---------------------------
OMB APPROVAL
---------------------------
OMB Number: 3235-0116
Expires: August 31, 2005
Estimated average burden
hours per response.....6.20
---------------------------
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 28 , 2006.
-------------- --
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)(l): _______
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 April 12, 2006 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 (11-02) CONTAINED IN THIS FORM ARE NOT REQUIRED TO RESPOND UNLESS THE
FORM DISPLAYS A CURRENTLY VALID OMB CONTROL NUMBER.
[WESTERN FOREST PRODUCTS 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 FOREST PRODUCTS ANNOUNCES Q4 2005 RESULTS
MARCH 28, 2006 -- DUNCAN, BRITISH COLUMBIA. Western Forest Products Inc. (TSX:
WEF) today announced its results for the fourth quarter and year ended December
31, 2005. The Company will host a teleconference call on Thursday, March 30,
2006 at 10:00 a.m. PST (1:00 p.m. EST) on the Company's results. (See below for
details on participation).
During the fourth quarter of 2005, the Company announced a number of significant
strategic initiatives that are designed to improve its competitive position in
the industry and build value for shareholders.
Q4 2005 OVERVIEW
- --------------------------------------------------------------------------------
o Announced a definitive agreement to acquire Cascadia Forest Products Ltd.,
a significant coastal lumber producer with 3.6 million cubic metres of
annual allowable cut under crown tenures, for approximately $120 million
plus net working capital. Acquisition financing was secured from a $295
million fully underwritten equity rights offering. Also secured $308
million of new long-term debt facilities to redeem the Company's existing
issue of US$221 million of senior secured bonds and a restated revolving
credit facility.
o Announced the acquisition of the Englewood Logging Division, formerly owned
by Canfor Corporation, that includes 945,000 cubic metres of annual
allowable cut under TFL 37 on Vancouver Island.
o Announced the closure of the 275,000 tonne NBSK Squamish pulp mill in March
2006 and the decision to exit the softwood pulp business.
o EBITDA for the solid wood segment improved to negative $0.8 million
compared to negative $8.1 million in the third quarter and negative $10.3
million in the fourth quarter of 2004, primarily due to reduced logging
costs.
o Operating loss for the quarter of $84.5 million includes non-recurring
charges totaling $71.4 million (non-cash write-downs of $47.6 million, and
severance and other costs of $23.8 million) relating to the closure of the
Squamish pulp mill.
- --------------------------------------------------------------------------------
Commenting on the quarter, Reynold Hert, President and CEO noted, "The fourth
quarter marked a milestone for Western. Over the course of 2005, we had been
working on the implementation of our business strategy, and we believe the
initiatives announced represent the foundation upon which we can build a
globally competitive, softwood lumber company based on our high quality fibre
basket on the B.C. Coast. As we bring together the three businesses of Western,
Cascadia and Englewood, we will be seeking to realize approximately $70 million
of annual synergies within 48 months to create significant value for our
shareholders and the recapitalization of our balance sheet provides us the
necessary liquidity and the window of time to make the structural changes
required. Notwithstanding that, we will be moving quickly to reduce costs and
create a streamlined and efficient business with the assets acquired..." He
further added, "Our results for the fourth quarter principally reflect our
strategic decision to exit a pulp business that had long been an underperforming
segment for the Company".
Subsequent Events
Subsequent to the quarter end, the equity rights offering for 178.8 million
subscription receipts closed on March 9, 2006 for cash proceeds of $295 million
that were placed in escrow. Tricap Management Limited purchased the 58 million
subscription receipts not acquired under the equity rights offering. The
proceeds from the equity rights offering will be released from escrow to Western
upon the closing of the acquisition of Cascadia, which is expected to take place
in April, 2006 upon receipt of regulatory approvals. Proceeds surplus to the
funds required for the Cascadia acquisition will be applied to reduce the
revolving credit facility and contribute to cash on hand.
The Company's US$221 million 15% Secured Bonds were redeemed on March 10, 2006
from the proceeds of the two new long-term debt facilities totaling C$308
million. The facilities also provided approximately $13 million of funding that
was applied to reduce the revolving credit facility.
On March 17, 2006 Western closed the acquisition of the Englewood Logging
Division and also entered into a long-term fibre supply agreement for residual
wood chips and pulp logs. Western received $35 million cash on closing in the
form of a price premium prepayment on future chip deliveries. These funds were
also applied to reduce the revolving credit facility.
*********
WESTERN FOREST PRODUCTS
Western is an integrated Canadian forest products company and currently 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, and value-added
remanufacturing. 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 20 countries worldwide. Following the acquisition
of Tree Farm License 37 and Western's previously announced acquisition of
Cascadia Forest Products Ltd. which is subject to regulatory approval and
expected to close in April of 2006, Western expects to be the largest
Coastal woodland operator and lumber producer with an AAC of approximately 7.7
million cubic meters and lumber capacity in excess of 1.5 billion board feet.
The Company exited the softwood pulp business with the closure of the Squamish
pulp mill on March 9, 2006.
FORWARD LOOKING STATEMENTS
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 misjudgments in
the course of preparing forward-looking statements. The information contained
under the "Risk Factors" section of Western's Annual Information Form, under the
"Risk Factors" section of Western's Form 20-F/A and under the "Risk Factors"
section of the final prospectus 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: THURSDAY, MARCH 30, 2006 AT
10:00 A.M. PST/1:00 P.M. EST
On Thursday, March 30, 2006, 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 1-866-249-1964 in Canada and the U.S. (toll free) and
in Toronto or Internationally, 416-644-3416 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 April 13, 2006. To hear a complete replay, please call
1-877-289-8525 in Canada and the U.S. (toll free), Passcode 21180839# or in
Toronto and Internationally, 416-640-1917, Passcode 21180839#. This call will
also be webcast from Western's website at www.westernforest.com.
CONTACTS:
For further information, please contact:
REYNOLD HERT (250) 715-2207 PAUL IRELAND (250) 715-2209
PRESIDENT & CEO CFO
[WESTERN FOREST PRODUCTS - LOGO]
WESTERN FOREST PRODUCTS INC. - 2005 FOURTH 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 fourth
quarter ended December 31, 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 unaudited
consolidated financial statements and related notes thereto, for the fourth
quarter and year ended December 31, 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 year ended December 31, 2005 with the pro forma combined results
of the Company and our Predecessor for the year ended December 31, 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 unaudited 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 results of operations for 2005 compared to
our Pro forma results for 2004 should be reviewed with caution.
Unless otherwise noted, the information in this discussion and analysis is
updated to March 27, 2006. All financial references are in Canadian dollars
unless otherwise noted.
SUMMARY OF SELECTED RESULTS FOR THE QUARTER AND YEAR
<Table>
<Caption>
Three Months Three Months Three Months
Ended Ended Ended Year Ended Year Ended
December 31, September 30, December 31, December 31, December 31,
(millions of dollars 2005 2005 2004 2005 2004
except per share amounts) Company Company Company(1) Company Pro forma(1)
- ---------------------------------------------------------------------------------------------------------------------
Sales $ 161.0 $ 156.7 $ 165.8 $ 666.8 $ 759.8
Countervailing & $ (6.0) $ (8.3) $ (9.2) $ (36.4) $ (45.1)
anti-dumping duties
EBITDA(2) $ (7.1) $ (15.7) $ (15.8) $ (16.4) $ 64.3
Write-down of property, $ (70.8) $ 5.9 $ - $ (73.4) $ -
plant and equipment and
operating restructuring
costs
Operating earnings (loss) $ (84.5) $ (14.9) $ (24.5) $ (118.0) $ 17.1
Interest expense $ (11.8) $ (11.5) $ (11.2) $ (47.1) $ (91.3)
Foreign exchange gain $ (0.1) $ 13.3 $ 12.6 $ 8.3 $ 3.2
(loss) on long-term debt
Net loss attributable to $ (84.6) $ (12.5) $ (19.6) $ (139.6) $ (104.4)
common shares
- ---------------------------------------------------------------------------------------------------------------------
Per share:
Basic $ (3.30) $ (0.49) $ (0.76) $ (5.45) $ n/a
Diluted $ (3.30) $ (0.49) $ (0.76) $ (5.45) $ n/a
- ---------------------------------------------------------------------------------------------------------------------
Cash flow from Operations $ (11.0) $ 17.8 $ (17.8) $ 6.2 $ n/a
- ---------------------------------------------------------------------------------------------------------------------
</Table>
(1) Year ended December 31, 2004 represents the results of our Predecessor for
the period from January 1, 2004 to July 27, 2004 added to the Company's
results for the period from July 28, 2004 to December 31,2004.
