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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 March 24 , 20 05 .
-------------------------- -----
Commission File Number 033-74656-99
------------------------
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 as of March 24, 2005 By /s/ Paul Ireland
------------------------------------ --------------------------------
(Signature) *
- ----------------------------------------- Paul Ireland
* Print the name and title under the Chief Financial Officer
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.
[WESTERN FOREST LOGO]
WESTERN FOREST PRODUCTS INC.
435 Trunk Road
Duncan, British Columbia
Canada V9L 2P9
Telephone: 250 748 3711
Facsimile: 250 748 6045
WESTERN FOREST PRODUCTS INC.
----------------------------
FOR IMMEDIATE RELEASE TSX: WEF
WESTERN ANNOUNCES 4TH QUARTER RESULTS
March 24, 2005 - Duncan, British Columbia. Western Forest Products Inc.
("Western" or the "Company") announced today the Company's results for the 4th
quarter and period from July 28 to December 31, 2004. The Company will host a
teleconference call on Tuesday, March 29, 2005 at 7:30 a.m. PST (10:30 a.m. EST)
on the Company's results. (See below for details on participation.)
Western acquired the solid wood and NBSK pulp assets of Doman Industries Limited
(the "Predecessor") upon implementation of the Predecessor's plan of compromise
and arrangement under the Companies' Creditors Arrangement Act (Canada) on July
27, 2004. The Company's common shares trade on the Toronto Stock Exchange under
the symbol "WEF".
This News Release and accompanying audited consolidated financial statements,
including footnotes, and Management's Discussion and Analysis covers the period
from July 28, 2004 to December 31, 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.
Reynold Hert, President & CEO commenting on the results noted, "The last quarter
was very challenging for the Canadian forest products sector including Western
Forest Products as we experienced a drop in both lumber and pulp prices combined
with an 8% increase in the value of the Canadian dollar. In response, we took
significant downtime at our sawmills, curtailed logging operations and reduced
inventories while still preserving our flexibility to take advantage of improved
markets which we have begun to see in the first quarter of 2005. During the last
quarter of 2004, we also substantially settled the tenure take back issue with
the Province of British Columbia and continued to make progress on the sale of a
number of non-strategic real estate assets. These initiatives combined with an
emphasis on cash management will help to position us as a focused and efficient
coastal forest products operator with the ability to improve and grow our
business in the future."
OPERATING HIGHLIGHTS:
2004
------------------------------------------------------------------------------------
Period from 4th Quarter 3rd Quarter
(millions except per July 28 - December 31 October 1 - December 31 July 28 - September 30
share amounts)
------------------------ ------------------------ ------------------------
Sales $ 324.1 $ 165.8 $ 158.3
EBITDA $ 2.0 $ (15.8) $ 17.8
Net income (loss) $ (5.5) $ (19.6) $ 14.1
Basic earnings (loss) per $ (0.21) $ (0.76) $ 0.55
share
Cash used in operations $ (25.1) $ (22.8)(1) $ (2.3)(1)
Capital expenditures $ (11.6) $ (4.4) $ (7.2)
Credit line drawn $ 28.4 $ 24.2 $ 4.2
Note:
1. Includes interest paid of $0.5 million in the 3rd quarter and $17.9 million
in the 4th quarter.
- 2 -
EARNINGS
Western incurred a loss in the 4th quarter of $19.6 million or $0.76 per share
compared to net income of $14.1 million or $0.55 per share in the stub period
from July 28 to September 30, 2004. Overall, markets in the 4th quarter of 2004
were weaker for both lumber and pulp compared to the period from July 28, 2004
to September 30, 2004. The Canadian dollar also strengthened by 8% from an
average of $1.3227 in the July 28 to September 30, 2004 period to an average of
$1.2219 in the 4th quarter. As a result, prices realised in Canadian dollars
decreased on average by approximately 12% for lumber and 13% for pulp.
Offsetting this negative impact, the strengthening Canadian dollar resulted in a
non-cash foreign currency translation gain on the Company's US dollar
denominated long-term debt in the amount of $14.8 million in the 3rd quarter and
$12.6 million in the 4th quarter. To some extent this debt can be considered a
natural hedge against our sales that are denominated in US dollars although
because of its non-cash nature it does not protect cash flow. The weaker lumber
markets also resulted in a charge to expenses in the 4th quarter of $8.4 million
with respect to log and lumber inventories valuation at year end. EBITDA
decreased from $17.8 million in the period July 28, 2004 to September 30, 2004
to negative $15.8 million in the 4th quarter and in total was $2.0 million for
the period from July 28, 2004 to December 31, 2004.
Western introduced new accounting policies compared to its Predecessor for the
calculation of the lower of cost and market test for lumber and log inventories
and for the accounting treatment of spur roads (expensed instead of
capitalized). If the Predecessor accounting policies had been continued then
EBITDA would have been $13.6 million higher during the five-month period ended
December 31, 2004.
Sales for the period from July 28, 2004 to December 31, 2004 totalled $324.1
million, of which $158.3 million related to the 3rd quarter and $165.8 million
to the 4th quarter. The increase reflects three months in the 4th quarter
compared to just over two months in the 3rd quarter although the increase due to
this is not as high as might be expected as typically a significant portion of
our lumber and pulp sales occur near the end of a month due to the timing of
shipping of our lumber and pulp overseas by ocean vessels and the sales for the
3rd quarter benefited from the inclusion of the last 3 days of July.
SOLID WOOD SEGMENT
Lumber sales in the 4th quarter totalled $87.8 million compared to $85.5 million
in the 3rd quarter with average prices realised when converted into Canadian
dollars decreasing from $634 per thousand board feet in the 3rd quarter to $557
in the 4th quarter. Lumber shipments totalled 158 million board feet in the 4th
quarter compared to 135 million board feet in the July 28 to September 30, 2004
period.
External log sales decreased to $27.7 million in the 4th quarter compared to
$31.8 million in the 3rd quarter primarily as a result of lower sales volumes
following the closure of the Port Alice pulp mill in October by its owner Port
Alice Specialty Cellulose Inc.
As a consequence of the above, EBITDA for the solid wood segment decreased from
positive $19.7 million in the 3rd quarter to negative $10.3 million in the 4th
quarter. Production from the Company's six sawmills totalled 158 million board
feet compared to 131 million board feet in the 3rd quarter. Log production
totalled 894 million cubic metres in the 4th quarter compared to 681 million
cubic metres in the 3rd quarter.
PULP SEGMENT
Pulp sales for the period July 28, 2004 to December 31, 2004 totalled $80.4
million and comprised $35.8 million in the July 28, 2004 to September 30, 2004
period and $44.6 million in the 4th quarter. Shipments in the 4th quarter
totalled 74,000 ADT compared to 52,000 ADT in the 3rd quarter. Average realised
sales prices when converted into Canadian dollars decreased from $694 per ADT in
the 3rd quarter to $601 in the 4th quarter. As with the lumber segment, pulp
EBITDA was negatively impacted by the price decreases and foreign exchange
impacts and became negative $1.8 million in the 4th quarter compared to positive
$0.5 million in the 3rd quarter.
- 3 -
BALANCE SHEET HIGHLIGHTS:
As at
-----------------------------------------
(millions) December 31, 2004 July 28, 2004
------------------- ----------------
Non-cash working capital $ 184.7 $ 179.9
Net bank indebtedness $ 70.1 $ 33.1
Long-term debt $ 253.5 $ 279.8
Shareholder's equity $ 249.7 $ 255.2
CASH FLOW AND BALANCE SHEET
There was a cash outflow from operations in the 4th quarter of $22.8 million
compared to $2.3 million in the 3rd quarter. The main factor behind this was the
Company's decision to make the interest payment of $17 million in December in
full instead of electing to defer 50% of it as the Company is entitled to under
the terms of the long-term debt agreement. The negative pricing and exchange
factors described above contributed to the use of cash in operations.
Cash flows of the Company continue to be impacted by the requirement to pay cash
deposits for countervailing and antidumping duties on shipments of lumber to the
United States. The Company expensed $9.2 million for duty deposits during the
4th quarter bringing the total paid by the Company and its Predecessor to
US$73.3 million at December 31, 2004. Western began paying the lower deposit
rate of 20.96% from December 20, 2004 down from the previous 27.22% rate and
effective February 24, 2005 the deposit rate was lowered to 20.15%.
At the end of the 4th quarter the Company concluded a settlement framework
agreement on compensation to be paid to us by the government of British Columbia
with respect to the Bill 28 take back. We received $16.5 million in 2005 in
compensation for the loss of 685,216 m3 of AAC and 827 hectares of timber
licences. Under this agreement, we also received an advance payment of $5
million towards compensation for improvements we made to Crown land in the
take-back areas. The amounts were included as receivables in restricted assets
as of December 31, 2004. No gain or loss was recorded.
When the capital expenditures are also considered the Company drew down its
operating facility by $24.2 million in the 4th quarter taking the balance to
$78.1 million.
OUTLOOK
In 2005 we expect to see improvements in our operations although the challenges
of the high Canadian dollar will continue to impact operating cash flows.
Although the Canadian dollar has weakened somewhat from the highs reached in the
fourth quarter of 2004 the consensus forecast for the balance of the year
appears to be calling for a higher dollar.
The lumber markets started 2005 with strong demand and pricing, particularly in
the US due to demand exceeding supply caused by rail car shortages. Countering
this, the Japanese market demand has declined and is expected to continue
through March. We have curtailed production from our Nanaimo mill that primarily
supplies the Japanese markets to match the reduced demand. Production is
expected to return to previous levels as demand strengthens in the second
quarter. Pricing in the pulp market has also started the year in a strong
position and is expected to continue through the first half of the year.
We expect increases in our production volumes for lumber during 2005 compared to
2004 although January and February have been lower than planned due to the
impact of poor weather on the US North East construction market and
transportation related factors.
Our focus for 2005 will be centered on three key areas; managing cash flow and
interest costs, growing the business and enhancing corporate governance.
We have initiated a review of alternatives to refinance our US$221 million
Secured Bonds which carry a 15% interest rate. The first call date on the
Secured Bonds is July 2005 although we may consider an earlier financing if
circumstances permit.
The operating performance of each of our assets will be reviewed during the
year. To some extent the divisions had previously operated as autonomous
business units. We believe synergies may exist in considering the business on a
- 4 -
more holistic basis. Such a review will also consider the extent to which the
current business can be grown internally. We expect to dispose of assets that do
not form part of our core business.
Longer-term we believe that consolidation of the British Columbia coastal forest
industry will enhance the ability of coastal producers to compete in world
markets. We will consider suitable opportunities to be involved in this
consolidation as well as looking at other growth possibilities.
About Western:
Western is an integrated Canadian forest products company and the second largest
coastal woodland operator in British Columbia. Principal activities conducted by
Western and its subsidiaries include timber harvesting, reforestation,
sawmilling logs into lumber and wood chips, value-added remanufacturing and
producing NBSK pulp. Over 95% of Western's logging is conducted on government
owned timberlands in British Columbia. All of Western's operations, employees
and corporate facilities are located in the coastal region of British Columbia
and its products are sold in 30 countries worldwide.
EBITDA
Reference is made in this news release 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. Information concerning EBITDA has
been included 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.
Forward Looking Statement
This press release and the documents referenced herein contains statements that
are forward-looking in nature. Those statements appear in a number of places
herein and include statements regarding the intent, belief or current
expectations of Western, primarily with respect to market and general economic
conditions, future costs, expenditures, available harvest levels and future
operating performance of Western. Such statements may be indicated by words such
as "estimate", "expect", "intend", "believes" and similar words and phrases.
Readers are cautioned that any such forward-looking statements are not
guarantees and may involve known and unknown risks and uncertainties, and that
actual results may differ from those expressed or implied in the forward-looking
statements as a result of various factors, including general economic and
business conditions, product selling prices, raw material and operating costs,
changes in foreign-currency exchange rates, changes in government regulation,
fluctuations in demand and supply for Western's products, industry production
levels, the ability of Western to execute its business plan and misjudgements in
the course of preparing forward-looking statements. The information contained
under "Risks and Uncertainties" section of Western's annual management's
discussion and analysis identifies important factors that could cause such
differences. All written and oral forward-looking statements attributable to
Western or persons acting on behalf of Western are expressly qualified in their
entirety by the foregoing cautionary statements. Western does not expect to
update forward-looking statements as conditions change.
