SHARES COMMON SHARES
- ------------------------------------------------- -------------------- --------------------
Harbert Distressed Investment Master Fund, Ltd.
("Master Fund"), HMC Distressed Investment Offshore
Manager, L.L.C. and HMC Investors L.L.C.
(collectively, "Harbert") (1) 8,065,939 31.5%
Dublin, Ireland, in the case of the Master Fund and New
York, NY, in the case of the others
Tricap Management Limited ("Tricap") (2) 4,563,228 17.8%
Toronto, Ontario
Merrill Lynch Investment Managers, L.P. ("MLIM") (3) 3,255,162 12.7%
Plainsboro, New Jersey
(1) Based on "Report Filed by Eligible Institutional Investor Under Part 4"
of National Instrument 62-103 ("NI 62-103") which was filed on SEDAR by
Harbert (on its behalf and other entities managed and controlled by
Harbert) on August 6, 2004.
(2) Based on an Early Warning Report dated July 29, 2004 filed on SEDAR by
Tricap (as manager for and on behalf of Tricap Restructuring Fund).
15
(3) Based on a "Report Filed by Eligible Institutional Investor Under Part
4" of NI 62-103 which was filed on SEDAR by MLIM (as manager, together
with its affiliates for and on behalf of certain investment funds) on
August 10, 2004.
ADDITIONAL INFORMATION
Additional information about the Company and information about the operation of
our business by our Predecessor prior to the implementation of the Plan,
including our Predecessor's latest Form 20-F, is available at <www.sedar.com>
under the Company name, Western Forest Products Inc.
FORWARD LOOKING STATEMENTS
THE FOREGOING CONTAINS STATEMENTS WHICH CONSTITUTE FORWARD-LOOKING STATEMENTS
WITHIN THE MEANING OF THE UNITED STATES SECURITIES EXCHANGE ACT OF 1934. THOSE
STATEMENTS APPEAR IN A NUMBER OF PLACES IN THIS DOCUMENT AND INCLUDE STATEMENTS
REGARDING THE INTENT, BELIEF OR CURRENT EXPECTATIONS OF THE COMPANY, ITS
DIRECTORS OR ITS OFFICERS PRIMARILY WITH RESPECT TO MARKET AND GENERAL ECONOMIC
CONDITIONS, FUTURE COSTS, EXPENDITURES, AVAILABLE HARVEST LEVELS AND FUTURE
OPERATING PERFORMANCE OF THE COMPANY. SUCH STATEMENTS MAY BE INDICATED BY WORDS
SUCH AS "ESTIMATE", "EXPECT", "INTEND", "THE COMPANY BELIEVES" AND SIMILAR WORDS
AND PHRASES. READERS ARE CAUTIONED THAT ANY SUCH FORWARD-LOOKING STATEMENTS ARE
NOT GUARANTEES AND MAY INVOLVE RISKS AND UNCERTAINTIES, AND THAT ACTUAL RESULTS
MAY DIFFER FROM THOSE IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS
FACTORS, INCLUDING GENERAL ECONOMIC AND BUSINESS CONDITIONS, CHANGES IN
GOVERNMENT REGULATION, FLUCTUATIONS IN DEMAND AND SUPPLY FOR THE COMPANY'S
PRODUCTS, INDUSTRY PRODUCTION LEVELS, THE ABILITY OF THE COMPANY TO EXECUTE ITS
BUSINESS PLAN AND MISJUDGMENTS IN THE COURSE OF PREPARING FORWARD-LOOKING
STATEMENTS. THE INFORMATION CONTAINED UNDER "RISKS AND UNCERTAINTIES" HEREIN
IDENTIFIES IMPORTANT FACTORS THAT COULD CAUSE SUCH DIFFERENCES. ALL WRITTEN AND
ORAL FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO THE COMPANY OR PERSONS ACTING ON
BEHALF OF THE COMPANY ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY THE FOREGOING
CAUTIONARY STATEMENTS.
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