(2) Non-GAAP measure -- see page 9 for a discussion of EBITDA.
WESTERN FOREST PRODUCTS INC. 2 2005 FOURTH QUARTER REPORT
OVERVIEW
Western is in the process of transition as it implements its strategy of
building a margin focused lumber business located on the coast of British
Columbia of sufficient size to compete in global softwood lumber markets. During
the fourth quarter the Company announced its strategic decision to focus on the
lumber business and exit the pulp business with the closure of the Squamish pulp
mill. The Company also announced the proposed acquisitions of Cascadia Forest
Products Ltd. ("Cascadia") and the Englewood Logging Division, formerly owned by
Canfor Corporation. These proposed acquisitions are key steps in our strategy
and will increase our access to high quality Crown-owned coastal timber, and
increase our lumber production capacity.
Since announcing the proposed acquisition of Cascadia on November 10, 2005 we
have made progress in raising the financing for the transaction and the
refinancing of our US$221 million 15% Secured Bonds. We filed a Final Prospectus
dated January 31, 2006 with respect to a rights offering to all shareholders
that has raised $295 million. The proceeds will be used to fund the proposed
acquisition of Cascadia, pay down the revolving credit facilities and provide
additional working capital. We will receive the funds on closing the acquisition
of Cascadia, which is expected in April, 2006 on receipt of regulatory
approvals. We also redeemed our US$221 million 15% Secured Bonds on March 10,
2006 with the proceeds of two term loans of US$187.5 million and C$90 million
obtained from the Brookfield Bridge Lending Fund.
The acquisition of the Englewood Logging Division that was announced on December
15, 2005 closed on March 17, 2006, other than certain private lands that should
be transferred to us on receipt of consent from the Minister of Forests and
Range. The Division's main asset is Tree Farm Licence 37 ("TFL 37") that is
located on the north end of Vancouver Island close to our existing operations
and those of Cascadia. TFL 37 currently has an Allowable Annual Cut ("AAC") of
approximately 945,000 cubic metres and is expected to generate annual synergies
of approximately $6 million within 48 months when fully integrated with our
existing operations. TFL 37 is currently under a Timber Supply Review that may
result in its AAC being reduced in 2006. The $45 million cost of the acquisition
will be paid as a set-off against part of the consideration to be received from
entering a long-term agreement to supply a partnership of Canadian Forest
Products Ltd. and Oji Paper Canada Ltd. with residual wood chips and pulp logs.
We also received $35 million cash on the execution of that agreement on March
17, 2006.
Operating results excluding unusual items improved in the fourth quarter of 2005
compared to both the third quarter of 2005 and the fourth quarter of 2004
primarily due to lower logging costs. EBITDA for the fourth quarter of 2005 of
negative $7.1 million compares to negative $15.7 million in the third quarter
and negative $15.8 million in the fourth quarter of 2004.
The net loss for the fourth quarter of 2005 was $84.6 million ($3.30 per share)
compared to a net loss of $12.5 million ($0.49 per share) in the third quarter
of 2005 and a net loss of $19.6 million ($0.76 per share) in the fourth quarter
of 2004. The results for the quarter reflect the impact of the closure of the
Squamish pulp mill with production ending on January 26, 2006. The Company
recorded a charge in the quarter of $71.4 million in connection with the closure
including $47.6 million with respect to the write-down of property, plant and
equipment and associated supplies inventories and $23.8 million for severance,
environmental and other costs.
The Company used $11.0 million of cash during the quarter to fund our operations
compared to using $17.8 million in the fourth quarter of 2004 and an inflow of
$17.8 million in the third quarter of 2005. The use of funds in the fourth
quarter of 2005 does not reflect any interest on our US$221 million 15% Secured
Bonds as the $20 million interest payment for the second half of 2005 was not
due until January, 2006. For the comparable period of 2004 the interest was paid
in December. The positive cash flow in the third quarter of 2005 results from
lower inventories and receivables caused by the curtailment of operations due to
market conditions.
WESTERN FOREST PRODUCTS INC. 3 2005 FOURTH QUARTER REPORT
Fourth Quarter Results Compared to the Third Quarter of 2005
- ------------------------------------------------------------
The following table and discussion indicates the major factors impacting EBITDA
for the current quarter compared to EBITDA as reported in the previous quarter
(EBITDA for the comparative period has been restated to exclude operating
restructuring items):
<Table>
<Caption>
(millions of dollars)
- ------------------------------------------------------------------------------
EBITDA for the three months ended September 30, 2005, as $ (9.8)
previously reported
Items now excluded from EBITDA:
Gain on termination of saw-log agreement in Q3 (13.1)
Silvertree severance costs in Q3 7.2
-----------
EBITDA for the three months ended September 30, 2005, as (15.7)
redefined
Lower production costs 7.2
Lower lumber prices realised (4.0)
Higher log and pulp prices realised 2.4
Change in mix of lumber and logs sold 1.6
Higher log and lumber sales offset by lower pulp sales 2.0
Lower by-product revenues (2.3)
Lower anti-dumping and countervail duty 2.5
Other (0.8)
-----------
EBITDA for the three months ended December 31, 2005 $ (7.1)
===========
</Table>
Results in the fourth quarter were primarily influenced by lower logging costs.
Logging production resumed to more normal levels in the fourth quarter following
the down time taken in the summer with a reduction in the expense for shutdown
costs compared to the third quarter. Stumpage rates also decreased both in
absolute terms and as a result of harvesting less cedar in the quarter.
Decreases in actual prices realised for lumber were more than offset by higher
volumes of lumber and log sales, higher log and pulp prices and the change in
the mix of lumber to more high-value cedar and hemlock products and less fir.
This was offset to some extent by the sale of a lower log value mix.
Results for the quarter also benefited from the reduction in the anti-dumping
and countervail duty deposit rates that were announced by the United States
Department of Commerce effective from December 12, 2005 from a combined total of
20.15% to 10.81%.
Fourth Quarter Results Compared to the Fourth Quarter of 2004
- -------------------------------------------------------------
The following table and discussion indicates the major factors impacting EBITDA
for the current quarter compared to EBITDA as reported in the fourth quarter of
2004:
<Table>
<Caption>
(millions of dollars)
- -----------------------------------------------------------------------------
EBITDA for the three months ended December 31, 2004 $ (15.8)
Lower pulp log inventory write-downs 7.4
Lower costs, primarily logging 7.3
Lower lumber prices realised (5.5)
Lower log prices realised (3.9)
Change in mix of lumber and logs sold 8.1
Impact of foreign exchange rates (1.0)
Lower by-product revenues (2.1)
Other (1.6)
-------------
EBITDA for the three months ended December 31, 2005 $ (7.1)
=============
</Table>
The results for the fourth quarter of 2005 improved compared to the same period
in 2004 primarily due to lower logging costs and the impact of changes in pulp
log inventories. During 2004, pulp log inventories increased from approximately
78,000 cubic metres at the end of the third quarter to 189,000 cubic metres at
the end of the fourth quarter. This resulted in the lower of cost and market
reserves taken and charged to earnings of $6.6 million in the fourth quarter as
compared to a reduction in the reserve of $0.8 million in the fourth quarter of
2005. Stumpage and royalty rates also decreased between the two quarters as a
result of declining log prices and the impact of log mix. This was partially
offset by higher costs, particularly for fuel and transportation
WESTERN FOREST PRODUCTS INC. 4 2005 FOURTH QUARTER REPORT
Lower lumber and log prices and the impact of the stronger Canadian dollar were
largely offset by a shift in the sales mix towards more high value cedar and
hemlock lumber products and higher value logs as a percentage of the total
compared to the same period in 2004.
