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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13a-16 OR 15d-16 UNDER THE
SECURITIES EXCHANGE ACT OF 1934
For the month of November 14, 2005.
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 November 16, 2005 By /s/ Paul Ireland
-------------------------------------
(Signature)*
Paul Ireland, Chief Financial Officer
- ----------
* Print the name and title under the signature of the signing officer.
PERSONS WHO ARE TO RESPOND TO THE COLLECTION OF INFORMATION
SEC 1815 (09-05) CONTAINED IN THIS FORM ARE NOT REQUIRED TO RESPOND UNLESS THE
FORM DISPLAYS A CURRENTLY VALID OMB CONTROL NUMBER.
(WFP LOGO)
WESTERN FOREST PRODUCTS INC.
435 Trunk Road
Duncan, British Columbia
Canada V9L 2P9
Telephone: 250 748 3711
Facsimile: 250 748 6045
WESTERN FOREST PRODUCTS INC.
FOR IMMEDIATE RELEASE TSX: WEF
WESTERN ANNOUNCES 3RD QUARTER RESULTS
November 14, 2005 - Duncan, British Columbia. Western Forest Products Inc.
("Western" or the "Company") announced today the Company's results for the 3rd
quarter ended September 30, 2005. The Company will host a teleconference call on
Tuesday, November 15, 2005 at 10:00 a.m. PST (1:00 p.m. EST) on the Company's
results. (See below for details on participation.)
Results for the quarter reflect weak lumber and pulp prices due to an
oversupplied market and the impact of a strong Canadian dollar.
Q3 2005 OVERVIEW
- - EBITDA for the solid wood segment of negative $2.2 million, down from
positive $2.2 million in the second quarter reflecting lower realised
lumber prices and change in sale mix, a stronger Canadian dollar and the
Silvertree severance of $7.2 million partially offset by the gain of $13.1
million from the termination of the Saw-log supply agreement with
TimberWest.
- - EBITDA for the pulp segment of negative $4.2 million compared to negative
$0.7 million in the prior quarter as a result of lower pulp prices and a
stronger Canadian dollar.
- - Total liquidity at the end of the third quarter of $61.3 million was
comprised of cash of $3.9 million, cash in a working capital reserve
account of $48.5 million, and availability under our operating line of
credit of $8.9 million.
Reynold Hert, President & CEO commenting on the results noted, "As expected,
market conditions have continued to be difficult with lower prices and a higher
exchange rate in the third quarter. During these tougher market conditions we
have improved our liquidity by being disciplined in our mill operations,
following through on our inventory reductions, and selling non core assets. We
continue to balance liquidity with making fundamental shifts in the base
business performance. As announced, the Silvertree sawmill was closed with $7.2
million in severance being incurred, and the Saltair sawmill has been
indefinitely curtailed. When the markets and our inventory levels are right, we
will be implementing the third shifts at our remaining sawmills."
The Company is also in the process of reviewing its assets to determine whether
they remain core to its business and have concluded that the Company's focus
shall revolve around the solid wood business including logging from Crown
timberlands and manufacturing of lumber. Management has been considering
strategic options with respect to certain non-core assets including the Squamish
pulp operation and private timberlands and have engaged legal and financial
advisors to assist in this process. Advanced discussions with third parties on
potential transactions involving Squamish have been held although there has been
no agreement with respect to a transaction on acceptable terms. The Company has
also applied to the Minister of Forests of B.C. for the removal of our private
timberlands from the Crown TFLs. If successful the Company will consider the
sale of some or all of the private timberlands on terms satisfactory to it.
Proceeds from the sale of the private timberlands would be applied to reduce the
Company's debt burden pursuant to terms and conditions under the proposed bridge
term facility announced November 10, 2005.
-2-
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 over 25 countries worldwide.
Forward Looking Statement
This press release 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", "anticipate", "plan",
"intend", "believe", "will", "should", "may" 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 the "Risk Factors" section of Western's Annual Information Form and under
the "Risk Factors" section of Western's Form 20-F/A 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, NOVEMBER 15, 2005 AT 10:00 A.M.
PST/1:00 P.M. EST
ON TUESDAY, NOVEMBER 15, 2005, WESTERN FOREST PRODUCTS INC. WILL HOST A
TELECONFERENCE CALL AT 10:00 A.M. PST (1:00 P.M. EST). TO PARTICIPATE IN THE
TELECONFERENCE PLEASE DIAL 1-866-249-5221 IN CANADA AND THE U.S. (TOLL FREE) AND
IN TORONTO OR INTERNATIONALLY, 416-644-3431 BEFORE 10:00 A.M. PST (1:00 P.M.
EST). THIS CALL WILL BE TAPED, AVAILABLE ONE HOUR AFTER THE TELECONFERENCE, AND
ON REPLAY UNTIL NOVEMBER 29, 2005. TO HEAR A COMPLETE REPLAY, PLEASE CALL
1-877-289-8525 IN CANADA AND THE U.S. (TOLL FREE), PASSCODE 21163096# OR IN
TORONTO AND INTERNATIONALLY, 416-640-1917, PASSCODE 21163096#. 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
(WFP LOGO)
WESTERN FOREST PRODUCTS INC. - 2005 THIRD QUARTER REPORT
MANAGEMENT'S DISCUSSION & 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 our third quarter
ended September 30, 2005 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 financial
statements and related notes thereto, for the third quarter ended September 30,
2005, and our audited consolidated financial statements and management's
discussion and analysis ("MD&A") for the period from July 28, 2004 to December
31, 2004 (the "2004 Annual Report") which are filed on SEDAR at <www.sedar.com>
under our Company's name.
We acquired the solid wood and pulp business of Doman Industries Limited
("Doman") and certain of its subsidiaries (collectively with Doman, the
"Predecessor") on July 27, 2004 in connection with the implementation of the
Predecessor's Plan of Compromise and Arrangement under the Companies' Creditors
Arrangement Act (Canada) and Reorganization under the Canada Business
Corporations Act (the "Plan"). This discussion and analysis also compares our
results for the third quarter and nine months ended September 30, 2005 with our
Predecessor's results in the comparable periods of 2004. 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
due to differences in our corporate and financial structure from that of our
Predecessor, the application of "fresh start" accounting as explained in note 1
of our audited consolidated financial statements as a result of the
implementation of our Predecessor's Plan and differences in certain accounting
policies from those applied by our Predecessor. Accordingly, the discussion and
analysis of our financial condition and results of operations compared to our
Predecessor should be reviewed with caution.
Unless otherwise noted, the information in this discussion and analysis is
updated to November 11, 2005. All financial references are in Canadian dollars
unless otherwise noted.
SUMMARY OF SELECTED RESULTS FOR THE QUARTER AND NINE MONTHS
Three Months Ended Three Months Ended Nine Months Ended Three Months Ended Nine Months Ended
September 30, June 30, 2005 September 30, 2005 September 30, 2004 September 30, 2004
(millions of dollars) 2005 Company Company Company Proforma(1) Proforma(1)
- --------------------------- ------------------ ------------------ ------------------ ------------------ ------------------
Sales $156.7 $186.4 $505.8 $202.4 $594.0
Countervailing &
anti-dumping duties $ (8.3) $(13.6) $(30.4) $(13.8) $(35.9)
EBITDA $ (9.8) $ (2.3) $ (3.4) $ 17.3 $ 80.1
Write-down of property,
plant and equipment $ -- $ (8.5) $ (8.5) $ -- $ --
Operating earnings (loss) $(14.9) $(21.1) $(33.5) $ 7.4 $ 41.6
Interest expense $(11.5) $(12.0) $(35.3) $ n/a $ n/a
Foreign exchange gain
(loss) on long-term debt $ 13.3 $ (3.3) $ 8.4 $ n/a $ n/a
Net loss attributable
to common shares $(12.5) $(37.2) $(55.0) $ n/a $ n/a
Per share:
Basic $(0.49) $(1.45) $(2.15) $ n/a $ n/a
Diluted $(0.49) $(1.45) $(2.15) $ n/a $ n/a
(1) Q3 and nine months of 2004 represent the results of our Predecessor for the
period from July 1, 2004 to July 27, 2004 and from January 1, 2004 to July
27, 2004, respectively, both restated for the sale of the Port Alice pulp
mill in May, 2004, added to the Company's results for the period from July
28, 2004 to September 30,2004.
WESTERN FOREST PRODUCTS INC. 2 2005 THIRD QUARTER REPORT
OVERVIEW
The net loss for the third quarter and first nine months of 2005 was $12.5
million ($0.49 per share) and $55.0 million ($2.15 per share), respectively
compared to a net loss of $37.2 million ($1.45 per share) in the second quarter
of 2005. The results for the quarter reflect weaker lumber and pulp markets and
a stronger Canadian dollar. In addition, the Company recorded a $7.2 million
charge in the quarter for severance costs with respect to the previously
announced closure of its Silvertree sawmill operation which took effect in
October 2005.
During the quarter the Company reached agreement with TimberWest Forest Corp. to
end a saw-log supply arrangement. TimberWest paid the Company $15.0 million cash
to end the agreement under which it had provided up to 330,000 cubic metres of
saw-logs to the Company annually from its private lands at Vancouver log market
prices. We recorded a gain on the termination of the agreement of $13.1 million.