TELECONFERENCE CALL NOTIFICATION: TUESDAY, MARCH 29, 2005 AT 7:30 A.M. PST/
10:30 A.M. EST
- -------------------------------------------------------------------------------
ON TUESDAY, MARCH 29, 2005, WESTERN FOREST PRODUCTS INC. WILL HOST A
TELECONFERENCE CALL AT 7:30 A.M. PST (10:30 A.M. EST). TO PARTICIPATE IN THE
TELECONFERENCE PLEASE DIAL 1-800-814-4853 IN CANADA AND THE U.S. (TOLL FREE) AND
IN TORONTO OR INTERNATIONALLY, 416-640-4127 BEFORE 7:30 A.M. PST (10:30 A.M.
EST). THIS CALL WILL BE TAPED, AVAILABLE ONE HOUR AFTER THE TELECONFERENCE, AND
ON REPLAY UNTIL APRIL 12, 2005. TO HEAR A COMPLETE REPLAY, PLEASE CALL
1-877-289-8525 IN CANADA AND THE U.S. (TOLL FREE), PASSCODE 21117954# OR IN
TORONTO AND INTERNATIONALLY, 416-640-1917, PASSCODE 21117954#. THIS CALL WILL
ALSO BE WEBCAST FROM WESTERN'S WEBSITE AT WWW.WESTERNFOREST.COM.
---------------------
FOR FURTHER INFORMATION CONTACT:
REYNOLD HERT 250 715 2207 PAUL IRELAND 250 715 2209
Consolidated Financial Statements
(Expressed in Canadian dollars)
WESTERN FOREST PRODUCTS INC.
For the period from July 28, 2004 to December 31, 2004
[KPMG LOGO]
KPMG LLP Telephone (604) 691-3000
CHARTERED ACCOUNTANTS Fax (604) 691-3031
PO Box 10426 777 Dunsmuir Street Internet www.kpmg.ca
Vancouver BC V7Y 1K3
Canada
AUDITORS' REPORT TO THE SHAREHOLDERS
We have audited the consolidated balance sheets of Western Forest Products Inc.
(the "Company") as at December 31, 2004 and July 28, 2004 and the consolidated
statements of operations, deficit and cash flows for the period from July 28,
2004 to December 31, 2004 for the Company and, for the Company's Predecessor
Company, Doman Industries Limited, for the period from January 1, 2004 to July
27, 2004 and for the year ended December 31, 2003. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at December 31, 2004
and July 28, 2004 and the results of the Company's operations and cash flows for
the period from July 28, 2004 to December 31, 2004 and for the Predecessor
Company from January 1, 2004 to July 27, 2004 and for the year ended December
31, 2003 in accordance with Canadian generally accepted accounting principles.
KPMG LLP (SIGNED)
Chartered Accountants
Vancouver, Canada
March 15, 2005
KPMG LLP, a Canadian limited liability partnership is the Canadian
member firm of KPMG International, a Swiss cooperative.
WESTERN FOREST PRODUCTS INC.
Consolidated Balance Sheets
(Expressed in thousands of Canadian dollars)
==========================================================================================
December 31, July 28,
2004 2004
- ------------------------------------------------------------------------------------------
(note 1)
Assets
Current assets:
Cash $8,007 $16,640
Accounts receivable 77,970 77,109
Inventory (note 3) 176,709 185,569
Prepaid expenses 5,204 8,421
--------------------------------------------------------------------------------------
267,890 287,739
Restricted assets (note 6) 24,428 -
Investments 7,166 6,912
Property, plant and equipment (note 4) 395,554 421,662
Other assets 1,397 1,171
- ------------------------------------------------------------------------------------------
$696,435 $717,484
==========================================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Bank indebtedness (note 5) $78,113 $49,738
Accounts payable and accrued liabilities 75,176 91,237
-------------------------------------------------------------------------------------
153,289 140,975
Long-term debt (note 6) 253,522 279,825
Future income taxes (note 7) 10,537 10,537
Other liabilities 29,382 30,972
- ------------------------------------------------------------------------------------------
446,730 462,309
Shareholders' equity:
Share capital (note 8):
Common shares 255,175 255,175
Deficit (5,470) -
-------------------------------------------------------------------------------------
249,705 255,175
- ------------------------------------------------------------------------------------------
$696,435 $717,484
==========================================================================================
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
(Expressed in thousands of Canadian dollars, except for share and
per share amounts)
===============================================================================================================
July 28, to January 1 to January 1 to
December 31, July 27, December 31,
2004 2004 2003
- ---------------------------------------------------------------------------------------------------------------
(predecessor) (predecessor)
(Restated)
Sales (note 2(f)) $ 324,106 $ 433,704 $ 621,088
Costs and expenses:
Cost of goods sold 263,374 306,624 528,926
Anti-dumping and countervailing duties 21,050 23,991 36,088
Freight expenses 27,903 28,294 49,609
Selling and administration 9,721 12,473 18,080
Amortization of property, plant and equipment 14,249 33,036 45,973
Write-down of property, plant and equipment and
operating restructuring costs - - 7,986
- ---------------------------------------------------------------------------------------------------------------
336,297 404,418 686,662
- ---------------------------------------------------------------------------------------------------------------
Operating earnings (loss) (12,191) 29,286 (65,574)
Interest income (expense):
Bank indebtedness (1,660) (1,686) (2,891)
Long-term debt (17,045) (67,397) (93,547)
Foreign exchange gains (losses) on translation of
long-term debt 27,436 (24,228) 189,180
Amortization of deferred finance costs and debt
discount (1,133) (2,266) (4,411)
- ---------------------------------------------------------------------------------------------------------------
7,598 (95,577) 88,331
Other income (expense) (96) (5,869) 2,200
Financial restructuring costs - (11,391) (7,790)
- ---------------------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes (4,689) (83,551) 17,167
Income taxes (note 7) (781) (77) (1,034)
- ---------------------------------------------------------------------------------------------------------------
Net earnings (loss) from continuing operations (5,470) (83,628) 16,133
Net loss from discontinued operations - (12,426) (19,937)
- ---------------------------------------------------------------------------------------------------------------
Net loss (5,470) (96,054) (3,804)
Provision for dividends on preferred shares - (2,753) (4,779)
- ---------------------------------------------------------------------------------------------------------------
Net loss attributable to common and non-voting shares $ (5,470) $ (98,807) $ (8,583)
===============================================================================================================
Loss per share:
Basic $ (0.21) $ (2.33) $ (0.20)
Diluted (0.21) (2.33) (0.20)
Weighted average number of common and non-voting shares
outstanding (thousands of shares) 25,636 42,481 42,481
===============================================================================================================
See accompanying notes to consolidated financial statements.
2
WESTERN FOREST PRODUCTS INC.
Consolidated Statements of Deficit
(Expressed in thousands of Canadian dollars)
=============================================================================================
July 28, to January 1 to January 1 to
December 31, July 27, December 31,
2004 2004 2003
- ---------------------------------------------------------------------------------------------
(predecessor) (predecessor)
(Restated)
Deficit, beginning of period $ - $ (724,143) $ (720,339)
Net loss (5,470) (96,054) (3,804)
- ---------------------------------------------------------------------------------------------
Deficit, end of period $ (5,470) $ (820,197) $ (724,143)
=============================================================================================
See accompanying notes to consolidated financial statements.
3
WESTERN FOREST PRODUCTS INC.
Consolidated Statements of Cash Flows
(Expressed in thousands of Canadian dollars)
=====================================================================================================================
July 28, to January 1 to January 1 to
December 31, July 27, December 31,
2004 2004 2003
- ---------------------------------------------------------------------------------------------------------------------
(predecessor) (predecessor)
(Restated)
Cash provided by (used in):
Operations:
Net earnings (loss) from continuing operations $(5,470) $ (83,628) $16,133
Items not involving cash:
Amortization of property, plant and equipment 14,249 33,036 45,973
Amortization and write-down of deferred charges 161 2,266 10,397
Foreign currency translation gain (27,436) 24,228 (189,180)
Accretion of debt discount 1,133 - -
Loss on property, plant and equipment disposals - 450 (2,174)
Other (1,844) (106) 5,679
- ---------------------------------------------------------------------------------------------------------------------
(19,207) (23,754) (113,172)
Changes in non-cash working capital items:
Accounts receivable (860) (14,215) 23,144
Inventory 8,860 (51,670) 53,500
Prepaid expenses 3,217 (4,052) 4,526
Accounts payable and accrued liabilities (17,061) 94,108 79,460
- ---------------------------------------------------------------------------------------------------------------------
(5,844) 24,171 160,630
- ---------------------------------------------------------------------------------------------------------------------
Continuing operations (25,051) 417 47,458
Discontinued operations - (2,307) (30,693)
- ---------------------------------------------------------------------------------------------------------------------
(25,051) (1,890) 16,765
Investments:
Additions to property, plant and equipment (5,329) (3,506) (29,170)
Additions to capitalized roads (6,307) (21,122) -
Disposals of property, plant and equipment 2,949 1,062 3,761
Restricted assets (2,883) - -
Other (387) 1,224 (1,002)
- ---------------------------------------------------------------------------------------------------------------------
(11,957) (22,342) (26,411)
Financing:
Bank indebtedness 28,375 19,311 8,608
- ---------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash (8,633) (4,921) (1,038)
Cash, beginning of period 16,640 21,561 22,599
- ---------------------------------------------------------------------------------------------------------------------
Cash, end of period $ 8,007 $16,640 $21,561
=====================================================================================================================
Supplementary information:
Cash paid for:
Interest $19,677 $69,083 $96,438
Income taxes - 559 1,034
Non-cash item:
Take-back proceeds receivable (note 9(b)(iii)) 21,546 - -
=====================================================================================================================
See accompanying notes to consolidated financial statements.
4
WESTERN FOREST PRODUCTS INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars,
except per share amounts)
For the period from July 28, 2004 to December 31, 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. Western's
active subsidiaries, all wholly owned, are as follows:
Western Pulp Limited
WFP Lumber Sales Limited
4018982 Canada Inc. (formerly Doman Western Lumber Ltd.)
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 Compromise and
Arrangement under CCAA and Reorganization under the Canada Business
Corporations Act (the "CBCA ") (the "Plan") and emerged from protection
under CCAA. Western was incorporated under 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 certain 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
(Tabular amounts expressed in thousands of Canadian dollars,
except per share amounts)
For the period from July 28, 2004 to December 31, 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
costs, 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 (note 5) 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 (note 8); 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
(Tabular amounts expressed in thousands of Canadian dollars,
except per share amounts)
For the period from July 28, 2004 to December 31, 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
- ---------------------------------------------------------------------------------------------------------------
(note 1(a)) (note 1(b))
Assets
Current assets:
Cash $ 16,640 $ 279,750 (iii) $ - $ 16,640
(279,750)(ii)
Accounts receivable 77,109 - - 77,109
Inventory 198,159 - (12,590) 185,569
Prepaid expenses 8,421 - - 8,421
- ---------------------------------------------------------------------------------------------------------------
300,329 - (12,590) 287,739
Investments 10,085 (3,173)(ii) - 6,912
Property, plant and equipment 452,402 - (30,740) 421,662
Other assets 17,266 75 (iii) (16,170) 1,171
- ---------------------------------------------------------------------------------------------------------------
$ 780,082 $ (3,098) $ (59,500) $ 717,484
===============================================================================================================
Liabilities and Shareholders' Equity (Deficiency)
Current liabilities:
Bank indebtedness $ 49,738 $ - $ - $ 49,738
Accounts payable and accrued
liabilities 97,049 (5,812)(v) - 91,237
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) - -
- ---------------------------------------------------------------------------------------------------------------
1,268,175 (1,127,200) - 140,975
Long-term debt - 279,825 (iii) - 279,825
Other liabilities 25,086 - 5,886 30,972
Future income taxes - - 10,537 10,537
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 (820,197) 896,120 (iii) (75,923) -
- ---------------------------------------------------------------------------------------------------------------
(513,179) 844,277 (75,923) 255,175
- --------------------------------------------------------------------------------------------------------------
$ 780,082 $ (3,098) $ (59,500) $ 717,484
===============================================================================================================
7
WESTERN FOREST PRODUCTS INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars,
except per share amounts)
For the period from July 28, 2004 to December 31, 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 (previously sold by Doman on May 11,
2004), 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.