SOLID WOOD SEGMENT
<Table>
<Caption>
Three Months Three Months Three Months
(millions of dollars except where Ended Ended Ended Year Ended Year Ended
noted) December 31, September 30, December 31, December 31, December 31,
2005 2005 2004 2005 2004
Company Company Company Company Pro forma (1)
- ------------------------------------------------------------------------------------------------------------------------
Lumber sales $ 91.3 $ 88.2 $ 87.8 $ 384.3 $ 412.2
Log sales 25.5 22.2 27.7 91.9 140.5
By-product sales 3.6 5.9 5.7 23.6 25.6
---------------------------------------------------------------------------------
$ 120.4 $ 116.3 $ 121.2 $ 499.8 $ 578.3
=================================================================================
EBITDA $ (0.8) $ (8.1) $ (10.3) $ 4.3 $ 75.0
EBITDA margin (0.7%) (7.0%) (8.5%) 0.9% 13.0%
Operating earnings (loss) $ (6.1) $ (6.7) $ (18.6) $ (23.3) $ 34.1
Total assets employed $ 499.2 $ 546.3 $ 594.0 $ 499.2 $ 594.0
Lumber production -- millions of 127 150 158 648 679
board feet
Lumber sales - millions of board feet 166 165 158 669 669
Log production -- thousands of cubic 822 465 896 2,933 3,925
metres
Log purchases - thousands of cubic 87 147 144 626 1,167
metres
Log sales - thousands of cubic metres 212 172 236 763 1,197
Internal Log consumption - thousands 590 719 768 3,028 3,379
of cubic metres
Average lumber sales revenue per $ 549 $ 535 $ 557 $ 574 $ 616
thousand board feet
Average log sales revenue per cubic $ 120 $ 129 $ 118 $ 120 $ 117
metre
</Table>
(1) Year ended December 31, 2004 represents the results of our Predecessor for
the period from January 1, 2004 to July 27, 2004 added to the Company's
results for the period from July 28, 2004 to December 31, 2004.
The solid wood segment had an operating loss of $6.1 million in the quarter
compared to an operating loss of $6.7 million in the third quarter of 2005 and
an operating loss of $18.6 million in the fourth quarter of 2004. EBITDA for the
solid wood segment was negative $0.8 million in the fourth quarter compared to
negative $8.1 million in the third quarter and negative $10.3 million in the
fourth quarter of 2004. The fourth quarter of 2004 was negatively impacted by
the changes in the provision for the lower of cost and market pulp log
inventories as discussed in the comparison of EBITDA above.
Lumber sales of 166 million board feet in the quarter were comparable to the
previous quarter and approximately 5% higher than the same period in 2004.
Lumber production of 127 million board feet was approximately 15% lower than the
previous quarter and 20% lower than the same period of 2004 as we managed our
lumber inventories down with an extended shut down at the Ladysmith sawmill and
the closure of the Silvertree sawmill and curtailment of the Saltair sawmill
both as of October 28, 2005. In total there were 74 fewer shifts worked in the
fourth quarter compared to the previous quarter and 122 fewer shifts in the
comparative period of 2004. We will increase the number of shifts, including
moving to three shifts per day at certain sawmills, as markets and log supply
dictate. Sales of by-products were lower in the fourth quarter of 2005 compared
to the third quarter of 2005 and the fourth quarter of 2004 as a result of the
lower sawmill production.
Log production of 0.822 million cubic metres in the quarter compares to 0.465
million cubic metres in the third quarter and 0.896 million cubic metres in the
comparable period of 2004. The increase in production compared to the third
quarter reflects the resumption to normal logging levels following the
previously announced downtime taken at the logging operations during the summer
to reduce log inventories. The higher log production during the quarter also
resulted in higher external log sales compared to the previous quarter. Log
sales in the quarter were lower compared to the same period of 2004 as it
included pulp logs sold to the Port Alice mill prior to its closure in October,
2004. Average log prices realised during the quarter decreased to $120 per cubic
metre compared to $129 per cubic metre in the previous quarter primarily due to
the mix of logs sold.
During the quarter we were notified that we had been selected as a mandatory
respondent in the anti-dumping duty third administrative review of certain
softwood lumber products from Canada. We were selected, along with seven other
companies, under the United States Department of Commerce's ("USDOC") new
"probability proportional to size"
WESTERN FOREST PRODUCTS INC. 5 2005 FOURTH QUARTER REPORT
sampling methodology. The review covers the period from May 1, 2004 to April 30,
2005. We are currently posting anti-dumping duty deposits at the "all others"
rate of 2.11% on the value of our lumber shipments to the United States.
Following the third review, we will post anti-dumping duties at a "company
specific" rate that will be determined for us as a result of this review. We do
not expect to receive the final results of the USDOC third review until December
2006, consistent with the timing of the USDOC second administrative review
determinations announced in 2005.
PULP SEGMENT
As announced on December 15, 2005 the Company has decided to exit the Pulp
Segment and close its Squamish pulp mill. The last production shift was
completed on January 26, 2006 and most of the workforce completed their
employment on March 9, 2006. The Company is evaluating possible future uses for
the site. Commencing with the first quarter of 2006, the Pulp Segment will be
classified as a discontinued operation.
<Table>
<Caption>
Three Months Three Months Three Months Year Year
Ended Ended Ended Ended Ended
(millions of dollars December 31, September 30, December 31, December 31, December 31,
except where noted) 2005 2005 2004 2005 2004
Company Company Company Company Pro forma(1)
- --------------------------------------------------------------------------------------------------------------------
Sales $ 40.6 $ 40.4 $ 44.6 $ 167.0 $ 181.5
EBITDA $ (1.8) $ (4.2) $ (1.8) $ (4.8) $ 0.3
EBITDA margin (4.4%) (10.4%) (4.0%) (2.9%) 0.2%
Operating earnings $ (73.9) $ (4.8) $ (2.2) $ (78.8) $ (6.0)
(loss)
Total assets employed $ 37.2 $ 82.2 $ 84.6 $ 37.2 $ 84.6
Pulp production 71 69 73 279 266
- -thousands of tonnes
Pulp sales -thousands 69 71 74 275 262
of tonnes
Average pulp revenue $ 582 $ 573 $ 601 $ 606 $ 693
per tonne
Average pulp price $ 600 $ 587 $ 600 $ 612 $ 626
delivered to Northern
Europe -- (US$ per
tonne)(2)
Average pulp price $ 702 $ 712 $ 753 $ 742 $ 816
delivered to Northern
Europe -- (C$
equivalent per tonne)(2)
</Table>
(1) Year ended December 31, 2004 represents the results of our Predecessor for
the period from January 1, 2004 to July 27, 2004 added to the Company's
results for the period from July 28, 2004 to December 31, 2004.
(2) Benchmark prices sourced from Resource Information Systems, Inc. Canadian
equivalent translated at average exchange rate for the period.
The operating loss from the pulp segment during the quarter of $73.9 million
reflects the charges associated with the closure of the pulp mill of $71.4
million and compares to a loss of $4.8 million in the third quarter of 2005 and
a loss of $2.2 million in the comparative quarter of 2004. EBITDA for the pulp
segment in the quarter was negative $1.8 million compared to negative $4.2
million in the third quarter and negative $1.8 million in fourth quarter of
2004. The improvement in the results for the quarter compared to the third
quarter is primarily attributable to lower fibre costs as a result of the
purchase of lower cost pulp chips from the interior of British Columbia.
In addition to the charges related to the closure discussed above, the Company
expects to expense a further $4.5 million in the first quarter of 2006 for
contract termination and other costs. The Company will also incur ongoing costs
for supervision, security, property taxes and other costs (including demolition
costs less any recoveries for asset sales, if the Company decides to remove
certain plant and equipment) in 2006 and future years depending on the Company's
plans for the site. These costs will be expensed as incurred.
OTHER CORPORATE ITEMS
Interest expense increased to $11.8 million in the quarter from $11.5 million in
the third quarter and $11.2 million in the fourth quarter of 2004 primarily as a
result of fluctuations in the Canadian dollar. The Company recorded a foreign
exchange loss in the quarter of $0.1 million on the translation of its US dollar
denominated secured bonds compared to a gain recorded in the third quarter of
$13.3 million and a gain of $12.6 million in the fourth quarter of 2004.
We recorded an income tax recovery in the fourth quarter of 2005 of $10.6
million with respect to the draw down of future income taxes payable in a
subsidiary of the Company.