On November 10, 2005 the Company reached a definitive agreement to acquire
Cascadia Forest Products Ltd. ("Cascadia") from Brookfield Asset Management
Inc., for approximately $120 million, subject to certain closing adjustments
plus Cascadia's net working capital, all payable in cash on closing. Financing
for the transaction has been secured from Tricap Management Inc. ("Tricap"),
which will provide both equity and debt financing sufficient to fund the
acquisition of Cascadia and to refinance Western's existing 15% senior secured
bonds. The acquisition is expected to close in the first quarter of 2006,
subject to the receipt of regulatory approvals. The announcement marks the
culmination of negotiations and due diligence to acquire these assets that had
been on going for nearly one year and reflects the Company's strategy to be a
major player in the consolidation of the coastal industry.
The combined Western and Cascadia operations will have over 1.5 billion board
feet of annual lumber capacity and 6.8 million cubic meters of annual allowable
cut from Crown-owned tenures on Vancouver Island, the mainland coast and the
Queen Charlotte Islands. By combining resources and leveraging best practices
from both companies, Western expects to capture annual pre-tax synergies of
approximately C$65 million through marketing programs and operating
efficiencies, which are anticipated to be realized within about 48 months of the
completion of the transaction.
The following table and discussion indicates the major factors impacting EBITDA
for the current quarter compared to EBITDA as reported in the previous quarter:
(millions of dollars)
- ---------------------
EBITDA for the three months ended June 30, 2005 $(2.3)
Gain on termination of saw-log agreement 13.1
Silvertree severance costs (7.2)
Higher anti-dumping rate in second quarter 3.4
Impact of summer down-time (4.6)
Lower realised NBSK pulp prices (1.6)
Lower realised lumber prices (2.5)
Change in mix of lumber and logs sold (3.8)
Foreign exchange impact on sales and receivables (7.4)
Impact of less volume sold (2.3)
Other 5.2
-----
EBITDA for the three months ended September 30, 2005 $(9.8)
=====
WESTERN FOREST PRODUCTS INC. 3 2005 THIRD QUARTER REPORT
EBITDA for the current quarter changed compared to the previous quarter due to:
- gain on the termination of the log supply agreement with TimberWest.
- reorganisation costs represents severance in connection with the
closure of the Silvertree sawmill.
- higher anti-dumping costs recorded in the second quarter when the
Company was subject to an 11.54% anti-dumping rate prior to the
Company's successful application to use the lower 3.78% rate of its
Predecessor.
- to reduce log and lumber inventories we took downtime during the
summer which had cash impact of $4.6 million of fixed cost write-offs.
- NBSK prices realised in the quarter were approximately 6% lower than
the second quarter.
- Lumber prices realised were lower by approximately 7% than the second
quarter primarily in cedar and fir.
- We sold less high value lumber and more high value logs in the quarter
- The Canadian dollar strengthened from an average of $0.806 in the
second quarter to $0.825 in the third quarter resulting in lower
Canadian dollar proceeds from US dollar denominated sales.
- Lumber, log and pulp sales all decreased in the third quarter relative
to the second quarter as a result of oversupplied markets.
Some of the significant factors accounting for the decrease in EBITDA from
positive $17.3 million for the proforma three months ended September 30, 2004 to
negative $9.8 million in the three months ended September 30, 2005 are weaker
lumber prices, lower log sales, and the mix of lumber and logs sold (negative
$20.1 million); lower pulp prices realised partially offset by higher volumes
(negative $6.5 million); a stronger Canadian dollar (negative $10.9 million);
and severance at the Silvertree mill (negative $7.2 million); partially offset
by the gain on the termination of the log supply agreement (positive $13.1
million) and the deferral of the Squamish pulp mill annual maintenance shutdown
from the third quarter as part of moving to an 18 month major maintenance
program with 12 month mini-shutdowns (positive $5.7 million).
Some of the significant factors accounting for the decrease in EBITDA from
positive $80.1 million for the proforma nine months ended September 30, 2004 to
negative $3.4 million in the nine months ended September 30, 2005 are weaker
pulp and to a lesser extent lumber prices realised (negative $12.9 million); a
stronger Canadian dollar (negative $ 35.6 million); lower external log sales
partially offset by higher pulp sales (negative $23.2 million); higher unit log
production costs due to lower volumes harvested (negative $14.6 million); the
change in accounting to expense spur roads (negative $9.9 million); severance at
the Silvertree mill ($7.2 million); partially offset by the gain on the
termination of the log supply agreement (positive $13.1 million); the change in
accounting policy to consider pulp and saw logs separately in performing the
lower of cost and market test (positive $6.6 million) and the deferral of the
Squamish pulp mill annual maintenance shutdown from the third quarter as part of
moving to an 18 month major maintenance program with 12 month mini-shutdowns
(positive $5.7 million).
WESTERN FOREST PRODUCTS INC. 4 2005 THIRD QUARTER REPORT
SOLID WOOD SEGMENT
Three Months Nine Months Three Months Nine Months
Ended Three Months Ended Ended Ended
September 30, Ended September 30, September 30, September 30,
2005 June 30, 2005 2005 2004 2004
(millions of dollars except where noted) Company Company Company Proforma (1) Proforma (1)
- ---------------------------------------- ------------- ------------- ------------- ------------- -------------
Lumber sales $ 88.2 $107.5 $293.0 $106.9 $324.4
Log sales 22.2 26.0 66.4 45.3 112.8
By-product sales 5.9 7.0 20.0 8.1 19.9
------ ------ ------ ------ ------
$116.3 $140.5 $379.4 $160.3 $457.1
====== ====== ====== ====== ======
EBITDA $ (2.2) $ 2.2 $ 11.0 $ 30.6 $ 85.3
EBITDA margin (1.9%) 1.6% 2.9% 19.1% 18.7%
Operating earnings (loss) $ (6.7) $(16.0) $(17.2) $ 21.8 $ 52.7
Total assets employed $546.3 $577.0 $546.3 $615.4 $615.4
Lumber production - millions of
board feet 150 186 521 191 521
Lumber sales - millions of board feet 165 176 503 165 511
Log production - thousands of cubic metres 465 1,148 2,111 1,103 3,030
Log purchases - thousands of cubic metres 147 192 539 353 1,092
Log sales -thousands of cubic metres 172 213 551 411 960
Internal Log consumption- thousands
of cubic metres 719 844 2,438 866 2,611
Average lumber sales revenue per
thousand board feet $ 535 $ 612 $ 583 $ 648 $ 635
Average log sales revenue per cubic metre $ 129 $ 122 $ 121 $ 110 $ 117
(1) Q3 and nine months of 2004 represent the results of our Predecessor for the
period from July 1, 2004 to July 27, 2004 and from January 1, 2004 to July
27, 2004, respectively added to the Company's results for the period from
July 28, 2004 to September 30,2004.
The solid wood segment had an operating loss of $6.7 million in the quarter and
a loss of $17.2 million in the nine months compared to an operating loss of
$16.0 million in the second quarter of 2005 and operating earnings of $21.8
million and $52.7 million in the comparative periods of 2004. EBITDA for the
solid wood segment decreased to negative $2.2 million in the third quarter
compared to positive $2.2 million in the second quarter and $30.6 million in the
third quarter of 2004. Operating earnings and EBITDA were impacted by the $13.1
million gain recorded on the termination of the log supply agreement with
TimberWest and the $7.2 million reorganisation expense recorded with respect to
the closure of the Silvertree sawmill site that will be effective October 28,
2005. Operating earnings for the year to date have also been impacted by the
second quarter $8.5 million non-cash write-down of property plant and equipment
for the closure of the Silvertree sawmill.
On April 26, 2005 we were notified by the US Department of Commerce ("USDOC")
that we were not entitled to use the reduced "all others rate" for anti-dumping
duty deposits of 3.78% unless we filed a changed circumstances review request
with the USDOC to confirm that we are the successor in interest to our
Predecessor. We subsequently filed an application for an expedited changed
circumstances review and received a positive ruling from the US Department of
Commerce confirming we are entitled to use the "all others rate" of 3.78%
effective from August 19, 2005. For the period from April 26, 2005 to August 19,
2005 we posted anti-dumping deposits at the higher rate of 11.54%.
Lumber sales of 165 million board feet in the third quarter of 2005 were the
same as the comparable period of 2004 and decreased 6% from 176 million board
feet in the second quarter. Lumber sales for the nine months ended September 30,
2005 of 503 million board feet were comparable to the 511 million board feet
sold in the same period of 2004. Overall average lumber prices received in the
third quarter of 2005, when translated into Canadian dollars
WESTERN FOREST PRODUCTS INC. 5 2005 THIRD QUARTER REPORT
were $535 per thousand board feet compared to $612 in the second quarter. For
the first nine months of 2005 the average price received was $583 per thousand
board feet compared to $648 in the comparable period of 2004.