(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.
8
WESTERN FOREST PRODUCTS INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars,
except per share amounts)
For the period from July 28, 2004 to December 31, 2004
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION AND REORGANIZATION PROCEEDINGS (CONTINUED):
(a) Plan of Arrangement Adjustments (continued):
(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 $287,739
Investments 6,912
Property, plant and equipment 421,662
Other assets 1,171
-------------------------------------------------------------------------
717,484
Current liabilities 140,975
Secured Bonds 279,825
Other long-term liabilities 30,972
Future income taxes 10,537
-------------------------------------------------------------------------
462,309
-------------------------------------------------------------------------
Equity value $255,175
=========================================================================
The adjustments required to arrive at the values above are as follows:
=========================================================================
Inventory valuation $(12,590)
Property, plant and equipment write-down (30,740)
Deferred pension asset and other assets eliminated (16,170)
-------------------------------------------------------------------------
(59,500)
Other long-term liabilities fair value adjustment (5,886)
Future income taxes (10,537)
-------------------------------------------------------------------------
Elimination of remaining deficit $ (75,923)
=========================================================================
9
WESTERN FOREST PRODUCTS INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars, except per share
amounts)
For the period from July 28, 2004 to December 31, 2004
- --------------------------------------------------------------------------------
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 as follows:
(i) Lumber by species (hemlock, fir and cedar);
(ii) Logs by sawlogs and pulp logs; and
(iii) NBSK pulp and chips in aggregate.
(c) Property, plant and equipment:
Property, plant and equipment are initially recorded at cost.
Amortization periods range from 5 to 10 years, except:
(i) Logging roads: spur roads are expensed; temporary roads with a
life of over three years are capitalized and amortized on a unit
of production basis over the estimated volume of timber; and
mainline roads are amortized on a straight line basis over the
expected lives of the roads which range from 7 to 20 years.
(ii) Timberlands: are capitalized and amortized on a straight line
basis over 40 years; and
(iii) Squamish Pulp Mill: amortization is on a unit of production basis
over 15 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.
(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.
10
WESTERN FOREST PRODUCTS INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars, except per share
amounts)
For the period from July 28, 2004 to December 31, 2004
- --------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(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 when title to the goods transfers and the risk and
rewards of ownership are passed to the customer which is generally 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.
(i) Adoption of accounting policies:
As a result of fresh start accounting, the Company adopted most of the
accounting policies of the Predecessor Company except for the
following:
(i) for inventory valuation, the Predecessor aggregated lumber
species in testing for lower of cost and net realizable value;
(ii) for inventory valuation, the Predecessor aggregated sawlogs and
pulp logs in testing for lower of cost and net realizable value;
and
11
WESTERN FOREST PRODUCTS INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars, except per share
amounts)
For the period from July 28, 2004 to December 31, 2004
- --------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(i) Adoption of accounting policies (continued):
(iii)for spur roads, the Predecessor capitalized spur roads and
amortized the roads based on timber accessed by the roads.
The adoption of these new policies has not been retroactively applied
to the Predecessor results included for comparative purposes only.
3. INVENTORY:
======================================================================
December 31, July 28,
2004 2004
----------------------------------------------------------------------
Raw materials $ 4,048 $ 4,515
Logs 76,491 75,017
Finished pulp 6,510 12,151
Lumber 67,850 72,030
Supplies and other 21,810 21,856
----------------------------------------------------------------------
$176,709 $185,569
======================================================================
4. PROPERTY, PLANT AND EQUIPMENT:
==========================================================================
Accumulated Net book
December 31, 2004 Cost amortization value
--------------------------------------------------------------------------
Land, buildings and equipment:
Pulp mills $ 38,436 $ 1,112 $ 37,324
Solid wood facilities 96,602 5,008 91,594
Land 59,672 - 59,672
---------------------------------------------------------------------
194,710 6,120 188,590
Timberlands 176,759 848 175,911
Logging roads 38,334 7,281 31,053
--------------------------------------------------------------------------
$409,803 $14,249 $395,554
==========================================================================
During the period ended December 31, 2004, the Company reduced timberlands
by $16.5 million and roads by $4.0 million to recognize the timber-take
back proceeds (note 9(b)(iii)).
12
WESTERN FOREST PRODUCTS INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars, except per share
amounts)
For the period from July 28, 2004 to December 31, 2004
- --------------------------------------------------------------------------------
4. PROPERTY, PLANT AND EQUIPMENT (CONTINUED):
==========================================================================
Accumulated Net book
July 28, 2004 Cost amortization value
--------------------------------------------------------------------------
Land, buildings and equipment:
Pulp mills $ 38,447 $ - $ 38,447
Solid wood facilities 91,262 - 91,262
Land 62,622 - 62,622
---------------------------------------------------------------------
192,331 - 192,331
Timberlands 193,305 - 193,305
Logging roads 36,026 - 36,026
--------------------------------------------------------------------------
$421,662 $ - $421,662
==========================================================================
Amortization of property, plant and equipment:
===========================================================================
December 31, July 28,
2004 2004
---------------------------------------------------------------------------
Amortization of buildings and equipment $ 6,120 $10,435
Amortization of timberlands and logging roads 8,129 22,601
---------------------------------------------------------------------------
$14,249 $33,036
===========================================================================
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 December 31, 2004, of the $93,906,000 of the facility that was available
to the Company, $78,113,000 had been drawn down and $2,949,000 was used to
support standby letters of credit leaving a balance of $12,844,000
available for future use.
6. LONG-TERM DEBT:
===========================================================================
December 31, July 28,
2004 2004
---------------------------------------------------------------------------
Secured Bonds (US $221,000,000), 15% due in 2009 $253,522 $279,825
===========================================================================
13
WESTERN FOREST PRODUCTS INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars, except per share
amounts)
For the period from July 28, 2004 to December 31, 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.
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. 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. At December 31, 2004, $2.9 million of cash from asset
sales and $21.5 million in accounts receivable from the B.C. Government for
the timber take-back (note 9 (b) (iii)) have been included in restricted
assets on the balance sheet as these funds may be required to redeem
Secured Bonds to the extent that the adequate liquidity criteria is met in
the future.
7. INCOME TAXES:
Income tax expense for the period from July 28, 2004 to December 31, 2004
differs from the amount that would be computed by applying the Company's
combined Federal and Provincial statutory rate as follows:
==========================================================================================
2004 Tax rate
------------------------------------------------------------------------------------------
Net loss before taxes $(4,689)
===========================================================================
Expected income tax recovery $ 1,670 35.62 %
Tax effect of:
Capital gains tax rate on unrealized foreign exchange gain 4,685 99.91
Losses not recognized (5,961) (127.13)
Large corporations tax (781) (16.66
Other (394) (8.40)
------------------------------------------------------------------------------------------
Income tax expense per financial statements $ (781) (16.66)%
==========================================================================================
Income tax recovery (expense) comprised of:
Current income tax expense $ (781)
Future income tax expense -
==========================================================================================
14
WESTERN FOREST PRODUCTS INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars, except per share
amounts)
For the period from July 28, 2004 to December 31, 2004
- --------------------------------------------------------------------------------
7. INCOME TAXES (CONTINUED):
===============================================================================================
December 31, July 28,
2004 2004
-----------------------------------------------------------------------------------------------
Future tax assets:
Losses carried forward $ 5,961 $ -
Reforestation and other accruals not deductible for tax
until paid 10,464 11,032
-----------------------------------------------------------------------------------------------
16,425 11,032
Valuation allowance (6,037) -
-----------------------------------------------------------------------------------------------
10,388 11,032
Future tax liabilities:
Property, plant and equipment, due to differences in net
book value and unamortized capital cost (16,240) (21,569)
Unrealized foreign exchange gain (4,685) -
--------------------------------------------------------------------------------------------
(20,925) (21,569)
-----------------------------------------------------------------------------------------------
Net future tax liability $(10,537) $(10,537)
===============================================================================================
In addition, at December 31, 2004, a subsidiary of the Company has unused
tax losses carried forward of approximately $450,000,000 (July 28, 2004 -
$500,000,000) expiring between 2005 and 2010 which are available to reduce
taxable income and capital losses of $880,000,000 which are available
indefinitely, but can only be utilized against capital gains. The ability
of the Company and its subsidiary to utilize the losses carried forward and
capital losses is not considered more likely than not and therefore, a
valuation allowance has been provided against the tax assets.
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 December 31, 2004,
25,635,424 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.
15
WESTERN FOREST PRODUCTS INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars, except per share
amounts)
For the period from July 28, 2004 to December 31, 2004
- --------------------------------------------------------------------------------
8. SHARE CAPITAL (CONTINUED):
(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 December 31,
2004:
=============================================================================================
Number of Exercise price per Weighted average
Common Shares Common Share exercise price
---------------------------------------------------------------------------------------------
Outstanding, July 28, 2004 - - -
Granted 299,590 $ 9.72 $ 9.72
Cancelled - - -
Exercised - - -
---------------------------------------------------------------------------------------------
Outstanding, December 31, 2004 299,590 $ 9.72 $ 9.72
=============================================================================================
16
WESTERN FOREST PRODUCTS INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars, except per share
amounts)
For the period from July 28, 2004 to December 31, 2004
- --------------------------------------------------------------------------------
8. SHARE CAPITAL (CONTINUED):
(b) Stock-based compensation plan (continued):
Details of options outstanding under the share option plan at December
31, 2004 are as follows:
=================================================================================================================
Options outstanding Options exercisable
------------------------------------- ---------------------------------
Number Weighted Number
Range of outstanding average Weighted exercisable, Weighted
exercise December 31, remaining average December 31, average
prices 2004 option life (yrs) exercise price 2004 exercise price
-----------------------------------------------------------------------------------------------------------------
$12.10 49,590 4.5 $ 12.10 (1) - $ 12.10
$ 9.50 250,000 4.7 9.25 (2) - 9.25
-----------------------------------------------------------------------------------------------------------------
299,590 $ 9.72 - $ 9.72
=================================================================================================================
(1) Granted at a 10% premium above trading price of the shares at
grant date.
(2) Granted at the trading price of the shares at grant date.
During the period ended December 31, 2004, 299,590 Options with a
weighted average fair value of $4.51 per Common Share were granted and
valued using the Black-Scholes option pricing model with the following
weighted average assumptions:
=======================================================================
Risk-free interest rate (%) 4.5%
Expected volatility (%) 30%
Expected life (in years) 5 - 10
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 $73,000 during the period
based on the fair value of the options of $1,350,000 as determined
under Black-Scholes using the above assumptions, and prorated for the
vesting periods 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.
17
WESTERN FOREST PRODUCTS INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars, except per share
amounts)
For the period from July 28, 2004 to December 31, 2004
- --------------------------------------------------------------------------------
8. SHARE CAPITAL (CONTINUED):
(c) Class C Warrants (continued):
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.
9. COMMITMENT AND CONTINGENCIES:
(a) Operating leases:
Future minimum lease payments at December 31, 2004 under operating
leases were as follows:
=============================================
2005 $3,617
2006 2,672
2007 1,729
2008 981
Thereafter 322
---------------------------------------------
$9,321
=============================================
(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%.
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.
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 May 22, 2002, cash
deposits were required for shipments at the rates determined by
the USDOC. All prior bonds or cash deposits posted prior to May
22, 2002 and since inception of this dispute on April 2, 2001
were refunded.