WESTERN FOREST PRODUCTS INC. 6 2005 FOURTH QUARTER REPORT
CHANGES IN FINANCIAL POSITION AND LIQUIDITY
<Table>
<Caption>
Three Months Three Months Three Months Year Year
Ended Ended Ended Ended Ended
(millions of dollars December 31, September 30, December 31, December 31, December 31,
except where noted) 2005 2005 2004 2005 2004
Company Company Company Company Pro forma(1)
- -------------------------------------------------------------------------------------------------------------------
Cash flow from $ (11.0) $ 17.8 $ (17.8) $ 6.2 $ (24.3)
operations
Additions to property, $ (2.1) $ (3.7) $ (1.4) $ (9.2) $ (8.8)
plant and equipment
Additions to capitalized $ 2.1 $ (3.3) $ (3.0) $ (9.1) $ (27.4)
roads
Change in bank $ (0.7) $ (7.0) $ 24.2 $ (6.6) $ 47.7
indebtedness
Total liquidity (2) $ 54.5 $ 71.3 $ 20.9 $ 54.5 $ 20.9
Financial ratios:
Current assets to 1.28 1.67 1.76 1.28 1.76
current liabilities
Debt to shareholders 4.21 2.29 1.78 4.21 1.78
equity
Debt to market 9.1 6.24 2.61 9.1 2.61
capitalization
</Table>
(1) Year ended December 31, 2004 represents the results of our Predecessor for
the period from January 1, 2004 to July 27, 2004 added to the Company's
results for the period from July 28, 2004 to September 30, 2004.
(2) Total liquidity comprises cash, restricted cash and available credit under
the Company's operating line.
Cash flow from operations in the quarter of negative $11.0 million compares to
positive cash flow of $17.8 million in the third quarter and negative $17.8 in
the fourth quarter of 2004. Cash flow from operations in each period benefited
from the reduction in net working capital due to the timing of cash flows and
planned reductions in logging and lumber inventories. Net working capital in the
fourth quarter of 2005 also benefited from the timing of the semi-annual payment
of the interest on the Company's 15% Secured Bonds being paid in January 2006
instead of December 2005.
Cash flow from operations before the non-cash changes in working capital items
was negative $42.0 million in the quarter compared to negative $33.3 million in
the third quarter and negative $28.2 million in the fourth quarter of 2004. The
fourth quarter of 2005 includes $23.8 million with respect to severance and
other charges resulting from the closure of the Squamish pulp mill. These
amounts are included in accounts payable and accrued liabilities at December 31,
2005.
Additions to property, plant and equipment during the quarter of $2.1 million
primarily relate to sawmill improvements. Total expenditures on logging roads
were $5.2 million in the quarter compared to $6.5 million in the third quarter.
The Company reclassified certain costs that had been previously capitalized and
as a result recorded a net decrease in road costs capitalized in the quarter of
$2.1 million.
During the quarter the Company withdrew $40 million from the working capital
reserve account to fund operations and the semi-annual interest payable with
respect to the second half of 2005 on the US$221 million 15% Secured Bonds that
was paid in full on January 3, 2006.
At December 31, 2005 the Company had a cash balance of $29.6 million, the
working capital reserve of $8.9 million and available credit of $16.0 million
under its revolving credit facility to meet its operational requirements. As
noted above, on January 3, 2006 the Company paid $20.0 from this cash balance
with respect to interest due on its 15% Secured Bonds. On March 10, 2006 the
Company completed its previously announced redemption of its Secured Bonds
including paying all accrued interest thereon. The total redemption amount of
US$252.5 million (Cdn$293.3 million), including accrued interest, was funded
from the proceeds of the new US$187.5 million and C$90 million term loans
obtained from the Brookfield Bridge Lending Fund that were also drawn on March
10, 2006. The new loan facilities provided approximately $13 million of
additional working capital to the Company. In addition, the closing of the
acquisition of the Englewood Logging Division and the execution of the long-term
fibre supply arrangement with the Partnership resulted in the Company receiving
$35 million cash on March 17, 2006 which has been applied against the Company's
revolving line of credit. Approximately $17 million will be required in the
short-term to fund severance and other obligations with respect to the closure
of the Squamish pulp mill.
In addition to the above noted debt restructuring, the Company completed its
rights offering to all shareholders on March 9, 2006. The rights holders and
Tricap Management Limited, through its standby commitment, paid $295 million for
subscription receipts that will be exchangeable into common shares (subject to a
change of control exchange limitation) upon the completion of the proposed
acquisition of Cascadia. The proceeds will be used to fund the proposed
acquisition of Cascadia, pay down the revolving credit facilities of both
Western and Cascadia and contribute to working capital. Following the closing
the Company estimates that it should have availability under its amended
revolving credit facility in the range of $110-$120 million and unrestricted
cash in the range of $30-$40 million, depending on working capital movements and
operating results until closing.
WESTERN FOREST PRODUCTS INC. 7 2005 FOURTH QUARTER REPORT
SELECTED QUARTERLY INFORMATION
To assist shareholders and other readers in understanding 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) level as a comparison of items below that level is
not meaningful as a result of the Predecessor's 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 U.S., 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, Form 20-F/A filed with the US Securities and Exchange Commission and our
Final Prospectus dated January 31, 2006. A key risk and uncertainty that we have
been facing is our cash flow and liquidity position. As a result of the
continuing strength of the Canadian dollar, the 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.
The Company incurred a net loss for the year ended December 31, 2005 of $139.6
million and at December 31, 2005, has an accumulated deficit of $145.1 million.
Included in the net loss for the year ended December 31, 2005 is $73.4 million
in write-downs of assets and operating restructuring costs related to the pulp
mill and sawmill closures and $7.4 million for operating losses of the pulp mill
which was closed permanently in early 2006.
As at December 31, 2005, we had approximately $319.3 million of indebtedness
outstanding comprised of our Secured Bonds and Revolving Credit 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 exchange rate and lumber prices, all of which are beyond our control.
At December 31, 2005, the Company had cash, restricted cash and available lines
of credit totaling $54.5 million to fund future operations.
In response to the losses incurred during 2005, the Company closed and
consolidated certain of its operations so as to lower its cost structure and
improve future operating results. In addition, the Company has entered into an
agreement to acquire Cascadia. The Company is financing the proposed acquisition
and raising additional working capital through an equity rights offering and a
refinancing of its long-term debt and bank indebtedness. Closing of the Cascadia
acquisition is dependent on receiving approvals from certain governmental
authorities.
Market conditions including foreign exchange rates, prices for its products and
other factors will have a significant impact on the ability of the Company to
improve financial performance over the next fiscal year. In addition to market
conditions, future profitable operations on a long-term basis are also dependent
on the Company's ability to successfully integrate its operations with
Cascadia's operations and realize significant synergies that we believe should
help reposition the Company to successfully compete in global softwood markets.
The Company anticipates that the governmental approvals will be received in
April of 2006 and the Cascadia acquisition will close and the proceeds of the
rights offering will be released at that time. In the event that market
conditions are not favourable and the acquisition of Cascadia and related
financings does not close, the Company will need to consider other strategic
alternatives to finance and maintain its operations.
For a full discussion of the risks and uncertainties which affect our business
please see our 2004 Annual Report, Annual Information Form, Form 20-F/A and our
Final Rights Offering Prospectus dated January 31, 2006 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
WESTERN FOREST PRODUCTS INC. 8 2005 FOURTH QUARTER REPORT
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 was 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 included 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. In determining
the appropriate assumptions we have analyzed external data, including RISI, and
sought advice from advisors.
Following the strategic decision to exit the pulp business and close the
Squamish pulp mill the Company reviewed the carrying amounts for these
operations and the estimated costs to exit the business. On the basis of this
review the Company took a fourth quarter charge of $71.4 million including $47.6
million to write-down the property, plant and equipment and related supplies
inventories to their estimated recoverable amount. Environmental remediation and
other costs are primarily based on the preliminary findings of work performed by
consultants. Actual costs may be significantly different once investigative
drilling and other planned analysis is completed.
With respect to the Solid Wood segment, we closed our Silvertree sawmill in
October and recorded an impairment charge of $8.5 million in the second quarter
of 2005. On the basis of the 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 December 31, 2005.
Given the inherent imprecision of 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 results for the quarter continue to demonstrate the need for us to pursue
our strategy of leading the consolidation of the BC coastal lumber industry.
Costs must be reduced through rationalisation, productivity improvements and a
more integrated approach to the business. The proposed acquisition of Cascadia
and the acquisition of the Englewood Logging Division together with the
recapitalisation of the Company should, over time, better enable us to make
these structural changes. The acquisition of Cascadia is subject to regulatory
review and we are working to provide the government agencies with the
information they require and expect the transaction to close during April, 2006.