Log production of 0.465 million cubic metres in the third quarter compares to
1.148 million cubic metres in the second quarter and 1.103 million cubic metres
in the third quarter of 2004 and reflects the previously announced downtime
taken at the logging operations during the summer to reduce log inventories. Log
production for the nine months ended September 30, 2005 of 2.111 million cubic
metres compares to 3.030 million cubic metres in the same period of 2004 and
reflects both the summer downtime noted above as well as the first quarter's
delayed start up of logging operations due to higher than optimum inventories.
A combination of the lower third quarter log production and a weak Vancouver log
market also resulted in lower third party log sales compared to the previous
quarter. However, average log prices received increased to $129 per m(3)
compared to $122 per m(3) in the second quarter of 2005 and benefited from the
sale of higher quality logs and higher prices achieved for cedar poles offset
the overall decrease in sales prices for other species. The average price
realised in the third quarter of 2005 of $129 per m(3)compares to the $110 per
m(3) in the comparable period of 2004. The 2004 sales represent a mix of
saw-logs which realised an average of $151 per m(3)and pulp logs which realised
an average of $54 per m(3).
WESTERN FOREST PRODUCTS INC. 6 2005 THIRD QUARTER REPORT
PULP SEGMENT
Three Months Ended Three Months Ended Nine Months Ended Three Months Ended Nine Months Ended
(millions of dollars September 30, 2005 June 30, 2005 September 30, 2005 September 30, 2004 September 30, 2004
except where noted) Company Company Company Proforma(1) Proforma(1)
- -------------------- ------------------ ------------------ ------------------ ------------------ ------------------
Sales $ 40.4 $45.9 $126.4 $ 42.2 $136.9
EBITDA $ (4.2) $(0.7) $ (3.0) $(10.2) $ 2.1
EBITDA margin (10.4%) (1.5%) (2.4%) (24.2%) 1.5%
Operating earnings (loss) $ (4.8) $(1.4) $ (4.9) $(11.3) $ (3.8)
Total assets employed $ 82.2 $86.4 $ 82.2 $ 94.5 $ 94.5
Pulp production
-thousands of tonnes 69 72 208 57 193
Pulp sales -thousands
of tonnes 71 73 206 61 188
Average pulp revenue
per tonne $ 573 $ 624 $ 615 $ 692 $ 728
Average pulp price
delivered to Northern
Europe - (US$ per
tonne)(2) $ 587 $ 620 $ 616 $ 640 $ 626
Average pulp price
delivered to Northern
Europe - (C$ equivalent
per tonne)(2) $ 712 $ 769 $ 755 $ 849 $ 833
(1) Q3 and nine months of 2004 represent the results of our Predecessor for the
period from July 1, 2004 to July 27, 2004 and from January 1, 2004 to July
27, 2004, respectively, both restated for the sale of the Port Alice pulp
mill in May, 2004, added to the Company's results for the period from July
28, 2004 to September 30,2004.
(2) Benchmark prices sourced from Resource Information Systems, Inc. Canadian
equivalent translated at average exchange rate for the period
There was an operating loss from the pulp segment during the quarter of $4.8
million compared to operating losses of $1.4 million in the second quarter of
2005 and $11.3 million in the comparative quarter of 2004. EBITDA for the pulp
segment in the quarter was negative $4.2 million compared to negative $0.7
million in the second quarter and primarily results from both a weaker US$ pulp
price realised in the quarter and the stronger Canadian dollar. The third
quarter results are an improvement over the negative $10.2 million recorded in
the third quarter of 2004 primarily because the third quarter of 2004 includes
the annual maintenance shutdown costs and corresponding lower production and
sales whereas the 2005 shutdown was deferred to November, 2005 as part of the
program to move to an 18 month major maintenance cycle with 12 month
mini-shutdowns as part of a cost reduction effort. The annual maintenance
shutdown will now likely be delayed to early 2006 as a result of possible labour
disruption by certain of the maintenance contractors represented by the Boiler
Makers Union who are in a legal strike situation. Partially offsetting this are
the impacts of lower realised pulp prices and the stronger Canadian dollar.
For the nine months ended September 30, 2005 the pulp segment recorded an
operating loss of $4.9 million and negative EBITDA of $3.0 million compared to
the proforma operating loss of $3.8 million and positive EBITDA of $2.1 million
recorded by our Predecessor. The negative impacts of the lower US$ sales prices
realised and the stronger Canadian dollar more than offset the deferral in the
annual maintenance shutdown costs and higher production levels.
OTHER CORPORATE ITEMS
Selling and administration expense of $5.4 million in the quarter was similar to
the $5.5 million in the second quarter and the $5.5 million recorded by the
Company and our Predecessor in the comparable period of 2004. For the nine
months ended September 30, 2005 the selling and administration expense was $17.1
million compared to the $16.4 million total recorded by the Company and our
Predecessor. Included in selling and administration expense for the nine months
is approximately $1.9 million for legal and consulting services in connection
with due diligence and other procedures performed with respect to strategic
initiatives including work on the recently announced acquisition of Cascadia and
related financing.
Interest expense decreased to $11.5 million in the quarter from $12.0 million in
the second quarter as a result of the stronger Canadian dollar. The Company
recorded a foreign exchange gain in the quarter of $13.3 million on the
WESTERN FOREST PRODUCTS INC. 7 2005 THIRD QUARTER REPORT
translation of its US dollar denominated secured bonds as a result of the
strengthening of the Canadian dollar from $1.2411 at June 30, 2005 to $1.2122 at
September 30, 2005. This compares to a loss recorded in the second quarter of
$3.3 million when the Canadian dollar weakened compared to the March 31 quarter
end. Interest expense and the foreign exchange gain or loss on the translation
of long-term debt recorded in 2005 is not directly comparable to the amounts
recorded by our predecessor in 2004 due to the different capital structures.
Financial restructuring costs recorded by our Predecessor in 2004 relate to the
costs of implementing the Plan. Discontinued operations of our Predecessor
relate to the results of the Port Alice pulp mill prior to its sale by them in
May, 2004.
Other income primarily represents reimbursements from the BC Government for
project engineering and other costs incurred by our Predecessor with respect to
certain timber cutting rights taken back by the BC Government under the Forestry
Revitalisation Plan.
WESTERN FOREST PRODUCTS INC. 8 2005 THIRD QUARTER REPORT
CHANGES IN FINANCIAL POSITION AND LIQUIDITY
Three Months Ended Three Months Ended Nine Months Ended Three Months Ended Nine Months Ended
(millions of dollars September 30, 2005 June 30, 2005 September 30, 2005 September 30, 2004 September 30, 2004
except where noted) Company Company Company Proforma(1) Proforma(1)
- ---------------------- ------------------ ------------------ ------------------ ------------------ ------------------
Cash flow from
operations $17.8 $(15.8) $ 17.2 $ (4.9) $ (8.3)
Capital additions $(7.0) $ (8.8) $(18.3) $(13.0) $(31.8)
Change in bank
indebtedness $(7.0) $ 12.0 $ (5.9) $ 9.5 $ 23.5
Financial ratios:
Current assets to
current liabilities 1.67 1.80 1.67 n/a n/a
Debt to shareholders
equity 2.29 2.25 2.29 n/a n/a
Debt to market
capitalization 6.24 4.41 6.24 n/a n/a
(1) Q3 and nine months of 2004 represent the results of our Predecessor for the
period from July 1, 2004 to July 27, 2004 and from January 1, 2004 to July
27, 2004, respectively, both restated for the sale of the Port Alice pulp
mill in May, 2004, added to the Company's results for the period from July
28, 2004 to September 30, 2004.
Cash flow from operations in the third quarter of 2005 of $17.8 million compares
to negative cash flow of $15.8 million in the second quarter and is attributable
to the decrease in both accounts receivable and inventories. The decrease in
inventories is a direct result of the Company's previously announced plan to
take down time at its logging and sawmill operations during the summer. The
decrease in receivables is primarily attributable to the lower sales recorded in
the third quarter compared to the second quarter and the timing of shipments and
cash receipts.
Cash flow from operations before the non-cash changes in working capital items
was negative $33.3 million in the quarter compared to negative $12.8 million in
the second quarter and results from the same factors impacting EBITDA as
previously discussed except that the proceeds received on the termination of the
saw-log supply agreement is classified as a cash inflow under investing
activities instead of from operations. Excluding one-off items incurred during
the quarter such as the severance paid for the closure of the Silvertree saw
mill and the write-off of fixed costs during the summer down-time at the logging
and sawmill operations cash flow from operations before the changes in non-cash
working capital would have been approximately negative $20 million.
Capital additions in the third quarter of $7.0 million include additions to
property, plant and equipment of $3.7 million compared to $2.9 million in the
second quarter. Expenditures on logging roads totalled $6.5 million in the third
quarter ($22.5 million for the nine months) of which $3.3 million relating to
intermediate and mainline logging roads was capitalised in the quarter ($11.2
million for the year to date) with the balance of $3.2 million relating to spur
roads expensed in accordance with the Company's accounting policy. The decrease
in total road cost during the quarter compared to the second quarter total of
$11.4 million was due to the scheduled down time. Capital additions in the
quarter are $6.0 million lower than the proforma amount in the comparative
period of 2004 primarily due to the change in accounting policy to expense spur
roads (they would have been capitalised for one third of the comparative period)
and due to the impact of the scheduled down time on road construction in 2005.