18
WESTERN FOREST PRODUCTS INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars, except per share
amounts)
For the period from July 28, 2004 to December 31, 2004
- --------------------------------------------------------------------------------
9. COMMITMENT AND CONTINGENCIES (CONTINUED):
(b) Contingencies (continued):
(i) Softwood lumber duties (continued):
Effective December 20, 2004, the USDOC implemented new deposit
rates for shipments made after this date. The USDOC reduced the
countervailing duty deposit rate to 17.18% from 18.79% and the
all others anti-dumping deposit rate to 3.78% from 8.43%. These
new deposit rates are based on the USDOC's final rate
determinations for the first Administrative review period (May
22, 2002 to March 31, 2003 for the countervailing duty case and
May 22, 2002 to April 30, 2003 for the anti-dumping duty case).
Effective February 24, 2005, the USDOC further reduced the
countervailing deposit rate to 16.37% to adjust for ministerial
errors.
The Company has expensed $21,050,000 in duties for the period
from July 28, 2004 to December 31, 2004 representing the combined
final countervailing and antidumping duties of 27.22% for the
period from May 22, 2002 to December 20, 2004 and 20.96% from
December 20, 2004 ($23,991,000 for the period from January 1,
2004 to July 27, 2004 for the Predecessor; year ended December
31, 2003 for the Predecessor - $36,088,000). The Company and its
Predecessor have paid US$73,300,000 in cash deposits since May
22, 2002.
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 pursue appeals of the final countervailing and
dumping determinations with the appropriate courts, NAFTA panels
and the WTO.
NAFTA and WTO panels have issued several rulings with respect to
the countervailing and anti-dumping investigations. The USDOC has
responded to these rulings and modified its methodology and
calculations in evaluating and calculating subsidy and dumping
rates. However, primarily in the countervailing case, with each
response to NAFTA panel rulings, the USDOC's methodology changes
have resulted in substantive changes to the duty rates, both up
and down, making it difficult to accurately estimate the final
rates after all appeals will be complete. As a result, the
Company has not recorded any receivable for prior periods as a
result of the change in the cash deposit rate applicable to new
shipments.
A NAFTA Panel, in reviewing the "threat of injury" determination
made by the USITC, has ruled that the USITC has not been able to
provide the NAFTA Panel with substantive evidence to support the
USITC ruling of "threat of injury". The NAFTA Panel requested
that the USITC reverse its ruling on "threat of injury" with
which the USITC reluctantly complied. US interests are appealing
this ruling to an Extraordinary Challenge Committee ("ECC")
Panel. If the ECC Panel upholds this finding by the NAFTA Panel,
the Company would expect that all prior duties paid would be
refunded with interest. However, there can be no certainty that
the USDOC would comply with this ruling and US industry and trade
groups have indicated that they may even challenge the
constitutional validity of NAFTA in US courts.
19
WESTERN FOREST PRODUCTS INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars, except per share
amounts)
For the period from July 28, 2004 to December 31, 2004
- --------------------------------------------------------------------------------
9. COMMITMENT AND CONTINGENCIES (CONTINUED):
(b) Contingencies (continued):
(i) Softwood lumber duties (continued):
The final amount of countervailing and antidumping duties that
may be assessed on the Company's 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,
including appeals.
(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
provision has been made or for which no material liability is
expected.
(iii) The Forest Revitalization Plan:
Retroactive to March 31, 2003, the Government of British Columbia
(the "Crown" or "Provincial Government") as part of the Forestry
Revitalization Plan (the "FR Plan"), reduced the Crown land
portion of the allowable annual cut ("AAC") from major tenure
holders by 20%, less an exemption for the first 200,000 cubic
metres, in exchange for compensation payable by the Crown. The
take-back under the FR Plan reduced the Company's harvesting
rights by 685,216 cubic metres from its tree farm licences
("TFL") and forest licences ("FL") and 827 hectares from its
timber licences. Although the legal take-back is retroactive to
March 31, 2003, all licence holders were able to continue to
operate in the normal course of business within the take-back
areas until the Minister of Forests issues a final take-back
order.
The first phase of negotiations with the Crown regarding the
reduction of the Company's harvesting rights began in November
2003. These negotiations have recently concluded and a settlement
framework agreement has been reached on compensation to be paid
to the Company by the Crown. In 2005, pursuant to terms of the
settlement framework agreement, the Company received $16.5
million in compensation for the loss of 685,216 cubic metres of
AAC and 827 hectares of timber licences. Under this agreement,
the Company also received an advance payment of $5 million
towards compensation for improvements the Company made to Crown
land in the take-back areas ($4 million has been recorded as a
reduction in capitalized roads and $1 million has been recorded
in accounts payable for future site obligations). The amounts
were included as receivables in restricted assets as of December
31, 2004 and these proceeds resulted in no gain or loss due to
the fair value allocations as at July 28, 2004.
Negotiations in 2005 will finalize take-back areas, complete the
compensation payments for improvements and determine if there
will be cost recovery for costs already incurred for planning and
inventories. The final comprehensive settlement agreement is
expected to be reached in 2005.
20
WESTERN FOREST PRODUCTS INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars, except per share
amounts)
For the period from July 28, 2004 to December 31, 2004
- --------------------------------------------------------------------------------
9. COMMITMENT AND CONTINGENCIES (CONTINUED):
(b) Contingencies (continued):
(iii) The Forest Revitalization Plan (continued):
In 2003, the Crown budgeted for two funds totalling $275 million
- $200 million to compensate British Columbia forest companies
for the reduction of harvesting rights and $75 million to
mitigate impacts on their displaced contractors as well as
company and contractor employees. In early 2005 the Crown
announced that they would increase each fund by $50 million in
fiscal 2005/06. The Company is working with the Crown to
determine compensation for its displaced workers and contractors.
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 December 31, 2004
-------------------------------------------
Solid wood Pulp Total
-------------------------------------------------------------------------------------
Sales:
To external customers $243,740 $80,366 $324,106
To other segment (1) 15,852 - 15,852
-------------------------------------------------------------------------------------
$259,592 $80,366 $339,958
=====================================================================================
=====================================================================================
July 28 to December 31, 2004
-------------------------------------------
Solid wood Pulp Total
-------------------------------------------------------------------------------------
Segmented operating loss $ (3,676) $(2,370) $ (6,046)
General corporate expenses (6,145)
Cash interest (18,705)
Foreign exchange gain/amortization of
finance costs 26,303
Other expense (96)
Income tax expense (781)
-------------------------------------------------------------------------------------
Net loss $ (5,470)
=====================================================================================
21
WESTERN FOREST PRODUCTS INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars,
except per share amounts)
For the period from July 28, 2004 to December 31, 2004
- --------------------------------------------------------------------------------
10. SEGMENTED INFORMATION (CONTINUED):
(a) Industry segments (continued):
============================================================================================
July 28 to December 31, 2004
------------------------------------------
Solid wood Pulp Total
-------------------------------------------------------------------------------------------
Identifiable assets $ 594,008 $ 84,609 $ 678,617
Corporate assets 17,818
-------------------------------------------------------------------------------------------
$ 696,435
============================================================================================
Amortization of property, plant and equipment $ 13,137 $ 1,112 $ 14,249
============================================================================================
Capital expenditures $ 11,636 $ - $ 11,636
============================================================================================
(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 December 31, 2004 were as follows:
======================================================================================
Canada $ 86,860
United States 110,753
Asia 94,509
Europe 29,299
Other 2,685
--------------------------------------------------------------------------------------
$ 324,106
======================================================================================
(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
$3,953,000 for the period from July 28, 2004 to December 31, 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) all of which are unfunded
arrangements.
22
WESTERN FOREST PRODUCTS INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars,
except per share amounts)
For the period from July 28, 2004 to December 31, 2004
- --------------------------------------------------------------------------------
11. PENSION PLANS (CONTINUED):
Information about the Company's salaried pension plans and other
non-pension benefits, in aggregate, for the period from July 28, 2004 to
December 31, 2004 is as follows:
=================================================================================
Salaried Non-pension
pension plans plans
---------------------------------------------------------------------------------
Plan assets:
Market value, beginning of period $ 89,333 $ -
Company contributions 876 158
Employees' contributions 16 -
Benefits paid (2,621) (158)
Actual return on assets 7,138 -
---------------------------------------------------------------------------------
Market value, end of period $ 94,742 $ -
=================================================================================
Accrued benefit obligation:
Balance, beginning of period $ 98,149 $ 9,162
Company current service cost 1,220 80
Past service cost - -
Employees' contributions 16 -
Benefits paid (2,621) (158)
Interest on obligation 2,615 272
Actuarial loss 5,665 1,116
---------------------------------------------------------------------------------
Balance, end of period $ 105,044 $ 10,472
=================================================================================
Funded status (end of year):
Funded status deficit $(10,302) $(10,472)
Unamortized past service costs - -
Unamortized net actuarial losses 1,259 1,116
---------------------------------------------------------------------------------
Balance sheet liability $ (9,043) $ (9,356)
=================================================================================
Included in the accrued benefit obligations above for salaried pension
plans and non-pension plans, at December 31, 2004, are the liabilities for
the Supplementary pension plan ($6,524,000) and the hourly bridging and
hourly non-pension post retirement plans ($11,601,000) which are unfunded
arrangements.
23
WESTERN FOREST PRODUCTS INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars,
except per share amounts)
For the period from July 28, 2004 to December 31, 2004
- --------------------------------------------------------------------------------
11. PENSION PLANS (CONTINUED):
The significant actuarial assumptions adopted in measuring the Company's
accrued benefit obligations are as follows:
==================================================================================
Discount rate at beginning of year:
Pension plans 6.50%
Non-pension plans 6.50%
Discount rate at end of year:
Pension plans 6.00%
Non-pension plans 6.00%
Expected long term return on assets:
WFP and Doman Plan 7.50%
Other plans n/a
Rate of compensation increases 3.50%
Health care cost trend rate 6.90% for 2005 reducing to 4.30% in 2011
==================================================================================
The Company's salaried pension and non-pension benefits expense for 2004 is
as follows:
==============================================================================================
Salaried Non-pension
pension plans plans
----------------------------------------------------------------------------------------------
Current service cost $ 1,220 $ 80
Interest cost 2,615 272
Actual return on assets (7,138) -
Amortization of past service cost - -
Actuarial loss 5,665 1,116
Difference between actual and expected return on plan assets:
Return on plan assets 4,406 -
Actuarial loss (5,665) (1,116)
----------------------------------------------------------------------------------------------
$ 1,103 $ 352
==============================================================================================
12. FINANCIAL INSTRUMENTS AND RELATED DISCLOSURES:
(a) Fair value of financial instruments:
The estimated fair values of the Company's financial instruments as at
December 31, 2004 are as follows:
===========================================================================================
Carrying Fair
amount value
-------------------------------------------------------------------------------------------
Accounts receivable $ 99,515 $ 99,515
Restricted assets 24,428 24,428
Other investments 7,166 7,166
Bank indebtedness 78,113 78,113
Accounts payable and accrued liabilities 75,176 75,176
Secured Bonds (note 6) 253,522 286,480
===========================================================================================
24
WESTERN FOREST PRODUCTS INC.
Notes to Consolidated Financial Statements
(Tabular amounts expressed in thousands of Canadian dollars,
except per share amounts)
For the period from July 28, 2004 to December 31, 2004
- --------------------------------------------------------------------------------
12. FINANCIAL INSTRUMENTS AND RELATED DISCLOSURES (CONTINUED):
(a) Fair value of financial instruments (continued):
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 including
one customer which comprised 11% of the Company's sales for the period
from July 28, 2004 to December 31, 2004. However, all of the Company's
sales are either made on a cash basis, without credit terms, or are
insured for 90% of their sales value with the Export Development
Corporation.
25
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion and analysis reports and comments on the financial
condition and results of operations of Western Forest Products Inc. (the
"Company", "us", "we", or "our"), on a consolidated basis, for the period
commencing July 28, 2004 and ending December 31, 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 audited financial statements and related notes thereto,
for the period commencing July 28, 2004 and ending December 31, 2004, which are
filed on SEDAR at www.sedar.com under our Company's name.