As previously disclosed, we are looking for opportunities to realize additional
value through the sale of our 29,000 hectares of private timberlands. We have
applied to the BC Ministry of Forests and Range to remove these lands from their
associated Tree Farm Licenses and have engaged an advisor to assist us with the
sales process. Proceeds from any sale would predominantly be used first to pay
down the $90 million Canadian term loan facility and thereafter the US dollar
term loan facility, subject to any funds retained and deposited in the working
capital reserve, all in accordance with the terms of these new facilities.
The strength of the Canadian dollar continues to be a concern. Although the
acquisition of Cascadia is expected to reduce the percentage of our sales
denominated in US dollars from over 60% to approximately 49%, our results will
continue to be significantly impacted by fluctuations in the value of the
dollar, particularly if they occur over short periods of time. We estimate that
a 1% change in the value of the Canadian dollar per US$1.00 will impact
operating earnings by approximately $6 million on a post acquisition basis.
The volume of logs currently available on the Vancouver log market is at
unusually low levels even when considering normal seasonal fluctuations. This
has been caused by a number of factors including low log and lumber prices in
the fourth quarter of 2005 that have resulted in most logging operators avoiding
building inventories heading into the traditional winter slow down. Cedar log
and lumber prices have recovered in the first quarter of 2006, however many of
the major logging operations have been prevented from significantly increasing
cedar output due to heavy snow pack preventing access to higher elevations.
Conversely, even though customer demand for hemlock lumber is consistent it has
not translated into appreciably stronger pricing. We have the ability to
increase our logging production to some extent as we move further into the
spring however the future availability of logs to purchase on the market is
unknown and is very dependent on log prices and speculative considerations.
The mild winter in North America has resulted in higher levels of construction
activity and demand for dimension lumber products than would normally be
expected at this time of the year. However, this increased activity has only
caused a modest price increase which is affecting the log market as described
above. The advance in the construction cycle is expected to result in prices
remaining flat in the second quarter as the market assesses supply and demand
trends.
WESTERN FOREST PRODUCTS INC. 9 2005 FOURTH QUARTER REPORT
Demand for Western Red Cedar is seasonal with higher demand in the spring as
sales of decking and outdoor furniture increase. The mild winter has brought
that demand forward resulting in higher demand and prices, particularly compared
to the weak prices in the same period in 2005. Demand and prices are anticipated
to fall off in the second half of 2006 as this seasonal demand slows down.
Prices have increased in the Japanese market over the past two months by
approximately 3-5% on average in US$ terms. Prices are expected to remain firm
through the first half of 2006 as a result of supply constraints, particularly
from Russia and Europe due to the impacts of a particularly severe winter and
Russian lumber being diverted to the Chinese market. Overall, housing starts are
expected to be below 2005's level.
OUTSTANDING SHARE DATA
As of March 27, 2006, 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 March 19, 2006 we have
granted 399,590 options under our incentive stock option plan. The Company
completed its rights offering of subscription receipts to all shareholders on
March 9, 2006 raising $295.0 million. On March 16, 2006, 178.8 million
subscription receipts were issued and, on the closing of the proposed
acquisition of Cascadia, will be automatically exchanged for an equivalent
number of common shares and the funds released to the Company. The exchange is
subject to a restriction in the event that it would result in a holder or group
of holders exercising control or direction over 50% or more of the common
shares. See note 6(a) to the (Unaudited) Interim Consolidated Financial
Statements for additional information.
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
March 27, 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 and operating restructuring items.
We use EBITDA as a benchmark measurement of our own operating results, and as a
benchmark relative to our 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
vary widely from company to company in a manner that we consider largely
independent of the underlying cost efficiency of their operating facilities.
Further, operating restructuring costs are not expected to occur on a regular
basis and may make comparisons of our operating results between periods more
difficult. We also believe EBITDA is commonly used by securities analysts,
investors and other interested parties to evaluate our financial performance.
WESTERN FOREST PRODUCTS INC. 10 2005 FOURTH 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
AND FORWARD-LOOKING INFORMATION WITHIN THE MEANING OF APPLICABLE SECURITIES
LAWS. THOSE STATEMENTS AND INFORMATION APPEAR IN A NUMBER OF PLACES IN THIS
DOCUMENT AND INCLUDE STATEMENTS AND INFORMATION 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 AND INFORMATION 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 AND INFORMATION 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 OR
INFORMATION 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 OR INFORMATION. THE INFORMATION CONTAINED
UNDER THE "RISK FACTORS" SECTION IN OUR ANNUAL INFORMATION FORM, UNDER THE "RISK
FACTORS" SECTION OF OUR FORM 20-F/A AND UNDER THE "RISK FACTORS" SECTION OF OUR
FINAL PROSPECTUS DATED JANUARY 31, 2006 IDENTIFIES IMPORTANT FACTORS THAT COULD
CAUSE SUCH DIFFERENCES. ALL WRITTEN AND ORAL FORWARD-LOOKING STATEMENTS OR
INFORMATION ATTRIBUTABLE TO US OR PERSONS ACTING ON OUR BEHALF ARE EXPRESSLY
QUALIFIED IN THEIR ENTIRETY BY THE FOREGOING CAUTIONARY STATEMENTS.
WESTERN FOREST PRODUCTS INC. 11 2005 FOURTH 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 price and per share amounts
unless noted otherwise)
<Table>
<Caption>
QUARTER
-----------------------------------------------------------------------------------------------
2005 2004 2004
---------------------------------------- ------------------ ----------------------------------
4th 3rd 2nd 1st 4th 3rd 3rd 2nd 1st
---------------------------------------- ------------------ ----------------------------------
(July 28 (July 1
- Sept 30 - July 27
----------------------------------------- -------- --------------------------------------------
Company Predecessor (restated for sale of Port
Alice pulp mill in May, 2004)
---------------------------------------- ------------------ ----------------------------------
AVERAGE EXCHANGE RATE -- CDN $ $ 1.1703 $ 1.2122 $ 1.2411 $ 1.2259 $ 1.2219 $ 1.3227 $ 1.3338 $ 1.3489 $ 1.3190
TO PURCHASE ONE U.S. $
NET SALES
Lumber $ 91.3 $ 88.2 $ 107.5 $ 97.3 $ 87.8 $ 85.5 $ 21.4 $ 116.4 $ 101.1
Logs 25.5 22.2 26.0 18.2 27.7 31.8 13.5 53.4 14.1
By-Products 3.6 5.9 7.0 7.1 5.7 5.2 2.9 6.5 5.3
---------------------------------------- ------------------ ------------------------------
Solid wood segment 120.4 116.3 140.5 122.6 121.2 122.5 37.8 176.3 120.5
Pulp segment 40.6 40.4 45.9 40.1 44.6 35.8 6.4 52.2 42.5
---------------------------------------- ------------------ ------------------------------
$ 161.0 $ 156.7 $ 186.4 $ 162.7 $ 165.8 $158.3 $ 44.2 $ 228.5 $ 163.0
======================================== ================== ==============================
LUMBER
Lumber production -- 127 150 186 185 158 132 59 175 155
millions of board feet
Lumber sales-- millions of 166 165 176 162 158 135 30 171 175
board feet
LOGGING
Log production -- thousands 822 465 1,148 498 896 681 421 1,158 769
of cubic metres
Log purchases -- thousands 87 147 192 200 144 231 81 395 316
of cubic metres
Log sales-- thousands of 212 172 213 166 236 291 120 449 100
cubic metres
Internal Log consumption - 590 719 844 875 768 605 261 936 809
thousands of cubic metres
NBSK PULP
Pulp production-- thousands 71 69 72 67 73 46 11 72 64
of tonnes
Pulp sales-- thousands of 69 71 73 62 74 52 9 66 61
tonnes
SALES PRICES
Lumber -- per thousand board $ 549 $ 535 $ 612 $ 599 $ 557 $ 633 $ 712 $ 681 $ 577
feet
Logs -- per cubic metre $ 120 $ 129 $ 122 $ 110 $ 117 $ 109 $ 113 $ 119 $ 141
Pulp -- per tonne $ 582 $ 573 $ 624 $ 651 $ 601 $ 694 $ 734 $ 797 $ 697
EBITDA
Solid wood segment $ (0.8) $ (8.1) $ 2.2 $ 11.0 $ (10.3) $ 19.7 $ 10.9 $ 37.0 $ 17.7
Pulp segment (1.8) (4.2) (0.7) 1.9 (1.8) 0.5 (10.7) 12.2 0.1
General corporate (4.5) (3.4) (3.8) (4.2) (3.7) (2.4) (0.7) (2.1) (2.1)
---------------------------------------- ------------------ ------------------------------
$ (7.1) $ (15.7) (2.3) $ 8.7 (15.8) $ 17.8 $ (0.5) $ 47.1 $ 15.7