As previously discussed, the Company realised proceeds of $15 million on the
termination of its saw-log supply agreement with TimberWest and deposited the
proceeds in the Working Capital Reserve. For the nine months ended September 30,
2005 the Company has received $51.2 million in cash proceeds from surplus asset
sales and the Bill 28 take back settlement of which $45.6 million has been
deposited in the Working Capital Reserve account as required under the terms of
the Secured Bond indenture. At September 30, 2005 the total funds held in the
Working Capital Reserve and available to the Company for operational purposes
amounted to $48.5 million.
At September 30, 2005 the Company had a cash balance of $3.9 million, the
working capital reserve of $48.5 million and available credit of $18.9 million
under its credit facility to meet its operational requirements. The amount of
the credit facility available to the Company at September 30, 2005 was $10.0
million higher than would normally result from the availability calculation due
to a temporary reduction in the reserve base used in those calculations. The
temporary reduction ended on October 8, 2005. As a result of the Cascadia
transaction, the lender under our credit facility has agreed to adjust the
availability calculation to increase our availability under the credit facility
by $10 million through to the closing of the transaction, expected in the first
quarter of 2006. Due to the highly cyclical nature of our business we believe we
need available liquidity of approximately $50 million to enable us to have
sufficient reserve for market downturns.
WESTERN FOREST PRODUCTS INC. 9 2005 THIRD QUARTER REPORT
SELECTED QUARTERLY INFORMATION
To assist shareholders and other readers understand our business, we have
included as Appendix A to the MD&A a table of the financial results and
operating data for the Company and its Predecessor for the last eight quarters.
Note that in the case of the Predecessor the 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 Predecessors different capital structure.
In a normal operating year, there is some seasonality to the Company's
operations with higher activity in the second and third quarters as construction
activity, particularly in the US tends to be higher. Logging activity may also
vary depending on weather conditions due to snow and ice in the winter and the
threat of forest fires in the summer.
RISKS AND UNCERTAINTIES
Our business is subject to a number of risks and uncertainties which are
described in this quarterly report, our 2004 Annual Report, Annual Information
Form and our Form 20-F/A filed with the US Securities and Exchange Commission. A
key risk and uncertainty that we have been facing is our cash flow and liquidity
position. As a result of the continuing softwood lumber dispute, current market
conditions and our current capital and operating cost structure, we have not
generated sufficient cash flows from operations to meet our debt service
obligations and to fund the capital requirements and structural changes of our
business.
As at September 30, 2005, we had approximately $319.4 million of indebtedness
outstanding comprising our Secured Bonds and Working Capital Facility. Our
ability to pay our debt obligations depends on our current and 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.
We have taken certain steps to improve our liquidity in the short-term,
including taking down-time at our logging and sawmill operations during the
summer of 2005, deferral of the payment of 50% of the interest due on June 30,
2005 on our Secured Bonds, and the opportune termination of our saw log supply
contract with TimberWest.
With respect to the longer-term, the acquisition of Cascadia and related equity
and debt financing as well as the combined Company's secured revolving credit
facilities in the total amount of $200.0 million should improve the Company's
liquidity and balance sheet structure. We believe, given time, the acquisition
should significantly strengthen the Company's ability to reduce costs and
increase cash flow. The acquisition is expected to close in the first quarter of
2006, subject to the receipt of regulatory approvals.
Although we believe the steps we have taken to date to ensure short-term
liquidity should sustain our current operations until the closing of the
Cascadia acquisition and related financing transactions in 2006, there can be no
assurance that we will be successful in our efforts to implement our plan.
Further, it is anticipated that it may take up to 48 months to achieve the
estimated $65 million of pre tax annual synergies arising from the acquisition
of Cascadia. No assurance can be given that our business will generate
sufficient cash flow from operations to pay our ongoing debt obligations or fund
our other liquidity needs during this period.
For a full discussion of the risks and uncertainties which affect our business
please see our 2004 Annual Report, Annual Information Form and Form 20-F/A which
are available on Sedar at www.sedar.com. Any of the risks and uncertainties
described in this quarterly report and in the above noted documents could have a
material adverse affect on our operations and financial conditions and cash flow
and should be carefully considered in evaluating our business.
MEASUREMENT UNCERTAINTY
The Company reviews the carrying values of long-lived assets when events or
changes in circumstances indicate that the carrying value of the assets may not
be recoverable through future operations. During the third quarter, as a result
of continued losses by the Company, the potential impact of its restructuring
activities and the potential impact on operations of a weaker U.S. dollar and
reduced lumber and pulp prices in the market, the Company commenced an
impairment review of all of its long-lived assets.
The impairment review is being performed by determining whether projected
undiscounted future cash flows from operations exceed the net carrying amount of
the assets. Key assumptions in performing this review include lumber
WESTERN FOREST PRODUCTS INC. 10 2005 THIRD QUARTER REPORT
prices, pulp prices and the U.S. dollar exchange rate. Other significant
assumptions include the useful life of the assets (for example, curtailment
decisions) and the effect of the ongoing softwood lumber dispute with the U.S.
In determining the appropriate assumptions we have analyzed external data,
including RISI, and sought advice from our advisors.
Although we have not completed our analysis, by performing certain sensitivity
tests on a range of pricing and exchange rate assumptions, we have determined
that the Squamish pulp mill operations are particularly sensitive to the key
assumptions. If our final analysis indicates an impairment of this asset, then
it will be necessary to write it down to its fair value. As discussed further
under "Outlook", we are considering a number of strategic options for the pulp
mill including its continued operation, sale or closure. In determining the
appropriate fair value of the pulp mill using discounted future cash flows we
will need to consider these strategic options. The pulp mill has a carrying
value of $38.1 million at September 30, 2005.
As previously noted, we closed our Silvertree sawmill in October and recorded an
impairment charge of $8.5 million in the second quarter. On the basis of the
preliminary findings of the impairment review of the Solid Wood segment, we do
not consider that any further write down of these assets is necessary at
September 30, 2005.
Given the inherent imprecision of such impairment testing and the sensitivity of
results to the key assumptions used, it is possible that changes in future
conditions may lead management to use different assumptions in the future which
could require a material change in the carrying values of its long-lived assets.
OUTLOOK AND STRATEGY
The agreement to acquire Cascadia represents a significant milestone in the
Company's long-term strategy to be a key participant in the consolidation of the
British Columbia coastal forest industry. Through this transaction, Western will
acquire:
- 3.6 million cubic meters of associated annual Crown harvest rights
located in coastal British Columbia.
- Four sawmills and four remanufacturing facilities on Vancouver Island
and the lower Mainland with total production capacity of approximately
600 million board feet of lumber, as well as the leased Island Phoenix
division sawmill on Vancouver Island
- A custom-cut business, contract sawing high value lumber products to
order for customers in Asia; and
- A global marketing and sales organization, including offices in
Canada, Japan, Australia and China with agency relationships
worldwide.
The combined Western and Cascadia operations will have over 1.5 billion board
feet of annual lumber capacity and 6.8 million cubic meters of annual allowable
cut from Crown-owned tenures on Vancouver Island, the mainland coast and the
Queen Charlotte Islands. By combining resources and leveraging best practices
from both companies, Western expects to capture annual pre-tax synergies of
approximately C$65 million through marketing programs and operating
efficiencies, which are anticipated to be realized within about 48 months of the
completion of the transaction.
Since emergence from CCAA, we have been reviewing our assets to determine
whether they remain core to our business. On the basis of this review we have
determined that the Company's core business activities revolve around the solid
wood business and include logging from Crown timberlands and manufacturing of
lumber for sale in Canada, the U.S. and Asian markets. We have been considering
strategic options with respect to the non-core assets including the Squamish
pulp operation and private timberlands. We have engaged legal and financial
advisors to assist in this process.
The Company and its advisors have been in advanced discussions with third
parties on potential transactions that involve the Squamish pulp mill operation.
To date, the Company has not entered into a definitive agreement with any third
party and will only do so if economic terms and values are satisfactory to the
Company. At this time, there is no certainty that the Company's process will
result in a transaction that will impact the Squamish pulp mill. For accounting
purposes, the Company is in the process of reviewing its assets for impairment
and will be completing this process in the fourth quarter. There can be no
certainty that this review, or any transaction if completed, would not result in
a write-down or loss on sale of the pulp mill operations.
WESTERN FOREST PRODUCTS INC. 11 2005 THIRD QUARTER REPORT
The Company has been in discussions with the Minister of Forests of B.C. on the
removal of the Company's private timberlands from its TFLs. To the extent the
Company is successful in these discussions we will consider the sale of some or
all of the private timberlands if economic terms and values are satisfactory to
the Company. Proceeds from the sale of the private timberlands would be applied
to reduce the Company's debt burden pursuant to terms and conditions under the
proposed bridge term facility announced November 10, 2005.
Lumber prices in the North American markets have been weakening in the last
month with key commodity items falling by US$20-$25 per thousand board feet.
Kiln dried lumber, an increasing focus for us, has maintained a US$10-$15 per
thousand board feet premium to green lumber. Western Red Cedar activity is
relatively buoyant although most of the activity is targeted at the first
quarter of 2006. Sales to the Japanese market have been relatively firm although
prices are coming under pressure with the drop in the value of the Yen. We are
expecting to see the usual seasonal slow down in sales with a pick up early in
the New Year.