1. BACKGROUND
On July 27, 2004, Doman Industries Limited ("Doman") and certain of its
subsidiaries (collectively with Doman, the "Predecessor") implemented a Plan of
Compromise and Arrangement under the Companies' Creditors Arrangement Act
(Canada) ("CCAA") and Reorganization under the Canada Business Corporations Act
("CBCA") (the "Plan") and emerged from protection under the CCAA. We were
incorporated under the CBCA 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
certain 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 US$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".
- 2 -
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
Predecessor's name, Doman Industries Limited.
2. 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 December 31, 2004 combined with our Predecessor's results
from January 1, 2004 to July 27, 2004 (pro forma) with the year ended December
31, 2003 of our Predecessor. The consolidated financial and other information of
the Company issued subsequent to the Plan implementation may not be comparable
with the consolidated financial information and other information issued by the
Predecessor prior to the Plan implementation. Accordingly, the discussion and
analysis of our financial condition and results 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
March 24, 2005. All financial references are in Canadian dollars unless
otherwise noted.
3. COMPANY'S BUSINESS
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 a 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.
- 3 -
4. REVIEW OF THE COMPANY'S RESULTS FOR THE PERIOD FROM JULY 28, 2004 TO
DECEMBER 31, 2004
SELECTED FINANCIAL INFORMATION 2004
---------------------------------------------------------
5 mths 4th Qtr 3rd Qtr
(millions of Canadian dollars-except per (July 28 to (Oct 1 to (July 28 to
unit sales prices and per share amounts) Dec 31) Dec 31) Sept 30)
----------------- -------------- ---------------
Average Exchange Rate - Cdn$ to purchase one US$ $ 1.2622 $ 1.2219 $ 1.3227
Sales volumes
Lumber - millions of board feet 293 158 135
Logs - thousands of cubic metres 527 236 291
Pulp - thousands of ADMT 126 74 52
Sales prices
Lumber - per thousand board feet $ 593 $ 557 $ 634
Logs - per cubic metre $ 113 $ 118 $ 109
Pulp - per ADMT $ 639 $ 601 $ 694
Net sales
Lumber $ 173.3 $ 87.8 $ 85.5
Logs 59.5 27.7 31.8
By-products 10.9 5.7 5.2
----------------- -------------- ---------------
Solid wood segment 243.7 121.2 122.5
Pulp segment 80.4 44.6 35.8
----------------- -------------- ---------------
324.1 165.8 158.3
Costs and expenses 322.1 181.6 140.5
----------------- -------------- ---------------
Operating earnings (loss) before amortization (EBITDA) 2.0 (15.8) 17.8
Amortization of property, plant and equipment 14.2 8.7 5.5
----------------- -------------- ---------------
Operating earnings (loss) (EBIT) (12.2) (24.5) 12.3
Other income and expense
Interest (19.8) (11.2) (8.6)
Exchange gains and (losses) on long-term debt 27.4 12.6 14.8
Other income (expense) (0.1) - (0.1)
----------------- -------------- ---------------
Earnings (loss) before income taxes (4.7) (23.1) 18.4
Income tax (expense) recovery (0.8) 3.5 (4.3)
----------------- -------------- ---------------
Net earnings (loss) $ (5.5) $ (19.6) $ 14.1
================= ============== ===============
Basic earnings (loss) per share $ (0.21) $ (0.76) $ 0.55
Diluted earnings (loss) per share $ (0.21) $ (0.76) $ 0.55
Shares outstanding (000's) 25,636 25,636 25,636
Use of cash in operating activities $ (25.1) $ (22.8) $ (2.3)
Total assets(4) $ 696.4 $ 696.4 $ 730.9
Total long-term debt $ 253.5 $ 253.5 $ 265.4
Notes:
1. For ease of reference, we use the term "third quarter" to mean the period
from July 28, 2004 to September 30, 2004 and the term "fourth quarter" to
mean the period from October 1, 2004 to December 31, 2004.
2. The financial information presented has been prepared in accordance with
Canadian GAAP, with the exception of references to EBITDA and EBIT, as
discussed under "General" above.
3. Secured debt of US$210.9 million at December 31, 2004 (US$210.04 million at
September 30, 2004) 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 on the issuance of the Secured
Bonds, translated at an exchange rate of 1.2020 at December 31, 2004
(1.2616 at September 30, 2004).
4. Total assets as at September 30, 2004 restated for final July 28, 2004
"fresh start" entries (see note 1(b) to our audited consolidated financial
statements).
- 4 -
SEGMENTED INFORMATION 2004
------------------------------------------------------------
5mths 4th Qtr 3rd Qtr
(July 28 to (Oct 1 to (July 28 to
(millions of Canadian dollars) Dec 31) Dec 31) Sept 30)
------------------- ---------------- -----------------
EBITDA
Solid wood segment $ 9.4 $ (10.3) $ 19.7
Pulp segment (1.3) (1.8) 0.5
General corporate (6.1) (3.7) (2.4)
------------------- ---------------- -----------------
$ 2.0 $ (15.8) $ 17.8
=================== ================ =================
AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT
Solid wood segment $ 13.1 $ 8.3 $ 4.8
Pulp segment 1.1 0.4 0.7
------------------- ---------------- -----------------
$ 14.2 $ 8.7 $ 5.5
=================== ================ =================
EBIT
Solid wood segment $ (3.8) $ (18.7) $ 14.9
Pulp segment (2.3) (2.1) (0.2)
General Corporate (6.1) (3.7) (2.4)
------------------- ---------------- -----------------
$ (12.2) $ (24.5) $ 12.3
=================== ================ =================
OVERVIEW OF THE PERIOD FROM JULY 28, 2004 TO DECEMBER 31, 2004
Overall, markets in the fourth quarter of 2004 were weaker for both lumber and
pulp compared to the period from July 28, 2004 to September 30, 2004 and the
Canadian dollar strengthened by 8% from an average of $1.3227 in the July 28 to
September 30, 2004 period to an average of $1.2219 in the fourth quarter. As a
result, operating earnings before amortization, or EBITDA, went from $17.8
million in the period July 28, 2004 to September 30, 2004 to negative $15.8
million in the fourth quarter and in total was $2.0 million for the period July
28, 2004 to December 31, 2004. We took action to mitigate the impact of the
weaker markets on cash flow and prevent increases in log and lumber inventory by
curtailing production at our logging operations and sawmills earlier than the
normal planned shutdowns in the fourth quarter.
Sales for the period July 28, 2004 to December 31, 2004 totalled $324.1 million,
of which $158.3 million related to the third quarter and $165.8 million to the
fourth quarter. The increase in sales reflects three months in the fourth
quarter compared to just over two months in the third quarter although the
increase due to this is not as high as might be expected as typically a
significant portion of our lumber and pulp sales occur near the end of a month
due to the timing of shipping of our lumber and pulp overseas by ocean vessels
and the sales for the third quarter benefited from the inclusion of the last 3
days of July. Fourth quarter sales were also negatively impacted by a stronger
Canadian dollar and lower sales prices for lumber and pulp. Total sales for the
period July 28, 2004 to December 31, 2004 comprised $243.7 million for the solid
wood segment (75% of the total) and $80.4 million for the pulp segment (25% of
the total).
Lumber sales for the period July 28, 2004 to December 31, 2004 totalled $173.3
million and comprised $85.5 million in the July 28 to September 30, 2004 period
and $87.8 million in the fourth quarter and were likewise impacted by the timing
of shipments and the price and foreign exchange factors described for total
sales above. Offsetting this to some degree was an 8% shift away from hemlock to
more valuable cedar and fir production in the fourth quarter.
Log sales for the period July 28, 2004 to December 31, 2004 totalled $59.5
million and comprised $31.8 million in the July 28, 2004 to September 30, 2004
period and $27.7 million in the fourth quarter. A lower volume of outside log
sales in the fourth quarter (236 km3 verses 291 km3 in the period July 28 to
September 30, 2004) resulted in large part from reduced pulp log sales 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. PASCI
ceased operation in October and has subsequently filed under the Bankruptcy and
Insolvency Act (Canada). As a result, pulp log sales to PASCI declined from 116
km3 in the period July 28 to September 30, 2004 to 34 km3 in the fourth quarter.
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.
- 5 -
Pulp sales for the period July 28, 2004 to December 31, 2004 totalled $80.4
million and comprised $35.8 million in the July 28, 2004 to September 30, 2004
period and $44.6 million in the fourth quarter and were also impacted by the
timing of shipments and the price and foreign exchange factors described for
total sales above.
Costs and expenses for the period from July 28, 2004 to December 31, 2004
totalled $322.1 million and comprised $140.5 million in the July 28, 2004 to
September 30, 2004 period and $181.6 million in the fourth quarter. The increase
in costs and expenses reflects three months in the fourth quarter compared to
just over two months in the third quarter. However, as noted previously since a
significant portion of our lumber and pulp sales occur near the end of a month
due to the timing of shipping of our lumber and pulp overseas, the sales and
therefore costs and expenses for the third quarter were higher as a result of
this inclusion. In addition, in accordance with our new accounting policy for
valuing log inventories, costs and expenses include an additional $6.5 million
write-down for the fourth quarter and $6.8 million write-down for the five-month
period ending December 31, 2004 to recognize the weaker pulp log market and an
increase in our inventories as at December 31, 2004. Costs and expenses also
includes a further $3.6 million for the fourth quarter and $6.8 million for the
five-month period ending December 31, 2004 to recognize the adoption of our new
policy to expense spur roads.
Amortization of property, plant and equipment for the period July 28, 2004 to
December 31, 2004 was $14.2 million, comprising $5.5 million in the July 28 to
September 30, 2004 period and $8.7 million in the fourth quarter.
EBIT for the period July 28, 2004 to December 31, 2004 was $(12.2) million,
comprising $12.3 million in the July 28, 2004 to September 30, 2004 period and
$(24.5) million in the fourth quarter.
Interest expense of $19.8 million includes $17.0 million in interest on the
long-term debt. The debt is denominated in US dollars at a 15% interest rate.
The amount of interest in each period will fluctuate with changes in the
exchange rate. Interest on the long-term debt for the period of July 28 to
December 31, 2004 in the amount of $17.0 million was paid on December 31, 2004.
Interest expense also includes $1.1 million in accretion on the long-term debt
and $1.7 million in interest on the line of credit.
The $27.4 million gain on the debt translation is a non-cash gain that affects
earnings as the debt is marked to the current exchange rate. $14.8 million of
the gain relates to the period July 28, 2004 to September 30, 2004 and $12.6
million relates to the fourth quarter reflecting the continuing strengthening of
the Canadian dollar from US$1.3325 at July 27, 2004 to US$1.2616 at September
30, 2004 and US$1.2020 at December 31, 2004.
The provision for income taxes represents large corporations tax. We have not
recorded the tax benefit for the loss incurred during the period as we have not
met the requirements for recognition under Canadian GAAP.
As a result of the above factors, the net loss was $5.5 million and loss per
share was $0.21 for the period from July 28, 2004 to December 31, 2004.
- 6 -
SUMMARY OF FINANCIAL POSITION
(millions of Canadian dollars)
As at
---------------------------------
December 31, July 28,
2004 2004
-------------- --------------
Cash $ 8.0 $ 16.6
Accounts receivable 78.0 77.1
Inventories 176.7 185.6
Prepaid expenses 5.2 8.4
-------------- --------------
Current Assets 267.9 287.7
Restricted Assets(1) 24.4 -
Investments 7.2 6.9
Property, plant and equipment 395.5 421.7
Other assets 1.4 1.2
-------------- --------------
Total Assets $ 696.4 $ 717.5
============== ==============
Bank indebtedness $ 78.1 $ 49.7
Accounts payable and accrued liabilities 75.2 91.3
-------------- --------------
Current Liabilities 153.3 141.0
Long-term debt 253.5 279.8
Other liabilities 39.9 41.5
Shareholders' Equity 249.7 255.2
-------------- --------------
Total Liabilities and Shareholders' Equity $ 696.4 $ 717.5
============== ==============
Cash generated from (used in):
Working capital generated from operations $ (19.2)
Increase in non-cash working capital (5.8)
--------------
Funds used in operating activities (25.0)
Financing activities 28.4
Investing activities (12.0)
--------------
Decrease in cash $ (8.6)
==============
Note:
1. See discussion of take back proceeds under the heading "BC Forest
Revitalization Plans". See also note 6 to our audited consolidated
financial statements.