======================================== ================== ==============================
NET EARNINGS (LOSS) $ (84.6) $ (12.5) $ (37.2) $ (5.3) $ (19.6) $ 14.1
NET EARNINGS LOSS PER SHARE -- $ (3.30) $ (0.49) $ (1.45) $ (0.21)$ (0.76) $ 0.55
BASIC AND DILUTED
RECONCILIATION OF EBITDA TO NET EARNINGS (LOSS)
EBITDA $ (7.1) $ (15.7) $ (2.3) $ 8.7 $ (15.8) $ 17.8 $ (0.5) $ 47.1 $ 15.7
Amortization of property, (6.6) (5.1) (10.3) (6.2) (8.7) (5.5) (4.4) (17.1) (11.5)
plant and equipment
Restructuring and other items (70.8) 5.9 (8.5) - - - - - -
Interest expense (11.8) (11.5) (12.0) (11.8) (11.2) (8.6) (8.7) (31.5) (28.9)
Foreign exchange gain (loss) (0.1) 13.3 (3.3) (1.6) 12.6 14.8 0.6 (16.1) (11.0)
on translation of long-term
debt
Other income / expense 1.2 0.8 (0.4) 5.8 - (0.1) (5.5) (0.4) 0.1
Financial restructuring costs - - - (3.1) (5.0) (3.3)
Income taxes 10.6 (0.2) (0.3) (0.3) 3.5 (4.3) 0.7 (0.4) (0.3)
Net loss from discontinued - - - - - (1.6) (5.7) (5.1)
operations
Provision for preferred - - - - - (0.4) (1.2) (1.2)
dividends
--------------------------------------- ------------------ -------------------------------
NET EARNINGS (LOSS) ATTRIBUTABLE $ (84.6) $ (12.5) $ (37.2) $ (5.3) $ (19.6) $ 14.1 $(22.9) $ (30.3) $(45.6)
TO COMMON SHARES
======================================= ================== ===============================
</Table>
WESTERN FOREST PRODUCTS INC. 12 2005 FOURTH QUARTER REPORT
CONSOLIDATED BALANCE SHEETS
(Expressed in millions of Canadian dollars)
<Table>
<Caption>
- ----------------------------------------------------------------------------------------------------------------
December 31, 2005 December 31, 2004
----------------------------------------
(Unaudited) (Audited)
ASSETS
Current assets
Cash $ 29.6 $ 5.0
Accounts receivable 71.6 78.0
Inventory 126.1 176.7
Restricted cash (note 5) 8.9 2.9
Prepaid expenses 5.5 5.2
----------------------------------------
241.7 267.8
Restricted assets (note 5) - 21.5
Investments 7.2 7.1
Property, plant and equipment 323.7 395.6
Other assets 2.6 1.4
----------------------------------------
$ 575.2 $ 693.4
========================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Revolving credit facility (note 4) $ 71.4 $ 78.1
Accounts payable and accrued liabilities 117.4 72.2
----------------------------------------
188.8 150.3
Long-term debt (note 5) 247.9 253.5
Future income taxes - 10.5
Other liabilities 28.0 29.4
----------------------------------------
464.7 443.7
Shareholders' equity
Common shares 255.2 255.2
Contributed surplus 0.4 -
Deficit (145.1) (5.5)
----------------------------------------
110.5 249.7
----------------------------------------
$ 575.2 $ 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. 13 2005 FOURTH QUARTER REPORT
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Expressed in millions of Canadian dollars, except for share and per
share amounts)
<Table>
<Caption>
October 1 to October 1 to January 1 to July 28 to January 1 to
December 31, December 31, December 31, December 31, July 27,
2005 2004 2005 2004 2004
Company Company Company Company Predecessor
-------------------------------------------------------------------------------
Sales $ 161.0 $ 165.8 $ 666.8 $ 324.1 $ 435.7
Cost and expenses
Cost of goods sold 139.5 150.9 560.5 263.9 308.0
Anti-dumping and countervailing duties 6.0 9.2 36.4 21.1 24.0
Freight expenses 16.5 16.0 63.1 27.9 30.4
Selling and administration 6.1 5.5 23.2 9.2 11.0
Amortization of property, plant and equipment 6.6 8.7 28.2 14.2 33.0
-------------------------------------------------------------------------------
174.7 190.3 711.4 336.3 406.4
-------------------------------------------------------------------------------
Operating earnings (loss) before write-down of
property, plant and equipment and operating (13.7) (24.5) (44.6) (12.2) 29.3
restructuring items
Write-down of property, plant and equipment and
operating restructuring items (note 10) (70.8) - (73.4) - -
-------------------------------------------------------------------------------
Operating earnings (loss) (84.5) (24.5) (118.0) (12.2) 29.3
Interest expense (11.8) (11.2) (47.1) (19.9) (71.4)
Foreign exchange gain (loss) on long-term debt (0.1) 12.6 8.3 27.4 (24.2)
Other income / expense 1.2 - 7.3 (0.1) (5.9)
Financial restructuring costs - - - - (11.4)
-------------------------------------------------------------------------------
Loss before income taxes (95.2) (23.1) (149.5) (4.7) (83.6)
Income tax recovery (expense) 10.6 3.5 9.9 (0.8) (0.1)
-------------------------------------------------------------------------------
Net loss from continuing operations (84.6) (19.6) (139.6) (5.5) (83.7)
Net loss from discontinued operations - - - - (12.4)
-------------------------------------------------------------------------------
Net loss $ (84.6) $ (19.6) $ (139.6) $ (5.5) $ (96.1)
===============================================================================
Loss per share:
Basic $ (3.30) $ (0.76) $ (5.45) $ (0.21) $ (2.33)
Diluted $ (3.30) $ (0.76) $ (5.45) $ (0.21) $ (2.33)
Weighted average number of common and non-voting 25,632 25,635 25,632 25,635 42,481
shares outstanding (thousands of shares)
Provision for dividends on preferred shares for $ - $ - $ - $ - $ (2.8)
loss per share calculations
</Table>
See accompanying notes to the consolidated financial statements
WESTERN FOREST PRODUCTS INC. 14 2005 FOURTH QUARTER REPORT
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Expressed in millions of Canadian dollars)
<Table>
<Caption>
October 1 to October 1 to January 1 to July 28 to January 1 to
December 31, December 31, December 31, December 31, July 27,
2005 2004 2005 2004 2004
Company Company Company Company Predecessor
-------------------------------------------------------------------------------
----------------------------------------------------------------------------
Cash provided by (used in):
Operating activities:
Net loss from continuing operations $ (84.6) $ (19.6) $ (139.6) $ (5.5) $ (83.7)
Items not involving cash:
Amortization of property, plant and equipment 6.6 8.7 28.2 14.2 33.0
Write-down of property, plant and equipment 36.8 - 45.3 - -
Write-down of supplies inventory 10.8 10.8 - -
Amortization of deferred charges 0.1 0.1 0.3 0.2 2.3
Foreign currency translation (gain) loss 0.1 (12.6) (8.3) (27.5) 24.2
Accretion of debt discount 0.7 1.1 2.7 1.1 -
(Gain) loss on property, plant and equipment 0.1 - (12.7) - 0.5
disposals
Future income taxes (10.5) (3.9) (10.5) - -
Other (2.1) (2.0) (1.1) (1.8) (0.2)
----------------------------------------------------------------------------
(42.0) (28.2) (84.9) (19.3) (23.9)
----------------------------------------------------------------------------
Changes in non-cash working capital items:
Accounts receivable (14.6) 14.6 6.4 (0.9) (14.2)
Inventory 13.4 10.3 39.8 8.9 (51.7)
Prepaid expenses 3.2 3.0 (0.3) 3.3 (4.0)
Accounts payable and accrued liabilities 29.0 (17.5) 45.2 (16.1) 95.9
----------------------------------------------------------------------------
31.0 10.4 91.1 (4.8) 26.0
----------------------------------------------------------------------------
Cash provided (used) by continuing operations (11.0) (17.8) 6.2 (24.1) 2.1
Cash used by discontinued operations - - - - (2.3)
----------------------------------------------------------------------------
(11.0) (17.8) 6.2 (24.1) (0.2)
----------------------------------------------------------------------------
Investing activities:
Additions to property, plant and equipment (2.1) (1.4) (9.2) (5.3) (3.5)
Additions to capitalized roads 2.1 (3.0) (9.1) (6.3) (21.1)
Disposals of property, plant and equipment (0.3) 2.9 29.4 2.9 1.1
Restricted cash 39.6 (2.9) (6.0) (2.9) -
Bill 28 take back proceeds and infrastructure - - 21.5 - -
advance (note 6(c))
Other (1.9) (0.4) (1.5) (0.4) 1.2
----------------------------------------------------------------------------
37.4 (4.8) (25.0) (12.0) (22.3)
----------------------------------------------------------------------------
Financing activities:
Revolving credit facility (0.7) 24.2 (6.7) 28.4 19.3
----------------------------------------------------------------------------
(0.7) 24.2 (6.7) 28.4 19.3
----------------------------------------------------------------------------
Increase (decrease) in cash 25.7 1.6 24.6 (7.7) (3.2)
Cash, beginning of period 3.9 3.4 5.0 12.7 15.9
----------------------------------------------------------------------------
Cash, end of period $ 29.6 $ 5.0 $ 29.6 $ 5.0 $ 12.7
============================================================================
</Table>
See accompanying notes to the consolidated financial statements
WESTERN FOREST PRODUCTS INC. 15 2005 FOURTH QUARTER REPORT
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts expressed in millions of Canadian dollars)
1. BASIS OF PRESENTATION
Western Forest Products Inc.'s (the "Company") business is timber
harvesting and lumber manufacturing for worldwide markets. The Company has
historically also carried on pulp operations consisting of producing and
marketing pulp. As discussed in note 10, the Company is exiting the pulp
business.