NBSK Pulp prices are currently showing slight upward movement. We remain
cautious with respect to the short-term outlook and do not forecast significant
changes at this time.
OUTSTANDING SHARE DATA
As of November 14, 2005, 25,631,795 of our Common Shares are issued and
outstanding. In addition, we have issued 569,373 Tranche 1 Class C Warrants,
854,146 Tranche 2 Class C Warrants, and 1,423,743 Tranche 3 Class C Warrants
(collectively, the "Class C Warrants"). We have reserved up to 2,847,262 Common
Shares for issuance upon the exercise of the Class C Warrants. We have also
reserved 2,500,000 Common Shares for issuance upon the exercise of options
granted under our incentive stock option plan. As of November 14, 2005 we have
granted 399,590 options under our incentive stock option plan.
OTHER MATTERS
Other than as described in this quarterly report, there has been no change to
the information provided in our MD&A for the period from July 28, 2004 to
December 31, 2004, dated March 24, 2005 ("2004 Annual MD&A") in respect of the
following items: Contractual Obligations (other than ordinary course), Financial
Instruments, Off-balance Sheet Arrangements, Transactions with Related Parties,
Critical Accounting Estimates, Changes in Accounting Policy and Risks and
Uncertainties. Please see our 2004 Annual MD&A for information on these items.
Additional information about the Company, including our Annual Information Form
is available at <www.sedar.com> under the Company name, Western Forest Products
Inc. 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.
On behalf of the Board of Directors
John MacIntyre Reynold Hert
Chairman President and Chief Executive Officer
Duncan, BC
November 14, 2005
Note:
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 is defined as operating
earnings (loss) plus amortization of property, plant and equipment and the
write-down of property, plant and equipment. We use EBITDA as a benchmark
measurement of our own operating results, and as a benchmark relative to its
competitors. We consider EBITDA to be a meaningful supplement to operating
income as a performance measure primarily because amortization expense and
property write-downs are not actual cash costs, and varies widely from company
to company in a manner that we consider largely independent of the underlying
cost efficiency of their operating facilities. In addition, we believe EBITDA is
commonly used by securities analysts, investors and other interested parties to
evaluate our financial performance.
WESTERN FOREST PRODUCTS INC. 12 2005 THIRD QUARTER REPORT
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.
Furthermore, EBITDA does not reflect the impact of a number of items that affect
our net income (loss). EBITDA is not a measure of financial performance under
GAAP, and should not be considered as an alternative to measures of performance
under GAAP. Moreover, because all companies do not calculate EBITDA in the same
manner, EBITDA as calculated by us may differ from EBITDA as calculated by other
companies.
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", "ANTICIPATES", "PLAN",
"INTEND", "BELIEVE", "WILL", "SHOULD", "MAY" 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 THE "RISK
FACTORS" SECTION IN OUR ANNUAL INFORMATION FORM AND UNDER THE "RISK FACTORS"
SECTION OF OUR FORM 20-F/A 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.
WESTERN FOREST PRODUCTS INC. 13 2005 THIRD QUARTER REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS - APPENDIX A
SUMMARY OF SELECTED RESULTS FOR THE LAST EIGHT QUARTERS
SELECTED FINANCIAL INFORMATION
(millions of Canadian dollars except per unit sales prices)
QUARTER
------------------------------------------------------------------------------------
2005 2004 2004 2003
------------------------- ------------------- --------------------------- -------
3rd 2nd 1st 4th 3rd 3rd 2nd 1st 4th
------- ------- ------- ------- ---------- --------- ------- ------- -------
(July 28 (July 1 -
- Sept 30) July 27)
---------------------------------------------------------
Predecessor (restated for sale of
Company Port Alice pulp mill in May, 2004)
------------------------- ---------------------------------------------------------
AVERAGE EXCHANGE RATE - CDN $ TO PURCHASE
ONE U.S. $ $1.2122 $1.2411 $1.2259 $1.2219 $1.3227 $1.3338 $1.3489 $1.3190 $1.3226
NET SALES
Lumber $ 88.2 $ 107.5 $ 97.3 $ 87.8 $ 85.5 $ 21.4 $ 116.4 $ 101.1 $ 81.3
Logs 22.2 26.0 18.2 27.7 31.8 13.5 53.4 14.1 25.9
By-Products 5.9 7.0 7.1 5.7 5.2 2.9 6.5 5.3 6.2
------- ------- ------- ------- ------- ------- ------- ------- -------
Solid wood segment 116.3 140.5 122.6 121.2 122.5 37.8 176.4 120.5 113.4
Pulp segment 40.4 45.9 40.1 44.6 35.8 6.4 52.2 42.4 43.4
------- ------- ------- ------- ------- ------- ------- ------- -------
$ 156.7 $ 186.4 $ 162.7 $ 165.8 $ 158.3 $ 44.2 $ 228.5 $ 163.0 $ 156.8
======= ======= ======= ======= ======= ======= ======= ======= =======
LUMBER
Lumber production - millions of
board feet 150 186 185 158 132 59 175 155 165
Lumber sales- millions of board feet 165 176 162 158 135 30 171 175 156
LOGGING
Log production - thousands of
cubic metres 465 1,148 498 894 681 422 1,158 769 709
Log purchases - thousands of
cubic metres 147 192 200 257 254 99 421 318 227
Log sales- thousands of cubic metres 172 213 166 236 291 120 449 100 176
Internal Log consumption - thousands
of cubic metres 719 844 875 768 605 261 936 809 907
NBSK PULP
Pulp production- thousands of tonnes 69 72 67 73 46 11 72 64 62
Pulp sales- thousands of tonnes 71 73 62 75 51 9 66 61 67
SALES PRICES
Lumber - per thousand board feet $ 535 $ 612 $ 599 $ 557 $ 633 $ 712 $ 681 $ 577 $ 521
Logs - per cubic metre $ 129 $ 122 $ 110 $ 117 $ 109 $ 113 $ 119 $ 141 $ 147
Pulp - per tonne $ 573 $ 624 $ 651 $ 601 $ 694 $ 734 $ 797 $ 697 $ 648
EBITDA
Solid wood segment $ (2.2) $ 2.2 $ 11.0 $ (10.3) $ 19.7 $ 10.9 $ 37.0 $ 17.7 $ (1.1)
Pulp segment (4.2) (0.7) 1.9 (1.8) 0.5 (10.7) 12.2 0.1 (2.2)
General corporate (3.4) (3.8) (4.2) (3.7) (2.4) (0.7) (2.1) (2.1) (2.6)
------- ------- ------- ------- ------- ------- ------- ------- -------
$ (9.8) $ (2.3) $ 8.7 $ (15.8) $ 17.8 $ (0.5) $ 47.1 $ 15.7 $ (5.9)
======= ======= ======= ======= ======= ======= ======= ======= =======
NET EARNINGS (LOSS) $ (12.5) $ (37.2) $ (5.3) $ (19.6) $ 14.1
NET EARNINGS LOSS PER SHARE - BASIC AND
DILUTED $ (0.49) $ (1.45) $ (0.21) $ (0.76) $ 0.55
RECONCILIATION OF EBITDA TO NET EARNINGS
(LOSS)
EBITDA $ (9.8) $ (2.3) $ 8.7 $ (15.8) $ 17.8 $ (0.5) $ 47.1 $ 15.7 $ (5.9)
Amortization of property, plant and
equipment (5.1) (10.3) (6.2) (8.7) (5.5) (4.4) (17.1) (11.5) (12.2)
Restructuring and other items (8.5) -- -- -- -- (1.1)
Interest expense (11.5) (12.0) (11.8) (11.2) (8.6) (8.7) (31.5) (28.9) (22.2)
Foreign exchange gain (loss) on
translation of long-term debt 13.3 (3.3) (1.6) 12.6 14.8 0.6 (16.1) (11.0) 34.1
Other income / expense 0.8 (0.4) 5.8 -- (0.1) (5.5) (0.4) 0.1 0.7
Financial restructuring costs -- -- (3.1) (5.0) (3.3) (2.5)
Income taxes (0.2) (0.3) (0.3) 3.5 (4.3) 0.7 (0.4) (0.3) (0.4)
Net loss from discontinued operations -- -- -- -- (1.6) (5.7) (5.1) (5.0)
Provision for preferred dividends -- -- -- -- (0.4) (1.2) (1.2) (1.2)
------- ------- ------- ------- ------- ------- ------- ------- -------
NET EARNINGS (LOSS) ATTRIBUTABLE TO
COMMON SHARES $ (12.5) $ (37.2) $ (5.3) $ (19.6) $ 14.1 $ (22.9) $ (30.3) $ (45.6) $ (15.7)
======= ======= ======= ======= ======= ======= ======= ======= =======
WESTERN FOREST PRODUCTS INC. 14 2005 THIRD QUARTER REPORT
CONSOLIDATED BALANCE SHEETS
(Expressed in millions of Canadian dollars)
September 30, 2005 December 31, 2004
------------------ -----------------
(Unaudited) (Audited)
ASSETS
Current assets
Cash $ 3.9 $ 5.0
Accounts receivable 56.9 78.0
Inventory 150.3 176.7
Restricted cash (note 5) 48.5 --
Prepaid expenses 8.7 5.2
------ ------