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 December 31, 2004 was $8.0 million. In addition, $12.9
million was available under our revolving credit facility. The total credit
facility of $100 million is subject to a borrowing base calculation determined
by the amount of eligible accounts receivable and inventories which can vary
significantly over time. As at December 31, 2004 the amount available under the
borrowing base calculation was $93.9 million of which $78.1 million had been
drawn as bank indebtedness and a further $2.9 million in letters of credit.
Cash consumed in operations for the five month period was $25.0 million, of
which $22.8 million arose in the fourth quarter primarily as a result of the
payment of the bond interest of $17.0 million made on December 31, 2004.
Interest was paid in full as we elected not to defer payment of 50% of the
interest payable as permitted under the terms of the bond indenture. Working
capital increased in the five month period and used $5.8 million of cash
primarily as a result of the reduction in accounts payable and accruals due to
the lower levels of logging activities at the end of the year. As discussed
above, we curtailed logging production and shutdown the sawmills for a longer
period than the normal year end shutdowns as a measured response to the weak
lumber markets to conserve cash flow. Capital expenditures totalled $11.6
million, with the major portion, $6.3 million, being spent on the construction
of logging roads with the balance spent as to $2.6 million on equipment for the
sawmills and $2.7 million on logging equipment. Overall, we do not expect
significant changes in the capital expenditure requirements of the business for
2005 compared to the five months to December 31, 2004.
- 7 -
Our revolving credit facility was drawn down by $28.4 million to a balance of
$78.1 million as at December 31, 2004 to finance these outlays.
Long-term debt consists of secured debt denominated in US dollars. On
translation into Canadian dollars, it declined from $279.8 million at July 28,
2004 to $253.5 million at December 31, 2004 as a result of the strengthening
Canadian dollar ($27.4 million) offset in part by the accretion ($1.1 million)
for the discount on its issuance.
A key focus for 2005 will be on the management of cash flow and improvement in
the Company's financial position. We expect to achieve this through a review of
the operating results for each of our assets, the sale of non-core assets, the
refinancing of our long-term bonds with lower interest debt, the rigorous review
of capital projects and working capital management.
SUMMARY OF CONTRACTUAL OBLIGATIONS
The following table summarizes our contractual obligations at December 31, 2004
and our payments due for each of the next five years commencing December 31,
2004 and thereafter:
(millions of Canadian dollars) Total 2005 2006 2007 2008 2009 Thereafter
----- ---- ---- ---- ---- ------ ----------
Long-term debt (1) $ 265.6 $ - $ - $ - $ - $ 265.6 $ -
Operating leases 9.3 3.6 2.7 1.7 1.0 0.3 -
Reforestation liability 13.9 7.1 2.9 1.4 1.6 0.3 0.6
- ------------------------------------------------------------------------------------------------------------
Total contractual obligations $ 288.8 $ 10.7 $ 5.6 $ 3.1 $ 2.6 $ 266.2 $0.6
============================================================================================================
Note:
1. The amount shown for long-term debt represents the US$221 million Secured
Bonds translated at the December 31, 2004 exchange rate of $1.2020. This
amount is different to the Balance Sheet figure of $253.5 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 during the period from July 28, 2004 to
December 31, 2004.
We do not have any off-balance sheet arrangements as at December 31, 2004 or
related party transactions during the period from July 28, 2004 to December 31,
2004.
US SOFTWOOD LUMBER DUTIES
Effective December 20, 2004, the United States Department of Commerce ("USDOC")
implemented new deposit rates for shipments made after this date. The USDOC
reduced the countervailing duty deposit rate to 17.18% from 18.79% and all the
other anti-dumping deposit rate to 3.78% from 8.43%. These new deposit rates are
based on the USDOC's final rate determinations for the first administrative
review period (May 22, 2002 to March 31, 2003 for the countervailing duty case
and May 22, 2002 to April 30, 2003 for the anti-dumping duty case). Effective
February 24, 2005, the USDOC further reduced the countervailing duty deposit
rate to 16.37% to adjust for ministerial errors.
We expensed $21.1 million in duties for the period from July 28, 2004 to
December 31, 2004 representing the combined final countervailing and antidumping
duties of 27.22% for the period from May 22, 2002 to December 20, 2004 and
20.96% from December 20, 2004 ($24.0 million for the period from January 1, 2004
to July 27, 2004 for the Predecessor; year ended December 31, 2003 for the
Predecessor - $36.1 million). We, together with our Predecessor, have paid
US$73.3 million in cash deposits since May 22, 2002.
We and other Canadian forest product companies, the Federal Government of Canada
(the "Federal Government") and Canadian provincial governments (collectively
"Canadian Interests") categorically deny the US allegations and strongly
disagree with the final countervailing and antidumping determinations made by
the United States International Trade Commission ("USITC") and USDOC. Canadian
interests continue to pursue appeals of the final
- 8 -
countervailing and dumping determinations with the appropriate courts, the North
American Free Trade Agreement ("NAFTA") panels and the World Trade Organization
("WTO").
NAFTA and WTO panels have issued several rulings with respect to the
countervailing and antidumping investigations. The USDOC has responded to these
rulings and modified its methodology and calculations in evaluating and
calculating subsidy and dumping rates. However, primarily in the countervailing
case, with each response to NAFTA panel rulings, the USDOC's methodology changes
have resulted in substantive changes to the duty rates, both up and down, making
it difficult to accurately estimate the final rates after all appeals will be
complete. As a result, we have not recorded any receivable for prior periods as
a result of the change in the cash deposit rate applicable to new shipments.
A NAFTA Panel, in reviewing the "threat of injury" determination made by the
USITC, has ruled that the USITC has not been able to provide the NAFTA Panel
with substantive evidence to support the USITC ruling of "threat of injury". The
NAFTA Panel requested that the USITC reverse its ruling on "threat of injury"
with which the USITC reluctantly complied. US interests are appealing this
ruling to an Extraordinary Challenge Committee ("ECC") Panel. If the ECC Panel
upholds this finding by the NAFTA Panel, we would expect that all prior duties
paid would be refunded with interest. However, there can be no certainty that
the USDOC would comply with this ruling and US industry and trade groups have
indicated that they may even challenge the constitutional validity of NAFTA in
US courts.
The final amount of countervailing and antidumping duties that may be assessed
on our Canadian softwood lumber exports to the US cannot be determined at this
time and will depend on appeals of the final determinations to any reviewing
courts, NAFTA or WTO panels or on a negotiated settlement. 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, including appeals.
B.C. FORESTRY REVITALIZATION PLAN
Retroactive to March 31, 2003, the Government of British Columbia (the "Crown"
or "Provincial Government") as part of the Forestry Revitalization Plan (the "FR
Plan"), reduced the Crown land portion of the allowable annual cut ("AAC") from
major tenure holders by 20%, less an exemption for the first 200,000 m3, in
exchange for compensation payable by the Crown. The Crown's purpose for the FR
Plan includes increasing the timber supply for new forest initiatives and
allowing new participants into the forest industry in the Province of British
Columbia (the "Province"). 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 distributed to BC Timber Sales. BC
Timber Sales is an independent organization within the BC Ministry of Forests
created to develop Crown timber for auction to establish market prices for
timber in the Province. Currently, BC Timber Sales manages 13% of the Provincial
AAC, with its share increasing to approximately 20% after the conclusion of the
timber reallocation initiative.
The take-back under the FR Plan reduced our harvesting rights by 685,216 m3 from
our tree farm licences ("TFL") and forest licences ("FL") and 827 hectares from
our timber licences. Although the legal take-back is retroactive to March 31,
2003, all licence holders were able to continue to operate in the normal course
of business within the take-back areas until the Minister of Forests issues a
final take-back order.
The first phase of our negotiations with the Crown regarding the reduction of
our harvesting rights began in November, 2003. These negotiations have recently
concluded and a settlement framework agreement has been reached on compensation
to be paid to us by the Crown. In 2005, pursuant to terms of the settlement
framework agreement, we received $16.5 million in compensation for the loss of
685,216 m3 of AAC and 827 hectares of timber licences. Under this agreement, we
also received an advance payment of $5 million towards compensation for
improvements we made to Crown land in the take-back areas. The amounts were
included as receivables in restricted assets as of December 31, 2004 and these
proceeds resulted in no gain or loss due to the fair value allocations as at
July 28, 2004.
For purposes of the take-back, all of our Crown tenures were grouped together.
This grouping of licences enabled the Crown to take-back 20% of the total AAC
from the group of licences as a whole rather than requiring 20% be taken from
each licence in the group. Negotiations in 2004 established where the take-back
areas for our reductions would come from.
We received two Ministerial Orders at the end of 2004 that put the AAC
reductions into effect. The first Order reduced various tenure AACs by a
cumulative 526,171 m3 effective December 31, 2004 while the second reduced
- 9 -
various tenure AACs by a further 159,045 m3 effective December 31, 2005. By the
end of 2005, the Forestry Revitalization Act (British Columbia) (the "FR Act")
will have reduced our TFL AACs by 292,455 m3 and the FL AACs by 392,761 m3. The
considerable effort put into negotiations with the Crown resulted in much of the
take-back volume coming from tenures not directly associated with forestry
dependent communities.
Negotiations in 2005 will finalize take-back areas, complete the compensation
payments for improvements and determine if there will be cost recovery for costs
already incurred for planning and inventories. The final comprehensive
settlement agreement is expected to be reached in 2005.
In 2003, the Crown budgeted for two funds totalling $275 million - $200 million
to compensate British Columbia forest companies for the reduction of harvesting
rights and $75 million to mitigate impacts on their displaced contractors as
well as company and contractor employees. In early 2005 the Crown announced that
they would increase each fund by $50 million in fiscal 2005/06. We are working
with the Crown to determine compensation for our displaced workers and
contractors.
- 10 -
5. COMPARISON TO THE RESULTS OF PRIOR PERIODS OF OUR PREDECESSOR
To assist shareholders and other readers understand our business, the following
table compares the pro forma results of operations of the Company and its
Predecessor for the year ended December 31, 2004 with the results of the
Predecessor for the years ended December 31, 2003 and 2002.
Year Ended December 31
------------------------------------------------------
(millions of Canadian dollars-except per 2004 2003 2002
unit sales prices) ------------------------------------------------------
Pro forma Predecessor Predecessor
Restated(1) Restated(1)
------------------------------------------------------
Average Exchange Rate - Cdn$ to purchase one US$ $ 1.3041 $ 1.4132 $ 1.5700
Sales
Lumber $ 409.9 $ 328.7 $ 370.2
CVD prior year refund - - 12.3
Logs 140.5 106.5 123.3
By-products 25.5 22.0 19.6
Other 0.3 - -
------------------------------------------------------
Solid wood segment 576.2 457.2 525.4
Pulp segment 181.6 163.9 130.3
------------------------------------------------------
$ 757.8 $ 621.1 $ 655.7
======================================================
Sales Volumes
Lumber (MMfbm) 669 596 591
Logs (km3) 1,194 721 782
Pulp - NBSK (thousand ADMT) 261 259 205
Production Volumes
Lumber (MMfbm) 677 615 562
Logs (km3) 3,923 2,616 3,032
Pulp - NBSK (thousand ADMT) 266 253 204
Average Prices
Lumber ($/mfbm) $ 613 $ 552 $ 627
Logs ($/m3) $ 118 $ 148 $ 158
Pulp - NBSK ($/thousand ADMT) $ 696 $ 633 $ 635
EBITDA
Solid wood segment $ 75.0 $ 12.7 $ 79.9
Pulp segment 0.3 (17.7) (3.5)
General corporate (10.9) (6.6) (7.1)
------------------------------------------------------
$ 64.4 $ (11.6) $ 69.3
======================================================
Amortization
Solid wood segment $ 40.9 $ 36.3 $ 38.3
Pulp segment 6.4 9.6 8.1
------------------------------------------------------
$ 47.3 $ 45.9 $ 46.4
======================================================
Write Down of Assets and Operating Restructuring Costs $ - $ 8.0 $ 67.5
======================================================
Segmented Operating Earnings (Loss)
Solid wood segment $ 34.1 $ (23.7) $ 41.6
Pulp segment (6.1) (27.3) (11.8)
------------------------------------------------------
$ 28.0 $ (51.0) $ 29.8
======================================================
Note:
1. The figures have been restated to exclude the results of Port Alice and to
include Port Alice as discontinued operations of the Predecessor.