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 it does not reflect the
effects of the financial reorganization or the application of its
accounting described in the Company's 2004 annual report.
The Company has incurred a net loss for the year ended December 31, 2005
of $139.6 million and at December 31, 2005, has an accumulated deficit of
$145.1 million. Included in the net loss for the year ended December 31,
2005 is $73.4 million in write-downs of assets and restructuring costs
related to pulp mill and sawmill closures and $7.4 million for operating
losses of the pulp mill which will be closed permanently in early 2006
(note 10). At December 31, 2005, the Company has cash, restricted cash and
available lines of credit totaling $54.5 million to fund future
operations.
In response to the losses that were being incurred during 2005, the
Company closed and consolidated certain of its operations so as to lower
its cost structure and improve future operating results. In addition, the
Company has entered into an agreement to acquire Cascadia Forest Products
Ltd. ("Cascadia" (note 6(a)). The Company is financing the proposed
acquisition and raising additional working capital through an equity
rights offering and a refinancing of its long-term debt and revolving
credit facility. Closing of the Cascadia acquisition is dependent on
receiving approvals from certain governmental authorities.
Market conditions including foreign exchange rates, prices for its
products and other factors will have a significant impact on the ability
of the Company to improve financial performance over the next fiscal year.
In addition to market conditions, future profitable operations on a
long-term basis are also dependent on the Company's ability to
successfully integrate its operations with Cascadia's operations and
realize significant synergies that should help reposition the Company to
successfully compete in global softwood markets. The Company anticipates
that the governmental approvals will be received in April of 2006 and the
various agreements for the acquisition, the equity rights offering and
revolving credit facility will close at that time. In the event that
market conditions are not favourable and the acquisition of Cascadia and
related financings does not close, the Company will need to consider other
strategic alternatives to finance and maintain its 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 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.
WESTERN FOREST PRODUCTS INC. 16 2005 FOURTH QUARTER REPORT
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts expressed in millions of Canadian dollars)
4. REVOLVING 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 December 31, 2005, of the $91.2 million of the facility that was
available to the Company, $71.4 million had been drawn down and $3.8
million was used to support standby letters of credit leaving a balance of
$16.0 million available for future use.
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.
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, 2005, 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 December 31, 2005 the balance in the working
capital reserve account was $8.9 million. On March 10, 2006, the Company
redeemed the Secured Bonds in full together with all accrued interest
(note 6(a)).
6. COMMITMENTS AND CONTINGENCIES
(a) ACQUISITION OF CASCADIA FOREST PRODUCTS LTD. AND ASSOCIATED
FINANCINGS
On November 10, 2005 the Company reached a definitive agreement to acquire
Cascadia Forest Products Ltd. ("Cascadia") from Brookfield Asset
Management Inc. ("BAM"), 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 has provided both equity and
debt financing sufficient to fund the acquisition of Cascadia, refinance
the Company's existing 15% senior secured bonds and provide additional
working capital. The acquisition is expected to close in April of 2006,
subject to the receipt of regulatory approvals. Tricap is related to the
Company by virtue of its 20.05% ownership of the Company's Common Shares.
BAM is related to the Company by virtue of its voting arrangements with
Tricap.
The equity financing will raise a total of $295.0 million by way of a
rights offering of 178.8 million subscription receipts to all shareholders
pursuant to a final prospectus dated January 31, 2006. Under the terms of
the rights offering common shareholders received one right for each Common
Share enabling them to subscribe for 6.975 subscription receipts of the
Company with each subscription receipt representing the right to receive
one Common Share at a price of $1.65 per subscription receipt. The rights
were listed for trading on the Toronto Stock Exchange and were exercisable
until March 9, 2006. The subscription receipts were listed for trading on
the Toronto Stock Exchange on March 10, 2006.
Pursuant to the terms of a standby agreement with the Company, Tricap
purchased 51 million common share subscription receipts that had not been
purchased by other rights holders under the rights offering at a price of
$1.65 per subscription receipt.
WESTERN FOREST PRODUCTS INC. 17 2005 FOURTH QUARTER REPORT
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts expressed in millions of Canadian dollars)
At the time of closing the acquisition of Cascadia, each subscription
receipt will be automatically exchanged for one Western Common Share
unless such exchange would result in the holder or group of holders
beneficially owning, or exercising control or direction over, 50% or more
of the Common Shares. Under such circumstances the Company would permit
the exchange of only that portion of the subscription receipts that would
result in the holder or group of holders beneficially owning, or
exercising control or direction over, 49% or more of the Common Shares.
The remaining subscription receipts would be converted to a new class of
non-voting shares once the creation of such class had been authorized by
the Company's shareholders at the next Annual General Meeting.
The debt financing consists of two secured term facilities, a four-year
US$187.5 million facility, and a one-year Canadian $90.0 million facility,
which may be extended for a second year at the Company's option. 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%.
The proceeds from the two term facilities were used to redeem the
Company's existing US$221.0 million 15% senior secured notes on March 10,
2006.
In addition to the above financings, the current revolving credit lender
to the Company and Cascadia has agreed to maintain its existing working
capital facilities in the aggregate amount of $200.0 million. The lender
has also agreed to amend certain of the terms of the credit facilities
that will result in an increase in the availability under the facilities.
(b) 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 licenses. 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 2006 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 inventory. Included
in other income for the year ended December 31, 2005 is $4.6 million for
reimbursements agreed to date with the Provincial Government for project
engineering and other costs incurred by our Predecessor with respect to
certain timber cutting rights taken back by the Provincial Government. The
final settlement agreement is expected to be reached on the remaining
outstanding items in 2006.
(c) SOFTWOOD LUMBER DUTIES
The Company has recorded countervailing and anti-dumping duties assessed
on Canadian softwood lumber exports to the United States totaling $6.0
million for the fourth quarter of 2005. Cumulative duties from May 22,
2002, when cash deposits were made necessary for shipments of Canadian
lumber into the United States, until December 31, 2005, total US$104.2
million.
On April 26, 2005 the Company was notified by the United States Department
of Commerce ("USDOC") that it was not entitled to use the reduced "all
others rate" for anti-dumping duty deposits of 3.78% unless it filed a
changed circumstances review request with the USDOC to confirm that it is
the successor in interest to our Predecessor. The Company 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 the
Company posted anti-dumping deposits at the higher rate of 11.54%.