268.3 264.9
Restricted assets (note 5) -- 24.4
Investments 7.2 7.1
Property, plant and equipment 366.8 395.6
Other assets 1.0 1.4
------ ------
$643.3 $693.4
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Bank indebtedness (note 4) $ 72.2 $ 78.1
Accounts payable and accrued
liabilities 88.3 72.2
------ ------
160.5 150.3
Long-term debt (note 5) 247.2 253.5
Future income taxes 10.5 10.5
Other liabilities 30.1 29.4
------ ------
448.3 443.7
Shareholders' equity
Common Shares 255.2 255.2
Contributed surplus 0.3 --
Deficit (60.5) (5.5)
------ ------
195.6 249.7
------ ------
$643.3 $693.4
====== ======
Commitments and Contingencies (note 6)
See accompanying notes to consolidated financial statements
Approved on behalf of the Board:
"Reynold Hert" Director
"John MacIntyre" Director
WESTERN FOREST PRODUCTS INC. 15 2005 THIRD QUARTER REPORT
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Expressed in millions of Canadian dollars, except for share and per share
amounts)
July 1, to July 28, to January 1, to
September 30 September 30 July 1, to September 30 January 1, to
2005 2004 July 27, 2004 2005 July 27 2004
------------ ------------ ------------- ------------- -------------
Company Company Predecessor Company Predecessor
(Restated) (Restated)
Sales $ 156.7 $ 158.3 $ 44.2 $ 505.8 $ 435.8
Cost and expenses
Cost of goods sold 143.0 112.8 39.0 421.0 306.6
Anti-dumping and countervailing duties 8.3 11.9 1.9 30.4 24.0
Freight expenses 15.7 11.9 2.2 46.6 30.4
Amortization of property, plant and equipment 5.1 5.5 4.4 21.6 33.0
Restructuring and other items (note 10) (5.9) -- -- 2.6 --
Selling and administration 5.4 3.9 1.6 17.1 12.5
------- ------- ------- ------- -------
171.6 146.0 49.1 539.3 406.5
------- ------- ------- ------- -------
Operating earnings (loss) (14.9) 12.3 (4.9) (33.5) 29.3
Interest expense (11.5) (8.7) (9.0) (35.3) (71.4)
Foreign exchange gain (loss) on translation of
long-term debt 13.3 14.9 0.9 8.4 (24.2)
Other income / expense 0.8 (0.1) (5.5) 6.1 (5.9)
Financial restructuring costs -- -- (3.1) -- (11.4)
------- ------- ------- ------- -------
Earnings (loss) before income taxes (12.3) 18.4 (21.6) (54.3) (83.6)
Income taxes (0.2) (4.3) 0.7 (0.7) --
------- ------- ------- ------- -------
Net earnings (loss) from continuing operations (12.5) 14.1 (20.9) (55.0) (83.6)
Net loss from discontinued operations -- -- (1.6) -- (12.4)
------- ------- ------- ------- -------
Net earnings (loss) (12.5) 14.1 (22.5) (55.0) (96.0)
Provision for dividends on preferred shares -- -- (0.4) -- (2.8)
------- ------- ------- ------- -------
Net earnings (loss) attributable to common and
non-voting shares $ (12.5) $ 14.1 $ (22.9) $ (55.0) $ (98.8)
======= ======= ======= ======= =======
Loss per share:
Basic $ (0.49) $ 0.55 $ (0.54) $ (2.15) $ (2.33)
Diluted $ (0.49) $ 0.55 $ (0.54) $ (2.15) $ (2.33)
Weighted average number of common and non-voting 25,636 25,636 42,481 25,636 42,481
shares outstanding (thousands of shares)
See accompanying notes to the consolidated financial statements
WESTERN FOREST PRODUCTS INC. 16 2005 THIRD QUARTER REPORT
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Expressed in millions of Canadian dollars)
July 1, to July 28, to January 1, to
September 30 September 30 July 1, to September 30 January 1, to
2005 2004 July 27 2004 2005 July 27 2004
------------ ------------ ------------ ------------- -------------
Company Company Predecessor Company Predecessor
(Restated) (Restated)
Cash provided by (used in):
Operations:
Net loss from continuing operations $(12.5) $ 14.1 $(20.9) $(55.0) $(83.6)
Items not involving cash:
Amortization of property, plant and equipment 5.1 5.5 4.4 21.6 33.0
Future income taxes -- 3.9 -- -- --
Amortization and write-down of deferred charges 0.1 0.1 0.3 0.2 2.3
Write-down of property, plant and equipment -- -- -- 8.5 --
Foreign currency translation (gain)loss (13.3) (14.9) 0.9 (8.4) 24.2
Accretion of debt discount 0.6 -- -- 2.0 --
(Gain) loss on property, plant and equipment
disposals (13.1) -- 0.8 (12.8) 0.4
Other (0.2) 0.2 4.7 1.0 (0.2)
------ ------ ------ ------ ------
(33.3) 8.9 (11.6) (42.9) (23.9)
------ ------ ------ ------ ------
Changes in non-cash working capital items:
Accounts receivable 20.3 (15.5) 26.9 21.0 (14.2)
Inventory 30.1 (1.4) (22.3) 26.4 (51.7)
Prepaid expenses (1.7) 0.3 0.1 (3.5) (4.0)
Accounts payable and accrued liabilities 2.4 1.4 48.1 16.2 94.1
Accounts payable and accrued liabilities subject
to compromise -- -- (41.2) -- --
------ ------ ------ ------ ------
51.1 (15.2) 11.6 60.1 24.2
------ ------ ------ ------ ------
Cash provided (used) by continuing operations 17.8 (6.3) 0.0 17.2 0.3
Cash used by discontinued operations -- 1.4 -- (2.3)
------ ------ ------ ------ ------
17.8 (6.3) 1.4 17.2 (2.0)
------ ------ ------ ------ ------
Investments:
Additions to property, plant and equipment (3.7) (3.9) (1.4) (7.1) (3.5)
Additions to capitalized roads (3.3) (3.3) (4.4) (11.2) (21.1)
Disposals of property, plant and equipment 15.3 -- -- 29.7 1.1
Restricted cash (15.4) -- -- (45.6) --
Bill 28 take back proceeds and infrastructure -- -- -- 21.5 --
advance (note 6(a))
Other 0.1 -- (2.2) 0.3 1.2
------ ------ ------ ------ ------
(7.0) (7.2) (8.0) (12.4) (22.3)
------ ------ ------ ------ ------
Financing:
Bank indebtedness (7.0) 4.2 5.3 (5.9) 19.3
------ ------ ------ ------ ------
(7.0) 4.2 5.3 (5.9) 19.3
------ ------ ------ ------ ------
Increase (decrease) in cash 3.8 (9.3) (1.3) (1.1) (5.0)
Cash, beginning of period 0.1 12.7 17.9 5.0 21.6
------ ------ ------ ------ ------
Cash, end of period $ 3.9 $ 3.4 $ 16.6 $ 3.9 $ 16.6
====== ====== ====== ====== ======
See accompanying notes to the consolidated financial statements
WESTERN FOREST PRODUCTS INC. 17 2005 THIRD QUARTER REPORT
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Tabular amounts expressed in millions of Canadian dollars)
1. BASIS OF PRESENTATION
Western Forest Products Inc.'s (the "Company") business is the harvesting
of timber and the manufacturing and sale of lumber and pulp for worldwide
markets.
The Company acquired all of its operating assets from Doman Industries
Limited and certain of it subsidiaries ("Doman" or the "Predecessor") on
July 27, 2004. For a full discussion of the Company's acquisition of
Doman's assets and Doman's reorganization, please see the Company's annual
information form filed on Sedar at www.sedar.com.
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 in the Company's 2004 annual report. Certain amounts
presented in the Predecessor's financial information have been reclassified
to conform with the presentation adopted by the Company and have also been
restated to reflect the classification of the Port Alice pulp mill as
discontinued operations.
2. SIGNIFICANT ACCOUNTING POLICIES
These interim consolidated financial statements do not include all
disclosures required by Canadian generally accepted accounting principles
for annual financial statements and, accordingly, should be read in
conjunction with the Company's most recent audited annual consolidated
financial statements. These interim consolidated financial statements
follow the same accounting policies and methods of application used in the
Company's consolidated financial statements as at December 31, 2004 and for
the period from July 28, 2004 to December 31, 2004.
3. ADOPTION OF NEW ACCOUNTING POLICY
The new Canadian Institute of Chartered Accountants Accounting Guideline 15
"Consolidation of Variable Interest Entities" is effective for fiscal years
commencing after November 1, 2004. The Guideline provides criteria for
identifying Variable Interest Entities and their consolidation. The Company
has determined that the Guideline does not materially impact the Company's
Interim Consolidated Financial Statements.
4. 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 $100.0 million.