- 11 -
As described above, our results of operations are not necessarily indicative of
the results that may be expected for the full fiscal period or for any other
period and any comparisons of financial performance with our Predecessor should
be reviewed with caution.
Sales for 2004 increased by 22% to $757.8 million from $621.1 million in 2003.
Increases were achieved across all active segments.
Sales for solid wood increased 26% to $576.2 million in 2004 from $457.2 million
in 2003. This increase reflects:
o An 11% upturn in lumber market prices from an average price per mfbm of
$552 in 2003 to $613 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 that went from an average of US$1.4132 in 2003 to an average
of US$1.3041 in 2004. Lumber sales volumes also increased by 12% to 669
MMfbm in 2004 from 596 MMfbm in 2003 reflecting strong markets and a new
marketing program in the North Eastern United States.
o Log sales in 2004 increased to $140.5 million from $106.5 million in 2003.
Sales volume increased by 66% as a result of increased log production and
the sale of pulp logs to PASCI in 2004. Log sales to PASCI in 2004 by our
Predecessor and ourselves totalled 342 km3 at an average price of $55 per
m3. Prior to the sale of the mill by our Predecessor to PASCI in May 2004,
our Predecessor would have transferred these pulp logs internally and would
not have recorded them as an external sale. The increase in the sales of
lower value pulp logs to PASCI during 2004 also had the effect of pulling
down the average log price realised in 2004 to $118 per m3 from $148 per m3
in 2003.
Overall sales for the pulp segment increased to $181.6 million in 2004 from
$163.9 million in 2003. The sales volume of kraft pulp was similar in the two
years, however the sales price increased by $63 per ADMT.
EBITDA increased by $79.6 million from $(11.6) million in 2003 to $68.0 million
in 2004. The primary factors for this increase were a $65.9 million increase in
EBITDA for the solid wood segment, due to increased lumber prices and increased
log sales volumes plus an $18.0 million increase in EBITDA for the pulp segment
as a result of higher kraft pulp prices. The adoption of the accounting policies
referenced above for the expensing of spur roads and the valuation of pulp log
inventory reduces the proforma EBITDA for 2004 by $17.2 million compared to what
it would have been if these policies had not been adopted. The increase in
general corporate costs of $4.3 million from 2003 to 2004 primarily represents
reorganization expenses and legal and consulting costs with respect to
evaluating corporate strategies.
- 12 -
QUARTERLY FINANCIAL INFORMATION
To assist shareholders and other readers understand our business, the following
table compares the fourth quarter results of operations of the Company, the
third quarter results of operations of the Company and its Predecessor and the
quarterly results of operations of the Predecessor for the period from January
1, 2003 to June 30, 2004. Note that amounts shown do not extend beyond the
operating earnings (loss) line as a comparison of items below that line is not
meaningful as a result of the Predecessor's different capital structure. Please
see the discussion beginning on page 4 under the heading "Overview of the Period
from July 28, 2004 to December 31, 2004" for a discussion of our results of
operations for the third and fourth quarters.
QUARTERLY FINANCIAL INFORMATION
(millions of Canadian dollars)
Quarter
------------------------------------------------------------------------------------------
2004 2004 2003
-------------------- -------------------------- -----------------------------------------
4th 3rd 3rd 2nd 1st 4th 3rd 2nd 1st
(July 28 July 1 to
to Sept 30) July 27)
-------------------- --------------------------------------------------------------------
Company Predecessor
Restated(1)
-------------------- --------------------------------------------------------------------
Sales $ 165.8 $ 158.3 $ 44.3 $ 227.5 $ 161.9 $ 156.8 $ 159.9 $ 149.8 $ 154.5
Costs and Expenses 181.6 140.5 44.8 180.4 146.1 162.7 164.2 169.7 136.0
-------------------- --------------------------- ---------------------------------------
Operating earnings (loss)
before amortization (EBITDA) (15.8) 17.8 (0.5) 47.1 15.8 (5.9) (4.3) (19.9) 18.5
Amortization of property,
plant and equipment 8.7 5.5 4.4 17.2 11.5 12.2 9.5 12.8 11.4
Operating restructuring
costs and asset write-downs - - - - - 1.1 4.9 2.0 -
-------------------- --------------------------- ---------------------------------------
Operating earnings (loss) $ (24.5) $ 12.3 $ (4.9) $ 29.9 $ 4.3 $ (19.2) $ (18.7) $ (34.7) $ 7.1
==================== =========================== =======================================
Note:
1. The figures have been restated to exclude the results of Port Alice and to
include Port Alice as discontinued operations of the Predecessor.
The higher sales and EBITDA in the second and third quarters of 2004 relative to
the other quarters was primarily due to higher lumber sales due to strong lumber
markets and prices, an increase in log sales primarily as a result of the sale
of the Port Alice pulp mill by our Predecessor on May 11, 2004 (see discussion
in "Overview of the Period from July 28, 2004 to December 31, 2004"), and
stronger pulp markets.
- 13 -
FOURTH QUARTER 2004 VS 2003
To assist shareholders and other readers understand our business, the following
compares our fourth quarter results of operations with the fourth quarter
results of operations of our Predecessor.
4th Quarter
------------------------------------
(millions of Canadian dollars-except per unit sales prices) 2004 2003
Company Predecessor
Restated(1)
------------------------------------
Exchange Rate - Cdn$ to purchase one US$
(US$ to purchase one Cdn$) $ 1.2219 $ 1.3226
Sales
Lumber $ 87.8 $ 81.3
Logs 27.7 25.9
By-products 5.7 6.2
------------------------------------
Solid wood segment 121.2 113.4
Pulp segment 44.6 43.4
------------------------------------
$ 165.8 $ 156.8
====================================
Sales Volumes
Lumber (MMfbm) 158 156
Logs (km3) 236 176
Pulp - NBSK (thousand ADMT) 74 67
Production Volumes
Lumber (MMfbm) 158 165
Logs (km3) 894 709
Pulp - NBSK (thousand ADMT) 73 62
Average Prices
Lumber ($/mfbm) $ 557 $ 521
Logs ($/m3) $ 118 $ 147
Pulp - NBSK ($/ADMT) $ 601 $ 648
EBITDA
Solid wood segment $ (10.3) $ (1.2)
Pulp segment $ (1.8) $ (2.2)
General corporate $ (3.7) $ (2.5)
------------------------------------
$ (15.8) $ (5.9)
====================================
Note:
1. The figures have been restated to exclude the results of Port Alice and to
include Port Alice as discontinued operations of the Predecessor.
For the fourth quarter of 2004, our sales increased by 6% to $165.8 million from
$156.8 million in the fourth quarter of 2003.
Sales for solid wood increased 8% to $121.2 million in the fourth quarter of
2004 from $113.4 million in the same period of 2003. This increase reflects:
o an upturn in lumber market prices from an average price per mfbm of $521 in
the fourth quarter of 2003 to $557 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 an average
of US$1.3226 in the fourth quarter of 2003 to an average of US$1.2219 in
the same period of 2004. Lumber sales volumes were relatively stable at 158
MMfbm compared to 156 MMfbm for the fourth quarter of 2003.
o log sales for the fourth quarter of 2004 were $27.7 million, comprised of
236 km3 at an average price of $118 per m3. This compares to sales of $25.9
million for the same period of 2003 made up of 176 km3 at an average price
of $147 per m3. The lower price in 2004 reflects the sale of 34 km3 of pulp
logs to PASCI and also the fact that prices were generally lower than in
the fourth quarter of 2003 when log production in coastal British Columbia
was down and prices were driven higher.
- 14 -
Sales for the pulp segment of $44.6 million in the fourth quarter of 2004
compared to $43.4 million the fourth quarter of 2003. Both the sales volume and
US dollar gross price were higher, in 2004 (74,152 ADMT vs 66,719 ADMT and
US$533/ADMT vs US$515/ADMT respectively), however the stronger Canadian dollar
largely offset and eliminated these positives.
Cost of goods sold increased to $181.6 million from $162.7 million in the
respective fourth quarters as a result of the increased sales volumes in the
fourth quarter of 2004, compared to 2003, in particular for sales of logs and
pulp, as well as the changes in accounting policies to expense spur roads and
value pulp log inventories that resulted in increased costs of $10.1 million.
EBITDA declined from $(5.9) million in the fourth quarter of 2003 to $(15.8)
million in the fourth quarter of 2004 as a result of the factors described above
as well as changes in accounting policies noted above.
6. 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
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 a review of current
economic conditions and specific customer issues. We have significant exposure
to individual customers with the
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largest customer representing approximately 11% of sales for the period from
July 28, 2004 to December 31, 2004. However, all of our sales are either made on
a cash basis, without credit terms, or are insured or backed by letters of
credit for 90% of their sales value with the Export Development Corporation.
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.
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 cannot be completed.
Until these reviews are performed, a reasonable cost estimate of the
obligations, if any, cannot be determined.
7. CHANGES IN ACCOUNTING POLICIES
Our accounting policy for logging roads expenses the cost of spur roads in the
period the work is incurred. For intermediate and mainline roads, our practice
is to capitalize the road cost. Intermediate roads are then amortized over the
estimated timber volume that the road services whereas mainline roads are
amortized on a straight line basis over a maximum of 20 years. This policy
broadly 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. Although the overall impact on total expenses over
time should not be significant, for financial statement presentation purposes it
will effectively result in the transfer of expenses from amortization expense to
operations expense and thus a reduction in EBITDA.
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 whereas the unrealized profits in higher value lumber and
log inventories are recognized when sold.
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.
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8. RISKS AND UNCERTAINTIES
The following risks and uncertainties may have a material adverse effect on our
operations.
VARIABLE OPERATING RESULTS AND PRODUCT PRICING
Our financial performance is principally dependent on the prices we receive for
our products. Average prices that we receive are dependent on the product mix of
lumber and logs sold as prices vary significantly between species and grade.
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 $35 million,
$23 million and $0.88 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 including weather factors; 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 65% 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 $4.1 million, $2.7 million and $0.10 per share respectively.
All of our long-term debt of US$210.9 million at December 31, 2004, is
denominated in $US. The exchange rate at December 31, 2004, was $1.2020. A 1%
change in the US dollar has an effect of $2.5 million on our debt when
translated into Canadian dollars.
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 December 31, 2004, total approximately US$73.3
million. Pursuant to the Plan implemented by our Predecessor, we have the right
to any refunds of duties paid by our Predecessor, and may have the obligation to
pay further duties. As noted above, although Canadian Interests have initiated
challenges under
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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 challenges are resolved in favour of
Canadian lumber companies, the softwood lumber dispute will continue to
adversely impact on our future operations.
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;
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.
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 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.
DEPENDENCY ON FIBRE OBTAINED FROM GOVERNMENT TIMBER TENURES
Approximately 95% of the timberlands in which we operate 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 TFLs, FLs and timber sales licences to producers. The
Provincial Chief Forester must conduct a review of AAC for each timber supply
area and each TFL in the Province on a periodic basis which is usually once
every five years. This review is then used to determine the AAC for licences
issued by the Crown. 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 began implementing the most significant
legislative reforms in the Province's forest industry in over 40 years. These BC
reforms include (i) market pricing - for stumpage purposes, (ii) appurtenancy -
the removal of the requirement to link fibre supply under harvesting licences to
specified conversion facilities, (iii) cut control - introduction of new cut
control provisions and elimination of minimum
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harvesting requirements, and (iv) industry rationalization - through transfers,
mergers or division of forest tenures and changes of control of licence holders.