WESTERN FOREST PRODUCTS INC. 18 2005 FOURTH QUARTER REPORT
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts expressed in millions of Canadian dollars)
Effective December 12, 2005, the USDOC implemented new deposit rates based
on its second Administrative review period (April 1, 2003 to March 31,
2004 for the countervailing duty case; and May 1, 2003 to April 30, 2004
for the antidumping duty case) and reduced the CVD deposit rate to 8.70%
and the all others antidumping rate to 2.11%. At the date of this report
the Company's combined deposit rate is 10.81% (2004 - 21.21%).
During the quarter the Company was notified that it had been selected as a
mandatory respondent in the anti-dumping duty third administrative review
of certain softwood lumber products from Canada. The Company was selected,
along with seven other companies, under the USDOC new "probability
proportional to size" sampling methodology. The review covers the period
from May 1, 2004 to April 30, 2005. The Company is currently posting
anti-dumping duty deposits at the "all others" rate of 2.11% on the value
of our lumber shipments to the United States. Following the third review,
the Company will post anti-dumping duties at a "company specific" rate
that will be determined for us as a result of this review. The Company
does not expect to receive the final results of the USDOC third review
until December 2006, consistent with the timing of the USDOC second
administrative review determinations announced in 2005.
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 US 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 the
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.
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, or in our final prospectus dated
January 31, 2006.
(d) 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 complaint however, the lumber broker
is appealing the decision. Management believes 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. On
December 15, 2005, the Company announced it was exiting the pulp segment
and closing its pulp mill (note 10 (a)). Sales to other segment are
accounted for at prices which approximate market value.
WESTERN FOREST PRODUCTS INC. 19 2005 FOURTH QUARTER REPORT
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts expressed in millions of Canadian dollars)
<Table>
<Caption>
Quarter ended December 31, 2005
----------------------------------------------------
Solid wood Pulp Corporate Total
-----------------------------------------------------------------------------------------------------------
Sales to external customers $ 120.4 40.6 - 161.0
Sales to other segment $ 6.4 - - 6.4
Operating Loss $ (6.1) (73.9) (4.5) (84.5)
Amortization of property, plant and equipment $ (5.9) (0.7) - (6.6)
Write-down of property, plant and equipment and $ 0.6 (71.4) - (70.8)
other restructuring items
Capital expenditures $ - - - -
<Table>
<Caption>
Year ended December 31, 2005
----------------------------------------------------
Solid wood Pulp Corporate Total
-----------------------------------------------------------------------------------------------------------
Sales to external customers $ 499.8 167.0 - 666.8
Sales to other segment $ 27.5 - - 27.5
Operating Loss $ (23.3) (78.8) (15.9) (118.0)
Amortization of property, plant and equipment $ (25.6) (2.6) - (28.2)
Write-down of property, plant and equipment and $ (2.0) (71.4) - (73.4)
other restructuring items
Capital expenditures $ (17.9) (0.4) - (18.3)
</Table>
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 December 31,
2005 with respect to these defined benefit plans and a further $2.5
million with respect to the contributions to the hourly paid employee
union pension plans ($3.5 million and $9.4 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 twelve
months ended December 31, 2005. The accounts receivable balance from the
same customer comprised 26% of the Company's outstanding receivables at
December 31, 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.
10. WRITE-DOWN OF PROPERTY, PLANT AND EQUIPMENT AND OPERATING RESTRUCTURING
ITEMS
<Table>
<Caption>
October 1, to January 1, to
December 31, December 31,
2005 2005
------------------------------
Closure of Squamish pulp mill (a):
Write-down of supplies inventory $ 10.8 $ 10.8
Write-down of property, plant and 36.8 36.8
equipment
Severance and other 23.8 23.8
------------------------------
71.4 71.4
------------------------------
Closure of Silvertree sawmill (b):
Write-down of property, plant and - 8.5
equipment
Severance and other (0.6) 6.6
------------------------------
(0.6) 15.1
------------------------------
Gain on termination of saw log supply - (13.1)
agreement (c)
------------------------------
$ 70.8 $ 73.4
==============================
(a) On December 15, 2005 the Company announced the closure of its
Squamish, BC pulp mill. The Company wrote down the pulp mill to its
estimated recoverable value and recorded a charge of $10.8 million
on parts and supplies inventory and $36.6 million on property, plant
and equipment and recorded an additional charge of $23.8 million
with respect to severance and other costs associated with the
closure of the pulp mill. At December 31, 2005, $23.8 million is
included in accounts payable and accrued liabilities. In addition to
the above, the Company will record a charge of approximately $4.5
WESTERN FOREST PRODUCTS INC. 20 2005 FOURTH QUARTER REPORT
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts expressed in millions of Canadian dollars)
million in the first quarter of 2006 with respect to the
cancellation of certain long-term contracts as a result of the
closure. The Company will also incur ongoing costs for supervision,
security, property taxes and other costs (including demolition costs
less any recoveries for asset sales, if the Company decides to
remove certain plant and equipment) in 2006 and future years
depending on the Company's plans for the plant site (note 11). These
costs will be expensed as incurred.
(b) 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 and production
transferred to other facilities. The Company wrote down the
Silvertree sawmill to its estimated recoverable value and took a
charge of $8.5 million and recorded an additional charge of $6.6
million with respect to severance associated with the closure of the
Silvertree sawmill. The Company sold the site subsequent to the year
end for $13.5 million with final proceeds and closing subject to
completion of environmental remediation.
(c) The Company terminated its saw-log supply arrangement with
TimberWest Forest Corp in September 2005 and received cash proceeds
of $15.0 million which were deposited into the Working Capital
Reserve account. The company recorded a gain of $13.1 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. During the year, 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 was 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 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
external advisors.
Following the strategic decision to exit the pulp business and close the
Squamish pulp mill the Company reviewed the carrying amounts for the
operations and the estimated costs to exit the business. On the basis of
this review the Company took a fourth quarter charge of $71.4 million
including $47.6 million to write-down the property, plant and equipment
and related supplies inventory to their estimated recoverable amounts.
Environmental remediation and other costs are primarily based on the
preliminary findings of work performed by external consultants. Actual
costs may be significantly different once investigative drilling and other
planned analysis is completed.
With respect to the solid wood segment, the Company closed its Silvertree
sawmill in October and recorded an impairment charge of $8.5 million in
the second quarter. On the basis of the findings of the impairment review
of the Solid Wood segment, the Company does not consider that any further
write down of these assets is necessary at December 31, 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.
12. SUBSEQUENT EVENTS
On March 17, 2006 the Company closed its previously announced acquisition
of the assets of the Englewood Logging Division, from a partnership
between Canadian Forest Products Ltd. and Oji Paper Canada Ltd. ("the
Partnership"), for $45.0 million plus closing adjustments of approximately
$2.7 million. The acquisition comprises Tree Farm License 37 which
currently has an annual allowable timber cut of approximately 945,000
cubic meters and includes approximately 6,800 hectares of fee simple
lands, existing capital improvements, equipment and railway rolling stock.
Transfer of the fee simple lands within Tree farm License 37 is postponed
WESTERN FOREST PRODUCTS INC. 21 2005 FOURTH QUARTER REPORT
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts expressed in millions of Canadian dollars)
pending receipt of a required consent of the Minister of Forests and Range
and until that time the Company may harvest timber on such lands under
contract with the landowner. The Company has assumed certain contracts and
offered employment to all of the employees but has not assumed any other
material pre-closing liabilities relating to the assets. The Company has
granted a first charge over the acquired assets to secure obligations to
the Partnership.
On March 17, 2006, the Company also executed a 40 year fibre supply
agreement with the Partnership. As consideration for entering the fibre
supply agreement, the Company will receive a price premium that will be
earned as wood chips are delivered under the agreement. A$35.0 million
non-refundable prepayment of the price premium was received on March 17,
2006 and applied to reduce the amount drawn under the Company's revolving
line of credit. A further $45 million price premium will be set-off
against the consideration due on the acquisition of the Englewood Logging
Division. The Company will record the price premium as deferred revenue
and amortize it into income over the term of the agreement.
WESTERN FOREST PRODUCTS INC. 22 2005 FOURTH QUARTER REPORT
[WESTERN FOREST PRODUCTS - LOGO]
Head Office
435 Trunk Road
Duncan, British Columbia FINANCIAL STATEMENTS ON THE INTERNET
Canada V9L 2P9 www.westernforest.com
(250) 748-3711 www.sedar.com
Fax: (250) 748-6045
E-mail: info@westernforest.com