At September 30, 2005, of the $94.9 million of the facility that was
available to the Company, $72.2 million had been drawn down and $3.8
million was used to support standby letters of credit leaving a balance of
$18.9 million available for future use. The amount of the facility
available to the Company at September 30, 2005 was $10 million higher than
would normally result from the availability calculation due to a temporary
reduction in the reserve base used in those calculations. The temporary
reduction ended on October 8, 2005.
5. LONG-TERM DEBT
On July 27, 2004 the Company issued US$221.0 million of 15% Secured Bonds
due in 2009 for proceeds of US$210.0 million. 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 4). 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.
WESTERN FOREST PRODUCTS INC. 18 2005 THIRD QUARTER REPORT
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. On March 24, the Company established a working
capital reserve account as defined in the Bond Indenture with a permissible
ceiling of up to $50.0 million. Proceeds from asset sales will be credited
to the reserve account and be available for operational requirements, if
needed. At September 30, 2005, the balance in the working capital reserve
account was $48.5 million and is included in current assets as restricted
cash.
The Company chose to defer payment of 50% of the interest due on June 30,
2005 as it is entitled to do as discussed above. The Company has not yet
determined when it will pay this interest to the bondholders. The interest
deferred of US$8.3 million accrues interest at 15% and is included in
accounts payable and accrued liabilities.
6. COMMITMENTS AND CONTINGENCIES
(a) THE 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 cubic metres, in exchange for compensation payable by the
Crown. In January 2005, pursuant to terms of the settlement framework
agreement negotiated in late 2004, 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 $5.0 million towards compensation for improvements the
Company made to Crown land in the take-back areas ($4.0 million was
recorded as a reduction in capitalized roads and $1.0 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. Included
in other income for the nine months is $4.6 million for reimbursements
agreed to date with the BC Government for project engineering and other
costs incurred by our Predecessor with respect to certain timber cutting
rights taken back by the BC Government. The final comprehensive settlement
agreement is expected to be reached in 2005.
(b) SOFTWOOD LUMBER DUTIES
The Company has recorded countervailing and antidumping duties assessed on
Canadian softwood lumber exports to the United States totalling $8.3
million for the third quarter of 2005. Cumulative duties from May 22, 2002,
when cash deposits were made necessary for shipments of Canadian lumber
into the US, until September 30, 2005, total US$98.5 million.
On April 26, 2005 we were notified by the US Department of Commerce
("USDOC") that we were not entitled to use the reduced "all others rate"
for anti-dumping duty deposits of 3.78% unless we filed a changed
circumstances review request with the USDOC to confirm that we are the
successor in interest to our Predecessor. We subsequently filed an
application for an expedited changed circumstances review and received a
positive ruling from the US Department of Commerce confirming we are
entitled to use the "all others rate" of 3.78% effective from August 19,
2005. For the period from April 26, 2005 to August 19, 2005 we posted
anti-dumping deposits at the higher rate of 11.54%.
The Company and other Canadian forest product companies, the Federal
Government and Canadian Provincial Governments ("Canadian Interests")
categorically deny the US allegations and strongly disagree with the final
countervailing and antidumping determinations made. Canadian Interests
continue to aggressively defend the Canadian industry in this U.S. trade
dispute and have appealed the US decisions to NAFTA panels and the WTO.
A NAFTA Panel has ruled that the US authorities have not been able to
provide the NAFTA Panel with substantive evidence to support their ruling
of "threat of injury". The NAFTA Panel requested that they reverse their
ruling on "threat of injury" with which they reluctantly complied. US
interests appealed this ruling to an Extraordinary Challenge Committee
("ECC") Panel. On August 10, 2005 the ECC Panel upheld this finding by
WESTERN FOREST PRODUCTS INC. 19 2005 THIRD QUARTER REPORT
NAFTA Panel. However, the US authorities have not complied with this ruling
and US industry and trade groups have indicated that they may even
challenge the constitutional validity of NAFTA in US courts.
On June 1, 2005, the USDOC issued preliminary results for the second
administrative review period from May 1, 2003 to April 30, 2004 in the
anti-dumping case and April 1, 2003 to March 31, 2004 in the countervailing
duty case. The review process resulted in preliminary anti-dumping rates
ranging from 0.51% to 5.62% for the eight selected companies reviewed and a
review specific average of 2.44% (currently 3.78%) for all of the other
companies that had requested a company-specific review. The review process
also resulted in a preliminary countervailing rate of 8.18% (currently
16.37%) for all imports of softwood lumber from Canada excluding companies
and certain products from the Maritime Provinces. These rates are
preliminary, subject to review and comments, with expected final rates to
be published in December of 2005 (unless the review is extended). The final
rates will also be subject to appeals as discussed below.
The final amount of countervailing and anti-dumping 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 anti-dumping
duties will not be determined until each annual administrative review
process is complete, including appeals. A fuller discussion of the softwood
lumber duty issue can be found in our 2004 Annual Report, 2004 Annual
Information Form and Form 20-F/A.
(c) LITIGATION AND CLAIMS
In the normal course of its business activities, the Company may be 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.
A lumber broker for our Predecessor, commenced an action in New York in
2001 alleging that our Predecessor was in breach of U.S. anti-trust
legislation. The court dismissed the lumber brokers complaint, however,
they are appealing the decision. We believe the claim is without merit and
will vigorously defend it.
7. SEGMENTED INFORMATION
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. Sales to other
segment are accounted for at prices which approximate market value.
Quarter ended September 30, 2005
-------------------------------------
Solid wood Pulp Corporate Total
---------- ---- --------- -----
Sales to external customers $116.4 40.3 -- 156.7
Sales to other segment $ 6.2 -- -- 6.2
Operating Loss $ (6.6) (4.8) (3.5) (14.9)
Amortization of property, plant and equipment $ (4.5) (0.6) -- (5.1)
Silvertree severance $ (7.2) -- -- (7.2)
Gain on Saw log supply agreement termination $ 13.1 13.1
Capital expenditures $ (7.0) -- -- (7.0)
Nine months ended September 30, 2005
--------------------------------------
Solid wood Pulp Corporate Total
---------- ----- --------- -----
Sales to external customers $379.5 126.3 -- 505.8
Sales to other segment $ 21.1 -- -- 21.1
Operating Loss $(17.2) (4.9) (11.4) (33.5)
Amortization of property, plant and equipment $(19.7) (1.9) -- (21.6)
Write-down of property, plant and equipment $ (8.5) -- -- (8.5)
Silvertree severance $ (7.2) (7.2)
Gain on Saw log supply agreement termination $ 13.1 -- -- 13.1
Capital expenditures $(17.9) (0.4) -- (18.3)
WESTERN FOREST PRODUCTS INC. 20 2005 THIRD QUARTER REPORT
8. PENSION EXPENSE
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 earnings. The Company also has health care plans covering
certain hourly and retired salaried employees. The Company recorded expense
of $0.9 million in the three months ended September 30, 2005 with respect
to these defined benefit plans and a further $2.6 million with respect to
the contributions to the hourly paid employee union pension plans ($2.7
million and $6.8 million, respectively for the year to date).
9. FINANCIAL INSTRUMENTS
The Company has significant exposures to individual customers including one
customer which comprised 12% of the Company's sales for the nine months
ended September 30, 2005. The accounts receivable balance from the same
customer comprised 24% of the Company's outstanding receivables at
September 30, 2005 and was insured through the Export Development
Corporation as to approximately 87% of the balance outstanding. The
Company's general practice is to make sales on a cash basis, without credit
terms, or to insure them for 90% of their sales value with the Export
Development Corporation. The uninsured portion primarily results from the
timing of shipments.
10. RESTRUCTURING AND OTHER ITEMS
January 1,
July 1, to July 28, to July 1, to January 1, to to
September 30 September 30 July 27 September 30 July 27
2005 2004 2004 2005 2004
Company Company Predecessor Company Predecessor
------------ ------------ ----------- ------------- -----------
Silvertree severance (a) $ 7.2 $-- $-- $ 7.2 $--
Write-down of property, plant and
equipment (a) -- -- -- 8.5 --
Gain on termination of sawlog supply
agreement (b) (13.1) -- -- (13.1) --
------ --- --- ------ ---
$ (5.9) $-- $-- $ 2.6 $--
====== === === ====== ===
(a) On August 4, 2005 the Company announced the restructuring of its sawmill
operations. The Silvertree sawmill was closed at the end of October, and
the buildings will be dismantled, the site sold and production transferred
to the Duke Point sawmill. Production at the Saltair sawmill has been
indefinitely curtailed also effective at the end of October pending
determination on future opportunities for profitable production and its
current production will be transferred to the Cowichan Bay and Ladysmith
sawmills. The Company wrote down the Silvertree sawmill to its estimated
recoverable value and took a charge of $8.5 million in the second quarter.
The Company has recorded an additional charge in the third quarter of
approximately $7.2 million with respect to severance associated with the
closure of the Silvertree sawmill. No write-down has been recorded with
respect to the Saltair sawmill at this time pending a final decision on its
future. The net book value of the Saltair sawmill at September 30, 2005 was
$10.0 million.
(b) The Company terminated its saw-log supply arrangement with TimberWest
Forest Corp in September and received cash proceeds of $15 million which
were deposited into the Working Capital Reserve account. The Company
recorded a gain of $13.7 million on the termination.