The most controversial aspect of the new legislation involved the Provincial
Government taking back approximately 20% of the AAC from major licence holders.
As noted above, the first phase of negotiations on compensation due to us
recently concluded and a final comprehensive settlement agreement is expected to
be reached in 2005.
Early in 2004, significant updates were made to the 2003 legislation package
through the Forest Statutes Amendment Act (British Columbia). Late in the year
another set of updates were made through the Forest Statutes Amendment Act
(No.2) (British Columbia). As many of the legislative changes are still in the
process of being implemented, it is not possible to predict how our business
will be affected in 2005 by these changes.
STUMPAGE FEES
Stumpage is the fee that the Provincial Government charges forest companies to
harvest timber from Crown land in British Columbia. On January 16, 2004, the
Provincial Government announced the move to a more open and competitive market
pricing system for timber and logs for the coastal region. Prior to February 29,
2004, the amount of stumpage paid for each cubic metre of wood harvested from
the coastal region was based on a target rate set by the Provincial Government.
Post-February 29, 2004, stumpage for the coastal region will be set using a
market pricing system (the "MPS"). The MPS uses the results from BC Timber Sales
auctions to predict the value of Crown timber harvested under long-term tenures.
In this way the Crown believes that stumpage prices will become market based.
Amending the stumpage system is complex and is the subject of discussion
involving, among other things, lumber trade issues between Canada and the US in
response to the US claim that BC's forest industry is subsidized. 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.
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.
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;
o quotas, duties, taxes and other charges or restrictions upon exportation;
and
o transportation costs and the availability of carriers.
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.
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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 or future 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 or cash
flows.
With respect to the pulp and paper industry, both the Federal Government and
Provincial Government generally agree that effluent discharges are acceptable
and that no further work is anticipated at this time. However, the governments
are now focussing their attention on air issues. The Federal Government is
identifying "criteria air contaminants" ("CAC's") for which limits will be
established. The BC Ministry of Water, Land and Air Protection will take the
lead role in establishing the federal limits for CAC's including ozone, sulphur
dioxide and PM2.5 (particulate matter below 2.5 micron in size). The limits
have, for the most part been achieved in the Province. However the
interpretation of "no net increase" is unclear at this time.
The Federal Government's primary initiative with respect to air quality
improvement is the reduction in greenhouse gas emissions (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 assigned. Therefore at
this time we cannot assess the costs of complying with these requirements.
In connection with the transfer of environmental permits at the time the Plan
was implemented by our Predecessor and subsequent name change of certain
subsidiaries, our environmental permits are being amended by the B.C. Ministry
of Water, Land and Air Protection. The amendments may change our environmental
permit conditions. There is no assurance that the changes, if made, will not
have an adverse effect on our business, financial condition, results of
operations or cash flow.
FIRST NATIONS LAND CLAIMS
First Nations in British Columbia have made claims of rights and title to
substantial portions of land in the Province 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 by government in furtherance of a
legislative objective, including forestry, subject to meeting a justification
test. 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 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. In 1992,
the Federal Government and Provincial Government instituted a tripartite treaty
negotiation process with the First Nations Summit, representing the majority of
the First Nations in British Columbia. Any settlements that may result from
these negotiations may involve a
- 20 -
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 from our tenures as a result of this process, if any,
cannot be estimated at this time.
In a landmark decision in late 2004, the Supreme Court of Canada determined that
there is a duty to consult with and, where appropriate, accommodate First
Nations where government decisions may impact on claimed, but as yet unproven,
aboriginal rights or title. This decision also provided much needed
clarification of the duties of consultation and accommodation. The Court found
that third parties are not responsible for consultation or accommodation of
aboriginal interests and that this responsibility lies with government.
Current Provincial Government policy requires that forest management and
operating plans take into account and not infringe on aboriginal rights and
title, proven or unproven, and provide for consultation with First Nations. 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 and title. 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 these decisions could affect
lands claimed by them. There is no assurance that changes to the terms of our
tenures as a consequence of such consultation or action could have an adverse
effect on our business, financial condition, results of operations or cash flow.
In addition, the Provincial Government is also negotiating Forest and Range
Agreements with certain First Nations. These agreements are intended to provide
workable accommodation of aboriginal interest that may be impacted by certain
forestry decisions until such time as those interests are settled through the
treaty process. To date, the Provincial Government has entered approximately 38
such agreements with various First Nations throughout the Province, including a
number with First Nations whose traditional territories overlap some of our
operating areas.
As a result of the 2004 Supreme Court of Canada decision, industry does not have
an obligation to consult or accommodate aboriginal interests, however, industry
has a considerable interest in ensuring that Government conducts its
consultation properly. We believe that the fostering of mutually beneficial
business relationships with First Nations will facilitate these consultations
and accommodation processes. We are aware of some 40 First Nations or First
Nation Associations which have interests in the area within our tenures. 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 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.
RELIANCE ON DIRECTORS, MANAGEMENT AND OTHER KEY PERSONNEL
We rely upon the experience and expertise of our personnel. 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
- 21 -
ongoing labour costs, which could have a material adverse effect on our
business, financial condition, results of operations or cash flows.
The majority of our hourly paid workers in the solid wood segment are
represented by the IWA Council of the United Steelworkers (the "IWA Council").
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 Council. In May, 2004 a new collective agreement
was implemented. The agreement expires June 14, 2007.
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 and expires on April 30, 2008.
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. For example, the ferry workers that transport our workforce to the
Squamish pulp mill have been without a contract for a period of time. A labour
dispute involving the ferry workers may impact our Squamish pulp mill
operations.
9. OUTLOOK
In 2005 we expect to see improvements in our operations although the challenges
of the high Canadian dollar will continue to impact operating cash flows.
Although the Canadian dollar has weakened somewhat from the highs reached in the
fourth quarter of 2004 the consensus forecast for the balance of the year
appears to be calling for a higher dollar.
The lumber markets started 2005 with strong demand and pricing particularly in
the US due to demand exceeding supply caused by rail car shortages. Countering
this, the Japanese market demand has declined and is expected to continue
through March. We have curtailed production from our Nanaimo mill that primarily
supplies the Japanese markets to match the reduced demand. Production is
expected to return to previous levels as demand strengthens in the second
quarter. Pricing in the pulp market has also started the year in a strong
position and is expected to continue through the first half of the year.
We expect increases in our production volumes for lumber during 2005 compared to
2004 although January and February have been lower than planned due to the
impact of poor weather on the US North East construction market and
transportation related factors.
Our focus for 2005 will be centered on three key areas; managing cash flow and
interest costs, growing the business and enhancing corporate governance.
We have initiated a review of alternatives to refinance our US$221 million
Secured Bonds which carry a 15% interest rate. The first call date on the
Secured Bonds is July 2005 although we may consider an earlier financing if
circumstances permit.
The operating performance of each of our assets will be reviewed during the
year. To some extent the divisions had previously operated as autonomous
business units. We believe synergies may exist in considering the business on a
more holistic basis. Such a review will also consider the extent to which the
current business can be grown internally. We expect to dispose of assets that do
not form part of our core business.
Longer-term we believe that consolidation of the British Columbia coastal forest
industry will enhance the ability of coastal producers to compete in world
markets. We will consider suitable opportunities to be involved in this
consolidation as well as looking at other growth possibilities.
10. OUTSTANDING SHARE DATA
As of March 24, 2005, 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 March 24, 2005 we have
granted 299,590 options under our incentive stock option plan.
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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)
Dublin, Ireland, in the case of the Master Fund and New 8,065,910 31.5%
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) 3,205,162 12.5%
Plainsboro, New Jersey
1. The "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, indicated that Harbert beneficially owns,
directly or indirectly, or exercises control or direction over 8,065,939
Common Shares of the Company. However, our counsel has been advised
verbally on March 16, 2005 by a representative of Harbert that the number
of Common Shares held by Harbert has been reduced slightly to 8,065,910
Common Shares.
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).
3. The "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 indicated that MLIM beneficially owns, directly or indirectly, or
exercises control or direction over, 3,255,162 Common Shares of the
Company. However, our counsel has been advised verbally on March 8, 2005 by
a representative of MLIM that the number of Common Shares held by MLIM has
been reduced slightly to 3,205,162 Common Shares.
11. ADDITIONAL INFORMATION
Additional information about the Company is available at www.sedar.com under the
Company name, Western Forest Products Inc. In that regard, we anticipate filing
our annual information form on SEDAR on or before March 31, 2005. Information
about the operation of our business by our Predecessor prior to the
implementation of the Plan, including our Predecessor's last Form 20-F, is
available at www.sedar.com under the Predecessor's name, Doman Industries
Limited.
12. 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 OUR INTENT, BELIEF OR CURRENT EXPECTATIONS PRIMARILY WITH RESPECT TO
MARKET AND GENERAL ECONOMIC CONDITIONS, FUTURE COSTS, EXPENDITURES, AVAILABLE
HARVEST LEVELS AND OUR FUTURE OPERATING PERFORMANCE. SUCH STATEMENTS MAY BE
INDICATED BY WORDS SUCH AS "ESTIMATE", "EXPECT", "INTEND", "BELIEVES" AND
SIMILAR WORDS AND PHRASES. READERS ARE CAUTIONED THAT ANY SUCH FORWARD-LOOKING
STATEMENTS ARE NOT GUARANTEES AND MAY INVOLVE KNOWN AND UNKNOWN RISKS AND
UNCERTAINTIES, AND THAT ACTUAL RESULTS MAY DIFFER FROM THOSE EXPRESSED OR
IMPLIED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS,
INCLUDING GENERAL ECONOMIC AND BUSINESS CONDITIONS, PRODUCT SELLING PRICES, RAW
MATERIAL AND OPERATING COSTS, CHANGES IN FOREIGN CURRENCY EXCHANGE RATES,
CHANGES IN GOVERNMENT REGULATION, FLUCTUATIONS IN DEMAND AND SUPPLY FOR OUR
PRODUCTS, INDUSTRY PRODUCTION LEVELS, OUR ABILITY TO EXECUTE OUR 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 US OR PERSONS ACTING ON OUR BEHALF
ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY THE FOREGOING CAUTIONARY
STATEMENTS.
FASKEN MARTINEAU DUMOULIN LLP* www.fasken.com
Barristers and Solicitors
Patent and Trade-mark Agents
Suite 2100 [FASKEN MARTINEAU LOGO]
1075 Georgia Street West
Vancouver, British Columbia, Canada V6E 3G2
604 631 3131 Telephone
604 631 3232 Facsimile
CAROLE MCCOOL
Direct Dial: (604) 631-4938
Direct Fax: (604) 632-4938
E-Mail: cmccool@van.fasken.com
March 28, 2005
File No.: 261079.00022
VIA SEDAR
British Columbia Securities Commission
Saskatchewan Securities Commission
Ontario Securities Commission
Autorite des marches financiers
Dear Sirs/Mesdames:
RE: WESTERN FOREST PRODUCTS INC.
SEDAR PROJECT 754325 - NEWS RELEASE
Please disregard the previous letter incorrectly referencing SEDAR project
739366. The correct SEDAR project number is 754325 for the news release filed on
March 24, 2005 as submission no. 1 with respect to the Company's financial
results for the 4th quarter and period from July 28 to December 31, 2004 which
contained a typographical error. Please see attached notice which provides
details of the typographical error.
Yours truly,
FASKEN MARTINEAU DUMOULIN LLP
[signed]
Carole McCool
Paralegal, Corporate & Securities
WESTERN FOREST PRODUCTS INC.
4TH QUARTER RESULTS PRESS RELEASE
The Press release dated March 24, 2005 announcing Western Forest Products Inc.'s
results for the 4th quarter and period from July 28 to December 31, 2004
contains a typographical error. Under the caption "Solid Wood Segment", the
sentence that reads "Log production totalled 894 million cubic metres in the 4th
quarter compared to 681 million cubic metres in the 3rd quarter" should read
"Log production totalled 894 thousand cubic metres in the 4th quarter compared
to 681 thousand cubic metres in the 3rd quarter."
We apologise for any inconvenience this error may have caused.