11. MEASUREMENT UNCERTAINTY
The Company reviews the carrying values of long-lived assets when events or
changes in circumstances indicate that the carrying value of the assets may
not be recoverable through future operations. It does this by determining
whether projected undiscounted future cash flows from operations exceed the
net carrying amount of the assets (Step I test). Impaired assets are
recorded at fair value, determined principally by
WESTERN FOREST PRODUCTS INC. 21 2005 THIRD QUARTER REPORT
using discounted future cash flows expected from their use and eventual
disposition (Step II test). Estimates of future cash flows and of fair
values require judgment by management and may change over time.
During the third quarter, as a result of continued losses by the Company,
the potential impact of its restructuring activities and the potential
impact on operations of a weaker U.S. dollar and reduced lumber and pulp
prices in the market, the Company commenced an impairment review of its
long-lived assets.
This Step I test is being carried out on its pulp mill and solid wood
facilities (i.e. sawmills and logging operations). Key assumptions in
performing this test of recoverability include lumber prices, pulp prices
and the U.S. dollar exchange rate. Other significant assumptions include
the useful life of the assets (for example, curtailment decisions) and the
effect of the ongoing softwood lumber dispute with the U.S. Management is
analyzing external data, including RISI, and seeking advice from its
advisors in determining appropriate assumptions.
The Company has not yet finalized its Step I test. However, based on the
analysis performed to date and by performing certain sensitivity tests on a
range of pricing and exchange rate assumptions, management has determined
that the Company's pulp mill operations are particularly sensitive to the
key assumptions.
The pulp mill has a carrying value of $38.1 million at September 30, 2005.
If the final results of the Step I test do indicate an impairment of this
asset, then it will be necessary to write it down to its fair value. The
Company is currently seeking to determine the appropriate fair value of its
pulp mill using discounted future cash flows and by considering the impact
of a number of strategic options in relation to the future of its pulp
operations in the context of its overall restructuring activities. Options
being considered include the continued operation, sale or closure of the
mill. The assumptions being used to determine the discounted future cash
flows of the pulp mill include those used in the Step I test, except that
future cash flows are to be discounted at the risk-adjusted weighted
average cost of capital.
As noted in note 10, the Company has closed its Silvertree sawmill and it
recorded an impairment charge of $8.5 million in the second quarter. The
asset is recorded at its estimated recoverable amount of $12.1 million.
Operations at the Saltair sawmill have been curtailed, with no decision yet
taken as to its future. The carrying value at September is $10.0 million.
On the basis of the preliminary findings of the incomplete Step 1 test on
the long-lived assets in the Solid Wood segment, the Company does not
consider that any further write down of these assets is necessary at
September 30, 2005. The Company intends to complete its Step 1 and Step II
impairment testing in the fourth quarter.
Given the inherent imprecision of such impairment testing and the
sensitivity of results to the key assumptions used, it is possible that
changes in future conditions may lead management to use different
assumptions in the future which could require a material change in the
carrying values of its long-lived assets.
12. SUBSEQUENT EVENTS
On November 10, 2005 the Company reached a definitive agreement to acquire
Cascadia Forest Products Ltd. ("Cascadia") from Brookfield Asset Management
Inc., for approximately $120 million, subject to certain closing
adjustments plus Cascadia's net working capital, all payable in cash on
closing. Financing for the transaction has been secured from Tricap
Management Inc. ("Tricap"), which will provide both equity and debt
financing sufficient to fund the acquisition of Cascadia and to refinance
Western's existing 15% senior secured bonds. The acquisition is expected to
close in the first quarter of 2006, subject to the receipt of regulatory
approvals.
The rights offering will raise a total of $295.0 million of equity by way
of a rights offering to all shareholders pursuant to a prospectus expected
to be filed in early December, 2005. Under the terms of the rights offering
common shareholders will receive rights to subscribe for common share
subscription receipts of Western. At the time of closing the acquisition of
Cascadia, each subscription receipt will be automatically exchanged for one
Western common share. The subscription price shall be determined at the
WESTERN FOREST PRODUCTS INC. 22 2005 THIRD QUARTER REPORT
time the final prospectus for the offering is filed. The subscription price
for each common share subscription receipt will be fixed at 85% of the
volume weighted average trading price of the Western common shares on the
TSX for the 10 day period ending on the day prior to the date of filing of
the final prospectus, provided that the subscription price will not be less
than C$1.65 per common share subscription receipt nor greater than C$2.75
per common share subscription receipt. The rights are expected to be listed
for trading on the TSX and will be exercisable for at least 21 days
following the date of mailing of the final prospectus. Tricap has committed
to purchase any common share subscription receipts not otherwise purchased
by rightholders under the rights offering. In addition, Tricap has been
granted an option, which may be exercised for up to 10 business days
following the completion of the Rights Offering, to acquire sufficient
additional common share subscription receipts at the same issue price as
under the rights offering in order to ensure that Tricap, or its individual
investors in total owns, or exercises control or direction over, 45% of the
Western common shares if, following the exchange of all common share
subscription receipts for common shares, Tricap, or its individual
investors in total, would own less than 45% of the Western common shares.
Subscription funds will be refunded to investors if the Cascadia
acquisition does not close within six months, or if either the Cascadia
acquisition agreement or the Tricap debt facilities are terminated.
Net proceeds from the issuance of equity under the rights offering
totalling C$295 million (plus the proceeds of the subscription receipts
issued pursuant to Tricap's option, if any) less transaction costs will be
used to fund the acquisition of Cascadia and working capital.
In addition, Western has obtained a secured term-loan of approximately $310
million arranged by Tricap. The loan consists of two term facilities, a
four year US$187.5 million facility, and a one-year Cdn $90 million
facility, which may be extended for a second year at the option of Western.
The proceeds from these facilities will be used to redeem the Company's
existing US$221 million 15% senior secured notes. The secured loan is
non-amortizing and is pre-payable, in whole or in part, at any time.
Interest on amounts drawn under the US facility will be charged at the
floating US one-month LIBOR rate plus 8.15%. Interest on the Canadian
facility will be charged at the Canadian prime rate plus 5.25%.
Western will use the facility to fund the redemption of the senior secured
bonds not later than the completion of the acquisition of Cascadia.
Pursuant to the terms of the existing senior secured bond indenture,
Western is required to provide notice to bondholders at least 30 days prior
to the redemption date.
In addition to the above financings, the current revolving credit lender to
both Western and Cascadia, has agreed to maintain its existing working
capital facilities in the aggregate amount of $200.0 million.
WESTERN FOREST PRODUCTS INC. 23 2005 THIRD QUARTER REPORT
(WFP LOGO)
HEAD OFFICE
435 Trunk Road
Duncan, British Columbia FINANCIAL STATEMENTS ON THE INTERNET
Canada V9L 2P9
(250) 748-3711 www.westernforest.com
Fax: (250) 748-6045 www.sedar.com
E-mail: info@westernforest.com
FORM 52-109FT2
CERTIFICATION OF INTERIM FILINGS DURING TRANSITION PERIOD
I, REYNOLD HERT, President and Chief Executive Officer of WESTERN FOREST
PRODUCTS INC., certify that:
1. I have reviewed the interim filings (as this term is defined in
Multilateral Instrument 52-109 Certification of Disclosure in Issuers'
Annual and Interim Filings) of WESTERN FOREST PRODUCTS INC. (the
"Issuer") for the interim period ending September 30, 2005;
2. Based on my knowledge, the interim filings do not contain any untrue
statement of a material fact or omit to state a material fact required
to be stated or that is necessary to make a statement not misleading in
light of the circumstances under which it was made, with respect to the
period covered by the interim filings; and
3. Based on my knowledge, the interim financial statements together with
the other financial information included in the interim filings fairly
present in all material respects the financial condition, results of
operations and cash flows of the Issuer, as of the date and for the
periods presented in the interim filings.
Date: November 14, 2005
"REYNOLD HERT"
- ----------------------------------------
REYNOLD HERT
PRESIDENT AND CHIEF EXECUTIVE OFFICER
FORM 52-109FT2
CERTIFICATION OF INTERIM FILINGS DURING TRANSITION PERIOD
I, PAUL IRELAND, Chief Financial Officer of WESTERN FOREST PRODUCTS INC.,
certify that:
1. I have reviewed the interim filings (as this term is defined in
Multilateral Instrument 52-109 Certification of Disclosure in Issuers'
Annual and Interim Filings) of WESTERN FOREST PRODUCTS INC. (the
"Issuer") for the interim period ending September 30, 2005;
2. Based on my knowledge, the interim filings do not contain any untrue
statement of a material fact or omit to state a material fact required
to be stated or that is necessary to make a statement not misleading in
light of the circumstances under which it was made, with respect to the
period covered by the interim filings; and
3. Based on my knowledge, the interim financial statements together with
the other financial information included in the interim filings fairly
present in all material respects the financial condition, results of
operations and cash flows of the Issuer, as of the date and for the
periods presented in the interim filings.
Date: November 14, 2005
"PAUL IRELAND"
- ----------------------------------------
PAUL IRELAND
CHIEF FINANCIAL OFFICER